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Archive for the ‘Paul Krugman’ Category

This fool continues to prove that having a Nobel is actually a sign of stupidity rather than intelligence:

In 2011, as in 2010, America was in a technical recovery but continued to suffer from disastrously high unemployment. And through most of 2011, as in 2010, almost all the conversation in Washington was about something else: the allegedly urgent issue of reducing the budget deficit.

Oh, you mean you’ve found a way to repeal the laws of mathematics?  You mean exponential curves really don’t run away from each other in a hyperbolic blowoff in each and every case, and that this outcome isn’t guaranteed by literal middle-school mathematics?

Well I’ll be damned.

Perhaps most obviously, the economic “experts” on whom much of Congress relies have been repeatedly, utterly wrong about the short-run effects of budget deficits. People who get their economic analysis from the likes of the Heritage Foundation have been waiting ever since President Obama took office for budget deficits to send interest rates soaring. Any day now!

And while they’ve been waiting, those rates have dropped to historical lows. You might think that this would make politicians question their choice of experts — that is, you might think that if you didn’t know anything about our postmodern, fact-free politics.

So let’s see if I can put this into stark relief.

There is this general economic principle called “a balance sheet.”  It’s called that because surprise, surprise, it always balances.  For every debit there is a credit, you know.

Now here’s what Krugman says:

First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.

Oh well, how’s that worked out in point of fact?

Let’s remember the premise, and let’s in fact expand that: So long as your debt grows slower than your improvement in output it’s not a problem. 

This is a postulate.  It is true for a family, it is true for a company, and it is true for a nation.  It is always true because so long as you grow debt slower than you grow production your “coverage” improves no matter how you look at it.  Improving coverage tends to lead to lower rates over time, absent intentional manipulation and fraud, because lenders see that you’re becoming more able over time to pay down your debt.  This induces them to charge you less, all things being equal, as it’s less likely you will default.

Now why were we able to grow output faster than debt for a while after WWII?  That’s pretty simple, actually: We literally bombed into dust the production capacity of virtually the entire civilized world, except for our factories and facilities.  We also managed to kill a hell of a lot of competitors for jobs.  This is not the “broken window” fallacy, which puts forward the (easily demonstrable as false) claim that breaking “things” means more work — it is the axiomatic fact that destruction of productive capacity elsewhere leads you to have the best competitive position for a while until your former competitors can come back online.

But eventually they do come back online and then the game is over. Attempting to act as if that didn’t happen leads to an ugly outcome.

Remember my wee chart?  You know, my favorite one?  Let’s look at how things have been in the economy as a whole over the last 30 years:

Oh darn.  Up until the crash there was not one single three month period where GDP (output) grew faster than outstanding debt did in the economy as a whole.  In other words Krugman’s claim that we can do this today is a outrageously false statement, as he cannot point to one single three month period from 1980 to 2009 where what he claims is “good debt” — by his own definition — actually happened in the economy as a whole.  His “example” cited, WWII, is one that left America as virtually the only industrial nation on the planet through literal carpetbombing of the entire European continent and the dropping of two nuclear bombs in Japan!

You want to know why that feat post-WWII hasn’t happened again since?  Because we have replaced capital with lending.  Capital is the surplus from what you produce.  When you have an excess of capital it is formed into new ventures covered with the fruits of previous labor.  This improves debt coverage as output increases with the new industry but debt does not change — as a consequence output rises but debt does not.  That’s economically positive.

On the other hand when you borrow more than output increases that’s economically negative.  Debt coverage deteriorates and eventually you reach a point where people discern that you’ll never pay them back in good value.  This is why people tend to say that “I went broke slowly, then all at once.”  They did — they were accumulating more and more negative debt coverage right up until lenders concluded they would not pay, at which the roof caved in “all at once.”

Greece anyone?

Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.

Immaterial.  If you owe debt to yourself you still have to pay, and further the compounding still happens.  The only way to escape this is to “print money”, which sounds like a panacea.  It is not, as I will demonstrate.

Krugman follows with this:

Now, the fact that federal debt isn’t at all like a mortgage on America’s future doesn’t mean that the debt is harmless. Taxes must be levied to pay the interest, and you don’t have to be a right-wing ideologue to concede that taxes impose some cost on the economy, if nothing else by causing a diversion of resources away from productive activities into tax avoidance and evasion.

