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Dangerous Defeatism Is Taking Hold Among America's Economic Elites

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http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7982807/Dangerous-Defeatism-is-taking-hold-among-Americas-economic-elites.html

The US economy has slowed to stall speed: successive quarters of 5pc growth, 2.7pc, and 1.6pc (to be revised down), the worst recovery of the post-war era. Such is the crush of debt.

While last week's data was less bad than feared, it was still awful. Manufacturing orders fell to the lowest in 15 months. Some 54,000 jobs were lost in August and the broad U6 gauge of unemployment rose from 16.5pc to 16.7pc. The US needs to create 150,000 a month just to stay even. The social depression is getting worse, not better.

Hardline bears think growth will drop below to 1pc in the second half as the inventory boost wears off and the tail winds of stimulus turn to headwinds, leaving no margin for error.

Soft bears such as Bank of America's Ethan Harris said the economy will limp along just shy of a double-dip. "Our sense is that the 'growth recession' is already here and it is likely to linger through the first half of next year," he said. His reason for concluding that it will not be worse is telling: the Fed will step in with $500bn to $750bn of fresh QE every six months if necessary.

Perhaps, but perhaps not. The luminaries are lining up to say there is very little that the Fed can do after already cutting rates to zero and purchasing $1.7 trillion of bonds. "The heavy artillery has already been fired," said former Fed vice-chair Alan Blinder.

"I really don't think there is a lot the Fed can do," said Harvard's Martin Feldstein.

"The benefits of additional QE are quite small," said Stanford's John Taylor, of the Taylor rule.

"The US has run out of bullets. More QE is not going to make any difference," said Nouriel Roubini, our Dr Gloom.

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. This would gain traction on the broad M3 money instead of letting it collapse (yes, the "monetary base" has exploded, but that is a red herring), working through the classic Fisher/Friedman mechanisms of the quantity of money theory.

This is quite different from the Fed's QE which buys bonds from the banks and works by trying to drive down borrowing costs. While Bernanke's 'creditism' is certainly better than nothing, it is not gaining full traction.

"Bernanke continues to babble on about futile credit easing: neither he nor his staff seems to appreciate the difference between purchases of assets from non-banks and from banks," said Tim Congdon from International Monetary Research. Crudely, banks sit on the money. Others use it.

Mr Congdon said a $750bn blitz of QE done the right way would lead to 5pc rise in M3 over three months. "This would indeed transform the US economic outlook". Instead, America drifts. It is already closer to a Japanese trap than Washington wants to admit, and may not escape from it for similar reasons of ideological paralysis.

Dr Bernanke said in November 2002 that Japan had the economic instruments to pull itself out of malaise but failed to do so. "Political deadlock" and a cacophony of views over the right policy had prevented action. He insisted that a central bank had "most definitely" not run out of ammo once rates were zero, and retained "considerable power to expand economic activity".

Yet eight years later, the US is in such "deadlock". Worse, Fed officials now say "the ball is in the fiscal court", arguing that budget policy should do more to "complement" the Fed's existing stimulus. Oh no!

This is the worst possible prescription. What is needed is fiscal austerity (slowly) before debt spirals out of control, offset by easy money or real QE for as long as it takes. This formula rescued Britain from disaster in 1931-1993, and 1992-1994.

Excellent free money to create growth, I mean at every other juncture in history this plan has worked so well and delivered growth and deleveraging....... Sorry that isn't what happened is it, I think something happened with inflation every time this idea was tried.

But still the it will be different this time because we understand the process better and our policy leaders wouldn't be so stupid as to introduce hyperinflation to the system would they.

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Insanity, cheap money and malinvestment caused this mess. The US has exported its jobs, invested in a self destructive asset bubble that encouraged the work abroad and what is the solution - pump more money in to keep the imabalance imbalanced.

No wonder there is a defeatest attitude, anyone with half a brain can seen the problem and that those pulling the levers are resolutely steadfast in continuing the same stupid route to oblivion.

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It is interesting how after one medium sized stimulus push America's political leadership has just sort of given up. The unemployment problem is really quite serious, yet it seems the leadership has just given up and would rather talk about other things.

At this rate Obama and friends will be voted out in a landslide next election for failure to turn things around, and the opposition is much more ideologically against stimulus.

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"The Fed has an arsenal of neutron bombs if it wants to use them"

but using them on your own population is not the stuff of right thinking people.

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Insanity, cheap money and malinvestment caused this mess. The US has exported its jobs, invested in a self destructive asset bubble that encouraged the work abroad and what is the solution - pump more money in to keep the imabalance imbalanced.

No wonder there is a defeatest attitude, anyone with half a brain can seen the problem and that those pulling the levers are resolutely steadfast in continuing the same stupid route to oblivion.

They cannot admit they were wrong!

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I see, since the problem is that so much prosperity has been stolen from the future through debt, the obvious solution is to print a ton of money and go around buying up debt. This will encourage banks to create even more debt knowing they can always sell it to the government for cash, thereby stealing even more prosperity from the future and adding to the original problem. How could it possibly succeed fail?

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Apparently the approximate duration of grief is about 12 months. (There is a stock market indicator based on this)

I think this sort of timescale is also about as far as the mind can stay focused in adversity.

