GM and Chysler Bankruptcies

[Jester]

Ooops, yes, I meant deflation. I'm worried about what happens when the current money supply meets the upturn in the economy.

I'd be more worried about actually getting an upturn in the economy. But, if growth, employment and the money supply all start going up, then first, you uncork a bottle of champagne, because you just saved the economy. Then, you let the Fed do its job and adjust interest rates to keep inflation in check. So long as the economy is growing and inflation is positive, monetary policy works.

-Jester

[kandrathe]

I'd be more worried about actually getting an upturn in the economy. But, if growth, employment and the money supply all start going up, then first, you uncork a bottle of champagne, because you just saved the economy. Then, you let the Fed do its job and adjust interest rates to keep inflation in check. So long as the economy is growing and inflation is positive, monetary policy works.

At some point, though, the $1.50 loaf of bread will raise to $3. Or, your celebratory champagne will go from $20 to $40. Wages will try to catch up, and people on fixed incomes will suffer.

I'm afraid that the Fed, as much as they might try, will not be able to contain the raising costs of production and materials. Currently, with interest rates set at zero, we see the Fed with the gas pedal tromped to the floor without much movement. I'd suggest that there is too big a burden on the economy inhibiting forward movement. That burden is debt, both the governments, and the peoples.

[Jester]

At some point, though, the $1.50 loaf of bread will raise to $3. Or, your celebratory champagne will go from $20 to $40. Wages will try to catch up, and people on fixed incomes will suffer.

So raise fixed incomes. Distributional problems can be solved with taxation. It's an issue, but it's hardly an insoluble one, and it's certainly not worth crippling the economy to avoid.

As the classic comment on the Austrian reaction to the great depression went: being worried about inflation in the middle of persistent deflation is like crying "fire, fire" in the middle of Noah's flood. You might even be right in the very long term, but as Keynes said, in the long term, we're all dead.

I'm afraid that the Fed, as much as they might try, will not be able to contain the raising costs of production and materials. Currently, with interest rates set at zero, we see the Fed with the gas pedal tromped to the floor without much movement. I'd suggest that there is too big a burden on the economy inhibiting forward movement. That burden is debt, both the governments, and the peoples.

I would suggest that, as you indicated, banks are no longer loaning out three dollars for every dollar they get, but are instead loaning out eighty cents. Thus, the "gas pedal" is going nowhere, so far. Monetary policy has no traction. This has little-if-anything to do with debt, and everything to do with risk aversion. So long as there are idle factories and idle workers, building new factories will be a sucker's game, and nobody wants to be the first to play. Enter government spending, to kickstart the process, get people back to work, increase aggregate demand, and stop people (and banks) from tucking their dollars under their mattresses.

Funny how Keynes vs. Hayek is just playing all over again. Apparently, we've learned almost nothing in 80 years.

-Jester

[--Pete]

Hi,

Apparently, we've learned almost nothing in 80 years.

Right in principle, wrong in duration -- by at least two orders of magnitude. If history teaches us anything, it's that it teaches us nothing.

--Pete

[Jester]

Right in principle, wrong in duration -- by at least two orders of magnitude. If history teaches us anything, it's that it teaches us nothing.

Didn't Sting say that?

Amen.

-Jester

[--Pete]

Hi,

Didn't Sting say that?

Well, yes and no. He did, literally, say it, but I think he meant it in a different (and wrong) way. He meant not that we don't learn anything from history but that we shouldn't. Pretty stupid, when you think about it -- a real case of baby/bathwater.

But, then again, except in Brimstone and Treacle (which was just weird enough to be kinda good), I've never much cared for Sting. Although I do have, and occasionally enjoy, Synchronicity. Basically, he's just too bubble-gum.

--Pete

[Jester]

Well, yes and no. He did, literally, say it, but I think he meant it in a different (and wrong) way. He meant not that we don't learn anything from history but that we shouldn't. Pretty stupid, when you think about it -- a real case of baby/bathwater.

But, then again, except in Brimstone and Treacle (which was just weird enough to be kinda good), I've never much cared for Sting. Although I do have, and occasionally enjoy, Synchronicity. Basically, he's just too bubble-gum.

Interesting. The usual criticism is that he's too pretentious. But I suppose that's not totally contradictory.

And yes, I think Sting is at least slightly wrong. Otherwise, I wouldn't be studying history. (I do suspect even he said it somewhat polemically. I doubt he actually believes there is literally nothing to be learned from history, but rather is saying that history is a rogues' gallery from whom we should learn what not to do.) But I can't but help but notice that we still haven't even figured out the last great depression, let alone this one (if that is what this is.)

-Jester

[kandrathe]

So raise fixed incomes. Distributional problems can be solved with taxation. It's an issue, but it's hardly an insoluble one, and it's certainly not worth crippling the economy to avoid.