Ah, but you see there are only three possible ways to pay that interest, right?

1. Increase taxes.  This sounds like a great idea, but it contracts GDP.  Why?  Because GDP is mathematically “C” (Consumption) + “I” (Net private Investment, which includes savings) + “G” (Government Spending) + “x – i” (Net exports).  When you increase taxes you are covering “G” (interest payments by government) with money that the taxed would either put into “C” or “I”.  Therefore GDP must fall by one dollar for every dollar of increased taxation to cover the debt service.  Remember, Krugman’s thesis and the entire premise of his argument is that so long as debt grows slower than does GDP it’s all ok.  But when you increases taxes GDP will go down, ergo you must also decrease the amount of debt.  This means you must decrease “G” as well.  The next year you are thus compelled to increase taxes more, and decrease “G” more.  Eventually you tax literally everything that the people make and they either riot or refuse to work for nothing, at which point the tax base collapses and the government ceases to exist.
2. Spend less so you can cover the interest.  This decreases “G” directly.  GDP decreases and if you pay down no principal then coverage gets worse, since the debt level remains the same but GDP is decreased.  Not so good either as this is a downward spiral — next year you must spend even less to restore the previous coverage, which decreases GDP even more.  Eventually you’re spending all government revenue on interest at which point the government ceases to exist.
3. Print money.  This looks like a “freebie” way out.  It’s not.  Increasing the denominator simply makes each unit of currency worth less.  So you still get a $50,000 a year salary but unfortunately all the things you wish to buy go up in price.  Due to economic inefficiency (all transference of things is inefficient to some degree) the common man sees his purchasing power destroyed by this process.  That is, in REAL terms “C” decreases.  But wait!  This means GDP (in real terms) decreases which means that debt must decrease in real terms too according to Krugman!  Now we’re back to the same spiral downward that inevitably leads the government to cease to exist!

There’s no way out of the box by “increasing spending”, “increasing taxes” or “printing money”; as the chart above shows Krugman’s claims may be correct but his implementation has never worked — not then, not now, not ever and it won’t this time either.  Shifting money from one pocket to another does nothing and increasing the debt load means that more and more of the tax revenues go to interest instead of government spending on programs.

This inevitably leads to either collapse or devaluation and in either case the citizens and government ultimately get screwed.

The good news is that the premise of “devaluation” is out the window because banks don’t like this idea very much.  They’re very uninterested in lending you $500,000 to buy a house and getting back that $500,000, plus another $250,000 in interest over some period of time, but having those repaid funds buy a toaster oven when they get them back!

That, I assure you, is not part of their business plan.

The only solution is to stop the compounding and accept the economic damage that we have accumulated by being serially stupid through our listening, as people and as government officials, to people like Krugman.

This means no more deficit spending and a tax structure sufficient to actually pay down the national debt to extinction over time.  That, in turn, means accepting both a major contraction in the size of government and, temporarily, GDP so as to clear that debt or defaulting it.  Since defaulting it is impermissible under The Constitution without an amendment this leaves us with paying it down, unless you think you can get the States to ratify a change to Amendment XIV.

At the same time we must realign our economy to address the other distortions we have taken on in our attempt to hide the economic damage.  Tax, trade, immigration, medical care, education and energy policy are the big ones, all of which I’ve covered in detail both here and in Leverage.

It would be nice if Krugman, before shooting off his mouth with statements that have a basis in fact (you’re fine so long as you increase output more than you increase debt) would actually look to see whether the nation has managed to do this at any time in the last 30 years on an aggregate basis.  If he had, he would have recognized, using nothing other than the Fed Z1 and BEA GDP series, that it had not and thus his claimed tonic was a crock.

And so, once again, is Krugman.

I have just one question: Why does Paul Krugman hate poor people so much? The mathematical facts are quite clear that the very policies for which Krugman advocates do the most damage to those who are poorest and at the same time, further enriches the wealthy. Isn’t this precisely what Occupy Wall Street is railing against? Well, there’s your answer as to why Obama and his liberal cronies like Krugman keep stabbing you all in the back while claiming to be for ‘the little person.’

This is an outrage.

Yglesias tells us that some Occupy Wall Street protesters have picked up Ron Paulish monetary ideas — although some know better. I thought I’d say a word about one particular idea that sounds plausible to some people but is actually quite wrong: banning fractional reserve banking.

