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Negative Rates, Plunging Yields and a “Fix” for the Economy
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On Tuesday, the 10-year German bund slipped into the bizarro-world of negative rates where lenders actually pay the government to borrow their money. Aside from turning capitalism on its head, negative rates illustrate the muddled thinking of central bankers who continue to believe they can spur growth by reducing the cost of cash. Regrettably, the evidence suggests otherwise. At present, there is more than $10 trillion of government sovereign debt with negative rates, but no sign of a credit expansion anywhere. Also, global GDP has slowed to a crawl indicating that negative rates are not having any meaningful impact on growth. So if negative rates are really as great as central bankers seem to think, it certainly doesn’t show up in the data. Here’s how the editors of the Wall Street Journal summed it up:

“Negative interest rates reflect a lack of confidence in options for private investment. They also discourage savings that can be invested in profitable ventures. A negative 10-year bond is less a sign of monetary wizardry than of economic policy failure.” (“Money for Nothing“, Wall Street Journal)

Bingo. Negative rates merely underscore the fact that policymakers are clueless when it comes to fixing the economy. They’re a sign of desperation.

In the last two weeks, long-term bond yields have been falling at a record pace. The looming prospect of a “Brexit” (that the UK will vote to leave the EU in an upcoming June 23 referendum) has investors piling into risk-free government debt like mad. The downward pressure on yields has pushed the price of US Treasuries and German bund through the roof while signs of stress have lifted the “fear gauge” (VIX) back into the red zone. Here’s brief recap from Bloomberg:

“Today’s bond market is defying just about every comparison known to man.

Never before have traders paid so much to own trillions of dollars in debt and gotten so little in return. Jack Malvey, one of the most-respected figures in the bond market, went back as far as 1871 and couldn’t find a time when global yields were even close to today’s lows. Bill Gross went even further, tweeting that they’re now the lowest in “500 years of recorded history.”

Lackluster global growth, negative interest rates and extraordinary buying from central banks have all kept government debt in demand, even as yields on more than $8 trillion of the bonds dip below zero.”….

The odds of the U.S. entering a recession over the next year is now the highest since the current expansion began seven years ago, according to JPMorgan Chase & Co. The Organisation for Economic Cooperation and Development also warned this month the global economy is slipping into a self-fulfilling “low-growth trap.” What’s more, Britain’s vote on whether to leave the European Union this month has been a major source of market jitters.” (“Most Expensive Bond Market in History Has Come Unhinged. Or Not“, Bloomberg)

There are a number of factors effecting bond yields: Fear, that a Brexit could lead to more market turbulence and perhaps another financial crisis. Pessimism, that the outlook for growth will stay dim for the foreseeable future keeping the demand for credit weak.. And lack of confidence, that policymakers will be able to reach their target inflation rate of 2 percent as long as wages and personal consumption remain flat. All of these have fueled the flight to safety that has put pressure on yields. But the primary cause of the droopy yields is central bank meddling, particularly QE, which has dramatically distorted prices by reducing the supply of USTs by more than $2.5 trillion in the US alone. David Stockman gives a good rundown of what’s really going on in an incendiary post titled “Bubble News From The Nosebleed Section”. Here’s a clip:

“…One of the enduring myths of Bubble Finance is that bond yields have plunged to the zero bound and below because of “lowflation” and slumping global growth. Supposedly, the market is “pricing-in” the specter of deflation. No it isn’t. Their insuperable arrogance to the contrary notwithstanding, the central banks have not abolished the law of supply and demand.

What they have done, instead, is jam their big fat thumbs on the market’s pricing equation, thereby adding massive girth to the demand side of the ledger by sheer dint of running their printing pressers white hot. Indeed, what got “priced-in” to the great global bond bubble is $19 trillion worth of central bank bond purchases since the mid-1990s that were funded with cash conjured from thin air.”

(“Bubble News From The Nosebleed Section“, David Stockman’s Contra Corner)

Central banks have never intervened in the operation of the markets to the extent they have in the last seven years. The amount of liquidity they’ve poured into the system has so thoroughly distorted prices that its no longer possible to make reasonable judgments based on past performance or outdated models. It’s a brave new world and even the Fed is uncertain of how to proceed. Take, for example, the Fed’s stated goal of “normalizing” rates. Think about what that means. It is a tacit admission that the that the Fed’s seven-year intervention has screwed things up so badly that it will take a monumental effort to restore the markets to their original condition. Needless to say, whenever Yellen mentions “normalization” stocks fall off a cliff as traders wisely figure the Fed is thinking about raising rates. Here’s Bloomberg again:

“Last year, inflation in developed economies slowed to 0.4 percent and is forecast to reach just 1 percent in 2016 — half the 2 percent rate most major central banks target, data compiled by Bloomberg show.”

So what Bloomberg and the other elitist media would like us to believe is that these highly-educated economists and financial gurus at the central banks still can’t figure out how to generate simple inflation. Is that what we’re supposed to believe?

Nonsense. If Obama rehired the 500,000 public sector employees who got their pink slips during the recession, then we’d have positive inflation in no-time-flat. But the bigwigs don’t want that. They don’t want full employment or higher wages or workers to a bigger share in the gains in production. What they want, is a permanently-hobbled economy that barley grows at 2 percent so they can continue to borrow cheaply in the bond market and use the proceeds to buy back their own shares or issue dividends with the money they just stole from Mom and Pop investors. That’s what they really want. And that’s why Krugman and Summers and the other Ivy League toadies concocted their wacko “secular stagnation” theory. Its an attempt to create an economic justification for continuing the same policies into perpetuity.

So what can be done? Is there a way to turn this train around and put the economy back on the road to recovery?

Sure. While the political issues are pretty thorny, the economic ones are fairly straightforward. What’s needed is more bigger deficits, more fiscal stimulus and more government spending. That’s the ticket. Here’s a clip from an article in VOX that sums it up perfectly:

“But if the exact cause of the bond boom is a little unclear, the right course of action is really pretty obvious: If the international financial community wants to lend money this cheaply, governments should borrow money and put it to good use. Ideally that would mean spending it on infrastructure projects that are large, expensive, and useful — the kind of thing that will pay dividends for decades to come but that under ordinary times you might shy away from taking on…..

The opportunity to borrow this cheaply (probably) won’t last forever, and countries that boost their deficits will (probably) have to reverse course, but while it lasts everyone could be enjoying a better life instead of pointless austerity.” (“Financial markets are begging the US, Europe, and Japan to run bigger deficits“, VOX)

That’s great advice, and there’s no reason not to follow up on it. The author is right, these rates aren’t going to last forever. We might as well put them to good use by putting people back to work, raising wages, shoring up the defunct welfare system, rebuilding dilapidated bridges and roads, expanding green energy programs, increasing funding for education, health care, retirement etc. These are all programs that get money circulating through the system fast. They boost growth, raise living standards, and build a better society.

Fixing the economy is the easy part. It’s the politics that are tough.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at [email protected].

