Bubble. Burst. Liquidity. Repeat

Increasing both

In March 2000 the dot com bubble burst. From a peak of 5,048.62 on March 10th, 24 percent up on late 1999, the NASDAQ Composite index had fallen to half that by late 2000. GDP growth slumped and unemployment steadily climbed from under 4 percent in late 2000 to a peak of 6.25 percent in mid-2003.

On January 3rd, 2001, Alan Greenspan acted and cut the Fed funds rate to 6 percent. By June 2003 it was down to 1 percent where it stayed until June 2004. The effects are well known. This wave of liquidity was directed by government action like the Community Reinvestment Act, government bodies like Fannie Mae and Freddie Mac, and a minefield of moral hazard in a financial sector which knew it would be bailed out of any trouble, into a housing bubble.

That bubble burst too. With inflation on its way up from 2 percent in mid-2003 to 4.7 percent in October 2005, Greenspan gradually raised the Fed funds rate, reaching 5.25 percent in June 2006. But this crippled many people who had borrowed at lower rates to buy property. The number of new foreclosure starts in the US increased by more than 50 percent to 1.1 million between 2006 and 2007.

Assets backed with these non-performing loans crashed in value. Banks holding them saw their balance sheets ravaged. Seeing counterparty risk everywhere, banks stopped lending to each other and the LIBOR, usually about 0.15 percent above where the market thinks the bank rate will be in three months’ time, shot up to over 6.5 percent in August 2007. The credit crunch had arrived.

And Greenspan, his academic successor Ben Bernanke, and central bankers around the world reacted as they had to the bursting of the dot com bubble. The Fed funds rate went back down from 5.25 percent in September 2007 to 0.25 percent in December 2008. Likewise, between July 2007 and March 2009 the Bank of England slashed its Base Rate from 5.75 percent to 0.5 percent. Even the supposedly cautious European Central Bank reduced its key rate from 4.25 percent in summer 2008 to 1 percent by the spring of 2009.

When this failed to have the desired stimulative effect central bankers began trying to pull down the long end of the yield curve. Under Quantitative Easing the Bank of England spent £375 billion of newly printed money on British government debt. The Federal Reserve is spending $85 billion dollars a month on bonds.

There is a pattern here. A bubble in assets (dot com stocks) bursts and central banks react by hosing liquidity into the system. But this liquidity inflates another bubble (property) and when that bursts central banks react by hosing liquidity into the system…

In the high Keynesian noon of the post-war period it was widely thought that monetary policy was ineffective for macroeconomic management (it is debatable how much this is actually owed to Keynes). All that could be hoped for from monetary authorities was support for the fiscal policies which really had the clout to equilibrate the economy.

But this Keynesian paradigm fell apart with the stagflation of the 1970s. Money mattered was the lesson and it became the primary tool of macroeconomic management, replacing fiscal action, at least until the ‘Return of the Master’ following the credit crunch.

But what has this meant in practice? As interest rates are lowered in response to an adverse shock investment, calculations change, especially when, like Alan Greenspan, those behind the policy publicly promise its continuance. To the extent that this fosters a wealth effect, consumption, as well as investment, may be stimulated. And this, in fact, is exactly the way the policy is supposed to work.

But the rates cannot stay that low indefinitely, nor, despite the jawboning by monetary policymakers, are they intended to. At some point they will rise. Again, this actually is the way the policy is supposed to work.

And when those rates do rise what happens to those marginal investors who made their decision when rates were at their lowest? What happened to the NINJAs who bought condos in Michigan when interest rates were 1 percent when the rates went up in 2006? They were scuppered. And what will happen to all the enterprises which are currently dependent on interest rates remaining at their historic lows when those rates start to rise? It is because more people are now asking that question that markets have turned skittish recently, since Ben Bernanke even began to discuss a possible future ‘tapering’ of Quantitative Easing.

Those rates will have to rise at some point. But, when they do, whichever bubble we have now will burst. Our monetary authorities have printed themselves into a corner.

This is what passes for macroeconomic management. As one of the high priests of this bubble-onomics, Paul Krugman, advised in 2002 in the wake of the dot com bust “To fight this recession the Fed needs…soaring household spending to offset moribund business investment…Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble”. And no, that’s not taken out of context.

One of the great myths in economics is that of some sort of stable equilibrium. It is apparent that active monetary policy is little better at producing that than fiscal policy proved. Instead the economy is characterised by crises of increasing frequency and amplitude and the only solutions policymakers appear to have to deal with them will buy ever shorter-lived respite at the cost of increasing both the frequency and amplitude of crises.

