Kuttner Has Been Lobotomized


Kuttner Has Been Lobotomized

Posted by Karl Denninger

There are times that so-called “pundits” and “editors” display such idiocy that it just must be responded to.  This is one of those times.

Posted last eve when I was well beyond the time when I’d allow my blood pressure to get jacked was this nonsense:

Austerity has suddenly become the universally prescribed cure for the fallout from the financial collapse. If widely adopted, it will prove worse than the disease.

It’s called fiscal balance Robert.  We had the inflation.  Punishing, cruel, ridiculous inflation.  Yeah, I know, you don’t think it happened because it was “only” a doubling of gasoline and diesel prices in a five year span (well, actually, it was closer to a tripling, but who’s counting, right?)

Of course this very same inflation showed up in other things, like houses and stock prices.  This made people “feel rich”, but in fact they were not, because their wages did not accelerate at anywhere close to the same rate, nor could they. 


Because we have “global wage arbitrage”, which is a pundit’s cute term for slave labor in China and Vietnam, prohibiting the classical wage-price spiral that everyone who studies economics recognizes.

The nations of the European Union are being treated as the object lesson in the costs of profligacy. This is supposedly what happens when you provide decent social benefits to regular people. In fact, most of Europe had reasonably well-disciplined budgets until a made-on-Wall-Street economic crisis took down their economies.

The budget deficit here and overseas does need to return to a more moderate level — after we get an economic recovery.

Like in the US, right?  Might I reprise one of my favorite charts?

See, we thought the same thing coming out of our recession in 2003.  We wanted to “provide decent social benefits to regular people”, including Medicare Part “D”, right?

What we did was embed a permanent $500 billion budgetary deficit and even though we had a so-called “recovery” in the economy we were never able to reduce deficit spending during that so-called “recovery.”

Europe did the same thing incidentally, and claimed “recovery” and “growth” when in fact what they (and we) had done is blow an asset bubble or three and claim that was “prosperity.”  It is not, because said bubble cannot attract additional participants and keep inflating without more and more debt being piled up by someone.

If you “own” a $500,000 house but have a $500,000 mortgage you in fact own nothing and have no prosperity.  You have the trappings of wealth but not the actualization of it.  If that valuation is not supported by underlying economic facts then when (not if) it collapses you find that you not only have nothing you have less than nothing as the vacuum cleaner is attached to your wallet, job, life and soul and sucks you into the black hole of debt on the other end.

With the exception of a few smaller nations, the large deficits in the OECD countries are not the result of fiscal profligacy, but of revenue losses caused by the downturn.

Nonsense.  The “revenue loss” occurred because actual private final demand driven by current income was insufficient to support the production that was taking place.  The balance was being supported by ever-larger amounts of debt being used to pull forward tomorrow’s demand into today.

But debt used to pull forward demand comes with interest cost, and once taken on is used up and done.  In order to keep doing so you must pull forward with ever-larger amounts of debt, and the interest expense inexorably rises as a function of compounding, even if you can manage to keep rates low.

Unfortunately the laws of mathematics do not allow for Mr. Kuttner’s utopia to play out the way he would like.  Exponential functions all look great when you start, and it is only when one recognizes the long-term impact of what you’re doing that the horror of the future comes into sharp relief.  If you fail to recognize this up front you get to live the horror, and once that time has passed there is simply no escape from it, no matter what you’d like to have happen.

In the US, we finally ended the Great Depression with massive wartime borrowing and public outlay. We ended the war with a debt-to-GDP ratio of more than 120 percent, more than double today’s ratio. In Britain, debt-to-GDP peaked at about 250 percent.

But all of the war spending recapitalized industry, re-employed and trained jobless workers; and after the war pent up consumer demand powered a record boom and rising revenues paid down the debt.

There was plenty of wartime sacrifice, but it was shared. Citizens bought war bonds and used ration books. There were wage and price controls.

WWII destroyed huge amounts of infrastructure which had to be rebuilt and also killed off millions of people – mostly young people who were competing for the available jobs prior to the war.

Anyone with a modicum of intelligence recognizes that when you have 20,000 people competing for 15,000 jobs the wage for that job will go down.  If you then kill off half the 20,000 people the wage will rise dramatically, since there are no longer a sufficient number of workers to fill the positions, and thus the offer wage must go up.

In addition all those dead young people prompted our nation (and others) to do what people will do when their lovers come home after a few years in a trench where they haven’t had communication with them: make lots of new mouthsWe call this “the baby boom” and it also contributed to a rising level of demand over time.

Today’s situation is different. The origin of all the debt is not a war but a financial collapse. The new round of financial panic is the result of still fearful markets, a still fragile banking system, and deficits caused mainly by reduced output, not overspending.


The debt came first jackass!

If this doesn’t make clear that the financial collapse resulted from the excessive debt then you’re blind – or an idiot who is unfit to scrub toilets with a toothbrush, say much less be “a senior fellow” at Demos.

There are plenty of people who are simply wrong because they have examined the facts and reached incorrect conclusions, and then there are those who simply ignore the facts and spout bald LIES in an attempt to drive an agenda that will lead directly to ruin.

One wonders exactly what sort of actual agenda Kuttner has – and whether, perhaps, he’s angling for a position in the next Hitler’s cabinet.