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2021 Year in Review: Crisis of Authority and the Age of Narratives

January 9, 2022

2021 Year in Review: Crisis of Authority and the Age of Narratives

Every year, friend-of-the-site David Collum writes a detailed “Year in Review” synopsis full of keen perspective and plenty of wit. This year is no exception. Poignant and delightfully acerbic when necessary, considering the troubling times. As with past years, he selected Peak Prosperity as the site where it is published in full. It is longer than our usual posts, but worth the time to read in full. This is Part 1.

Introduction

Dave: You do lack self control, but I learned and laughed making my way thru this.

~ Larry Summers (@LHSummers), former Secretary of the Treasury

I’ve been trying to reach you about your car’s extended warranty. What began more than a dozen years ago as a synopsis of the year’s events in markets and finance for a few friends morphed beyond my control into a Year in Review (YIR)—an attempt to chronicle human folly and world events for the entire year. It captures key moments before they slip into the brain fog. The process of trying to write a coherent narrative helps me better understand WTF just happened and seminal moments that catch my eye.

By far my favorite end-of-year recap for the last ten years. Finished it yesterday. Once again David hasn’t disappointed. He’s on my I want to go to dinner with list.

~ Jim Pallotta (@jimpallotta13), money manager and former owner of Boston Celtics

I’m game, Jim, even if it’s just a pretzel, nachos, and a brewski. The title, “Crisis of Authority,” is a double entendre. On the one hand, previously trusted authorities that we relied on to better understand the world are long gone. Edward R. Murrow, Walter Cronkite, and Tim Russert have been replaced with Chris Cuomo, Don Lemon, and Brian Stelter. Oops. Scratch Chris Cuomo..

…click on the above link to read the rest of the article…

Keynesian Ideas Can Only Make Things Worse

September 23, 2020

KEYNESIAN IDEAS CAN ONLY MAKE THINGS WORSE

In the New York Times on September 8, 2020, Paul Krugman suggested that

“The CARES Act, enacted in March, gave the unemployed an extra $600 a week in benefits. This supplement played a crucial role in limiting extreme hardship; poverty may even have gone down”.

For Krugman and many economic commentators, it is the duty of the government to support the economy whenever it falls into an economic slump. Following in the footsteps of John Maynard Keynes, most economists hold that one cannot have complete trust in a market economy, which is seen as inherently unstable. If left free the market economy could lead to self-destruction. Hence, there is the need for governments and central banks to manage the economy. Successful management in the Keynesian framework is done by influencing overall spending.

It is spending that generates income. Spending by one individual becomes income for another individual according to the Keynesian framework of thinking. Hence the more that is spent the better it is going to be. What drives the economy then is spending. If during a recession, consumers fail to spend then it is the role of the government to step in and boost overall spending in order to grow the economy.

In the Keynesian framework of thinking the output that an economy can generate with a given pool of resources (i.e. labour, tools and machinery, and technology) without causing inflation, is labelled as potential output. Hence the greater the pool of resources, all other things being equal, the more output can be generated.

If for whatever reasons the demand for the produced goods is not strong enough this leads to an economic slump. (Inadequate demand for goods leads to only a partial use of existent labour and capital goods). In this framework then, it makes a lot of sense to boost government spending in order to strengthen demand and eliminate the economic slump.

…click on the above link to read the rest of the article…

Krugman and the Goldbugs

August 24, 2019

Krugman and the Goldbugs

The announcement that President Trump would nominate Judy Shelton, a long-time advocate of the gold standard, for a seat on the Federal Reserve’s Board of Governors got Paul Krugman thinking: why do some economic commentators become goldbugs?

Krugman offers a rather cynical view. It is difficult “to build a successful career as a mainstream economist,” he writes.

Parroting orthodox views definitely won’t do it; you have to be technically proficient, and to have a really good career you must be seen as making important new contributions — innovative ways to think about economic issues and/or innovative ways to bring data to bear on those issues. And the truth is that not many people can pull this off: it requires a combination of deep knowledge of previous research and the ability to think differently.

