Showing posts with label depression. Show all posts
Showing posts with label depression. Show all posts
Tuesday, December 14, 2010
Friday, October 8, 2010
Rothbard on Depressions and their Cures
Thus, what the government should do, according to the Misesian analysis of the depression, is absolutely nothing. It should, from the point of view of economic health and ending the depression as quickly as possible, maintain a strict hands off, "laissez-faire" policy. Anything it does will delay and obstruct the adjustment process of the market; the less it does, the more rapidly will the market adjustment process do its work, and sound economic recovery ensue.
The Misesian prescription is thus the exact opposite of the Keynesian: It is for the government to keep absolute hands off the economy and to confine itself to stopping its own inflation and to cutting its own budget.
source
The Misesian prescription is thus the exact opposite of the Keynesian: It is for the government to keep absolute hands off the economy and to confine itself to stopping its own inflation and to cutting its own budget.
source
Saturday, September 11, 2010
Economic Depressions: Their Causes and Cure
Murray Rothbard writes:
What, then, are the causes of periodic depressions? Must we always remain agnostic about the causes of booms and busts? Is it really true that business cycles are rooted deep within the free-market economy, and that therefore some form of government planning is needed if we wish to keep the economy within some kind of stable bounds? Do booms and then busts just simply happen, or does one phase of the cycle flow logically from the other?
The currently fashionable attitude toward the business cycle stems, actually, from Karl Marx...
Marx concluded that business cycles were an inherent feature of the capitalist market economy. All the various current schools of economic thought, regardless of their other differences and the different causes that they attribute to the cycle, agree on this vital point: That these business cycles originate somewhere deep within the free-market economy. The market economy is to blame. Karl Marx believed that the periodic depressions would get worse and worse, until the masses would be moved to revolt and destroy the system, while the modern economists believe that the government can successfully stabilize depressions and the cycle. But all parties agree that the fault lies deep within the market economy and that if anything can save the day, it must be some form of massive government intervention.
There are, however, some critical problems in the assumption that the market economy is the culprit. For "general economic theory" teaches us that supply and demand always tend to be in equilibrium in the market and that therefore prices of products as well as of the factors that contribute to production are always tending toward some equilibrium point. Even though changes of data, which are always taking place, prevent equilibrium from ever being reached, there is nothing in the general theory of the market system that would account for regular and recurring boom-and-bust phases of the business cycle...
In the market economy, one of the most vital functions of the businessman is to be an "entrepreneur," a man who invests in productive methods, who buys equipment and hires labor to produce something which he is not sure will reap him any return...The market economy, then, is a profit-and-loss economy, in which the acumen and ability of business entrepreneurs is gauged by the profits and losses they reap. The market economy, moreover, contains a built-in mechanism, a kind of natural selection, that ensures the survival and the flourishing of the superior forecaster and the weeding-out of the inferior ones...How is it that, periodically, in times of the onset of recessions and especially in steep depressions, the business world suddenly experiences a massive cluster of severe losses?
An explanation such as "underconsumption" — a drop in total consumer spending — is not sufficient, for one thing, because what needs to be explained is why businessmen, able to forecast all manner of previous economic changes and developments, proved themselves totally and catastrophically unable to forecast this alleged drop in consumer demand. Why this sudden failure in forecasting ability?...
In particular, a theory of depression must account for the mammoth cluster of errors which appears swiftly and suddenly at a moment of economic crisis, and lingers through the depression period until recovery...Here is another fact of business cycle life that must be explained — and obviously can't be explained by such theories of depression as the popular underconsumption doctrine: That consumers aren't spending enough on consumer goods. For if insufficient spending is the culprit, then how is it that retail sales are the last and the least to fall in any depression, and that depression really hits such industries as machine tools, capital equipment, construction, and raw materials?...
Fortunately, a correct theory of depression and of the business cycle does exist, even though it is universally neglected in present-day economics...Essentially, these theorists saw that another crucial institution had developed in the mid-eighteenth century, alongside the industrial system. This was the institution of banking, with its capacity to expand credit and the money supply (first, in the form of paper money, or bank notes, and later in the form of demand deposits, or checking accounts, that are instantly redeemable in cash at the banks). It was the operations of these commercial banks which, these economists saw, held the key to the mysterious recurrent cycles of expansion and contraction, of boom and bust, that had puzzled observers since the mid-eighteenth century.
The banks, then, happily begin to expand credit, for the more they expand credit the greater will be their profits. This results in the expansion of the money supply within a country, say England. As the supply of paper and bank money in England increases, the money incomes and expenditures of Englishmen rise, and the increased money bids up prices of English goods. The result is inflation and a boom within the country. But this inflationary boom, while it proceeds on its merry way, sows the seeds of its own demise...
