The Red Queen's Money
Every so often there is a week of convergence, where the same question, perhaps in different forms, crosses the keyboard of a variety of different people. In the last few days or so Daniel Gross and Michael Kinsley and Barry Ritholtz all scratch their heads about the sloshing of global monetary dynamics and asset inflation. Their thoughts are related, and they are related to the the meaning of money. And for those of you taking bets on the hell freezing over, Max Sawicky quoting Milton Friedman has got to at least be an iceberg on the river Styx.
The meaning of money. One of the most important aspects of what we have seen in the last 25 years, and more specifically in the last 6, concerns the nature of money.
What the equity markets have figured out is that the two central banks in the world are both inflationist – the Fed and OPEC both have had the spigots wide open for some time now, and the result is an inflationary world boom. Growth over the last five years globally is the highest for any five year period on record. Just not for the developed economies. The big winners have been resource producers, and countries that benefit from labor arbitrage. The big loosers have been those hard on the margins of the world economy, with the middle class in developed countries seeing an erosion of security and their retirement savings put in danger. It is a strange day indeed when a right wing academic economist appointed by a right wing President dismisses Milton Friedman.
The reason of course is that Ben Bernanke thinks he is on to something better – hard money for the poor, soft money for the rich. As long as the rich are willing to bid up the price for control of assets, on the belief that they can turn them to some use, there is no limit how much money supply their can be. Just so long as the vast mass of people don't spend any of it. The result is not only that real wages have gone no where, but the cost for buying a dollar of future earnings has been elevated to levels unheard of before, and stayed there. Once upon atime, if the P/E ratio of the S&P 500 had been where it is now, people would be heading for the exits.
Instead, Google hit $500 today, and the world's stock indices have been marching out of the pit created by the global crash of 2000-2002.
Of course he doesn't want to talk about M1 versus M3, because it lays out what is going on. It isn't that Kinsley's theory of the stock market being irrational is correct, it is that there are two world's of money. Those who are playing with retail dollars piled up from ordinary people, and those playing with hot money from Japan's carry trade and Federvention liquidity, as well as the profits from low, low, no, no taxes on wealth.
It isn't that the market is irrational, it is that large Private Equity buyouts are designed to take a company out of the retail market of pension funds and mutual funds, and lay it before people who are willing to pay a big premium to get control over the company. Since the retail investor is just getting returns, while the control investor is getting real power to direct the company, and is buying with much cheaper money, there is no reason why he shouldn't be willing to pay a premium for a big bang moment of a company going back to public or in a strategic sale. Why didn't they do it earlier? Because the process of taking control of a company is often ugly, and leaves a great deal of ill will. Better to have specialists in bloodletting do that work.
But the question is – how long can the circumstance of soft money for the rich, and hard money for the poor stay in place? Previous experiments show that it takes decades for such a system to be put in place, but a very short period of time for it to collapse.
Here's why. As long as everyone is bidding up asset prices, one bubble can be used to pay off the wreckage of the last. The 1890-1906 period saw a series of boom and bust bubbles that, in each case, was bailed out and left to start over again. However, on the day that someone tries to take control of the bottleneck which can charge everyone else in the economy, the rout is on, and that rout often involves the very wealthy going to governments to fight a war over whatever is about to be in very short supply.
This isn't necessarily the end, however, the end generally comes after the war, when the powers that be try to reassert some control over a monetary system which is bringing people into the rich club faster than they can be tolerated. It is this moment, when some kind of "return to normalcy" is desired, that matters get out of hand. The other mistake is to simply continue to pump money in, because once wars get going, they have a way of pumping money down to the bottom very fast with people who are determined to spend before their number comes up. Post war inflation followed by tightening is a pattern so common in history as to make it almost a cliché.
In our present circumstance, Iraq is a mere blip in this process, a failed Boer War over oil, which seems, on the surface, to be the commodity that is in short supply. The reality is different.
It is not that oil supply isn't a problem, one which the world is bumping up against. However, as long as the United States is willing to sell its future generations into debt slavery to pay for SUVs and HDTVs and the energy that runs them – why then China and the OPEC oilarchs seem happy to buy. While many commentators – including Paul Krugman – have openly worried that this process will come to an end with an abrupt halt – the "Great Unravelling" – far more likely, and I have said this for some time – is Japanification.
Japanification is the quasi-permanent stagnation of wages and opportunities for ordinary people, along with sufficient growth to avoid collapse, but not enough to avoid a gradual pressing grind on the the social bonds and expectations. In Japan we see low birth rates, growing alienation and a falling share of world GDP as the symptoms. The US would have to balance differently, because it is not running a surplus in balance of payments, and its debt is held globally rather than, in general, locally.
But the question for the moment is whether the two tiered money system can long endure is dependent on two macro bets. The first is that the developing countries like China, and old developed countries start spending profligately on consumer goods. So far, despite various pleadings from Treasury Secretary Paulson, who echoes on this point the line that his predecessors took, this is not happening. For older developed countries, it is because they need to save for their safety net programs. For developing countries, ordinary people know that there is no safety net other than their own savings.