We are in an equilibrium of sorts, but it is an equilibrium of crises.

This article originally appeared at The Commentator

Why is David Blanchflower so scared of the truth?


The Michael Howard of economics

A couple of weeks back I took David Blanchflower of the New Statesman to task over the failure of his recent attempt to justify his infamous 2009 prediction that “unemployment could easily reach four million”. Blanchflower responded on Twitter: “If spending cuts are made too early and the monetary and fiscal stimuli are withdrawn “if crucial- buffooonery” (sic).

In fairness to Blanchflower he did preface his 2009 doomsday scenario with exactly those words. But let’s look a little more closely at Blanchflower’s warnings of the twin evils of tight money and spending cuts.

First, monetary policy. Who, in 2009, was advocating the tightening monetary policy? Possibly a few Austrians (though not all of them). Not many others. Certainly, as far I recall, no one in the Conservative Party as Blanchflower claimed. If I am wrong (and I have scoured the internet) and there were leading Conservatives advocating monetary tightness in 2009 then please, let me know.

But if, as I’m pretty sure is the case, nobody in the Conservative Party was advocating the early withdrawal of monetary stimuli then why on earth did Blanchflower waste anyone’s time warning them about it?

And what about the fiscal side of Blanchflower’s prediction? He loudly and regularly makes the point that ‘Slasher’ Osborne (I know, not much as nicknames go) has cut government spending and plunged Britain into renewed recession. I asked Blanchflower once or twice (or thrice) by how much ‘Slasher’ Osborne has cut government spending to send us into recession.

The answers I got ranged from “go and look it up yourself” to “go back into your hole” and “If you want to hire me to do consulting work for you I will bill at my normal high rates min 3hrs half up front”. How sad that when given a chance to engage and educate, a man who holds a teaching position chose instead to act in such a petulant and childish manner. How terrifying that someone so shifty, evasive, and brittle under pressure, was once a member of the Monetary Policy Committee.

Well, I went and looked up the numbers and the reasons for Blanchflower’s reticence quickly became apparent. In the fiscal year ending April 2010, Labour’s last in office, the British government spent £660.8 billion and in the year ending April 2012 it was £688 billion: an increase of 4.1 percent. Over the same period, however, we have had above target inflation which has given us a real terms cut in government spending of of 2.7 percent.

That’s it. After a decade which saw Labour double government spending in real terms it has been pruned by 2.7 percent. Hardly ‘slashing’ and all delivered by Mervyn King and his failure to keep inflation at 2 percent. If he had we’d have had a very slight real terms increase in spending; but that, presumably, really would have meant the monetary tightness Blanchflower was wailing about back in 2009.

I don’t suppose the monikers ‘Slasher King’ or ‘Trimmer’ Osborne would be much LOLZ for the Prof on Twitter. You can see why he was desperate to avoid giving a straight answer; his whole shtick would collapse if he did.

Blanchflower might argue that some areas of government spending have been cut quite drastically but there are two points to be made there. First, The Master himself, John Maynard Keynes, famously said that it didn’t matter too much what you spent your fiscal stimulus on, whether it’s Pyramids, wars, or burying old bottles full of cash and digging them up again. The key thing was to get the money spent.

Second, you have to wonder what else Blanchflower expects. Even with record low interest rates, British government debt, for which we are all liable, has risen so vertiginously that by 2015 it is estimated that we will be spending £70 billion a year on debt interest, up from £31 billion in 2008. To some extent we are seeing spending on welfare being cut so we can give the money to bond investors instead. Don’t like it? Don’t run up a load of debt.

Of course, Blanchflower would argue that we don’t actually need to worry. We just keep printing and borrowing the money we need. The £450 billion the coalition will have added to the national debt by April 2013 is too stingy; the doubling of the national debt over its lifetime too miserly. With views like that you can understand why Blanchflower runs scared from any rational discussion.

So, back in 2009, Blanchflower was warning us about something that wasn’t going to happen. After trying and failing to exonerate his 2009 prediction his argument now is that he wasn’t wrong, just irrelevant. But then you might find yourself asking why we should pay much attention to a slippery peddler of irrelevancies. Why indeed.

With his affected rudeness and terror of reasonable discussion with anyone who might disagree with him, Blanchflower is a sort of pound store Paul Krugman. But, without a bestselling book, a Nobel Prize, and with a column in the Independent rather than the New York Times, that’s a bit like comparing Donovan to Bob Dylan.