As this process intensifies, the banks will eventually become frightened. For the banks, after all, are obligated to redeem their liabilities in cash, and their cash is flowing out rapidly as their liabilities pile up. Hence, the banks will eventually lose their nerve, stop their credit expansion, and in order to save themselves, contract their bank loans outstanding...The bank contraction reverses the economic picture; contraction and bust follow boom...
This, then, is the meaning of the depression phase of the business cycle. Note that it is a phase that comes out of, and inevitably comes out of, the preceding expansionary boom. It is the preceding inflation that makes the depression phase necessary. We can see, for example, that the depression is the process by which the market economy adjusts, throws off the excesses and distortions of the previous inflationary boom, and reestablishes a sound economic condition. The depression is the unpleasant but necessary reaction to the distortions and excesses of the previous boom.
Why, then, does the next cycle begin? Why do business cycles tend to be recurrent and continuous? Because when the banks have pretty well recovered, and are in a sounder condition, they are then in a confident position to proceed to their natural path of bank credit expansion, and the next boom proceeds on its way, sowing the seeds for the next inevitable bust...
Banks can only expand comfortably in unison when a Central Bank exists, essentially a governmental bank, enjoying a monopoly of government business, and a privileged position imposed by government over the entire banking system. It is only when central banking got established that the banks were able to expand for any length of time and the familiar business cycle got underway in the modern world...
So now we see, at last, that the business cycle is brought about, not by any mysterious failings of the free market economy, but quite the opposite: By systematic intervention by government in the market process. Government intervention brings about bank expansion and inflation, and, when the inflation comes to an end, the subsequent depression-adjustment comes into play...
The correct and fully developed theory of the business cycle was finally discovered and set forth by the Austrian economist Ludwig von Mises, when he was a professor at the University of Vienna...
The inflationary boom thus leads to distortions of the pricing and production system. Prices of labor and raw materials in the capital goods industries had been bid up during the boom too high to be profitable once the consumers reassert their old consumption/investment preferences. The "depression" is then seen as the necessary and healthy phase by which the market economy sloughs off and liquidates the unsound, uneconomic investments of the boom, and reestablishes those proportions between consumption and investment that are truly desired by the consumers...
What does Mises say should be done, say by government, once the depression arrives? What is the governmental role in the cure of depression? In the first place, government must cease inflating as soon as possible. It is true that this will, inevitably, bring the inflationary boom abruptly to an end, and commence the inevitable recession or depression. But the longer the government waits for this, the worse the necessary readjustments will have to be. The sooner the depression-readjustment is gotten over with, the better. This means, also, that the government must never try to prop up unsound business situations; it must never bail out or lend money to business firms in trouble. Doing this will simply prolong the agony and convert a sharp and quick depression phase into a lingering and chronic disease. The government must never try to prop up wage rates or prices of producers' goods; doing so will prolong and delay indefinitely the completion of the depression-adjustment process; it will cause indefinite and prolonged depression and mass unemployment in the vital capital goods industries. The government must not try to inflate again, in order to get out of the depression. For even if this reinflation succeeds, it will only sow greater trouble later on. The government must do nothing to encourage consumption, and it must not increase its own expenditures, for this will further increase the social consumption/investment ratio. In fact, cutting the government budget will improve the ratio. What the economy needs is not more consumption spending but more saving, in order to validate some of the excessive investments of the boom. Thus, what the government should do, according to the Misesian analysis of the depression, is absolutely nothing. It should, from the point of view of economic health and ending the depression as quickly as possible, maintain a strict hands off, "laissez-faire" policy. Anything it does will delay and obstruct the adjustment process of the market; the less it does, the more rapidly will the market adjustment process do its work, and sound economic recovery ensue.
What, then, are the causes of periodic depressions? Must we always remain agnostic about the causes of booms and busts? Is it really true that business cycles are rooted deep within the free-market economy, and that therefore some form of government planning is needed if we wish to keep the economy within some kind of stable bounds? Do booms and then busts just simply happen, or does one phase of the cycle flow logically from the other?
The currently fashionable attitude toward the business cycle stems, actually, from Karl Marx...
Marx concluded that business cycles were an inherent feature of the capitalist market economy. All the various current schools of economic thought, regardless of their other differences and the different causes that they attribute to the cycle, agree on this vital point: That these business cycles originate somewhere deep within the free-market economy. The market economy is to blame. Karl Marx believed that the periodic depressions would get worse and worse, until the masses would be moved to revolt and destroy the system, while the modern economists believe that the government can successfully stabilize depressions and the cycle. But all parties agree that the fault lies deep within the market economy and that if anything can save the day, it must be some form of massive government intervention.