This is tied to a second reality, and that is the requirement that Americans consume far less in the way of raw materials. America is not a very materials dense economy - while we have high GDP per capita and per employee, we burn a great deal more oil and materials to get that higher GDP. For China, India, South Korea and other nations to consume more in their consumer sectors, America must consume less.
The reason this pairing is important is that a vast bet has been made that the global consumer is about to start consuming. The values of public shares are not supportable based on US domestic consumption - the US consumer may not be tapped out, but running a negative savings rate, there is very little room to move marginal propensity to save to marginal propensity to consume.
This means that others are going to have to consume. When you hear some Bushnick saying that "other countries have to grow their economies", that's what he or she is saying "why don't your consumers get stupid like ours and buy everything in sight?" Of course those other consumers are not doing so, because they have good reasons to believe that in the future, they have no one to rely on but themselves.
Thus it is very unlikely that future returns are going to justify the current very high prices for a dollar of future earnings.
- - -
What this means is that there are a short list of possibilities.
One, of course, is that the consumer plan gets an overhaul and a way is found to convince global consumers to become more profligate in their ways. However, the news on this front is not encouraging. One of the economies that is growing its consumer sector the best - Argentina - is doing so through protectionism and import substitution rather than through exposing their shares, and hence their profits, to the global market. It is a neo-liberal's nightmare - a country that uses the resource boom to pay its old debts, but imports less and finds ways of making its rich natural resource base generate consumption. Argentina is taking Australia's road. This isn't necessarily bad for them, though expect continued predictions of doom from the usual quarters, but it does mean that there aren't much in the way of profits to be found in this model for outside companies.
A second one is that there is some new and disruptive technology unleashed on the world that allows an unexpected growth of the global economy. So far, this technology is not present. Two candidates are hydrocarbon fuel cells - which unlike their more glamorous pure hydrogen cousins burn conventionally derivable fuels more efficiently - and nanotechnology. But the state of both arts does not make either bet a short term bet. Noncarbon energy is not a disruptive technology, but an unblocking one, it removes limits on growth, but does not generate incremental economic growth.
A third possible result is, of course, a dramatic fall in share prices. Many people who have never believed in this "new era" of high valuations have been predicting a collapse down to historic P/E ratios - which would put us close to Dow 7000.
These kinds of factors have led many people to believe that such a collapse is in the offing, or is at least reasonably close at hand. However, this ignores whether the temporary patches to keep a high asset inflation and low consumer inflation can be maintained. The answer seems to be "yes they can". And in business, the reality is that you do whatever juggling you have to do to keep things afloat, while hoping for the macro factors to make the money come rolling in.
These strategies include more upper bracket tax cuts - in effect borrowing at the public trough to keep the market floated - continued Japanese carry trade - in effect borrowing against future US consumption to keep the market floated - finding a way to refloat the real estate bubble in the United States with tax breaks for the middle class and juggling the mortgage market to allow continued relatively cheap mortgage interest - and continued deficit spending by the United States Government.
All of these mechanisms are problematic, and there have been stark warnings about allowing any of them to continue. However, faced with a massive stock slide and the resulting economic disruption, or going double or nothing, one can count on policy makers to go double or nothing almost every single time. Only at the point where it is clear that all semblence of orderly markets are about to be tossed out the window will the current be brought down on the three ring circus of cheap speculative money, global government deficits, and overheating of the global economy.
That which can't go on, won't, but the more it can't go on, the more incentive there is to keep it going.
- - -
In short, the most likely occurance is, more of the same. We have not, yet, reached a disruptive point where change is necessary. That point is still some years away, but many fewer than people think. Right now, as the A HREF=" http://www.csis.org/media/csis/pubs/aging_index.pdf" target=new>CSIS, among others, have pointed out, the United States is having a relatively small generation retire, while the baby boom is still in its peak earning years. As the baby boom shifts to retirement - and this is why retirement ages are being raised - this will reverse, with a relatively small baby bust generation earning to support a relatively large baby boom. The draw down of savings is already enough to send the over all US savings rate negative, it will only turn more so over the course of the baby boom's retirement. This is the disruption point - when pension fund draw downs, 401k draw downs and savings draw downs will bleed the US fiscal picture.
In essence the current plan of floating a huge speculative bubble has that long to convince Chinese, French and Indian consumers to get stupid, or face substantial drops in share prices, or a global rigidity of the investment system, where more and more money is parked in spots that it can't get out of.
The same limit is imposed on any "change in direction". While there are other solutions to the global economic conundrum that don't involve substantial economic collapse, or further overheating of the global economy - the time to put them in place is limited by the coming retirement wave.
Stirling,
This is a very lucid commentary. I just wonder about the trade-off between the increasing trend toward obesity, implying early death of the baby boomers, versus the decline in savings for retirement. Maybe the issue will turn out to be not so much the baby boomers retiring as the baby boomers dying. Perhaps this is an imponderable question, not to mention a morbid question, but would such an outcome make any difference to the economic prediction?
