Complete Whimsy, Deficits, Dubiously Free Trade, Trust

The Left Reaches Really, Really Far on Detroit Bankruptcy

So MSNBC’s Melissa Harris-Perr said the following about Detroit’s recent bankruptcy filing (and general state of awfulness):

This is what it looks like when government is small enough to drown in your bathtub, and it is not a pretty picture

See for yourself:

I honestly don’t even know how to respond to someone who can’t see the difference between reducing taxes and having a reduced tax base. I just don’t know.

So I’ll give up and let Reason sum it up:

Detroit has been a “model city” for big-government! All Detroit’s mayors since 1962 were Democrats who were eager to micromanage. And spend. Detroit has the only utility tax in Michigan, and its income tax is the third-highest of any big city in America (only Philadelphia and Louisville take more, and they aren’t doing great, either).

… Home loan subsidies, public housing, stadium subsidies, a $350 million project called “Renaissance Center” (the city ended up selling it for just $50 million), an automated People Mover system that not many people feel moved to use (it moves people in only one direction), endless favors to unions — if a government idea has failed anywhere in America, there’s a good chance it failed in Detroit first.

But yeah, it was probably Ayn Randian libertarianism that brought Detroit down… I mean why not?

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Deficits, Dollar, Federal Reserve, Hayek, Individual v. Collective, Keynes

The Key to Countering Keynes by @FriedrichHayek

The following is a comment posted by Greg Ransom, the purveyor of the F.A. Hayek Twitter handle @FriedrichHayek and Editor-in-Chief of HayekCenter.org. The post highlights the key to countering Keynes from a Hayekian perspective. The chief criticism of Keynes has little to nothing to do with addressing the paradox of thrift and liquidity traps. We all can agree that the well capitalized, bailed out banks are hoarding money in record droves, and people (quite rationally) can prefer holding money to investment or consumption when the economy is in the tubes. Rather, Hayekians try to show why recessions and economic downturns happen in the first place, therefore identifying the root cause so we can stop treating the symptoms.

Ransom does a fine job channeling Hayek on his Twitter handle. I highly recommend it. Enjoy:

 

Lee writes,
 
“Key to the criticisms of Keynesianism concern the paradox of thrift and liquidity traps.”
 
Actually, no. The key to countering Keynes is showing what real productive & consumption & leverage structures are out of line which set up the conditions for system wide monetary disequilibrium — once you’ve shown that, you’ve shown that Keynesian “stimulus” efforts can’t hope to correctly target the essential elements of the structural disequilibrium which must re-mesh coherently to get the system back into equilibrium.
 
The “stimulation” of additional demand in the wrong sectors & the re-leveraging of the system by pumping up credit & money & leverage in the wrong places can work to produce additional value-destroying dis-coordination, rather than alleviating it via value-producing coordination.
 
The HUGE fallacy in all of monetary economics, Keynesian or otherwise, is the failure to look at value creation and value evaporation.
 
People have bulldozed uncompleted houses & housing stock because dis-coordination reveals things to have less value than the cost of maintaining them. I.e. we don’t have “idle resources” — the revealed dis-coordination exposes what have turned out to be now non-economic _no-longer-resources_.
 
Using a massive blow-pump to pump dollars and resources into 5th wheel things which can never again have what turned out to be their illusory valuational place in the system is equivalent to the alchemists attempt to turn lead into gold.

As George Selgin duly notes, we must keep a careful eye on the productive use of the capital stock. That is, does the use of capital to employ workers contribute to either their own or others’ ability to consume. If it doesn’t, we’re not really progressing or experiencing “prosperity” when GDP figures rise. Selgin observes: “What [people] can [buy] depends crucially on what they themselves actually produce in exchange for the payments they receive.” The efficient use of the stock of productive capital is paramount. When companies are forced to offer products and services consumers actually want, the maintenance or augmentation of the stock of productive capital is probably going in the right direction. If government (a small group of people) diverts capital to wherever the political economy and lobbyists fancy at that given moment, there are no guarantees of sound maintenance of the capital stock; particularly because there is no efficient mechanism to stop the diversion of capital. The government typically spends more and more in a given area, year after year, as is the case in housing, education, and health care. If the results are not satisfactory (decided by bureaucrats on their criteria), then it must mean we didn’t throw enough money at it. Having money is only one part of the equation; you must use it effectively and efficiently. In the private sector, the mechanism to stop poor uses of capital is called bankruptcy. Well, at least that’s supposed to be how the profit and loss system works.