There are, however, some critical problems in the assumption that the market economy is the culprit. For "general economic theory" teaches us that supply and demand always tend to be in equilibrium in the market and that therefore prices of products as well as of the factors that contribute to production are always tending toward some equilibrium point. Even though changes of data, which are always taking place, prevent equilibrium from ever being reached, there is nothing in the general theory of the market system that would account for regular and recurring boom-and-bust phases of the business cycle...
In the market economy, one of the most vital functions of the businessman is to be an "entrepreneur," a man who invests in productive methods, who buys equipment and hires labor to produce something which he is not sure will reap him any return...The market economy, then, is a profit-and-loss economy, in which the acumen and ability of business entrepreneurs is gauged by the profits and losses they reap. The market economy, moreover, contains a built-in mechanism, a kind of natural selection, that ensures the survival and the flourishing of the superior forecaster and the weeding-out of the inferior ones...How is it that, periodically, in times of the onset of recessions and especially in steep depressions, the business world suddenly experiences a massive cluster of severe losses?
An explanation such as "underconsumption" — a drop in total consumer spending — is not sufficient, for one thing, because what needs to be explained is why businessmen, able to forecast all manner of previous economic changes and developments, proved themselves totally and catastrophically unable to forecast this alleged drop in consumer demand. Why this sudden failure in forecasting ability?...
In particular, a theory of depression must account for the mammoth cluster of errors which appears swiftly and suddenly at a moment of economic crisis, and lingers through the depression period until recovery...Here is another fact of business cycle life that must be explained — and obviously can't be explained by such theories of depression as the popular underconsumption doctrine: That consumers aren't spending enough on consumer goods. For if insufficient spending is the culprit, then how is it that retail sales are the last and the least to fall in any depression, and that depression really hits such industries as machine tools, capital equipment, construction, and raw materials?...
Fortunately, a correct theory of depression and of the business cycle does exist, even though it is universally neglected in present-day economics...Essentially, these theorists saw that another crucial institution had developed in the mid-eighteenth century, alongside the industrial system. This was the institution of banking, with its capacity to expand credit and the money supply (first, in the form of paper money, or bank notes, and later in the form of demand deposits, or checking accounts, that are instantly redeemable in cash at the banks). It was the operations of these commercial banks which, these economists saw, held the key to the mysterious recurrent cycles of expansion and contraction, of boom and bust, that had puzzled observers since the mid-eighteenth century.
The banks, then, happily begin to expand credit, for the more they expand credit the greater will be their profits. This results in the expansion of the money supply within a country, say England. As the supply of paper and bank money in England increases, the money incomes and expenditures of Englishmen rise, and the increased money bids up prices of English goods. The result is inflation and a boom within the country. But this inflationary boom, while it proceeds on its merry way, sows the seeds of its own demise...
As this process intensifies, the banks will eventually become frightened. For the banks, after all, are obligated to redeem their liabilities in cash, and their cash is flowing out rapidly as their liabilities pile up. Hence, the banks will eventually lose their nerve, stop their credit expansion, and in order to save themselves, contract their bank loans outstanding...The bank contraction reverses the economic picture; contraction and bust follow boom...
This, then, is the meaning of the depression phase of the business cycle. Note that it is a phase that comes out of, and inevitably comes out of, the preceding expansionary boom. It is the preceding inflation that makes the depression phase necessary. We can see, for example, that the depression is the process by which the market economy adjusts, throws off the excesses and distortions of the previous inflationary boom, and reestablishes a sound economic condition. The depression is the unpleasant but necessary reaction to the distortions and excesses of the previous boom.
Why, then, does the next cycle begin? Why do business cycles tend to be recurrent and continuous? Because when the banks have pretty well recovered, and are in a sounder condition, they are then in a confident position to proceed to their natural path of bank credit expansion, and the next boom proceeds on its way, sowing the seeds for the next inevitable bust...
Banks can only expand comfortably in unison when a Central Bank exists, essentially a governmental bank, enjoying a monopoly of government business, and a privileged position imposed by government over the entire banking system. It is only when central banking got established that the banks were able to expand for any length of time and the familiar business cycle got underway in the modern world...
So now we see, at last, that the business cycle is brought about, not by any mysterious failings of the free market economy, but quite the opposite: By systematic intervention by government in the market process. Government intervention brings about bank expansion and inflation, and, when the inflation comes to an end, the subsequent depression-adjustment comes into play...
