- Google and Your Memory
- Is Occupy Wall Street: Just Noise?
- Dropbox startup lessons learned 2011
- A Historical Look at CEO Pay
- The Great Recession Marches On
- 10 Weekend Reads
- Ferrari 458 Italia: $225,325 plus $57,000 in options
- Bloomberg: Ritholtz on Fed Policy, Economy, OWS
Posted: 22 Oct 2011 01:00 PM PDT
Posted: 22 Oct 2011 10:00 AM PDT
According to a Global Investment Strategy Special Report, the Occupy Wall Street movement symbolizes the fact that political extremism is rapidly becoming mainstream.
But is it really extremism?
Consider the following, from BCA:
Posted: 22 Oct 2011 09:00 AM PDT
Posted: 22 Oct 2011 07:30 AM PDT
Posted: 22 Oct 2011 07:15 AM PDT
The Great Recession Marches On
Demand Side Blind Alleys – When Will They Ever Learn?
Almost on a daily basis, whether from American politicians or European publications like the Financial Times, we are bombarded with calls for more government driven demand side stimuli. The fact that these have not worked so well in no way seems to bother their proponents. The US Federal government debt continues to careen upward and another $1.3 trillion dollar deficit was just racked up for fiscal 2011. Bernanke is rapidly reaching the point where the Fed cannot raise interest rates – the effect on the government budget would be too great. Not to worry apparently. Print money and manipulate interest rates – QEI, QEII, Operation Twist – is demand side stimulus number one. There seems to be no concern that government printing money out of thin air will eventually destroy the US dollar and distort the allocation of resources. "Not worth a Continental" was a saying that came out of America's wild printing of fiat money (called Continentals) in 1775 and history may repeat itself. Only in 1775 America was fighting a war. The Austrian School observation that the Fed's manipulation of interest rates is a version of central planning and price controls is regarded as quackery. Demand side stimulus number two is spending more government money on boondoggle projects like high speed rail to nowhere, financed by printing money or increasing government debt. Again there is no concern that the return on this government spending might be negative.
Since Keynes and the Great Depression, macroeconomics has been all about demand side management. Keynesian orthodoxy dictates that if the consumer stumbles, the government must rush in to take his or her place with monetary and fiscal stimuli, no matter how economically stupid. Unfortunately in a debt/deflation global environment which we are now in, demand stimulus is an unproductive waste of resources and is hitting or will hit a bond market wall.
What are needed are two things – debt/entitlement defaults and supply side measures that stimulate growth.
It sounds awful I know. But in my opinion defaults—in the broad sense of reneging on obligations including but not limited to legal defaults– will turn out to be the only option for all the advanced countries. Promises that never should have been made ultimately will not be kept. As I wrote last time and have now been convinced to write a book about, the age of defaults is upon us.
Supply side measures are something most macro economists – with a few exceptions – never consider. By supply side I mean those rules, regulations, laws and taxes that hold back economic growth. Supply side measures are growth enhancers and would include:
The Problem Isn’t the Euro
My views on the euro haven't changed. The euro will survive. History, technology, proximity – all favor the common European currency. The euro is not the real problem. The real problem is excessive debt and unfunded entitlements combined with unfavorable demographics and a socialist, anti-growth mentality in virtually all countries.
It makes a difference how Greece is dealt with. I wrote in this column over a year ago that Greece should be allowed to default just as US states did in the 1840s. Agreed, a onetime bank bailout of Greek banks may be necessary. But let Greece be rejected by the markets and not live on grudging handouts from the Germans.
One may ask: how can the problems of this small country of eleven million people drag on and on as it has? The simple answer is that the Europeans don't trust markets and have only gradually come to face the fact that Greece is hopelessly insolvent and that default is the only sensible option. But it goes way beyond that. Spain, Ireland, Portugal and Italy are lined up right behind Greece as potential problem countries. And Belgium and France are not that far behind. Italy and Spain in particular face formidable government debt refunding schedules in 2012.
Greece fortunately is sui generis. There is not an indicator you can name that Greece is not in a category by itself. For example as the table below shows, according to IMF estimates for 2011 Greece's net debt to GDP is an astounding 1.53% (and the IMF debt estimates for Greece are actually lower than other sources) and it is running current account deficit which is 8.3% of GDP. Its primary budget is in deficit and it is in the midst of a deep recession. Twenty percent of Greeks apparently "work" for the government. Not only has that but Greece historically been a serial defaulter, as Rogoff and Reinhart report. Greece was in default more or less continuously from 1800 until after WWII. The mindset and the institutions are socialist, not supply side. The outlook for Greece under the European imposed austerity plans is bleak. The rioting in Athens is understandable but a totally useless approach to Greece's problems. Any ambitious Greek twenty one year old, unless his or her father is a shipping magnate, should be thinking of emigrating.
None of the other European countries are as bad as Greece. At least not yet. But their cost of borrowing has been rising and the ECB has had to buy their debt. Contagion is an ever present danger. If one or more of these countries require major future bailouts and/or face default, Europe has a major banking crisis.
I would make the following points:
Time: 2011 Units: National Currency Scale: Billions Source: IMF
Posted: 22 Oct 2011 04:40 AM PDT
Some reads to start off your weekend:
What are you reading?
Posted: 22 Oct 2011 04:30 AM PDT
My New Birthday present is here!
You know that is not true because I would never buy any car in that ugly gray, and I prefer 3 pedals and a stick over those damned paddle shifters . . .
Posted: 22 Oct 2011 04:12 AM PDT
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