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My Sunday Washington Post column is out, and its titled “Note to investors: It takes longer to bounce back from a credit crisis” The online version gets a different title, Wall Street analysts and economists have this recession recovery wrong.

In it, I discuss how the post WW2 recession recovery cycle is the wrong frame of reference for looking at post credit crisis recoveries.

And while most Wall Street economists and analysts have gotten this entire cycle dead wrong, two academic economists standout as being prescient, before, during and after the crisis.

Here is a quick excerpt explaining how post credit cycles differ from ordinary recessions:

“Not only are credit crises different from other cycles, they also differ from other bubbles.

As Dan Gross explained in “Pop! Why Bubbles Are Great for the Economy,” the typical investing bubble leaves behind something of value. Whether it was thousands of miles of railroad tracks in the 19th century or thousands of miles of fiber-optic cables in the 1990s, usable infrastructure survives the bubble. Assets get scooped up out of bankruptcy for pennies on the dollar. Eventually, all of this overinvestment in the bubble du jour becomes a productive part of the economy. All that cable laid by Global Crossing and Metromedia Fiber and other bankrupt firms? Today, it is the bandwidth infrastructure that supports Google Maps, Netflix streaming video and Twitter.

Compare that with what gets left behind after a credit bubble bursts: No physical infrastructure, innovations or research breakthroughs; just soul-crushing, economy-sapping debt. And not just regular old balance-sheet obligations, but huge piles of counterproductive consumer and government liabilities.

Credit bubbles produce the exact opposite of productive resources. Deleveragers — those folks formerly known as consumers — spend the next decade paying down these obligations, rather than buying additional goods and services. And heavily indebted state and local governments are similarly thrifty, adding further pressure to the post-crisis economy.

Confusion about this is already taking a toll across the pond. The Irish, British and, soon, Greeks have bought into a misguided belief in austerity — that they can somehow cut their way to growth. In the United States, we have seen states and municipalities slashing head counts of teachers, cops and firemen. The “paradox of thrift” has morphed into a misguided economics of austerity. Hence, even when the private sector manages to create some jobs, its offset by public-sector job cuts.”

You can see the rest in either text or if you prefer PDF, click the image below:

click for PDF

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Source:
Wall Street analysts and economists have this recession recovery wrong
Barry Ritholtz
Washington Post, July 17 2011
http://www.washingtonpost.com/business/wall-street-analysts-and-economists-have-this-recession-recovery-wrong/2011/07/14/gIQAVRTIGI_story.html

Category: Apprenticed Investor, Cycles, Economy, Employment, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

96 Responses to “Wall Street Economists Have This Recovery All Wrong”

  1. MayorQuimby says:

    There’s nothing misguided about austerity when the alternative is to exacerbate a situation in which debt levels are spiraling out of control.

    The anti-austerity banter makes me lau. As if we have a choice!!! Explain to me how CURRENT indebtedness per capita is affordable and THEN explain to me how additional indebtness is possible on a per capita basis.

    Hint: it isn’t.

  2. Nice work. Third title would be “This Time is Different in One Expresso”

  3. foosion says:

    Policy responses to credit crises have been totally inadequate. If govt would do the right thing, we’d recover much faster. There’s nothing inevitable about a slow recovery, unless it induces us to do nothing to fix the problem.

    @quimby: Current US indebtedness is affordable we have the productive capacity to pay it back. The market certainly thinks so, as it’s lending to us at under 3% for 10 years. Greece is an entirely different story – it likely has no alternative other than restructuring its debts..

    Read up on the paradox of thrift. http://en.wikipedia.org/wiki/Paradox_of_thrift

  4. johnl says:

    Barry I really enjoy your blog…thanks.
    I am often confused by statements like, “paradox of thrift”, when referring to governments that are attempting to balance their budgets? I’ve always believed that these groups were reducing their borrowing on a voluntary basis, before they are forced to by the bond markets and ratings agencies, in essence front running.
    As far as Greece at el are concerned. I wonder what the “austerity” would look like if they punished those who were dumb enough to lend to them (I’m sure the duration of the pain would be shorter)? Though this could well lead to a marathon of streakers in Munich, Paris, London and New York!

  5. econimonium says:

    There is everything misguided about austerity, mayorquimby, as anyone with a finance/business background will tell you…all debt is NOT bad it can actually be good.

    For example, my grad school loans locked in at 2% interest until they are paid off. Good or bad? I currently earn around 7% in my self-managed portfolio, should I buy a car with cash or take the 1.9% loan on 30K? Should I buy that new fridge at 0% financing for 1 year and pay it off within the year or take out money from my account? Now for the big one: should the government spend spend spend with less than 1% interest or should it not spend? Should that money be plowed into things that employ people, so that they have paychecks and they can start replacing things with, essentially, free money the same way? Or contribute to the tax base that allows more people to be employed in a virtuous cycle? Or should government cut back, laying off more people, reducing tax bases, and throwing us into an even more contractionary cycle? You know why businesses aren’t hiring (I have a C in front of my title btw)? Because there aren’t any customers. Period.

    You seem to confuse “bad” high rate credit card debt with all debt. Don’t. All debt is NOT the same and some is virtuous, even for the government. Saying otherwise just makes me think you believe whatever is on Fox News, and that’s not going to put you in anyone’s high intelligence bracket.

  6. b_thunder says:

    Why single out Wall St. economist (also known as wall st. salesmen assistants called in to help promoting whatever banks are peddling?) What about the Fed economists? What about the economists working for the GWB’s and BO’s administrations? Just saw Larry “Jabba the Hutt in training” Summers on CNN – did he not know about the post credit bubble recessions, or did he lie to the people? (did he lie to the President?)
    i.e. should we completely disregard him as an economist, or should we, well, stone him on the streets?

    And regarding the fact that unlike the typical bubble that “leaves behind something of value” this credit bubble didn’t – well, it didn’t leave anything of value in the USA (except 3 million of excess and now rotting houses) but it surely helped create plenty of “stuff” in the commodity producing countries like Russia, Brazil, Gulf oil states, Canada and Australia.

  7. willid3 says:

    austerity could work if there was some one to sell to. right now there isn’t. there is no country that isn’t going this route. and consumers in the US are doing it big time. so all it will do now is make the debt even bigger, as the economy shrinks, making it even harder to pay back what is owed. this is the equivalent of having high personal debt, and taking a lower paying job (because you wanted to), making that debt you started out with even higher.
    right not all in favor of austerity have to explain how the cut backs will improve the economy and create jobs. since the government will be cutting jobs, the private sector will have to hire a lot more to make up for that.
    problem is, they have no reason to do so. they just lost more customers (those government employees are some bodies customer), and currently they don’t exactly have a surplus of customers as it is. so they won’t be adding any jobs either. they will shrink even more.

  8. MayorQuimby says:

    @econim…

    Oh here we go again…

    1. Will you concede that there are limits as to how much a given entity to push things or are you suggesting that omnipotence exists in monetary policy?

    2. You are the one who needs to bone up, not me. Your understanding of capital formation is nearly non existent. Firstly, with regards to cheap credit, while it may seem rational and beneficial to take a low interest loan, you are actually paying much more for tuition, cars, houses etc. BECAUSE chit is cheap and easy. For example, an economy with no credit (cash only) can only support prices backed by cash offers so if we ditched credit, the average car prices would be about $5,000 since that’s as much cash as people could gather to by one.

    But with credit, a person with $5,000 can now afford to pay $20,000 for a car. The key point here is that they don’t get MORE CAR, they get the SAME CAR. It just costs four times as much!!!

    Now banks CREATE the difference in capital and lend nothing so the banks LOVE cheapened credit. Rich people who sell cars, houses and well, everything ALSO love cheap credit because ALL of that new money goes to THEM on the front end and the banks on the back end (as people pay their bills over time).

    So credit cheapens the purchasing power of existing dollars and undermines your hard work. But people are fooled by semantics and falsely believe banks LEND money. They do not. They create it. Which is why inflation exists (more money being created always).