Photo Credit: HayekCenter.org

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Deficits, Dollar, Dubiously Free Trade, Federal Reserve, Individual v. Collective, Treasury, Trust

Paul Krugman Recommends the United States Borrow, Inflate, Default and Steal

Time to Just Get it Over With?

Readers of SwiftEconomics know I’ve been just an incy wincy bit critical of Paul Krugman (see here, here, here and here), but I guess I kind of agree with a column he wrote last month… at least part of it:

“So what will happen? In the end, I’d argue, what must happen is an effective default on a significant part of debt, one way or another. The default could be implicit, via a period of moderate inflation that reduces the real burden of debt; that’s how World War II cured the depression. Or, if not, we could see a gradual, painful process of individual defaults and bankruptcies, which ends up reducing overall debt.”

Well I agree we’re almost certainly going to need to default in one way or the other. However, I thought that according to Krugman, World War II cured the Depression by increasing aggregate demand, not by reducing our debt burdens through inflation. Regardless, it’s an interesting admission that Krugman makes, especially as he pushes for stimulus package after stimulus package. He said the initial $787 billion stimulus package “falls well short of what’s needed.” I guess if you’re gonna default anyway you might as well live it up.

Furthermore, he continues to argue against any form of austerity to return to fiscal sanity both on the part of the private and public sector:

“A naive view says that what we need is a return to virtue: everyone needs to save more, pay down debt, and restore healthy balance sheets. The problem with this view is the fallacy of composition: when everyone tries to pay down debt at the same time, the result is a depressed economy and falling inflation, which cause the ratio of debt to income to rise if anything. That is, we’re living in a world in which the twin paradoxes of thrift and deleveraging hold, and hence in which individual virtue ends up being collective vice.”

So paying down our debts is bad, because if we all do that together deflation happens and the economy falls into a depression. That’s what happened in 1920 when the United States fell into a deep recession and cut spending… oh wait, that recession ended in record speed.

Deflation, in fact, does not result in a depression and is not even correlated with depressions. According to a study by Andrew Atkeson and Patrick Kehoe that studied 17 countries over 100 years, 65 out of 73 episodes of deflation had no depression and 21 of the 29 depressions had no deflation. The evidence shows that pre-World War II there is a small correlation between deflation and depression (slope coefficient of 0.11), but there is actually a negative correlation post-World War II (slope coefficient of -.03). Which would mean inflation has an ever so slightly higher chance of leading to a depression than deflation.

A Strong Correlation you got there... Source: Atkeson and Kehoe (2004)

Furthermore, all of that can be misleading because an economy suffering runaway inflation is not necessarily in a recession, but instead has to go through a recession by significantly reducing the monetary supply to get inflation under control. This is what happened in the early 80’s when Paul Volker hiked up interest rates. He stopped inflation, but the United States suffered a severe recession as a result.

So deflation may not be bad, but spending boosts aggregate demand, so Paul Krugman would have us spend more. Unfortunately we have no savings, so we’d have to borrow or inflate. We’ve already talked about inflating, so what if the government borrows the money. Well Paul Krugman is all about that, too. As he wrote, an “obsession [opposed to] deficit spending could cause depression.” Unfortunately, the data shows too much deficit spending will simply make things worse. A study by Carmen Reinhart and Kenneth Rogolf concluded the obvious; too much debt is bad:

“Our analysis is based on new data on forty-four countries spanning about two hundred years. The dataset incorporates over 3,700 annual observations covering a wide range of political systems, institutions, exchange rate arrangements, and historic circumstances. Our main findings are: First, the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. We find that the threshold for public debt is similar in advanced and emerging economies.”