Ground control to Major Krugman


Paul Krugman was ill/The Day the Earth Stood Still…

One of the standard charges against believers in smaller government is that we are all fans of Ayn Rand and imagine ourselves as John Galt. I get this thrown at me despite the fact that I have never read a single thing Rand wrote.

Indeed, Paul Ryan got a roasting for his admiration of Rand from New York Times columnist Paul Krugman who called Rand “a very unserious, unreasonable novelist”. And maybe Krugman is right? Perhaps basing your political and economic philosophy on an old science fiction novel is the height of weirdness.

But hang on, what’s this? In an article for the Guardian titled ‘Asimov’s Foundation novels grounded my economics‘, Krugman writes, “I grew up wanting to be Hari Seldon, using my understanding of the mathematics of human behaviour to save civilisation.”

It’s worth reading that again and remembering that it’s from the same man who quotes the well-worn joke about Atlas Shrugged and Lord of the Rings; “the unrealistic fantasy world portrayed in one of those books can warp a young man’s character forever; the other book is about orcs.” If nothing else, at least Krugman’s suggestion that a fake alien invasion could rescue the economy makes a little more sense now.

For those who haven’t waded through Isaac Asimov’s several Foundation novels, Krugman explains:

In Foundation, we learn that a small group of mathematicians [including Krugman’s hero Hari Seldon] have developed ‘psychohistory’ (a) rigorous science of society. Applying that science to the all-powerful Galactic Empire in which they live, they discover that it is in fact in terminal decline, and that a 30,000-year era of barbarism will follow its fall. But they also discover that a carefully designed nudge can change that path…The novels follow the unfolding of that plan

There’s only one brief description of a space battle – and the true purpose of the battle, we learn, is not the defeat of an ultimately trivial enemy but the creation of a state of mind that serves the Plan

There are a series of moments in which the fate of the galaxy seems to hang in the balance… Each of these crises is met by the men of the hour, whose bravery and cunning seem to offer the only hope. Each time, the Foundation triumphs. But here’s the trick: after the fact, it becomes clear that bravery and cunning had nothing to do with it, because the Foundation was fated to win thanks to the laws of psychohistory. Each time, just to drive the point home, the image of Hari Seldon, recorded centuries before, appears in the Time Vault to explain to everyone what just happened.

You can see how Krugman pictures himself. He is one of a small band of Psychokeynesians who possess an insight, the IS/LM model, which enables them to predict the future of economies and gives them the tools – vast deficits and credit expansion – to steer them.

Anything that supports the Psychokeynesian analysis is evidence; anything that doesn’t is simply a ruse. And when the next bit of corroborating evidence floats along, Hari Krugman emerges from a Time Vault to say “told you so”.

But there’s a problem. It’s true that Krugman spotted the housing bubble in 2005 but then he had been calling for it in 2002. This might lead you to question Krugman’s omnipotence. Or you might want to wait for Hari Krugman to appear and explain how this crafty Knight’s Move is actually part of The Plan.

Hari Krugman celebrates his clairvoyance:

The IS-LM model (don’t ask) told us that under depression-type conditions like those we’re experiencing, some of the usual rules would cease to apply: trillion-dollar budget deficits wouldn’t drive up interest rates, huge increases in the money supply wouldn’t cause runaway inflation. Economists who took that model seriously back in, say, early 2009 were ridiculed and lambasted for making such counterintuitive assertions. But their predictions came true.

But considering that they also predicted that this mountain of debt and avalanche of new money would lead to economic recovery then no, their predictions didn’t come true.

Remember former Chair of the Council of Economic Advisors Christina Romer’s prediction that President Obama’s Keynesian stimulus would see American unemployment peak at 8 percent in late 2009 and fall to a little over 5 percent today? Remember that American unemployment actually peaked at over 10 percent in late 2009 and stands at 7.9 percent today?

This doesn’t worry Hari Krugman a bit. In the course of a spat with economist Robert P. Murphy, Krugman wrote:

[I]t’s really important to distinguish between fundamental predictions of a model and predictions that an economist happens to make that don’t really come from the model… [T]he unfortunate Romer-Bernstein prediction of a fairly rapid bounceback from recession reflected judgements about future private spending that had nothing much to do with Keynesian fundamentals, and therefore sheds no light on whether those fundamentals are correct. In short, some predictions matter more than others.

Quite so Paul. Apparently the predictions that come true matter; those that don’t, don’t.

In his Guardian piece Krugman excitedly writes of “the possibility of a rigorous, mathematical social science that understands society, can predict how it changes, and can be used to shape those changes.” Well, looking at the record it’s clear that Hari Krugman hasn’t found it.