The correct and fully developed theory of the business cycle was finally discovered and set forth by the Austrian economist Ludwig von Mises, when he was a professor at the University of Vienna...
Without bank credit expansion, supply and demand tend to be equilibrated through the free price system, and no cumulative booms or busts can then develop. But then government through its central bank stimulates bank credit expansion by expanding central bank liabilities and therefore the cash reserves of all the nation's commercial banks. The banks then proceed to expand credit and hence the nation's money supply in the form of check deposits. As the Ricardians saw, this expansion of bank money drives up the prices of goods and hence causes inflation. But, Mises showed, it does something else, and something even more sinister. Bank credit expansion, by pouring new loan funds into the business world, artificially lowers the rate of interest in the economy below its free market level.
On the free and unhampered market, the interest rate is determined purely by the "time-preferences" of all the individuals that make up the market economy...The inflationary boom thus leads to distortions of the pricing and production system. Prices of labor and raw materials in the capital goods industries had been bid up during the boom too high to be profitable once the consumers reassert their old consumption/investment preferences. The "depression" is then seen as the necessary and healthy phase by which the market economy sloughs off and liquidates the unsound, uneconomic investments of the boom, and reestablishes those proportions between consumption and investment that are truly desired by the consumers...
What does Mises say should be done, say by government, once the depression arrives? What is the governmental role in the cure of depression? In the first place, government must cease inflating as soon as possible. It is true that this will, inevitably, bring the inflationary boom abruptly to an end, and commence the inevitable recession or depression. But the longer the government waits for this, the worse the necessary readjustments will have to be. The sooner the depression-readjustment is gotten over with, the better. This means, also, that the government must never try to prop up unsound business situations; it must never bail out or lend money to business firms in trouble. Doing this will simply prolong the agony and convert a sharp and quick depression phase into a lingering and chronic disease. The government must never try to prop up wage rates or prices of producers' goods; doing so will prolong and delay indefinitely the completion of the depression-adjustment process; it will cause indefinite and prolonged depression and mass unemployment in the vital capital goods industries. The government must not try to inflate again, in order to get out of the depression. For even if this reinflation succeeds, it will only sow greater trouble later on. The government must do nothing to encourage consumption, and it must not increase its own expenditures, for this will further increase the social consumption/investment ratio. In fact, cutting the government budget will improve the ratio. What the economy needs is not more consumption spending but more saving, in order to validate some of the excessive investments of the boom. Thus, what the government should do, according to the Misesian analysis of the depression, is absolutely nothing. It should, from the point of view of economic health and ending the depression as quickly as possible, maintain a strict hands off, "laissez-faire" policy. Anything it does will delay and obstruct the adjustment process of the market; the less it does, the more rapidly will the market adjustment process do its work, and sound economic recovery ensue.
The Misesian prescription is thus the exact opposite of the Keynesian: It is for the government to keep absolute hands off the economy and to confine itself to stopping its own inflation and to cutting its own budget.
It's A Depression
This is what a depression is all about — an economy that 33 months after a recession begins, with zero policy rates, a stuffed central bank sheet, and a 10% deficit-to-GDP ratio, is still in need of government help for its sustenance...
Finally, you know it’s a depression when, 33 months after the onset of recession…
• Wages & Salaries are still down 3.7% from the prior peak
• Corporate profits are still down 20% from the peak
• Real GDP is still down 1.3% from the peak
• Industrial production is still down 7.2% from the peak
• Employment is still down 5.5% from the peak
• Retail sales are still down 4.5% from the peak
• Manufacturing orders are still down 22.1% from the peak
• Manufacturing shipments are still down 12.5% from the peak
• Exports are still down 9.2% from the peak
• Housing starts are still down 63.5% from the peak
• New home sales are still down 68.9% from the peak
• Existing home sales are still down 41.2% from the peak
• Non-residential construction is still down 35.7% from the peak
Folks, in a normal recession-recovery cycle, practically all these indicators are making new highs at this juncture of the business cycle.
sourceTuesday, July 13, 2010
How to Cure an Economic Depression
Bill Bonner writes:
It is amazing that anyone takes Krugman seriously. It is obvious now that he – and his fellow interventionists – had no idea what was going on two years ago...
So you see, dear reader, even a Nobel Prize-winning dog can learn a new trick. Now, he sees through a glass darkly… Soon, he will be face to face with deflation.