Paul Krugman didn’t agree with that study (as you can see here and his logic refuted by Robert Murphy here) and instead believes the United States should spend its way to prosperity. But let’s stop and put the pieces together to see what Paul Krugman is actually proposing we do here:

Step 1. Spend a ton of money we don’t have

Step 2. Finance step 1 by piling up a ton of debt

Step 3. Inflate away so we can pay back that debt in a significantly depreciated currency

Just like one of those schemes where an individual summarily racks up a bunch of credit card debt only to declare bankruptcy, Krugman is literally recommending we rob our creditors. If the United States defaults because of a series of fiscal errors, that would be akin to a homeowner being foreclosed on because they could no longer make their payments. But to intentionally run up a debt that we have no intention of paying is a scam. And of course, such a scheme would have savers and those on fixed incomes see their savings and living standards evaporate.

Given that Krugman is simply recommending we steal from other people, there may in fact be some stimulus there. But it’s not a model the whole world can use and it’s not something we can get away with very long before people figure out what we’re up to. Indeed, it’s a good thing for Krugman that to him “individual virtue ends up being collective vice.” Because if it wasn’t, individual virtues (like not stealing) would be completely unacceptable at the government level. And yes, let’s hope China and every other nation, company and individual who is considering buying American debt isn’t reading Krugman’s recommendations too carefully. They may just stop financing our fiscal binges.

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Deficits, Dollar, Taxes, Treasury, Trust

Is The United States Going Bankrupt?

Renowned economic historian Niall Ferguson is usually even-keeled with his predictions. That was not the case about a month ago when he warned that the United States could be nearing a sudden collapse:

“I think this is a problem that is going to go live really soon. In that sense, I mean within the next two years. Because the whole thing, fiscally and other ways, is very near the edge of chaos. And we’ve seen already in Greece what happens when the bond market loses faith in your fiscal policy.

…By combating our crisis of private debt with an extraordinary expansion of public debt, we inevitably are going to reduce the resources available for national security in the years ahead. Because as a debt grows, so the interest payments you have to make on it grow, even if interest rates stay low. And on current projections, the federal debt is going to be absorbing around 20 percent — a fifth of all the taxes you pay — within just a few years.

…I’ve just come back from China — a two-week trip there — and the thing I heard most often was, ‘You can’t lecture us about the superiority of your system anymore. We don’t need to learn anything from you about financial institutions and forget about democracy. We see where it has got you.’”

Niall Ferguson: Economic Badass

If the United States goes the way of Greece, there’s no one big enough to bail us out. Ferguson did at least say he thinks the situation isn’t inevitable and I would hesitate to predict a Soviet Union-style collapse. What I do see on the horizon is a long Japanese-like malaise, or very possibly a prolonged 70’s style stagflation and a slow downward spiral of a Britain-esque imperial decline. Unfortunately, I almost hope for that since an all out Rome-like implosion is within the realm of possibility.

And as the West fades and the East ascends, it is worth noting what they are saying about us and our long term outlook. Guan Jianzhong, the chairman of Dagong Global Credit Rating, the largest credit rating agency in China, had the following to say:

“The western rating agencies are politicised and highly ideological and they do not adhere to objective standards. China is the biggest creditor nation in the world and with the rise and national rejuvenation of China we should have our say in how the credit risks of states are judged… The US is insolvent and faces bankruptcy as a pure debtor nation but the rating agencies still give it high rankings. Actually, the huge military expenditure of the US is not created by themselves but comes from borrowed money, which is not sustainable.”

Indeed Professor Ferguson, the former lecturer is getting a nice talking to. Still, we shouldn’t get carried away, even Dagong Global Credit Rating concluded the United States’ debt was the 13th safest investment in the world. But U.S. debt had been considered far and away the safest investment for my entire life and probably everyone else out there reading this blog. And even Moody’s has warned of downgrading the U.S. from a triple-A rating.

The long term outlook is even more problematic. While the $1.5 trillion dollar deficit in 2010 is clearly unsustainable, the $107 trillion in unfunded liabilities puts the United States on even shakier ground. While that number sounds huge, it doesn’t mean anything until you actually break down what kind of growth and tax revenue we’d need to pay for it. Former comptroller general of the GAO, David Walker, estimates it will require over 10% growth from now until the end of time; something that has never happened, will never happen and is little more than a pipe dream.

