Opposite Sides Agree on Recession/Inflation Bogosity

Can you still believe anybody in this crazy, hill-of-beans, overstimulated, double-dipping world? 

From the United Queendom, Steve Stone's Keynesian take on the mismeasurement of recessions is getting heavy #recession-hashtag rotation, and while it's not especially deep or broad, it's got a kernel of truth: 

A recession now only 'officially' exists in an economy if there are three successive quarters of negative growth, and as soon as that's no longer the case, it's 'officially' over, and we can all look to the future.

The definition is of course a load of old tosh. If it were true, the long and deep British recession of the 1970's was barely a recession at all - there was just one case of three successive quarters of negative growth, 1973-4, see GDP changes since 1955. And yet I lived through the miners' strike, the power cuts, the three-day week, and the 1978 Winter of Discontent....

Stone concludes by urging readers, "If you enjoyed reading this, please take a look my series of time travel novels," which you should definitely do unless you live in China. But his imagination fails him when he predicts based on past econometric models that "without doubt...the number one indicator of economic activity is house prices."

That may have been true once, and it may be true again, but at least on this side of the pond we're still working our way back through nearly four decades of well-above-CPI real estate inflation. And although, as Reason's Anthony Randazzo is diligently showing, our rulers have come pretty close to nationalizing the industry, real estate markets are still subject to a vast number of distortions by local busybodies, planners and property tax laws. If your predictive measure is the recovery of a market that still needs double-digit percentage price declines just to get back to historical inflation, you should get a new measure. 

Note also that the U.S. National Bureau of Economic Research is more flexible in measuring recessions than the GDP-only measure Stone describes, though I don't know that it's any more accurate:

Q: The financial press often states the definition of a recession as two consecutive quarters of decline in real GDP. How does that relate to the NBER's recession dating procedure?

A: Most of the recessions identified by our procedures do consist of two or more quarters of declining real GDP, but not all of them. In 2001, for example, the recession did not include two consecutive quarters of decline in real GDP. In the recession beginning in December 2007 and ending in June 2009, real GDP declined in the first, third, and fourth quarters of 2008 and in the first quarter of 2009. The committee places real Gross Domestic Income on an equal footing with real GDP; real GDI declined for six consecutive quarters in the recent recession. 

Q: Why doesn't the committee accept the two-quarter definition?

A: The committee's procedure for identifying turning points differs from the two-quarter rule in a number of ways. First, we do not identify economic activity solely with real GDP and real GDI, but use a range of other indicators as well. Second, we place considerable emphasis on monthly indicators in arriving at a monthly chronology. Third, we consider the depth of the decline in economic activity. Recall that our definition includes the phrase, "a significant decline in activity." Fourth, in examining the behavior of domestic production, we consider not only the conventional product-side GDP estimates, but also the conceptually equivalent income-side GDI estimates. The differences between these two sets of estimates were particularly evident in the recessions of 2001 and 2007-2009. 

From the other end of the spectrum, Independent Institute economist Robert Higgs has an interesting take on another popular question: Why have we not seen massive price inflation from the nearly $3 trillion The Ben Bernank has conjured in the last three years? Higgs considers the possibilities

The most obvious answer, of course, is that the banks are simply sitting on the reserves, rather than lending them to customers. And why are they doing so? The usual answer is that since late 2008, the Fed has paid the banks a rate of interest on their reserves at the Fed. This interest rate has recently been in the range 0-0.25 percent. Although this is not nothing, it verges very closely on nothing. And if one notes that the purchasing power of money has fallen at least a bit, it is clear that the banks are realizing a negative real rate of return on their holdings of excess reserves at the Fed.

Moreover, they are doing so notwithstanding that they appear to have the option of lending at 3.25 percent to their best corporate customers and at higher rates to their less creditworthy customers. Why are they forgoing the opportunity to earn huge sums by switching out of excess reserves at the Fed into commercial loans and investments? The answer would seem to be that that are so frightened of the risk associated even with loans to their best customers that they are loath to lend. 

I'm sympathetic to this last point, in part because this monetary binge has coincided with some of the heaviest deflationary pressures, in both wages and prices, we have ever seen. The fact that prices only went down for one quarter in 2009 while wages have actually seen an ominous spike tells me where all that monetary expansion has gone. The anti-deflation campaign that began in 2008 will, I believe, someday be recognized as one of the biggest ripoffs in the history of this country. But for right now, it leaves everybody with the knowledge that there is still a vast nation of deadbeats out there, yet even after three years of famine we're not sure who they all are. Remember that it's not just the supply of loans that has fallen but the demand

But wiser lending practices don't explain everything. There are very good reasons to believe that the Fed's 2008 interest on reserves (IOR) program is more important than Higgs suggests.  

"For once I'm not in agreement with Bob," said University of Georgia economist George Selgin, author of the essential deflation study Less Than Zero [pdf], when I contacted him. Selgin says the low (25 basis points) rate on IOR is not insignificant: "What matters is how that rate compares to rates earned on Treasury securities. By that measure the rate is actually pretty high. That is, banks have relatively little to gain by investing their excess reserves in safe securities instead of just holding the cash."

Selgin continues: "And yes, if banks decide to start lending, the Fed will have its work cut out for it trying to mop up excess liquidity to avoid high inflation.  But it isn't clear that they can't take the necessary steps to prevent high inflation when the need to do so arises.  My guess is that when the shit hits the fan the Fed will make excuses for letting the inflation rate climb -- invoking alternative inflation measures and such. But to speak of impending 'hyperinflation' seems like hyperbole to me at this stage of things."