Of course, the poor man still completely misunderstands what is really going on. But what do you expect? His career depends on not understanding it. Krugman would have to turn his back on his neo-Keynesian creed if he ever caught on to the plot. He would have to look for a new job if he were ever to tell his readers about it. Almost everyone wants the feds to “do something” to avoid the Japanese “trap.” Imagine what would happen if The NY Times’ leading economist were to say:
“Forget it. The feds have already done too much. Following my advice, they were a major cause of the present crisis. Following my advice, they have made it worse. I was wrong. Now the best thing they can do is to withdraw as gracefully as possible.”
That’s not what Times readers want to hear. It’s not what anyone wants to hear, except us “crazy alarmists” here at The Daily Reckoning.
We’ve been talking about the Japan trap for years. Economist Richard Koo calls it a “balance sheet recession.” He’s right about that. The private sector destroys excess capacity and excess debt. When it’s over, the private sector balance sheet looks a lot better.
Of course, it could happen faster. In Japan, it may still be going on. Why? Because the Japanese feds worked so hard to stop it. Monetary stimulus. Fiscal stimulus. Quantitative easing. They tried everything. And kept at it for nearly 20 years.
But what they were really doing was preventing the one fix that really fixes. It is as if they were letting the air out of the market economy’s tires…and then were amazed that it didn’t roll.
You know what cures a depression, dear reader? We’ll tell you. A depression.
A depression destroys excessive debt. Businesses with too much debt go broke. Bonds that can’t be paid go into default. Households that have spent more than they could afford go broke.
Problem solved. Debt disappears.
Then, the economy can grow again.
So what does Krugman suggest? You guessed it: stop the process of debt destruction at all costs! Do what the Japanese did, in other words, only do more of it.
Friday, July 9, 2010
Is a Depression All Bad?
Maybe a depression wouldn’t be so bad, after all.
The gist of the argument against depression is that people lose their jobs, incomes go down, companies go bankrupt and so forth. Is that all? Well, in general, people have less stuff…and less money to buy more stuff.
If that were all there was to it, it would seem like a small price to pay for the benefits of a depression. After all, a depression would wring the debt out of the economy. It would get rid of weak businesses. It would turn spendthrift households into savers. That’s got to be worth something.
The large presumption behind these worries is that, in a depression, people do not get what they want…they are disappointed. They are poor. They wear shoes with holes in them and drive old cars. They vote for Democrats and start reading Das Kapital.
Big deal.
What actually causes a depression, anyway? People choose to save rather than spend. Reduced demand causes a drop in sales…an increase in unemployment…falling prices and all the other nasty things we associate with a ‘depression.’ And yet, behind it is something people really want – savings. And behind the desire for savings are very real calculations and concerns. Without savings, people cannot retire comfortably. Without savings, they cannot withstand financial shocks and setbacks. Without savings, they may not be able to take advantage of opportunities that come their way.
In other words, there is a depression because people would rather have savings than a new car, or a new pair of shoes, or a vacation. In other words, people choose to have their cake rather than to eat it. What’s wrong with that?
Nothing. But it causes the economists’ GDP meters to tick over in a direction they don’t like…or at least in a direction they think they can do something about. The economists’ answer to this is to let the people have their savings…but to counteract the economic affect of higher savings rates with increased government spending.
It sounds so neat…so clean…so symmetrical. You might almost think it made sense, if you don’t think about it too much.
But wait. Where do the feds get any money to spend? They have to take up the savings. They take the cake! And there you have the problem right there. Resources have to come out of some other use – say, inventories, investments, whatever – and be put to use on government projects. We can safely assume that the federal projects are not the angel food, layered and frosted confections that the savers wanted to eat. Otherwise, they would have willingly paid for them themselves and there wouldn’t be a downturn in the first place. So, instead of savings and depression, the people get boondoggles and “growth.” Only it isn’t real growth. It is growth that flatters economists but leaves the rest of us hungry and disappointed. It is empty calories…measurable as “growth” on the economists’ GDP meters…but completely phony and not at all what people really wanted.
And what happened to their savings? They’ve been eaten up by the feds and their favored groups.
This whole Keynesian stimulus project is scammy from beginning to end. And in the middle too.
read the entire essay
The gist of the argument against depression is that people lose their jobs, incomes go down, companies go bankrupt and so forth. Is that all? Well, in general, people have less stuff…and less money to buy more stuff.
If that were all there was to it, it would seem like a small price to pay for the benefits of a depression. After all, a depression would wring the debt out of the economy. It would get rid of weak businesses. It would turn spendthrift households into savers. That’s got to be worth something.
The large presumption behind these worries is that, in a depression, people do not get what they want…they are disappointed. They are poor. They wear shoes with holes in them and drive old cars. They vote for Democrats and start reading Das Kapital.
Big deal.