This all means that the United States will have to raise taxes and cut entitlements (while we’re in the midst of increasing them) during a drawn out recession that very well could linger in a decade-long malaise or disco itself into a decade-long stagflation. Whatever we do (and we have to do something) it will simply compound our economic problems.

Even before the financial crisis shrank tax receipts and national productivity, close analysis showed the United States was on an unsustainable fiscal path. In August of 2006, Laurence Kotlikoff, writing in the Federal Reserve Bank of St. Louis Review came to the conclusion that the United States was, for all intents and purposes, broke.  He did so with a lot of fancy math, using equations such as the following:

Yay for math. Anyways, the conclusion is certainly nothing to laugh at, especially since it preceded the meltdown:

“Is the United States bankrupt? Many would scoff at this notion. Others would argue that financial implosion is just around the corner. This paper explores these views from both partial and general equilibrium perspectives. It concludes that countries can go broke, that the United States is going broke, that remaining open to foreign investment can help stave off bankruptcy, but that radical reform of U.S. fiscal institutions is essential to secure the nation’s economic future.”

He goes on to recommend privatizing social security while simultaneously installing universal healthcare; a very interesting recommendation likely to garner support from absolutely no one. But the paper is sound and quite disturbing. Take this paragraph, updated and elaborated upon by yours truly:

“The Gokhale and Smetters measure of the fiscal gap is a stunning $65.9 trillion [now around $107 trillion]! This figure is more than five times [seven times] U.S. GDP and almost twice [thrice] the size of national wealth. One way to wrap one’s head around $65.9 trillion is to ask what fiscal adjustments are needed to eliminate this red hole. The answers are terrifying. One solution is an immediate and permanent doubling of personal and corporate income taxes [that kind of economy-wrecking increase would actually lower tax receipts, see the Laffer curve]. Another is an immediate and permanent two-thirds cut in Social Security and Medicare benefits [I’d bet the AARP opposes this option]. A third alternative, were it feasible, would be to immediately and permanently cut all federal discretionary spending by 143 percent [a guy can dream can’t he?].”

So are we nearing the end of Pax Americana? Is the sun setting on the American Empire? Have we crossed the Rubicon? While I would like to see our quasi-imperial presence come to an end, I hope we can do so in a peaceful, non-collapsing fashion. Nonetheless, it is unmistakable that the long term fundamentals of our economy look awful.

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Deficits, Live and Learn, Trust

Debt Makes the World Go Round: Greece Is Just the Beginning

As of the third quarter of 2009, American external debt to GDP hovers at 96.5%, the highest it’s been at any time since World War II. External debt includes all government, corporate and private debts to foreign nations; in other words, debts we don’t owe to ourselves. Right now we’ve amassed an astounding $13.77 trillion worth of them! That’s almost $4.5 trillion more than the United Kingdom who came in second and over $8 trillion over Germany, who came in third.

Yet right now, the world is focused on Greece, which is requiring a massive bailout from the IMF (partially paid for by United States taxpayers). As a stipulation of the bailout, the IMF is demanding Greece raise taxes and cut social benefits, which has predictably lead to rioting in the street.

I’ve had enough of the bailouts, but what’s more concerning to me is where Greece stands on a list of countries regarding their debt situation:


This information, from the CIA Worldfactbook, is actually a little old. A less complete, but more updated list (although still mostly from mid-2009) puts the United States at 96.5% instead of 94%, the United Kingdom at 425.9% instead of 365.4% and Ireland at 1312% instead of 998.9%! Wow, the United States actually looks pretty good, relatively speaking of course.

But look where Greece is on the list; 19th at 153% (at 170.5% as of 2009). That’s no where near as bad as Ireland, Iceland, the United Kingdom or the Netherlands. It’s also not much different than Sweden, Germany, France and Spain. And the United States is certainly doing what it can to catch up.

Greece was engaged in some deceptive tactics to hide their insolvency, such as hiding billions of dollars worth of currency swaps through Goldman Sachs. However, there’s no reason to necessarily think other governments haven’t been engaging in this kind of Enron-like accounting. And regardless, their debt is still multiples smaller than many fellow European nations.

