Posts Tagged ‘ambrose evans pritchard’

Relax, Central Banks Can Still Save Us (Ambrose Evans Pritchard)

August 22, 2011

I think this will be the last time I use AEP’s ruminations to get my point across.

Once again. I am not an economist. I am as far removed from academe as is possible. It is just that I find in AEP’s opinions the prevailing attitude that permeates both the wider public and the establishment and as you can imagine I have a bone to pick with both.

Relax, Central Banks Can Still Save Us

Full article with my comments interspersed:

GUIDO: The title is all you need to know. AEP places his entire faith in the banks for the well being of society. He may think Central Banks are a different animal entirely from your garden variety banks, but you and I can see that empirically, they are not. As I stated in previous posts, during the past century banks and governments in the West have successfully introduced the notion that it is the banks that create capital. Here AEP confirms that he either genuinely believes this notion to be true or he perpetuates it by design.

Even if Europe and America slide back into recession with fiscal deficits already dangerously stretched and interest rates on the floor, financial authorities still have the means to prevent a spiral into debt-deflation.

GUIDO: And this is the question our leaders still have to answer. Why is debt deflation so undesirable? When any official statistic you care to pull up shows that just in the past 40 years in the West debt has grown at a far greater clip than GDP (let alone capital formation), why is the potential reduction in debt so feared? Empirically and mathematically, considering that interest rates “are on the floor” we are already finding it difficult to service debt. Why would more debt be desirable or even a cure? If more debt was a solution than why not just keep piling it on thus obviating the need to work at all?

Whether they have nerve to use those means if necessary, and whether they can overcome deep rifts to act in unison and with overwhelming force, is another matter. It would help if China and other reserve powers stopped sniping from their clay towers. They will suffer just as badly, or worse, if the damn breaks.

Perhaps oddly, I am not as uber-bearish as some at this juncture. It is far from clear to me that the US is crashing into a second slump. While the Philly Fed’s manufacturing index for August was catastrophic at minus 30.7, it is a twitchy index.

Paul Dales at Capital Economics says it flashed false warnings in 1995 and 1998. The US Conference Board’s leading indicators are more reliable. They are signalling sluggish growth.

Andrew Haldane, the Bank of England’s financial stability chief, says global banks have raised equity by $500bn since the bubble burst. They have slashed assets by $3 trillion, and halved leverage ratios from 40:1 to a long-run average of 20:1. “UK and US banks’ cash ratios are at their highest levels for several decades,” he said.

GUIDO: Here AEP quotes Andrew Haldane but since he quotes him, we are given to understand that AEP agrees with the assessment. If memory serves (but am truly unsure and can’t be bothered to look it up because it makes no difference), I believe Andrew Haldane was in the papers some days ago advocating that banks should be allowed to take more risk to save society from implosion… which totally omits to point out that society is imploding because banks have taken risks far greater than their respective national GDPs… but such is the warped logic of the establishment… Regardless! That global banks should have raised equity since the bubble burst is the best we could have hoped for. But what remains a problem is how they have done so if they have done so at all. Last time I checked, banks were still allowed by sundry regulators to disregard a bunch of accounting rules pertaining to mark-to-market. That being so, how exactly did banks raise equity? We all know the answer to that do we not? Public funds… and considering that in the past three years whilst smack bang in the midst of a crisis of historic severity banks have distributed the largest bonuses in history… should we really take what this Haldane character is advocating seriously?

Citizens and firms on both sides of the Atlantic are running a “financial surplus” near 2.5pc of GDP, compared to a 1pc deficit five in 2006. US companies are sitting on $2 trillion in cash. The West is better cushioned this time.

GUIDO: The banks certainly are. As far as the rest of us, AEP or Haldane should check with the 45 million folks on food stamps.

There is much wreckage left, of course. A quarter of US mortgages are under water. A shadow inventory of unsold homes must still be cleared. Detox will be long and painful.

Yet it no longer makes sense to talk of a US housing bubble. The price to incomes ratio has halved to three, among the world’s lowest. Cleveland, Detroit, Cincinnati, and Atlanta are down to 2.4.

But let us concede – as a ‘Gedanken Expirement’ – that arch-bears are right to fear a full-blown global slump. Are we powerless?

The US cannot easily crank up fiscal stimulus with a deficit already at 10.8pc of GDP (IMF estimate). Much as I admire Nobel Laureate Paul Krugman – vindicated in his prediction that US 10-year bond yields would fall to historic lows – he misuses history to argue that spending on the scale of World War Two could safely lift America out of slump.

Yes, the US pushed public debt above 120pc of GDP to defeat Hitler, and Britain topped 200pc defeating Napoleon. Both countries marched on to greatness, but in each case they were the world’s paramount industrial power.

Who was going to threaten US Treasuries or the dollar in the late 1940s when Germany and Japan were under US occupation, and America accounted for half of global GDP?

