yet somehow the United States is a far wealthier country.

"I understand this Audi is priced $55,000, BUT, since the money is worth what I say it's worth, I will give you $7 for it."

That's now how it works though is it? The producer of the product puts a price on that which he wants to sell. We, with our finite amount of currency, determine whether the price he's set is worth it to us or not. The consumer isn't the only person in the equation. It's the producer as well. The only way the transaction takes place is if the price between two private individuals is agreed upon. That is how WE determine the value of currency. Obviously the printing of money exerts an upward force on pricing, but that value really isn't predicated on what the Fed says. They gauge money supply on how we value currency (albeit in a convoluted polluted manner.)



Really? I think it's number two in my book behind education.

In the 80s we had a progressive monetary policy that shifted people from savings into debt spending to encourage economic growth - without it we would have been in a perpetual recession or stagnation. This, coupled with our societies failure to keep up with economic demands of the world, is what leads to bubbles. Government needs bubbles to keep the economy growing for political purposes, so they fuel them, don't address them, hope they won't pop, and artificially inflate them as a result. Then you get the S&L crisis, the tech bubble, and finally the housing bubble. You get speculation in commodities. The rich people you deride extract what they can out of the economy, don't invest it in the people because there's nothing to invest in, and THEY RIDE SPECULATIVE BUBBLES! Being as they are more skilled, and more intelligent, they are able to get out of the bubbles, crushing the common people who are left in them. The rich extract the currency from the bubble, while common people are left behind.

Now let's look at the housing bubble. We had monetary policy with record low interest rates post tech bubble on the HOPE that inflation wouldn't rear its ugly head. It was how we got out of the tech bubble - we simply hoped home prices would inflate ad-infinitum. To keep the economy growing we kept dropping interest rates to record lows - we need that debt accumulation. This artificial manipulation of interest rates encouraged people to accumulate debt and purchase mortgages. But then inflation poked its ugly head out. Primarily in rising oil prices that matriculated through the economy - something that was outside of the Fed's control.

So you had this MASSIVE amount of debt accumulation and a lack of savings, the advent of prolific ARMs, and then the Fed had to increase interest rates because of inflation concerns. You had derivatives, credit default swaps circulating through the banking system. The banks all hoping to win in the game of musical chairs before the bubble burst. Some banks played it well, but others didn't, so much so that it was possible that it could have brought down the whole system. And when the whole house of cards crashed when: ARMS rose and people couldn't afford their mortgages, they were foreclosed, construction of new homes stopped, people lost their jobs, which caused more people to lose their jobs, which caused more foreclosures, which resulted in a sudden housing glut, TRILLIONS of dollars of wealth in the middle class was wiped out, and the bubble our economy was riding on was gone. The banks holding these mortgages lost, the middle class lost, hell, everyone lost.

But how did we address it? Why? We bailed out the banks with liquidity injections to write off asset losses! The banks were given massive liquidity injections to help offset the real values of the mortgages they held against actual assets they represented. The hope was that they'd circulate this cash in credit markets. But there was nothing to invest in. So they've just held onto the cash.

Result? The people half responsible for this mess had their sins forgiven from your precious Fed and Treasury, while the other half (the people who bought houses and lost their shorts) where left high and dry and ruined. The gap between the rich and poor grew vastly, and the TRILLIONS in assets that were lost weighed down almost exclusively on the poor and middle class in the form of job losses, losses in equity, and the loss of their homes. But the banks got a bailout, and many rich speculators made it out scott free.

How can I exploit the monetary system to garner the most currency possible before the system crashes...

And which countries aren't far wealthier? Very few are not wealthier today than in the past given all the gain in productivity and technology. The ones that are poorer are either by war or wacky job economics like Zimbabwe.

The thing is, the US faces a very high probability of becoming stagnated or even poorer in the near future given all the distortion, financial mumbo jumbo and giant debt allowed by the FED.

To part one, the important counterfactual question is whether technological progress would have advanced at the rate it did without federal spending, a lender of last resort, and large money supply growth. Productivity changes, i.e. innovation, drive long term wealth growth, sure, but what facilitates innovation?

