The Economy

[kandrathe]

I know where I've seen that graph before. It's from Krugman's argument about why a fiscal stimulus is necessary, because monetary expansion no longer has traction. Banks are being given reserves, and they're just sitting on them, rather than using them to increase the amount of circulating currency.

The Reserve banks have been given unprecedentedly huge reserves, to cover the unprecedentedly huge amount of risk (of insolvency). Don't blame the banks. The people, the businesses, and the government are bad credit risks.



Some other peoples opinions (besides the die hard Progressive Socialist Keynesian, Krugman :D). This article of his, from Sept 2008, mentions Fischer, and comes his usual conclusion (it's Bush's fault) about the coming crisis. The solution he invariably calls upon is *massive* government spending to act as an economic stimulus. But, what he fails to acknowledge, or maybe understand is that the market first needs to correct itself and become a viable platform upon which to rebuild.

Also, if it were to work at all, the projects the government invests in need to be those infrastructure projects that result in economic vitality. In other words, not socialist spending projects that result in no foreseeable return on investment. The Obama $787 Billion Dollar "stimulus bill" had very little stimulus spending, and very very little 2009 spending at all. The epitome of zero GDP return on Debt driven spending. Where is Krugman's criticism and contempt when you need it?

<blockquote>"The Federal Reserve stopped paying much attention to the data a long time ago. It has abolished M3 altogether. The US economic consensus is New-Keynesian (dynamic stochastic general equilibrium model). Delving into the money entrails is derided as little better than soothsaying."</blockquote>
[url=http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf]The Debt-Deflation Theory of Great Depressions by Irving Fischer (who was no friend of Libertarians :))

According to the debt deflation theory, a sequence of effects of the debt bubble bursting occurs:

<blockquote> 1. Debt liquidation and distress selling.
2. Contraction of the money supply as bank loans are paid off.
3. A fall in the level of asset prices.
4. A still greater fall in the net worth of businesses, precipitating bankruptcies.
5. A fall in profits.
6. A reduction in output, in trade and in employment.
7. Pessimism and loss of confidence.
8. Hoarding of money.
9. A fall in nominal interest rates and a rise in deflation adjusted interest rates.</blockquote><blockquote>"32. And, vice versa, deflation caused by the debt reacts on the debt. Each dollar of debt still unpaid becomes a bigger dollar, and if the over-indebtedness with which we started is great enough, the liquidation of debts cannot keep up with the fall of prices which it causes. In that case, the liquidation defeats itself. While it diminishes the number of dollars owed, in may not do so as fast as it increases the value of of each dollars owed. Then, the very effort of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede to liquidate in swelling each dollar owed. Then, we have the great paradox which, I submit, is the chief secret of most, if not all, great depressions: The more the debtors pay, the more they owe. The more the economic boat tips, the more it tends to tip. It is not tending to right itself, but it is capsizing."</blockquote>London Banker <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>I think the most sensible thing I read in all of this was that ultimately, the US and UK economies need to transform their basis from consumption to production. Do we have the guts to do it? This transformation would result in a 2nd great depression, where assets and valuations are freely allowed to find their true levels without government interference. The alternative would be to try to re-establish the consumer debt driven economy, where no one has the assets to secure their ballooning debt.

At least a decade ago, I suggested that one option the US government might use to reduce the impact of down turns in business cycles (as well as petty dictators holding our economy hostage) would be to buy oil when it is "cheap", and store it in expanded strategic reserves. When the prices rise beyond the economically viable level, the US government would begin selling their reserves. In the end, however, this can only moderate the problem, and not resolve it. We won't escape the frequency and intensity of these bust cycles until we get off the oil standard (and eliminate its crucial nature for our well being).