massive central bank easing is a form of cowardice

Nearly a century ago, the great economist Ludwig von Mises observed that massive central bank easing is invariably a form of cowardice that attempts to avoid the need to restructure debt or correct fiscal deficits, avoiding wiser but more difficult choices by instead destroying the value of the currency.

Von Mises wrote, “A government always finds itself obliged to resort to inflationary measures when it cannot negotiate loans and dare not levy taxes, because it has reason to fear that it will forfeit approval of the policy it is following if it reveals too soon the financial and general economic consequences of that policy. Thus inflation becomes the most important psychological resource of any economic policy whose consequences have to be concealed; and so in this sense it can be called an instrument of unpopular, that is, of antidemocratic policy, since by misleading public opinion it makes possible the continued existence of a system of government that would have no hope of the consent of the people if the circumstances were clearly laid before them. That is the political function of inflation. When governments do not think it necessary to accommodate their expenditure and arrogate to themselves the right of making up the deficit by issuing notes, their ideology is merely a disguised absolutism.”

As a side note, von Mises also cautioned against the misconception that destroying the value of a currency would have a sustainable benefit for the economy, writing “If the depreciation is desired in order to ‘stimulate production’ and to make exportation easier and importation more difficult in relation to other countries, then it must be borne in mind that the ‘beneficial effects’ on trade of the depreciation of money only last so long as the depreciation has not affected all commodities and services. Once the adjustment is completed, then these ‘beneficial effects’ disappear. If it is desired to retain them permanently, continual resort must be had to fresh diminutions of the purchasing power of money.”

via Hussman Funds – Weekly Market Comment: Why Quantitative Easing is Likely to Trigger a Collapse of the U.S. Dollar – August 23, 2010.

heading towards acceptance

But look at the bright spot, we are finally exiting the denial stage and heading towards acceptance. That, my friends, is progress in its own right. When Washington realizes that the solutions lie in supply-side policies that will promote growth in the capital stock and hiring/work incentives — education, infrastructure, payroll taxes, a coherent energy strategy (nuclear!) — and begin to abandon failed policies such as this ongoing emphasis on Keynesian short-term spending quick fixes, the adoption of “too big to fail” strategies, initiatives aimed at bailing out delinquent homeowners, measures that actually try to prevent market forces from working, initiatives that pay people to stay off work for 99 weeks with no thought behind skills improvement and training in return, and attempts at influencing the equilibrium level of asset prices, such as real estate, then indeed, when we have finally broken free from these failed interventionist and distorting manoeuvres, then we will likely have much more reason to turn optimistic.


How Good Were the Good Old Days?

In general, life is better than it ever has been, and if you think that, in the past, there was some golden age of pleasure and plenty to which you would, if you were able, transport yourself, let me say one single word: “dentistry” – PJ O’Rourke, All the Trouble in the World

This article is a sort of round-up of passages from various writers to the effect that things are better now – at least in some important ways – than they used to be.


Why do we romanticize the past? Steven Pinker puts forward a number of possibilities, including better record keeping in the modern era, and guilt over how we’ve treated colonized peoples. But I think a big part of it is a deep-seated fear of change. The up side of living in dynamic times is that it’s exciting to see the world transform in a short enough time span to be noticeable. The down side is that it’s scary. We don’t know where it’s going to end, and we’re worried we might fuck it all up. And we very well might. But the system is in motion, and we’re all a part of it, and it’s in a state of flux, regardless of our feelings on the matter. I think it’s a thrill to witness and participate in.

via How Good Were the Good Old Days?.

Bubble Psychology and Lessons from History

For starters, no market ever moves in only one direction. There are always counter-trend moves, some of which are very substantial. For instance, some of the largest short-term upward moves happened during the crash following on from 1929. In addition there were longer counter-trend moves which kept hope alive throughout a massive deleveraging:

We can expect to see such moves as well, and we can expect people to cast the most favourable light on every upswing, as if it was the dawn of a return to the previous ‘golden age’. Actually, extreme volatility is a sign of fear, and when fear is in control, markets are an exceptionally dangerous place to be. The potential to be whipsawed in both directions on a moment’s notice is very high, as is the risk that governments will rewrite the rules of the game, usually in a counter-productive way that will compound the pain.

The psychology of typical small-scale fluctuations plays out like this:

Click to enlarge

The psychology of a major bubble follows a similar pattern, but having risen to ridiculous levels of leverage, has very much further to fall. Much greater collective psychological extremes are experienced in a rare period of manic optimism, and its inevitable aftermath:

We are just past the point labeled ‘Return to Normal’, which corresponds to just after the end of the great sucker rally of 1930.

via The Automatic Earth: August 13 2010: Bubble Psychology and Lessons from History.

2008 Bailout Counter-Factual | The Big Picture

“What if we had done the right thing, instead of nothing — or the wrong thing?”