I know that’s a popular theme among some Austrians. But it’s actually neither a good idea nor even feasible.

The crucial thing is to understand what banks do. And it’s not mostly about money creation! Instead, what banks are for is helping to improve the tradeoff between returns and liquidity.

That’s a very quaint notion.  But were it true there wouldn’t be any such thing as systemic risk!

Why?

Simple: If you only loan against actual asset values there is no systemic risk possible; if you get in trouble you simply sell down the assets until you no longer are.  Since you’ve never “created money” there’s no systemic risk that can arise.  Ever.

Of course this isn’t how it works in the real world today.  That’s the “Bailey and Biddle” model from It’s a Wonderful Life, but pretending that we live in that world today is beyond fanciful.

For proof one need only look at the Credit Card in your wallet – or, for that matter, the student loan.  If you wish to get more esoteric you can look at the Credit Default Swap.

None of these are backed by capital in today’s banking system, but all should be – dollar for dollar.  Why?  Because all are claims on something that does not, today, exist!

That is functionally the precise same act as a naked short.  You put into circulation that which does not exist “on the come” that it will in the future.  In the case of stock that is naked shorted you’re counterfeiting the stock of the corporation in question – you’re representing that you have something to deliver (the stock) but only the company in question has the right to create (by issuance in exchange for capital) that stock.

In the case of naked credit creation unbacked by an asset the bank is effectively naked shorting the currency, betting “on the come” that production will in the future cause the government to issue actual currency with which to make the bet good!

That’s an outrage!  It’s also how we get massive asset inflation.

Krugman knows this, of course.  After all, he has a Nobel Prize and a PhD, right?  He can’t possibly be so ignorant as to claim that banking as currently practiced actually encompasses (mostly) lending against actual assets – that is, liquidity matching for a price – can he?

After all, were this the primary function of banks these days there could never be systemic risk, since lending against assets can’t cause it, as if the person who borrowed doesn’t pay you simply seize the asset and resell it into the market, extinguishing the debt without systemic consequence (the borrower, of course, goes broke by such a process, but that’s the risk of borrowing that which you can’t pay back!)

The claims of charlatans must be matched against the factual record of not only what has occurred before but what threatens to occur now.

PS: This is why I support – strongly – a “One Dollar of Capital” LAW for banks, and why you should too.

It is one thing (what thing that is we are not sure, but we have heard others say it, so like all good lemmings we will say it too) for Rick Perry to call Social Security a ponzi scheme. After all he is some crazy, foaming in the mouth conservative, as uber-Keynesian liberal Paul Krugman may call him. And that’s fine. What confuses us, however, is why Social Security would be called a ponzi by the same liberal noted previously: none other than Paul Krugman himself.

Exhibit A, from a distant 1997, which perhaps one would have expected to remain buried (source):

 

 Social Security is structured from the point of view of the recipients as if it were an ordinary retirement plan: what you get out depends on what you put in. So it does not look like a redistributionist scheme. In practice it has turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in. Well, the Ponzi game will soon be over, thanks to changing demographics, so that the typical recipient henceforth will get only about as much as he or she put in (and today’s young may well get less than they put in).

This coming from the same person who a year ago said the following much anticipated truism, and has in the interim become a caricature of himself:

 

 So where do claims of crisis come from? To a large extent they rely on bad-faith accounting. In particular, they rely on an exercise in three-card monte in which the surpluses Social Security has been running for a quarter-century don’t count — because hey, the program doesn’t have any independent existence; it’s just part of the general federal budget — while future Social Security deficits are unacceptable — because hey, the program has to stand on its own.

 It would be easy to dismiss this bait-and-switch as obvious nonsense, except for one thing: many influential people — including Alan Simpson, co-chairman of the president’s deficit commission — are peddling this nonsense.

 And having invented a crisis, what do Social Security’s attackers want to do? They don’t propose cutting benefits to current retirees; invariably the plan is, instead, to cut benefits many years in the future. So think about it this way: In order to avoid the possibility of future benefit cuts, we must cut future benefits. O.K.

 What’s really going on here? Conservatives hate Social Security for ideological reasons: its success undermines their claim that government is always the problem, never the solution. But they receive crucial support from Washington insiders, for whom a declared willingness to cut Social Security has long served as a badge of fiscal seriousness, never mind the arithmetic.

 And neither wing of the anti-Social-Security coalition seems to know or care about the hardship its favorite proposals would cause.