Over in the other thread on the Economy, I added a quote from the London Banker Blog, <blockquote>"Had Fisher observed the Greenspan/Bernanke Fed in action, he might have updated his theory with a revision. At some point, capital betrayed into unproductive works has to either be repaid or written off. If either is inhibited by reflation or regulatory forbearance, then a cost is imposed on productive works, whether through inflation, higher interest, diversion of consumption, or taxation to socialize losses. Over time that cost ultimately hollows out the real productive economy leaving only bubble assets standing. Without a productive foundation, as reflation and forbearance reach their limits, those bubble assets must deflate."</blockquote>Wouldn't doubling the cost of social spending just result in more debt, which would further accelerate the hollowing out of the *real* productive economy leaving only bubble assets standing?

Funny how Keynes vs. Hayek is just playing all over again. Apparently, we've learned almost nothing in 80 years.

Yes, funny = strange, not funny = haha. Being a pragmatist, I'm only interested in the soothsayer who accurately reads the skeins of the future and knows which strings to tug on to prevent catastrophe. The neo-Keynesian's running the show were able to get the race car of the economy going really really fast, when it suddenly careened off track and hit the wall. Obviously, their foresight is lacking. Maybe it is time to consider listening to some dissident voices. At least humor them, and climb down from the ivory tower and join the food riots in the streets. When Irving Fischer personally lost $6 MM, and bankrupted his brokerage firm and most of his clients during the market crash of 1929, it forced him to go back and analyze how he could have been so wrong.

[--Pete]

Hi,

Interesting. The usual criticism is that he's too pretentious. But I suppose that's not totally contradictory.

Actually, more complementary than contradictory. If he were the usual inane rock singer, there would be no need to characterize him as 'bubble-gum', that would be a given. It's the fact that he is, in his mind at least, something more that makes the characterization necessary. He's no early Dylan, or even Simon and Garfunkel, though I fancy he fancies himself in that company.

But I can't but help but notice that we still haven't even figured out the last great depression, let alone this one (if that is what this is.)

That's the beauty of history. Much like Tarot and I-Ching, the interpretation is as much a product of the interpreter as of the material interpreted. However, unlike the other two examples, history (or at least some of it) does have a factual basis. But never forget the ancient axiom: if you want to change history, become an historian. :whistling:

--Pete

[Jester]

But never forget the ancient axiom: if you want to change history, become an historian. :whistling:

Well, I am. But I'm not doing it because I want to change history. I was doing it according to that other ancient axiom. I heard that history is written by the victors, and that sounds like the right team to be on.:D

-Jester

[Jester]

If your contention is that Alan Greenspan, the man most at the helm of the economy these past decades, is best described by the term "neo-Keynesian", then I think I would describe your contention as "crazy".

While the influence of Keynes has waned in and out as people try variously to incorporate some bits of his theory, and reject others, the basic direction of economics has been sharply away from Keynes' policy perscriptions. Monetary stimulus replaced fiscal stimulus as the weapon of choice, which is closer even to Friedman than it is to Keynes, who included no such notion in his theory.

But, basically, anything resembling a full-blooded Keynesianism died with stagflation. What remained was "neo-Keynesian" (or more recently "New Keynesian") only insofar as it preserves sticky prices and avoids assuming perfectly rational agents. Keynes' actual policy perscriptions were utterly marginalized. Until now.

As for the dissident voices... uh... what food riots? We're still talking about the USA, right?

-Jester

[kandrathe]

As for the dissident voices...

I like Lawrence H. White, for one.<blockquote>"Most economists, government officials and politicians continue to believe the standard Keynesian explanation for recessions: Recessions are caused by consumers and firms becoming "spooked" for no meaningful reason, so consumption and investment spending falls below normal levels. This reduces demand for goods and services, which reduces employment, which reduces spending even further, and so on. Since the level of spending before the "spooking" was presumed to be sustainable, the solution to the problem is simple: Increase spending to where it had been during the boom."</blockquote>... and Alan Reynolds, <blockquote>"Krugman insisted "for the 1.6 trillionth time, we are in a liquidity trap." That makes 1.6 trillion times he's been wrong about that."</blockquote>

...what food riots?

Eat dinner at my house. No, really, need is on the increase, and philanthropy is suffering a 5 to 10 percent decline in 2009. The next shoe to drop will be the failures of many States in the US to keep up with Social program obligations due to the vastly increasing number of people without incomes. If it is bad here, it is a catastrophe in the third world.

Edit: As an experiment I just tried to Google about 20 states by entering %State Name% budget crisis. And, yup, I hit 20 for 20 with a 2008/2009 budget crisis.