Military demobilisation allowed an instant cut in the US budget deficit. Today the rot is structural, a failure to stop health care and ageing costs spiralling out of control.

GUIDO: I guess here AEP at least partly redeems himself as even though he may admire Krugman at least he can see through the “utility” of war to kick start an economy.

Have to run now. Will add to my comments later

So with fiscal policy exhausted, the burden must fall on monetary policy. Here we have barely begun to use our atomic arsenal even at zero rates. As Milton Friedman taught us – though nobody in Frankfurt — it is a fallacy to think that low rates are loose. Zero can be extremely tight.

GUIDO: AEP is advocating nagative interest rates. That would be nominally negative rates. Here AEP perpetuates the notion that saving is anathema to a healthy economy. Wealth comes about through spending thus savers and people that do not make use of debt must be punished because they are causing the implosion of the economy. So that if you are a boomer and have just retired with nary a penny to your name, you are supposed to take out even more debt to help the economy along.

That may be the case now with US Treasury yields signalling deflation and M2 velocity collapsing as it did pre-Lehman.

To those who argue that the Fed is pushing on the proverbial string, David Beckworth from the University of Texas replies that the Fed showed between 1933 and 1936 that it could deliver blistering growth of 8pc a year despite debt deleveraging in the rest of the economy.

GUIDO: Assuming that is correct, did that gambit result in a mended economy at the time?

My own view is that Ben Bernanke has strayed from classic Friedman policy, blunting the effect of his two rounds of QE. Under his doctrine of “credit easing” he has steered bond purchases to banks. This has limited effect on the quantity of money.

GUIDO: The Money Multiplier says that money has lost it’s presumed multiplier effect on the overall economy. From this point of view, even more money only debases the currency… which incidentally is exactly what is happening.

A Friedmanite would argue that Bernanke has barely tried monetary stimulus. Yet he has greatly eroded his political capital in the process, especially by arguing that the purpose of QE2 was to push up inflation and help Wall Street. These were tone deaf justifications. “Treasonous” is the verdict of Governor Rick Perry of Texas. That was to be expected, but it does complicate matters.

The eurozone obviously needs looser money. M3 broad money is stagnant and real M1 deposits have turned negative, even in Germany and Holland. Real M1 is contracting at an alarming pace in Italy. EMU growth has wilted, five countries are spinning towards default, and the banking system is seizing up. This cries out for a change of course, yet the European Central Bank is still tightening.

The ECB’s Jean-Claude Trichet said “we do not do QE”. Indeed, Germany forbids it. Not only has the Bundesbank forgotten that the Bruning deflation of 1931 destroyed Weimar – not the hyperinflation of 1923 – it is imposing its policy blunder on the whole currency bloc. The visible result of piling monetary contraction on top of fiscal contraction is to push the Club Med over the edge.

The lesson of 2008-2010 is that further QE by the Fed alone risks a dollar slide and a further global crisis. A successful monetary blitz – if required – would need joint action by all major central banks in concert, including the ECB with no ‘ifs’, ‘buts’, and hostile body language. Some $6 trillion would suffice, or 10pc of global GDP.

We are not there yet. The August squall may pass. US growth may surprise, and China may avoid a hard landing. For all our squabbling, we still live in a benign world where ships and capital move freely and leaders talk to each other.

Remember what the world looked like when Franklin Roosevelt moved into the White House in March 1933 and shut down the US banking system.

The front page of the New York Times on his first Monday in office announced: “Hitler Bloc Wins A Reich Majority, Rules Prussia”; “Japanese Push On In Fierce Fighting, China Closes Wall, Nanking Admits Defeat”; “City Scrip To Replace Currency”; “President Takes Steps Under Sweeping Law of War Time”; “Prison For Gold Hoarders”.

That was a serious situation.

End of article

GUIDO:  In his various incarnations, AEP has been a Monetarist and a Keynesian in equal measure. If not dictated by an agenda, in light of the sheer mountain of incontrovertible empirical and legal evidence that shows the major banks to be at the heart of the problem afflicting us today, AEP’s staunch belief in and support for the centrality of banks in our socio-economic construct has to be admired.

If he is not advocating purchasing sovereign debt a outrance he is pushing for monetary gimmickry that borders on the criminal like negative interest rates. It is hard to believe that professionals of the presumed caliber of AEP, be they pundits, economists or politicians, are collectively unable to draw parallels with the rise and fall of states and societies of the past. Of two things one. Either the people that could make a difference truly believe they can create their own reality, or they are deliberately intent on inflicting the greatest damage on the largest percentage of the population. The third option of course would be that our leaders are incompetent useful idiots. But if one believes in the inherent rationality of man, then one must perforce conclude that it is unlikely that so many leaders could be truly ignorant collectively and simultaneously.