Also, notice the countries who are saving: China, India, South Korea, Singapore, etc. As many have predicted, including myself, we are witnessing the rise of the East and the fall of the West.

Furthermore, it’s interesting how little debt many of the poorest countries have. Part of this is certainly because there are significant doubts as to these country’s credit-worthiness. But doesn’t it say something that while the richest countries in the world drown in debt, Bolivia—the poorest country in South America—has a debt/GDP ratio of 11.31%?

Regardless of the irony, these debt/GDP ratios are unsustainable. In all likelihood, Greece is just the beginning.

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Complete Whimsy, Deficits, Dollar, Individual v. Collective

Swift Wits: Ron Paul Polling Even with Barack Obama

Barack Obama 42% Ron Paul 41%

Ron Paul has made quite the journey; from the outer fringe to just outside the mainstream. He won the Republican straw poll at CPAC and came within one vote of Mitt Romney at the Southern Republican Leadership Conference. And after being repeatedly made fun of on Fox News during the 2008 election, today he’s one of their regular guests.

Now the libertarian Republican has made a big splash in the polls. According to Rasmussen Reports, in a hypothetical matchup for the presidency in 2012 between Ron Paul and Barack Obama, they are polling in a virtual dead heat! Barack Obama is at 42% and Ron Paul is at 41%. While statistics and surveys can be deceptive, I find this shocking, albeit in a good way. Plus the press release had this little gem in it:

“Ask the Political Class, though, and it’s a blowout. While 58% of Mainstream voters favor Paul, 95% of the Political Class vote for Obama.”

Wow.

33 States Out of Money

If you think the federal government has budget problems, just look at the states. California is basically bankrupt and now, according to CNN, 33 states have run out of money to fund their unemployment benefits. This in turn has forced them to borrow from the federal government just to meet the bills. So far they’ve borrowed $38.7 billion and that figure is surely to rise as unemployment appears to have stagnated.

Cow Farts No Longer Cause Global Warming

In some “good” news, cows may no longer cause global warming. Louise Gray of The Telegraph in England reports that “…a new study found that cattle grazed on the grasslands of China actually reduce another greenhouse gas, nitrous oxide.”

She does stress this doesn’t mean grazing cows can help fight global warming in all cases. And, at least in my judgment, this actually doesn’t mean anything at all. But it’s nice to know the money spent studying cow farts has been put to good use.

Study Shows Problems with Foreign Aid

It’s very contentious to oppose foreign aid… Bono would be quite upset indeed. However, experts from The Lancet studying countries receiving foreign aid found that these countries trimmed their health budgets after receiving aid. For every dollar in aid, $1.14 was sent from health to somewhere else. While there are other important areas to be spending money on, given the devastating effects of disease in these third world countries, it seems health would be their primary concern.

What this shows is that while foreign aid sounds nice, often it just props up corrupt governments. John Stossel had a good piece on it back when he worked for 20/20:

What we should be doing instead of sending dictators billions of dollars to “disburse” is circumvent the corrupt bureaucrats and trade with these countries. As economist Johan Norberg puts it:

“External barriers such as rich country protectionism in goods of particular importance to the third world – textiles and agriculture – that (according to UNCTAD) deprives developing countries of nearly $700 billion in export income a year – almost 14 times more than they receive in foreign aid.”

That would help poor people a lot more than subsidizing the kleptocracies they live under.

Smart Women Get Their Drink On

And finally, according to a study by the London School of Economics, smart women get tipsy, buzzed, blitzed, sloshed, sauced, trashed, plastered, wasted and hammered more often than other women… Nice.

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Deficits, Dollar, Federal Reserve, Individual v. Collective, Live and Learn, Obama Says, Taxes, Treasury, Trust

General Motors (GM) Reinvention Commercial

I don’t hope for GM to fail, but for some reason, I snickered during this commercial.

Choice quotes:

“There was a time when our cost structure could compete worldwide. Not anymore.”

“Leaner, greener, faster, smarter.”

“This is not about going out of business. This is about getting down to business. Because the only chapter we’re focused on, is chapter one.”

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