62 replies to this topic

[salsabob]

also more on this on FT

....
a sampling...

And a rising number of voices, often those not so close to policy making circles but privately including some within the club, suggest central bankers could become more radical still. Central banks are being urged to buy assets other than government bonds, breaking a taboo that they should not accept credit risk on to their balance sheet.

While none of this is palatable, it is better than the really radical ideas that may gain traction if economic malaise lingers, such as the infamous “helicopter drop”. A central bank could simply credit the bank accounts of the citizens in a country, directly boosting incomes for a period and encouraging them to spend.

A variant of this proposal is to finance the spending of government temporarily, allowing it to cut taxes for a period. This monetary financing of government is outlawed in Europe for the good reason that when it has previously been tried direct money-printing has ended in hyperinflation. An economy cannot provide sufficient goods and services to match all the newly minted cash at prevailing prices, and inflation takes hold.

...........

http://www.ft.com/in...l#axzz2655SAVvl

The markets are extremely boring today, so what the heck, how about some hopeless/thankless task.

Here's the most important/correct thing you've said -

An economy cannot provide sufficient goods and services to match all the newly minted cash at prevailing prices, and inflation takes hold.

Now let's be clear about what kind of inflation you are talking about. That would be "demand-pull inflation." What putting too many dollars in the economy does is that it puts that money in hands that can spend it and create too much demand for the economy to supply, and as you noted, prices will rise.

That is NOT cost-push inflation that happens when, for example, the Saudi King gets pissed about geo-politics (or concerned about a revolt) and raises oil prices as revenge (see late 1970s) or to raise the income checks to keep his loyal constituents, well, loyal. Other cost-push inflation is food prices rise because of drought or medical or higher education cost going up because, well, they got you by short hairs, what are ya gonna do? The thing about cost-push is that it is sector specific and one can find substitutes for the spending - i.e. stay-at-home vacations or sending little Johnny to community college. With demand-pull inflation ALL sectors are impacted and you can't escape the price increases.

The other thing about demand-pull inflation is that you need some of it for a vibrant growing economy - the inverse is true as well (i.e. you can't get a "balloon" without first having a "boom"). First, as I suggested above, a smart business person doesn't invest in new production or hiring someone until his order book (or market forecast) is screaming at him to do so; ah, guess where that occurs? That would be at the margin where demand is beginning to reach or exceed the economy's ability to supply, i.e. near the point where demand-pull inflation begins. Second, without demand-pull inflation say bye-bye to barbers, bricklayers or any other profession where productivity is not likely to improve - today's barber doesn't cut 10x as many heads of hair in an hour than what a barber did just 20 or even 200 years ago. And third, and most important, when you have demand-pull inflation that likely means you are not presently suffering from yet-to-be-detected deflation - something that scares the poo out of any economist or politician that is facing it, far more than any namby pamby inflation particularly after Paul Volker proved who is the boss back in the 80s.

So, are we anywhere near having the sweet spot of demand-pull inflation - not to hot but not too cold? Not with 12 million unemployed and at least that many under-employed - that porridge would turn Goldilocks frigid.

Is there room for more federal deficit spending without causing inflation? You betcha.

Will more federal deficit spending lead to raising taxes? Not for any economic reason. The federal govt's spending isn't constrained by its revenue; the very existence of deficit spending should make that pretty darn clear to anyone paying attention. The people who use computer keystrokes to credit the bank accounts of Social Security beneficiaries don't first call the IRS to see if there's enough revenue coming in; I doubt they even have the phone number. Federal spending simple injects money into the economy and federal taxes simply destroy money in the economy - the latter is the principle means for controlling demand-pull inflation if it ever comes about. Given that we're pretty far removed from any demand-pull inflation, does it make sense to be taxing ANYBODY right now? No, not really; unless you're into social engineering - I'm not, but that's another story.

Okay, but someday, our children's or grandchildren's taxes are going to have to go up to pay off all that huge federal debt?! Aaaghhh, we're all going to die! Well, the latter is true (i.e., yes, we are all going to die, some day). However, it is also true that the federal govt pays off its entire debt about every three months. It's there in every quarterly FED statement. They pay it off by rolling it over - since the founding of the nation, it always has and it always will [note- this is where people usually get hysterical because "that just can't be true!"].

