Demand Side Transcript

Today: Politics and economics,

Markets

Paul Krugman, a dangerous man part 2

More markets

Apology for no book.

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We read candidate Obama's economic plan in 2008. You may remember, we did a series on it: single payer, end tax cuts for the wealthy, infrastructure spending, limits on speculation.

O is for oops. We read it, apparently the president did not. Early on he took Robert Rubin in front of the cameras, brought in Larry Summers, went Wall Street, stood on the steps of the White House and spoke about....

I can't find it here, but as I recall he said something very much like, "Many of you are asking, 'Where's my bailout? But we need to recapitalize the banks and get the process of credit creation going again." Something like that. In other words, first the banks, then the economy will follow.

We'll let you fill in the commentary today. We're going to take off in another political direction. A recent USA today poll looked at the support for the two presidential candidates and broke them out by opinion on the economy. It is at cross-currents with the political wisdom coming out of Washington, DC, which I will categorize as "If the economy tanks, Obama is in trouble, so job one for the Republicans should be to make sure the economy tanks."

The poll found that many of Obama's supporters come from the hard-pressed and the 99 percent, those who do not see things getting better any time soon. On the other hand, the great bulk of Romney's support comes from what USA today calls, the Thriving.

The Hard Pressed favored Obama 63% to Romney at 23%. Most doubt the economy will improve regardless of the election. Their top economic issue: Cost of health care. 60% of this group are aged 55 and up. 54% are independents. They gave Obama a job approval of 54%.

The Upbeats on the other side, also favored Obama, here 58% to Romneys 23%. These are split, some see better times if Obama wins. Their top issue: savings and retirement. 39% are moderates.

Those identified as the 99% ers, about twice the size of the first two groups, are in Obama's camp 77% to 17%. Their top economic issue: the concentration of wealth. 20% of this group are Hispanic, most of any group, and this is the most liberal and Democratic group. Obama's job approval 74%.

On the other side, Romney is tops with the Thriving, whose outlook is sunny, especially if Romney wins. Top economic issue: federal deficit/debt. These are the youngest group, average age 42 and have the highest income and educational level. Combined with these are the Downbeats, who all say the economy improves only if Romney wins, whose top economic issue is still the federal deficit and debt, and who attend church at least once a month. These are the most conservative and Republican group.

To reveal bias, I guess I would categorize myself as a 99%er who does not give Obama a good job approval mark.

But the poll reveals that the wisdom of Washington seems to be going after the base. The Republicans want the Downbeats, who they already have. The President wants the Upbeats, and risks blowing it with them if the economy does not do well over the next six months.

But the great majority of each side's support are in the opposite camp. The 99%ers and the Hard Pressed for Obama and the Thriving for Romney.

I see this in my listening to business radio. The conservative and establishment continually talk up the recovery and how we are turning the corner and trying to consolidate a recovery. The liberal and insurgent continually warn of the mess in the banking system, the weakness in jobs, the inordinate and continuing stimulus needed to keep the economy above water.

So make of that what you will. A friend of mine with similar sensibilities says, "Who do you want with the gun, Barney Fife defending you, or Davey Crockett shooting at you?"

I wouldn't say anything like that.

Paul Krugman is a dangerous man, part 2.

I apologize to those of my liberal friends who think Paul Krugman is a progressive answer. He has a liberal critique, that is in large part true, but an answer....? Not so much. While we agree that refunding states and localities is a good place to start, the rest of Krugman's shtick, further reducing the interest rate and risking inflation is a hypothetical situation that won't happen because the Neoclassical playbook from which he operates does not fit the real world. We went over that a couple of weeks ago.

Some of you may be aware of the set-to between Steve Keen and Krugman over the DSGE models, the Dynamic Stochastic General Equilibrium models, which Krugman defends and Keen attacks. Krugman's recent defense of these was to retire from the field when challenged.

