Posts Tagged ‘stimulus’

The temperature is rising…

September 14, 2010

Nothing new to readers of this blog…

And then we have this from the man that not only single-handedly made the fiscal situation worse but the very man that blackmailed congress by painting an outcome of fire and brimstone if they did not approve the $700Billion he was asking for…

And from my favorite fiat money piñata…

… and although in this article it is not him speaking, we know he endorses the idea set forth by “Mr Blanchard called for extra monetary stimulus as the first line of defence if “downside risks to growth materialise”, but said authorities should not rule out another fiscal boost, despite debt worries. “If fiscal stimulus helps avoid structural unemployment, it may actually pay for itself,” he said.

I know I keep going over the same ground over and over again. But that’s because main stream politicians and economists drone-on about the same thing over and over again. Everybody and their cousin wants stimulus of one variety or another.

As far as I am concerned, I just wonder why nobody that matters has noticed that this time around doing more of the same may actually be counterproductive. Every single field of human endeavor is subject to the study of efficiency. Whether in science or agriculture or engineering, efficiency is a key parameter that is sliced, diced, studied and evaluated at all levels. So why shouldn’t the same degree of scrutiny apply to the monetary system? Why is it that main stream politicians and economists cannot see that money too conforms to parameters of efficiency?

In 100 hundred years since a select number of banks imposed our modern monetary system, the efficiency of money has been steadily declining. Today, in the absence of new markets or new currencies that could be absorbed in the US$ monetary system, creating and spending more money no longer gets us the desired result. The metrics are there and are available for anyone that wants to see:

Graph: M1 Money Multiplier

At a time when just about every single sovereign nation has spent all the money they have plus all the money they don’t have and will not have for decades to come, simple arithmetic says that we should try another tack.

But of course. In a democracy, spending cuts are politically untenable. Particularly when governments have played fast and loose with public finances for decades so that today larcenous and criminal strategies are necessary just to maintain the appearance of normality:

Today, the US Treasury department disclosed that its August deficit was a slightly better than expected $90.5 billion, compared to $103.6 billion in the year prior. What received less fanfare was that the comparable increase in debt in the month of August 2010 was $212 billion, compared to $143.6 billion a year earlier. In other words, more than twice the the deficit had to be issued in the month of August.

So, what do you think our politicians will do this time around?

You know what I think: 2013/2015 latest…

Prepare accordingly.

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?

Jus’ check’n….

June 14, 2010

So how’s that stimulus working out then?

Romer, Bernstein and Krugman – January 2009

Today we know that unemployment was not reduced. In all fairness, Krugman did comment that the stimulus as proposed by Romer and Bernstein was “too weak”; the implication being that he advocated much greater stimulus.,8599,1910208,00.html (this is a year old article but things have not improved since anyway)

What baffles me is how Mr. Krugman and any of the gaggle of pundits, economists and politicians can clamor for stimulus when stimulus has been the hallmark of the economy for at least the past thirty years.

I hear you asking what I am talking about.

When government spending has progressed from about $2Trillion in 1980 to about $12Trillion today but GDP has progressed from about $6Trillion in 1980 to $14Trillion today, that, in my book, is pretty aggressive stimulus. In percentage terms, since 1980 government spending has progressed by over 1000% whereas GDP has barely progressed by 100%. (The figures are actually much worse as I only take into account Federal debt as outlined in the links below).

And Krugman today is looking for even more stimulus.

Somebody, somewhere must at some point realize the absurdity of stimulating an already grossly over stimulated economy… ???… This next graph depicts the reason why stimulus may no longer have the desired effect:

Inflation is a dynamic that conforms to the law of diminishing returns. You can see what that means in the above graph. Considering the various cash infusions and guarantees that have totaled several Trillion Dollars in the past two years, the money multiplier is telling you that the presumed stimulant has lost traction. To call for more stimulant at this point, it seems to me, is the definition of insanity.

I like to think Germany has realized the predicament we are in and is putting its foot down. Iceland has too and its president has sided with the people to tell the banks to go fudge cake.

Men go mad in herds but come to their senses one by one.

Gold seems to be the only refuge for the time being. At least till more Icelands and Germanys will hold sway in international politics and economics.

How can stimulus not show up in official data? (another sneaky pete – zero hedge)

January 16, 2010

No need to rehash all the unorthodox, thus untested, plans our monetary authorities and our politicians have devised and foisted upon us in the past 12 months. Here is something very recent that I am sure all but a handful of people have heard about.

Hat tip to Zero Hedge for their vigilance.

