I do not know anyone who predicted this course of events. This should give us cause to reflect on how hard a job it is to make genuinely useful forecasts. What we have seen is truly a ‘tail’ outcome – the kind of outcome that the routine forecasting process never predicts. But it has occurred, it has implications, and so we must reflect on it.
Glenn Stevens, Governor of the Reserve Bank of Australia quoted by Dirk J Bezemer of the University of Groningen. Dirk proves that the common wisdom is wrong and lists a number of economist who saw it coming. The full article is worth a read.
Long gone are the days when economists thought deeply about how life actually works. Adam Smith, Adam Ferguson, Anne-Robert Turgot – the great "moral philosophers" – all died hundreds of years ago. Since then, the trade has gone bad. They're all numbers guys now. An economist, of the modern variety, is a statistician...an extrapolator...and a mountebank. If numbers go up two months in a row, he predicts they will go up another one. He rarely stops to ask whether his numbers really make any sense.
Bill Bonner on Bubble Deniers.
In 2005, Americans saved nothing. Not even aluminum foil or string. Now, the savings rate is approaching 5% of disposable income - a big turnaround.
We know from logic and experience that saving money - not spending it - is the key to getting wealthier. Saving money gives you capital. And it’s capital accumulation - in the form of factories, roads, ships, buildings, machines…and raw savings - that gives people the ability to produce more. It may take a man with a shovel a whole day to dig a decent grave. Give him capital - in the form of a backhoe - and he can bury everyone in town. That’s why capitalism works. It rewards the fellow who saves his money.
Yet every yahoo economist in the year of our Lord 2009 takes news of rising savings rates like the death of Michael Jackson. If households don’t consume, they reason, how can a consumer economy grow?
The problem is that you can’t really grow an economy by borrowing and spending.
Recent history proves it. Despite the biggest splurge of borrowing and spending in history, the US consumer economy barely grew at all.
Bill Bonner on the Great Credit Contraction.
What distinguishes the Austrian School and will lend it everlasting fame is its doctrine of economic action, in contrast to one of economic equilibrium or nonaction. The Austrian School makes use of the ideas of rest and equilibrium, without which economic thought cannot get along. But it is always aware of the purely instrumental nature of these ideas.
The Austrian School aims to account for prices actually paid in the market, and not just prices that might be paid under certain never-realizable conditions. It rejects the mathematical method, not because of ignorance or an aversion to mathematical accuracy, but because it does not place importance upon the detailed description of the condition of a hypothetical and static equilibrium.
The Austrian School has never succumbed to the fatal illusion that values can be measured, and has never misunderstood that statistical data has nothing to do with economic theory, but belongs to the history of economics alone.
From the Memoirs by Ludwig von Mises.
Poor Bernie Madoff. The man has been ordered to spend 150 years in the hoosegow. What for? Who did he kill? A century and a half seems a little excessive for a financial crime. You could hold up three liquor stores and rape a whole convent and still not get 150 years. With a little bit of good lawyer-ing, a history of child abuse in the family, and good behavior in the big house, you'd be back on the street in 18 months.
But all the papers seem delighted. "Locked up for Life!" says one of today's headlines. The judge "threw the book at him," says another. His victims wanted him to get no mercy. The judge gave him none, imposing the maximum sentence. He is "extraordinarily evil," said the man on the bench.
Justice has been done. Right? ......
But, what is the point of keeping Madoff in prison? He represents no threat. Rather than pay $30,000 per year to keep him locked up, we suggest that he be forced to do community service work. He should be pressed into service as the next head of the Federal Reserve after Ben Bernanke's term expires in December. With Madoff in the big office, there would be no longer any illusions about what sort of bank the Fed is running.
Bill Bonner puts the evil of the century into perspective.
Generations X (30-45) and Y (15-30) need to wake up and see the massive inter-generational theft happening before their eyes. Baby-boomers need to be shocked into knowing they are being shortsighted and will end up living in two retirement islands and having to visit their grandchildren overseas.
Bernard Hickey of interest.co.nz at the Herald.
If you feel you are being forced to buy something by a business,
you will usually find a government law or regulation behind their power.
Twitter is not a social network. It is a tool for social and political elites (the followed) to lead their sheep (the followers).
The whole world “followed” the beast (Rev 13:3).