(Republished from Counterpunch by permission of author or representative)
 
• Category: Economics • Tags: Federal Reserve, Wall Street 
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  1. There is so much about this article that is so effed up that it does not even rise to the level of wrong and rebutting it is a waste of time, but there is one thing that I think most people will be able to understand

    If the international financial community wants to lend money this cheaply, governments should borrow money and put it to good use.

    There are two kinds of money in this world, public money and private money. Very little is private. When one hears about how wealthy person A or B is, one should understand that this wealth is usually based on inflated stock or real estate values and only a percentage of it is really available to the person.

    Public money (and that includes money trapped in public corporations) has no choice but to participate in the game of musical chairs that is charitably called the “global economy”. That is the “money” that the “international financial community” is willing to lend so cheaply. That money exists for the simple reason that Central Banks have been flooding the world with it since 2008 (and to a lesser extent since the late 60s) in order to keep the game of musical chairs going.

    One should notice that a substantial part of private money is being used to buy private islands, ranches, vast plantations in the 3rd world, and other well furnished “bug-out” locations.

    Mr Whitney’s “fix” is no fix at all, but another kick at the can. Eventually there will be a washout, then “meet the new boss, same as the old boss”. God help you if you believe the new boss will be better.

    • Replies: @Jacques Sheete
  2. JJ says:

    Why must a government borrow the money when it can issue new money for zero (or near zero) cost? Why pay interest to banks et al?

    As Thomas Edison wrote: “But here is the point: If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good. The difference between the bond and the bill is that the bond lets the money brokers collect twice the amount of the bond and an additional 20 per cent, whereas the currency pays nobody but those who directly contribute to Muscle Shoals in some useful way.”

    • Replies: @Seamus Padraig
    , @Lot
  3. The quote from VOX was right. But why does the Fed get blamed for trying to promote demand in ithe very inefficient way that is all that is available to it?

    When no one else is making the big investments needed to keep the economy stoked we need to swallow our scepticism about the competence of government to spend money wisely or manage anything and encourage even primitive anti-Keynesians to find ways to invest money in public infratructure. And don’t call it deficit spending. It belongs on the balance sheet as investment in assets financed by loans.

  4. Rehmat says:

    Western politicians don’t want to FIX the problem because they’re the product of Capitalism and the Wall Street. They’re put into Congress and White House to rob the 99% and bail-out the 1% fat cats – more than 40% of whom are Zionist Jews.

    In December 2013, the kosher Pope Francis was accused of being a communist for criticizing Capitalism.

    Werner Sombart (died 1941), German sociologist and author in his 1911 book, ‘The Jews & Modern Capitalism’, claimed that Jewish elites were the dominant beneficiary of Capitalism.

    India’s famous human rights activist and author, Arundhati Roy, in her new book, ‘Capitalism: The Ghost Story’, examines the dark side of democracy in contemporary India, and shows how the demands of the globalized western capitalist banking system has subjugated billions of peoples to the highest and most intense form of racism and exploitation. Watch a videos below to understand the evil world of capitalism and the evildoers who benefit from this system.

    https://rehmat1.com/2015/01/22/capitalism-is-jewish/

    • Replies: @epochehusserl
  5. @another fred

    There must be something in the air that’s corroding the minds of some of the best. Normally intelligent, perceptive people seem to strain themselves to write the dumbest columns.

    Mike has shown himself to be a sharp cookie and is able to describe situations and problems well but falls short on the fixes, especially here.

    For instance, who, in his right mind, would advocate rehiring 500,000 worthless Federales for any reason? That’s as bad as bailing out the banksters and worthless corporations. This column describes the problem with the Fed, which is in bed with our rulers (government), then suggests that government is a solution rather than a huge accomplice in the problems we now have. Yeah, in La La Land government is our buddy, our nurse and protector but in the real world it just don’t work dat way.

    Clearly, rehiring a bunch of bureaucrats would be the modern equivalent of erecting a multitude of New Offices, and sending hither swarms of Officers to harrass our people, and eat out their substance. Even a dumb Sheete like me can see that!

    • Replies: @Wizard of Oz
  6. I’m looking for the sarc tags. but can’t seem to find them.

    The current system and the proposed “remedies” are nothing more than measures to strip the populace of the assets they already have and to indenture them to serfdom on the never-ending rat-wheel of higher indebtedness and taxes.

    This can only end in global war and other calamities.

    • Agree: Jacques Sheete
  7. @Jacques Sheete

    On the face of it borrowing money so that government can employ people to build infrastrcture which allows the aversge American commuter to cut 10 minutes off his daily travel makes a lot of sense if the cost of borrowing is very low even if the gain isn’t reflected in added GDP apart from the construction itself.
    But what calculations justify such use of borroed money – or tax receipts for that
    matter – when the benefits are mononetary like additional leisure for the relatively prosperous and more years of healthy life forthe retired?

  8. @Rehmat

    Rehmat I am working on a platform that would teach people how to trade financial derivatives. I plan on marketing it to the Palestinians.

  9. The current federal debt is officially $15 trillion and actually well north of that number, probably above $20 trillion. There is currently no attempt to pay this down and realistically this cannot be done without awe-inspiring levels of austerity equivalent to financing a world war. In fact, current federal budget deficits add another $0.5 trillion to the total federal debt every year.

    Meanwhile, unfunded state and local liabilities increase this country’s total debt by an additional $15-30 trillion; no one is quite sure of the figure since the financial accounting is so murky. And private debt, if I recall correctly, is around another $5 trillion.

    And the solution of Mr. Whitney and others of his ilk is to increase the rate at which we are racking up debt! Okay. Just for argument’s sake I’ll go along: By how much should we increase budget deficits? Should we another $1 trillion to the debt each year? Maybe $2 trillion? At what point should we stop deficit spending? When the federal deficit reaches $20 trillion? Maybe $30 trillion? And the most interesting question of all: How, when the federal printing presses finally break down from overload, will we ever be able to retire this debt? When answering this last question Mr. Whitney should remind himself, as he must surely be aware, that in ten or twenty years interest payments on the projected debt are going to soak up half of the current federal budget.

    The bottom line is that there is no way that the debt the USA has currently accrued, let alone the projected debt, can ever be paid off without enormous pain and suffering. The politically easiest way is to let inflation take care of the problem. Eventually so much worthless paper money will flood the market that social security and welfare payments will barely buy a loaf of bread. The dissatisfaction of the gimmie classes at that point will turn the whole country into one massive race riot more violent than any we’ve yet seen. The Chinese reaction, when they realize they’ve been snookered out of tens of trillions of today-valued dollars is harder to predict. Extremely bellicose behavior would be reasonable.

    Another option is extreme austerity. Again, the gimmie classes will not be happy. A smouldering, low level civil war is not unlikely. And its unlikely the elites will readily accede to paying exhorbitantly higher taxes.

    So what’s the real solution, Mr. Whitney?

  10. kaf says:

    You mean like that trillion dollar stimulus package for shovel ready infrastructure projects we did in 2009?

    Yes, excellent idea. Let’s do that again. Because it worked so well the first time.

    Jeez.