Or maybe he has, and we mere mortals simply need to wait for his shimmering likeness to appear from the Time Vault and say “told you so.”

This article originally appeared at The Commentator

Why do smart people still choose Keynes over Hayek?

The ridiculous and the sublime

On October 17th a group of concerned economists wrote to the Times. The current economic woes, they wrote, were down to insufficient spending/increased saving. “[W]hen a man economizes in consumption”, they argued, “and lets the fruit of his economy pile up in bank balances or even in the purchase of existing securities, the released real resources do not find a new home waiting for them.” Crucially, “In present conditions their entry into investment is blocked by lack of confidence.” The government should step in and spend to make up the shortfall they said.

On October 19th another group of economists replied with their own letter to the Times. They believed that the cause of the economic problems was monetary mismanagement which had created “a deficiency of investment-a depression of the industries making for capital extension, &c., rather than of the industries making directly for consumption.” They argued for the necessity of increased saving to readjust this and explicitly rejected any role for government spending, writing that “many of the troubles of the world at the present time are due to imprudent borrowing and spending on the part of the public authorities.”

But this was October 1932 and the letters were written by John Maynard Keynes and Friedrich von Hayek. It says much about the essentially static nature of economic knowledge that an 80 year old debate remains so compelling today that it continues to inspire radio shows, debates, books, and even rap-offs.

Keynes’s economics, in a nutshell, argues that of the two components of ‘effective demand’, consumption and investment, investment is prone to volatile swings. As Keynes put it, investment spending was reduced when their expected payoff, the Marginal Productivity of Capital, dipped below the cost of financing them, the interest rate.

Why might this happen? “Animal spirits” was Keynes’ answer; “Don’t ask me guv” in other words. Whatever it was that tipped investors from optimism into effective demand-sapping pessimism is exogenous to the model; it cannot be accounted for by it.

Either way, the policy prescriptions of the Keynesian model are obvious. Financing costs must be held down with low interest rates and the Marginal Productivity of Capital must be underwritten by a government guarantee to purchase, with deficit spending if need be, whatever output industry might produce. Low interest rates and deficit spending. That is the Keynesian prescription for prosperity.

Hayek’s theory is very different. For Hayek, when low interest rates cause an expansion of credit, this credit flows into some parts of the economy before others. This blows up bubbles in the affected part of the economy, be it in housing, internet stocks, or tulips.

At some point, Hayek argues, the inflationary effect of this credit expansion overwhelms any wealth effect and interest rates begin to rise. With no further credit available to purchase the bubble assets the prices of these assets and their attendant industries collapse. This is the bust.

A major difference between Hayek’s theory and Keynes’s is that for Hayek the bust as well as the boom is endogenous to the model, it is explained by it. The bust isn’t caused by “animal spirits” switching inexplicably out of the clear blue sky, but by the predictable outcome of actions undertaken in the boom.

As Hayek’s model is radically different from Keynes’s, radically different prescriptions follow from it. Viewing the cycle as a whole Hayek believed that preventing a future bust was as important as fighting the current one and he proposed measures to limit the ability of banks to swell credit, his favoured solution being competing currency issue by banks.

More immediately, Hayek argued that as the bubble assets and attendant industries had been pumped up by unsustainable injections of inflationary credit, they could only be liquidated; any attempt to preserve their value would only prolong the bust or, as bad, set another cycle in motion. Sound money and non-intervention was the prescription of Hayek and his fellow Austrian Schoolers.

Looking back over the last few years you have to ask how intelligent people, examining the evidence, can still choose Keynes over Hayek. In both Britain and America we had monetary policy makers working to keep financing costs down with low interest rates. We had governments running budget deficits and applying fiscal stimulus to economies which were already growing. We followed the Keynesian prescription for prosperity and we still ended up with a bust – a bust which Hayekians, with their superior model, saw coming.

The answer lies in the prescriptions. Keynes, with his cheap credit and shower of borrowed money, is a pleasant prospect. Indeed, Paul Krugman, one of the most uncompromising modern Keynesians, believes that “Ending the depression should be incredibly easy”, all we need is cheaper credit and more borrowing. Just, in fact, what we had going into the crisis.

Hayek, on the other hand, offers a more painful prospect. As his mentor Ludwig von Mises put it:

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved”

Which of these vistas would you prefer to gaze upon?

But these theories should be judged not on how warm and fuzzy they make us feel but on how accurate they are. On that score Hayek wins hands down yet some still cling doggedly to Keynes. It’s for the same reason the aunt who gives you chocolates is preferred to the aunt who makes you do your homework.