As for part two, I basically agree that excess debt and the resultant deleveraging is one of the key factors hurting growth, although "allowed by the Fed" implies that the Fed could have stopped the financial innovations from occurring. If it could have done so, it surely would have involved a more interventionist policy. Easy money had something to do with the bubble, but not everything--even after the Fed raised interest rates mid-decade, the bubble kept going and the most egregious "innovations" became more commonplace.* It's also important to consider whether the financial innovations didn't paper over problems in the real economy (due to lost competitiveness vis a vis emerging economies in lower and middle class jobs, in part contributing to growing inequality, for example), and so coming stagnation should instead be looked at as stagnation that's been deferred a decade or two.

Anyway, if the private sector is deleveraging, I'd argue the right answer to sustain employment is public spending, and that QE has little upside and a good deal of long term risk.


*Another overlooked factor adding to the difficulty of controlling credit growth is the existence of additional endogenous sources of credit growth. Like talked about here and here

Oh, and I liked this article by Michael Pettis. It talks about the euro crisis and problems in China's economy and emphasizes "inverted balance sheets." Basically, these are procyclical balance sheets, where in good times investments compound with the good times, making everything look even better, while the opposite happens in bad times. The most obvious example is excess reliance on the real estate market, which sees rising prices during boom times, which in turn increases income, leading to further rises in real estate prices, and on; then, when recession hits, the real estate prices decline, decreasing income and (perceived) wealth in the form of real estate, which further decreases real estate prices, and on.

If you're going to justify more public spending, then you have to have a horizon. You have to have a goal. You have to have something to achieve, or else you will end up like Greece and Spain. Any government spending in the form of debt MUST a return on investment. If you cannot show that your investments provide a return, then you will lose people willing to purchase your bonds, and you'll collapse.

The stimulus didn't provide a rate of return. It didn't kick start private sector job growth. The trillion dollar deficits it precipitated have done nothing but continue - and this is unsustainable.

I want to see money spent primarily on infrastructure, maybe with some on R&D.

If markets begin to doubt our ability to pay off the debts, yes, we will have more trouble getting bond purchasers and see interest rates rise (or see an increasing portion of our bonds bought up by the government). Of course, we will never face actual default if we don't choose to; we can always "print money" to pay off our debts or pay for new deficits. But that strategy obviously has many potential costs (decreased wealth for those holding USD, market distortions such as increased commodity prices at the expense of other prices especially if wages don't rise with inflation, increased uncertainty undermining growth, etc). But that is a key difference between us and Greece or Spain: we have more options (including shifts in currency value, either through the market or policy). And especially compared to Greece (I don't know too much about Spain), we don't have such a stifling bureaucracy. The US system isn't perfect, but it's far more conducive to economic growth than the Greek system.

I will say that at the moment, markets seem pretty willing to buy American debt despite poor growth and high deficits and debt. Two interpretations come to mind right away: lack of good alternatives, and trust that the US will make good on its payments (whether or not it ever actually eliminates its debt). One implication I take from these, especially taking into account the lack of good alternatives, is that investors are scared to invest in the market and instead are putting money into the safe haven of US debt, and as a result, the USG should do the investing the rest of the economy is not doing.

And when considering sustainability of debt, keep in mind that we already have a debt base. If we allow for GDP contraction, especially in nominal terms, our debt burden will actually grow, and reducing government spending now will 99% chance reduce GDP now (as well as making the private debt issue more problematic).

The ultimate text to understand the whole mess, just perfect.

http://www.zerohedge.com/news/friday-hu ... que-relish

Submitted by Mark McHugh of Across The Street,

My Doctor’s an idiot. A few years ago, he started expressing concerns about my weight, pointing at this chart supposedly showing how much a man of my height should weigh. One glance at his stupid chart and it was clear to me that he had completely misdiagnosed my condition. There was nothing wrong with my weight, I just wasn’t tall enough. Clearly I needed to grow my way out of this. So I went home and googled “how to stimulate growth.” Once I got past the all the baldness cures and penis pumps (it’s not my bag, baby), I found hundreds of papers so incredibly boring I knew they had to be true. In no time, I was able to design and implement my own stimulus plan based on the irrefutable scientificky principles of Nobel prize winners and other people so smart they never had to do an honest day’s work in their lives. Despite the difficulty climbing stairs, I was feeling pretty good about things until my last check-up….

“Hi, Doc.”

“Hi,” he said, examining my file. He looked up, “You’ve put on twenty pounds since the last time I saw you”

“Thanks for noticing,” I beamed.