  11. Miro23 says:

    The article says, “We might as well put them to good use (very low interest rates) by putting people back to work, raising wages, shoring up the defunct welfare system, rebuilding dilapidated bridges and roads, expanding green energy programs, increasing funding for education, health care, retirement etc. These are all programs that get money circulating through the system fast.”

    The problem here is that the debt mountain grows.

    As Micheal Pettis unfashionably points out, investment has to be able to repay the loan and interest which most of these projects aren’t able to do. He suggests that investment of real value is only found in rare situations such as developing a genuinely new technology, the US in the 19th century or Europe and Japan rebuilding after WW2 (with welfare spending sourced from these surpluses).

    So what happens to all the debt? It disappears the way it came – out of thin air and into thin air – same as happened in Weimar Germany in 1923. The price of a cabbage which had recently sold for 25 pfennigs, arrived at 50.000.000 marks and Bond holders got paid back in so called “Confetti Money”.

    In the US this would probably cause such chaos that the Establishment would also have a second shot at imposing Emergency Rule.

    They messed up their first attempt with the failed assassination of George Bush (at the Colony Beach and Tennis Resort in Florida) on the morning of 9/11. Had it succeeded, VP Cheney would have become President under Emergency Law dating from the Reagan administration, with the Neocons holding the Office of Homeland Security and the Patriot Act to enforce it – which would have been the end of American democracy.

  12. anonymous • Disclaimer says:

    I think the problem with Krugman’s models is that they are premised on a fully functioning, wealthy economy that had accrued wealth stored in the system in terms of infrastructure, worker expertise, know how, established channels of credit, research and development etc.–what in physics is called Potential Energy. He took that as the given, the ground state–which it is not. So, his modeling works only for as long as there is stored potential energy i.e. wealth in all of its manisfestations, to use up. One it is exhausted, there is nothing left and the system runs on fumes till it runs out.

    As is so common in the history of ideas, an intellectual looked about himself, correctly perceived his immediate surroundings and made a name for himself by describing the functioning of that small world. Ultimately, time demonstrates that his was a special case within the broader spectrum of history and his theories are forgotten, his name moldering in the dustbin of obsolete Ideas.

  13. @JJ

    Why must a government borrow the money when it can issue new money for zero (or near zero) cost? Why pay interest to banks et al?

    Good question, JJ. And if we bear in mind the cui bono of the situation, the answer will be obvious.

  14. Tom Welsh says:

    I find it depressing, but interesting and important, that economists – whether professional or amateur – can never agree. Nor can they ever forecast the future accurately, for even the shortest period.

    That, I sincerely believe, is because economists don’t know nearly as much as they pretend to. The most important thing that most professional economists know is how to become moderately wealthy by ingratiating themselves with the powers-that-be. This is done, safely and easily, by making diagnoses and suggesting policies that suit the powers-that-be. Since no one really understands economics, it is impossible to refute their statements. Rather like those of priests about the existence and wishes of God, or life after death.

    • Replies: @Seamus Padraig
  15. CanSpeccy says: • Website

    In an economy of which 70% is consumption spending, substantial growth is unlikely without either increased wages or increased consumer debt. But consumers are maxed out on debt and will find themselves over their heads in debt if, or rather when, interest rates rise. Meantime, real wages are falling. So the only way forward is to inject more cash into consumers pockets.

    Whitney’s solution is for the government to borrow more and hire, more blue-gloved TSA goons, perhaps, to alleviate airport congestion created by blue-gloved TSA goons.

    But putting money into consumers pockets can be done in other ways that Unz Review authors will not, apparently, discuss. For example, the Trump program, the economic consequences of which I spelled out here (a piece Ron Unz considered unsuitable for his review).

    But Trumponomics is not the only option. One could restore the free labor market by abolishing minimum labor laws that deny work to anyone whose labor is worth less than the minimum wage. That would create employment opportunities for the uncounted (in the headline unemployment number) millions of unemployed, particularly the millions of poorly educated young people, whose main economic opportunities under present conditions range from prostitution to dope dealing and petty theft.

    Consequences of abolishing minimum wage laws would include: (1) elimination of the advantage that illegal immigrants working in the underground, untaxed, below-minimum-wage economy have over American citizens in obtaining a job and thus an opportunity to gain skills that increase their labor market value; (2) increased opportunity for American companies operating within the law to compete with foreign sweatshops; (3) reductions in welfare spending and hence, potentially taxes, and the incidence of crime and mental illness associated with mass unemployment.

    Liberal bleeding hearts are apparently sickened at the thought of welfare mothers having to go to work for peanuts, but do most Americans really want to make spawning the next generation of welfare recipients the taxpayer-funded occupation of last resort for the dumbest members of the community?

    Anyhow, it is easy enough to devise methods of supplementing the earnings of the working poor, without seriously impeding the operation of a free labor market as I discussed here.

  16. The best thing about this article and its subsequent reader responses is it demonstrates how ridiculous and shallow are “economic” discussions. There is only one reason for negative interest rates: The Central Banks have the power to enforce them. And by the way: This authors “let them eat cake” attitude about borrowing money and putting the repayment on the backs of the people simply trying to feed their families is going to end up, as it always, always, always does, simian economic theory aside; Just ask Marie Antoinette she will elucidate the non-theoretical end.

  17. Lot says:
    @JJ

    Why must a government borrow the money when it can issue new money for zero (or near zero) cost? Why pay interest to banks et al?

    It should be doing that too, at least until we are out of the deflation trap. The economic difference is that bonds cannot be spent on goods and services while money can. But since they are partial substitutes for each other, more bonds means fewer people using money as a store of value, and more people using it for goods and services.

  18. CanSpeccy says: • Website

    @ Luca Rivera

    There is only one reason for negative interest rates: The Central Banks have the power to enforce them.

    That’s not quite correct. Western economies are in a long-running near depression, or maybe a real depression if the statistics were not fiddled. That being so, not many people want to borrow large amounts at a much above zero percent.

    What that means is that central banks have to set near or below zero rates if they are to keep the loan bubble growing. And keeping the loan bubble growing is the only thing they can do to prevent outright economic contraction.

    The problem for the high-wage economies of boosting demand by blowing credit bubbles is that it sucks in more cheap stuff from the low-wage areas of the Third World. This creates a few jobs in the West, or anyhow it saves a few jobs, at Walmart, etc., but it doesn’t save the economy from continued contraction in manufacturing and offshorable services.

    The West can grow its economy substantially in only one of two ways: one is protectionism, or the Trump solution, the other is by way of a free labor market in which welfare is largely if not entirely limited to wage supplements to the working poor. Either way would increase competitiveness with low-wage economies and thus lead to real economic expansion. An expanding economy would mean increased opportunity for investment and hence demand for loans, which would result in a rise in interest rates.

    The current cheap money regime chiefly serves the globalist interest. It facilitates high-profit margin offshore investment that destroys jobs and shrinks the economy at home. It also inflates the stock market, for a number of obvious reasons. So if your betting on Trump, do what Trump supporter Carl Icahn is doing, short the market.

    • Replies: @Luca Rivera
  19. “believe they can spur growth by reducing the cost of cash”

    that’s what happens when a society is created where no one earns enough to survive.