[Jester]

I like Lawrence H. White, for one.<blockquote>"Most economists, government officials and politicians continue to believe the standard Keynesian explanation for recessions: Recessions are caused by consumers and firms becoming "spooked" for no meaningful reason, so consumption and investment spending falls below normal levels. This reduces demand for goods and services, which reduces employment, which reduces spending even further, and so on. Since the level of spending before the "spooking" was presumed to be sustainable, the solution to the problem is simple: Increase spending to where it had been during the boom."</blockquote>... and Alan Reynolds, <blockquote>"Krugman insisted "for the 1.6 trillionth time, we are in a liquidity trap." That makes 1.6 trillion times he's been wrong about that."</blockquote>

Needless to say, I don't find the analyses particularily convincing. The White and Rose argument is just Austrian old hat: everything is somehow the fault of easy credit. If this was just, as they suggest, a problem of low interest rates finally meeting the inevitable uptick, causing a bear market, then the market would have adjusted by now. The problem here was the financial sector, and the reliance on: massive leverage; the assumption of perpetually rising house prices; and financial wizardry designed to eliminate risk, that instead only bundles it together. All three multiplied together was especially suicidal, as fragile assets were made to seem solid, and therefore could be heavily leveraged against. Low interest rates add to the whole witches' brew, but they aren't more than a fraction of the story. Even if they were, that tells us nothing about how to get out of *today*'s situation.

Alan Reynolds' use of the Japan case seems particularily strange. Japan went through a phase almost exactly like Krugman's analysis of the great depression: persistent deflation causing lingering economic stagnation. When they experienced growth, it was following an increase in government spending. Where their growth shut down again, it was following a premature attempt to balance the budget. He can fiddle with the numbers to try and poke holes, but I don't find it more convincing than the usual story.

Now, Krugman is in agreement with Romer, and most people who have studied the great depression from a monetary perspective, going back to the seminal Friedman and Schwartz: the right solution was monetary policy, and if they'd tried that sooner, things might have been a whole lot better. (This is, of course, the exact opposite of Hayek's advice.) The New Deal was nowhere near large enough to really do the heavy lifting of pulling up the economy. Getting off gold was the first great move, and reflating the currency, however slowly, was the second. The New Deal comes in third. It could have done better, but didn't, because FDR was skittish about continual deficits. In light of present events, Krugman is slowly moving towards the idea that monetary policy maybe isn't quite so awesome as he once thought it was, but I don't think he has any disagreement with the basic notion: if you have room to cut interest rates in a depression, do it.

But that only applies when interest rates can actually be adjusted. If nominal interest is near-zero, as it is now in the US, or was in Japan for most of the 1990s, there is no further work it can do. At that point, it's either use fiscal stimulus, or wait it out.

Eat dinner at my house. No, really, need is on the increase, and philanthropy is suffering a 5 to 10 percent decline in 2009. The next shoe to drop will be the failures of many States in the US to keep up with Social program obligations due to the vastly increasing number of people without incomes. If it is bad here, it is a catastrophe in the third world.

There are food riots at your house? During dinner, no less?

I didn't say things weren't getting worse, or that there aren't people in need. That's just a long way yet from food riots. Predicted events are not the same as actual events. (Not to mention that the Austrian solution to food riots is about the same as the Austrian solution to anything: stand back and let the market work its magic. Is that really where we want to go? Private philanthropy as the only thing between the needy and hunger, when that same philanthropy is currently dropping like a rock?)

Edit: As an experiment I just tried to Google about 20 states by entering %State Name% budget crisis. And, yup, I hit 20 for 20 with a 2008/2009 budget crisis.

Which makes me wonder why so many of them are trying to make some stink about rejecting stimulus money. But yes, quite a few states are in serious trouble, and will continue to be, unless the economy turns around.

-Jester

[kandrathe]

At that point, it's either use fiscal stimulus, or wait it out.

Like the overprotective parent, the government meddles in things and only makes them worse. If I knew they could come in like a surgeon and fix it, then I might be more agreeable. But, they are more like the drunken uncle who solves everything with booze. And, its booze he bought by borrowing your money. The governments solution to our financial problems are a choice between; 1) "I could take less of your money and run up huge deficits", or 2) "I could take more of your money and run up huge deficits".

There are food riots at your house? During dinner, no less?

I have two boys. We have a mini tramp in the house to help erode excess energy. Caring for boys is applying the proper technique for keeping their batteries charged, while simultaneously keeping them drained.

I didn't say things weren't getting worse, or that there aren't people in need. That's just a long way yet from food riots. Predicted events are not the same as actual events. (Not to mention that the Austrian solution to food riots is about the same as the Austrian solution to anything: stand back and let the market work its magic. Is that really where we want to go? Private philanthropy as the only thing between the needy and hunger, when that same philanthropy is currently dropping like a rock?)