So what’s an aspiring if not so smart or creative economist to do?

“Heterodoxy,” Krugman writes, “can itself be a careerist move.”

Everyone loves the idea of brave, independent thinkers whose brilliant insights are rejected by a hidebound establishment, only to be vindicated in the end. And such people do exist, in economics as in other fields.… But the sad truth is that the great majority of people who reject mainstream economics do so because they don’t understand it; and a fair number of these people don’t understand it because their salary depends on their not understanding it.

In other words, Krugman suggests most gold standard advocates are either ignorant or disingenuous — and, in some cases, both.

According to Krugman, “events of the past dozen years have only reinforced that consensus” view that “a return to the gold standard would be a bad idea.”

…click on the above link to read the rest of the article…

Waiting For The Black Swan

June 15, 2019

Waiting For The Black Swan

War with Iran would be the beginning of the end

Two more tankers were attacked near the Strait of Hormuz on Thursday morning (6/13/19) in the Gulf of Oman, and if hostilities advance we could be facing a ‘black swan’ event. One that changes everything, and divides the world into ‘before’ and ‘after’ periods.

A lot of us are waiting for ‘something’ to happen. We know that there are too many unsustainable trends and practices running and we fall into the “let’s just rip the Band-Aid off” camp. Some, like myself, have lost faith in the political leadership and institutions and doubt they retain any capacity to attend to anything more than their own selfish interests, let alone manage the difficult tasks ahead rooted as they are in systems theory and managing complexity.

So, let’s get on with it already. Bring it on. Black swans are welcome to those who feel a swift kick to the behind is sometimes needed to begin setting things straight.

Like many, I am also conflicted because I also know that getting onto a new path will be disruptive and probably quite economically and financially painful for everyone, myself included. Hoping for ‘something to break’ and hoping nothing breaks hang in an uneasy balance.

Luckily, my hopes and wishes have nothing to do with what’s going to happen, or when. I might as well be performing a secret hand ritual before the TV in my living room to ensure that my team’s basketball free-throw goes in. The dry tinder of the next bonfire was laid down over many years and decades and it will catch fire when it does, no matter how much denial or how many superstitious practices we employ.

…click on the above link to read the rest of the article…

Now Even Paul Krugman Of The New York Times Is Admitting That The Next Crisis Will Likely Be Worse Than 2008

November 28, 2018

Now Even Paul Krugman Of The New York Times Is Admitting That The Next Crisis Will Likely Be Worse Than 2008

There is a growing consensus that once the next economic crash finally arrives that it will be significantly worse than what we experienced in 2008. This is something that I have been saying for a very long time, but now even mainstream economists such as Paul Krugman of the New York Times are admitting the reality of what we are facing. And without a doubt, the stage is set for a historic collapse. We are living at a time when everything is in a bubble – the current housing bubble is much larger than the one that collapsed in 2008, student loan debt has now surpassed the 1.5 trillion dollar mark, corporate debt has doubled since the last financial crisis, U.S. consumers are 13 trillion dollars in debt and the federal government is nearly 22 trillion dollars in debt. And even though stock prices have fallen dramatically in recent weeks, the truth is that stocks are still wildly overpriced. What goes up must eventually come down, and Paul Krugman insists that we “are poorly prepared to deal with the next shock” and that “there’s good reason to think it will be worse”…

“We are poorly prepared to deal with the next shock,” Krugman said. “Interest rates are still close to zero in the US and in most of the rest of the advanced world. The fiscal policy we did was badly handled in the aftermath of the 2008 crisis, and there’s no particular reason to think it will be better. In fact, there’s good reason to think it will be worse.”

Hmmm.

Where have I heard talk like that before?

You know that it is very late in the game when even Paul Krugman can see what is coming.

…click on the above link to read the rest of the article…

The Great Financial Crisis: Bernanke and the Bubble

September 25, 2018

The Great Financial Crisis: Bernanke and the Bubble

Ben Bernanke responded to Paul Krugman’s post last week, which agreed with my argument that the main cause of the Great Recession was the collapse of the housing bubble rather than the financial crisis. Essentially, Bernanke repeats his argument in the earlier paper that the collapse of Lehman and the resulting financial crisis led to a sharp downturn in non-residential investment, residential investment, and consumption. I’ll let Krugman speak for himself, but I see this as not really answering the key questions.