What actually causes a depression, anyway? People choose to save rather than spend. Reduced demand causes a drop in sales…an increase in unemployment…falling prices and all the other nasty things we associate with a ‘depression.’ And yet, behind it is something people really want – savings. And behind the desire for savings are very real calculations and concerns. Without savings, people cannot retire comfortably. Without savings, they cannot withstand financial shocks and setbacks. Without savings, they may not be able to take advantage of opportunities that come their way.
In other words, there is a depression because people would rather have savings than a new car, or a new pair of shoes, or a vacation. In other words, people choose to have their cake rather than to eat it. What’s wrong with that?
Nothing. But it causes the economists’ GDP meters to tick over in a direction they don’t like…or at least in a direction they think they can do something about. The economists’ answer to this is to let the people have their savings…but to counteract the economic affect of higher savings rates with increased government spending.
It sounds so neat…so clean…so symmetrical. You might almost think it made sense, if you don’t think about it too much.
But wait. Where do the feds get any money to spend? They have to take up the savings. They take the cake! And there you have the problem right there. Resources have to come out of some other use – say, inventories, investments, whatever – and be put to use on government projects. We can safely assume that the federal projects are not the angel food, layered and frosted confections that the savers wanted to eat. Otherwise, they would have willingly paid for them themselves and there wouldn’t be a downturn in the first place. So, instead of savings and depression, the people get boondoggles and “growth.” Only it isn’t real growth. It is growth that flatters economists but leaves the rest of us hungry and disappointed. It is empty calories…measurable as “growth” on the economists’ GDP meters…but completely phony and not at all what people really wanted.
And what happened to their savings? They’ve been eaten up by the feds and their favored groups.
This whole Keynesian stimulus project is scammy from beginning to end. And in the middle too.
read the entire essay
Thursday, May 27, 2010
Wall Street Crash, Again?
A bigger meltdown than the credit crisis? Yes, Bush's team drove America into a ditch. But now Obama and his money men, Summers, Geithner, Bernanke, are digging the hole deeper. Soros says we have not learned "the lessons that markets are inherently unstable." As a result, "the success in bailing out the system on the previous occasion led to a super-bubble." Now "we are facing a yet larger bubble." Worse than 2008?
Yes, the game may be "in the refrigerator," the lights will go out, but as Soros hints, the electricity may get turned off too. Get it? This may not be a correction. Not even a bear. What's coming could be worse than the 2000 dot-com crash and the 2008 meltdown combined, a "Super-Bubble" says Soros. And the biggest reason, Nouriel Roubini and Stephen Mihm tell Newsweek, is that "the president's half-measures won't fix our failed financial system" because he refuses to "bust up the too-big-to-fail banks."...
Sound familiar? Yes indeed, in "This Time Is Different: Eight Centuries of Financial Folly," economists Carmen Reinhart and Kenneth Rogoff pinpoint the key signal that will blow the whistle and call the game: The "90% ratio of government debt to GDP is a tipping point in economic growth." For 800 years "you increase it over and beyond a high threshold, and boom!"
Warning, fans, the numbers on the game-clock are flashing wildly. America's ratio is now 92%, thanks to Obama's $1.7 trillion budget, future deficits, exploding debt. Soon, Ka-Booom! Another great nation bites the dust. Depression follows. Goodbye retirement...
"The lesson of history, then, is that even as institutions and policy makers improve there will always be a temptation to stretch the limits. ... If there is one common theme to the vast range of crises ... it is that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom. ... Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang -- confidence collapses, lenders disappear and a crisis hits. ... Highly leveraged economies ... seldom survive forever ... history does point to warnings signs that policy makers can look to access risk -- if only they do not become too drunk with their credit bubble-fueled success and say, as their predecessors have for centuries, 'This time is different'."
No, "this time" it's never different. Get it? In the end, it doesn't matter what happens to the Dodd-Obama financial reforms. The endgame's never a Black Swan, it's a very White Swan well known to historians -- guaranteed, inevitable and inescapable. This time is never different.
Wednesday, January 6, 2010
Recession is Over...Depression Continues
If you read the papers you’re likely to think that the recession is over…we’re in full recovery mode…with rising sales, rising production, and rising prices. This year is going to be a good one for stocks…and the US economy is coming back stronger than expected.
Is it true?
Well, it’s sort of true. The recession is over…the depression continues. As we keep saying, if you’re going to make a royal mess of things, you need taxpayer support. And with the unwitting and unwilling support of millions of American taxpayers, the federal authorities are busily making a bad situation worse.
read the essay
Is it true?