He frowned. “I remember now. You’re the guy on the diet designed to make you grow. What’s that called again?”

“The Keynesian Plan.”

“Is that the one where you eat bacon and cheese, but not vegetables?”

“No,” I replied, “But I have incorporated some elements of that plan” (I don’t like vegetables).

“And how’s this whole Keynesian thing working out?” he asked.

“I’ll admit I’m a little disappointed. I’ve only grown and inch and a half so far, but..”

“No you haven’t,” he interrupted, pointing, “You’ve just got those stupid elevator wedges in your shoes to make you look taller.”

“They’re to get me acclimated to being taller.”

“Which you’re not,” he declared. “I told you, you’re fully grown. The only thing you’ve succeeded in doing is collapsing you arches and giving yourself Type 2 Diabetes.”

“We Keynesians call things like that “unintended consequences” (I used finger-quotes to let him know it was a technical term). And trust me, Doc, I’m no happier about them than you. Can I see that height-weight chart of yours again?”

He handed me the chart. After a moment, I sighed, “Looks like I’ll have to do more QE.”

“What?”

“Quantitative eating. It’s how you stimulate growth, Doc. It’s technical.”

“Oh,” he said. “Because it sounds an awful lot like what we in the medical profession call “stuffing your fat face” (giving me finger-quotes, but in a condescending, not-at-all-helpful kind of way).”

I tried to stay calm and empathize. “Doc, it’s not your fault you haven’t been educated about Keynesian principles. They only teach it at top-notch schools like M.I.T. and Harvard. I don’t know about you, Doc, but I feel better knowing that no matter what happens on election day, the White House will be occupied by someone who attended Harvard.”

“As did the Unabomber,” he added.

“Still better than the bumblefuck medical school you went to!” I snapped.

“Johns Hopkins?” he queried, thrusting his eyebrows up.

“John Hopkins.” I corrected (Friggin’ Idiot!)

“Tell me, how are you paying for all this stimulus?”

“Food Stamps…and my ex-wife’s credit card.” (I just knew he wasn’t going to understand this part…)

He looked at me with a curious mixture of confusion and utter disgust. “What….Does she even know?”

“I’m no Dr. Bernanke, but I know one of the most important aspects of Keynesian stimulus is sticking someone else with the bill. It works out better for everyone if the victim, er , stimulus provider is unaware. She’ll be OK. I’m going to make it all up to her.”

“Really? How?”

“Look at your damn chart, Doc!” I bellowed. “I’m going to be taller than Shaq when all this stimulus kicks in! Can you say NBA contract?“

“No,” he said, unimpressed, “just over-sized casket.”

(I could tell he was about to launch into another one of his “austerity” sermons. You know, “Consume less, do more, stop spending other people’s money, blah-blah-blah.” Pinhead. Obviously Dr. Quackenstein was beyond all hope.)

“No offense Doc, but I need help from people with a better understanding of these things. Any chance you can refer me to the Mayo clinic?”

“Is that where the treat illness with mayonnaise?”

“Yes,” I said.

“No,” he said, and walked out.

As I sat down to rest in the lobby on the way back to my car, I remembered that the key ingredient to the Keynesian system is confidence and realized that what I was feeling, beside the tingling sensation in my left arm, was nothing more than the sting of rejection felt by true visionaries like Jon Corzine and the Octomom.

So if anyone asks, I’m at the grocery store.

that was a funny and insightful parable. Thank you for sharing that humorous window into your worldview.

in all seriousness, the author of that piece should be congratulated for finding an even stupider 'the economy is like...' metaphor than a family budget or a business.

yeah

Stupidier than the orwellian "debt is wealth" and "spending less is irresponsible" preached in DC?

16 trillions and only going up, babe.

yes. far stupider. Perhaps 16 trillion times stupider

and neither of those two catch phrases are Orwellian. Debt is investment. You can certainly reach a point where you take on too much of it, and some debt is more harmful than others, but debt is usually the precursor to the generation of wealth. And if right now public investment is helping to drive the economy and private investment is not prepared to pick up the slack then yes, cutting spending right now is irresponsible.

In all these cases the important thing to do is figure out where the appropriate balance is under a particular social/economic/institutional context. Catch phrases and catechisms are usually not very helpful, especially since they make it much harder to effectively evaluate the degree to which a particular strategy is working and how it might be revised.