November 22, 2006 7:23 AM | Reply | Permalink
As with so many of these pieces, there is very much of value in this analysis, seriously undermined by the slavish adherence to anchoring in the fictitious portion of the economic CW. IOW, "autistic" economics strikes again.
It is certainly true that money is organized in a hierarchical manner. That is, money is anything that serves as a medium of exchange, store of value, standard of deferred payment and unit of account. The reason that this extends beyond the things that the median household experiences as money ... cash, checking accounts, on demand savings accounts (all of M1 from before WWII, and evolving more recently to include additional chunks of M2) is that when faced with liquidity constraints, banks engage in financial innovation to allow other accounts function as money for some type of transaction.
It is this process by which the transferable CD became money in the US ... but since the unit of account is US$1,000, it is primarily money for a class of high end corporate transactions.
If we were to compose a "21st century M1", composed of all bank accounts used as "retail" money, we would have a firm measure of this "ordinary household" money that we could compare to broad money.
The bulk of M1 is, of course, created by the banking system, and since M1 is a minority component of M3, fiat currency is an extremely small proportion of M3.
Note that while Central Bank operations to control interest rates tend to have a relatively strong impact on the amount of M1, because of the much higher risk of cash withdrawals from M1 accounts, so that a higher cost of funds for reserves hits retail money first. The more nearly closed the system of account transfers is to leakage of the leverage asset base (cf. Wray 1991), the greater the possible leverage, and the more money of that type that can be created on the same leverage asset base.
Given that the vast bulk of M3 consists of bank liabilities, which they are free to create to the extent that the liabilities can be consistently met, it is evident that a substantial expansion of M3 relative to "new M1" is not the result of Central Bank action, but rather of Central Bank inaction.
It is the predictable consequence of the expansion of the ongoing processes of deregulation of the financial sector that removes constraints on banks creation of new credit, which are particularly focused on the "wholesale money" sector, since the intrinsic limits to the creation of credit in the "wholesale money" sector to meet all credit-worth demand are substantially lower than the intrinsic limits to the creation of credit in the "retail money" sector.
Wray, Randall. (1991) "Boulding's Balloons: a contribution to monetary theory", Journal of Economic Issues Vol. 25(1)
November 22, 2006 9:02 AM | Reply | Permalink
Re: I just wonder about the trade-off between the increasing trend toward obesity, implying early death of the baby boomers, versus the decline in savings for retirement.
There does not appear to be any trend toward declining life expectancies in this country. At most unhealthy life habits seem to have slowed the rate of increase to our life expectancy. There is however no reason to think that baby boomeers, or any other generational group, will have shorter lives than their parents did. (Moreover, at least some health habit statistics have turned positive: there are far fewer smokers, and somewhat fewer heavy drinkers, in today's population than 50 years ago, and also far more people use seat belts.)
November 22, 2006 9:28 AM | Reply | Permalink
(I can hear Stirling typing now...)
November 22, 2006 10:14 AM | Reply | Permalink
Problem, the facts don't agree with your inaction theory of M3:
http://www.nypost.com/seven/11072006/business/u_s__treasury_is_quietly_doing_the_feds_work_business_john_crudele.htm
Stirling Newberry http://www.bopnews.com
November 22, 2006 10:17 AM | Reply | Permalink
So, I know you're not giving investment advice, but let's make this real: If you had a 401K or, say, a TIAA-Cref account that was going to replace your salary when you retire, how would you respond to the scenario you lay out? Since you say that the crisis will come soon, but not too soon, let's take a person retiring in, say 2016 with enough projected to be in their savings to replace their salary adjusted for inflation? The short version or my question is, what can individuals do to avoid the worst consequences of the coming crisis?
November 22, 2006 10:40 AM | Reply | Permalink
Buy real estate in Luanda?
November 22, 2006 11:35 AM | Reply | Permalink
Maybe the collapse is coming sooner than you think?
Look at the inverted yield curve -- recession will hit in about 8 months? The last time the yield curve looked like this was in latter third of 2000 --stock market headed down and didn't stop until it hit the ocean floor in 2003.
And gains since then would look much much less if given in euros --given how the dollar has collapsed in value. In fact, how much of the increase in the Dow over the past six months is an increase if itoffset by the decline of the dollar re to the Euro in the same time period?
Plus, of course, we are projected to be about $4 Trillion deeper in debt by 2008 than we were in Jan 2001.
November 22, 2006 11:55 AM | Reply | Permalink
I've been watching the yield curve like a hawk for three years now, and was overly pessimistic about the prospects for the macro economy as a result. Chastened, I went back and studied the American yield curve and came to some interesting conclusions. One of them was that while the yield curve is a good indicator of a recession, that there are several scenarios where, instead of recession, inflation is the result of an inverted yield curve - in essence the fed keeps liquidity high enough to prevent a contraction, but not so high as to flatten out the yield curve. Also crucial is reaching full inversion, which while we have had top to bottom inversion, we haven't quite reached either on the cash market or on the constant mature measure.