Well, it’s sort of true. The recession is over…the depression continues. As we keep saying, if you’re going to make a royal mess of things, you need taxpayer support. And with the unwitting and unwilling support of millions of American taxpayers, the federal authorities are busily making a bad situation worse.
read the essay
Economic Recovery???
We’re in a depression. It won’t end until it has done its work. And, with the feds trying to block it, prevent it, hold it off, deflect it and retard it, it could take years before this depression has finished its job.
Martin Feldstein, an expert on business cycles:
“The recession isn’t over.” In a Bloomberg Radio interview on December 17th.
David Rosenberg explains that 90% of the ‘growth’ in the third quarter came from stimulus measures. And that still only produced a 2.2% annualized GDP increase, far below the rates typical at the end of a recession.
“What is normal is that the first quarter of post-recession growth is that real GDP expands at a 7.3% annual rate; 2.2% is really nothing to get excited about – it’s actually quite worrisome...
The US is fast becoming the worst kind of banana republic…one with ice storms and no bananas.
read the entire essay
Martin Feldstein, an expert on business cycles:
“The recession isn’t over.” In a Bloomberg Radio interview on December 17th.
David Rosenberg explains that 90% of the ‘growth’ in the third quarter came from stimulus measures. And that still only produced a 2.2% annualized GDP increase, far below the rates typical at the end of a recession.
“What is normal is that the first quarter of post-recession growth is that real GDP expands at a 7.3% annual rate; 2.2% is really nothing to get excited about – it’s actually quite worrisome...
The US is fast becoming the worst kind of banana republic…one with ice storms and no bananas.
read the entire essay
Monday, December 28, 2009
The Economy 2010 and Beyond
Is it a bounce or a bull market? We’ll stick with the bounce hypothesis a while longer; until we’re proven right…or people start laughing at us, whichever comes first.
Meanwhile, the man on the street is not taking chances. While he probably believes the claptrap from Washington and Wall Street, he also knows that his house has lost 30% of its value and that if he loses his job he’ll have a hard time finding another one. So, he’s cutting back – just like he should...
The economy can’t go back to the Bubble Epoque. That period was irreproducible. Consumers were able to live beyond their means by borrowing against their houses (or, ‘taking out equity,’ as they liked to say.) Those days are gone forever...
Depressions take time to express themselves. Remember, they are not pauses in the life of an otherwise healthy trend. They are what happens after the trend drops dead. Then, the economy needs to reinvent itself. At first, people don’t want to believe it. They try to revive the old business model. They bet that the old companies will quickly return to robust health; they buy their stocks. They demand that the government do something to save the poor, ailing economy.
But it’s not that simple… You can’t revive a dead economy. And when you realize the old economic model is, in fact, a corpse…it’s depressing.
The US economy (and much of the rest of the world economy) can no longer depend on increasing consumer debt. We need a new model…a new business plan… The sooner we find one, the better off we all will be.
read the entire essay
Meanwhile, the man on the street is not taking chances. While he probably believes the claptrap from Washington and Wall Street, he also knows that his house has lost 30% of its value and that if he loses his job he’ll have a hard time finding another one. So, he’s cutting back – just like he should...
The economy can’t go back to the Bubble Epoque. That period was irreproducible. Consumers were able to live beyond their means by borrowing against their houses (or, ‘taking out equity,’ as they liked to say.) Those days are gone forever...
Depressions take time to express themselves. Remember, they are not pauses in the life of an otherwise healthy trend. They are what happens after the trend drops dead. Then, the economy needs to reinvent itself. At first, people don’t want to believe it. They try to revive the old business model. They bet that the old companies will quickly return to robust health; they buy their stocks. They demand that the government do something to save the poor, ailing economy.
But it’s not that simple… You can’t revive a dead economy. And when you realize the old economic model is, in fact, a corpse…it’s depressing.
The US economy (and much of the rest of the world economy) can no longer depend on increasing consumer debt. We need a new model…a new business plan… The sooner we find one, the better off we all will be.
read the entire essay
Tuesday, September 29, 2009
What Causes a Depression?
…how does it all work? We’re doing some serious thinking this week. What is it that actually causes a depression? A stock market collapse? Or too much debt? How come government can appear to cure the problem sometimes – 2001-2007 – but not other times? How come the Japanese were not able to increase consumer prices? Even now…Japan’s inflation rate is negative. And why is it, despite the most massive effort at monetary inflation ever undertaken, the US bond market still forecasts an inflation rate of less than 2%?...
A friend made the mistake of asking us what to expect from the economy. We said it would go do down.
“You mean, you expect a W-shaped recovery,” he said… “A double-dip recession?”
