EconomicsJunkie

New data is in for the final weeks of February 2010:

The annual rate of decline is now at 6.7%

I want to follow up on something Marc Faber said the other day in the second clip.

He said that it is true that private credit is contracting, but it is being offset by a government credit expansion.

Let’s examine this suggestion a little more closely.

I regularly publish the total contraction of total private loans and credit:

This is, however, only a subset of the total credit picture. What is missing are things like corporate and government bonds, and probably some other non financial obligations.

The most comprehensive data on the total of pretty much ALL credit issued in the US is really the Federal Reserve’s Flow of Funds Report, in particular the subsection “Level tables”.

The current flow of funds report can always be accessed here and for March 11, the latest release shows us the following:

Based on these numbers we can see that total credit, when measured across all sectors, has indeed been declining throughout 2009, by roughly $466 billion, in spite of a massive ramp up in public debt.

This simply shows us the magnitude of the deflationary forces in action.

I would also add to this that we could easily double the total credit outstanding above if we included the federal government’s Medicare and Social Security obligations which nominally amount up to $43 trillion and will never be fully paid back. There is no official number to track for this since these obligations are not reported on any balance sheet and are not traded on any markets. Thus we can only assume that their present value is declining by at least the current rate of decline in the remaining credit volume (about 0.8% through 2009).

This would bring the total contraction in credit up to around $810 billion through 2009.

I’m also not sure to what extent other municipal and state pensions are covered in the flow of funds number, but I rather doubt they are included at all. A lot of those lavish union pension plans are going to have to cut back on their commitments soon, probably the next big events to shake the markets, along with commercial real estate defaults and property values declining.

And last but not least, it is rather unlikely that the current numbers are all marked to market. Government regulations across the board have ensured that banks and corporations can be rather creative in their reporting.

Either way, all this is a rather strong indication that Marc Faber’s assertion may not me correct.

Once in a while you can observe a few minutes where people on mainstream news speak the truth. I treasure these moments …

Part 1: Mish & Faber discuss market outlook and see value in Japan

Part 2: Mish & Faber on Inflation or Deflation

In case you care about my humble views in next to these two brilliant titans, read my Inflation & Deflation Revisited.

Part 3: Mish and Faber agree “It’s too late to fix things”

True GDP Q4 2009

True GDP in Q4 2009 has fallen to $10,655 million gold ounces, a 15.2% drop from the previous quarter.

True Consumption as Percentage of GDP

The true consumption ratio will need to come down significantly before a true alignment of resources in the production structure toward a recovery will be possible.

A close up to the years 2000 through now:

Government stimulus and bailout programs since the beginning of 2008 have fundamentally accomplished one thing: The ratio of the production of consumer goods versus factors of production has been bumped up for a little while.

Road to Recovery?

Contrary what the government says, they have not lead us onto a “path to recovery”. In fact, they have done the exact opposite! They have used all means at their disposal and all the force and dedication in the world to pull us away from this path.

This is the outcome of all the corporate bailouts, the cash for clunkers program, the 10,000 tax credit for homebuyers and what have you. Instead of abstaining from producing overproduced consumer goods and re-aligning toward capital goods, businesses have thus continued to produce excess trash and continued to engage in overly risky activities.

The payback for supporting this nonsense will be a double dip recession, Uncle Sam sends his regards.

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Time to examine some stuff written by a guy whom some people apparently call an economist:

I hear through the grapevine that the usual suspects at the WSJ have put out something along the lines of “Krugman says that unemployment benefits won’t raise unemployment, but in his textbook he says they will, neener neener.” Are they really that stupid? Probably not — but they you think that you, the reader, are that stupid.

My comment:
I think last part was supposed to be a sentence. I must assume that the guy who wrote this was in quite a rage over some unspeakably mean and cunning accusations pointing out inconsistencies in his “philosophy”. Thus he should be exculpated for such minor typos. This, however, does not in the slightest exculpate him for the actual crapload of “content” he fired off thereafter. I will for the most part not attempt to refute any statements made. For this would necessitate the existence of statements. The author obviously tries to avoid making any. For the most part he neither utters truths, nor falsehoods, but instead indulges is “un-truths”. (An un-truth is a claim that in itself defies the existence of truth. One can accomplish making such statements by using undefined terms. Example. If I say dooory and glooory makes fooory, then I have uttered an un-truth. I was asked by a reader to clarify which terms I consider undefined in this piece.)

But anyway, maybe this is a good time to explain the difference between determinants of the NAIRU — the minimum rate of unemployment consistent with a stable inflation rate — and the determinants of the unemployment rate at a point in time.