This article first appeared at The Commentator

Overrated: Paul Krugman

“Snake oil, £14.99!”

When Friedrich von Hayek became a Nobel Laureate in economics in 1974 he said: “The Nobel Prize confers on an individual an authority which in economics no man ought to possess.” The truth of this is demonstrated daily by the case of Paul Krugman.

Krugman and his supporters whip out his Nobel Memorial Prize in Economic Sciences like a Top Trump of Diego Maradona. It is awarded annually — so why the special fuss about a prize Krugman won four years ago? His Nobel is being used to intimidate opponents. Any opposition to Krugman with his Nobel Prize is opposition to science itself.

Why Krugman generates so much opposition isn’t hard to fathom. From his perch in the New York Times he says one ridiculous thing after another. In the British context Krugman’s risible thesis is that the economy is struggling because the government isn’t spending enough money, that austerity is driving us back into recession, and that the solution to our debt crisis is to borrow and spend even more money.

But there is no austerity. British government spending has fallen from record highs by only about 1 per cent since the coalition took office. This has tipped us back into recession? Most private sector companies could save that by switching to cheaper copier paper.

Krugman argues that we need vast government spending to get us out of the recession. But Britain is running a budget deficit of more than 8 per cent of GDP, one of the highest in the developed world. The government is spending more than 400 million borrowed pounds every day; the national debt is increasing by more than £5,000 every second.

And yet, with all this extra borrowing and all this spending Britain’s economy is still tanking. Perhaps this suggests that massive deficit spending isn’t the answer. That’s one interpretation. Not for Krugman. To him the problem is that even the record levels of borrowing which will see Britain’s national debt increase by 60 per cent, from £1 trillion to £1.6 trillion, by the next election, are not enough. We need to borrow more. That, he claims, would solve our debt crisis.

Krugman’s new book (its recommended retail price an aggregate demand boosting £14.99) is called End This Depression Now! (Norton) as though that hadn’t previously occurred to anyone else. Indeed, it’s possible that if George Osborne decided to increase borrowing to 10 or 12 per cent of GDP we might have a quarter or two of growth. Labour managed to boost GDP growth to 1 per cent by dumping £160 billion of borrowed money into the economy.

But after that? Don’t ask Krugman. He follows John Maynard Keynes who, accurately but none too helpfully, observed: “In the long run we are all dead.” Actually, if you did ask Krugman, you might get a response like the one he gave when the dot com bubble burst: “To fight this recession the Fed needs . . . soaring household spending to offset moribund business investment . . . Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”

That worked out fine, didn’t it? Well yes, in Krugman’s terms it did. Sure, we are now living with the effects of the bursting of that bubble but we did get a few good years of rocketing property prices which made us all feel as though we were getting richer just by sitting in our homes. And now that bubble has burst we just inflate a new one somewhere else. And when that bursts we inflate a new one. And when that bursts . . .

This is where the Keynesian ignorance of the long run demonstrated by Krugman leads you: lurching from one catastrophe to the next with a series of increasingly expensive quick fixes of ever shorter duration which do nothing to address the underlying problems.

The economic problems of Greece, Spain, and Britain are not that the deficits of 7 per cent, 7 per cent and 8 per cent their governments are respectively running are not high enough. Greek labour costs are higher than elsewhere and Greece doesn’t export very much. Spain has unemployment of 24 per cent thanks to a labour market which makes job creation almost impossible. Britain is  already one of the most indebted nations on the planet.

These fundamental problems are ignored by Krugman and his followers. In his 1994 book Peddling Prosperity Krugman accused the supply-side economists of the 1980s of being “cranks” selling “snake oil” because, he said, they offered politically expedient economic non-remedies with no   basis in fact. Hypocrisy, thy name is Krugman.

As for that Nobel Prize, Paul Krugman won it for his work on international trade patterns, not his crackpot Keynesianism. Sir Paul McCartney won an Ivor Novello award for writing “Yesterday”. That doesn’t mean sentimental schlock like “Mull of Kintyre” is worth listening to.

This article originally appeared in Standpoint

The Tea Party and the Occupy Movement: two sides of the same coin but only the former really gets it

That is, like, soooooooo Tea Party

My mother always used to tell me that what was sauce for the goose was sauce for the gander. Apparently not. Many of the same people who get swivel eyed about Tea Party rallies are running out of laudatory epithets for the various ‘Occupy’ protests.

Back in January it only took a pair of crosshairs on a web page for New York Times columnist Paul Krugman to deduce that the Tea Party were behind the horrific shooting of Gabrielle Giffords.