    3. We now have an indebtedness of $47,000 per taxpayer. On top of that we have $100 TRILLION in unfunded liabilities, mortgage debts, credit card debts, tuition debts, cost of living etc. Most people have little to no savings so burdening them with many thousands in even more unpayable debts is pointless. The only place the increased debts CAN be serviced is by the proverbial top.

  9. Equityval says:

    BR you praise Reinhart and Rogoff for their astute analysis of history, yet ignore there comments this week about the wisdom of continuing to pile up debt. It appears they think that some measure of austerity is the lesser of two evils, or does that news not fit the tint of the blog?

    From Bloomberg: Reinhart-Rogoff Warn Rising Government Debt Levels Threaten Global Economy

    “Reinhart and Rogoff took issue with “prominent public intellectuals” who play down the significance of the debt and argue that the U.S. should take advantage of low yields on Treasury securities to launch another big fiscal stimulus.

    One such intellectual is Nobel laureate Paul Krugman, whom Reinhart and Rogoff don’t mention by name. Krugman, a Princeton University professor and a columnist for The New York Times, has castigated Obama and other policy makers for focusing on cutting the budget deficit and has called for increased government spending to help bring down the 9.2 percent unemployment rate.

    “It would be folly to take comfort in today’s low borrowing costs, much less to interpret them as an ‘all clear’ signal for a further explosion of debt,” the co-authors of the book “This Time is Different: Eight Centuries of Financial Folly,” said. “Market interest rates can change like the weather. Debt levels, by contrast, can’t be brought down quickly.”

    http://www.bloomberg.com/news/2011-07-14/reinhart-rogoff-warn-rising-government-debt-levels-threaten-global-economy.html

    ~~~

    BR: This column was about why we should expect a mediocre recovery regardless of what we do in terms of debt or stimulus.

    I do not recall reading R&R suggesting debt reduction during or immediately after a recession — and as we have seen elsewhere, it is counterproductive and makes deficits wider.

  10. Moss says:

    The issue is that the bad debt is not being written down. The majority of the bad debt has no underlying asset since it was fabricated via Wall Street bankster voodoo. There simply is no physical asset to support the debt. Since the debt holders, namely the banks will melt down if the true economic value of the debt is priced, the burden associated with maintaining the false value is shifted to the tax payer via sovereign austerity measures. The sovereign ‘austerity’ is now the last backstop for the banksters.

  11. LostinATX says:

    @mayorquimby – LOL by ≠ buy.

    @BR- what’s the alternate cure if government won’t or can’t spend?

  12. Ivan Karamazov says:

    @mayorquimby

    So you are advocating deflation?

    Yanking all the credit out of an economy where cars cost $20,000 does not lead to an economy where cars cost $5000. It leads to an economy where everyone stops building cars.

  13. MayorQuimby says:

    Yes moss. Think of each liquidity bubble as:

    A stretching of the rubber band and a means by which the TOP literally prints themselves counterfeit money which then forces up the price of everything upon e bottom they stealing more energy and labor output from the bottom. This undermines the ABILITY for new capital to be formed by the bottom a quandary which is then used as justification for even MORE money printing by the top!!!

  14. MayorQuimby says:

    Sorry for the typos. On an iPad and watching le tour (de doping).

  15. wtkasch says:

    Barry,

    I enjoyed reading this article today. However, I thought some about the statement that credit bubbles do not leave physical infrastructure after they burst, and I wondered what your thoughts were about the excess housing inventory left over from this crisis? Isn’t housing productive in some way, if even to keep people off the streets and reduce the crime rate?

    ~~~

    BR: New home account for between 12-15% of all sale transactions. Existing home sales is still the dominant transaction by far. So while there was some legitimate excess capacity built, its was a small percentage relative to lets say railroad tracks or fiber optics.

    Most highly leveraged debt purchases of homes are akin to buying lots of stock on margin — if and when the share price falls, you end up with an asset worth less than the margin call, leaving behind nothing usable, only a debt obligation.

  16. MayorQuimby says:

    Ivan-

    I’m not. I was making an example. But in point of fact, that is not true at all. It is theoretically possible to have a deflationary growth cycle.

    But what I support is a SEVERLY curtailed credit creation monetary system and RIGID zero percent inflation mandate. Back ALL “lending” with REAL SOLID collateral, restrict increases in the money supply to actual GDP, audit GDP yearly and by so doing, bring about a strong dollar economy. This can only happen if bad debts are written down and that mit even include sovereign. So be it.

  17. [...] Read the rest here in the Washington Post, or on his blog,  here. [...]

  18. Conjure Bag says:

    econimonium, I suggest you re-think your personal economic hygiene.

    Your 2% college loan, 1.9% car loan and 0% fridge loan all work until you, as an individual economic entity, cease to cash flow.

    In a crisis, the 7% return on your self-managed investments could go to 0%–or worse– and those “virtuous” loans could morph into a cannonball that would take you straight to the bottom.

    As far as government debt is concerned, that’s a different matter entirely.

  19. carleric says:

    Some of you seem to be arguing for increased government intrusion into the marketplace to support the economy…sober up folks…government is too big, too intrusive with its hands on too much misallocated capital. Remeber the “stimulus” when money was poured down eveery rat hole the politicos could find. The solution is to reduce its scope and size, let people get out of debt, stop whining about consumers deleveraging and get on with your life. And ans stop whining about unemployed ex-governemtn parasites.

    BR: Remember how we got here in the first place: Reducing the size and scope of regulations so government could get out of the way of bankers.

    Why on earth do you want more of the same?

  20. mathman says:

    Obama disappoints yet again:

    http://www.stinque.com/2011/07/16/dont-let-the-bus-hit-you-as-i-throw-you-under-it/

    In yet another victory for the plutocracy that controls both political parties, President Barack Obama has decided not to back Elizabeth Warren as director of the new Consumer Financial Protection Bureau, which opens on Thursday, according to sources who were briefed on the subject. Warren is reviled by Wall Street and Republicans for having the audacity of speaking up for the little people getting shafted by shady mortgages and credit card companies, and for her ability to speak cogently to people across the country. The bankruptcy and tax law professor at Harvard has been a longtime advocate of consumers’ rights, and was the person who conceived of and led the creation of the new bureau.

  21. carleric says:

    H ey Barry, I remember how we got here and how government tried to preserve the status quo…..effective, coherent regulation is absolutely required to keep the thieves in line but if you think the gigantic stitulus package accomplished anything positive or the Dodd-Frank bill is anything more than laughable I will be very disappointed in your take. Government’s attempt to make sure no one is ever offended, death is prevented and campaign contributors are insulated from the real world hardly seems like the correct road to me.

  22. Centurion 9.41 says:

    @MayorQuimby

    Good to see someone who gets it. I’d add this point.

    In the past, under fixed standard currency systems, the economies had developed rudimentary leverage and risk products; interest loans and the like.

    Moving to a fiat currency system allowed for greater “acceleration” of the system, thereby creating more force; think F=ma. And the variances, though outside the realm of most human’s linear ability to conceive and understand the 1st derivative consequence, remained somewhat controllable.

    However, when the market invented leverage and risk products that went 2nd & 3rd derivative, not only did the “reality” of economic movements move so far beyond common man’s linear thought, they were accelerated by the fiat currency system from F=ma to E=mc2 (sorry, no superscript on an iPad – ironic such limitations in a product from a man who pointed to the importance of font and calligraphy to Apple’s early success & impact on computers).

    Regardless, E=mc2. Even Einstein said it takes the average student 5 years of study to get Relativity.

    I fear it will take far longer, and with far more pain than mere testing and economic contemplation bounded by the failed assumptions of EMT & Keynseian thought, to learn the lessons needed.

  23. arrian says:

    > Confusion about this is already taking a toll across the pond. The Irish, British and, soon, Greeks have bought into a misguided belief in austerity — that they can somehow cut their way to growth.

    Well, BR, the administration would disagree . . .