    • Replies: @CanSpeccy
  20. “as long as wages and personal consumption remain flat”

    hence no demand…….what the fuck are these people smoking?

  21. “What’s needed is more bigger deficits, more fiscal stimulus and more government spending”

    please fucking tell me that is sarcasm?

    super ultra mega facepalm

    • Agree: Jacques Sheete
  22. CanSpeccy says: • Website
    @interesting

    @ interesting

    that’s what happens when a society is created where no one earns enough to survive.

    Or where almost 100 million people of working age are out of the workforce and earn nothing at all.

    Whitney talks of the:

    muddled thinking of central bankers who continue to believe they can spur growth by reducing the cost of cash

    but that the bankers know more than Whitney is evident if you consider what the US economy would look like were the Fed put the hydraulics under rates. Widespread collapse would ensue, beginning with the construction and auto sectors.

    The only way forward is to put money in people’s pockets, which can be done in various ways, the most productive solution being to create jobs for those who’ve been made redundant or who have never been employed in the first place due to offshoring or automation.

    This as noted above will be done by the private sector provided that the labor market is free. True some jobs will be at starvation wages or less, but that’s not a serious problem. Every legal resident of the United States or other Western nation who holds a job must be registered for income tax. Therefore, it is a simple matter to supplement the incomes of the working poor through some kind of reverse tax scheme of which many would be totally workable.

    Since wealth is now so unevenly distributed, funding a negative tax scheme might be best done with a capital tax of one to one and a half percent (such as they have in most cantons of Switzerland), which would raise hundreds of billions in new government revenue.

    That way Mr. Buffet would finally get the the tax increase he’s been asking for —between $600 and 900 million a year.

  23. JackOH says:

    “Fixing the economy is the easy part. It’s the politics that are tough.”

    Mike, thanks. I don’t believe our political leaders actually want solutions to problems. Under an article by Linh Dinh, I noted that a homeless, panhandling junkie who wanted to leave the world at which he was experienced in self-medicating for government-funded pain management and detox would have to negotiate a mess of legislatively mandated”pinball bumpers” that, I suspect, would have him demoralized and unsuccessful. But, Congressmen could prattle about “access” and “funding” and rubbish like “tackling the problem”, etc.

    I’m confident there are hundreds of examples of policy decisions in which definitive solutions are short-circuited in favor of money giveaways to established interests, and a maze of “pinball bumpers” to baffle the grass roots.

    In other words, control is what it’s all about. I’m not happy about that characterization, but that’s been my experience.

  24. @Jus' Sayin'...

    Laurence Kotlikoff puts the total unfunded liabilities at over $200 trillion.

    http://usawatchdog.com/financial-system-will-collapse-just-a-matter-of-when-laurence-kotlikoff/

    There is no “solution” within the current economic regime. The choice is default or “helicopter money” and default is not going to happen as far as domestic liabilities of the US government are concerned.

    There will eventually be a “one time” bailout attempt to square the books. In a classic economic “panic” like the great depression there would be liquidation of bad debts, but the difference this time is that so much of the debt is social obligations of the government and pensions that are backed by government “insurance”. There is no alternative to helicopter money, which Mr. Whitney’s “fix” would lead to, as he most probably knows. As he says, the matter is political. Who is going to supposedly “benefit” the most.

    The “prosperity” of the last 50 years has been financed by borrowing from the future (as has the Pax Americana). There is no way to return to that situation, but life will go on as long as we can avoid an all-out nuclear exchange with another major power.

    My personal prediction is that we will see wars that will reduce the earth’s population to a level from which a more balanced sustainable life can be fashioned. Cities will not be pleasant places to live while that is going on. Afterwards – no Garden of Eden, life will still be challenging, just sustainable.

  25. Olorin says:
    @Jus' Sayin'...

    It’s a little bit like gun control or affirmative action, Jus’. It’s always the next and identical installment of the thing we’ve been doing that’s utterly failing that will do the trick and stop failing.

    Trying something different is unthinkable.

    I’m not big on the “job creation” solution…unless it involves incentivizing small scale local entrepreneurship and keeps employment out of the hands of those who’ve made such a muddle of it by speculating on and devaluing labor in order to inflate the value of worthless currency.

    As Joel Salatin puts it, the moment you sell the first dollar’s worth of goods or services, the regulatory state sees you as Wal-Mart.

  26. anonymous • Disclaimer says:

    Most of you are wrong but one of you at least has the motive right.

    another fred says “The “prosperity” of the last 50 years has been financed by borrowing from the future”.

    Yes. And at projected growth rates of 2.5% per annum, gains in productivity would double the national wealth in 29 years. Which, if the newly created wealth were distributed more or less equally, would mean that everyone would be wealthier by that amount. The debt incurred in the past would not be a burden–just as the payment on your home mortgage is easily borne if you have lived in the same house for thirty years.

    The problem, as Mike Whitney is trying to pound into your thick skulls, is that the gains in worker productivity have not been anywhere close to being evenly distributed, wealth and income inequality being at near all time highs. The New World Order has screwed its workers. Demand is in the tank and making money cheap to borrow is pushing on the proverbial string.

    Any you geniuses come up with the solution of cutting the minimum wage????

    Morons.

    • Replies: @another fred
  27. @anonymous

    And at projected growth rates of 2.5% per annum, gains in productivity would double the national wealth in 29 years.

    I’m on my 70th year and I’ve been listening to that 2.5% growth bullshit for 50 years. The simple fact is that debt has grown faster than GDP steadily for those 50 years. It does not matter what the “growth” rate is, if debt is growing faster we are losing ground.

    You might want to go to the St Louis Fed “FRED” site and plug in total debt.

    https://fred.stlouisfed.org/series/TCMDO

    To this chart you can append GDP in any kind of measure you want. If you can get GDP to grow faster than debt on this historical measure you have made a mistake.

    If you can make it grow faster in the real world they will crown you King of the World, but I would not give up my day job if I were you..

    • Replies: @helena
  28. helena says:
    @another fred

    A naive question: why do we not create societies that are homeostatic, as it were?

    i.e. A society that remains largely the same; same levels of population, same levels of consumption and wages (I don’t mean that in the sense of everyone earning the same, rather stability over time).

    Is it because some people want to have the opportunity to have more than other people (even if it means ‘exploiting’ others) or, is it because it is the actual ‘nature’ of post-h/g society?

    Why is continued growth imperative? Is it because there needs to be surplus in order to innovate and advance technologically. Is ‘economic development’ actually technological development?

    • Replies: @another fred
  29. @Tom Welsh

    Since no one really understands economics, it is impossible to refute their statements. Rather like those of priests about the existence and wishes of God, or life after death.

    I have often had the same thought myself: economics is the new theology.

  30. @helena

    Science is only beginning to tease out proof of what is going on in the heads of humans and other animals, but many have always assumed that there is some kind of instinctual aggressive drive that makes people strive for higher social positions and greater wealth. This assumption came under attack by the behaviorist school in the 20th century (behaviorists held that everything was learned), but that model is being overtaken by the advances in brain science in the latter part of the 20th and the early 21st.