The only question we have for the Nobelist: is some form of affective disorder a necessary and sufficient condition to espouse the virtues of government dumping endless capital in what said Nobelist himself calls a Ponzi scheme, and just how would the overlord, John M. Keynes, fell about this?

h/t John Poehling

ZeroHedge

This is astounding crap from a man who obviously doesn’t have a TV:

Why the difference? The obvious point is that back in the 70s many labor contracts included cost of living adjustments (COLAs). This in turn partly reflected stronger worker bargaining positions and also real doubts about whether monetary policy would contain inflation. Today, none of that: COLAs are rare, and commodity-price fluctuations don’t feed into wages at all.

That’s right.  And if you’ve followed me for any length of time you know that this is why I am resoundingly in the “nope” on the “high inflation” or even “hyperinflation” camp.

Why?  Because you can’t get there from here without a way to couple back into wages.  And we lack that method.  It simply doesn’t exist; not only are there no COLA clauses worth anything nowdays but we now have intentional (and admitted!) distortions in the CPI, including “Owners Equivalent Rent” and hedonic adjustment.

Neither of which is related to what you actually pay, incidentally.

See, the CPI’s weighting is an average for “all urban” residents, formally called “CPI-U”, and the claim is made that about 40% of your expenses are housing, and 15% or thereabouts are food and transport, respectively.

This of course is an average.  I, for example, pay dramatically less than that for my housing as a percentage of my income, because I own my home outright.  I therefore pay property taxes, hazard insurance and utilities and maintenance (the latter, incidentally, is essentially missing as a sub-category on the CPI-U, and that’s a load of crap – ask anyone what the amortized per-year is on a roof, or a water heater, or a furnace or AC unit.  They claim “operations” is 0.8% of income – for a $50,000 income household they claim that the total spend on all such items, from lawn care to maintenance and upkeep of the residence, is less than $500 a year?)

I also pay less as a percentage for my transportation (cost of acquisition at present is zero, vehicle is paid for) and for food.

But I have a well-above-average income.

I remember quite well, however, when I didn’t. Unlike Krugman, Bernanke and the rest of these eggheads I didn’t grow up with a silver spoon in my mouth nor did Mommy and Poppy hand me a Piled-Higher-And-Deeper that I did not have to earn with my own sweat.   In point of fact, one of my first “real” jobs paid $18,000 a year programming computers for a little dogcrap company in the 1980s.  That was $1,500 a month gross and my apartment rental was $600, or 40% of my gross income.  The CPI-U counts ”rent” as 5.96% of the weight, or about one-sixth of what I actually had as my real-world ”weighting” for expense.

My transportation was a literal $100 car and I carried minimum-legal insurance.  Every stop at the gas station stung the wallet, and the stops at the grocery store were worse.  14% of my income for food?  Baloney.

The CPI says that I had about than 30% of my income (net!) left after paying for my transportation, housing and food.  My wallet said that I had about $40 per paycheck left, or about $100 out of $1,500, enough for me to afford a couple of six packs and a CD or two once in a while, or a movie.  I occasionally had credit card companies try to entice into this or that, but I knew that was a trap from which I’d never escape, as I had a literal zero in terms of ability to service debt on my income.

I know there’s a school of thought that believes that the 1970s are coming back any day now. But I haven’t seen any sign of the return of bell-bottom pants, actually good Hollywood movies, or wage-price spirals.

No, what’s coming soon is what’s happened in Egypt.  There is no coupling mechanism to wages in The United States any more.

Egypt has suffered a 45% cumulative inflation rate over the last three years.  If you applied that to me in the late 1980s when I made $18,000 a year, I’d literally starve and, when my belly growled loudly enough, guess what I’d be very inclined to do?

Krugman, you’re full of crap.  Refusal to confront this head-on and put a stop to it isn’t going to lead to the 1970s or some Weimar Germany outcome.

What it’s going to lead to is privation and starvation, and if we are unfortunate, civil unrest or worse.

One would hope that the impacted people, when their belly growls sufficiently, will choose to take out their anger on the eggheads who have argued for the last three years that The Fed and government are “doing the right thing” by forcing them into starvation so as to protect the banks and other well-connected who caused this mess in the first place.

Unfortunately that’s a hopium-laced belief, because history says that when the belly growls and leads to civil unrest or even civil war and revolution that the last thing the crowd cares about is who and what gets sacked.