But when a speaker at Occupy Los Angeles steps forward to say that “the bourgeoisie won’t go without violent means” Krugman purrs that we are “seeing the rise of a popular movement that, unlike the Tea Party, is angry at the right people”.

Krugman is wrong is to paint the two movements as diametrically opposed. In fact, there is much common ground between Occupy and the Tea Party.

Both groups are angry with the vast transfer of wealth from individual citizens to banks.

When the Tea Party movement got going nearly two and a half years ago its protestors, according to CNN, were out to protest against “excessive government spending and bailouts”.

Now we have Occupy Wall Street protesting “against bank bailouts, corporate greed, and the unchecked power of Wall Street in Washington”.

Both groups see people like former Treasury Secretary Hank Paulson bailing out his former employers Goldman Sachs to the tune of $12.9 billion of taxpayers’ money and are justifiably outraged. The only difference is that while the Tea Party focuses its anger on the politicians who are so free with taxpayers money, the Occupy movement focus theirs on the banks who received it.

They are in many ways working on the same problem from opposite ends. Big government and big, bailout dependent business are just two sides of a corporatist coin.

There are differences though. Whereas the opposition of the Tea Party to Federal bailouts is part of a more general belief in lower government spending, the Occupy movement has no problems with massive government per se; they are just opposed to this government spending.

The Tea Party want less Federal spending full stop. The Occupy movement want more Federal spending on them. The Tea Party, in other words, is more ideologically coherent.

And its incoherence compared to the Tea Party means that the Occupy movement is unlikely to be as successful.

The Tea Party can state clearly that they are for smaller government. Occupy Wall Street is forced to come out with confusing statements like “It’s not about ‘small government’ or ‘big government’. It’s about who controls the government”.

The Occupy movement may well win support as long as its sticks to vague statements having a go at bankers, but if it settles on a list of demands including, as one suggests, “Begin a fast track process to bring the fossil fuel economy to an end” and “Open borders migration”, it is hard to see others coming along for the journey.

Even though it’s early days, tactically it is unlikely that the Occupy movement will match the effectiveness of the Tea Party.

By working hard within the political system the Tea Party have reshaped American politics, reenergised the Republican Party and won control of Congress in less than three years. It is difficult to see how the Occupy movement expects to achieve whatever its aims are by mildly inconveniencing a few bankers and tourists.

And let’s not forget, the Tea Party were doing this first. If imitation is the sincerest form of flattery then the Tea Partiers can look at the Occupy movement and feel rather pleased with themselves.

But let’s end on a note of harmony. In 2008 candidate Obama received more funding from Wall Street than anywhere else, nearly twice as much as John McCain and he is still desperately schmoozing them.

One Wall Street Occupier rails that “Right now the 99% can’t participate, except through ‘representatives’ who are bought and paid for ahead of time. Time to shift the power! Time to take this country back from the 1%!”

If this angry protestor wants to stick it to the bankers’ candidate he too will be voting against Obama in November 2012.

This article originally appeared at The Commentator

Ed Balls and Irish austerity: what you didn’t hear at party conference

May the growth rise to meet you

Ed Balls used to cite Ireland as exhibit A in his argument that ‘austerity’ would cripple the British economy.

A year ago, when Ireland’s economy had just shrunk by 1.2% Balls, then making his unsuccessful run for Labour leader, said

“These figures are a stark warning to governments across Europe including our own. An austerity programme of deep cuts now, when our economic recovery is not secure, risks lower growth and higher unemployment”

Perhaps he was busy drawing up his plan for British economic recovery which he announced at the Labour conference this week (easily summed up: spend more money) or maybe he was keeping his head down following poll numbers from ComRes which showed just 27% of voters thinking he would make a better Chancellor than George Osborne with 43% disagreeing.

Either way we were denied his reaction to the latest set of figures from Ireland; second quarter GDP figures showing growth of a healthy 1.6%.

A lively (in economic terms anyway) debate has kicked off over what these figures mean.

Free market economist Tyler Cowen led by claiming that such growth following such cuts disproved the Keynesian theory. Paul Krugman responded for the Keynesians arguing that Keynes always said this would happen, it was just question of how much damage was done in the meantime and how long it took. In the long run we are all dead, after all.