How can anyone think that giving $30Billion to Fannie or Freddie is not a cost to the taxpayer is beyond me.  Considering that Fannie and Freddie have already received public funds to the tune of several hundred Billions (with a B and that is “hundreds” as in well over 300) it is clear the taxpayer has already paid an obscene amount. But beyond anything else, Fannie and Freddie are entities that have already collapsed financially. Fannie, I will remind you, is that entity that not two years after the Enron debacle was unable to publish its books for a period of 18 months!!?? 18 months in order to be able to put together accounting books that would look acceptable??? And this from an entity that by itself propped up well over a third of the entire US housing market??? And nobody thought something may be up???

But even if nobody thought something may be up, purely from the point of view that this one company was the main pillar of the several Trillion dollars real estate market, one would think that the accounting regulatory authorities may have taken a keener interest in how they did what they did?

All the above not withstanding, I still cannot understand why anyone should want to return to a rate of inflation resembling anything like we’ve experienced in the recent past. I can see how it is vital for government to re-ignite inflation but for the life of me I cannot understand how/why the general public has not woken up to this con yet.

Why stimulus is nonsense II

August 10, 2009

As I explain here, stimulus money is taxpayer’s money; i.e. money that should be spent on road or electric grid maintenance for example or on schools and hospitals improvement.

If a government decides to give this money to bail out a company because it is thought that said company is too big or too important to fail, the following happens:

Some jobs in said company will be preserved.


In a first instance, this money can no longer be used to improve the life of ALL citizens. This money that was supposed to benefit society and employ companies and people to improve infrastructure across the country now goes to benefit only a  few workers of one company. So, the entirety of society pitches in to save a few thousand jobs in one company.

In a second instance, by arbitrarily giving money to one company, government picks a favorite thereby punishing all other companies in the same sector. So now, companies that might benefit from the disappearance of a competitor are instead forced to confront a competitor that is suddenly much better capitalized. Thus, those companies that were doing well and could have done better if a competitor failed will see their trade diminish whereas those companies that might have been just getting by and would have become comfortably profitable if the competitor disappeared, will now be pushed into default. So, we save many jobs in one company but we force many other companies to shed many more workers.

In a third instance, by maintaining in business a company that should have rightly disappeared, government fosters excess productive capacity thereby compromising pricing power. Lack of pricing power brings about diminished earnings for all companies in the sector thus feeding unemployment, thus diminishing pricing power even further.

Fourthly, if a company is going bankrupt, there must be a very valid reason. Therefore, what is the sense in spending money trying to turn around something that is clearly not working? Why not let the broken fail and, if anything should be supported, support and protect those companies that are healthy and profitable. So some jobs will be lost in the failed company but healthy companies can pick up part of the slack contributing to a healthier economy all around.

Deflation at work

August 4, 2009

As I point out here and in many other essays before it, once deflation sets in, government revenue collapses. The trouble with this situation is that in deflation gov revenue collapses right at the time that social costs are increasing; i.e. unemployment. In turn, this means that social expenditure must be reduced at first but then, eventually, discontinued in an attempt to maintain those government disbursements that are perceived directly by the public; i.e. pensions. But, if I am correct and this is the end of a secular inflationary cycle, eventually even pensions will not be maintained as promised.

As a side note, those of you that may believe in the logic of stimulus, you should think again. In the past thirty years in the West, money and debt creation has progressed at an average rate of 10% year on year with peaks at 20%. However, the money multiplier has declined inversely and is currently below 1. This means that although we’ve aggressively, consistently, relentlessly and pervasively stimulated the economy over thirty years, each additional new Dollar created has a diminishing effect on GDP expansion. Sure enough, despite accelerating money and credit creation at an average of 10% year on year, GDP progression only averaged around 4% year on year over the same period.

So now, as the money multiplier is below 1, more money creation and Quantitative Easing of gargantuan proportions will not help in reviving demand or GDP. How could it? We’ve been at it for thirty years having to create ever greater amounts of money and credit and still the money multiplier has been steadily declining. So, now that it is finally below 1, how can anyone think that even more money creation can bring it back up? However, what stimulus will do is first place a fiscal burden of biblical proportions on the economies of the West and, in addition, it will necessarily take away from social spending right at the time that social costs are rising.

