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

Thursday, September 12, 2013


Demand Side Review:  Bouncing along the bottom with downside risks. No recovery in sight.

Also, Reinhart twins Carmen and Vince, lost in a sea of data, nothing useful to contribute, proven wrong time and again, yet still at the apex of the policy discussion.

Last week's piece on the Free Silver movement introduced us to the so-called long depression of the 1870s and the Great Sag that ran from 1873 into the 1890s.
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Recessions used to be called depressions or panics, until the Great One came along and made the term toxic.

One can argue that the economy actually did better in the Great Depression, four years after Franklin Roosevelt took office, the economy was 62.6 percent above the day he started.  Similar results for Barack Obama, 15.6 percent. Employment was over 30 percent higher in 1937 than 1933. It barely gets to 3 percent higher in 2013 vs. 2009.  After four years of Roosevelt, the banking system was sound. Investment banks did not rule the world. Enormous mortgage debt had been renegotiated via the Homeowners Loan Corporation.

Now put on your tinfoil hats with me, and

Imagine what the current situation would be like without the automatic stabilizers and the social safety net created and installed in that period under FDR.

Now imagine that we had not wasted this crisis, we had written down excess mortgage debt along the lines of the Homeowners Loan Corporation rather than bailed out the financial operators who created it. Imagine that we had installed the programs to rebuild transportation and energy infrastructure, improve our schools and health care system, and not put these in the back of the file cabinet because they were not shovel ready.

What if we bought $85 billion of infrastructure bonds every month, instead of dodgy mortgage-backed securities and Treasury debt

No. That's not interference in your tinfoil antenna, it IS higher inflation. Obviously, if people are employed. But it is also higher private investment, strong small businesses, healthy tax receipts, and oh yeah, it's a wealthier economy by virtue of the investment.

Any visions of higher deficits and public debt ARE interference. Hard to get good tinfoil these days. Long term, even medium term, the deficits and debt are lower for the healthier economy, particularly if we tax the rich. And we have six percent real unemployment or lower, rather than fourteen percent. I am talking about the U-6 all-in measure. We have people working instead of holding cardboard signs.

And the investment is there, both public and private. We PRESUME the tax breaks and zero interest rates were designed to encourage investment, not just to enrich the already wealthy and to calm the hysterical matrons of the markets. Hasn't happened. Corporations quickly traded high interest debt for low interest debt, and that has helped their bottom lines. But investment. Not so much.

But without investment how else would they think it could help unemployment?  Could it really be the soc-called "wealth effect," where making stocks more pricey means people are fooled into thinking they have more money so they spend, and yes, it TRICKLES DOWN?

By the way, I saw the greatest cardboard sign down here at First South and Spokane. A tall, skinny young man capable of work was standing by the side of the road holding up a square ... of air. No cardboard.  Mime cardboard.  Fill in the blank.

But yes... now onto Carmen and Vince Reinhart.

Vince, How good are the Fed's forecasts?


No, not very good. Throw in the bull about the natural rate of unemployment, the equilibrium rate of interest and why should inflation be so low, hard to know. Why is inflation low? How about overcapacity, no investment and declining incomes among the majority of the population. And you see the complete bankruptcy of the economics practiced by Vince Reinhart and the orthodoxy that runs the show.

It makes my skin crawl to hear people talk about the natural rate of unemployment. Doesn't exist. Can't find it in the data, only in the -- hey Vince, here's my tinfoil hat.  It looks so natural on you.

The equilibrium rate of unemployment. Phooey. That was exploded by Keynes, what, eighty years ago. Interest is not where the demand and supply of money cross, it is the price of convincing people not to hoard, except when the Fed sets it.

So, How good are the Fed's forecasts?  They are miserable. You would do better to listen to them and bet the other way. And Vincent Reinhart is the former head of research for the Greenspan Fed. That is why we are stuck in zero percent interest. Because the Fed could not see that it would not work. Or more rightly, was convinced it would work and will work and predicted so, and it is always just over the horizon.

At the onset of the recession, the line was "The Fed will do whatever it takes to avoid recession." Two years later it became, "There is only so much the Fed can do." Now it is, "The Fed doesn't have the tools." Well, we know it sure cannot forecast. Doesn't have the tools for that. Demand Side's funky little PC and old copy of Excel seems to do better. Of course, we have another tool -- a realistic theory of the economy, one that does not assume equilibrium and has a role for -- hold onto your hat, Vince -- money, credit and banking.

Okay, on to Carmen Reinhart, who you will remembered authored a book with Kenneth Rogoff.  This Time is Different: Eight Centuries of Financial Folly, which advocated austerity by governments, because when government debt gets to 90% of GDP, it is followed by a declining economy.


Ah, my mistake. On the other hand, you were feted in the press without contradicting the austerity prescription. Which turned out to be a bonehead mistake on a spreadsheet and some foolish assumptions. And that Eight Centuries of Financial Folly part, that was ...


Mmm.  I guess you have a new paper out called The Road to Recovery?


Ah, strong recovery here, but not abroad?


What about those who say this was not a bolt from the blue, but the result of debt, that is leverage?


Ah. Bubbles will happen. Good news on the inflation front, though. Debt is high. Unemployment is high. Stagnation is the order of the day. No investment. But inflation is low.  Could they be connected?


Eight centuries of financial folly continues, not in the form of government debt, but in ignoring the policies that worked.

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