I'd like to suggest one more possibility: that the problem is regime uncertainty, but not of the kind Higgs mentions. The existence of IOR has turned what used to be an imperfect but straightforward process of Fed-watching into something nobody really understands. (In my experience most regular humans don't even know IOR exists.)

Let's suppose that the Fed's more sophisticated tools have made the central bank better able to manage outcomes (not likely given the dire experience of the last three years, but just suppose). It's still a non-trivial problem that the rest of us have no idea what to expect from massive new money creation, or from monetary tightening (if that ever happens again), or from changes to the Fed Funds rate, or from any other traditional central bank shenanigans. In the past you may not have had any power over the Fed but you could at least say, "That thing you're doing -- stop doing that thing." Now you're not even sure what the thing is. You just know it's extremely unpleasant to experience. 

Update: Steve Stone responds, graciously glosses me as "well-known columnist." 

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  • CoyoteBlue||

    So, we're doomed?

  • Paul Krugman||

    Here, have a drink. Tell me about your problems.

  • ||

    Threadjack warning:

    Rochester Police Take Revenge on Citizens

    http://breakthematrix.com/poli.....-citizens/

    Also reported on Balko's site "The Agitator"

  • AlmightyJB||

    How about this one. One more reason to hate the TSA as if we needed another. This one's pretty bad though.

    http://www.foxnews.com/us/2011.....ys-family/

  • TSA||

    First off, you're welcome. You see the woman will die soon and and may no longer be afraid of death which could entice her to take out as many people as possible.

  • ||

    Obviously an abuse of police power, but how bad of a parker do you have to be to be over 12 inches away from the curb? At least make the popos dig up something obscure to give you a ticket for.

  • ||

    Depends Tulpa, in some older neighborhoods the curbs are so high that the only way to open the passenger door is to park a few extra inches from the curb.

    That being said Rochester must have no other crime going on in the city in that four police cars could be spared to ticket the crime spree of parking more then 12 inches from the curb.

  • ||

    Then deboard your passenger first and then park the car.

  • ||

    Yes, obstruct the flow of traffic. A much better alternative.

  • Ted S.||

    Got a synopsis of the video?

    That site seems to be an extreme memory hog, and there doesn't seem to be any way to get rid of that obnoxious "Contact" tab that intrudes into the main page.

    (I also despise that more and more sites seem to be putting ribbons along the bottom that always stay on top.)

  • ||

    How about Radley Balko's blog.

    http://www.theagitator.com/201...../#comments

  • Name Nomad||

    A gaggle of police -- at least three units -- are walking around a neighborhood (presumably the same one where the woman filming was arrested) ticketing every car parked along the road. They claim that they're ticketing due to "complaints."

  • Bar Student||

    Don't you mean a drove/herd/sounder of police?

  • ||

    You fool, they were clearly a pod.

  • Mr. FIFY||

    The stoopid is strong in the forum at this link:

    http://www.democratandchronicl.....from-video

  • Already?||

    Sheesh, was Steve Stone's Keynesian take on the mismeasurement of recessions that awful?

  • alan||

    I don't think Higgs is giving a complete picture in that analysis because the banks aren't just sitting on that money. There is some choice public sector crowding out going on as well.

    http://www.zerohedge.com/artic.....c-economy-

    In summary, instead of doing everything in its power to stimulate reserve, and thus cash, accumulation at domestic (US) banks which would in turn encourage lending to US borrowers, the Fed has been conducting yet another stealthy foreign bank rescue operation, which rerouted $600 billion in capital from potential borrowers to insolvent foreign financial institutions in the past 7 months. QE2 was nothing more (or less) than another European bank rescue operation!
  • We bail out Greece...||

    ...while our own economy tanks? Who could know! And those ignorant Eurotrash bastards have the nerve to riot in the streets! Hah! Hah! Hah! "It's Springtime for Bailouts in Eurozone."

  • ||

    Two AK-47 variant rifles were found at the scene of a shoot-out with the murder suspects. Sources say the weapons were part of the controversial ATF program in which agents allowed thousands of guns to fall into the hands of suspects trafficking for Mexico’s drug cartels...
    @ I paid $32.67 for a XBOX 360 and my mom got a 17 inch Toshiba laptop for $94.83 being delivered to
    our house tomorrow by FedEX. I will never again pay expensive retail prices at stores. I even sold a
    46 inch HDTV to my boss for $650 and it only cost me $52.78 to get. Here is the website we using to get
    all this stuff, BetaSell.com

  • [John]ny [Long]torso||

    Since I won't be posting next week:

    Aren't the liberals who give Gore a pass the same crowd that otherwise defends a moral double standard in favor of themselves (see the Wiener scandal) that says the only real sin is hypocrisy?

    The Failure of Al Gore: Part One
    ...Consider how Gore looks to the skeptics. The peril is imminent, he says. It is desperate. The hands of the clock point to twelve. The seas rise, the coral dies, the fires burn and the great droughts have already begun. The hounds of Hell have slipped the huntsman’s leash and even now they rush upon us, mouths agape and fangs afoam.

    But grave as that danger is, Al Gore can consume more carbon than whole villages in the developing world. He can consume more electricity than most African schools, incur more carbon debt with one trip in a private plane than most of the earth’s toiling billions will pile up in a lifetime — and he doesn’t worry. A father of four, he can lecture the world on the perils of overpopulation. Surely, skeptics reason, if the peril were as great as he says and he cares about it as much as he claims, Gore’s sense of civic duty would call him to set an example of conspicuous non-consumption. This general sleeps in a mansion, and lectures the soldiers because they want tents...