MY comment:
OK, since the author uses the term inflation without any further elaboration, I must assume that he has dealt quite a big deal with the phenomenon of inflation and is well aware of the only useful definition of inflation, meaning an increase in the supply of money and credit. I must thus assume that he does not fall prey to the completely arbitrary definition of inflation, namely the average price increase composition of some goods that some bureaucrat decided to consider.

That being said I am not sure what he means by “the minimum rate of unemployment consistent with a stable inflation rate”. He seems to be asserting there is some logical inverse linkage between inflation and unemployment, at least that’s my guess. I hope he doesn’t consider such constructs as the Philips curve in any way supportive of this claim, given that its validity has been long refuted. However, he doesn’t elaborate on it further so this statement of his remains, for now, unexplained and arbitrary.

So: there are limits to how hot you can run the economy without inflationary problems. This is usually expressed in terms of a non-accelerating-inflation unemployment rate; yes, there are some questions about whether the concept is quite right, especially at very low inflation, but that’s another issue.

My comment:
What is he taking about here? Again, I have to resort to guesswork.
What does he mean by “there are limits to how hot you can run the economy without inflationary problems” ?
What are those limits? What, in fact, is the unit in which I measure those limits?
What is “hot”?
Who is “you”?
What does “to run” the economy mean? In fact, what is the economy? Is it the market? But then who is that “you” who “runs” the market? The market is, by definition, not run by anybody, but is a system of multiple elements interacting as an organism, not an organization! So it is not “run” by anybody.
And then he says “there are some questions whether the concept is quite right”. If that is so, wouldn’t it make sense to resolve those questions first and establish the truth of a hypothesis you are applying to fundamentally support your reasoning?
And still I see him use the term inflation quite a lot without ever having told me what precisely it is, what it’s caused by, and what its valid relevance is when talking about unemployment.

Everyone agrees that really generous unemployment benefits, by reducing the incentive to seek jobs, can raise the NAIRU; that is, set limits to how far down you can push unemployment without running into inflation problems.

My comment:
What? Again, who is “you”? Is it the President? The central bank chairman? God? Who “pushes” unemployment. In fact, what does it mean in the first place?

But in case you haven’t noticed, that’s not the problem constraining job growth in America right now. Wage growth is declining, not rising, and so is overall inflation. A wage-price spiral looks like a distant dream.

My comment:
The author is right on one thing: Inflation is declining and has been for a while. In fact there is no inflation, there is deflation. And it is the only thing that can bring about a true and sustainable recovery. The only problem is, those who produce money and to some extent credit are trying to slow down or even stop deflation.
Now, I am unsure as to what this has to do in any way with his assertion that unemployment benefits reduce unemployment.

What’s limiting employment now is lack of demand for the things workers produce.

My comment: This is quite a strong statement to make. I wish this ivy league professor could deign to explain to us what he means by “lack of demand for the things workers produce”. Could he give me some real life examples? Does he actually understand what the purpose of prices is?

If a “lack of demand”, meaning the deliberate desire of some individuals to consume less and thus a perfectly valid choice, were the cause of unemployment, then the solution to this problem would be for those who produce those “things” to drop the prices of the goods offered so as to entice marginal consumers to purchase the goods in question.

If the author refers to the lack of profitability of such measures then it would indeed be better for those workers to stop what they are doing and find occupations that are more useful from the consumers’ points of view. This is the whole purpose of the mechanism of entrepreneurial profit and loss. Unfortunately the author nowhere delves into such annoying questions and thus leaves us nothing but a giant hole of nothingness.

Their incentives to seek work are, for now, irrelevant. That’s why comments by the likes of Sen. Kyl are so boneheaded — anyone who thinks that high unemployment in the first quarter of 2010 has anything to do with workers getting excessively generous benefits must not get out much.

My comment:
And so as a conclusion the author declares that the whole disincentive rooted in the provision of money taken from one person at gunpoint and supplied to another person for not working is simply irrelevant. I’m sorry, but this does not convince me in any way. Are you convinced??

And the truth is that unemployment benefits are a good, quick, administratively easy way to increase demand, which is what we really need. So right now they have the effect of reducing unemployment.

My comment:
How exactly do unemployment benefits “increase demand”. Wouldn’t it be helpful to try and explain the supposed mechanism at work when trying to advance such an argument? How precisely does it increase demand if I tell someone to give me $50 or else I will shoot him and then I hand it over to someone else who needs to prove to me that he is not working? And please don’t you tell me you think that the unemployed person spending the money will increase demand. That money has been taken from another person whose demands will be reduced by just that same amount! What it does indeed do is reduce the output of goods, which is the worst thing you can do for the well being of the people!!

I’m sorry to appear so nitpicky. I was asked to comment on this piece of crap and point out what I consider undefined terms so that’s what I did.