    Today one is once again allowed to speak of human instinct without creating controversy.

    IMO the best explanation is by Jaak Panksepp’s SEEKING drive.

    http://discovermagazine.com/2012/may/11-jaak-panksepp-rat-tickler-found-humans-7-primal-emotions

  31. Continued growth is imperative because death is imperative as well.

  32. The biggest con in all human history is on its way out. The ultimate ponzi scheme, that of the time value of money on which the charging of interest and all modern economic theory is based, is on its way to collapse. Think about it for just one moment. Everything declines in value over time; except for the value of debt, which human folly has chosen as the one object that can defy the reality which all else is subject to. The ultimate goose that lays the golden eggs is being snuffed out by the incredibly short sighted greed of those who benefit the most by it. One can only say “NIRP!!!”

    • Replies: @Jacques Sheete
  33. @Seamus Padraig

    I disagree. The people who understand that economics reveal a cycle of growth and decay (or boom and bust) understand economics quite well, it is a natural system like any other.

    The analogy with religion is quite apt, it is the fools who try to come up with some way of having growth without decay, boom without bust, who are like the priests of some religion selling pie in the sky.

    Try reading Michael Pettis. He understands that growth creates instability, in each boom lie the seeds of the bust.

    BTW, there is little point in focusing on government debt vs business debt as far as the effect on instability. It is the total debt in the system that matters as far as bringing a bust, the difference is in the consequences of the bust. There is one hell of a difference between individuals or businesses going broke and a government going broke.

  34. Sure. While the political issues are pretty thorny, the economic ones are fairly straightforward. What’s needed is more bigger deficits, more fiscal stimulus and more government spending. That’s the ticket.

    And he was doing so well.

    The Keynesians have been telling us this is the cure to what ails us since the 1930’s, and the result is an endless cycle of booms and busts that is nearing its denouement.

    The U.S. is getting older and less white. The economy is, perforce, going to contract. This would not be a problem but for the fact that we’ve leveraged our capital so far into the future that any contraction spells disaster for large segments of the population (voters). The biggest Bubble right now is the one in public debt. That is what is starving the real economy of capital and why Mike looks in vain for signs of growth. I do think he is half-right, in that roads, bridges, nationwide wi-fi, etc., would probably generate positive ROI versus kerosene and diesel for military logistics.

    The Japanese are further down this road than we are. They have no growth despite public debt measured in the quadrillions. By the Keynesians’ hysterical reasoning, public debt should be pushed into the quintillions lest the Japanese starve and their corpses pile up in the streets. The Japanese have not yet exhausted the asset side of their ledger, in the form of high human capital and savings.

    There is more debt than can ever be repaid and this economic deadweight is increasingly patent. Can it just be rolled over into infinity? I think if it could, a lot of former governments would still be around. So history has not stopped and eventually this debt, like the mortgage-backed-securities in 2008, will be discounted to the ability of the debtors to repay. Again, like 2008, the Fed will blow up its balance sheet and paper over the drop in nominal values. I don’t think there will be enough left in the tank of the real economy at that point, evidenced by the fact that the economy has barely grown since 2008. Entire sectors will have to disappear for capital to be reallocated to productive uses. Many of us won’t make the cut and will sink into poverty. I wish I were younger.

  35. Sam Shama says:

    The core conclusion underlining the need for sustained spending on the public account is a valid one. However the following portion is wrong [and demonstrably so]:


    Central banks have never intervened in the operation of the markets to the extent they have in the last seven years. The amount of liquidity they’ve poured into the system has so thoroughly distorted prices that its no longer possible to make reasonable judgments based on past performance or outdated models.

    Why? Because the Fed started tapering QE in 2013 and stopped completely in 2014. The expectation from debt scolds at that time [or to be precise, always], was that any tapering or cessation of Fed purchases would send long term yields sharply and irreversibly higher; a condition that was realised for perhaps only a few weeks [mostly speculative selling], after which the inexorable downward trend returned with full vengeance.

    The important thing to glean from the preceding observation, is that Fed purchases, if anything were only a portion of the massive demand for risk-free assets on a global basis. This demand is purely on account of excess savings generated in a global economy that sees little prospect for growth, and thus reduced demand for investments on the private side.

    So Mr. Whitney gets it right when he speaks eloquently in the end, for the great need for fiscal spending, an action much overdue when private spending is curled up in the foetal position.
    However, the actions of the Fed, were very much the solitary rearguard protections after a deep financial crisis and recession hit us, in which fiscal policy [+ve NPV public infrastructure projects e.g.], was bitterly opposed and scuppered by the same debt scolding class.

    So, the Fed was the only game in town. No amount of hyberbole from Stockton [whose opinion I otherwise have respect for] will change the central observable fact noted in the first paragraph. You cannot engage in debt theatrics and expect serious consideration if your position is not supported by a shred of evidence.

    The Fed was, and is, faced with a rather unique situation where unlimited demand for liquidity renders traditional monetary policy ineffectual. The Fed has stated, actually implored Congress to undertake large scale fiscal action. So have Paul Krugman and Larry Summers [should you need assistance on this, Google’s your man, or I can provide links, just ask. ] since at least 2009.

    Also let’s dispense with the excessive debt scolding, shall we? Our current debt-t0-gdp ratio is around 105%, which only reflects the issuance demanded by extreme liquidity and risk-free asset preference. This country has seen debt-to-gdp ratios higher than this [120-130%] in the late 1940s and early 1950s when U.S. expansion started. Our current rise in debt, which in itself is not an economic time bomb with associated USD devaluation and inflation, as some would have us believe [after all haven’t we been waiting for Godot since 2009?], while U.S. bonds have done only the opposite!

    Why do we have a high d-to-gdp ratio? Well it is a longer discussion that will surely involve many things, including rising income and wealth inequality. However blaming QE for our troubles is akin to blaming the ship for causing the hurricane.

    • Replies: @CanSpeccy
    , @another fred
  36. CanSpeccy says: • Website
    @Sam Shama

    The problem with QE as practiced is that newly printed money is going to the wrong people. Chiefly it goes to finance foreign wars, fascistic population control measures such as the TSA and Homeland Security, or to provide dirt cheap capital to financial interests.

    Instead, the money should be going into the pockets of consumers, by way of tax cuts (Trump proposes to remove half of all wage earners from the tax rolls), wage supplements to the lowest paid (i.e., negative tax), etc., thereby creating demand in an economy that is 70% consumption spending.

    But this obvious solution to the ongoing depression is anathema to the elite, who think that the faces of the poor should be ground, if not underground, hence the elite hatred, on both left and right, for Donald Trump and his populist program.

    So Mr. Whitney hardly gets it right when he speaks eloquently in the end, for the great need for fiscal spending, since he fails to point out the need to direct fiscal spending in the right direction. To talk of private spending being “curled up in the foetal position” is simply silly since it is the consumer who is not spending and he or she is not spending because he or she flat out of cash and heavily indebted.

  37. @Sam Shama

    Why do we have a high d-to-gdp ratio?