    Clinton Praises Greece for Economic-Policy Leadership

    http://www.nytimes.com/2011/07/18/world/europe/18clinton.html?hp

  24. Winston Munn says:

    It is impossible for the classical and neo-classical economists to get this right because in their world disequalibrium cannot occur – price is a function of perfect equalibrium between supply and demand.

  25. techy says:

    MayorQuimby:

    back in early 2009, you could have sold puts of apple strike $30 8-10 months expiration for almost 20% profit on the margin required, considering that apple had $30 of cash in the balance sheet.

    why was the market pricing companies like that? answer: because the financial house of cards was collapsing, and deflation was going to swallow close to 10 trillion of asset, leading to counter party risks which would have made even most secure investment vanish. leading to unemployment of around 25% or more.

    what was the fix: USG and FED stepped up and supportee all the insolvent so that true pricing can be established for assets, Even today if those assets for those fin institutions are sold the FED may incur losses of couple of trillions. but well time and inflation can definitely cure those debt related issues.

    go back and see how debt to GDP has been last 50 years…..debt is meaningless if inflation stays positive…and sometimes if it grows faster it can swallow debt and make it puny.

    Give me $5 trillion and I will show you how to revive the economy and put it back on a steady growth scenario(positive inflation). of course that will make the debt go to around 20 trillion, who cares…if the debt can grow from $2 trillion to $6 trillion from reagan to end of clinton, a 300% increase. it can definitely manage 35% increase.

    If not for the tea party whose only interest is defeating liberals…..we would have had those policy in place. Also devaluation of the dollar is needed…to make local goods\services comparable to those currency manipulators like india\china.

  26. MayorQuimby says:

    Techy- you’re not seeing the forest for the trees. If capital formation is not backed by collateral and real GDP, all the accounting gimmicks in the world amount to nothing more than an expansion of risk.

    Iow, the REAL economy is the only thing that can get us out of this mess along with a lower debt to GDP ratio.

    Your plan is not going to work because you’re essentially trying to build a house on an increasingly weakened and cracked foundation.

    Short version: you can’t successfully expand the credit supply when existing debts are not serviceable for to do so is to introduce severe distortions, volatility and instability into the market.

    Inflation and deflation are not phenomena that can be sustainably controlled from the ramparts of the tower. They are functions of purchasing power. Stealing purchsing power by forcing REDUCTIONS in purchasing power into the populace via higher inflation and cost of living undermines the entire point of our entire economic system.

  27. Orange14 says:

    @MayorQuimby – by your logic we should have never fought WW-II since the level of debt to support the war effort exploded. Perhaps you would feel more comfortable moving the country back to the gold standard; after all it is a defined and solid asset to back the currency. You apparently don’t want to believe that government debt is different from private debt.
    @carleric – perhaps the best solution is to move back to the 1830s when government funding was reliant on a tariff system. That would certainly shrink the size of government and get us back to the good old days of financial panics and zero regulation of the financial (as well as a lot of other) system.

  28. ilsm says:

    quimby,

    Clinton was a good democrat reducing deficits, as likely as Nixon going ot Red China.

    Bottmline deficits and debt only matter in bad way for democrats, and liberals. They are wonderfull and limitless for tax cuts, no tarriffs on slave labor imports, buying trillions of wall street’s toilet paper and war profits.

    Please refrain from using lines like this: “1. Will you concede that there are limits as to how much a given entity …..”

    I stopped there.

    No, you starting off with your theory then building the argument as if that fiction were real or relevant is how we got to this place in public debate.

    It is why I do not do the media for information.

  29. techy says:

    MayorQuimby Says:

    July 17th, 2011 at 2:14 pm
    Techy- you’re not seeing the forest for the trees. If capital formation is not backed by collateral and real GDP, all the accounting gimmicks in the world amount to nothing more than an expansion of risk.
    *******
    who said GDP will not increase with increase in debt. go back and look at GDP and debt chart, and you can see how debt increased by huge factor…but GDP also increased
    ********
    Iow, the REAL economy is the only thing that can get us out of this mess along with a lower debt to GDP ratio.
    ***********
    yes, I want low debt to GDP, but now now…right now we need to borrow and spend to be the spender of the last resort. right now wage inflation is needed to transfer all the cornered wealth from the very few.

    where were you people during reagan when he doubled the debt, ditto during Bush Jr.

    I will be up in arms in support of austerity during times of plenty.
    *************
    Your plan is not going to work because you’re essentially trying to build a house on an increasingly weakened and cracked foundation.
    *************
    Wrong analogy. this is not a house since there are millions of homes to choose from. this is a country, and it is what it is. And I do not think that the foundation is cracked…I think that the reason why 70% of the people are in pain is because 15% of people have cornered the wealth and gamed the system.
    *************
    Short version: you can’t successfully expand the credit supply when existing debts are not serviceable for to do so is to introduce severe distortions, volatility and instability into the market.
    *************
    you still do not understand inflation. Its a fight between owners of capital and providers of labor…wage inflation will transfer the value of capital to labor and thats the cure.

    I am not sure what you are actually trying to say, so please elaborate.

    But there are plenty of people with savings, not to mention the FED can definitely loan infinite amount for the spending, and I can bet you that it will be only bad for the current capital owners…when there is a huge economic activity leading to shortage of labor and increase in wages.
    *************
    Inflation and deflation are not phenomena that can be sustainably controlled from the ramparts of the tower. They are functions of purchasing power. Stealing purchsing power by forcing REDUCTIONS in purchasing power into the populace via higher inflation and cost of living undermines the entire point of our entire economic system.

    *************
    stealing purchasing power from 30% (people with high net worth or savings) to give it to 70% who are in debt(or lack discretionary spending power) is better for the society since it benefits most since there will be only 10-15% of the retirees who may be collateral damage who are totally dependent on their savings to generate income (who can be supplemented using means based increased in social security payment)
    *************

  30. MayorQuimby says:

    Orange you lie. Reread my earlier post when I mentioned higher REAL growth and lower debt to GDP. WW II ending enabled both. As for gvmt vs. Private debt it IS the same thing. Gravity is gravity, math is math. Dbt is debt.

    Clinton never ran a real surplus. I’m not going to look it up but go find the USA today article that explains how he took money from social security.

  31. Another voice-in-the-wilderness in 2008 was the FRB-NY’s Richard Koo who at the time described the event as a “balance sheet recession” and how Japan’s experience could assist policy makers by stressing fiscal policy more so than monetary policy.

    The dilemma for several jurisdictions was irresponsible fiscal management in the recent past had left them unprepared for the necessary fiscal stimulus. By running constant annual deficits the USA & others had already chalked up unsustainable Debt/GDP ratios. The reason Canada’s Prime Minister Stephen Harper challenged G-20/G-8 nations to signup to “aspirational” austerity measures at last year’s Toronto Summit was ‘cuz increasing the Debt/GDP ratio to over 100% in some countries was setting up the globe scene for an imminent currency crisis.

    The immediate impact was to restore confidence in the EURO as it climbed back from 1.18 exchange agin the USDollar to a 1.45 rate. There is no doubt Harper’s initiative and the real-time empirical case headed by the Cameron Conservatives in the UK averted a severe round of trade wars and protectionism.

  32. Orange14 says:

    @MajorQuimby – I would not be so quick to call anyone a liar anywhere, anyplace, or anytime. It’s just not good manners. You conveniently forget what happened to the US economy in 1938 when Roosevelt dropped the Keynesian stimulus; the economy started sucking wind; exactly the same thing that is happening right now since we didn’t take the appropriate steps to get out of the liquidity trap. Clinton did run a surplus because his OMB was ruthless in cutting the budgets of government agencies; I was there when it was happening and know exactly how real operating budgets dropped precipitously. It wasn’t a Social Security trick that did it. Methinks you need a macroeconomics refresher.