More over, given the new NBER rules, it is entirely possible we could have a recession under the old rules, but not have the NBER declare a recession under the new ones. Simply put, discounting wage declines makes it possible for GDP to rise because of falling exports, real investment to rise because of falling prices, and have large wage declines, without triggering the recession threshold.
Thus, my prediction is for a down turn which will feel like a recession, but which will not be a declared recession. Call it a 1986 style "hard landing".
Stirling Newberry http://www.bopnews.com
November 22, 2006 12:03 PM | Reply | Permalink
Do you have a functioning version of that URL?
November 22, 2006 12:04 PM | Reply | Permalink
A recession is not equivalent to a financial collapse, but if there is a substantial financial asset bubble in progress as the recession hits, it certainly can be a trigger to puncturing the bubble.
November 22, 2006 12:06 PM | Reply | Permalink
OK, fixed it, it was %%20 pollution.
So, it shows the Treasury injecting purchasing power into the economy, which it always does when it deficit spends, and in particular the Treasury doing its level best to inject that purchasing power into the wholesale money circuit, which is no surprise with a Greed_Over_People / God_Over_People in control of the White House.
The Fed can either accomodate the banks efforts to extend credit to wholesale borrowers or it can attempt to refuse to do so, pushing up interest rates and restricting supply of credit in the short term and sparking a wave of financial innovation over the medium term that relieves the constraint.
Surely, though, you do not expect people to adhere to a traditional exogenous monetary theory of money because they read it in the New York Post?
November 22, 2006 12:16 PM | Reply | Permalink
I am expressly not giving financial advice with this post. No one should invest without looking at their own objectives and consulting their own advisor.
I can, however, point to some outlines for people to think about.
First, global diversification. US equities have underperformed global markets. Buying index funds in major global indexes is a good way to hedge against movements in us-centric stocks. I am particularly partial to the SSMI.
Second, seek Yuan exposure. Hedge against inflation in petro-currencies and commodity currencies - including the Norwegian krone, the Pound Sterling and the Swiss Franc for this purpose.
Third, index funds, index funds index funds. Most actively manged funds underperform the cost of money in their sector substantially, and take chunks out of you in terms of fees. No load passive fund management consistently outperforms the active managed funds.
Fourth, loan short. I love long bonds, but right now, they are just not a good deal given the balance of inflation risks. Put the bond part of your asset allocation in shorter maturities, and wait for the time when it is clear that the fed is going to signal easing before going to longer maturities again. There will be a moment to lock in long rates, now isn't it.
Fifth, include commodities in your mix of investments. I'm not a big Goldbug, but there are ample commodities index opportunities. During the "Great Commodities depression" we call got used to avoiding commodities. That period is over, and while commodities are volatile and a wild ride, it is no longer prudent to avoid them. I would look at petroleum, corn, copper, steel and other essential commodities first. I like platinum plays personally, but that is territory for wonks. Energy is something that everyone should be able to invest in sensibly, since people have a good feel as to whether the consumer economy is getting better or worse, and that drives energy demand.
In short, Bernanke is a conservative inflationist, and one who is helping enable a global asset bubble. Don't fight the fed, don't bash the bull, and go with it for the time being. As always, as soon as you feel ridiculously happy with any investment - liquidate it, because it means it has exceded your wildest expectations.
I will also point to a call that I like, and just found out that Jim Cramer of Mad Money likes - stock markets. Again, a play on the global asset bubble.
Stirling Newberry http://www.bopnews.com
November 22, 2006 12:16 PM | Reply | Permalink
1)In my opinion, if you have most of your savings in an IRA or 401K account, then you are screwed like a dog.
Those savings are in "before tax" dollars and can be taxed/confiscated at whatever rate future administrations want. At 90 percent if need be. And likely will be as the Bill for the $9.9 TRILLION in debt --largely run up over the personal signatures of "fiscal conservatives" Ronald Reagan, George H Bush, and George W Bush -- comes due with the retirement of the baby boomers.
2) Every year, Fortune rates AARP as the most powerful lobby in DC. What do you think will happen to its power when baby boomers join?
Social Security is underfunded by $8 TRILLION. Medicare by $40 TRILLION. Plus
$4 TRILLION of the assets of the Trust Funds for those programs consist of nothing more than Bush's IOUs.
3) Basically, what Bush and the Republicans did was take --say, $200,000 -- from your Trust Fund account and give you an IOU for $200,000. BUT the IOU says that YOU, not Bush and the Republicans, are the one on the hook to pay off the IOU. But What is the value of an asset that says you owe yourself $200,000?
Ha ha ha ha ha. I'm not kidding --they used to shoot con artists for doing this type of stealing.
And Bush then tries to ..er.. "cool off the mark" by telling us that "there's a problem with Social Security". Ha ha ha ha
4) But no government can stay in power if it lets the elderly starve. So future governments will have to seize your IRAs/401Ks. That's why they encourage you to trap your life savings into a form that is recorded and controlled by the Congress.