We don’t have alternative universe laboratories to run control bailout experiments, but we can imagine the alternative outcomes if different actions were taken.

So let’s do just that. Imagine a nation in the midst of an economic crisis, circa September-December 2008. Only this time, there are key differences: 1) A President who understood Capitalism requires insolvent firms to suffer failure (as opposed to a lame duck running out the clock); 2) A Treasury Secretary who was not a former Goldman Sachs CEO, with a misguided sympathy for Wall Street firms at risk of failure (as opposed to overseeing the greatest wealth transfer in human history); 3) A Federal Reserve Chairman who understood the limits of the Federal Reserve (versus a massive expansion of its power and balance sheet).

via 2008 Bailout Counter-Factual | The Big Picture.

money printing won’t stop, and will accelerate

personally i think this prescription is insane, but it’s clearly what they are going to try

To generate increased growth in aggregate demand, some sector of the economy must be willing to pro-actively lever its balance sheet. And that must be the fiscal authority, if the private sector is intent on delevering. Yes, I know all about the perils of long-term fiscal unsustainability. But I also know that in the long run, we are all dead. I see no reason to die young from fiscal-orthodoxy-imposed anorexia.

While the Fed has not sounded the horn on QE2 (Quantitative Easing), it has declared that the band will keep playing at the same volume on QE1. That decision was and is important, I think, not for any meaningful direct simulative effect on the economy, but rather because it signals that the Fed is no longer on an exit strategy from QE1 – the unconventional, presumed to be temporary, has morphed into the conventional.

This is a profound change, because it means the intellectual and institutional hurdle for QE2 has been dramatically lowered. The textbook monetarists wrapped around the inflation axle of a bloated monetary base have been defeated: Money is as money does and the bloated monetary base ain’t doing anything, because the economy is in a liquidity trap of private sector delevering.

It is especially sweet that St. Louis Fed President James Bullard led the public charge for keeping the band playing at the same volume on QE1. When the head of the regional Fed bank with the greatest tradition of textbook monetarism helps re-write the textbook to reflect liquidity trap realities, it’s a good day, a very good day, in the macroeconomics neighborhood.

So, do I think QE2 will be pulling into the harbor quickly? The honest answer is that I do not know. I actually hope not, because I believe that QE2, if she is going to sail, should sail with a meaningful fiscal expansion on board, on the back of Chairman Bernanke’s cogent analysis back in 2002–2003. The Fed can’t turn deflationary milk into a reflationary milkshake by itself. It needs the fiscal authority to show up with a proactive blender, sweetened with bigger-deficit sugar.

This should not be hard. Indeed, the irony of ironies is that the fiscal authority, from time immemorial, has craved a monetary authority that would be openly cooperative. And to Congress’ credit, recognizing the inflationary potential of such a craving, it wisely extended independence to the monetary authority. But, right now, Congress has a once-in-a-lifetime (we hope!) opportunity to exploit that craving. But it isn’t seizing the moment.

This is not only irony; it is sad. The nation deserves better, especially the 8 ½ million Americans who have lost their jobs. When deflation is the fat tail risk, when the Fed is willing to monetize deficits, there is no excuse for the fiscal authority to resist running bigger deficits to directly finance job creation.

via PIMCO | Global Central Bank Focus – When Unconventional Becomes Conventional.

Ayn Rand on Racism

Racism is the lowest, most crudely primitive form of collectivism. It is the notion of ascribing moral, social or political significance to a man’s genetic lineage—the notion that a man’s intellectual and characterological traits are produced and transmitted by his internal body chemistry. Which means, in practice, that a man is to be judged, not by his own character and actions, but by the characters and actions of a collective of ancestors.

Racism claims that the content of a man’s mind (not his cognitive apparatus, but its content) is inherited; that a man’s convictions, values and character are determined before he is born, by physical factors beyond his control. This is the caveman’s version of the doctrine of innate ideas—or of inherited knowledge—which has been thoroughly refuted by philosophy and science. Racism is a doctrine of, by and for brutes. It is a barnyard or stock-farm version of collectivism, appropriate to a mentality that differentiates between various breeds of animals, but not between animals and men.

Like every form of determinism, racism invalidates the specific attribute which distinguishes man from all other living species: his rational faculty. Racism negates two aspects of man’s life: reason and choice, or mind and morality, replacing them with chemical predestination.

Stoneleigh takes on John Williams: Deflation it is

people need to hold liquidity during the period of deleveraging, as the risks to cash will be lower than most other wealth preservation strategies. At the point when they can afford to do so without debt, which will depend on how much money they have to begin with, they need to move into hard goods. In doing so, they will prepare for an eventual bottom, at which point inflation should be a genuine threat. People need to be fully liquid at tops and fully invested (in hard goods in this case) at bottoms. In doing so they will be doing the exact opposite of the larger human herd, which is always the best prescription for success.

via The Automatic Earth: August 8 2010: Stoneleigh takes on John Williams: Deflation it is.