What is key is the interest being paid on that debt. But look, interest payments are just another form of govt spending. And guess what, just like any federal govt spending, they ain't gonna run out of money, well, unless they run out computer keystrokes. So, like with any federal govt spending, we're back to that most important statement you made -

An economy cannot provide sufficient goods and services to match all the newly minted cash at prevailing prices, and inflation takes hold.

Now, can you tell me in 5, 10, 20, 30 years whether the economy will be operating at full tilt and such govt spending would be inflationary or will the economy be demand starved, as it is today, and any spending would be welcome? If you can, then you are surely wasting your forecasting skills; you should be just telling us where the DOW is going to close in the next couple of hours and make us all a ton of money!

Just some hopeless/thankless thoughts during a rather boring trading day.

Oh, if interested, here's a homework assignment I use to give in my former, and much less prosperous, life -

You know that Social Security Trust Fund that suppose to run out of money so the federal government will use computer keystrokes to credit future retirees with only 78% of their benefits - where is all that Trust Fund cash being stored? Did Uncle Sam open a CD at a bank down from the White House? Or did they put it in a Swiss bank account or in the Caymans? Maybe buried under the Mall in DC somewhere?

How do you run out of something that doesn't exist? Does Santa Claus really come down everyone's chimney on Dec. 24th?

[salsabob]

Interesting discussion...

I tend to think the US is, as Andiron says, at the limit of deficit spending, but simply cutting taxes won't work either, because there's still no guarantee that this will do anything other than increase corporate coffers.

The US already has the lowest corporate and individual tax rates anywhere in the developed world. And we have badly unaddressed social needs, mainly education and health care and to an increasing extent, purely basic infrastructure. These are areas where the free market doesn't work so hot, and where government could step in, creating stability and more confidence in the future. Unfortunately, in post-industrial economies government spending provides a superstructure for all other economic activities, less so in the US than Europe. For the first time in a long time Americans are retrenching, though consumer spending remains strong. But it can't remain so forever in the face of health care costs (which are actually going to increase for the uninsured who have to buy insurance, further depressing consumer spending while making insurance companies even wealthier) and education.

The student loan crisis will be the next one in 5-7 years...There is no way 20-somethings are going to be able to pay off their loans. Their baby boomer parents can no longer afford to bail them out, so we've got a big problem...If we do not get inflation, it will be a bigger problem, as it will not be inflated away, especially if salaries remain relatively stagant.

So I agree with salsabob, and I'm just saying specifically where debt transfer needs to take place. On the other hand, I fail to see how inflation will not be the end result. How the Fed manages inflation expectation in the next 5 years is key to sustained recovery. I fear it will be relatively easy to start an inflation snowball at some point. Inflation is fine, but it has to be managed...if wage growth and consumer spending is devoted to necessities like health care and student loan payments rather than buying stuff, a very-hard-to-stop period of stagflation will result.

While I'm very supportive of cutting the taxes for the 98%, I'm a little agnositic about doing so for the top 2%. Cutting the taxes of the top 2% isn't really going to help increase aggregate demand (how many private jets does one really want before it becomes just another hassle?), but from a macro-econ perspective, it doesn't hurt either. So, again, on the face of it, I don't care one way or the other.

However, iIf cutting the top 2% taxes can be used in a deal to get more spending particularly on infrastructure, then that would be a deal I could get behind. I would likely give a lot of money to any pol who would see that reducing student debt load was a necessary part of infrastructure investment.

Again, it gets back to Andiron primary concern -

An economy cannot provide sufficient goods and services to match all the newly minted cash at prevailing prices, and inflation takes hold.

The only three things that we can leave for the future to ensure the economy's ability to meet whatever demand (and avoid higher inflation and the taxes/interest rates necessary to kill it if it comes about) are: highly maintained infrastructure; a highly educated and productive workforce; and vibrant research and development. I guess a fourth would be a healthy natural environment, but that's not my field of expertise.

On all four, it looks like we are trying really hard to screw the future.