Indeed I read somewhere yesterday that the first year of fiscal consolidation is typically much easier than the second year when fatigue sets in.

Is this a bit like compassion fatigue?

How will our chav celebrity culture cope? Looks like a boom coming in confessional TV about how people can't cope.

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I see, since the problem is that so much prosperity has been stolen from the future through debt, the obvious solution is to print a ton of money and go around buying up debt. This will encourage banks to create even more debt knowing they can always sell it to the government for cash, thereby stealing even more prosperity from the future and adding to the original problem. How could it possibly succeed fail?

Ponzi always fails...Ponzi Always causes a bubble.

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We need to put a parking meter on every piece of idle money.

inflation performs this task.

Penalise the ones with the money.

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inflation performs this task.

Penalise the ones with the money.

Not if you have to create debt to create the inflation.

We need credit to fall into the debt holes and go *puff*.

Edited by Alan B'Stard MP

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It is interesting how after one medium sized stimulus push America's political leadership has just sort of given up. The unemployment problem is really quite serious, yet it seems the leadership has just given up and would rather talk about other things.

At this rate Obama and friends will be voted out in a landslide next election for failure to turn things around, and the opposition is much more ideologically against stimulus.

The US is developing a quite serious political problem. The fact is that the US right has been braying some pretty extreme stuff about how 'lefties' and 'liberals' are destroying the country and combining it with the social religious right agenda. Add in mass unemployment and a lot of guns... How does president-for-life Palin sound?

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Just spotted this new user reading this thread...

<º))))><.·´¯`·.

All I can say is cracking user name!

trouble is being a goldfish, he needs to remind himself of the post he is replyin to....terrible handicap when you have to do this 50 times an hour.

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debt jubilee needed

of course the bankers wont like it (and i mean those right at the top)

Yep.

Right around the globe.

Sorry China, you lost.

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"The Fed has an arsenal of neutron bombs if it wants to use them"

but using them on your own population is not the stuff of right thinking people.

:lol: You do cheer me up. Why do you persist with the notion that these people run things for your benefit?

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The US is developing a quite serious political problem. The fact is that the US right has been braying some pretty extreme stuff about how 'lefties' and 'liberals' are destroying the country...

Of course it was 'lefties' and 'liberals' who exported all those jobs wholesale to Mexico and India and Asia, wasn't it? Nothing to do with the profit motive, no sirree, it was all a Commie conspiracy.

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The US is developing a quite serious political problem. The fact is that the US right has been braying some pretty extreme stuff about how 'lefties' and 'liberals' are destroying the country and combining it with the social religious right agenda. Add in mass unemployment and a lot of guns... How does president-for-life Palin sound?

Loud, but totally outgunned if they want to try it.

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Of course it was 'lefties' and 'liberals' who exported all those jobs wholesale to Mexico and India and Asia, wasn't it? Nothing to do with the profit motive, no sirree, it was all a Commie conspiracy.

jobs abroad is not the problem....its the debt. government debt now in a bubble.

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Not if you have to create debt to create the inflation.

We need credit to fall into the debt holes and go *puff*.

Agreed, it's the only way we can climb down from this debt high leverage mountain. The politicians should take this as their target point and start figuring out ways to hit it.

The question is: how?

Firstly, I would stop this obsession with trying to pump up broad money figures. I don't see how this is helpful and printing money to replace broken promises will be inflationary, likely in the places they least want it to be.

Secondly, the wealthy won't be holding much cash, as they'll have it invested in various alternatives, as guided by their advisers. It would end up hitting the middle classes instead (who didn't gain as much as the wealthy).

So, we are left with two options (or a bit of both): carrot or stick.

Carrot: Cut red tape, hope the next 'big thing' comes along to entice money into (perhaps Thorium reactors or some such?).

Stick: Negative interest rates on savings (IMO, too risky - bank run potential here), equity based banking (a long term solution, but won't fix this problem now), land value tax.

IMO, we can hope for the former (carrot), even feather the bed for it. However, if we want to resolve this crisis quickly and rebalance the wealth distribution in this country, a land value tax seems to be the appropriate solution, after a land value boom has caused the problem. A LVT can't be dodged (you own the land or you don't) and if people sell up instead, they will take a hair cut on their resale price anyway. Meanwhile, you can cut income tax and corporation tax ('carrot' for spending) with the proceeds, to encourage productivity, investment (EDIT: and, importantly, debt repayment!).

LVT = Take money from very wealthy land owners who benefited from the boom, while encouraging productivity and investment.

Result: Credit falling in debt holes and going *puff*!

I would also encourage equity based banking, like LPB, to prevent credit hoarding too, as 'savings' would actually be an equity share in the underlying investment. Instant haircuts all round when it goes pair shaped (popped bubbles), no bank failures or a need to respond with bailouts.

Edited by Traktion

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debt jubilee needed

of course the bankers wont like it (and i mean those right at the top)

Bank debt and credit are two sides of the same coin. You just need people with lots of the latter to spend it, to allow the former to retire it.

IMO, figuring out a way to do this is the best way of getting us down this high leverage mountain.

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  • 152 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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