  33. gman says:

    I know which blogs and think tanks quimby reads and agrees with …think “WMD” “Iraq behind 9-11″ “DOW 36k” “tax cuts ALWAYS pay for themselves” “FNM FRE caused the bubble” “Glass Steagal bad” and now the same people are peddling “AUSTERITY FUELED GROWTH”…

  34. gman says:

    I know which blogs and think tanks quimby reads and agrees with …think “WMD” “Iraq behind 9-11″ “DOW 36k” “tax cuts ALWAYS pay for themselves” “FNM FRE caused the bubble” “hyperinflation 2010″ “Glass Steagal bad” and now the same people are peddling “AUSTERITY FUELED GROWTH”…

  35. MayorQuimby says:

    @orange

    I call it as I see it. And you are lying when you suggest that government debt is different from any other kind of debt. It isn’t. Compound interest, exponents etc. all function in precisely the same manner.

    Liar liar pants on fire.

    As for 1938….what’s your point? That there are no limits nor consequences to pushing our debt levels past 100 pct of GDP? You do understand that all debt is essentially stealing wealth from the future right? But there is no equilibrium between the amount of future energy that is expended to make up for today’s deficit spending. On the contrary, thanks to usury, we lose every time we deficit spend. Every single time.

    Suuuuuuuuuuure….if we just print and inflate the debt away all will be well!!!

    Um, no.

    Because inflation cannot be sustainably created since prices ar a function of supply and demand and the amount of serviceable credit is a function of real economic production. No production? No inflation. We can print and create asset bubbles but they burst because people such as yourself STILL do not see what is right in front of your eyes.

    The economy is telling you, Krugman, Bernanke et al that prices are too high; that there is TOO MUCH credit and debt in the system. You’re trying to inflate a tire with an increasingly large hole in it and it will take exponentially more air to keep the tire inflated over time as the hole grows.

    So by all means, I would LOVE to see you destroy the dollar, the middle class and bigger and bigger chunks of the economy if it means silence from your quarters as humanity marches on through the centuries.

    Oh and while we are at it, I’ll have some of that free lunch you’re having.

    Why pay when you don’t have to?

  36. MayorQuimby says:

    Gman I’m a staunch fiscal hawk and that’s it. I support no wars, a keep to ourselves type of country, generally detest the stock market, and gold and all the other bs which is rampant today.

    But thanks for trying.

  37. Petey Wheatstraw says:

    Conjure Bag:

    if you are indeed, the one and only, true conjure bag, tell me what you ate at your last meal.

    Mayor Quimby:

    You are mostly correct, yet you are outside the box. People are very uncomfortable when they, or even someone else, are/is outside the box. Keep going.

    Complexity and rule-changing in accounting prevent us from ever really knowing if Clinton ran a surplus, or not.

    No wonder we, as a people, have stopped believing science, when math is a matter of opinion.
    _______________

    Our entire economy is like a child’s tea party. These aren’t real dishes, and there is no tea in the pot, or the cups. Fiat is fiction. It’s magic. It requires you to believe, or it disappears. As long as we believe, the kid running the tea party has a lock on his/her imaginary asset(s).
    _______________

    As for the question regarding credit being bad or good. I think it’s bad (at least where the government is giving money away so that a select group can loan-shark it out). There are more historical words of wisdom against borrowing/lending/credit with interest/usury/greed, etc., than there are for them. Good ideas stick around. Our predecessors were trying to look out for us, and we treat their wisdom like platitudes offered by fools. We can’t see beyond the box.

  38. Petey Wheatstraw says:

    BTW: Y’all do realize that where the real rubber hits the real road, there a folks (recently downgraded from middle class, especially), who would rather put a bullet in your head(s) than try to figure all this out, don’t you? Lots of brain power, time and electrons spent on arguing the relative merits of competing fictions.

  39. Orange14 says:

    @Major Quimby – I’m glad you detest the stock market (I don’t care about your opinion about gold as it is an asset bubble at this point in time) and hope you are happy with your FDIC insured bank savings account that is earning 0.1% these days (but maybe you have learned the alchemist’s secret and don’t care to share it). Please explain to me if you are a deficit hawk and deficits mean the end of civilization why US treasury yields are so extraordinarily low (25 words or less please)? Let’s emulate the other wonderful nations in the world that are using austerity fueled growth to improve their economies.

  40. Petey Wheatstraw says:

    Quimby, RE: Your last comment:

    IT’S FIAT. How can interest be charged on good will, full faith, or credit, when the value of the underlying asset is imaginary? WITHIN our fiat system, there need not be debt, as all debt could be cancelled at the stroke of a pen (without hurting anyone but the one(s) counting on your belief that they alone are able to pull “money” out of their asses).

  41. Conjure Bag says:

    Petey Wheatstraw wrote:

    ” … if you are indeed, the one and only, true conjure bag, tell me what you ate at your last meal.”

    Toad bones and ground-up dog balls. Thank you for asking.

    Have a nice day.

  42. MayorQuimby says:

    Orange-

    Poor try. Clearly I never stated that deficits were the end of the world. Ditch the hyperbole and puerilistic and argumentative tone of voice. Put your adult mask on for a NY minute.

    Yields are low for a great many reasons and I’m not going to sit here and mention them all. The answers are out there if you seek them. But regardless of that issue the concept that we can just spend without consequence would be lost on any 2nd grader. And yet we have an entire FIELD of academics (read: useful idiots for a political class he’ll bent on handing out free money to the sheeple to get elected in perpetuity) telling us that we can essentially bend the laws of math and physics at will.

    Forget it. The ponzi economy broke and no amount of whining, arguing, calculating and moaning will put Humpty Dumty back together again.

  43. Petey Wheatstraw says:

    Conjure Bag:

    Sounds about right. Glad you’re okay. Thought you’d choked on a dog ball.

  44. MayorQuimby says:

    Petey-

    Fiat is NOT Monopooy money although the powers that be tend to treat it as such. We do not all gt up and work for worthless paper money. Capital formation occurs when a person requests it from a bank. But to do so they must post collateral (past labor) and pledge to create ‘something’ (ie future collateral for another “loan”) themselves. So the money is really our work, our labor output, our nominal wealth and it is THIS that bond holders lay claim to. It is this in which investors invest.

    So despite bernankes attempts, money still holds tremendous value because it represents our collective efforts. We can not just eradicate debt with the stroke of a pen because all money is debt. If you default on all treasury bonds, you erase the collateral for HUGE chunks of loans forcing super high rates, margin calls etc. The entire edifice crash into oblivion at a moments notice.

    But nice the real wealth is our production, there are limits to the downside.

    Dilution of the dollar just destroys purchasing power and harms future capital formation which we’ve seen for over a decade.

    Still we foolishly try and try and try to fit that square peg into that round hole.

  45. MayorQuimby says:

    Orange

    I’d also like to add that I never suggested that austere would help us grow. Of COURSE it will take a chunk out of GDP. What’s the alternative? Oil at $150? That won’t work! $DXY at 50? Whoops. Etc.

    What you just cannot grasp is that we cannot paper over decades of deficits and debts and mismanagement any more than a terminally I’ll cancer patient can asprin their cancer away.

    REALITY IS REALITY AND MUST BE ACCEPTED.

    Now get back to me when you are willing to stand tall like an adult and accept this. Until then, best of luck with that free lunch. I suspect they’re going to ask for some cash the next time you head over to that deli.

  46. BigD173 says:

    Reinhart and Rogoff — the economists quoted in Barry’s article — have weighed in.

    They criticize “prominent public intellectuals [ i.e., Krugmann, et al] who play down the significance of the debt and argue that the U.S. should take advantage of low yields on Treasury securities to launch another big fiscal stimulus.”

    Reinhart and Rogoff further opine: “It would be folly to take comfort in today’s low borrowing costs, much less to interpret them as an ‘all clear’ signal for a further explosion of debt. Market interest rates can change like the weather. Debt levels, by contrast, can’t be brought down quickly.”

    I think Mayor Quimby has it about right.

    * http://www.bloomberg.com/news/2011-07-14/reinhart-rogoff-warn-rising-government-debt-levels-threaten-global-economy.html

    I think Mayor Quimby has it about right.