One other thing. In a very recent opinion piece, AEP stated that there is an inherent difference between the fiscal characteristics that apply to individuals and those that apply to the state. AEP made the statement in order to advocate state intervention beyond parameters that would conversely be damaging to individuals. AEP’s thinking appears to go something like this. Individual economic actors have real mathematical and legal limits that they must abide to vis-a-vis making use of debt. Not so the state. And here we can only presume that AEP feels that sovereignty confers to the state the ability to suspend the laws of mathematics (by extension, we must further believe that AEP feels this to be the case particularly if the state in question is the owner of the global reserve currency).

But how can that be possible?

Any state funding must come from individual economic actors. Similarly, the ability of a state to borrow money is predicated on the ability of the members of the state to be economically active.

If economic actors for whatever reason should be unable to maintain the same level of economic activity due to, say, their inability to keep up with current debt service payments, then it is clear that state funding will suffer proportionally more. That is because not only fiscal revenue declines but the ability to sell sovereign debt decreases too.

But, apparently, AEP believes that in this case, the state should just go on to buy its own sovereign debt a outrance and everything will be put right again.

This line of thought of course omits to take into account two basic arithmetical truisms.:

First. If the state is forced to purchase its own sovereign debt because economic actors are unable to make ends meet, then incrementally adding state debt can only result on an even greater fiscal burden on the economic actor.

Second. Adding incremental debt in the absence of a corresponding increase in productive output can only result in debasement of the currency. Debasement of the currency places a further burden on economic actors by needlessly increasing the nominal price level of commodities at a time that economic actors are already struggling to service existing debt.

But I am not an economist. So, what do I know.


Ambrose Evans Pritchard’s latest…

August 8, 2011

You know how I feel about AEP.

Some interesting excerpts:

The decision to throw everything we had at the crisis after Lehman-AIG was a legitimate gamble at the time, given the near certainty of depression if shock therapy had been tried – as in 1931

In his opening salvo, AEP says that Keynesian policies have failed. Most Western countries have pushed their debt burden to the limits of safety and yet, our debt burden has not diminished.

It is too early to say the policy has failed, and failure is a false term when leaders confront cruel choices. Yet last week’s drama has brought home the truth that suffocating debt has not gone away; it has merely hopped on to the shoulders of sovereign states, threatening just as much damage.

Considering that the trajectory of debt has been demonstrably proved unsustainable for the past 40 years, one wonders why it should be puzzling that adding even more debt upon old debt should fail to diminish the overall debt burden…

I too want a column in The Telegraph.

But it gets better. Having established that overall debt burdens have worsened and are now threatening our entire socio/economic construct, AEP now advocates stretching this aberrant situation even farther in time… I am not making this up…

The US Treasury is right to disregard the verdict and keep risk weightings unchanged to avoid a cascade of forced debt sales.

In the same breath, AEP chastises the rating agencies for not having acted 6 years ago (whilst himself too was egging the farce on during the same period of time) but now wants to avoid doing what should exactly have been done 6 years ago if not earlier.

But it gets better.

If China had not distorted world trade in this fashion, the US would not be in such a mess.

Considering that the USA have been steadily devaluing the US$ over the past 40 years, and considering the WTO, and considering corporate tax legislation in the USA and considering the expedient manipulation lower of interest rates in the USA, and considering Western corporations are very happy to set up production facilities in China and sell their wares back into the West… saying that China distorts world trade is arrogant and ignorant mixed with decline-of-empire sour grapes.

But wait!! Just when you thought he might be done!

Unlike America, Europe still has stimulus cards it could play. Yet EMU politics prevents the use of these cards.

AEP just finished saying that Western countries are pushing the limits of this monetary system and our obtuse remedies have made things worse rather than better… and he goes on to lament the fact that there should be legislative obstacles to doing more of the same…

I absolutely must get me a column in The Telegraph too. Seriously; how difficult is it to dish out pablum and continuously contradict yourself?

Not content with having slagged China, AEP goes on to slag Germany.

“Germany still fails to understand the logic of monetary union: that (Teutonic) surplus states have a duty to boost demand in order to offset austerity in (Latin) deficit states until equilibrium is restored. Instead, Berlin is imposing a 1930s Gold Standard formula of deflation decrees through the EU machinery, with the burden of adjustment falling on debtor states. ”

Besides the fact that AEP claims there to be a logic in monetary union he also advocates that it is not those that have taken advantage of the system that should now pay the consequences. If the banks ever had any shills, AEP certainly qualifies as a high ranking officer in the shill army.

We may learn over coming days whether the European Central Bank is at least willing to stop the bond crisis in Italy and Spain from spiralling out of control.

The sheer inability of Mr. AEP to observe reality is staggering. I’m not an economist but if the ECB now has to bail out Italy it is because it has singularly failed staunch crisis in Greece, Ireland and Portugal. Considering that the financial crisis in these three countries is still smoldering and that countries like France are now about to lose their AAA at a time when the US has already lost theirs, why would throwing more money at Italy stabilize anything? And, anyway, didn’t AEP just say that we’ve been unable to diminish our debt burdens and that is a bad thing? So, which is it Mr. AEP?