Federal Tax Revenues plummeting;_ylt=AoMATEJ21gb_mVpg_hux5Wh2wPIE;_ylu=X3oDMTJta2QxNG1sBGFzc2V0A2FwLzIwMDkwODA0L3VzX3BsdW1tZXRpbmdfdGF4ZXMEY3BvcwM2BHBvcwM2BHNlYwN5bl90b3Bfc3RvcmllcwRzbGsDYXBlbnRlcnByaXNl

Postal service considers closings, consolidation;_ylt=AokEaBJaqDJKzdtExb1ofvT9xg8F;_ylu=X3oDMTJsMWxrY3VpBGFzc2V0A2FwLzIwMDkwODA0L3VzX3Bvc3RhbF9jbG9zaW5ncwRjcG9zAzUEcG9zAzUEc2VjA3luX3RvcF9zdG9yaWVzBHNsawNwb3N0YWxzZXJ2aWM-

Why stimulus is nonsense

August 2, 2009

At least in the West, government is a human construct that is supposed to be by the people for the people.

Government is not a for profit entity. Government is supposed to collect money from society and allocate these sums to facilitate the socio economic development of its members.

If a government spends in excess of what it collects in taxes, it must make up the shortfall with debt. Taking on debt, means that government must also pay interest. In order to pay interest, government must collect more taxes (inheritance tax, stamp duties, VAT, income tax…).

As I explain here, society needs a monetary system. Short of going back to barter, there are only two choices: a monetary system based on some sort of value that is directly related to the economy or a monetary system that is based on nothing other than political will.

In the modern era since the turn of the 20th century, Western governments have gradually and arbitrarily moved towards the political monetary system known as “fiat”. The USA went on a fiat monetary system in 1913, Europe in 1970 and then all other countries in the world followed suit. Today, all countries in the world are on a US Dollar based fiat monetary system. Note that fiat monetary systems have been tried in the past and all, inevitably, collapsed in a final glorious conflagration of debt (i.e. the French Assignats, the American Continentals, the Argentine Peso…)

Thus, today all world currencies are interconnected which means that what happens in the USA and what the USA does domestically or overseas affects us all.

So then, why is stimulus nonsense?

Stimulus is nonsense because in order for the government to spend that money, the sums must first be extracted from the economy; or the sums must be borrowed first and then extracted from the economy; … which means that however you slice it the sums must be extracted from the economy sooner or later.

In the particular case of the cash-for-clunkers stunt, pundits and officials are all in a tizzy as to the purported “success” of the scheme. So much so that they now wish to double the effort with another Billion Dollars. This of course begs the question: why not extend the scheme to clothes, windows, bicycles, TVs or, for that matter and since it is the largest national employer, the hotel and restaurant industry or any other industry you care to think of. If cash for clunkers is so effective at securing economic growth, then lets give money to every single man, woman and child to buy what they please. Come to that, why limit it to 2Billion Dollars? Heck, let’s make it 15Billion; no, wait! Let’s make it 50Billions so everyone can become at least a millionaire; that should get things going nicely me thinks.

Advocates of stimulus (mostly Keynesians) maintain that the advantage of government stimulus lies in that lag of time found in borrowing-first-paying-later scam.

And they would be right… at least for a limited time… and at an earlier stage of the inflationary cycle… because that is a scam that you can only run so long. Essentially, you can run the stimulus scam only for as long as underlying economic activity is sufficient to cover debt service. However, in 40 years of skyrocketing debt accumulation and cratering velocity of money, GDP expansion has been on life support since at least 2000. Essentially, as is typical in fiat monetary systems, once past the half way point in the inflationary dynamic, the structure of “value” is compromised as it becomes ever more dependent on currency depreciation and increasing debt rather than real demand. So, cash for clunkers, is nothing but more currency depreciation pulling even more demand forward in time.

However, in October 2008, after a steady 30 year decline, the money multiplier finally fell below 1… meaning that money and credit creation were no longer having any effect on economic expansion. This means that unless money starts circulating again, then GDP must adjust downward accordingly. Now, considering the charts I posted here and in many other essays, I’d say GDP has to adjust downwards by a good chunk for a few years to come… quite a few years to come.

The moment economic activity generates less revenue than required to cover debt service, more stimulus brings about the implosion of the economy, thus the implosion of the tax base; thus the implosion of the monetary system; thus the implosion of government.

But, as self proclaimed holders of the moral high ground, I really don’t see any Western government admitting to being bankrupt nor, indeed, admitting to fraud… because that’s what a fiat monetary system becomes when coupled with a “democracy”.

So, if the West cannot admit bankruptcy and yet there is no money to maintain social services such as mail delivery, road maintenance, driver license renewal, unemployment benefits… traffic management…. teachers’ salaries……  medical staff salaries……. food stamps………. pensions……………. debt service……………………….

Then what?

War by 2013/2015… that’s what…

Putting Hippos on the Titanic by Paul Mladjenovic

February 12, 2009

Although the author believes in an inflationist outcome to stimulus, this is a good essay nonetheless. Particularly, it makes some compelling arguments as to why government cannot be the solution to a crisis.