5) What the rich know is that after tax wealth is protected from seizure by the federal government per the anti-"taking" clause of the 4th Amendment. (Although local governments can, of course, seize personal property and real estate via taxes/sheriff' sales.)
6) Of course, assets which are unknown to the governments -- gold coins, guns, diamonds, etc -- are immune from seizure if kept secret. Treasury Bonds, by contrast, are nothing more than entries in the government's computers.
November 22, 2006 12:26 PM | Reply | Permalink
Solid advice, Stirling, though I'd warn of two things. First, for those seeking international exposure in order to not be dependent on the US stock market, remember that you'll likely be owning shares in a lot of foreign companies that get most of their revenues and profits from... the US. Sometimes, it's just not as "diversified" as you think.
Also, on your yuan recommendation -- that currency will also be largely dependent on US consumers and investors who send their money east. If the US goes, that currency goes with it.
thosethingswesay.blogspot.com
November 22, 2006 12:52 PM | Reply | Permalink
I don't see a trade off either. Technology and medicine has advanced to the point where it can increase life expectancy despite adverse health choices that people make. It might be that people's unhealthy choices (maybe choices is too strong a word as a lot of this is caused by how we all have to live) are slowing the life expectancy gains that medicine offers, but life expectancy and quality of life in later years, are both on the upswing right now.
thosethingswesay.blogspot.com
November 22, 2006 1:08 PM | Reply | Permalink
Destor's got a point I was going to make, that the U.S. has a nasty habit of dragging others down. Not primarily financially either, of course, as in a certain war. No wonder Europe is ticked off at us. I'd rather keep my post at that return to politics, since (as Stirling notes) TPM is not about sharing or dispensing financial advice (not that you'd wish to listen to mine).
John
http://www.haberarts.com/
November 22, 2006 3:11 PM | Reply | Permalink
Re: Destor's got a point I was going to make, that the U.S. has a nasty habit of dragging others down.
Care to cite some examples? Our Native Americans, yes, absolutely. Maybe Mexico, although you'd have to make a case that absent the Mexican War Mexico would be better off today. Spain took little enough hurt from out war with them. Vietnam has recovered and South Korea is quite prosperous. Russia pretty much wrecked itself. Certainly Europe and Japan have not been "taken down" by us. In some ways they are better off than we are. Ditto for our closest neighbor, Canada.
Maybe the Philippines would prove your case?
November 22, 2006 3:35 PM | Reply | Permalink
Re: Those savings are in "before tax" dollars and can be taxed/confiscated at whatever rate future administrations want. At 90 percent if need be. And likely will be as the Bill for the $9.9 TRILLION in debt
I very much doubt this would happen, except maybe for the highest income brackets. Taxing away 401ks and IRAs would make the retiorement income crisis even worse. I suspect that the goivernment will leave those funds strictly alone and go looking for much easier money. Moreover, the elderly tend to vote at high rates. Do you really think a governmnent that attempted what you suggest would last past the next election?
Re: But no government can stay in power if it lets the elderly starve. So future governments will have to seize your IRAs/401Ks.
Reread what you just wrote. You first clause strongly dictates against the second.
November 22, 2006 3:40 PM | Reply | Permalink
Not really --there are huge numbers of blue collar baby boomers who have little in the way of assets other than their house and their Social Security/Medicare accounts.
So I think the 401Ks/ IRAs of the Middle to Upper Middle Class will have to be taxed heavily just to provide austere , bare minimum survival incomes to the elderly population of blue collar workers and lifelong working poor. Not a handout --just having the government make good on its promises over the past 40 years.
What other sources of additional tax revenue are there?? If we haven't been able to run a balanced budget in the past decade--during boomers peak earning years -- then how will we be able to run a $200-$300 Billion surplus year after year in the period 2010-2030?
Soak the rich won't work --because the rich will do what they did in the Great Depression -- hide assets under the mattress, enjoy cash in a deflationary environment, and drive unemployment up through the roof.
Cut spending? How? A huge chunk of the federal budget goes just to pay annual interest on the huge debt we have. The other big chunk is defense spending.
While I think defense could be cut deeply, doing so leave the large US foreign direct investment at risk (nationalization, war, unrest,etc.) and will reduce the income that the US receives from those overseas investments.
This is Not counting the damage to US industries of disruptions to their global supply chains.
I would still cut defense --because the huge profits of globalization are being reaped by a wealthy few while the huge costs --in defense budgets to maintain order, loss of lives, US unemployment and stagnant wages, etc -- are being dumped off onto the common citizen. But the transition would be painful.