The search for a scapegoat has begun.” claims AEP. All I can say is: pot, kettle. Remember what you just said about China?

In closing, AEP says:

Yet the Bank for International Settlements is surely right that we are pushing ever closer to the limits of a model that relies on artificial stimulus to keep stealing extra prosperity from the future. There is ever less to steal.”

What is that? Is it contrition? Is it resignation? Is it recognition of the fact that our leaders deliberately pursue aberrant and regressive policies?

Is AEP suffering from a psychological condition?

Ambrose Evans Pritchard is back…

July 11, 2011

Love him or hate him, AEP is one of the most read economics columnists in the UK and around the English speaking world.

AEP was off for a while and he is now back proffering his own solutions for a crisis that is daily becoming increasingly lethal for sovereigns and people alike (but not for the banks however).

I read AEP because many do and many reference him and because despite the fact I don’t agree with his solutions, I do find the data he digs out useful.

And so it is that on this torridly hot day in Amman I perused AEP’s column where he discusses the woes of Greece, Spain and Italy and of the world in general and, in guise of closing argument to an otherwise factual article, AEP suggests that (emphasis added):

A full-throttle global recovery would mitigate this [ed. no kidding]; a half-decade of super-easy money by the ECB to weaken the overvalued euro and stave off debt deflation would help, too.”

… ??? … (insert stupefied disbelief emoticon here)

Just because politicians and economists of AEP’s variety believe that easy money can stimulate an economy, interest rates in the West  have been on an inexorable march towards oblivion for the best part of 30 years. Yet, today we find ourselves in the predicament we are in…  What makes AEP or anyone else think that even more of the same could now magically help us come out of this shit hole?

Read far and wide though he may be, AEP certainly lacks the ability to observe what is empirically glaring for anyone that wants to see it:

FRED Graph

Germany is asking the bondholders share the pain

November 25, 2010

And that is exactly the lawful, moral and decent thing to do.

From my favorite pinata Ambrose Evans Pritchard (full text with my comments intersperesed throughout):

German plans to push for bondholder haircuts in Europe as soon as next year have triggered a surge in default risk on European bank debt and set off further flight from Spanish, Portuguese and Irish bonds.

“Credit default swaps on Spanish five-year bonds surged to an all-time high of 312 basis points, and reached 510 on Portuguese bonds, after Frankfurter Allgemeine cited a confidential report by the German finance ministry suggesting that Berlin aims to confront creditors with the risk of serious losses two years earlier than feared.

The Markit iTraxx Senior Financials index – the “fear gauge” for banks – jumped to a reading of 158.5, the highest since the mini-panic in the late spring.

“There is a major fear of contagion in the eurozone,” said Gavan Nolan, chief economist at Markit. “If Portugal stays beyond the 500 level for long, that is when the pressure starts to ratchet up, as we saw in Ireland. This whole scenario of burden-sharing for bondholders is scaring people. The plans have been changed so many times, investors don’t know what to believe anymore and are sceptical about promises that senior debt won’t be touched.”

The German document said “collective action clauses” (CAC) should be introduced into all EMU bonds issued from next year. These clauses open the way for creditor haircuts in cases where countries need a rescue.

The planned date is even sooner than the 2013 target announced by EU leaders in October’s summit, which itself came as a nasty shock to the bond markets. It gives the eurozone’s struggling debtors far less time to clear up their public finances. The plans will be aired at the EU summit in December.

Elena Salgado, Spain’s finance minister, warned Germany that the proposal risked making matters worse at a delicate moment. “We don’t think this idea is quite appropriate right now, including after 2013,” she said.

GR: Elena Salgado fears for her position. That is all. The delicate moment she refers to is nothing but public anger slowly rising which, from a political point of view, means that a politician’s position is at stake. Ms. Salgado obviously finds that shutting off the spigot of fiat money simply means she, and her party along with her, will be booted out of power. There are absolutely no other considerations in her line of thinking; certainly there are no fiduciary duty considerations.

Mrs Salgado said there was “an abyss” separating her country from Ireland and Greece. “We have a solid financial sector. Austerity and reforms are producing exactly the results we forecast,” she said, insisting that the country was the victim of a “speculative attack”.

However, iFlow data from the Bank of New York Mellon shows a major withdrawal of foreign funds from Spanish debt markets, mostly coming from “real money” investors. “The flows look rather similar to what we saw in Greece,” said Neil Mellor, the bank’s currency strategist.

GR: I had taken the other side of the bet on this issue a few weeks back. Had the Spanish prime minister taken the bet then, once again, I would be a rich man.

Portugal had the added strain on Wednesday of a near total shutdown of its airports, harbours, trains and buses as unions launched their first general strike in 22 years, protesting against the latest austerity budget and wage cuts of 5pc for public workers.

“Sacrifices by workers is not the way out of the crisis,” said Manuel Carvalho da Silva, of Portugal’s CGTP union, echoing a refrain now heard in a string of European countries.