I certainly would not dispute that the financial crisis hastened the decline in house prices, which was already well underway by September of 2008. It also hastened the end of the housing bubble led consumption boom, which again was in the process of ending already as the housing wealth that drove it was disappearing.

I’ll come back to these points in a moment, but I want to focus on an issue that Bernanke highlights, the drop in non-residential investment following the collapse of Lehman. What Bernanke seemed to have both missed at the time, and continues to miss now, is that there was a bubble in non-residential construction. This bubble essentially grew in the wake of the collapsing housing bubble.

Prices of non-residential structures increased by roughly 50 percent between 2004 and 2008 (see Figure 5 here). This run-up in prices was associated with an increase in investment in non-residential structures from 2.5 percent of GDP in 2004 to 4.0 percent of GDP in 2008 (see Figure 4).

This bubble burst following the collapse of Lehman, with prices falling back to their pre-bubble level. Investment in non-residential structures fell back to 2.5 percent in GDP. This drop explains the overwhelming majority of the fall in non-residential investment in 2009. There was only a modest decline in the other categories of non-residential investment.

…click on the above link to read the rest of the article…

Trump buys into the Krugman con

August 8, 2018

Trump buys into the Krugman con

Leading economic indicators suggest that the Republicans are headed into the fall mid-term election season with the wind at their backs.

Real GDP growth hit 4.1% during the second quarter. The unemployment rate recently slipped to 3.9%, and the US Federal Reserve is finally starting to meet its inflation targets.

Things are so good that U.S. president Donald Trump calls it “the greatest economy in the history of America.”

Yet while all appears well on the surface, there are growing concerns among gold investors about the sustainability of the current pick-up.

Works well in practice… but does it work in theory?

Part of the problem relates to the old joke about French university professors. “It works well in practice,” they reportedly ask. “But does it work in theory?”

The same question underlies Trump’s economic practices. They are clearly generating short-term results. But they don’t appear to adhere to any underlying philosophy.

Republicans liken Trump’s tax cuts and his deregulation efforts with policies implemented by the Reagan Administration. However, the comparison is far from perfect.

For one, the Trump Administration’s growing tariffs on imported goods, which amount to hidden sales taxes, are gradually undoing the effects of his earlier tax cuts.

Worse, the Trump Administration’s practice of choosing which sectors will benefit from protective tariffs and which won’t amounts to a drastic increase in government intervention in the economy.

Making government great again

Taking a step back, Trump’s policies incorporate many of the “big government” themes advocated by mainstream economists from both major political parties during much of the past four decades.

Led by Paul Krugman, a Nobel Prize winner, New York Times columnist and professor at CUNY, the economics profession has consistently advocated growth in government spending, borrowing and credit creation in the hopes of spurring economic growth.

…click on the above link to read the rest of the article…

Do We Really Borrow From Only Ourselves? Does the Debt/GDP Ratio Means Anything?

June 17, 2018

Do We Really Borrow From Only Ourselves? Does the Debt/GDP Ratio Means Anything?

QUESTION: Mr. Armstrong, the famous economist Paul Krugman says that debt is ok when we owe it to ourselves. He calls it “deficit scolding” as he wrote in the New York Times. Would you like to comment on this statement?

ANSWER: Paul Krugman seems to lack any historical understanding of how nations rise and fall. Anyone who claims debt is OK and can be infinite because “we” owe it to ourselves is clueless. He wrote in the article you referred to that “we have a more or less stable ratio of debt to GDP, and no hint of a financing problem.” The debt to GDP ratio is interesting but totally irrelevant. China’s debt to GDP stands at 250%, the USA at 103%, and Greece buckled at 186%. Obviously, this ratio is rather meaningless as a forecasting tool. I have published this chart on call money rates previously. In my studies, I quickly discovered that you cannot reduce the cause of any effect to a single issue. We can see that the peak in call money rates took place during 1899 and it was the lowest in 1929 when the Great Depression hit. You can’t even claim that if interest rates hit some magical level the stock market would crash. The world is far more complicated than just this one-dimensional approach to everything.