I guess you don't read "Food Industry News". :D Point taken. I forget sometimes that others are not as prescient as I. { Please ignore the WMD in Iraq discussion we had in 2001. Unless they really did move them to Syria, and then I was right. :P}.

Which makes me wonder why so many of them are trying to make some stink about rejecting stimulus money. But yes, quite a few states are in serious trouble, and will continue to be, unless the economy turns around.

That is easy to explain. The federal bail out of 2009, allows politicians the easy way out and will delay the budget tightening needed by 2010. States cannot print money, and therefore deficits at the State level are bad (as California and others can attest). Even in my State, the Fed's money allowed us to float this year by only cutting $2.7 billion from the budget, rather than the projected $4.6 billion we need to cut to match revenue projections. So, our tax addicted State gets a methadone shot from the Feds to make detox a bit less painful but also will take at least twice as long. Government, is by far, the largest employer here, so a downturn in the economy has ripple effects which make our recessions longer.

[Jester]

Like the overprotective parent, the government meddles in things and only makes them worse. If I knew they could come in like a surgeon and fix it, then I might be more agreeable. But, they are more like the drunken uncle who solves everything with booze. And, its booze he bought by borrowing your money. The governments solution to our financial problems are a choice between; 1) "I could take less of your money and run up huge deficits", or 2) "I could take more of your money and run up huge deficits".

If you don't trust the government to do anything, then obviously, you don't trust the government to do this. Using governments to solve problems directly is not costless, but I'm pretty sure it's nowhere near as extreme as you make it out to be. But, then, if we agreed on that, we'd agree on everything, or at least a lot more than we do.

I guess you don't read "Food Industry News". :D Point taken.

The countries experiencing food riots have between 1/3 (Mexico) and 1/40th (Haiti) of your per capita GDP. I think you'll be fine, although some government support for keeping food banks stocked would not go amiss for the poorest, given that demand is up and charity is down.

Globally, food prices are a serious problem, and have been since well before the 2008 crisis. I'm not quite sure what to do about that, but ending biofuel subsidies in the first world seems to be step one. I think we can agree on that one, at least.

-Jester

[kandrathe]

If you don't trust the government to do anything, then obviously, you don't trust the government to do this. Using governments to solve problems directly is not costless, but I'm pretty sure it's nowhere near as extreme as you make it out to be. But, then, if we agreed on that, we'd agree on everything, or at least a lot more than we do.

I just think difficult and complicated problems lend themselves to a politically expedient solution that panders to an electorate too ignorant or lazy to dig into and understand. Their opinions are bought with infomercials, and appearances on David Letterman. Or, they are loyalists who don't agree with the majority of the candidates positions, but still vote for the representative from their party. Or, such as we see with Pres. Obama, as he uses triangulation to keep the far left, the middle and the right off balance. Swat a fly? My god, he could strangle a kitten on the 6 o'clock news and still have a higher approval rating than Bush ever did. He wouldn't have to fulfill a single one of his campaign promises and depending on his challenger, he might still win re-election. So, no, I think politicians do the minimum that is necessary to keep themselves in office. Once you get to agencies of the federal government, well, its a crap shoot really. Some are bureaucratic and entrenched where a seemingly simple task in the *real* world takes them 10 times longer, and some through necessity or chance good leadership have become streamlined and efficient. All in all, the private sector does it cheaper, faster, and with higher quality. That is why, wherever possible, the government should always try to privatize everything that the is not directly in their Constitutional mandate. So, for me, where government is concerned, smaller is better. Aim small, miss small.

The countries experiencing food riots have between 1/3 (Mexico) and 1/40th (Haiti) of your per capita GDP. I think you'll be fine, although some government support for keeping food banks stocked would not go amiss for the poorest, given that demand is up and charity is down.

I wasn't thinking of the US, actually, but really the third world somewhat in the proximity of our southern border. There are places in the US, that are actually more like Mexico than like the US.

Globally, food prices are a serious problem, and have been since well before the 2008 crisis. I'm not quite sure what to do about that, but ending biofuel subsidies in the first world seems to be step one. I think we can agree on that one, at least.

Yes, we agree on this.

[Jester]

My god, he could strangle a kitten on the 6 o'clock news and still have a higher approval rating than Bush ever did.

His ratings would go up by 30 points for strangling a kitten on the news? Because Bush's approval ratings peaked at 90%, the highest ever since they were measured. Remember 9/11?

-Jester

[kandrathe]

His ratings would go up by 30 points for strangling a kitten on the news? Because Bush's approval ratings peaked at 90%, the highest ever since they were measured. Remember 9/11?

Ok. Busted. I was exaggerating to make a point. :)

By the way, does anyone else find it ironic that Chrysler was carved up and sold to Fiat, against the wishes of the bond holders who tried to stop it in court? (considering one of the definitions of fiat is "an authoritative or arbitrary order").