    *

  47. Winston Munn says:

    The problem with classical and neo-classical thought is that there is no motivation for capital investment when demand wanes. Instead of savings leading to investment, waning demand leads to layoffs and higher unemployment, resulting in further diminuation of demand and further entrenching by businesses, further reducing investment.

    The stimulus needed right now is better jobs and higher wages. Demand is primarily a function of wages, not capital investment. It is wage-fueled demand that leads to capital investment.

  48. MayorQuimby says:

    Big- Both the bond market and fx markets threw a nice sized tantrum when qe 2 was launched. In dollar terms the stock market has not rallied much at all actually. We’ve depreciated our currency to make it appear as if the markets have rallied but in nominal terms we hae gained little.

    Make NO mistake here – the consensus crowd is DANGEROUSLY close to precipitating an irrevocable crash in most USD denominated assets. If that happens, we will see much darker times than the 1930s. Be careful everyone. We are tinkering and experimenting with the very heart of our economy. If Bernanke pushes this thing one too many times, it is literally game over for our economy way of life and nation.

    Drop the hubris and grow the hell up for crying out loud.

  49. MayorQuimby says:

    Winston, that’s a good way of putting it. I would add that forcing inflation forces AWAY savings thereby increasing wealth disparity and income gaps. This harms capital formation at which point asset price declines and equilibrium are needed to restore sanity to the market.

    But instead, the political class and wealthy business interests found a useful idiot in Greenspan and Bernanke – both of whom suggested that we can get absolutely smashed on gin without any hangover so long as we just….keep drinking gin!

    Good luck with that,

  50. Petey Wheatstraw says:

    MayorQuimby:

    “We do not all gt up and work for worthless paper money.”

    Yes, we do. We are forced to, as that is the only “medium of exchange” with which we can pay our taxes. Problem is, it changes in “value,” so a cheeseburger today is half a cheeseburger, tomorrow. If I’m wrong, please tell me what a fiat dollar is worth, tomorrow. If it had any real value, you could tell me with certainty.

    Capital is created only by farming, mining, manufacture, or intellectual product. “Money” is a medium of exchange.

    That the money supply can be increased/decreased and allocated/reallocated at (someone else’s) will is proof that there is absolutely no relationship between it and any tangible/actual thing of value (work, labor output, etc.).

    It’s analogous to the old saying, “it’s not what you know, it’s who you know.” In a pinch, that shit goes out the window. If it’s me and Warren Buffet arguing over a banana on a desert isle, Warren will be going hungry, ‘cause I don’t give a shit who he is or what he has to trade for it. I’m hungry, and I WILL eat. He can carry my parasol.

    You cannot dilute the value of that which can be created ad infinitum. Unlimited supply (even potentially) = no value.

    If wealth production is rewarded with units of the medium of exchange, please tell me how the bankers came to possess not only the majority of those units, but also the “right” to call more of the same into existence, by doing nothing (except engaging in arbitrage of imaginary, self-created units of “wealth”).

  51. Orange14 says:

    @Winston Munn – of course you are describing the classic liquidity trap that we are now in. The only way out of it is a large government stimulus (direct not a QE #99 or whatever number we are up to). Infrastructure repair work is the best bet and most needed.

  52. MayorQuimby says:

    Orange-

    You don’t solve a liquidity problem by creating a solvency problem. And we don’t have a liquidity problem. We have a debt-saturation problem.

    You have drank from the kool aid bucket.

    Free lunches do not exist and yet you suggest they do. It really is just quite amazing. Just whip out the credit card and all the world’s problems vanish in a puff of smoke. What should I ask for with my other two wishes?!

    Okay…let’s start with the very basics.

    What is the cost of a dollar borrowed by gvmt ver time at 1% interest?

  53. Petey Wheatstraw says:

    Goddamnit. TBP ate my comment.

    MayorQuimby:

    “We do not all gt up and work for worthless paper money”

    Yes, we do. If not for the fact that it is all we can pay our taxes (read: stay out of jail), with, we would have shitcanned it long ago.

    Farming, mining, manufacturing, and intellectual property (and the labor supporting each), are the ONLY means by which wealth is created. “Money” is the medium of exchange. We have foolishly allowed units of the medium of exchange to be created, at will, by a class of people who enrich themselves, automatically, by doing so. As a unit of exchange, fiat money is a bad choice, as the potential supply is unlimited (and anything in unlimited supply is worth precisely zero), and the people in charge of creating it are not trustworthy, by nature.

    If a dollar has any real value, please tell me what one will be worth tomorrow.

    Please explain why we needed to (and, perhaps, more importantly, how we could, in any mathematically valid or realistic way), implement QE (to infinity, and beyond), and how we will, or possibly could, cancel our existing debt (accidental/unregulated fiat), without the necessary units of exchange to do so.

    Further, if you could explain how and why those units of QE fiat, already called into existence against our collective future labor/wealth (fat chance on collecting THAT debt), have not been able to find their way to settling any of our debt. Simply: What is QE’s reason for being? Why has all of the fiat QE used, so far, not cancelled the debt or any appreciable amount of it? If they can create $4 trillion, why not a gazillion? WHO TF is gaming this system?

    The paper is worthless.

    Our “money” holds value because it is the legal medium of exchange, and legalities are enforced at the point of a gun. That it is fiat and political negates all potential of its having any true value. TPTB have clearly demonstrated as much.

    We could print and pay our way out of our current troubles at the stroke of a pen. That we don’t says nothing about economics, and everything about politics and power.

    Fiat money/value is artifice.

  54. BR,

    are you sure that “We” wouldn’t have, such, a deep ‘Credit Crisis’, but, for the existance of the FedRes?

    Personally, I think We would to do well to Wonder..

    Really? What led so many to take such ‘Risks’?

    How? was so much, so ‘freely’ offered?

    Who? was thought to ‘back-stop’ “It” all?
    ~~

    and, Really, Should “We” not wonder, at all, about the USGov/FedRes Duopoly?

    again, personally, That would be a grave Error.
    ~~

    Orange14 ,

    check your “GPS”, something tells me that you are on ‘Uncharted Desert Isles’..

  55. O, & by the Way…

    ‘Petey’,

    @ 9:14

    D@mn Right, you are.

  56. MayorQuimby says:

    Petey-

    I explained it before:

    “Capital formation occurs when a person requests it from a bank. But to do so they must post collateral (past labor) and pledge to create ‘something’ (ie future collateral for another “loan”) themselves. So the money is really our work, our labor output, our nominal wealth and it is THIS that bond holders lay claim to. It is this in which investors invest.”

    Money is a placeholder for BOTH past and future labor. But as with all things in the real world, the minute you stop producing, your money becomes worthless the same way a house rots due to weather. ’twas always thus!

    A dollar is a ‘piece’ of debt; a bond with negative interest thanks to inflation. The real world is deflationary and we all get up and work to stave off this deflation and keep ourselves, bodies, minds and possessions protected and ‘valuable’.

    So, to answer your question:

    “If a dollar has any real value, please tell me what one will be worth tomorrow.”

    It will be worth a lot if we keep innovating and exploring space, inventing new technologies and maintain a stable political system free of excessive debts. To undermine any of those potential points of strength is to weaken the currency.

    “Please explain why we needed to (and, perhaps, more importantly, how we could, in any mathematically valid or realistic way), implement QE (to infinity, and beyond)”

    We didn’t need to. QE favors asset holders and harms savers and potential capital formers. It helps those in debt and hurts those saving to BE in debt.

    “and how we will, or possibly could, cancel our existing debt (accidental/unregulated fiat), without the necessary units of exchange to do so.”

    Debts are canceled by the market.

    Think of money as something that is grown out of our labor. If we can’t grow enough money to service existing debts, printing money does nothing. It’s like putting tobacco in a joint. Eventually – it’s no longer a joint, it’s a cigarette.

    “Further, if you could explain…”

    Petey- You’re not understanding our monetary system. The ENTIRE CREDIT SUPPLY CAN CONTRACT to a singularity. ALL MONEY is debt. Look at the money supply charts during the Depression or ’08. Credit can expand or it can contract. Your money isn’t actually IN your bank. It is ALL an illusion and can vanish like any other! So all the QE in the world can disappear as easily as it was created.