There is much truth in what Krugman says. The problem in Ireland, as in Greece and elsewhere, lies mostly on the monetary side of the economy. As Patrick Honohan, a former Trinity College academic now governor of Ireland’s central bank, wrote

“Until about 2000, the growth had been on a secure export-led basis, underpinned by wage restraint. However, from about 2000 the character of the growth changed: a property price and construction bubble took hold. This boom sustained employment and output growth until 2007 despite a loss of wage competitiveness”

A slump in interest rates when Ireland joined the euro saw a borrowing boom which bid up prices and wages. As a result, given that Irish prices are now relatively high, Ireland will be unable to export. It will need to get its prices down to a level approximating those of its competitors. This devaluation can be internal or external.

An external devaluation works by inflating the money supply so that prices rise and the real wage (the amount of goods and services the money wage can purchase) falls that way. Britain has eagerly pursued this course and sterling has lost about 25% of its value since 2007. This was not an option open to Ireland. As a member of the euro the money supply of the Irish Republic is controlled in Frankfurt.

This left the option of internal devaluation where prices and wages are reduced to competitive levels by simple cuts in nominal wages and, thus, the real wage.

There are two things to note.

First, both internal and external devaluation are different paths to the same destination, devaluation. Both entail a fall in the real wage and a decline in living standards. The difference is that if it is not possible to reduce nominal wages (if they are ‘sticky’ in the odd Keynesian parlance), say because of trade union opposition, then any attempt at internal devaluation will only succeed at the price of great unrest and unemployment; as falling prices depress companies’ incomes they will reduce their wage bill with layoffs if they cannot cut wages.

Secondly, it should be clear that Ireland’s problem was a monetary one not a fiscal one. For Ed Balls to point to Irish austerity as a warning for Britain is either breathtaking cynicism or economic ignorance. Take your pick.

This article originally appeared at The Commentator

Religious Keynesianism and Obama’s blind faith


Birds of a feather…

In the film ‘2010’ Milson tells the astronaut Heywood Floyd “Whenever a President is going to get us into serious trouble they always use Lincoln”.

During his much trailed speech on jobs in front of a joint session of Congress last week President Obama took no chances throwing in Kennedy along with Abe. But given the content of the speech he might have been better invoking Nixon; if two wrongs don’t make a right, try a third.

Obama’s proposed American Jobs Act contains nothing he hasn’t tried already. Since his election Obama has added nearly $5 trillion to the Federal debt, helped by his last stimulus package of $787 billion back in 2009. In that time unemployment has risen by two percent. Under the proposed Act Obama will spend another $447 billion, seemingly working on the belief that doing half of what didn’t work the first time will work the second time.

Paul Krugman, one of the leading Keynesian cheerleaders for the President’s failed policies, accuses opponents of having ‘drunk the Kool Aid’ of free market philosophy. This is a reference to the followers of cult leader Jim Jones who killed his gullible followers by making them drink poisoned Kool Aid.

But in arguing, as they do, that the reason we are in this mess is because the stimulus wasn’t big enough and that all we need to do is commit our economic souls more fully to Keynes, it is the Keynesians who remind one of those religious types who, after a disaster, see it as punishment for being insufficiently pure of faith. Joan Robinson once referred to ‘bastard Keynesianism’. This is religious Keynesianism.

Also, the particulars of the package are hideously badly designed. Obama promised to “offer ideas to reform a corporate tax code that stands as a monument to special interest influence in Washington” but he also proposed, as Peter Ferrara wrote in the American Spectator, a raft of new loopholes including “a new tax credit of $4,000 for hiring the long-term unemployed…a tax credit for hiring veterans who have been unemployed for more than six months, and another tax credit for hiring the unemployed with service connected disabilities”

With the failure of the last stimulus package and the dog eared nature of the new one the belief that Obama’s  Jobs Act will do any good at all is a case of hope (and ‘Change’) triumphing over experience.

But beyond this the US can’t afford it. At one point during his speech Obama said “Building a world-class transportation system is part of what made us an economic superpower. And now we’re going to sit back and watch China build newer airports and faster railroads?”

Well yes actually, you are. The Chinese are building those airports and railways because they can afford to, the United States can’t. In fact, watching Obama speak and make billion dollar spending commitment after billion dollar spending commitment you found yourself thinking ‘I hope the Chinese are happy to pay for all this’

And they may be reaching the end of their willingness to work, save, and lend those savings to Americans to spend on things that most Chinese can’t afford. This week a senior official of the Chinese central bank spoke of Beijing’s wish to “liquidate” its holdings of US Treasury bonds. As the biggest buyer of US debt the prospect of this market drying up presents the Treasury with the nightmare scenario for a heavily indebted economy like America’s of rocketing bond yields. Think Athens on the Hudson.