Capital flows were fleeing the USA in 1899 so interest rates went higher with a shortage of money. In 1929, the capital was in the USA for it rushed here because of World War I. The inflow of capital created an excess so the peak in call money rates was lower than 1899 when capital was fleeing. We even have the world of President Grover Cleveland from the Panic of 1893 commenting on the net capital outflow because of the “unsound” financial policy of the Silver Democrats.

…click on the above link to read the rest of the article…

Debt Doesn’t Matter, Because “We Owe It to Ourselves”? Why Krugman and Keynes Are Wrong about This

June 6, 2018

Debt Doesn’t Matter, Because “We Owe It to Ourselves”? Why Krugman and Keynes Are Wrong about This

It is an undeniable fact that debt, whether private or public, must, eventually, be repaid.

Creditors have better memories than debtors. This elegant line was coined by Benjamin Franklin—political philosopher, prolific writer, humorist and American ambassador to France. Mr. Franklin also was one of the Founding Fathers of the United States of America. A true polymath and a man of great common sense.

Does it Matter Whether Assumptions in Economics are Arbitrary?

May 21, 2018

DOES IT MATTER WHETHER ASSUMPTIONS IN ECONOMICS ARE ARBITRARY?

Various assumptions employed by mainstream economists appear to be of an arbitrary nature. The assumptions seem to be detached from the real world.

For example, in order to explain the economic crisis in Japan, the famous mainstream economist Paul Krugman employed a model that assumes that people are identical and live forever and that output is given. Whilst admitting that these assumptions are not realistic, Krugman nonetheless argued that somehow his model can be useful in offering solutions to the economic crisis in Japan.^[1]

The employment of assumptions that are detached from the facts of reality originates from the writings of Milton Friedman. According to Friedman, since it is not possible to establish “how things really work,” then it does not really matter what the underlying assumptions of a model are. In fact anything goes, as long as the model can yield good predictions. According to Friedman,

The ultimate goal of a positive science is the development of a theory or hypothesis that yields valid and meaningful (i.e., not truistic) predictions about phenomena not yet observed…. The relevant question to ask about the assumptions of a theory is not whether they are descriptively realistic, for they never are, but whether they are sufficiently good approximation for the purpose in hand. And this question can be answered only by seeing whether the theory works, which means whether it yields sufficiently accurate predictions.^[2]

Observe that on this way of thinking, the formation of the view regarding the real world is arbitrary – in fact, anything goes as long as the model could generate accurate forecasts.

In his Philosophical Origins of Austrian Economics (Mises Institute Daily Articles June 17 2006), David Gordon wrote that Bohm Bawerk maintained that concepts employed in economics must originate from the facts of reality – they need to be traced to their ultimate source. If one cannot trace it the concept should be rejected as meaningless.

…click on the above link to read the rest of the article…

Krugman Dismisses That an Increase in Money Supply Causes Inflation

April 15, 2018

KRUGMAN DISMISSES THAT AN INCREASE IN MONEY SUPPLY CAUSES INFLATION

In the New York Times article on March 27, 2018 – Immaculate inflation strikes again – Paul Krugman argues that those economists who are of the opinion that the key factor that causes inflation is increases in money supply are very wrong. According to Krugman, the key factor that sets in motion inflation is unemployment. Whilst a decline in the unemployment rate is associated with a strengthening in the rate of inflation an increase in the unemployment rate is associated with a decline in the rate of inflation.

Note that for Krugman inflation is about general increases in the prices of goods and services, which we suggest is a flawed definition. To ascertain what inflation is all about we have to establish how this phenomenon emerged. We have to trace it back to its historical origin.