People think that we are living in the age of democracy,
but multitudes are being deceived into serving the beast,
while thinking they are free.
I do not follow Twitter; I am following Jesus.
The rich hate capitalism because it threatens to take away their money. The poor hate it because they think it keeps them from getting any money in the first place. And everywhere you look, the chiselers are offering bailouts, boondoggles and bamboozles. With so many people trying to improve on capitalism, it’s a wonder they’ve never come up with something better.
When you leave people alone: some people watch TV...some blabber about politics...and some build wealth. The rules are simple: Thou shalt not steal, it saith in the Bible. Do unto others as you would have them do unto you, Jesus added. Everything else - from hedge funds to derivatives - is merely an elaboration. People make deals with their neighbors in order to get what they want. One plants the wheat; the other bakes the bread. As long as they respect each other's deals and each other's property, everything goes tolerably well.
The western, capitalist economies are in the midst of their own perestroika. They are being restructured. But not by the world-improvers. Instead, they are being restructured by capitalism itself... Leave capitalism alone and it will do the job far faster and far better than the meddlers could ever do.
From Hoorah for Capitalism by Bill Bonner
..many governmental actions -- including several pursued by Franklin Roosevelt during the Great Depression -- can make things worse. I wish I could be confident that the array of U.S. policies already in place and those likely forthcoming will be helpful. But I think it more likely that the economy will eventually recover despite these policies, rather than because of them.
Wisdom from Robert Barro at the Wall Street Journal. Read the full article
This is a crisis brought on by our collective profligacy, which manifested itself in too much spending, too much debt and no savings. The normal way to get out of a situation like that is to spend less, reduce borrowing and save more. I’m wondering why we haven’t taken that approach – well, I know why, but I still question the response.
Julian Robertson quoted by Rolfe Winkler at Option Armageddon
We know that interest rates are going to go up eventually. But no-one wants the cost of borrowing to go up right now - least of all the world's overextended governments. That's why the ructions in the US government bond market this week has people nervous.......
But the second lesson is more fundamental: we all have higher interest rates in our future. And when I say higher, I don't just mean higher than the record lows they are at today, I mean higher than they were before the crunch. An era of cheap money partly got us into this mess. Thanks to the mountain of public debt now sitting on government balance sheets, it's a fair bet that money is going to more expensive when we come out the other side....
The financial crisis has generated a "scrambling for public funds of war-like proportions". Other things equal, basic economic theory suggests that a rise in government borrowing on that scale will push up the long-term cost of borrowing once the recovery gets going. Of course, that might not happen overnight, especially with so much slack in the big economies due to the recession. But even sceptics about the effect of borrowing on rates would probably accept that this kind of rise in government debt will have an effect on the cost of debt....
When the advanced economies pull out of this crisis, the level of public debt is going to be the central fact of economic and political life for years to come.
Stephanie Flanders at BBC.
Liam Halligan wrote,For what we're doing instead is surely a folly of historic proportions. The Bank of England is about to start printing money. We're piling government debt on top of debt. Our leaders seem to have decided that the only solution is to inflate away the UK's crippling liabilities – while spinning a yarn the danger is deflation instead.
Well, the money market won't have it. The UK's foreign creditors, in particular, won't buy gilts if they see our currency being debauched. Then we'll be in serious trouble – facing an IMF bail-out and with our credit rating shot. But don't worry – the bankers will still get their bonus …
There is confusion between the "disease" — high levels of debt — and the "cure" — the reduction of the level of debt now under way (deleveraging). Debt within the financial system is falling as some borrowers default, destroying existing debt and also limiting the capacity for further credit creation. Total losses from the crisis are estimated by the International Monetary Fund at about $US4.1 trillion ($A5.4 trillion), of which $US2.7 trillion will be borne by financial institutions.
Government ownership, or de facto nationalisation, has become the primary option to recapitalise the banking system in many countries. Even after recapitalisation there is likely to be a capital shortfall in the global banking system of about $US1 trillion-plus, forcing a contraction in global credit of about 20-30 per cent from existing levels. This is much more than a banking problem. At this point it affects the real economy.
Satyajit Das at The Age on End of the Age of Plentiful Debt.