Jürgen Michels from Citigroup said Germany’s haircut proposals would make it much harder for struggling Club Med states to raise money, risking a self-fulfilling crisis. “Portugal and Spain would be probably forced to tap the current European Financial Stability Facility, which could bring the facility to its limit and even exceed it,” he warned.

Mr Michels said the results would be so destructive that Germany is unlikely to win EU backing for the idea.

However, Chancellor Angela Merkel has already announced that she will “not back down” on demands for creditor pain. In an odd statement this week she said investors had made money “speculating on the bankruptcy of countries” and must now share the burden of rescue costs.

Critics say Mrs Merkel seems unwilling to acknowledge the difference between two vastly different types of players: hedge funds who are “short” eurozone debt and therefore stand to benefit from her policy; and the pension funds, life insurers and savers (many of them German) who bought southern European and Irish debt in good faith and now stand to lose.

GR: Pension funds and life insurers would not have purchased sovereign debt had it not been falsly graded investment grade by the rating agencies. Rating agencies that are working for and are sponsored by the banks I might add. So, having already been duped (very often willingly because of political favor) over the years, now pension and insurance funds should throw even more money after bad? This is a problem created by the politicians with the assistance of the bankers. It is time we cut the funds off to them. Whatever is lost is lost anyway. We should not give them even more.

There is confusion in the markets over how different types of debt will be treated. The Irish government has already enforced an 80pc haircut on the junior debt of Anglo Irish Bank but insists that senior debt is sacrosanct. That guarantee is now worthless since Fianna Fail is certain to lose the election in January.

GR: From the legal point of view there is nothing sacrosanct about senior debt. Quite the contrary. That’s the role they are suppose to play by law; i.e. take the losses. Senior bond holders reap the profits when things go well. They should shoulders the losses when things don’t go well.

Opposition leaders have not clarified how they will handle the issue. However, it is becoming ever harder to explain to the Irish people why they should suffer austerity in order to ensure that foreign holders of damaged Irish bank debt should lose nothing. The country’s Labour Party already favours burden-sharing. The concern is that once Ireland cracks on senior debt, the dam will break across Europe.

Greg Gibbs from RBS said the European Central Bank (ECB) had helped cause the latest eurozone eruption by draining liquidity too soon and signalling that it aimed to end the “addiction” of struggling Irish and Club Med banks to its cheap funding window sooner rather than later.

“This tough stance is reigniting a eurozone debt crisis. The ECB needs to rethink its plans,” he said. The RBS team said the central bank should dramatically increase its purchase of eurozone debt, especially Spanish debt, starting with €100bn sovereign and corporate bonds.

José Luis Martínez Campuzano, Citigroup’s economist in Spain, also faulted the ECB for letting matters get out of hand. “We have a situation where bodies that should be playing a key role are sitting on the sidelines repeating messages that have little to do with reality and the true risks ahead. That is the case with the ECB,” he said.

However, it is unclear whether the ECB has the firepower – or the legal mandate – to carry out the sort of bond purchases seen in the US, where the US government stands behind the Federal Reserve.”

GR: What is clear whether in the US or in Europe is that monetary policy has lost traction. It has been gradually losing traction over many years but it has now pretty much reached the point of least effect if at all. Doing more of the same in the clear absence of a demand driver anywhere in the world only serves to obliterate the currency.

A (unwitting) mention of dictatroship…?

November 1, 2010

Our weekly dose of Ambrose Evans Pritchard is, as usual, interesting. But this time, it is interesting in unexpected ways.

Two things jump out. The first and the most stunning for reasons other than economics is this (emphasis added as a hint): “These were the terms imposed by Germany at Friday’s EU summit as the Quid Pro Quo for the creation of a permanent rescue fund in 2013. A [EU] treaty change will be rammed through under Article 48 of the Lisbon Treaty, a trick that circumvents the need for full ratification. Eurosceptics can feel vindicated in warning this “escalator” clause would soon be exploited for unchecked treaty-creep.”

If there ever were any doubts as to what the Lisbon Treaty is, the above should put those to rest. The Lisbon Treaty is the single most dangerous piece of fascist autocratic legislation aimed at the concentration of executive power that has been “passed” on mainland Europe since 1930s Germany.

But we all too numb yet (or still) to realize what is happening.

The other thing that jumped out at me from AEP’s piece today is his comment that: “Chancellor Merkel is ultimately correct. A mechanism for sovereign defaults is entirely healthy. Had it been in place long ago, EMU would have been stronger. The proper timing for this was at the Maastricht Treaty, or Amsterdam, or at the latest Nice, but in those days the EU elites were still arrogantly dismissive about the implications of a currency union. To wait until now borders on careless.”

That’s a bit of a departure for AEP whom till very recently advocated a (not entirely understood by this writer) mix of fiscal austerity with massive stimulus.

You know where I stand.

