Economists: Wrong Again

As if they didn't cause enough damage by espousing theories that failed to account for the inefficiencies and irrationalities of the real world, many economists are advocating aggressive spend-and-borrow policies to revive the financial crisis-hit U.S. economy that reflect an astonishing degree of naïveté and ivory tower hubris.

In a word, the Keynesian Kool-Aid drinkers are saying that debt doesn't matter.

As I see it, there are plenty of reasons to challenge the apparent indifference of Paul Krugman, Dean Baker, James Kwak, and others to the parabolic rise in public debt, including the fact that the latest crisis, like many of those before it, stemmed from a similar complacency about the risks of unrestrained borrowing.

But as someone whose long experience in financial markets helped him to anticipate the kinds of earth-shattering developments most economists didn't see coming, I find the popular argument that current low yields on government bonds are a vote of confidence on current policies to be utterly ridiculous.

For one thing, long-term rates are being influenced to an extraordinary degree by the Federal Reserve, which has been supplying copious amounts of liquidity to the financial sector. With banks unwilling to channel those funds into loans for Main Street, this cheap financing is effectively underwriting their massive purchases of Treasury and other securities, distorting prices (and yields).

In addition, the Fed itself has been the biggest buyer of government bills, notes, and bonds during the past seven months as a result of the quantitative easing program it launched in March. In the second quarter of this year, for example, the Fed absorbed nearly half of all net Treasury issuance.

Overall, the Fed's balance sheet has more than doubled since the financial crisis began, which has undoubtedly kept a lid on yields across the credit spectrum. Meanwhile, the Fed's zero interest rate policy and the historical term structure of interest rates have likely anchored long-term yields at lower levels than they might otherwise be.

Treasury markets, in particular, have benefitted from safe haven buying in the wake of the crisis. But there are significant differences between the current episode and those that occurred before, including the fact that the latest upheaval has taken place against a backdrop of widespread global imbalances and extraordinary levels of public and private debt. Many assume that what worked before makes sense now, without really thinking things through.

Government bond prices have also been been pressured lower by a structural shift in asset allocation preferences. A step-change jump in financial market volatility, greater economic uncertainty, and growing pressure among insurers and financial institutions to better hedge long-term liabilities have stirred an impulsive burst of buying of long-term bonds that likely won't be sustained at the same pace for long.

Yet even in the absence of such influences, the view among economists that financial markets reflect the wisdom of crowds, especially in regard to current policies and the economic outlook, is a supposition that is dubious at best in light of what we've seen in recent years.

I wonder, for example, what credit markets were signalling in the spring of 2007, when risk spreads were at all-time lows, while risk -- as evidenced by extremes in leverage and speculation and a bursting housing bubble -- was at an all-time high? And when global equity markets were hitting record highs in October of that year, what exactly were they telling us about the state of the world economy?

In my view, whatever predictive ability markets once had has been steadily eroded by years of monetary recklessness, a cultural shift away from long-term investing towards short-term trading and speculation, and the shrinking share of market participants -- read professionals -- who actually understand the fundamentals that matter.

So, to those economists who keep insisting that the large and growing obligations our government is committing us to in the name of saving or increasing jobs -- a theory that hasn't quite panned out yet, as it happens -- don't matter because markets are signalling otherwise, I say one thing.

Bunk.

Comments

[kevinearick]

so the economy doesn't work the way everyone was taught.

breeding best business practice, replication, leveraged by objective-based management, self-serving discrimination, to exploit labor, pay people not to participate, and penalize non-conformance in a global economy of subsidies, with no real prices and casino capitalization, doesn't work?

surprise, surprise, surprise.

evolution favors replication to eliminate less capable participants as efficiently as possible.

Graham, and many others, called it the Law of Retribution.

evolution, like everything else in the universe, is a wave propagation. The momentum portion of the wave, incremental improvement, hits the wall, and propels the preferred characteristics, into the next quantum orbit, like a catapult.

for agency, the enemy of better is best, which is why evolution discards it on a regular basis. the shortest distance between two points is never a straight line.

it is of litle wonder that those who persistently choose expediency, the short-cut, who have zero experience putting out a real product, at a real price, in a real market, come up with ever more elaborate misdirection, as they compel others to follow them farther and farther off course.

basicly, the economy pays people, including economists, to become irrelevant.

[Greg]

I really think you need to familiarize your self with the MMT/Chartalist school of thought. Billy Mitchell (billyblog) and Warren Mosler (Center of the Universe) have the best sites to discuss this powerful paradigm.

Many people are too hung up on government debt, as if its the same as private debt. Its not. The government cannot default in its own currency....................period. Government deficits NEVER need to be paid back. They are not IOUs. Government bonds are not needed by the government to spend, they are desired by the non governmental sector to save. Our grandchildren will be able to consume everything they produce, they will owe us NOTHING. That is all gold standard/ zerosum paradigm talk. We are no longer in that system and we all should be glad we aren't.

Free your minds, dont fear govt spending(respect it and use it wisely) and check out Mr Mitchell and Mr Moslers sites. Youll be glad you did

[kevinearick]

the education system is a bad joke, and everything runs off of education. it has to be replaced, top to bottom, side to side.

Agency, which naturally operates at deficit, because it cannot create wealth, must have the willing participation of those who can create surplus, which are the product of the crucible of evolution. That is not government, not corporation, and not physical capital.

If a government creates debt without my approval, and assigns a tax to me, or anyone I care about, I simply shift my surplus, and leave that government to liquidate, while its economists pontificate their latest theory of how the bubble can be maintained, with certain knowledge that evolution will prick that bubble, and expose its contents to environmental recycling.