The united states would be much better off if instead of having people holding their breath, jumping up and down, putting their fingers in their ears, and shouting in whiny, reedy voices 'government is bad and i hate it' we instead accepted the reality that government is a presence in people's lives, will always be a presence in people's lives, does a lot of good when it is championing effective policy, and worked on figuring out what makes effective policy.

I love it when you post dirty.

Oh yeah, a state whose basic expenses are 1 trillion more than they get from taxes is such an investment, creating credit out of thin air to inflate the mythical "aggregate demand" is such an investment, Solyndra was such an investment.

Here are some effective policies:

- A budget equal or less than the amount of money obtained from taxes
- No manipulation of credit that distort the whole system and create unsustained bubbles that will hurt a lot of individuals and companies in the long term
- No bureaucrats deciding who should be the winners and creating all kinds of moral hazard.

So goverment can do a lot of good when it doesn't try too hard. Top-down planning of society is full of side effects and every intervention tends to create the need of a new on in a vicious cycle, that is not whinning, that is a well knwon and studied effect.

Any system or philosophy for the creation and sustaining of community is going to have side effects, be they economic or human or environmental in nature. We argue with facts, but we choose based on our personal values more often than not. Economics is such a vast and all-encompassing subject, with so many facets, philosophies and consequences to each intricacy, that it's hard to take anybody seriously who acts as though there is a single "right answer" out there just waiting to fix everything. There's a sort of fidelity swap scenario to each decision contained within economics, and I think that plays a quiet role in the philosophies people adhere to.

This is completely contradictory. If debt is an investment, then you can never reach a point where you take on too much of it. How can all debt be an investment, but some be HARMFUL? Lastly, how is AT ALL moral for a current generation to debt spend if it's potentially RISKY to produce a generation of wealth? This is total nonsense. There's a whole continent across the Atlantic that's proving that this is total nonsense. Their debt WASN'T an investment. It was money down the shitter, and now you have once modern nations reverting back to third world status. It's sad, frankly.

What we have now IS NOT investment! There is nothing about it that's an investment. Pulling cash out of the register at the grocery market to give people food stamps isn't a fucking investment. Putting millions of people on mental disability after their 99 weeks of unemployment runs out isn't investment. Losing 40 billion dollars on GM isn't an investment. Losing billions more in failed green firms isn't investment. This is economic dislocation and it's HAMPERING our ability to recover.

How fucking long do we have to bend ever and take it up the ass while government expropriates our wealth and re-appropriates in a manner that generates wealth?

When comes to functional economic policy, government only does things that are ECONOMIC LOSERS prima facie. And it's hilarious to sit here and watch you write that the people who are capable and willing to produce in a free market, and have the integrity to accept what they equitably earn, are the whiners here. Yeah, they're the whiners. Not the half of the population on some kind of federal monetary assistance, or the millions of people working in government, or the public unions bitching that they actually have to contribute to their benefit programs, or the crony capitalists looking to plunder the tax base via credits, subsidies, loans, and grants, as opposed to actually producing and competing in a free market.

Right on, Stip. Right on.

If only Dear Leader spent MORE debt - it's investments.

Solyndra was a BAD investment. It'll happen. Not everything is successful, and when you're trying to develop new and cutting edge technology quite a bit of your investments don't pan out. Look at drug companies. Most of their research fails. Most artists signed by record companies don't make them any money. But you stick with it because if/when you're ultimately successful the payoff is huge.

I agree that greater controls over how credit is distributed/manipulated is important, but there were bubbles LONG before the Fed. In fact, the period of more robust regulation from the 40s through the 70s was, I believe, one of the most stable in modern history. The bubble cycle returned with Regan's assault on regulation.

Who should decide who the winners and losers are? The market? There is no such thing as a market that exists independent of politics. Markets have always been, and always will be, a system of rules created by people that will benefit some interests over others. Even the most basic assumptions, the privileging of capital over labor, reflect political choices rather than some kind of natural state.

most of the great technological advances of the last 80 years (shit, we can go back to the dawn of the US, which is the history I know best) are the result of government investment, financing, research, favorable laws, etc. Some of that was even *GASP* top down planning. Your facile absolutes are functionally meaningless as abstract principles. They'll apply to some cases, and not to others.