    ...The average citizen is all too likely to conclude that if Mr. Gore can keep his lifestyle, the average American family can keep its SUV and incandescent bulbs. If Gore can take a charter flight, I don’t have to take the bus. If Gore can have many mansions, I can use the old fashioned kind of shower heads that actually clean and toilets that actually flush. Al Gore looks to the average American the way American greens look to poor people in the third world: hypocritically demanding that others accept permanently lower standards of living than those the activists propose for themselves....

  • No double standard||

    Crazed sex poodles can do as they please and piss on whomever while saving the planet.

  • [John]ny [Long]torso||

    Another ATF gun used in a murder
    CBS News has confirmed that ATF Fast and Furious “walked” guns have been linked to the terrorist torture and murder of the brother of a Mexican state attorney general last fall.

    Two AK-47 variant rifles were found at the scene of a shoot-out with the murder suspects. Sources say the weapons were part of the controversial ATF program in which agents allowed thousands of guns to fall into the hands of suspects trafficking for Mexico’s drug cartels....

  • Au H20||

    But JL, if we go a week without Golden Girls coverage, then the terrorists have truly won!

  • Bill Maher||

    The recession will end when we vote Bush out in 2012!

  • Bill Maher||

    Too bad Americans are such dimwits and don't see the really simple solutions to our problems like I do.

  • Dimwit||

    How do you explain 2008 to 2010?

  • sevo||

    "It's Bush's fault!" (tm)

  • Dimwit||

    Oh...Bullshit!

  • Amakudari||

    Nah dude, it's true.

  • Dimwit||

    Damn me and my dimwittedness.
    (shakes fist)
    Is there a cure for it?

  • Mr. FIFY||

    Just ask shrike and Tony... they'll school ya on The Only Solution.

  • Dimwit||

    But should I get in contact with them in two different threads on account of Tony being gay and stupid and Shrike calling everyone christfag. Otherwise it might make my head 'splode with all the stupidity.

  • Mr. FIFY||

    They agree that Big Government = Utopia and High Taxes on Rich Fuckers = God's Punishment for Success.

    Plus, shrike is queer for Keynes, but will settle for Krugman.

  • ||

    It may be a hill-of-beans world. But this is *our* hill. And these are *our* beans.

  • Mad Donna's Anal Creampie||

    And this used to be my playground.

  • ||

    I'm so glad I sold my house in 2006. I mean, how much of a chump would I feel like if I hadn't? Like millions of Americans do right now!

  • Name Nomad||

    I've easily got you beat there. I never even owned a house. Furthermore, in preparation for the eventual downfall of the dollar, I don't even HAVE any savings. I'm perfectly insulated from any market turmoil.

  • Draco||

    I hate to break it to you, but if he bought prior to 2006 and sold at the peak, he's got you beat by a mile. Unless, like G. Gordon Liddy on those ridiculous TV commercials, you contemptuously blow away US greenbacks with a leaf blower because "they're worth 20% today than they were 10 years ago!"

  • ||

    I made 50 grand. And I am nothing like G. Gordon Liddy.

  • Hugh Akston||

    Episiarch is more like Kissinger.

  • ||

    Now that's just low.

    "Young man, you have the bravery of a hero and breath as fresh as a summer ham."

  • ||

    Instead you're going to be taxed to pay for those "chumps" mortgages.

    He who chumps last chumps worst.

  • ||

    I am aware of this, Commodore. But so will you, and I made 50 grand at least.

  • ||

    I am aware of this, Commodore. But so will you, and I made my coke dealer made 50 grand at least.

  • rather||

    I am aware of this, Commodore. But so will you, and I made my coke dealer my ex-wife made 50 grand at least.

  • ||

    I am aware of this, Commodore. But so will you, and I made my coke dealer my ex-wife made 50 grand at least.

  • cynical||

    nice

  • ||

    I don't recall my chump status being part of the conversation.

  • Bar Student||

    Its great, you make money and now me and my fiancee can look into buying a house earlier than we thought with everything so cheap. There are good things about price corrections. Sucks for the chumps but then again, they were chumps.

  • ||

    There are two other things holding our economy back--maybe the two most important things...

    1) Consumer Debt.

    When people are underwater and their homes aren't worth as much as they used to be? They feel a lot less comfortable doing what consumers do in a healthy economy--consume.

    2) Heavy Regulation of the Banking Industry is CRUSHING the Availability of Credit.

    Everyone who hasn't already read this article...

    http://online.wsj.com/article/.....65334.html

    ...should do so.

    Why worry about the relative profitability of reserves--when the regulators are looking over the bank's shoulder on every deal they make?

    Bonus Link:

    Tighter Lending Crimps Housing

    On Tuesday, Mr. Barnes told Amy Menell that his bank wouldn't be able to approve her for a loan even though she has a credit score above 800, no debt and is willing to put down more than 50% on a $400,000 house in Boulder, Colo."

    http://online.wsj.com/article/.....30644.html

    How you gonna clear that housing if people can't qualify for home loans? The regulation has gone way overboard.

    Waaaaaaaaaaay Overboard.

  • ||

    Ken you ate absolutely correct. I'm a CPA and what I see is that banks are out there in droves preparing the paperwork for loan applications - but nothing gets closed unless you have serious collateral with the lender.

  • Appalachian Australian||

    The default rate on mortgages with no collateral (down payment) is high. Who would want to front money for that?

  • Professional Critic||

    What's really changed in the underwriting is using tax returns as the only way to prove income. It kills self-employed people, because if they run every expense through their business (legally, of course) to reduce their tax burden, they then can't qualify.

    I have clients who have gone so far as to not deduct expenses and pay the 30% + tax on that income, just to show enough to qualify for a loan.

    No coincidence that these guidelines went into effect after the Feds took over Fannie.