    The problem is not the ratio, but the fact that GDP was increasing exponentially while debt (total debt in the system) was increasing super-exponentially (from the 60s until 2008). It was taking greater and greater increases in debt to gain a dollar or % gain in GDP.

    There is no known natural system that can sustain a super-exponential rate of increase forever. This means that at some point the system will approach a singularity where the amount of debt must double in a single year ( a ways off, to be sure, but since all known natural systems break down before singularity, not of particular significance).

    For your analysis to make sense to me one of three things seems to be required.

    1. You may deny that debt (total debt) was increasing at an increasing rate relative to the increase in GDP (in which case I would appreciate some numbers – see the FRED chart I referenced).

    2. You agree that at some time the super-exponential increase relative to GDP must be stopped or reversed.

    3. If you do not say #1 or #2, then I suppose that you may postulate that debt can increase super-exponentially forever, in which case we will just agree to disagree, but I would sure love to hear about some examples.

    We touched on this subject once before. I agreed and agree that we have no choice but to embark on a project of infrastructure investment, but as I said at that time I am quite sanguine about the long-term results. I am no financier, but I have read and agree (to the best of my ability) with an analysis by Michael Pettis that it really makes no difference, math-wise, whether the money is printed or debts issued, the matter of consequence is whether or not the investment results in an increase in GDP that justifies it.

    Michael Hudson has proposed a “jubilee” to wipe out debts, but that would require a dramatic change in our laws, probably in the Constitution, and do nothing about pensions. This involves politics as stated by Mr. Whitney, but what I am interested in is your understanding of #1, 2, and 3, above.

    Professor Pettis has an interesting post on his blog about Social Capital that is germane to the long-term results, but that is a subject far beyond the space or my time here. I have a feeling we would disagree pretty strongly about that effect.

    I would appreciate your comments as to #1, 2, or 3, above or any alternative I may have missed.

    http://blog.mpettis.com/2016/06/how-much-investment-is-optimal/

    If you find the blog post by Professor Pettis interesting I would appreciate hearing about it from you.

    FRED
    https://fred.stlouisfed.org/series/TCMDO

    • Replies: @another fred
    , @Sam Shama
  38. @another fred

    The TED talk by Didier Sornette is germane to the subject of natural systems and super-exponential growth.

  39. @CanSpeccy

    Than you for taking the time to speak to me. Let me think about what you said and try to reply cogently.

  40. @Seamus Padraig

    Your absolutely correct.! It is a belief system masquarading as a science. All part of the Materialist world view.

    • Replies: @CanSpeccy
  41. CanSpeccy says: • Website
    @Luca Rivera

    Thank you for being so polite. I am afraid I wasn’t. Sorry. I look forward to your comment.

  42. “I am not interested in illustrating my time. A man’s “time” limits him, it does not truly liberate him. Our age – it is one of science, of mechanism, of power and death. I see no point in adding to its mechanism of power and death. I see no point in adding to its mammoth arrogance the compliment of a graphic homage.” Clyfford Still

    Time is money and money limits you.

  43. @Clearpoint

    I DO hope yer correct, but “we” seem to never learn.

    Plutarch on debt:

    “Care not for fine horses or chariots with handsome harness, adorned with gold 886 and silver, which swift interest will catch up with and outrun, but mounted on any chance donkey or nag flee from the hostile and tyrannical money-lender, who does not demand land and water like the Mede,887 but interferes with your liberty, and lowers your status.

    If you pay him not, he duns you; if you offer the money, he won’t have it; if you are selling anything, he cheapens the price; if you don’t want to sell, he forces you; if you sue him, he comes to terms with you; if you swear, he hectors; if you go to his house, he shuts the door in your face; whereas if you stay at home, he billets himself on you, and is ever rapping at your door.”

    Plutarch, Morals, Chapter 23, “Against Running in Debt” c. 100 AD

    http://www.gutenberg.org/files/23639/23639-h/23639-h.htm…

  44. Sam Shama says:
    @another fred

    So
    GDP: https://fred.stlouisfed.org/series/GDPA
    DEBT: https://fred.stlouisfed.org/series/TCMDO

    Using the numbers obtained from above and exponential fitting, I obtain the following rates [y=Initial level*exp{rt}]

    1945 GDP=228 DEBT= 363
    2015 GDP=18,000 DEBT=63,435
    fit accuracy: (0) (0)
    Exp rate GDP=6.24% DEBT=7.38%

    On an exponential basis, the rate at which debt has grown is greater than that for gdp [I cannot comment on whether it is super-exponential or not. Both are second order positive, meaning the slopes have increased over time].

    Simply written, [this little maths aside], there are really two broad issues I find useful to consider. (1) world gdp , however measured, goes up, trivially first, as populations climb and more importantly as technological leaps are experienced. (2) As gdp goes up, savings, both private and public for the global system as a whole have risen, interspersed with periods of partial destruction during episodes of wide-scale wars. From that perspective, global debt is simply a labelling of capital [savings], where more savers have through legal means essentially, categorised their contributions as senior [more risk-averse capital] to the contributions of other forms of capital. There is NOTHING up to this point, logically, to indicate why a mere distribution or categorisation of the capital ought to to have any implication on the productive capacity of assets [factories, communications infrastructure, farms, roads etc and their qualities are invariant to the method of financing] . As long as we are productive, it matters not a whit how those assets or endeavours are financed. They could have $1 in debt and $99 in equity [or public tax from current collections in the case of public assets] or indeed the reverse. It is when the productive capacity, technology or the willingness of labour declines that we have real issues [Weimar destruction of productive capacity led to hyperinflation e.g.] . Currently our productive capacities remain intact and nothing remotely close to the armageddon-ish scenarios painted by debt scolds. What we must see [related to CanSpeccy’s observation in #37] without much difficulty, is that consumers need incomes and employment, ones which offer comfortable permanence for the future, otherwise we are very likely to render this central plank of the modern capitalist order totally susceptible to social disorder and collapse. How we do it is a matter for social choice really, and not of economics. I am personally in favour of wiping out student debt for state universities and many other systems [longer discussions on the values placed by society on degrees like Black Studies and Women’s Studies etc]. Naturally there are going to be frictions when we do this, and the end solution has to contain some form of wealth and income redistribution. We cannot have the 1% cornering so much, nor can we have a large section of the population simply collecting transfers, contributing little or nothing other than an unreliable promise of not precipitating social chaos and violence. I am also a proponent of the central bank engaging in large scale seignorage where public debt, which goes to finance $2-3tr in infrastructure over the next 5 years. In other words a slow imperceptible conversion of public debt to future taxation of the 1%+ aided by inflation around 3%. This path will surely be despised by wealthy bondholders, but you know, eggs need to cracked and what not…….

    Another observation: ratio-ing income, a flow variable, to debt, a stock variable, is not a favourite indicator of mine, despite their common use. We can however make historical assessments based on past levels; which is precisely why we ought to concede that d/gdp ratios have been far higher in the the 1940s and 1950s. They do come down as the economy resumes its upswing on a sustained basis since greater quantities of equity finance reduces the demand for risk-averse financing.