We’re hurtling towards a world war that is entirely engineered by our leaders as a way to get out of their responsibility for having aided and abetted the arbitrary and unilateral imposition of a monetary system that is limited mathematically and that, in its ending phase, is inherently destructive but that in the intervening period ensures an albeit diminishing degree of financial independence to the politicians that are willing to offer the most recklessly costly programs to the electorate.

War by 2012 / 2015

Krugman & Evans Pritchard

September 7, 2010

Here are typical and recurrent thoughts from two of the more prominent advocates of the preeminence of government in their unwavering belief that what is needed is not just more government intervention but “neutron bomb” more in the form of unlimited government spending.

I am placing this post online with links to the relevant articles and related excerpts as well as with the empirical evidence that shows that both Krugman (Nobel laureate) and Evans Pritchard are demonstrably wrong. No PhDs required to look at the charts and draw conclusions.

I will provide commentary at a later stage just because Krugman’s opinion deserves it. I just need to gather my thoughts so I won’t come across as some deranged hysterical crank.

(It is now later in the day since I posted this blog and am now going add my comments at the bottom of Krugman’s article excerpts)

“[…] it’s both instructive and discouraging to look at the state of America circa 1938 — instructive because the nature of the recovery that followed refutes the arguments dominating today’s public debate, discouraging because it’s hard to see anything like the miracle of the 1940s happening again. Now, we weren’t supposed to find ourselves replaying the late 1930s. President Obama’s economists promised not to repeat the mistakes of 1937, when F.D.R. pulled back fiscal stimulus too soon. But by making his program too small and too short-lived, Mr. Obama did just that: the stimulus raised growth while it lasted, but it made only a small dent in unemployment — and now it’s fading out. […] The story of 1937, of F.D.R.’s disastrous decision to heed those who said that it was time to slash the deficit, is well known. What’s less well known is the extent to which the public drew the wrong conclusions from the recession that followed: far from calling for a resumption of New Deal programs, voters lost faith in fiscal expansion. […]

Then came the war.

From an economic point of view World War II was, above all, a burst of deficit-financed government spending, on a scale that would never have been approved otherwise. […] But guess what? Deficit spending created an economic boom — and the boom laid the foundation for long-run prosperity. Overall debt in the economy — public plus private — actually fell as a percentage of G.D.P., thanks to economic growth and, yes, some inflation, which reduced the real value of outstanding debts. And after the war, thanks to the improved financial position of the private sector, the economy was able to thrive without continuing deficits. […] The economic moral is clear: when the economy is deeply depressed, the usual rules don’t apply. Austerity is self-defeating: when everyone tries to pay down debt at the same time, the result is depression and deflation, and debt problems grow even worse. And conversely, it is possible — indeed, necessary — for the nation as a whole to spend its way out of debt: a temporary surge of deficit spending, on a sufficient scale, can cure problems brought on by past excesses. […]

Get a grip, the lot of you. While there is no easy way out for the US after stealing so much prosperity from the future through debt, there is no excuse for this dead-end defeatism. Clearly, the ‘canonical New Keynesian’ model that holds such sway on America’s elites is intellectually exhausted.

The Fed has an arsenal of neutron bombs if it wants to use them, and uses them correctly. It can engage in “monetary policy a l’outrance” as Maynard Keynes propsed in his Treatise on Money in 1930, before he lost his way with the General Theory.

Blitz the market with bond purchases, but do so outside the banking system by buying from insurers, pension funds, and the public.

Guido’s comments posted some time after this blog went online.

I have observations at several levels of Mr. Krugman’s opinion. For openers, and considering my contention, I find it interesting Mr. Krugman should mention WWII and the similarities of the socio/economic/political juncture of today. But I find it appalling that he should think that “[…]it’s hard to see anything like the miracle of the 1940s happening again.” So the global devastation and loss of life brought about by war during the 40s was a miracle? If Mr. Krugman had any degree of attachment to reality feeble though it may have been, he now has obviously totally lost it and is adrift in a universe of purely subjective values and aberrant half truths. Just for starters, how can human action born of human intention ever come to be classified as a miracle? And how is the loss of untold millions human lives and the concomitant devastation of the land and cities a miracle?

I’m not a religious person. But; my God. Somebody stop this man.

Mr. Krugman goes on to use WWII as a means to leverage his argument. Essentially, Mr. K feels that compared to the 40s, government today did not spend enough money. Mr. K tells us that all would be well if only Mr. Obama just let rip and instead of pfaffing about with spending Trillions in the low single digits as he’s done to date, he took a page out of the WWII playbook and threw Trillions in the range of twice GDP at the economy – i.e. $30Trillions or thereabouts.

Mr. K is either blissfully unaware or is purposely omitting to remark the concomitant circumstances that went with WWII US deficit spending. That is; the male population was enlisted and sent to the front, women were hired in industry and commerce, and civilian industry was turned to war industry producing ships, planes, tanks, guns and ammo – production that was immediately absorbed and spent resulting not only in total capacity utilization at home but also bringing about the destruction of global industrial capacity. In the meantime, war was wasting men, women and children and devastating agricultural land and fishing grounds around the world.