The Market-Ticker

Seriously.  This tripe is so bereft of logic and actual mental acuity that it is unworthy of graduation from elementary school:

About that math: Legally, Social Security has its own, dedicated funding, via the payroll tax (“FICA” on your pay statement). But it’s also part of the broader federal budget. This dual accounting means that there are two ways Social Security could face financial problems. First, that dedicated funding could prove inadequate, forcing the program either to cut benefits or to turn to Congress for aid. Second, Social Security costs could prove unsupportable for the federal budget as a whole.

Baloney.  This is called fraud in the private-sector.  First, there is no dedicated funding.  Second, all the money taken in over the years was not “invested”, it was spent.

Social Security has been running surpluses for the last quarter-century, banking those surpluses in a special account, the so-called trust fund.

That so-called “trust fund” is a fraud.  It does not exist.

Here’s what actually happens (and Krugman knows this, which makes him a damned liar besides):

• Your tax dollars go to Treasury.

• Treasury keeps them and issues “special” Treasury bonds to the Social Security “trust fund.”

• Treasury counts these tax receipts against the federal deficit, making it look (much, until the last year) smaller than it really is.

Note the slight-of-hand here.  Social Security gets an alleged “bond” but they can’t sell it to anyone but the Treasury.  That is, legally it is an IOU, not a bond.  A bond can be marketed in the open market to anyone who is willing to buy, for whatever they’re willing to pay.  These are unmarketable (intentionally) and thus can only be redeemed in one place – at Treasury.

The problem is that Treasury spent the money and thus doesn’t have anything with which to redeem the IOUs!

So in order to redeem these alleged “bonds” Treasury will have to sell more bonds – this time to the general public (foreign governments, people, etc) who have actual capital surplus, because Treasury doesn’t – it blew that surplus on social spending programs right here and now.

This is similar to you coming to me with $100,000 and I “promise” to hold on to it for you and keep it “safe.”  I give you a promissory note to this effect.  But I never hold the funds – I immediately go blow them on hookers, coke and limousines.  You now have a bunch of IOUs, and I have no money.

Now perhaps I can manage to sell someone else some bonds when you come to redeem those IOUs.  Perhaps.  But what is unmistakable and true is that the money you allegedly “deposited” with me was immediately dissipated, not invested, saved, held or secured.

This little scheme seems to work just fine provided that each year the Social Security system takes in more than it spends on benefits – that is, so long as the file cabinet full of IOUs continues to get bigger.  Treasury gets the appearance of “Free Money”, Social Security is able to pay benefits, nobody’s the wiser.

But it’s a scam, because in point of fact the so-called “Special Bonds” are nothing more than a bare promise to pay and the asset against which they were issued (tax receipts) was instantly dissipated!

So what happens when Social Security starts to eat into that so-called “trust fund”?  Immediately, Treasury needs to sell more debt.  Ok, that sounds reasonable – but on what terms – that is, at what interest rate – will Treasury have to pay in order to sell that debt?

If you surmise that there’s every possibility that we’ll face a “Greece” moment long before 2037, you’re correct.  In fact, we could face that as soon as three or four years from now.

It is this that the Commission folks are worried about, and with good cause.  As we have repeatedly seen these sorts of fraudulent accounting schemes are both extremely common in government and work really well right up until they collapse – and when they collapse they tend to do so without any warning at all.

What’s really going on here? Conservatives hate Social Security for ideological reasons: its success undermines their claim that government is always the problem, never the solution.

What’s really going on here is that LIEberals have run this scam for 50 years and accumulated a bunch of IOUs that have absolutely no capital behind them, since they have already SPENT the capital on their other fairy-tale projects which have, in turn, failed to produce to claimed and expected increase in Treasury cashflows.

And neither wing of the anti-Social-Security coalition seems to know or care about the hardship its favorite proposals would cause.

The hardship was created by stealing the Social Security tax receipts and lying about the so-called “Trust Fund.”  Everyone involved in that, including those in the LIEberal media, ought to be brought up on charges and jailed.

Those who believe that there is an actual “Social Security Trust Fund” are either lying or have an IQ smaller than their shoe size.

Either way, listening to them and believing this tripe, if you’re expecting to actually receive Social Security and structure your life around that belief, is a great way to wind up destitute, homeless, hungry and cold.

The Market-Ticker