    Lastly, when you speak of Singularity in this context, I gather it alludes to a situation where debt overwhelms the human spirit. If that is what you mean, I am sympathetic to the notion, but choose to place the burden of arranging a solution for it, squarely on morality, politics and social choice disciplines. Economics is not a morality play. Which is why it escapes me as to why stasis or zero economic growth is a necessary condition [I mean I can see it as a special case of our model, and even argue that high technology economies like Japan are already in the midst of such an episode]. Are we confident that it is not a trick played on our minds by the vestiges of ancient religion, compelling us to view income, growth and wealth as corrupting evil for the soul?

    • Replies: @CanSpeccy
    , @CanSpeccy
  45. CanSpeccy says: • Website
    @Sam Shama

    What we must see … is that consumers need incomes and employment, ones which offer comfortable permanence for the future, otherwise we are very likely to render this central plank of the modern capitalist order totally susceptible to social disorder and collapse.

    On the contrary, it appears that policy makers do not “see” the necessity for incomes and employment offering “comfortable permanence for the future.” Rather, to quote what I wrote several years ago:

    The reason for mass unemployment in the west is in plain sight. It is the 1994 GATT agreement that opened the Western nations to unrestricted free trade with the rest of the World, which is to say with the teeming masses of Asia, the Middle East and Africa, where hundreds of millions of workers are sweated for pennies an hour.

    The reason for the 1994 GATT round is obvious. “Wages plus profits, together, are always the same,” as David Ricardo tirelessly repeated. In other words, cheap Asian labor = max western-owned multinational corporate profits.

    In the short term, the resultant mass unemployment can be avoided through mass indulgence in debt, to fuel property booms, retail mall construction and the consumption of wonderfully cheap Chinese stuff. But at the point now reached, the cost of debt service approaches total income and the bubbles burst.

    There are thus, now, only two ways mass unemployment in the West can be eliminated. One is by a return to protectionism, which is out of the question, given that we are ruled by corporate-owned governments, e.g., the Golden Sacks, Nobel-Peace-Prize-winning, wholly-owned-subsidiary, Barak O’Bomber. The other is through wage convergence between the West and the Rest. That’s what governments are working on now.

    And that, it seems clear, is what governments are still working on, hastening the process through the promotion of mass immigration, which fulfills three objectives:

    First, it speeds the process of global wage convergence by hastening the decline in wages of workers in the West, thereby bolstering corporate profits, i.e., the incomes to the upper lever one percenters.

    Second, it creates demand in the West for infrastructure, roads, schools, maternity hospitals, houses, etc., which is supplied by governments at taxpayer expense and at a very nice profit to friends of government in property development, construction, etc.

    Third, it demoralizes the less successful members of the indigenous population causing many to die prematurely, or kill themselves, a most desirable consequence in the view of policy makers at a time when a pair of hands is often unworthy of its hire.

    • Replies: @Sam Shama
  46. Sam Shama says:
    @CanSpeccy

    [On the contrary, it appears that policy makers do not “see” the necessity for incomes and employment offering “comfortable permanence for the future.” ]

    My statement was prescriptive and not declarative, and therefore do I discern your agreement on this matter? [if so it isn’t clear when you write ‘on the contrary….’ and if not, what are your prescriptions?]

    [First, it speeds the process of global wage convergence by hastening the decline in wages of workers in the West, thereby bolstering corporate profits, i.e., the incomes to the upper lever one percenters.]

    Agree with small caveats. Multi-array wage equalisation is an inevitability as technologically divergent economies separate between service vs. production specialisations with capital flow remaining unencumbered. One might weigh against freely flowing capital and technology, but at it’s core that reduces to an argument over speed rather than desirability. I am sympathetic to the notion that economies should never relinquish their capacities to produce a diverse array of goods and services [and some advanced ones like Japan have indeed done so to an extent], but that is an argument you would need to win in our majoritarian rule based system. To be honest, I am unsure at this juncture whether Trump alone can [or even wishes to] reverse what is already in motion.

    [Second, it creates demand in the West for infrastructure, roads, schools, maternity hospitals, houses, etc., which is supplied by governments at taxpayer expense and at a very nice profit to friends of government in property development, construction, etc.]

    It does indeed, and given the choice I should not opt for the converse, a bit of crony capitalism notwithstanding. “Thus it has always been in Rome” – from Romulus, Octavian, Hadrian to Constantine. It a question of tolerable degrees, and one might lay the cause of grift at the feet of human nature.

    [Third, it demoralizes the less successful members of the indigenous population causing many to die prematurely, or kill themselves, a most desirable consequence in the view of policy makers at a time when a pair of hands is often unworthy of its hire.]

    I am aware of recent health trends and while one ought to be open to the desirability of protecting the indigenous population [I am assuming you mean Whites rather than native Indians] from unfair competition, it is unclear to me what portions of the causality for premature mortality is on account of drug abuse, obesity, sedentary lifestyles or, depression arising from a loss of economic hope and dignity. Do understand that I am not refuting the pernicious contribution of the last two, indeed most of these are likely inter-related, yet one would like to see a clean proportional attribution to the causal factors.

    • Replies: @CanSpeccy
  47. CanSpeccy says: • Website
    @Sam Shama

    My statement was prescriptive and not declarative

    But ambiguous: “must see” meaning either “should see” as you intended, or “cannot avoid seeing” as I took it to mean.

    But misunderstanding aside, my contention was that policy makers do not see the need of consumers for “incomes and employment, … which offer comfortable permanence for the future” as necessary to avoid making capitalism “susceptible to social disorder and collapse.”

    In that, we are in clear disagreement, with the evidence very much on my side as we observe the abandonment of national interest and law to drive millions of immigrants, legal, illegal, law abiding, and criminal, into both the US and Europe, while virtually the entire corporate media plus leaders of both the Democratic and Republican Parties seek with apparent desperation to destroy the Presidential campaign of Donald Trump of which protectionism and immigration law enforcement are the key planks. This is an elite crime against democracy, which will prove irreversible and which will replace the indigenous peoples of Europe and the European people of America with a new electorate that will vote the indigenes out of power for good.

    As for any serious social disorder or tendency to collapse, the US has FEMA camps plus Homeland Security equipped with heavy armored vehicles and supplied with six hollow point bullets for every citizen.

    You say,

    Multi-array wage equalization is an inevitability as technologically divergent economies separate between service vs. production specializations with capital flow remaining unencumbered.

    What’s inevitable about it? In the United States only the election of Hillary Clinton makes it inevitable. But it certainly was not considered inevitable a generation ago when both European nations and the US ran national economic policies which deliberately and more or less effectively controlled export of capital and technology to the Second (Soviet Union), and Third Worlds, while restricting import of goods from cheap labor areas by means of import tariffs.

    The idea that the US will remain rich by doing the design, the IT work, the R and D, entertainment and Internet vaporware such as Google and Facebook seems obviously wrong. General Motors designs cars in Korea, Microsoft writes programs in India, and big pharma is outsourcing R& D to China and elsewhere. Meantime, as the late Andy Grove warned, the US is losing its edge in high tech services including process technology because little of the manufacturing is now done at home. Thus it is that the US is in a permanent slump. Jobs leave, few new ones are created, and most jobs that are created are low or minimum wage jobs or below minimum wage jobs in the black economy taken by illegal immigrants. For the elite, this is not a problem it is a plus: their investments are in the globalized economy.

