A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Saturday, January 28, 2012

Transcript: 491 Inflating the burden, deflating the means to carry it with Daniel Alpert

Today we’re going to listen a bit to Daniel Alpert, managing partner at Westwood Capital LLC. Alpert is a blogger at Economonitor and recently was named a fellow at the Century Foundation. The introductory question is from Michael McKee of Bloomberg on the Economy.
Listen to this episode

So, we are going to agree with Alpert on much of his analysis, just not the pivot point. It is simply not a problem of excess supply, it is a problem of inadequate demand. I suppose that is the “… relative to demand … ” disclaimer.

We agree that a rational central bank would want to produce some inflation. And we agree that the effort to do that has produced the wrong results. Inflation in everything except the means to pay for inflation. That is, by injecting liquidity, stocks are up, benefitting those who don’t need to benefit, bonds are up, draining interest income from savers; commodity prices are up, sapping the real incomes of consumers; wages are down or stagnant; real assets are down, the debt deflation persists in the real economy in spite of and even because of the financial shadow play by the so-called rational central bank.

So we can reflate our economy, just not with bank-centric money creation. We can do it by real economy stimulus. When you go the other way, this is the madness of austerity – to expect good things when you subtract from an already failing demand side – the definition of the madness of austerity.

But Quantitative Easing is working, right?


We are happy to relay this analysis of the Fed’s impotence and the quantitative easing’s pushing up the wrong inflation rate (as long as we’re going to have more than one). That is, commodity inflation is, in Alpert’s terms, liquidity chasing money substitutes. You may remember our outrage at Demand Side when commodities became a quote “class of investment” when commodities are products of Investment.

Our early call was that 2011 was a repeat of 2008, with the trigger for a new slump being a new spike in oil prices. Those prices have broken from their highs in April. They came down in algorithm-hops and are now trending up again, insofar as a hop is a trend. But the point is that 2011 saw the highest average oil price in history, in real inflation-adjusted terms. It did not come near the peak of $147 per barrel as in 2008, but it did not see the trough of $33 we saw then either. Prices have hopped along near $110 on Brent and $95-$100 on West Texas Intermediate. There’s plenty of folks who point to Iran and Lybia, but we point at Wall Street and the Fed.


There is no problem with competition from excess supply of labor in China when you are building infrastructure in California, employing teachers, firefighters and police, or substituting labor for fossil fuels instead of the other way around. There is no leakage.

The debt part is right.

What about a Tobin Tax, a tax on financial transactions, a casino tax, a way of letting the financial industry help pay the costs of its failure?


The free flow of capital, the bond vigilantes running the governments, this has got to stop. As we’re seeing in Europe, it is either control the movement of capital or give up your sovereignty.

That’s Daniel Alpert. We recommend him.

Extraordinarily painful it is to watch the non-response of the corporate-sponsored governments to the challenges of our time. Eighteen months ago, Greece was solvable. Twelve months ago it was trivial. Six months ago it was a challenge. Today it is a lost cause.

Those who got it right 18 months ago, the Roubini’s, the Stiglitz’es, the others, are no longer getting points or position in the establishment. They are getting frozen out. We at Demand Side no longer see the percentage in arguing on the merits. The argument has been won, and not by us, but also not on the mereits, logic, long-, medium- or short-term viability. We have guaranteed ourselves another crisis because we have let those responsible for the last crisis remain in charge.

We did not fix the problems that were exposed. We punished the innocent for the benefit of the guilty – turning market discipline into a perversion. We are not kicking the can down the road, we are allowing the cancer to fester.

1 comment:

  1. I have been thinking for many months now that the first step is capital controls. South Korea realised this before anyone else and seems to have avoided some of the problems. If Japan had capital controls in the past then hot money fleeing the crisis would not have driven up its currency impacting its exports.

    I do see the next crisis approaching, because as you say the wrong solutions have been carried out. The banks are still mismanaging their loan books, and investing in commodity markets. The stock markets are still rigged in the favour of high frequency traders at the expense of the market makers and day traders. A Tobin tax would eliminate the High Frequency traders and reduce day trading but would have little impact on the economy. Breaking up the banks would diffuse the bonus issues everywhere because private investment banks would be seen as risking their own capital rather than gambling with tax payers money.

    The problem is that mainstream economics is corrupted and fails to see the problems. It will mean that living standards for the masses will fall and fall, and governments will blame the fact on that they have not been aggressive enough with austerity for failure. More and more middle class jobs will disappear as lower incomes are squeezed to the point that only essentials like food and rent are paid. Then as the middle classes fall into the new poor they will blame the poorest for costing the tax payer too much in support, as in the UK.