Winning a golf tournament – skill or luck?

Pro golfers who lack adequate power are like runners competing with pebbles in their shoes. They lose fractions of a stroke on most long shots, meaning that over 18 holes they are slowly ground down by the course. Golfers overemphasize putting because they can’t mentally tally these fractional losses. Instead, they carry around those pesky missed eight-footers. But the truth is that once a pro golfer is crouched down to examine the break of a green, there’s not as much room for him to excel. That’s partly because golfers are very close in skill on the greens, and it’s also because nothing that disastrous can happen, such as putting into the water. The tee box, the fairway, and the rough are where good and bad things happen on the golf course. The green is mostly there to make you hate yourself.

via Does winning a golf tournament come down to skill or luck? – By Michael Agger – Slate Magazine.

U.S. Is Bankrupt and We Don’t Even Know It

Let’s get real. The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills.

What it can and must do is radically simplify its tax, health-care, retirement and financial systems, each of which is a complete mess. But this is the good news. It means they can each be redesigned to achieve their legitimate purposes at much lower cost and, in the process, revitalize the economy.

Last month, the International Monetary Fund released its annual review of U.S. economic policy. Its summary contained these bland words about U.S. fiscal policy: “Directors welcomed the authorities’ commitment to fiscal stabilization, but noted that a larger than budgeted adjustment would be required to stabilize debt-to-GDP.”

But delve deeper, and you will find that the IMF has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: “The U.S. fiscal gap associated with today’s federal fiscal policy is huge for plausible discount rates.” It adds that “closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.”

The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.

Double Our Taxes

To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act.

Such a tax hike would leave the U.S. running a surplus equal to 5 percent of GDP this year, rather than a 9 percent deficit. So the IMF is really saying the U.S. needs to run a huge surplus now and for many years to come to pay for the spending that is scheduled. It’s also saying the longer the country waits to make tough fiscal adjustments, the more painful they will be.

Is the IMF bonkers?

No. It has done its homework. So has the Congressional Budget Office whose Long-Term Budget Outlook, released in June, shows an even larger problem.

‘Unofficial’ Liabilities

Based on the CBO’s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt. This gargantuan discrepancy between our “official” debt and our actual net indebtedness isn’t surprising. It reflects what economists call the labeling problem. Congress has been very careful over the years to label most of its liabilities “unofficial” to keep them off the books and far in the future.

For example, our Social Security FICA contributions are called taxes and our future Social Security benefits are called transfer payments. The government could equally well have labeled our contributions “loans” and called our future benefits “repayment of these loans less an old age tax,” with the old age tax making up for any difference between the benefits promised and principal plus interest on the contributions.

The fiscal gap isn’t affected by fiscal labeling. It’s the only theoretically correct measure of our long-run fiscal condition because it considers all spending, no matter how labeled, and incorporates long-term and short-term policy.

$4 Trillion Bill

How can the fiscal gap be so enormous?

Simple. We have 78 million baby boomers who, when fully retired, will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today’s dollars. Yes, our economy will be bigger in 20 years, but not big enough to handle this size load year after year.

This is what happens when you run a massive Ponzi scheme for six decades straight, taking ever larger resources from the young and giving them to the old while promising the young their eventual turn at passing the generational buck.

Herb Stein, chairman of the Council of Economic Advisers under U.S. President Richard Nixon, coined an oft-repeated phrase: “Something that can’t go on, will stop.” True enough. Uncle Sam’s Ponzi scheme will stop. But it will stop too late.

And it will stop in a very nasty manner. The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills.

Worse Than Greece

Most likely we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices. This is an awful, downhill road to follow, but it’s the one we are on. And bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece.

Some doctrinaire Keynesian economists would say any stimulus over the next few years won’t affect our ability to deal with deficits in the long run.

This is wrong as a simple matter of arithmetic. The fiscal gap is the government’s credit-card bill and each year’s 14 percent of GDP is the interest on that bill. If it doesn’t pay this year’s interest, it will be added to the balance.

Demand-siders say forgoing this year’s 14 percent fiscal tightening, and spending even more, will pay for itself, in present value, by expanding the economy and tax revenue.

My reaction? Get real, or go hang out with equally deluded supply-siders. Our country is broke and can no longer afford no- pain, all-gain “solutions.”

(Laurence J. Kotlikoff is a professor of economics at Boston University and author of “Jimmy Stewart Is Dead: Ending the World’s Ongoing Financial Plague with Limited Purpose Banking.” The opinions expressed are his own.)

via U.S. Is Bankrupt and We Don’t Even Know It: Laurence Kotlikoff – Bloomberg.