If you are a reader of this blog, you will know that today there is sufficient evidence to prove that the US administration of the time was aware of the Japanese plan to attack Pearl Harbor. The reason the attack was allowed to proceed is because at the time the USA were still reeling from the effects of the Great Depression with no obvious way to overcome the ramifications of the debt overhang that afflicted the economy since 1929. Something was needed to once again re-ignite inflation. War was just the ticket not so much because it would galvanize local markets and industry but because by obliterating the rest of the world’s industrial capacity and infrastructure, the USA emerged as the de facto single industrial power left standing. As such, the USA were once again free to expand the credit markets because the new inflation could now be pushed into new markets in Europe and in Asia. Thus US industry and credit markets were jump started as the US began to supply the rest of the world with everything from the most basic necessities to the Marshall Plan, technology, armaments and consumer goods.

That is the empirical truth of WWII.

Krugman either naively or intentionally omits to indicate the circumstance that allowed the USA to go ballistic on government spending. Even worse, Mr. Krugman omits to say that the excess credit creation of the 40s and the 50s, led us directly to 1970 and the abrogation of Bretton Woods. WWII deficit spending did not solve a problem. It just postponed it and made it bigger and much more dangerous. As our leaders abrogated Bretton Woods and as Nixon stopped gold convertibility by pushing the US$ as reserve currency unto all other countries, the problem was postponed yet again and made much bigger. The creation of the Euro and the push for globalization was just more of the same.

Today, the Bank of International Settlements estimates global outstanding obligations at US$600Trillion – that’s Six Hundred Trillion US Dollars. By comparison, global GDP is hovering in the range of US$50Trillion and dropping very fast.

The following charts highlight the reason Mr. Krugman is demonstrably wrong. Either he is wrong or he is on a mission.

However, considering that our governments at the behest of a restricted band of banks have deliberately imposed a fiat monetary system upon society, the inescapable truth is that government must always and everywhere preach more debt and more spending regardless the juncture. In this respect, government needs minions to express “learned” opinions. Mr. Krugman Noble laureate that he is, is a government propagandist. There cannot be any other explanation to what is clearly laid out in the charts below.


Graph: M2 Money Stock

Graph: Federal Government Debt: Total Public Debt

M3 is no longer published. In terms of official data, we have to make do with M2 but the message does not change. The year-on-year growth of money supply chugs along in the double digits…. Since 1980 for example, money supply increased by well over 1000%

FRED Graph
In the meantime, GDP only really chugs along barely at 3% in a good year (we haven’t seen 3% in a long time) with some very occasional peaks at above 4%. Since 1980 for example, GDP has progressed by 100% – i.e. it has doubled. Compare that with the progression of money supply above or the progression of Federal Debt.
So where, you may ask, is the problem with that? The problem is illustrated below –


The problem is in your standard of living. Do you ever wonder why till the 50s families could make a decent living on one salary? Do you ever wonder why you need debt not only to splurge on a little extra but also for your daily living requirements? Do you ever wonder why prices seem to increase relentlessly but your ability to maintain your life style is predicated on increasing your debt load?

The final act

May 31, 2010

As the final act of the fiat monetary logic plays out, society, and politicians first amongst all, become preoccupied with assigning blame to everyone and everything else but themselves.

These days I only quickly scan press articles not because I have no time but because what politicians, officials and pundits have to say is a foregone conclusion. One of the more popular commentators I monitor is Ambrose Evans Pritchard of the Daily Telegraph and one of his latest comments illustrates perfectly the foregone conclusion character of what he has to say. But more interestingly, what is more of a foregone conclusion is the hand wringing and the bewildered response of the commentators to the article.

Of course, if you grasp the logic enshrined in the fiat monetary logic, you also realize what, in fact, is the ultimate cause of any crisis. So that despite the fact that deliberately aberrant government policies are the root cause of crisis, society is not entirely free of blame.

It is true that government deliberately, unilaterally and arbitrarily imposes the monetary system thus providing well defined boundaries for the socio/economic/cultural development of society. It is also true that in order for the arbitrary choice of a fiat monetary system to have the desired effect on the development of society, government must ensure that the system is not questioned. Thus, ultimately, government is at the very least responsible for encouraging a type of education that omits studying the system. So, yes, government is the ultimate cause of crisis.

That being said, Western society as represented by individuals like you and me, must at the very least share the responsibility for the proximate causes of crisis. That is, society must share the responsibility for letting itself fall into the trap that “democracy” inherently sets.

Let me explain. Allow me to simplify the concept of democracy as the concept whereby each individual citizen has a say in shaping socio/economic policy. Society expresses its desires through representatives it elects to carry its message; these are the politicians. If follows that in order for politicians to acquire power they must promise desirable outcomes to ever larger segments of the population. That is the principle of democracy; i.e. the desire of the many will have the upper hand over the desires of the few. Thus successful politicians must secure large voting bases. Ergo, the democratic political process is a system of quid pro quo – I promise to give you benefits if you give me your vote.