The essence of inflation

The subject matter of inflation is an act of embezzlement. Historically inflation originated when a country’s ruler such as king would force his citizens to give him all their gold coins under the pretext that a new gold coin was going to replace the old one. In the process, the king would falsify the content of the gold coins by mixing it with some other metal and return diluted gold coins to the citizens.

On this Rothbard wrote,

More characteristically, the mint melted and recoined all the coins of the realm, giving the subjects back the same number of “pounds” or “marks”, but of a lighter weight. The leftover ounces of gold or silver were pocketed by the King and used to pay his expenses.^[1]

On account of the dilution of the gold coins, the ruler could now mint a greater amount of coins and pocket for his own use the extra coins minted. What was now passing as a pure gold coin was in fact a diluted gold coin.

…click on the above link to read the rest of the article…

Why Mainstream Economics Consistently Fails to Explain the Occurrence of Recessions?

March 26, 2018

WHY MAINSTREAM ECONOMICS CONSISTENTLY FAILS TO EXPLAIN THE OCCURRENCE OF RECESSIONS?

In his article released on March 21 2018 – Economics failed us before the global crisis – Martin Wolf the economics editor of The Financial Times expressed some misgivings about macroeconomics.

Economics is, like medicine (and unlike, say, cosmology), a practical discipline. Its goal is to make the world a better place. This is particularly true of macroeconomics, which was invented by John Maynard Keynes in response to the Great Depression. The tests of this discipline are whether its adepts understand what might go wrong in the economy and how to put it right. When the financial crisis that hit in 2007 caught the profession almost completely unawares, it failed the first of these tests. It did better on the second. Nevertheless, it needs rebuilding.

Martin Wolf argues that a situation could emerge when the economy might end up in self-reinforcing bad states. In this possibility, it is vital to respond to crises forcefully.

It seems that regardless of our understanding of the key causes behind the crises authorities should always administer strong fiscal and monetary policies holds Martin Wolf. On this way of thinking, strong fiscal and monetary policies somehow will fix things.

A big question is not only whether we know how to respond to a crisis, but whether we did so. In his contribution, the Nobel laureate Paul Krugman argues, to my mind persuasively, that the basic Keynesian remedies — a strong fiscal and monetary response — remain right.

Whilst agreeing with Krugman, Martin Wolf holds the view that, we remain ignorant to how economy works. Having expressed this, curiously Martin Wolf still holds the view that Keynesian policies could help during an economic crisis.

For Martin Wolf as for most mainstream economists the Keynesian remedy is always viewed with positive benefits- if in doubt just push more money and boost government spending to resolve any possible economic crisis. It did not occur to our writer that without understanding the causes of a crisis, administering Keynesian remedies could make things much worse.

The proponents for strong government outlays and easy money policy when the economy falls into a crisis hold that stronger outlays by the government coupled with increases in money supply will strengthen monetary flow and this in turn will strengthen the economy. What is the reason behind this way of thinking?

…click on the above link to read the rest of the article…

An Inflation Indicator to Watch, Part 1

February 18, 2018

An Inflation Indicator to Watch, Part 1

“Inflation is always and everywhere a monetary phenomenon.”
—Milton Friedman

Have you ever questioned Milton Friedman’s famous claim about inflation?

Ever heard anyone else question it?

Unless you read obscure stuff written for the academic community, you’re probably not used to Friedman’s quote being challenged. And that’s despite a lousy forecasting record by economists who bought into his Monetarist methods.

Consider the following:

When Friedman’s strict Monetarism fizzled in the 1980s, it was doomed partly by his own forecasts. Instead of the disinflation the decade delivered, he expected inflation to reach 1970s levels, publicizingthat prediction in 1983 and then again in 1984, 1985 and 1986. Of course, years earlier he foresaw the 1970s jump in inflation, but the errant forecasts that came later left him wide open to a “clock twice a day” dismissal.
Monetarists suffered an even harsher blow in 2012, when the Conference Board finally threw in the towel on Friedman’s favorite indicator, removing M2 from its Leading Economic Index (LEI). Generally speaking, forecasters who put M2 in their models are like bachelors who put “live with mom” in their dating profiles—they haven’t been successful.
The many economists who expected quantitative easing (QE) to wreak havoc on inflation are, of course, on the defensive. Nine years after QE began, core inflation remains below the Fed’s 2% target, defying their Monetarist beliefs.