    Oddly, since you imply that globalization is inevitable, you say

    … one ought to be open to the desirability of protecting the indigenous population … from unfair competition

    That concedes the argument. Trump is right, whatever he might do as President his contention that prosperity will only return when Americans compete on a level playing field is correct. And what it means to compete on a level playing field means with countries having similar wage scales, workplace health and safety regulations, and environmental protection legislation as the US. And to create such a level playing field means tariffs and major tax reform among other things.

  48. CanSpeccy says: • Website
    @Sam Shama

    From that perspective, global debt is simply a labelling of capital [savings], where more savers have through legal means essentially, categorised their contributions

    That is not so.

    Government debt created by money printing is not a labelling of capital [savings] and is best considered a tax since it devalues the dollar in your pocket.

    The same is true of bank loans, most of which are created independently of anyone’s savings. They are created by means of a book-keeping entry: an amount, unrelated to any savings, is credited to the borrower’s account (i.e., the money is created by the bank out of nothing) and the debt becomes an asset of the bank.

    The amount of money banks can create in this way is related to a multiple of their deposits. But since every new loan creates an equivalent new deposit, the only effective limit on the money banks can create is the amount they think will be repaid.

    The result is a tendency for banks to finance destabilizing speculation leading to stock market and property bubbles that hurt wage earners and can lead to a crash such as occurred in 2008, and seems increasingly likely to occur in the near future.

    • Replies: @Sam Shama
  49. Sam Shama says:

    […..What’s inevitable about it?]

    there are many reasons, and short of attempting to go through a history and predictive accuracy of that statement I made, some of Paul Krugman’s startling insights for partially closed economies [as early as 1979] might prove useful, e.g:
    http://www.jstor.org/stable/1832086?seq=1#page_scan_tab_contents

    I think you are misunderstanding my own preferences [Trump’s stated policy on trade] for what I see as results validated first through elegant theory and then solidified by evidence. As I said, if Trump wins – and I hope he does – I remain circumspect as to what he can actually implement in policy

    • Replies: @CanSpeccy
  50. Sam Shama says:
    @CanSpeccy

    Too many fallacious statements, and I tire.

    [Government debt created by money printing…..]

    Fiat, whether short or long-term credit is always created by the government/treasury/Fed complex. I know you must be angling to introduce gold, but I am afraid that won’t do at all. Whether you choose to see it or not, is really rather immaterial, since this debt is held by the public and other institutions as the vessel in which savings [postponement of current consumption] is contained. Nothing more, nothing less.

    Fractional reserve banking is the method via which a modern economy pursues its productive endeavours, innovations and investments by calling a geared claim on future productive capacity. Were it absent, we would likely be plodding along in another age. [To be fair, the Romans, in particular, Octavian, Claudius, Trajan and Hadrian engaged in some version or another, of multiplicative credit issuance to fund their infrastructure projects. The question as to whether gold or the productive endowment of the USA/UK/Europe/Japan should form the basis and backbone for fiat is one that has been decisively answered and put to rest]

    Stock market [or asset market volatility] has always been with us, irrespective of geared finance via banks. In fact the episodes have been far less frequent since the installation of the central banking system. Destabilisation, at least the one in 2008, arose for the reason of rapid growth in shadow banking practices, regulatory capture and lack of regulatory capital. So it is a question of appropriate regulations and not the essential mechanisms afforded by fractional reserve banking. Look in the end we might agree that U.S. banks [and certainly European ones] are thinly capitalised, therefore ripe for remedy, but that is definitely not an argument against the principles of soundly regulated banking infrastructure.

    Write no more on this I will …..

    • Replies: @CanSpeccy
  51. CanSpeccy says: • Website
    @Sam Shama

    short of attempting to go through a history and predictive accuracy of that statement…

    Agreed, predictions are difficult — especially about the future.

    Still whatever the downside to “partially closed economies”, it seems clear that opening Western economies wide to Asian competition has been a disaster. Since 2000, China’s GDP has almost tripled, while the West has been at a virtual standstill. And now China has the technological advantage in many areas including supercomputers. And that is as predicted by James Goldsmith in this interview with Charlie Rose in 1994.

  52. Art says:

    Take Cover – Janet Whiffs Again

    By David Stockman
    David Stockman’s Contra Corner
    June 17, 2016

    If Donald Trump has even a partial clue about the nation’s monumental economic mess one of his first acts will be to demand Janet Yellen’s resignation. And for sheer incompetence among countless other failings.

    She was out there again today talking in completely incoherent circles. On the one hand, Yellen robotically insisted that the U.S. economy is moving steadily toward the Keynesian nirvana of full employment.

    https://www.lewrockwell.com/2016/06/david-stockman/take-cover-now/

    Granny Janet Jew runs America!

  53. CanSpeccy says: • Website
    @Sam Shama

    Too many fallacious statements …

    I know you must be angling to introduce gold …

    Well, there’s one false statement — yours.

    What I do advocate is:

    The Numero: Beyond Gold and Fractional Reserve Banking

    • Replies: @Sam Shama
  54. Art says:

    Vote Trump! By By Granny Janet Jew!

    In response to a question about presumptive Republican presidential nominee Donald Trump’s proposal that he could renegotiate U.S. debt with foreign creditors, Yellen said the damage from that could be “very substantial.”

    http://www.cnbc.com/2016/06/21/janet-yellen-speaks-in-front-of-senate-banking-committee.html

    Hmm – no second term for Granny Yellen – this gets better and better.

  55. Neoconned says:

    This is what Japan has been doing for 25 years and yet they’re still mired in deflation. We’re going into deflation caused by demographic issues that will sap demand from the economy. Printing money to buy bonds via deficit spending is the only move we got in the chess board.

    Will it heal the economy? No. But as Keynes put it “in the end we’re all dead anyway.”

    There is no solution or play here.

    • Replies: @CanSpeccy
  56. Neoconned says:
    @Jus' Sayin'...

    And yet you postulate libertarian Randian anarchy is the answer? Even if you got your way some autocratic warlord would take power to fill the vacuum.

  57. CanSpeccy says: • Website
    @Neoconned

    Printing money to buy bonds via deficit spending is the only move we got in the chess board.

    So say those who can’t think of anything else.

    In fact, there’s the three-part Trump economic program, which I spelled out in detail four years ago: (1) abolish corporation tax; (2) eliminate minimum wage laws (and introduce a wage subsidy program to ensure the lowest paid receive a living income); and (3) impose an across-the-board import tariff thereby leveling the international playing field among nations with very different standards of workplace health and safety and environmental protection.

    The result would be fourfold: (a) increased domestic investment and hence increases in both economic output and demand for labor; (b) increased total income to wage earners and hence increased consumer demand; (c) reduced welfare expenditures, and other unemployment-related costs, including those due to crime and mental illness; and (d) higher prices and wages, creating inflation and thus a return to significantly positive interest rates.

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