If we want to debate concepts clearly, I could simply sum up Krugman’s main point in one or two sentences and refute it with ease. But that is not how he rolls. He tries to obfuscate his concepts and claims with as many scary and unclear terms as possible and sometimes even just resorts to references to entire papers written by others, so as to make a reasonable debate over real issues virtually impossible.

That’s why I would, in my humble opinion, ask anybody who is genuinely interested in economics and human action to not take his stuff serious. Again, just tune out. There are so many more useful things you can do in your life than wasting your time with articles written by Paul Krugman.

Talk to a friend about truth and epistemology, talk to your mom and dad about your childhood, question people in your life about ethics, concepts, the state, and God, heck … sit in a room and stare at a wall. All these things would be a thousand times more useful than reading one paragraph from this deranged crackpot.

Please consider this clip of Riots erupting in Berkeley over tuition increases.

Why is education becoming more and more expensive every year?

Tuition costs have been rising constantly over the past decades. Any comparison of today’s numbers with past numbers usually baffles people.

But why is education cost so expensive? You guessed it. As always it’s government involvement. Every field that the state gets its sleazy fingers around will always and everywhere suffer from this simple, repeatable and predicable phenomenon.

If you use money stolen from people at gunpoint, and use it to subsidize cheap student loans, you are not doing anything to increase the supply, you are merely increasing the demand. You will have more people purchasing higher education than would have under voluntary circumstances.

If on top of that you inflate the money supply over decades and use that same money for the same purposes, that only aggravates the price effects on the market, and a business cycle ensues. Just as I explained the business cycle in consumer goods versus a business cycle in capital goods, you can have the exact same business cycle in the production of education, arguably a capital good.

You can complain and riot all you want, you can act surprised about the inevitable results of completely misguided policies, you can ask for yet more state involvement if you like, but please don’t expect different outcomes then … because it’ll make you look kind of silly.

This is not brain surgery or rocket science. This is all pretty basic and simple stuff. All we can do as long as people don’t understand it is to point out again and again what is at the root of our problems.

Other than that, sit back, relax, and watch this gigantic and predictable crap pile of madness erupt from a safe distance …

Paul Krugman on unemployment benefits:

Take the question of helping the unemployed in the middle of a deep slump. What Democrats believe is what textbook economics says: that when the economy is deeply depressed, extending unemployment benefits not only helps those in need, it also reduces unemployment. That’s because the economy’s problem right now is lack of sufficient demand, and cash-strapped unemployed workers are likely to spend their benefits. In fact, the Congressional Budget Office says that aid to the unemployed is one of the most effective forms of economic stimulus, as measured by jobs created per dollar of outlay.

But that’s not how Republicans see it. Here’s what Senator Jon Kyl of Arizona, the second-ranking Republican in the Senate, had to say when defending Mr. Bunning’s position (although not joining his blockade): unemployment relief “doesn’t create new jobs. In fact, if anything, continuing to pay people unemployment compensation is a disincentive for them to seek new work.”

In Mr. Kyl’s view, then, what we really need to worry about right now — with more than five unemployed workers for every job opening, and long-term unemployment at its highest level since the Great Depression — is whether we’re reducing the incentive of the unemployed to find jobs. To me, that’s a bizarre point of view — but then, I don’t live in Mr. Kyl’s universe.

… and here, on the other hand, is Paul Krugman on unemployment benefits:

What does textbook economics have to say about this question? Here is a passage from a textbook called “Macroeconomics“:

Public policy designed to help workers who lose their jobs can lead to structural unemployment as an unintended side effect. . . . In other countries, particularly in Europe, benefits are more generous and last longer. The drawback to this generosity is that it reduces a worker’s incentive to quickly find a new job. Generous unemployment benefits in some European countries are widely believed to be one of the main causes of “Eurosclerosis,” the persistent high unemployment that affects a number of European countries.

So it turns out that what Krugman calls Sen. Kyl’s “bizarre point of view” is, in fact, textbook economics. The authors of that textbook are Paul Krugman and Robin Wells. Miss Wells is also known as Mrs. Paul Krugman.

It’s not that this particular contradiction should surprise anybody in any way or that this is some great ‘gotcha’ moment. He’ll come up with some stupid explanation that his deluded readers will gobble up. Just look at the hilarious comments on the above article!

Paul Krugman is a bigoted, dishonest and despicable apologist for state expansion wherever possible. His writing style is for the most part condescending and arrogant, meanwhile spouting some of the most incoherent and laughable nonsense one can find on economics.

He conveniently chooses to avoid syllogistic proof of his positions and sways with whatever a Democrat in power happens to need to have justified at any particular moment. Don’t take it serious, just tune out.

The total volume of private credit and loans in the US has dropped to now $15,474 billion. It has fallen by now $1,468 billion since the peak in October 2008.

The annual rate of decline remains at 6.2%.