When it comes to explaining inflation, Monetarism hasn’t exactly nailed it. Then again, neither has Keynesianism, whose Phillips Curve confounds those who rely on it. You can toss inflation onto the bonfire of major events that mainstream theories fail to explain.

But I’ll argue there might be a better way.

…click on the above link to read the rest of the article…

The Dollar–From Bohemia to Bust

February 12, 2018

THE DOLLAR – FROM BOHEMIA TO BUST

Virtually no investor studies history and the few who do always think it is different today. The most important lesson is that people never learn. If they did, they wouldn’t be invested in a stock market that on any criteria is now at a bubble extreme. And they wouldn’t be invested in a global debt market which has grown exponentially in recent decades and which will become worthless in the next few years as debtors default. Nor would anyone hold paper money which is down 97-99% in the last 100 years and which is guaranteed to soon fall the final bit to take the value to zero.

The history of money clearly illustrates that “Plus ça change, plus c’est la même chose” (the more it changes, the more it is the same thing). The most constant factor in the history of money is the cycle of boom and bust or euphoria and despair. Cycles are part of nature just like the change of seasons.

But throughout history, mankind has always believed that they know better than previous generations and can eliminate the cycle of boom and bust. This is what the British prime minister Gordon Brown proudly declared before the economy collapsed in 2007. And the Nobel Prize winner in Economics, Paul Krugman, also believes that eternal prosperity can be generated by creating endless debt and printing unlimited money.

But history has time and time again turned hubristic know-it-alls into humbled has-beens.

FOR 6,000 YEARS GOLD HAS OUTLIVED ALL CURRENCIES

Whenever mankind has deviated from sound money, the consequences have without fail been catastrophic. The only money which has survived since it first came into use around 6,000 years ago is gold. All other money has been destroyed by greed and economic mismanagement. I believe I have quoted Voltaire for over 20 years and will continue to do so: “Paper Money Eventually Returns to its Intrinsic Value – ZERO”.

…click on the above link to read the rest of the article…

Climate Crisis, ‘Smart’ Growth and the Logic of Calamity

December 1, 2017

Climate Crisis, ‘Smart’ Growth and the Logic of Calamity

A few years back at a Leftish gathering a group of self-described Marxist economists channeled liberal Democrat Paul Krugman’s explanation of the Great Recession without apparently knowing of Mr. Krugman’s thesis. Basically, a self-perpetuating recession had a grip on the economy, Wall Street was a catalyst of the crisis but ultimately only a bit player, money is economically ‘neutral,’ and government spending could raise demand and end the recession.

This is all standard fare in liberal economics. Within the circular logic of the genre, it circles just fine. What was odd was hearing it from self-described Marxists. Since Wall Street created the money that fueled the housing bubble and bust through predatory lending, how was its role not (1) pivotal and (2) political? If money is ‘neutral,’ why have financial asset prices responded so favorably (for their owners) to asset purchases by global central banks? And finally, where is the class analysis?

In similar fashion, UMASS Amherst economist Robert Pollin arguedrecently that capitalist economic production is necessary to maintain social wellbeing. The object of his disparagement is the suggestion that a planned reduction in economic growth (‘degrowth’) is the most probable way of resolving climate crisis. For the uninitiated, the contention that challenges to capitalist production will hurt ‘the little people’ has been a rhetorical tactic of capitalist economists for at least a century now.

Graph: Real (inflation-adjusted) Per Capita GDP is more than double today what it was in 1970. In the U.S. in 1970 mass starvation was notably absent. So people could conceivably not only get by if U.S. GDP were halved, but could thrive. The problems with doing so are (1) social complexity has been built into the political economy and (2) unwinding this complexity requires planning and the political will to do so. However, climate crisis poses the threat of unplanned degrowth of similar or greater magnitude. Source: St. Louis Federal Reserve

…click on the above link to read the rest of the article…

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