November 22, 2006 7:13 PM | Reply | Permalink
The meaning of money? Its a fine way to keep score when the impetus of one’s life is to prove an unrelenting commitment to intellectual development, to wrestle with one’s dark sense of greed, to repeatedly practice and exercise tactical acumen, to find the assorted edges in a staked deck, to read, read and read and then sense that unmitigated moment of intellectual instinct, to experience the wonder of capital raised entirely on your own, to jump into the abyss and never second guess on just what made you step to the plate. To examine the confines of your ego, and always keep it in a modest tow, to reap reward in astonishment with the substance of another homework correctly performed. To know you are only as good as this day, and the grim foreboding of a future trend that is always at hand’s length. It’s a choice of consumer as capitalist, in an arena of your liking, poised to remain in close contact for whatever may found at the instinctual opportunity of a wit’s length and a market’s breath.
Amen.
November 22, 2006 8:18 PM | Reply | Permalink
goddamnit, i have no idea what the hell you're saying. ever. i try to disentangle this stuff every now and then, but it's too damned dense, has too many backflips and u-turns of phrase, etc. can you at least post an abstract so that those of us incapable of wading through can understand?
November 22, 2006 8:44 PM | Reply | Permalink
Except again: any politician who tries this does not survive in office to do it. Rather, they will tax A) the Rich (and disallow the money hiding schemes, by draconian mreasures if necessary) and B) the young and middle-aged (who will be happy to go along so that they are not left to support their parents instead). Politics is the art of the possible. What you suggest could happen is not possible, and I cannot see how it could be. Again: the elderly vote! They can always just stick it to the young and/or rich if they want.
November 22, 2006 9:17 PM | Reply | Permalink
Besides which, I think you have bought into the GOP's disinformation on Social Security. Even under pessimistic (but reasonable-- no nuclear wars, killer asteroids etc) assumptions, it is sustainable indefinitely with a few reforms: higher retirement age, removing the FICA income cap, reindexing.
November 22, 2006 9:20 PM | Reply | Permalink
Actually, it is never difficult for a willing government to maintain aggregate demand at optimally high levels, no matter what happens to foreign demand.
Aggregate demand is nothing more than SPENDING. If there is a drop-off in aggregate demand either because consumers are "tapped out" or because firms have cut back sharply on their investments, governments can easily wipe out the negative effects of such developments by simply increasing government spending on Public Investment (infrastructure & human capital).
Those who think our 'negative saving rate' is some kind of obstacle to economic salvation are mistaken. In another version of "The Coming Collapse" theme that is circulating in Democratic circles, a direct connection is made between America's negative savings rate and the historically unprecedented levels of indebtedness we are seeing.
The simplistic reasoning we are presented with goes something like this: 'We' are much too heavily in debt. 'Our' savings rate is at historically low levels. Therefore, 'our' borrowing levels would drop if only 'we' saved more.
But consider: What good would it do if we were actually able to increase the Marginal Propensity to Save of those who actually have a choice to either save or spend, all else equal? More money saved is less money spent, right? Since all of the jobs in the economy are dependent on spending, it would cause an increase in unemployment. Is that what we want?
Keep in mind, GDP is a measurement of SPENDING. Unemployment rates are always directly connected to savings rates. If there is ANY unemployment in an economy, it is because too much money is being saved; not enough is being spent.
Here's the flaw: If increased savings levels are not matched by increased borrowing levels, then a call for higher savings rates is a call for increased unemployment. Spending cannot be maintained if people are borrowing less, all else equal. More money is taken out of the economy in the form of savings and less of it is being lent out. That's what a net increase in aggregate savings will do, all else equal.
When you consider all of the variables involved, the only best way to unwind the debt problem is to start taxing the rich at more speeply progressive rates while at the same time maintaining and even increasing the government's spending on Public Investment. While the government is maintaining aggregate demand through its increased spending levels, consumers will be able to start borrowing less without that drop in consumption hurting the overall economy.
That's how a Democratic administration could unwind the problem without bringing on the "hard landing" everyone seems to be afraid of. The big thing they need to keep in mind is that tax hikes are stimulative if they target the nation's biggest savers. It is the best way to unwind the imbalances that have worsened under the Republicans.
(The time to start limiting this approach is only after the labor market starts to favor wage earners, who are finally able to make real gains through improved market power. That's when you've achieved the optimal balance of income distribution that any society can hope to achieve.)
So if you want to see less borrowing in the economy while at the same time preventing a decrease in aggregate spending, the answer is to tax savings and then spend that money you collected on public investment. At no time are we dependent on the whims of foreign consumers in order to maintain domestic demand at levels that we find desirable.
November 23, 2006 5:49 AM | Reply | Permalink
Re James Kroeger's comment:
"Keep in mind, GDP is a measurement of SPENDING. Unemployment rates are always directly connected to savings rates. If there is ANY unemployment in an economy, it is because too much money is being saved; not enough is being spent."
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WRONG WRONG WRONG!!
GDP is the sum of government spending + BUSINESS INVESTMENT + Consumer Spending
I don't understand why economists can't understand the simple distinction between
INVESTMENT that yields incomes and profits in the future versus CONSUMPTION that consumes resources versus WASTE.
Some Government spending on the Internet during the Clinton admin was Investment -- it yielded the promise that we could speed up product innovation and development in multiple industries by allowing rapid and intricate coordination without have to spend enormous amounts of time and fuel flying people around the country for business meeting.