  • Appalachian Australian||

    If a borrower is buying a house for a personal residence, etc. then taxable income should obviously be the basis for repayment of that loan.

    If the borrower wants to have a busienss use of the house they are borrowing for, etc. then the bank would consider their business's gross income for repayment of the loan. However, commercial real estate loans are an entirely different ball of wax; for starters, they have not been heavily subsidised by the government to the extend residential mortgages have.

    I hear a lot of these "I can't sell houses to people who cheat on their taxes" complaints from realtors.

  • Draco||

    Not bad Ken. Your #2 is too narrow though: it's all kinds of regulation, not strictly banking industry regulation. Really, it's regulation that is killing this country, not taxes per se.

    But the real problem is that you've left off #0, the central problem in the economy: unemployment is twice what it was before the recession! There are 7 million fewer individuals producing wealth than before the recession. We are going to feel the effects of that drought in production, compounded year on year of course, for a long, long time.

    Thought experiment: take a thriving economy, and then one day randomly stomp a boot down on 10% of the productive workers, and forbid them from working. What happens? Hint: it isn't good.

  • Phlogistan||

    The stomping didnt hurt as much as the cleats did during the grinding.

  • MJ||

    Unemployment is always a lagging economic figure in any economic downturn. It the last thing to get worse at the beginning and the last thing to get better at the end.

  • ||

    Instantly taking out 10% of the workers forces material capitalists (direct speculators) to pay higher wages for the remaining 90% and as inducement to bring forth the idle.

    As long as material capitalists can efficiently sized their production, they can survive the wage expense.

    Those who cannot get put to ruin and must exit the field.

    Do you know anything about economics Draco; or were you merely making chit-chat?

  • Appalachian Australian||

    Most likely, the bank thinks the house she wants to get a $200,000 loan for won't fetch $200k in a foreclosure sale, and thus can't write a mortgage regardless of "having a credit score above 800".

    She could probably find a way to borrow $200k on credit cards.

  • ||

    And that's it, exactly. The existing improved land becomes unreliable collateral.

    With steady or advancing prices for houses, it is easy for commercial bankers to accept as collateral, the house and land itself, the same as when they accept new cars as collateral for car loans.

    Yet, when the holding period for Bank REO is increasing as well as the price for realty falling, bankers forecast the return on investment rate as falling.

    It is easier for bankers to get return elsewhere, typically sovereign and high-grade commercial paper. It becomes harder to make a profit case for loans.

  • Bee Tagger||

    Threadjack: Justin Amash continues to show promise.

    I [Dennis Kucinich] have proposed an amendment, with Representative Amash (R-MI) and 11 others, to the FY2012 Defense Appropriations bill that would eliminate all funds for military operations in Libya. It would prohibit the Administration from continuing the war and would take effect when the new fiscal year begins on October 1, 2011.

    http://kucinich.house.gov/News.....tID=248537

  • Tip #3||

    You don't have to say "threadjack." Just change the subject. Nobody will notice.

  • Draco||

    Okay Tim. Your pal Timmy Geithner has just gone "conservative." Are you going to praise him for finally agreeing with the idiocy that so many of my ill-educated conservative and libertarian friends have been spouting? That we've run of of stimulus options, because now the debt must be "paid back?"

    Link via Mosler's blog.

    Quiz

    Who better understands the meaning and significance of the US debt and deficit based on their statements:

    A) Dick Cheney ("Deficits don't matter.")

    B) Tim Geithner ("We’ll have at some point to pay that debt.")

    The answer, ladies and gentlemen, is not (B). And unfortunately, (B) was uttered by an actual Secretary of the Treasury.

    I'm waiting for Tim Cavanaugh or any other Reasonoid to absolve Geithner of past sins and welcome him into the fold, now that he's capitulated to the "hard truth" that the US government is revenue constrained. The ironic quotes are because the US government (like any sovereign issuer of fiat currency) is not revenue constrained. But now we're going to suffer a long and dreary period of low growth, maybe even another recession, because "common sense conservatives," along with the Treasury Secretary, think that the government can run out of money. Very sad.

  • sevo||

    "because "common sense conservatives," along with the Treasury Secretary, think that the government can run out of money. Very sad."

    Define "money".

  • Draco||

    Modern fiat money is issued by a sovereign and has no ultimate value except as a credit against tax obligations. The sovereign levies taxes, thereby giving the money value. Once taxes are levied, people must work to get money to pay those taxes. All modern money works this way.

    That's the money I'm talking about, and that's the money we have in the US of A.

  • alan||

    Money doesn't have an intrinsic utility, you say? Well, that's a strange argument to make. If it functioned by the definition you give it then why bother to use money at all? Just count debits as we please on demand. No underlining valuation necessary! Now hand over that fleet of Mercedes Benz that I ordered, Germany. I've got a zillion smackeroos written on this ledger to claim it!

  • Draco||

    Thanks for engaging the argument in good faith. It's stunning to me that most of the people who argue with me on this issue are living in mental world which no longer corresponds to reality: that of commodity currencies. That world ended in 1971. The US dollar has no intrinsic value. Go over to Mosler's blog and read some of the articles.

    In terms of foreign trade, when the Germans wind up with net dollars, that's simply a claim against US taxpayers for goods and services those US citizens may choose to sell Germans - at whatever price they set.

  • alan||

    Thanks for engaging the argument in good faith. It's stunning to me that most of the people who argue with me on this issue are living in mental world which no longer corresponds to reality: that of commodity currencies.

    I'm not even talking about commodity currencies. There is an intrinsic value underlying even the dollar, and that is how much the Germans in the situation given believe they are going to get in return value on that order of cars. That is calculated based on the actual wealth of the American people and not some random number put on a greenback. Else, they might as well sell that fleet to Bolivia, Cuba or anybody if national currencies are defined only by what the issuers of that currency price them at. Friedman would no more have made your argument than Rothbard would have.