[fib_1618]

Keynesian solution works when debt situation for the country is not precarious....

It's actually Keynesian solutions that get country's INTO debt to the point of being precarious because the private sector is looked upon as being "inefficient".

So, in essence, it's never worked, and tremendous failure as is social engineering....the proof is all around us.

Fib

[sluzbenik1]

The only three things that we can leave for the future to ensure the economy's ability to meet whatever demand (and avoid higher inflation and the taxes/interest rates necessary to kill it if it comes about) are: highly maintained infrastructure; a highly educated and productive workforce; and vibrant research and development. I guess a fourth would be a healthy natural environment, but that's not my field of expertise.

On all four, it looks like we are trying really hard to screw the future.

Exactly. I think economists who dare to be slightly political have already arrived at this conclusion. There are ways of arriving at what I think will be the eventual seachange in American politics from a perspective of encouraging growth, and that means bolstering those three areas precisely. Our infrastructure is poor: and I would include urban planning in this. The suburban system so loved by car-driving Americans has outlived it's usefulness, it's inefficient and costly and given global warming, a lot of areas may more productively used as farmland again (believe it or not!). Our workforce is fat, undereducated and little inclined to study the hard sciences because of decades of watching CEOs and lawyers rake in the bucks, and of course riddled with obesity-related health problems, a lot of which could be remedied by people living in cities and walking and using public transport rather than driving around (the average European or Asian walks much more than the average American: http://www.slate.com...strianism_.html). Education long ago became an end in itself rather than a means to an end, with all the appropriate diligence and "hardness" (in terms of expectations, grading, and rigor). R&D remains the one great American strength, IMHO...

As for screwing the future, if you study American political history, it's pretty much a set pattern. Nothing ever changes in this country until a crisis hits, and that's what we should expect and prepare for as investors. I differ from many people in not ascribing the blame to politicians - I don't think they're any better or worse than they ever were - rather, I argue that the Constitution itself is to blame, as the checks & balances system virtually ensures that no political party will ever make much progress, simply because the odds are heavily against against any particular party having control of all three branches of government long enough to make radical changes. This was part of the Founding Father's plan, as it maintains stability at the expense of real (and probably tumultuous) democracy a la the UK or continental democracy (even worse). Since there was no king or common religion to bind the country together, the FFs wisely set-up a system that is essentially a nearly-closed system with relatively little in the area of outside inputs that could destabilize it. They expected that common sense and compromise would be the result, and it has been for much of the US' political history. But I submit we've reached the absolute limits of compromise and common sense in United States politics. It's not that politicians are THAT much more obtuse or uncompromising, the real problem is that radical decisions need to made, real leadership is required, but our system is expressly set-up to keep that from happening. Only total crisis creates the opportunity for it. Thus only the Great Depression was able to bring about sweeping change, and in the case of civil rights and the abolition of slavery, the existence of large-scale social movements that were themselves causing such instability that the system itself was forced to respond before an "outside input" became so large as to actually be able to garner support for radically changing the system itself. Don't forget that the Civil War was fought not to end slavery, but to preserve the Union. If the South had been just allowed to secede, it would have put the entire American project in jeopardy...

Edited by sluzbenik1, 10 September 2012 - 02:07 PM.

[fib_1618]

Don't forget that the Civil War was fought not to end slavery, but to preserve the Union.

Actually, that's the story that's told.

But what the American civil war was really about was the number commodity of the United States at that time...cotton.

As with most wars, it almost always something to do with economics that is the real fight....at least initially.

Fib

[fib_1618]

the American civil war was really about was the number commodity

That should be "the number ONE commodity" of that time...but I'm sure you got the idea.

Fib

[salsabob]

Keynesian solution works when debt situation for the country is not precarious....

It's actually Keynesian solutions that get country's INTO debt to the point of being precarious because the private sector is looked upon as being "inefficient".

So, in essence, it's never worked, and tremendous failure as is social engineering....the proof is all around us.

Fib

Federal debt is precarious because the private sector is seen as inefficient???

I've heard all the silly arguments why an entity's debt in the currency it issues is precarious, but I've never heard this one.

I'm interested; care to expand on the notion?