From the above, it is clear that the democratic political process is predicated on perpetually increasing spending. That’s because no politician can ever hope to be elected to office by advocating cutting programs that are already established. So that by maintaining previously established expenditure and needing to promise new programs still, expenditure can never decrease.

And that’s where the utility of fiat money comes into play. Unlike value based money, in a fiat monetary system there are no temporal or capital constraints to expanding the monetary base so that state spending can be virtually instant and apparently infinite…. apparently, but not actually.

Fiat money appears to have no intrinsic cost thus it is thought to be free by politicians of all stripes. Of course, just like there are no free lunches, fiat money too has a cost. But, the cost of fiat money is a value that is accumulated and pushed forward in time. This cost is known as “inflation”.

If you follow this blog you will know that inflation is a dynamic that is exponential in character thus it is limited mathematically.

Hence the limit of the fiat monetary system.

Hence the necessity by government to maintain inflation on a positive trajectory come hell or high water.

Hence the reason government has a vested interest in at first tolerating but gradually encouraging and finally colluding if not perpetrating illegal practices.

Hence the reason government gradually becomes the largest actor in the economy.

Hence the reason that as the inflationary dynamic reaches its logical conclusion, nominal profits gradually concentrate in the finance industry.

Hence the reason that as the inflationary dynamic reaches its logical conclusion, the finance industry generates prodigious amounts of exotic instruments.

But lets take a break.

Assuming all I am saying is correct, what, you may ask, is the solution to the mess we find ourselves in?

There are multiple facets to this answer.

In the first place, we should not be where we are. Fiat money is actually a brilliant construct if only politicians could let the system follow its natural rhythm instead of constantly and artificially short circuiting the system’s natural inbuilt circuit breakers. But, then again, in a political system characterized by democratic features, a fiat monetary system will not and cannot be allowed to reset spontaneously. That’s because politics is inherently expedient thus as soon as the system threatens to reset (corporate bankruptcies) politicians will step-in offering assistance in a bid to garner votes (bailout and/or subsidies). Hence, fiat money in a democratic environment guarantees that inflation will run far in excess of underlying economic development forever… or, at least, for as long as inflation has a modicum of traction on the economy.

But as shown by this graph, our monetary system has lost traction.

So, we are where we are. Great. What now.

At least in theory, if both society and politicians could swallow their pride and admit to wrong doing, then we should be all right. We’d take our lumps for a few years but we’d be ok.

But other than in Iceland, nobody in the West is going to admit any wrong doing…

So the people will strike and rise up in anger and the politicians will be busy looking (creating) scape goats…

When enough people will rise up and things become messy and as the politicians begin feel power slip through their fingers, we’ll have us an appropriately evil enemy ready to focus the attention of the plebs… at that point, we’ll be ready to march on another military adventure… a military adventure this one that will employ large swathes of our unemployed…

Tic-toc, tic-toc… 2013/2015

World Bank warns of deflation spiral

July 16, 2009

For someone that takes pride in seeing things that others can’t, this piece of news is unsettling. It is unsettling on many fronts. First, because the one rule of thumb I follow is that whatever an official entity declares, the opposite is likely true. So it is unsettling that an official should be allowed to make remarks that pertain to the true state of the economy because it now shakes the foundations of my theory. Furthermore, it is unsettling because of the specific declaration made by this official that points to war; namely, I am referring to this pearl:

” Significant excess capacity has been built up and unless this issue is addressed, we will face a deflationary spiral and the crisis will become protracted

If you have read any of my rants on this blog, you are aware that excess industrial capacity is the logical consequence of the adoption of a fiat monetary system. By extension, you are also aware that excess industrial capacity can only be maintained for as long as the debt burden can be expanded. Therefore, you are aware that once the debt burden can no longer be expanded, then pricing power is lost; thus earning streams are compromised, thus unemployment rises, thus further impinging revenue streams thus, eventually, compromising government revenues (taxes). Once government is bankrupt and significant swathes of the population are out of a job and potentially hungry, any self respecting government will resort to the only honorable thing to do in these circumstances… they’ll start a war.

Anyway, the only way excess industrial capacity can be taken off line is by destroying it… and there is only one way to destroy industrial capacity.

Got bullion?

Notice however the inanity of the statement towards the bottom half of the article. Monetary authorities are being chastized because they have no indulged in sufficient quantitative easing.

Excess industrial capacity comes about exactly because governments induce much greater quantities of credit and money into the system in the first place. So, if excess industrial capacity is now identified as the problem, then what is the point of inducing even more money and credit into the system?

Which, incidentally, was exactly GM’s problem for the past decade. GM became such a bloated zombie company to the point that they were losing an average of US$2000 on every single vehicle they sold…. Which begged the question. Why would GM want to sell more vehicles at all????