They are no more impressed with Obama’s plans in Buffalo than they are in Beijing. A Bloomberg poll this week found that while sixty-two percent of Americans disapprove of Obama’s handling of the economy just thirty-three percent approve.  Bloomberg also found that “only thirty-six percent of respondents approve of his efforts to create jobs, thirty percent approve of how he’s tackled the budget deficit and thirty-nine percent approve of his handling of health care”. Americans doubt whether the Jobs Act will do anything for 9.1 percent unemployment by a margin of fifty-one percent to forty percent with fifty-six percent of independents sceptical. Overall, at 45 percent, Obama’s approval rating is the lowest of his presidency.

These weren’t the only bad figures for Obama to emerge this week. Inflation and jobless claims were up, manufacturing was down and poverty hit its highest rate for eighteen years.

This isn’t all Obama’s fault, most western countries face a painful process of deleveraging, but few are following his lead of merrily piling debt on top of debt in the hope that more debt will solve a debt crisis.

Obama has hit the road with his plan like some commission hungry vacuum salesman. He has, as ever, been met with adoring crowds, though these may be smaller than before, Bloomberg also found that those who supported him in 2008 have soured. As then the crowds have been chanting inanely but the fact that Obama’s message always seems to be capable of being summed up in between one and three words, be it ‘Hope’, ‘Change’, ‘Yes We Can’ or, now, ‘Pass This Bill’, suggests that it isn’t much of a message.

But it never was. On the campaign trail candidate Obama said “I’m not talking about a budget deficit. I’m not talking about a trade deficit…I’m talking about a moral deficit. I’m talking about an empathy deficit.” So of four deficits mentioned only two actually exist and he focused on the two that don’t.

It is an article of faith that Republican candidate Michele Bachmann is an idiot. She might be. But can you imagine how idiotic she would be considered if she went on Fox News and said “If you elect me I will spend $5 trillion dollars and increase unemployment by two percent”?

Yet that is exactly what President Obama has done. ‘Stupid is as stupid does’ as a wise man once said.

S**t my economist says #11

Economist overboard!

Its been a weird couple of weeks for Paul Krugman. First he popped up on CNN to speculate that the threat of an alien invasion of earth might be good for the economy. Lots of scope for Keynesian stimulus spending on ray guns you see.

Then he was forced to take to his blog to deny that that following the recent earthquake on the eastern seaboard of the United States he had said

“People on twitter might be joking, but in all seriousness, we would see a bigger boost in spending and hence economic growth if the earthquake had done more damage”

The fact that many of the comments on that post on the now deleted Google + page of the fake Krugman were from Keynesians defending the statement rather undermines Krugman’s indignation when he bridled at being called a cheerleader for destruction.

But his denial of the earthquake comments contained yet another far out statement from the whack economist

“Just to be clear: World War II was expansionary because it led to a large increase in public spending”

Lets leave until another day the argument that the act of destroying large sections of the planet’s labour force and capital stock can in any conceivable way be said to exercise an “expansionary” effect on an economy you have to wonder where exactly Krugman has been for the past decade. And what has he been doing there?

We have had, along with the Americans, two foreign wars. Krugman’s fellow Keynesian Joseph Stiglitz estimated the cost of just the war in Iraq at $3 trillion. How’s that for stimulus?

The Federal debt ceiling was raised from just under $6 trillion in 2001 to nearly $10 trillion on the eve of the Lehman Brothers collapse in 2008. A massive stimulus and the economy still tanked.

Federal debt ceiling

So Krugman’s prescription for an ailing economy is a massive dollop of stimulus spending. That’s it. The same thing, in other words, that was being done to the economy as it hit the wall in 2007-2008. Maybe Krugman should stick to Space Invaders.

The causes and consequences of a falling dollar


QE3 remains in dry dock for now but the dollar is still shipping water. Last week the dollar tumbled to its lowest level since July 2008 against a basket of five major currencies on speculation that Ben Bernanke, Chairman of the Federal Reserve, plans to hold interest rates to the historic lows of 0-0.25%, where they have been since 2008.

Bernanke’s dollar printing is based on the thinking that “price stability should be a key objective of monetary policy”. If the price level falls, deflation, debtors see the real value of their debts increase and have to devote a greater portion of their wealth to paying them off. Likewise, it is believed, consumers seeing falling prices may hold off on purchases in expectation of even lower prices in the future. Both forces will act to decrease spending and kick the economy into a downward spiral. Following Milton Friedman and Anna Schwartz’ prescription for the Depression, Bernanke sees the Fed as having to pump as much money as it takes into a failing economy to keep prices stable.

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