    “What is QE’s reason for being?”

    To support, maintain and enrich those in control of our economy and political system at the expense of the proletariat.

    “The paper is worthless.

    Our “money” holds value because it is the legal medium of exchange, and legalities are enforced at the point of a gun. That it is fiat and political negates all potential of its having any true value. TPTB have clearly demonstrated as much.

    We could print and pay our way out of our current troubles at the stroke of a pen. That we don’t says nothing about economics, and everything about politics and power.

    Fiat money/value is artifice.”

    Wrong. Our money holds value ONCE AGAIN because it is backed by what we do – ipads and cell phones and internet, pc’s, cars, phones, movies, jazz, airplanes and moon landings (oh, and appliances. Can’t forget appliances).

    As long as the monetary authorities RESPECT this situation and system, our credit supply will always contract/be supported by levels supported by the productive collateral posted at the point of capital formation.

    Which is what you saw in 2008. The credit supply ‘wanted’ to contract to DJIA 2,500 and a median house price of $50K. That would bring in savers and cash holders, force the end of the old system, reset everything anew and we move forward. It would have meant regime change AT THE TOP. It would mean Warren Buffet goes from a net worth of $40 Billion to $40 million and YOU get the chance at competing with him. YOU get assets at a cheap price and he gets stuck with a loss.

    Clearly you can see why “they” couldn’t let this happen! “They” being the most powerful and connected persons ever to have walked the planet aren’t going to just sit there and take a 90% loss and an end to all of their notereity and success. HELL no.

    So here we are….

  57. Petey Wheatstraw says:

    “Capital formation occurs when a person requests it from a bank.”

    Where did the banker get it? Maybe he pulled it from his ass?

    Capital formation begins when I grow a tomato. If you are hungry, and want my tomato, the richer I am. What’cha got?

    If you are truly hungry, and I don’t need what you have, why would I take a piece of paper that I know will be worth less in the future than it is today, for my tomato? Worse yet, if I’m charging $2, and you only have $1, and I agree to finance your purchase of my tomato (which, I created from virtually nothing, but which is a true asset that I alone control), and to accept your paper for it, for a net cost, to you, of $2.50, how am I to know that you will ever have that money? Do you create it? If you did not create it, but someone else did, and has completely free reign to allocate it to you, or not, for your labor or wealth that you created, or will create, or not, how do I know that they will create and allocate to you the money to cover the debt you just took on? By what right do they create the money that you use? Do they grow, mine, manufacture, or create anything I need? No. They make your money up, and lend it to you after they take a cut. They have nothing, they provide nothing but fictional debt by which they steal your future labor (but not my tomato, if it weren’t for their guns).

  58. MayorQuimby says:

    “Where did the banker get it? Maybe he pulled it from his ass?”

    Actually, that’s precisely what he did!!! Banks just create money out of thin air. Welcome to the “real” world lol.

    “Capital formation begins when I grow a tomato. If you are hungry, and want my tomato, the richer I am. What’cha got?”

    No. Capital formation is defined as the creation of credit backed by collateral and the pledge to create new collateral.

    So – to use your example – money is ‘grown’ on the back of you growing tomatoes and me pledging to grow some myself.

    “If you are truly hungry…”

    Because money represents both past labor in the form of existing goods and the pledge to create new goods, it has value. Centrally planned, printed bernanke-bucks are NOT the same thing which is why every time he opens his pie-hole the dollar takes a dump.

    You’re close – but you’re not there yet.

    Money IS debt – all of it but in truth – the real ‘money’ or value behind money is you and I working and what we all do every day.

  59. DeDude says:

    Anybody who think we would precipitate a crisis if we at the current Debt/GDP ratio added a few trillions in stimulus rather than cutting with an ill timed austerity program is an idiot who needs to reconnect with reality.

    Look at Japan’s debt/GDP ratio: now, 5, 10, 15 and 20 years ago. Catastrophic events are not precipitated at anything close to our current level. On the other hand you can cause a downturn in the economy if you begin austerity before the private sector is ready to pick up the slack created by government downsizing. Since all debt is relative, inducing a smaller economy (by austerity) is from a practical point the same as taking out more loans. Only problem is that when you reduce capacity utilization and leave millions of workers not producing, society suffers a real wealth loss (the production those workers would otherwise had created) and that loss is permanent.

    So far we have not seen a single case of austerity causing anything but pain, the suggestion that it somehow is doing something good for the economy just have no basis in real world experiences.

  60. MayorQuimby says:

    “why would I take a piece of paper that I know will be worth less in the future than it is today, for my tomato?”

    That’s precisely what Bernanke wants you to think. And so you convert those depreciating notes into hard assets like a house. But to do so – you need to….”borrow” from the bank at which point the bank creates even more money which depreciates your notes!

    Short version – 320 million people spend their entire lives expending energy chasing their own tails.

  61. MayorQuimby says:

    “Anybody who think we would precipitate a crisis if we at the current Debt/GDP ratio added a few trillions in stimulus rather than cutting with an ill timed austerity program is an idiot who needs to reconnect with reality.”

    You’re dead wrong.

    1. We are the reserve currency. If money is not backed by GDP but by ink, then that reserve status is in jeopardy. Say hello to $150 oil again and the whole house of cards can collapse into oblivion.

    2. We already printed MUCH MUCH more than Japan and in a MUCH shorter time frame. ONCE AGAIN – money is NOT paper that is printed by the Fed. It is money that is created by the Federal reserve SYSTEM every time we borrow money from the bank and BACK IT WITH BOTH EXISTING CAPITAL which can be repo’d in case of default and by the pledge to CREATE, GROW or INNOVATE ourselves! Gvmt can only push things so far before belief IN THE ENTIRE SYSTEM goes out the window and a world wide panic the likes of which has NEVER BEEN SEEN ensues.

    Think 75% market declines in 2 weeks type of thing.

    Keep on printing. We’ve already QE’d multiple trillions. Our ENTIRE DEBT LOAD a dozen years ago was only a few trillion. We are almost at the point at which we are printing money like a 3rd world country.

    Keep it up!

    I’d welcome the end just to get a great nation to learn a valuable lesson about “free lunches”.

    That’s right.

    They do NOT exist.

  62. MayorQuimby says:

    “Look at Japan’s debt/GDP ratio: now, 5, 10, 15 and 20 years ago. Catastrophic events are not precipitated at anything close to our current level. ”

    Catastrophic events are NEVER predictable which is why they are so fierce.

    “Since all debt is relative, inducing a smaller economy (by austerity) is from a practical point the same as taking out more loans. ”

    QUITE false. One leaves you with an overhang of debts and the other leaves you a clean balance sheet which allows for the creation of more serviceable debt.

    “Only problem is that when you reduce capacity utilization and leave millions of workers not producing, society suffers a real wealth loss (the production those workers would otherwise had created) and that loss is permanent.”

    True and false. Yes there is a price to be paid for being such a creditor nation. But the loss is not permanent.

    “So far we have not seen a single case of austerity causing anything but pain”

    Of course it causes pain. And going broke is WORSE. MUCH worse.

    But by all means, let’s just step on that pedal. I enjoyed Thelma and Louise when I first saw it and it’s been a while.

  63. DeDude says:

    “You’re dead wrong”

    I guess the opinions you pull out of your dumb ass, trumps real world facts and experiences. Dozens of countries have experienced being at our current levels of debt/GDP and going higher – without any of all of those chicken little fantasies you bable out appearing in the real world. Wake up little fella, its a nightmare it doesn’t happen in the real world.

  64. bigbases says:

    When a pendulum reaches an extreme, and begins to swing in another direction, it never stops half-way. It always goes to an equal and opposite extreme. The next bubble will be “frugality”.

  65. Petey Wheatstraw says:

    “Banks just create money out of thin air. Welcome to the “real” world lol.”
    ______

    “Real.” Exactly. It’s artifice, and it’s not, as we are seeing, a useful system for a growing number of real people, or as a socially beneficial utility.