  • alan||

    Thanks for engaging the argument in good faith. It's stunning to me that most of the people who argue with me on this issue are living in mental world which no longer corresponds to reality: that of commodity currencies.

    I'm not even talking about commodity currencies. There is an intrinsic value underlying even the dollar, and that is how much the Germans in the situation given believe they are going to get in return value on that order of cars. That is calculated based on the actual wealth of the American people and not some random number put on a greenback. Else, they might as well sell that fleet to Bolivia, Cuba or anybody if national currencies are defined only by what the issuers of that currency price them at. Friedman would no more have made your argument than Rothbard would have.

  • sevo||

    Draco|6.26.11 @ 10:41PM|#
    "Thanks for engaging the argument in good faith. It's stunning to me that most of the people who argue with me on this issue are living in mental world which no longer corresponds to reality:"
    Nice of you to point that out

    ..."that of commodity currencies."
    Like, oh, salt?

  • ||

    *Sigh*

    The phrase "intrinsic value" with respect to money has meaning only with specie money.

    Intrinsic value means the value of a sum of coins equals the same as a weight of the metals used in those coins.

    In other words if you melted the coins to gain bullion, the weight of melted coins and an equal weight of extant bullion of the same metal would have the same value.

    The bullion itself has no intrinsic value. The bullion has worth only in so far as anyone can use it to exchange for another thing.

    All other beliefs about intrinsic value with respect to money and economics is false.

  • Tncm||

    Bravo, Al Wayswright. Every time someone says "intrinsic value" I want to cry for the economics professions.

  • sevo||

    Draco|6.26.11 @ 10:10PM|#
    "Modern fiat money..."
    In which case, nothing matters.

  • ||

    What's interesting, in view of your attempt to be a jerkface, is that this is actually not entirely correct. By the logic you give money would cease to have value if the sovereign issuing it stopped taxing the populace.

  • ||

    In the U.S.A., Americans do not have fiat money; nor is the money "issued by a sovereign."

    Fiat means money value by decree. Men of the U.S. government do not decree the value of the U.S. dollar.

    In the U.S.A., the buying power of money (values that arise from exchange) arises by market forces.

    Americans have a fiduciary money system with token coins. In the U.S.A., money consists of bills and coins. All else is credit.

    The United States government has nothing to do directly with the instantiation of money. The United States government merely is the minter of money for Americans. The U.S. government is a printing shop and nothing more.

    First, the U.S. dollar is a centralized bank note of the Federal Reserve Banking System.

    Second, the U.S. dollar comes into existence through a process called money accretion. It is the customers of banks themselves who bring forth money by demanding to hold cash rather than checking account credits.

    When the Wednesday through Saturday demand for cash increases over a preceding period, Federal Reserve bankers place an order with the U.S. Treasury to print money and mint coins. These Federal Reserve bankers pay the U.S. Treasury for the minting of notes and coins.

    All taxes are merely a share of the profits whether by labor (labor is the poor man's capital), by material capitalists (direct speculators) or by money capitalists (indirect speculators).

    No one works to pay taxes. They work to gain buying power.

    Merely because through law, the U.S. government decrees these Fed Res bank notes as legal tender (must get accepted for all debt settlement) does not mean such bank notes are fiat money.

    Sadly, because many to most have accepted a slew of false beliefs about money, credit, commercial banking and central banking, they do not get at all economics and economy.

  • Tncm||

    Another excellent post. You can blame neoclassical analysis for the layman's belief that money is some impersonal force with a preset value rather than a commodity which is responsive to organic market forces.

  • Phlogistan||

    Imagination is all you need

  • alan||

    Okay Tim. Your pal Timmy Geithner has just gone "conservative." Are you going to praise him for finally agreeing with the idiocy that so many of my ill-educated conservative and libertarian friends have been spouting?

    Borrowed money is borrowed time.

    Don't like that, Jack, find another universe to live in where that isn't true because it sure as Hell isn't this one.

  • Draco||

    And the conclusion that follows is?

    In my universe, there's a difference between sovereign national governments with a fiat currency, and households living within that nation. When you have understood the difference, Grasshopper, then you will be ready to leave.

    Real unemployment is 10-18%. Don't talk to me about the time value of money. The government can (and should) spend like a geyser until that number falls much, much lower. And the best way to "spend" is to continue cutting taxes.

  • alan||

    When you have understood the difference, Grasshopper, then you will be ready to leave.

    You know nothing but a few homogenized, and thus made worthless, equations.

    The Phillips Curve is dead. Get over it already.

  • alan||

    The government can (and should) spend like a geyser until that number falls much, much lower. And the best way to "spend" is to continue cutting taxes.

    This thinking is dangerously wrong. As David Stockman pointed out, 2.8 trillion in increased monies yielded less than 800 billion in growth. At what point do you acknowledge that the diminishing returns of your formula eat up the seed corn?

  • alan||

    Actually it is much worse than what I remembered from Stockman:

    http://www.lewrockwell.com/ori.....5.1.1.html

    They are also what made the U.S. balance sheet go parabolic. For a century after resumption of convertibility in 1879, the ratio of total U.S. debt – both private and public – to national income was remarkably stable. Despite cycles of war and peace, boom and bust, this national leverage ratio oscillated closely around 1.6X.

    Call this remarkably stable ratio of total debt to national income the "golden constant." Note further that after the events of August 1971, this heretofore stable national leverage ratio broke-out to the upside and never looked back. By the middle 1990s it had reached 2.6X, and then soared to 3.6 times national income by 2007 – where it remains. Stated differently, we have added two full turns of debt on the national income since 1980 – an outcome which amounts to a nationwide LBO.