[salsabob]

The only three things that we can leave for the future to ensure the economy's ability to meet whatever demand (and avoid higher inflation and the taxes/interest rates necessary to kill it if it comes about) are: highly maintained infrastructure; a highly educated and productive workforce; and vibrant research and development. I guess a fourth would be a healthy natural environment, but that's not my field of expertise.

On all four, it looks like we are trying really hard to screw the future.

Exactly. I think economists who dare to be slightly political have already arrived at this conclusion. There are ways of arriving at what I think will be the eventual seachange in American politics from a perspective of encouraging growth, and that means bolstering those three areas precisely. Our infrastructure is poor: and I would include urban planning in this. The suburban system so loved by car-driving Americans has outlived it's usefulness, it's inefficient and costly and given global warming, a lot of areas may more productively used as farmland again (believe it or not!). Our workforce is fat, undereducated and little inclined to study the hard sciences because of decades of watching CEOs and lawyers rake in the bucks, and of course riddled with obesity-related health problems, a lot of which could be remedied by people living in cities and walking and using public transport rather than driving around (the average European or Asian walks much more than the average American: http://www.slate.com...strianism_.html). Education long ago became an end in itself rather than a means to an end, with all the appropriate diligence and "hardness" (in terms of expectations, grading, and rigor). R&D remains the one great American strength, IMHO...

As for screwing the future, if you study American political history, it's pretty much a set pattern. Nothing ever changes in this country until a crisis hits, and that's what we should expect and prepare for as investors. I differ from many people in not ascribing the blame to politicians - I don't think they're any better or worse than they ever were - rather, I argue that the Constitution itself is to blame, as the checks & balances system virtually ensures that no political party will ever make much progress, simply because the odds are heavily against against any particular party having control of all three branches of government long enough to make radical changes. This was part of the Founding Father's plan, as it maintains stability at the expense of real (and probably tumultuous) democracy a la the UK or continental democracy (even worse). Since there was no king or common religion to bind the country together, the FFs wisely set-up a system that is essentially a nearly-closed system with relatively little in the area of outside inputs that could destabilize it. They expected that common sense and compromise would be the result, and it has been for much of the US' political history. But I submit we've reached the absolute limits of compromise and common sense in United States politics. It's not that politicians are THAT much more obtuse or uncompromising, the real problem is that radical decisions need to made, real leadership is required, but our system is expressly set-up to keep that from happening. Only total crisis creates the opportunity for it. Thus only the Great Depression was able to bring about sweeping change, and in the case of civil rights and the abolition of slavery, the existence of large-scale social movements that were themselves causing such instability that the system itself was forced to respond before an "outside input" became so large as to actually be able to garner support for radically changing the system itself. Don't forget that the Civil War was fought not to end slavery, but to preserve the Union. If the South had been just allowed to secede, it would have put the entire American project in jeopardy...

Hard to argue with any of this. However, I've given up on the politics of it. Just looking at it from macro-econ and how our monetary system actually works. I've also mostly given up explaining this; the brainwashing has been going on for too long and too deep. But whether, it plays out for better or worse, I've got the context that probable less than 0.1% of people grasp - so it can be profitable regardless. I can live with that - very comfortable, in fact.

The only complication is that "the market can remain irrational longer than my wallet can hold out." That's why I lurk here.

Edited by salsabob, 10 September 2012 - 04:14 PM.

[fib_1618]

Federal debt is precarious because the private sector is seen as inefficient???

I've heard all the silly arguments why an entity's debt in the currency it issues is precarious, but I've never heard this one.

I'm interested; care to expand on the notion?

It's what Keynesian economics is all about...the government is the only truly efficient mechanism that can make the economy run.

As an example, the talk of late is that no one can build a business by themselves that government must help in doing so.

This is the backbone of Keynesian Economics and why we have a Federal Reserve...why Congress needs to pass stimulus to promote commerce as to regulate the business cycle with fiscal policy.

Fib

[...]

It's actually Keynesian solutions that get country's INTO debt to the point of being precarious because the private sector is looked upon as being "inefficient".

So, in essence, it's never worked, and tremendous failure as is social engineering....the proof is all around us.

Exactly.