    “. . . and me pledging to grow some myself.”

    Your pledge is not currency. It is not fungible. That’s the problem. The value of what you promise, in kind, quantity, or relative to the value of anything else, if you can even deliver it at all, is speculative (what’s more, you told me you pulled it out of your butt). I’m going to need collateral, and vague promises won’t cut it.

    I wish I could attribute this:

    “Money was invented so you’d know how much you owe.”

  66. MayorQuimby says:

    “I guess the opinions you pull out of your dumb ass, trumps real world facts and experiences. ”

    I think we all know who here is the dumb ass. You’re out of the conversation as far as I’m concerned.

  67. MayorQuimby says:

    “Your pledge is not currency. It is not fungible. That’s the problem. The value of what you promise, in kind, quantity, or relative to the value of anything else, if you can even deliver it at all, is speculative (what’s more, you told me you pulled it out of your butt). I’m going to need collateral, and vague promises won’t cut it.”

    All I’m saying is that there IS value to the dollar so long as our monetary authorities respect the system. When they stop respecting the system, we go to shit in a hurry.

    Others here think it’s just a numbers game. Okay. Roll the dice gang. Let the chips fall where they may and see if we can just print money and ignore reality.

    Petey-

    If you back money with real production both past and future, then the exchange of money is worth what’s behind it. If there’s nothing behind it well….

  68. Petey Wheatstraw says:

    Quimby:

    You seem to think that quantity matters when you’re talkin’ fiat. $1 or $1 trillion, it’s all just numbers — there is no underlying value. If you’re going to insist on treating it as if it has value, what you should be concerned about is how your percentage of infinity is allocated.

    You have already stipulated that money is created by the banks out of thin air. So, I ask you, how difficult could it possibly be, under those circumstances, to “settle the debt”? Nothing of specific value was promised against the debt that is a fiat dollar. The unit is worthless (if not for the guns).

  69. MayorQuimby says:

    Petey-

    First of all, thanks for an interesting debate on money. I love discussing money and economics in an abstract sense.

    I’ll say it again – money DOES have value because it represents things OF value. Cars, phones, technologies and more importantly – the pledge to create more of them in the future!

    What’s worth more to you – a tomato or the promise to grow a bunch of them? You can barter if you like but tomatoes rot and metal rusts. Nothing holds its value over time. Not gold, not tomatoes and not money.

    So it’s all relative is it not? Money is always an artifice – even gold – so it will never have value itself. We are part of a system which when functional, WORKS. I sympathize with your ‘monetary frustrations’ and I share them. But you must undertand that fiat currency IS NOT just paper. It is paper BACKED by work both past and future. When banks STOP backing money and lend easily and the Fed prints…

    THE END IS CLOSE

    Good night all.

  70. James says:

    > THE END IS CLOSE

    You must bring this subject up again, BR, hopefully sometime in the very near future! Quite entertaining.

  71. smedleyb says:

    It’s a technology/real estate bubble wrapped in a credit bubble inside a civilization bubble.

    And you know what that means in our day and age — DOW 15,000!

  72. Greg0658 says:

    Interesting discussion. Tomatoes & work effort.
    Out of thin air .. new money available at 10:1* ratio by signing a pledge to work for its dissolvement so interest will stop accrue’g.

    one thing – a pov of mine .. creating money via corporate stock reduces labors effect in this discussion. The corporation makes the rules for return of initial investment money (or not returned with interest) possibly used in taking out competition reducing the gross domestic worth and ability to produce labor efforts. Upper tier management in the organization are rewarding themselves for said efforts. Beyond that borrow’g values on stocks can become out of sync*.

    second point – our society is massively produce’g products (more like services) that are jobs but not a true domestic product. But said product/service jobs are eating foreign products such as oil. A war effort is also in this category .. if the place/country is not paying for the police action then the service is not gross domestic product. I believe the jobs building the bullets, guns, ships & planes are counted gross domestic product (but not invoiceable to counter the import needs). Another non-productive product/service job is the repair of this economic mess of a system. Another advertising.

    * or derivative on top of derivative of worse ratios

  73. DeDude says:

    “I think we all know who here is the dumb ass. You’re out of the conversation as far as I’m concerned.”

    I know someone refusing to accept the great MayorQuimby’s reality by decree and demanding that he connects it to economic theory, economic reality or economic data. Foxified screaming idiot debate is so much easier. You simply deny facts and make up your own facts instead – and then you call it an argument. The one who can scream his reality highest and with the greatest conviction is the “winner”. Sorry, this is not a gathering place for idiots. People want to see arguments, real world examples and a theoretical framework if you want to claim something.

    In the real world the lost production from a guy sitting at home doing nothing for a year is not regained when he gets back to work the next year it IS lost permanently. The same goes for any other below maximum capacity utilization, there is no such thing as going to 130% above full capacity utilization “catching up” with the 70% of full capacity utilization from the year before. Simple fact that only a foxified idiot would deny.

  74. techy says:

    Damn it..and I thought finally there was somebody from the other side willing to debate…

  75. [...] Barry on how economists aren’t looking at this recovery correctly.  (TBP) [...]

  76. paulie46 says:

    MayorQuimby Says:…

    At the beginning of your comments I found myself thinking “this guy is a clown”…

    At the end I find myself agreeing with pretty much everything you have written.

    Must have been semantics or something that got in the way…

    Makes me think I should listen more and talk less.

    Life can be weird sometimes.

  77. paulie46 says:

    Oh, I forgot…(re MayorQuimby Says:)

    The one thing I have to disagree on is the conflation of private debt with government debt.

    Private debt is a killer for sure.

    Government debt is a problem insofar as we place the burden of it on the private sector.

    Government debt for a Sovereign has no meaning in the real world – it is merely points on a scoreboard.

    It takes a hose to fill a swimming pool – the hose is government spending (debt as you call it).

    That hose cannot run out of water as long as we produce and grow. Some day growth will not be possible.

    Some day the Sun will burn out.

    I suspect this idea is what separates us – and it is a pretty big difference in my view.

  78. DeDude says:

    paulie46;

    Actually from the point of the economy it makes no difference whether the debt is private or public (in some sense debt obligations by “we the people” is identical to debt by individual people). Same thing with spending; the economy does not care if spending is private or public. The GDP formula puts the same weight to public and private spending. The issue is the multiplier effect of different types of spending (whether private or public). Spending on investments that require a lot of domestic labor and materials are particularly useful (high multiplier) regardless of whether conducted in the public or private sector. Not saying that the individual would prefer growing the GDP by his/her own spending rather than public sector spending, just that for the GDP there is no difference (GDP=private consumption+ public consumption + investment + trade surplus).

  79. paulie46 says:

    DeDude…

    The problem doesn’t lie with the spending.

    The problem lies in the idea that we, the Public, have to pay it back, which is nonsense.

    The money supply has to increase to support growth (as numbers on private sector balance sheets).

    All government spending on employees and services, etc. provided by the government occur in the private sector and impact only private sector balance sheets.

    The entity called the government has no budget other than a balance sheet that is basically a scoreboard.

    The scoreboard cannot run out of points. The points should be awarded on the basis of public purpose. They haven’t been.

    Deficit spending is one of two possible ways to increase the money supply.

    One of the ways doesn’t work if no one is borrowing or can’t afford to borrow due to debt overhang.

    As structured, both methods extract economic rents in the form of interest paid to rentiers at the expense of the rest of us.

    These structures are legislative in nature, not requirements nor features of a fiat monetary system. They are voluntary constraints that benefit a certain class of people.

    Why things are structured this way I will leave to the reader.

    All financial instruments in our monetary system are debt instruments, including money.

    An entity (Sovereign Government) cannot by definition owe money that the entity itself creates.

  80. DeDude says:

    paulie46;

    I don’t disagree with anything you list above (at least not the way I understand you).