The Bush admin's spending has had a great deal of Waste -- look at how much has been pissed away in Iraq.
Some level of military spending is necessary to protect the country. But we are spending almost as much as the world's other major powers COMBINED --which is enormous waste. Especially when most of those other major powers are our NATO allies.
Compare our $500 Billion/year "defense" budget with that of any possible opponent
--Russia and China only spend roughly $50 billion each. And if we are spending $500 Billion on "defense" then why do we need to spend another $70 Billion/YEAR on "Homeland Security"?? If DOD is not defending the homeland, then what is it doing?
Answer: It's defending the foreign investments of America's plutocrats. Which is idiotic --just look at our huge trade deficits. But the PROFITS of foreign investments flow to a few while the huge COSTs are dumped off onto the common US citizens. Why? Because plutocrats give a few million in campaign donations while "National Interest" don't give shit --so who do you think our national leaders serve?
November 23, 2006 8:43 AM | Reply | Permalink
I'm not sure how your comments challenge anything I said ("If there is ANY unemployment in an economy, it is because too much money is being saved; not enough is being spent").
Perhaps you are not aware that almost 85% of the money that corporations spend on investment comes from retained earnings or other internally generated funds.
What that means is that corporations are more dependent on the expenditures of consumers/governments/firms than they are on the savings of savers.
The most helpful thing you can do to stimulate private sector investment levels is increase aggregate demand through additional government spending on Public Investment.
That gives private firms the revenue (the 'internally generated funds') they use to finance most of their investments.
November 23, 2006 10:16 AM | Reply | Permalink
Stirling Newberry for President.
November 23, 2006 11:33 AM | Reply | Permalink
Re James Kroeger's comment that "The most helpful thing you can do to stimulate private sector investment levels is increase aggregate demand through additional government spending on Public Investment.
That gives private firms the revenue (the 'internally generated funds') they use to finance most of their investments."
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Again, it depends. If the Government spending is wise investment --e.g., education of workers, improvement of transportation and communication infrastructure, research which yields beneficial new technologies,etc --then the country benefits. If, on the other hand, the government spending is consumption which benefits only a few, then the country is worst off --because resources needed to improve our standard of living have been diverted into waste.
We do not pay $2.50/gallon for Middle East gasoline. We pay more like $8/gallon -- $2.50 at the pump and $5.50 on our 1040 tax return. The $5.50 is military spending to protect Houston's oil investments in the Middle East.
The situation makes no sense --but no investors want to put much money into alternative energy sources because the US government's huge subsidy for petroleum is an externality --i.e., does not show up in market prices which determine business competition.
Also, Consider Bush's 2001 tax cuts for the rich. Those were falsely sold to the American public as as stimulating the US economy.
But if you look at where the money went, you see that it went to create jobs in CHINA -- not in the USA. Because wealthy US investors directed the money abroad. Compare the increase in US foreign direct investment versus US domestic business investment since the tax cuts transfer capital to private investors.
Michael Dell, for example, is one of the world's richest billionaires --due to the creativity and hard work of his US employees. Yet Dell's USA employment has slumped since 2000 and Dell has had layoffs in the USA. But the number of Dell's FOREIGN employees have greatly increased --by about 10,000 per Dell's SEC reports, if my memory is correct.
November 23, 2006 3:54 PM | Reply | Permalink
Thank you very much for that.
"It's tough to make predictions, especially about the future." - Yogi Berra
Yogi nails it. Somehow what must happen often doesn't.
Best, Terry
November 23, 2006 7:11 PM | Reply | Permalink
That is very interesting. So, the prognosis is long-term expensive health-care, and we have to make difficult economic choices. I'm for slashing the military budget to pay for everything, but I don't expect much support.
November 24, 2006 9:17 AM | Reply | Permalink
On a day when headlines cite a "rout in the dollar", may we not with good cause amuse ourselves by venturing our best guess at the drastic currency adjustments that would obtain should the willingness of asian banks to hold our paper disappear just as the *petroeuro appears, ending the oil/dollar arb play with a consequent restatement of inflation assumptions.
My bet, one euro/three and one half dollars, maybe four...
*disclaimer:assumes successful ratification of SOME constitution.....
November 24, 2006 9:33 AM | Reply | Permalink
Great analysis.
I'll take option two: disruptive technology. The point being, as brilliant as Stirling is, there are engineers just as brilliant, whose analyses of their terrain is just as far beyond conventional wisdom. And as stupid as many venture capitalists are, some few of them are actually capable of finding and backing these engineers. Plus some few of the engineers learned from past periods of hype the principles of growing their own companies without vulture capitalists. But mostly: without disruptive tech, we're totally fucked. Necessity isn't just any mother; it's the mother.
Given the rest of Stirling's analysis, particularly the tight-wages/loose-profits split currently running, what happens if #2 plays out? Of course it means some investors get very rich, and others get encouraged for a few years in ways that on aggregate constitute a bubble, etc. It may even mean wages go up all around, as in the dot-com ramp-up. Or does it? Given everything else about this analysis, but then one or more disruptive tech breakthroughs of large scale, can we begin to predict what the shakeout might be?