Modern people live with an assumption that house prices will always rise. This is a false view. The intrinsic value of a house declines over time as it deteriorates and become old fashioned. What actually happens is the money loses its value over time, as central banks and governments manipulate their country’s currency. People confuse a decline in the value of money with an increase in the value of their houses. That latter is an illusion (unless captured by leverage).
The Japanese experience does not make Bill Bonner enthusistic about stimulus programs. In this morning’s paper is a front-page article describing how Japan “wasted trillions” on its various stimulus programs. Japan’s rural areas have been paved over and filled in with roads, dams, and other big infrastructure projects, the legacy of trillions of dollars spent to lift the economy from a severe downturn caused by the bursting of a real estate bubble in the late 1980s (The International Herald Tribune).
Public spending was so aggressive, it boosted Japan’s government debt to 180% of GDP – more than two times the current U.S. level. But did all that cement buy Japan out of its slump?
You be the judge. Housing prices in Japan are now back down to where they were in 1975 – nearly 90% below the late-’80s peak. And stocks? The Nikkei index is back down to where it was a quarter century ago. Stocks sell for half their book value – and they’re still considered too expensive for beaten-down, hyper-fearful Japanese investors. The downturn began in 1990. Over the following 19 years, it did more property damage than the Great Tokyo Fire of ’23 and the Enola Gay combined, wiping out wealth equal to three times the country’s GDP. This was despite interest rates at zero...and a heroic effort at Keynesian stimulation.
If America were to follow Japan’s example, it would have to leave its interest rates near zero for the next decade...and add about $10 TRILLION to its public debt. And if it got the same results, you’ll be able to sell your house in 2026 for the same price you paid in 1992. In a nutshell,Japan’s experience suggests that infrastructure spending, while a blunt instrument, can help revive a developed economy, say many economists (The International Herald Tribune).
Are these, perhaps, the same economists who thought America’s super-consumption, eternal-debt economy would never fail? The same economists who thought the bankers were providing a public service, by offering so many people so much credit...and then planting their debt bombs all over the planet? The same economists who forecast rising stock prices in 2008?
The French word for livestock, “cheptel,” is the root for the word “capital.” This reminds us of the nature of capital. The first capital was livestock. Keeping livestock is more productive than hunting and gathering.
What the Federal Reserve and Treasury have set in motion is the mother of all crowdings-out. The Fed is compelled to buy substantial amounts of Treasuries to prevent the federal deficit from turning into a $1.8 trillion black hole that sucks in all the free savings of the world and then some. The moment that yields start to rise, the stock market reacts negatively. There is no “give” in the economy for any substantial rise in yields: the penalty to growth expectations is exacted immediately.
By ballooning the deficit and tying the credit of the United States to the balance sheet of the banking system, the Fed has avoided panic, but has crippled the economy for the long term. There is no way to finance the deficit except by suppressing financing for everyone else. The massive amount of liquidity created by the Fed has no inflationary effect as long as the market does not want to hold real assets — and it will not as long as the federal government sucks up the available savings. The most likely scenario is a paralytic, zombie-like stasis.
From Seeking Alpha.
Fractional Reserve Lending (FRL) is fraudulent. Indeed, FRL in conjunction with micro-mismanagement of interest rates by the Fed is the root cause of the financial crisis we are in.
Mish Shedlock at Global Economic Analysis. This is really worth reading.
Perhaps the most important proposition in the economics of property rights is that people will not care for a resource they do not own as well as they will care for a resource they do own. It is amazing how much fashionable economic belief — for example, nearly everything ever advanced in support of socialism, as well as the bulk of what passes for environmentalist policy proposals — fails to take adequate account of this virtually axiomatic proposition.
But don’t take my word for it — or even the word of any of my illustrious former collegues at the University of Washington. Take the word of Jesus of Nazareth.
In the tenth chapter of the Gospel According to John, Jesus is trying to make a point, but his listeners are not getting it, so he finally gives them a parable he can be sure they will understand (verses 11-13):The good shepherd lays down his life for the sheep. The hired hand, who is not the shepherd and does not own the sheep, sees the wolf coming and leaves the sheep and runs away — and the wolf snatches them and scatters them. The hired hand runs away because a hired hand does not care for the sheep. I am the good shepherd. I know my own and my own know me.
Hired hands must be monitored closely if the owner is to prevent them from diminishing or destroying the value of the capital he has provided for them to work with.
Robert Higgs at the Independent.