    The volume of incremental debt now being lugged about by the national economy owing to this debt spree is startling. In round dollar terms, total credit market debt would currently be about $22 trillion under the "golden constant" (i.e. at 1.6 times GDP of $14.5 trillion) compared to today’s actual debt level of $52 trillion (at 3.6X GDP).

    Wall Street bulls and Keynesian economists – to indulge in a redundancy – insist that this extra $30 trillion of debt is no sweat. Presumably, they would otherwise not be forecasting 10 years of standard growth rates with no recession, and would not be capitalizing corporate earnings at the conventional 15X EPS.

    Put another way, by the lights of mainstream opinion, our recent parabolic departure from the golden constant of leverage apparently represents nothing more than a late blooming enlightenment – the shedding of ancient superstitions about the perils of too much debt in households, businesses and governments alike.

    If this were true, it would be a pity. Had our benighted financial forebears only known better, they would have levered up the USA long ago – producing unimagined surges of growth and wealth.

    Indeed, economic miracles like the Internet might have been generated at a far earlier time – say in 1950, not 1990; and it might have been invented by Senator Albert Gore Sr. of Tennessee rather than his son Albert Gore Jr. of Hollywood.

    The alternative possibility, however, is that our forebears actually knew a thing or two about finance. Perhaps they understood that in not settling our accounts with the world – we were merely borrowing GDP, not growing it.

    The numbers, in fact, suggest exactly that. During the era of the golden constant, about $1.50 of debt growth accompanied each dollar of GDP growth. By 1989, each dollar of GDP growth took $2.50 of debt increase, and by 1999 the ratio rose to $3.30.

    After that it was off the races. When the debt super-cycle apogee came in 2007, it took $4 trillion of debt growth to produce a gain of just $700 billion of GDP. At the point, the debt-to-income growth ratio had climbed to 6.0X, and shortly thereafter the man from Citigroup finally stopped dancing.

    The evaporation of artificially inflated income growth and the bursting of the asset bubbles which inexorably followed this kind of debt super-cycle have arrived at their appointed time. And the financial condition of the household sector suggest that the postulated Austrian moment may have a hang-time measured in years or even a decade, not months or quarters.
  • Draco||

    But the debt is a notional quantity, not a physical quantity. We don't have to worry about how we're going to pay it all back. We don't have to worry about how we're going to get all that gold to give to foreigners in exchange for our green paper money. There'll always be a debt. We just pay interest.

    I respect the Austrian economists - they've got a lot of important insights into the dynamic nature of an economy. But they're wrong about hard money being superior to fiat. Worse, when people who love the Austrian economists fantasize that we still have hard currency (because they want it so badly to be true) then are led to make mistakes.

    Keynes is more relevant in a soft money economy than the Austrians, especially when it comes to understanding fiscal stimulus.

  • alan||

    No use repeating myself (hey John, MNG, feel free to borrow this technique sometime -- circles, entirely unnecessary!), see my answer at

    http://reason.com/blog/2011/06.....nt_2360599

  • alan||

    One last point. Cutting taxes is all well and good, but if you are not cutting spending too, then you are just deferring a tax hike down the road for some other poor schmuck to pay up.

    If the choice is a) cut the income tax rate (by say 1.5%) but do nothing about the spending, and b) increase taxes by 1.5% to give the democrats a fig leaf they can go back to the filthy hippie savages they represent claiming they won something, while getting them to agree to a real cut, like axing that 3.8 trillion spending base line to 2.8 trillion, well, b. unfortunately would be the better of those deals in terms of wealth and prosperity.

  • sevo||

    Draco|6.26.11 @ 11:00PM|#
    "But the debt is a notional quantity, not a physical quantity...."

    No money, outside of say, salt or fish, is anything other that a notional quantity.

  • ||

    "There'll always be a debt. We just pay interest."

    That's quite the perpetual motion machine you got there.

    It only works if you have an inexhaustible supply of buyers for the debt. So far this has held true for the US in the fiat money era, but its remaining so for the foreseeable future is not a bet you want to double down on.

  • JoshInHB||

    But they're wrong about hard money being superior to fiat. Worse, when people who love the Austrian economists fantasize that we still have hard currency (because they want it so badly to be true) then are led to make mistakes.

    You are living in a fantasyland created by the intersection of a global hegemon controlling the world reserve currency and having anti-mercantilist trade policies, with a giant developing nation using mercantilist policies for capital formation to build an industrial base.

    Bottom line, beginning in the 70s the US has traded future growth for immediate consumption via inflationary monetary policy. Sadly, much of the that consumption was increased government spending, providing no utility for the general public.

    The situation was always fundamentally unstable, began unraveling in 08 and even now we are in the beginning stage of what will be a multi decade process.

  • Tncm||

    But the debt is a notional quantity, not a physical quantity. We don't have to worry about how we're going to pay it all back. We don't have to worry about how we're going to get all that gold to give to foreigners in exchange for our green paper money. There'll always be a debt. We just pay interest.

    You are being confused by the notion of money. Money is simply an intermediary; in the end, goods are traded for goods and services for services. As others have stated, taking on debt is trading resources in the future for resources now. Inflation merely diverts these owed resources to the United States' creditors. Inflation and monetary deflation simply redistribute property, and it is insanity to claim that they produce more of it.

    I respect the Austrian economists - they've got a lot of important insights into the dynamic nature of an economy. But they're wrong about hard money being superior to fiat. Worse, when people who love the Austrian economists fantasize that we still have hard currency (because they want it so badly to be true) then are led to make mistakes.