The issue was a comment by Keen that the common models used by Krugman and the rest of the Neoclassical school are really dressed up versions of completely unrealistic classical models that explicitly or implicitly assume one consumer, no money or debt dynamics, and time existing only in a stylized form. Krugman's version of DSGE employs tactics for sticky prices and other so-called imperfections, which Keen characterized as more or less fudge factors to make the data come out better.

It wasn't that Krugman disagreed, as he just overlooked or ignored Keen's points and when they were brought up to him by dozens of his blog followers, declined to engage them, saying, "I'm done with this conversation."

So again, Paul Krugman is a dangerous man, not because his heart isn't in the right place or much of his analysis is not good, but because it is. Having gotten credibility from that, however, he spends it in the mistaken prescription that a simple, temporary stimulus will jump start the economy. That is, further deficits and refunding states and localities.

No. Tremendous debt has to be dealt with, sooner or later. The mortgage mess has to be rationalized in the same way it was done in the 1930s, by writing down principle or keeping people in their homes as renters until the house is salable. The egregious disparities in incomes and political power have to be leveled. The government has to begin long-term, useful infrastructure and employment programs. We offer this not as a likely course of action, particularly in the near term. No politician is going to run on such a platform. We offer it because, from the demand side, it is the only course of action that will work. Sooner or later it will be tried. If it is not tried, we're in for hard times for a long time.

We keep hearing about avoiding deflation. We have not avoided deflation. Capital goods are deflating apace. Housing. Look at the 10-year bond as a surrogate. Investment is very low. Consumer goods may be inflating at very low levels, but primarily because the easy money from the Fed is inflating commodity prices.  Those liquidity injections are -- surprise -- inflating liquid assets, not the real assets we need for recovery.

Oh yeah, Do not lose track. We put up a Congressional hearing featuring Michael Greenberger not so long ago, noting a new intensity in investigating speculation and derivatives in oil markets. From that time, oil has trended lower. I know you don't hear anything but supply and demand anywhere else, but we're not buying it. When 70% of the market is speculation, speculation is controlling the price. Is there anything different about Iran and Israel? Can the markets not see three months ahead? Why would the price fall? But it is falling.  Or has been.

We'll let you decide.

A further comment on the market. We have two notes. Money fleeing the rest of the world looking for dollar-denominated assets will come into stocks as well as bonds, and the impact of the exchange rate should not be ignored. That is, because the dollar is going up, people want dollar-denominated assets. Not trust in the US economy, a play on financial markets.

And we can't let today go by without noting the weakness in stocks takes place after years of thin trading. The retail investor has been avoiding stocks. The professional trader has been in them. When you think professional trader, think leverage. As stocks trend down, think professional investor unwinding positions. I am not making predictions, but I am going to look to see if we don't have a strangely even glide path, as the sophisticated strategies that limit risk and maximize reward gradually unwind over time. Call it the algorithm glide.

Not to forget Europe. All about the banks. Nouriel Roubini in 2006 made speeches about the events we are seeing today, yet the desperate cries from here and there make you think it was a tsunami that started yesterday. The madness of austerity did not work. What's the answer? More austerity!!! Amazing.

All about the banks. A level of debt that cannot be repaid, so the official answer is to lend more money at higher interest rates. Individual nations have banks which are experiencing outflows and depend on ECB lending to them. If they do get the lending, they float on for awhile. If they don't, they go under and fail. How do you exit the euro? You get kicked out when sooner or later you don't get to float on ECB lending.

I guess we ought to note the JP Morgan Chase trading debacle has a few more items. The trade is still not boxed, meaning losses are open-ended. When you hear something like that admitted by Jamie Dimon, know it is worse behind the closed doors. The office in London where they make these hedges was taking gigantic positions even last year. The trade described initially as a hedge against losses was not in all likelihood anything of the sort, but strictly a play in the casino markets.

So that's it for today.

Our apologies for being such a slug. The review and comment edition is eliciting a lot more work than we had imagined, particularly late in the game. We'll stop predicting the date for the final. You can still get that edition at demandsidebooks.com. But don't, unless you're desperate. There's a lot that you can read for free there. It will be out when we get our act together. Nobody's fault but ours.