Rock n' Roll Doggie
Join Date: Jul 2004
Location: In right wing paranoia
Local Time: 02:03 PM
There seems to be two sides of the war on recovery:
Monetary Versus Fiscal - NYTimes.com
Math, Models, and Mystification - NYTimes.com
I wanted and still want fiscal expansion because it’s relatively certain in its effect: if the government goes and buys a trillion dollars’ worth of stuff, that will create a lot of jobs.
In my discussion of alternative models of the crisis, I didn’t get around to discussing two fringe sects that buzz around the edge of the debate.
One sect is the Austrians. Now, whenever I discuss what Austrians believe, I get told that I just don’t get it. (Eegor. That’s Eyegore! Eyegor! That’s Eegor! What hump?) Whatever. I do know that I keep being told that Peter Schiff has been right about everything; so, how’s that hyperinflation thing going?
For the record, I tend to think things through in terms of New Keynesian models, as in my old Japan paper, but often translate the results into IS-LM for simplicity. If that’s a crude, primitive approach, somebody should tell Mike Woodford.
What’s striking about the you’re-so-ignorant critics, however, is their tendency to get all confused about very basic things – to insist that the savings-investment identity somehow implies that government spending can’t increase demand, that the Euler condition is somehow a causal relationship implying that low interest rates cause deflation, that Ricardian equivalence means that even a temporary rise in government spending will be fully offset by reduced consumption.
What’s going on here? I believe that what we’re looking at is people who know their math, but don’t know what it means: they can grind through the equations of their models, but don’t have any feel for what the equations really imply. Confronted with informal discussion that’s grounded in models but not explicitly stated in terms of math, they’re totally baffled. And so they lash out.
Peter Schiff is none too happy
The Hail Mary | Euro Pacific Capital
In Crash Proof, I talked about how our economy suffered from the co-morbid diseases of asset bubbles, excessive debt and consumption, and insufficient savings, capital investment, and production. These conditions did not arise as a result of market forces, but from foolish monetary, fiscal, and regulatory policies that distorted market forces. The proper cure would have been to remove the distortions and allow the markets to correct.
Unfortunately, as I forecast, the opposite occurred. Washington lacked the economic understanding and the political will to allow for a painful adjustment to take place. So, instead, they cranked up the printing presses and administered the equivalent of economic heroine. The drugs succeeded in postponing the pain, but at the expense of exacerbating the underlying condition. As the high wears off, a more debilitating hangover will set in.
By electing to bail out the financial sector, prop up housing prices, allow excess spending and borrowing to continue, and maintain superfluous government and service-sector jobs, the government has pushed our economy to the edge of a very dangerous precipice.
The right choice is to admit past mistakes and reverse course. The Fed must raise interest rates aggressively, shrink its bloated balance sheet, and allow the real recession to finally run its course. It will be much more painful now than it would have been in 2008, but at least this time the pain will end and real recovery will take hold. By forcing the federal and state governments to slash spending, sound monetary policy will allow market forces to rebuild a solid foundation upon which future prosperity may be built.
The wrong choice is for the Fed to continue quantitative easing as planned, allowing the government to grow at the expense of the economy. This will widen the economic imbalances that lie at the root of our problems. As a side effect, the US dollar will continue spiraling downward as it becomes clear to foreign creditors that the Fed has no interest in protecting their investments. A weaker dollar will lead to higher inflation and higher interest rates, which will make the Fed’s task that much more difficult.
In the end, our bubble economy will not just deflate, it will burst. The dollar will collapse, consumer prices will skyrocket, real credit will completely evaporate, millions more will lose their jobs, and our economy will change in ways few of us can imagine. Our standard of living will plummet and legions of middle- and upper-class Americans will be impoverished. It is not a pretty picture, but unfortunately, it’s the one our government is painting. Unfortunately, we are running out of time to change artists.
And from the most unlikely artsy fartsy newspaper:
Metro - With low interest and high spending, we court disaster
Savings, not consumer credit, will save us.
Halloween is just around the corner. Here’s a scary thought to put you in the mood: The Canadian economy could collapse any day.
So far, our economy has survived the financial crisis thanks to our housing bubble. The construction boom fuelled spending on building materials, appliances, furniture, electronics and more. But the bubble is deflating. And more people are losing their jobs every day.
South of the border, house prices continue to collapse. Over-indebted Americans will need years to clean up their balance sheets. As of now, 41 million of them survive on food stamps, and thousands more join their ranks every day. Canadian exporters will share their pain.
Are we prepared for a severe recession? No. Most of us are walking a financial tightrope.
Canadians are struggling under record levels of debt — 145 per cent of disposable income.
Carrying $50,000 on four cards and three lines of credit is the new normal. We’re living paycheque to paycheque. Six in 10 Canadians say they would be in trouble if their paycheques were late. Imagine if they lost their jobs.
Who’s to blame? We are, of course. But so is the Bank of Canada, which has kept interest rates artificially close to zero for about three years now. When interest rates are low, we borrow to buy a house or a second car. Save? What for, when a certificate of deposit earns just one per cent?
This was our government’s brilliant plan to get us out of recession: Entice people to shop till they drop. Two years ago, I was called crazy for advocating tax cuts instead of “stimulus” packages. “People will pay down their debt instead of spending!” Saving is wrong, I was told.
How did that work out for us, other than making us more vulnerable than ever?
The road to a real recovery goes through savings, not consumer credit. The Central Bank must stop this little game and let interest rates rise. This will hurt the economy in the short run, but it’s the path we have to follow. If we delay the natural adjustment of the economy any longer, we will end up paying a much heavier price.
We face a simple choice — just as we did two years ago: Lots of pain now, or severe suffering later. Unfortunately, it’s human nature to postpone hard choices. And in this, as in many things, politicians are all too human.