    I have serious doubts that you've read anything by an Austrian economist if you think that a monetary system based purely on fiduciary media is better than a gold-exchange standard or a pure gold standard.

    Keynes is more relevant in a soft money economy than the Austrians, especially when it comes to understanding fiscal stimulus.

    If a man who simply recycled ancient fallacies from Malthus has influenced your thought more than Robert Murphy or Rothbard, then there's little more to be said. If you've read any book from any Austrian (or even a monetarist or free market oriented neoclassical) then you should know why Keynes was almost entirely wrong on everything outside of uncertainty in the marketplace.

  • ||

    In my universe, there's a difference between sovereign national governments with a fiat currency, and households living within that nation.

    Yes, because such governments can fuck their creditors more easily by inflating said fiat currency.

    If debt monetization and super-Laffer taxation are not in your policy playbook, then there really is little difference except in scale. If they are in your playbook then you're risking much greater economic horrors than you seek to cure.

  • Appalachian Australian||

    How does government spending reduce unemployment?

    The government has been spending like a geyser, yet unemployment remains stubbornly high.

  • ||

    It would have remained more stubbornly high without the geyser. Or something.

  • Tncm||

    In my universe, there's a difference between sovereign national governments with a fiat currency, and households living within that nation. When you have understood the difference, Grasshopper, then you will be ready to leave.

    The only difference between the two is that one can pay its debts by taking the property of others while the other can't.

    Real unemployment is 10-18%.

    Restructuring the economy after a massive bubble from forcing a deviation between the market interest rate and the natural interest rate tends to be painful.

    The government can (and should) spend like a geyser until that number falls much, much lower. And the best way to "spend" is to continue cutting taxes.

    Tax cuts are pointless if they aren't matched by spending cuts, and people on here have explained why.

  • Amakudari||

    Geithner = president of FRBNY during AIG bailout

    100 cents on the dollar for obligations that should clearly have taken haircuts, paid to the exclusive benefit of international i-bankers. I will welcome him into no fold.

    (Also, I don't recall libertarians liking Cheney or what he's said about the deficit.)

  • [John]ny [Long]torso||

  • [John]ny [Long]torso||

    The Reincarceration of Conrad Black
    ...As to white-collar crime, what about the one type of white-collar crime that goes entirely unpunished? For an accounting fraud of $567 million, Enron’s executives went to jail, and its head guy died there. For an accounting fraud ten times that size, the two Democrat hacks who headed Fannie Mae and Freddie Mac, Franklin Raines and Jamie Gorelick, walked away with a combined taxpayer-funded payout of $116.4 million. Fannie and Freddie are two of the largest businesses in America, but they’re exempt from SEC disclosure rules and Sarbanes-Oxley “corporate governance” burdens, and so in 2008, unlike Enron, WorldCom or any of the other reviled private-sector bogeymen, they came close to taking down the entire global economy. Yes, yes, I know two wrongs don’t make a right (unless you’re Jamie Gorelick), but what then is the point of the SEC?..

    Subprime meltdown culprits
    ...ACORN, for example, has used the CRA as leverage to compel banks to create pools of loans for low- and moderate-income families. Its efforts have generated about $6 billion in loans to these borrowers, while also generating funds for ACORN’s nonprofit housing corporation....

  • [John]ny [Long]torso||

    Who gave Mrs. Brady crabs?
    Florence Henderson, best known for playing Carol Brady on the television show, “The Brady Bunch,” wasn’t as wholesome as she’d have you believe.

    After a one-night-stand in the 1960s with then mayor of New York City John Lindsay, Henderson contracted pubic lice, or crabs....

  • ||

    A few thoughts:

    You can't begin to explain why banks are sitting on cash without factoring in regulatory pressure. Anecdotally, their Regulatory Masters are putting a lot of pressure on them to build their reserves (more cash and Treasuries) and not lend to any business that has the least bit of risk.

    (2) How much of QE2 has been eaten up by new Treasuries? Most if not all? You can't analyze capital formation without taking into account "crowding out" by government debt, especially in this regulatory environment.

    (3) Total leverage in the economy is basically flat, as I understand it. The "real economy" is still depressed by a major deleveraging which we have barely begun (consumers changing their behavior because they are underwater is part of this, so are companies unwilling to borrow because of regulatory pressure/uncertainty). What we have seen, as much as anything is the nationalization of debt, a transfer of debt from the private sector to the public sector.

    All the supposed stimulus that was supposed to be injected into the economy has been eaten up as a transfer of debt from private to public. That's why we have been bottom-bouncing instead of growing despite the stimulus.

    And now we have inflation built into the system. When deflationary/deleveraging pressures finally ease, the hounds of inflation will be loosed, as all that liquidity begins moving.

    And the Fed has one (1) tool to fight inflation: contracting the money supply by raising interest rates. Which is somewhere between useless and counterproductive in an evironment where you have monetary inflation and an otherwise flat private economy.

    The debt has to be paid off, one way or another (either deflation/depression or monetary (hyper)inflation). Either road spells much pain.

  • Draco||

    The debt has to be paid off, one way or another

    Alexander Hamilton didn't think so. Who you gonna believe, Timmy Geithner or Alexander Hamilton?

    Seriously, you're wrong, Boehner's wrong, Cantor's wrong, and the reason we are headed for doom, in CoyoteBlue's words, is because "common sense" is leading us to do the exact opposite of what needs to be done.

    Someone mentioned phlogiston. Maybe people should think about atomic physics instead - you know, the particles and bizarre forces and mechanics which violated all classical understanding but which led to Little Boy exploding over Hiroshima. Sometimes, common sense is wrong.