    I don’t think the public sector is anywhere close to “can’t afford to borrow due to debt overhang” which I think you agree with (but a lot of other people here don’t). Consumer class on the other hand has reached that point, so the only way forward is for government to pick up the slack until consumers get back in the game.

  81. paulie46 says:

    DeDude…

    Yeah sounds like we agree. There will never be 100% agreement. I can learn from others.

    The confusion probably stems from my use of “public” and “private” inconsistently…

    All economic transactions take place in the private sphere, including government services (including the military and foreign transactions).

    The private sector (Consumer class as you put it) is severely over-leveraged (at least double the National Debt).

    The Public Sector (Government accounting operations) is not over-leveraged as this is almost by definition not possible.

    Cue Weimar Republic and Zimbabwe cries in 3, 2, 1……………

    In my view the government is not in danger of over-spending until we reach full employment and the economy is humming along nicely.

    At that point government spending is not necessary.

    Should we then run surpluses to sock away money to pay for future spending? It makes no sense for the government to save.

    Surpluses are useful only if we need to remove money from the economy to slow it down.

    Surpluses in perpetuity would drain the economy of financial resources, eventually to zero money (financial assets).

    Sorry for being so long-winded, simple things are difficult to convey simply.

  82. DeDude says:

    The reason you sometimes want to pay down (or reduce growth of) national debt is that the alternative is expansion of the money supply (and the associated increase in inflation). So sometimes in an overheated economy you reduce money supply by reduced spending (or taxing people) – and use that money to annihilate public treasury bonds.

    In the current situation where we NEED to expand the money supply and NEED more inflation, it is very counterproductive to reduce deficits – yet that is what the congress is fighting with the president about (and not even the direction, just the size).

    To make matters worse, there is actually a productive way to reduce the deficit if those pea brains absolutely must (in order to feel safe). Tax the (rich) investor class so we can deflate the current bubbles in commodities (which are hurting the consumer class and, therefore, the economy). Yet the only productive deficit reduction approach available is also the one these idiots absolutely refuse to talk about.

  83. paulie46 says:

    Unfortunately it looks like a majority of America is pre-disposed to shoot themselves in the foot, including our leadership (or lack of).

    Realistically though I have no reason to believe that our leadership would do anything any different even if the public was aligned 100% against deficit reduction.

    They just aren’t that into us.

    The arithmetic view on deficits is that we don’t choose to have them.

    Deficits choose us, an outcome of economic performance.

    Any effort to reduce deficits will likely make them larger.

    And destroy the economy to boot.

    Amazing what 30+ years of economic propaganda can do.

  84. paulie46 says:

    It seems that in my 10 million words about what I believe I neglected to say that although I agree with a lot of what MayorQuimby Says… said,

    I don’t agree at all with his conclusions.

  85. MayorQuimby says:

    Paulie, et al…the concept of gvmt picking up slack and filling in demand is

    RIDICULOUS

    I’ll make it incredibly simple to understand.

    Gvmt has no money. In fact – gvmt really does not exist when it comes to $$$$. All gvmt is is a revenue allocating mechanism. So…ALL gvmt spending is forced indebtedness or spending of taxpayer $$$.

    So – if a credit burst is the economy telling you that prices are too high and taxpayers are LACKING purchasing power, then FORCING THEM TO SPEND MONEY THEY CANNOT SPEND via forced inflation, destruction of purchasing power and monetization/dilution of currency….MAKES THINGS WORSE.

    ***MUCH WORSE***

    The Fed and gvmt are doing the PRECISE OPPOSITE of what needs to be done – restore value to the dollar, default bad debts and clear the economy of bubblitis.

    Instead – they’re going to REPEAT THE SAME FREAKIN’ MISTAKE OVER AND OVER AGAIN until YOU ALL stand up and DEMAND it stops.

    Until then well….BOHICA.

  86. DeDude says:

    The FACT that government picking up slack and filling in demand has worked every time to the extend that it was applied – is RIDICULOUS.

    The FACT that China with a stimulus as large as the projected fall in demand avoided even a recession, whereas US with a stimulus package of just 40% of the projected demand (and only half being real stimulus) got into a severe recession – is RIDICULOUS.

    Indeed any and all facts that do not fit into the theories of the Mayor of Lalatown in Fantasy land are RIDICULOUS – (and some say that the fact also have a liberal bias). Obviously when the real life experiences and facts are in conflict with the great theories of the Mayor, then there is something wrong with the facts and they must be discarded at once as hearsay, and apostates must be corrected in CAPITAL LETTERS with citations of the great Mayors divine revelations (since arguments and examples do not exist).

  87. MayorQuimby says:

    All ponzis ‘work’ until they break. And when they break, they END.

    I get your pov DeDude – you don’t like what I’m saying and like any child out there, will throw a tantrum when Mommy wants to take the bottle away from you (the bottle being the cheap easy money bs). But it’s time to eat your spinach little guy!

    Oh – and check out CDS on PIIGS debt. It’s going ballistic. Ours is creeping higher as well.

    Enjoy.

  88. paulie46 says:

    The dollar has no intrinsic value – it is a medium of exchange, a promise much like a check (just like a check).

    That is a feature not a bug.

    It is however the only thing you can use to pay your taxes.

    Is does have BTU value though – If you have enough of them you can burn them to keep warm.

    The Fed’s job is to keep the accounting (score) in alignment so that we don’t experience deflation or inflation.

    I suspect deflation is much worse so they err on the side of inflation.

    That makes us working people wealthier at the expense of rentiers over time (redistribution of wealth).

    For me that is a feature not a bug. YMMV.

    I say we need more inflation.

  89. Greg0658 says:

    paulie46 Says @12:31pm “It makes no sense for the government to save.” .. in a balanced world yes .. but ..
    and Quimby @1:27pm .. why do capitalists hate the fact – government is a business with employees (ususally run a ground by the GOP) .. oh ya .. competition for work

    government shouldn’t run a surplus to handle the tide flowing out ? .. oh ya .. reduction of interest rents to the banking cartel .. that borrow funtion called a viable business

    banking cartels / military industrialist / globalists .. the other side is running out of cheeks to turn over for a __

  90. DeDude says:

    Yes and our 2 year bond yields are just so much higher than that of Germany and UK (those pillars of responsibility and sound austerity).

    I love anything anybody say as long as it is anchored in reality. If it is not, then I am happy to be the little boy screaming “he’s naked”.

    Enjoy your panic, just don’t invest accordingly – even on a Mayor salary you can probably not afford it.

  91. Greg0658 says:

    ps – Government is supposed to be the ultimate NonProfit for the “Save the People” Fund .. you capitalist can have “Save the Disposed of Pets” Fund

  92. paulie46 says:

    “Oh – and check out CDS on PIIGS debt. It’s going ballistic. Ours is creeping higher as well.”

    PIIGS debt is in Euro’s, and they can’t create them, so they are toast. No level of austerity can help them.

    Unless the ECB makes the smart choice and provides ECB funding at low or no interest and no payback requirement.

    Otherwise it’s default with an equivalent outcome – the investor class takes a big haircut.

    Way past due.

    CDS’ are private-sector obligations (again the investor class) and they should have already taken a haircut.

    Doesn’t affect us except maybe indirectly. All the reserves the Fed put behind them go down too.

    That doesn’t matter. The Fed can’t run out of numbers.

    Propping up losers is a bad game plan if the losers have no chance of success.

  93. paulie46 says:

    “Gvmt has no money”.…

    This is true.

    The government neither has money nor does it not have money.

    It can however create money out of thin air with a keystroke on a computer keyboard at the Fed.

    Been doing this for at least 40 years now…

  94. XRayD says:

    Why keep calling it a “credit crisis” or a balance sheet recession … as if it was some natural event.

    Call it what it is … the greatest financial heist in the history of the world by reckless and greedy bankers!

    ~~~

    BR: The crisis and the heist were two different events!

  95. [...] chart this week from David Leonhardt (We’re Spent), which very much supports the weak post crisis recovery thesis, as consumers cut back much more sharply. They are delveraging rather than adding more debt, this [...]