“No…we expect no recovery at all. It’s a ‘W’ without the last stroke…”
Of course, we were exaggerating. But not much. We do not think that the economy of the Bubble Era can ever be revived. It will never recover…because it is dead....
“But when will it come to an end?” you ask.
“When it is over.”
A depression ends when it has done its work. It must correct mistakes. It must punish errors. It must destroy the bubble economy…and the mindset of the Bubble Era. Only then can new real, sustainable growth begin again...
Here’s how it works. The Fed lends the bankers money. Then, the bankers turn around and lend it back to the feds. The banks are happy; they’re making money on a risk-free trade. The regulators are happy; what could be safer in a bank’s vault than US Treasury bonds? Investors are happy; it looks like the financial sector is making money again. And the feds are happy; they’re able to finance their deficits.
Who’s not happy? So far, so good. But hold on…
“This is not a sustainable recovery,” says fund manager Crispin Odey in The Financial Times.
read the entire essay
A friend made the mistake of asking us what to expect from the economy. We said it would go do down.
“You mean, you expect a W-shaped recovery,” he said… “A double-dip recession?”
“No…we expect no recovery at all. It’s a ‘W’ without the last stroke…”
Of course, we were exaggerating. But not much. We do not think that the economy of the Bubble Era can ever be revived. It will never recover…because it is dead....
“But when will it come to an end?” you ask.
“When it is over.”
A depression ends when it has done its work. It must correct mistakes. It must punish errors. It must destroy the bubble economy…and the mindset of the Bubble Era. Only then can new real, sustainable growth begin again...
Here’s how it works. The Fed lends the bankers money. Then, the bankers turn around and lend it back to the feds. The banks are happy; they’re making money on a risk-free trade. The regulators are happy; what could be safer in a bank’s vault than US Treasury bonds? Investors are happy; it looks like the financial sector is making money again. And the feds are happy; they’re able to finance their deficits.
Who’s not happy? So far, so good. But hold on…
“This is not a sustainable recovery,” says fund manager Crispin Odey in The Financial Times.
read the entire essay
Thursday, August 20, 2009
Learn to Love the Depression
A V-shaped recovery?
A W-shaped recovery?
Forget it…there ain’t no letter in the alphabet that describes a “recovery” we’re likely to have.
We say that in the spirit of mischief as well as elucidation. Of course, the world won’t stay in a depression forever. And even depression ain’t so bad, once you get used to it. The world economy will probably drag around a bit on the bottom…with low, or negative, growth rates in most places…until it finds a new model. The old model is dead. The authorities can put on as much rouge and powder as they want. They could even give the corpse jolts of electricity to make it sit up. But they can’t revive it. It’s finished. Over. Kaput...
The problems are real…at the heart of the real economy. They are not problems that can be solved by monkeying with the money supply, interest rates, or even fiscal policy. They are problems that need to be solved by the real economy…in the real economy…by consumers, who need to pay off their debts, and by businessmen, who need to adjust to the realities of the real world – adapting their capacity so as to produce things for people who can actually afford to buy them. It’s a long process…with many bankruptcies and disappointments along the way…
That process has only just begun. It will deepen and get worse, as both consumers and businessmen realize that there will be no quick recovery…and no return to the old model – ever. Look for more layoffs…more foreclosures…more cutbacks and workouts…
Look for more depression, dear reader…
And learn to like it; it will be with us for a long time.
read the entire essay
A W-shaped recovery?
Forget it…there ain’t no letter in the alphabet that describes a “recovery” we’re likely to have.
We say that in the spirit of mischief as well as elucidation. Of course, the world won’t stay in a depression forever. And even depression ain’t so bad, once you get used to it. The world economy will probably drag around a bit on the bottom…with low, or negative, growth rates in most places…until it finds a new model. The old model is dead. The authorities can put on as much rouge and powder as they want. They could even give the corpse jolts of electricity to make it sit up. But they can’t revive it. It’s finished. Over. Kaput...
The problems are real…at the heart of the real economy. They are not problems that can be solved by monkeying with the money supply, interest rates, or even fiscal policy. They are problems that need to be solved by the real economy…in the real economy…by consumers, who need to pay off their debts, and by businessmen, who need to adjust to the realities of the real world – adapting their capacity so as to produce things for people who can actually afford to buy them. It’s a long process…with many bankruptcies and disappointments along the way…
That process has only just begun. It will deepen and get worse, as both consumers and businessmen realize that there will be no quick recovery…and no return to the old model – ever. Look for more layoffs…more foreclosures…more cutbacks and workouts…
Look for more depression, dear reader…
And learn to like it; it will be with us for a long time.
read the entire essay
Subscribe to:
Posts (Atom)