November 24, 2006 5:37 PM | Reply | Permalink
You are correct, of course, to point out that it is possible for governments to spend money in ways that do not serve well the Common Good. That is why I specified that additional government spending on Public Investment is the most helpful thing that can be done to stimulate private sector investment levels.
I'm not inclined to describe Bush's tax cut giveaway to the wealthy as an example of government spending. Strictly speaking, the money that Bush gave the rich was not money that the government possessed at any point. Indeed, it was money that was 'not spent' by the government. When the government cuts taxes, it deprives itself of money to spend. At the moment that a tax cut goes into effect, the government's spending is reduced by the amount of the tax cut.
It is only when the government has done something else---borrow money---that it is able to again increase its spending to pre-tax-cut levels. When we ignore this sequence of events, it is possible to misunderstand the specific, immediate effects of fiscal policy initiatives like tax cuts.
You might be interested in a somewhat different view of Government Bureaucratic Waste vs. Private Sector Efficiency.
November 25, 2006 5:46 AM | Reply | Permalink
"Care to cite some examples?" I haven't troubled to reply, because I thought my meaning was obvious enough, but let me spell it out. U.S. policy, even when it looks primarily as if we're idiots shooting ourselves in the food, has consequences for others. In Iraq, it's meant tens of thousand of deaths, loss of even the most basic services, and a crippled economy. And it's not the first country we've torn apart. (Try Cambodia, say?)
Europe foresaw that a destabilized Mideast would have real as well as moral consequences. It's economy, like ours, is vulnerable to oil shocks, and it's increasingly felt itself as endangered domestically by minority populations. Sure, a lot of that is pure racism, inadquate attention to domestic inequality, or even more reasonble concerns for changing economic and cultural characteristics, to be generous. But Europe sure thinks there's a reason for change between the days after 9/11 when even much of the Mideast hated Al Qaeda to days of bombings in London or Madrid and growing sympathy for Islamic fundamentalism.
But I was focusing on politics, again, because I was trying not to play investment advisor. And yet of course a dip in the U.S. economy isn't just a gain for others. If we crash, others will feel the shock, too. Markets and businesses are global; the U.S. consumes (and even still produces at time) the goods of others; and we're often a guaranteur of financial stability in others as well.
John
http://www.haberarts.com/
November 25, 2006 1:31 PM | Reply | Permalink
If all you are trying to say is thae US has made an awful mess of Iraq, you will get no argument from me on that. But your comment was much broader and more generic than that, and you have not really supported it very well. Iraq is sui generis, not really typical of American policy at all, but rather the stage-managed calamity of the worst administratiuon in US history and a cabal of intellectuals who are quite unlike anything we've ever been governed by before.
November 25, 2006 1:55 PM | Reply | Permalink
I agree that some technological leaps are not out of the question - nanotechnology is really moving rather quickly now, and with some decent investment, fuel cell and nancarbon energy research could probably move relatively quickly as well.
However, there are downsides to disruptive technology, and we haven't even dealt that well with the last round of disruptions. We have done litle to provide adequate education to get a big swath of workers around the corner from the industrial economy to the information economy, which has pushed a lot of middle class families into low-wage jobs, early retirement, or marginal levels of employment. Even more thorough penetration by existing technology (e.g. any sort of improved efficiencies in record handling and claims processing in the medical industry) would throw a lot people out of work. While the specific technologies named may have long-term employment-creating effects, they are sure to provoke futher dislocation (e.g. a switch to noncarbon fuels would involve massive restructuring in the energy industry), and those workers would need to be absorbed. We are not dealing well with current disruptions and are ill prepared to deal with future ones. To my mind this means we need to consider measures that slow the pace of economic change, from temporary trade barriers to regulation slowing the entrance of these technologies into the economic mainstream, so that we can better deal with the consequences of that change for workers.
All that said, I find it very hard to believe that disruptive technology can completely save us from some seriously bad fiscal underliers of our economy, from risky mortgages back by implicit trust in a bailout to deficit spending to a negative savings rate. And the weaking of the climate for science and science education in this country makes it more likely (though this is still less likely than not) that the big winners of new technology will not be in the US
So we may catch a break from technology, but we still need to fix a lot of our deficient practices.
November 25, 2006 4:23 PM | Reply | Permalink
Re: Even more thorough penetration by existing technology (e.g. any sort of improved efficiencies in record handling and claims processing in the medical industry) would throw a lot people out of work.
A little appreciated fact of information technologies is that it tends to generate more office work by making more information available. Once you automate data processing the quantity of data you have at your fingertips explodes and you need to hire more people to sift through and analyze what it all means.
November 26, 2006 5:24 AM | Reply | Permalink
I don't guess you could put some time to that prediction, could you?
No, probably not.
November 26, 2006 11:39 AM | Reply | Permalink