The kids that are pursuing their talents, which will result in a surplus by nature, are going to do great. Everyone else is in big trouble, because those kids are watching this circus, and they have absolutely no intention of participating. They have left this economy to wither, and die.

The people that cannot reverse engineer a computer, then make it do something it was not originally designed to do, to create a surplus, are going to find out just how dependent they are on those who can.

There is a kernel of truth about infinite deficit expansion, but it requires the approval of willing participants, who are capable of creating a surplus, as defined by the universe, not by people who have never put out a real product in their life.

This is a generation war, and the kids always win.

[Greg]

The goal should be full employment. Whatever the "deficit" has to be to achieve that so be it. (Maybe we should stop calling it a deficit as its no different than points put up on a scoreboard, there is no limit to them). If private sector doesnt hire let the govt be employer of last resort and give everyone a stake in the present. Only when we are at full employment and suffering from shortages will we need to fear inflation. Smart management of our resources, removing the dependence on oil by a full court press on alternative energy systems and education/health care investments will leave us all wealthier, healthier and wiser. We can handle the food issues for this planet but scarcity in some other currently critical resources could put us in an inflationary bind if we dont act smartly and aggressively.

First off though we've got to get off the zero sum gold standard thinking that is rotting our minds. Its only money, more of a lubricant of our economic wheels than a hard asset.

I think everyone would be a willing participant if we told everyone the truth about the game. We most definitely are not right now.

[Kirk Powell]

Follow the money. If you want to understand something economically, you have to folllow the money. Who benefits from the classical economists telling the pubhlic that debt is good? Only the lender ... and who is the lender? The lender is the beggar at the door of the government looking for its next free meal.

Bonds create a delicate balance between private wealth and government needs. Under a fiat currency regime where migration is significantly decreased, the governments ability to tax the people for generations to come has greater weight. No one can simply move out west and start a farmstead in an unteritorialized region of the planet ... you must live somewhere. That consumer is born every minute. How do you manage the distinction in a consumer driven economy between labor and capital? A fiat currency. Fiat is our problem.

Nothing is truly arbitrary as men will always seek out to possess for themselves what they hold as value to their individual identities. The American system at it's core embraces that part of life, rather than fighting it ... the pursuit of happiness, wealth, family, etc.

How do we manage the limited resources in with ever-increasingly higher demand? Peak oil. Peak gold. Peak fresh water ... peak. The paradigm is the shift away from abundance for all to rations for everyone. Who makes that decision? The market place or government, never both.

From history we've learned that the market place [capital] always trumps government until the market place destroys itself with unreasonable expectations of the labor class. I think we are on the verge of that massive shift in expectations where labor is organized so effectively that they outnumber the capitalists ... hence the balance achieved through representative government.

But we don't get to the core issue of who benefits from a fiat currency until we understand the control mechanism that is in place to prevent labor from challenging the caveat hold that capital has. To understand the complexity of these issues ... the public is increasingly dependent upon economic specialization. In a real market, you can see the impact that biased economists further promote the very concepts that ensure the existence of the struture that enables them to wield political clout and intellectual prowess against the forces of labors inability to understand outside the time clock box.

Hence, it become obvious that the system is a self-perpetuating monstrosity on an inescapable path to self-destruction. A process that repeats itself throughout history as capital and labor continue an endless saga of financial wars.

[Tom Ofthenorth]

Michael,

Re Economists: Wrong Again, have I got an economist for you!

http://outsidethe-cardboard-box.tumblr.com/post/249074091/the-new-australian-school-of-economics-wonkish

G'day!
TomOfTheNorth

[kevinearick]

We have a group that is breeding ignorance among controlled populations, in effect reversing evolution, as a means to hide from evolution themselves, to avoid the need to adapt, and “thinking” all the while that they are the “intelligent” class, as their entire system recedes. And they compound the error by assuming that this planet is just a dumb rock, conveniently placed here for their exploitation, never once considering why the planet may find this arrangement temporarily advantageous.

As the speed of discovery accelerates to remove the mythology from the inside of their bubble, they find themselves dependent on technology and processes beyond their control, and their response is to cut off supply to their dependent populations, only to threaten themselves, while their economic extensions busy themselves in vain, re-painting the inside of the bubble with more paint thinner, arguing infinite deficits on the Internet.

By employing computers to accelerate economic activity, the same processes that brought down the Soviet Union, they exposed all top-down, command and control systems, whether capitalism, communism, or socialism, as invalid, triggering cascading economic collapse like dominoes.

Contrary to popular economic theory, neither the universe, nor the planet, is stupid, and agency is not the center of the universe. Denying the citizenry an education, inducing people to believe that their individual behavior has no bearing on economic outcomes, is the surest means to destroy an economy.

The universe simply will not tolerate a short circuit that does not increase diversity, as defined by the universe. An economy must have individuals distributed throughout its mechanisms that appreciate its algorithm, making adjustments, to keep an economy in check, and, once again, the economic priests are proving that they cannot keep even themselves in check.

Because majority control chooses economic slavery for itself does not bind the minority against its will, and any law to that effect will destroy the majority, because it shorts the algorithm, and decreases diversity against expectations, triggering planetary response.

Enterprise architecture is not about coming up with a big idea; it is about trimming the sails, and deciding on a captain. The captain does not pick the crew. Until these nation/state legitimacy issues are resolved, the economy will continue to sink, and it will get closer to becoming a sunk cost every day.

… and believe it or not, the “founding fathers” of Boston, which incidentally are hiding some really, really big problems, are getting set to rape and pillage some more, with another convention center, with more mismatched debt, only 5 years and $800M after the last assault.

The stepchild of Government and Corporation, the AFL-CIO in no way represents real labor. It’s just another face on the demographic ponzi scheme economy, stealing from real labor, and selling the country out for small change, just like the others in this cabal.