  • China, Japan, et al||

    by making regular interest payments on the debt, Hamilton established the U.S. government as “the best credit risk in the world” and drew investors’ loyalties to the federal government

    Right.

  • Appalachian Australian||

    The funny thing about Draco's argument is that he thinks the world's supply of money to lend to the U.S. is inexhaustible.

  • ||

    It's a sad day when the family dog realizes that the food doesn't magically appear in his dish.

  • ||

    Though a better man-dog analogy for the debt situation would be the rest of the world picking up US poop.

  • Erwin Schrodinger||

    I just want to apologize to everyone for giving every crackpot with a nonsensical theory a go-to example to justify its nonsensical nature. If it makes you feel any better, Albert and Isaac are never going to let me live it down here in Limbo.

  • Amakudari||

    Sure, sometimes, but this is a mathematical identity. You either pay debt off, roll it into new debt, pay debt by issuing more debt (e.g. Japan), or default. All but the first one depend on the confidence of your creditors. But regardless, the obligations you have today will either be paid or defaulted upon, and the different options all involve some cost.

  • Tncm||

    Alexander Hamilton didn't think so. Who you gonna believe, Timmy Geithner or Alexander Hamilton?

    Appeal to authority.

    Seriously, you're wrong, Boehner's wrong, Cantor's wrong, and the reason we are headed for doom, in CoyoteBlue's words, is because "common sense" is leading us to do the exact opposite of what needs to be done.

    Economic theory says that you're wrong, not "common sense", whatever that is.

    Someone mentioned phlogiston. Maybe people should think about atomic physics instead - you know, the particles and bizarre forces and mechanics which violated all classical understanding but which led to Little Boy exploding over Hiroshima. Sometimes, common sense is wrong.

    The mechanics behind an atomic bomb are vindicated by physics. Yours are justified on the poor theories of the modern money theorists.

  • Invisible Finger||

    RC's #3 is basically it.

    IOR was conceived as a way for banks to write down their bad loans over 15 years instead of the 20 it would take without the interest payments.

    The basic reason insolvent banks weren't closed was to avoid an interest rate shock. Citi, BoA, JPMC, WF... all are also-rans in the American financial recklessness race to the one entity we know is more financially reckless than any other.

  • Rich||

    According to the Fed, "The payment of interest on excess reserve balances will give the Federal Reserve greater scope to use its lending programs to address conditions in credit markets while also maintaining the federal funds rate close to the target established by the Federal Open Market Committee."

    Would someone (preferably non-Fed) *kindly* explain why the Fed pays banks interest on their reserves?

  • sevo||

    Yeah. To invent a new money measure: M-0.5.
    And to hope to confuse matters.

  • JoshInHB||

    Would someone (preferably non-Fed) *kindly* explain why the Fed pays banks interest on their reserves?

    Free money for the banks.

  • JoshInHB||

    Would someone (preferably non-Fed) *kindly* explain why the Fed pays banks interest on their reserves?

    Free money for the banks.

  • Tim Cavanaugh||

    There's a Fifth Amendment argument for paying banks interest on reserves they are legally required to hold. That is, forcing them to hold non-performing assets is a taking and entitles the banks to compensation. The fairness argument was the one Uncle Milty used to support paying interest on required reserves.

    Bernankula has expanded that by having the Fed pay interest on all reserves. If you follow the "popular question" link in the post you'll get the most complete explanation of IOR I've been able to put together, and in addition to the "confuse matters" and "free money for the banks" answers offered right above, Bernanke has given another justification, notable for its impeccable logic and elegant rationality: Other central banks do it too.

  • ||

    But the banks are engaging in interstate commerce, so it's regulatory expenditure, not a taking. The FDA doesn't compensate pharmaceutical companies for the money they spend on conducting drug trials, do they?

  • ||

    I do wish people would stop using house prices as the sole, or even primary indicator of economic prosperity. That's the kind of shit that has politicians constantly pumping up housing prices to juke the stats.
    And look where that gets us.

  • Um||

    You mean we shouldn't base our economic strategy on the popular board game, Monopoly?

  • ||

    As an average guy with a degree in economics, I'd have to say that inflation is very understated.

    Commodity prices have gone through the roof. And anyone who's filled up their car or gone to the grocery store lately feels the knock on effect.

    I work in printing and business is hot and cold. When we are busy, it's hard to meet deadlines. When we're not, you worry if anything will come back. Consequently, you work like dogs when the work is there because management is loathe to hire anyone. So wages probably go up for the people that are working because of overtime.

    The only growth industry right now is Government.

  • Appalachian Australian||

    I can definitely attest that wages remain strong and rising in skilled fields (medicine, IT, auto repair, skilled manufacturing, etc.).

    It seems whatever inflation would happen gets swallowed up by falling house prices.

  • Tim Cavanaugh||

    I just parked in a $6-flat-rate-after-5pm lot in Downtown L.A. When I was leaving I saw that the sign at the exit had the $6.00 price taped over with "$6.60." From what I could figure out they just raised the price a few months ago (which is why the sign outside still said it was an even six bucks).

    Downtown L.A. tourist visits are lower than they were a year ago. The area has fewer operating businesses than it had a year ago. The level I parked on was half full and the others were empty.

    So what has caused that 10% inflation in just a few months?

  • Appalachian Australian||

    My understanding of L.A. parking is that it has byzantine regulation and is hard for new market entrants, so the existing suppliers can probably abuse any inelastic demand.

  • Invisible Finger||

    The only way to get the same revenue from fewer customers is to raise the price. When the number of customers drops some more, the price will increase again. Eventually the garage will close.

  • ||

    Thank you to the USA.Notice how most hobby stuff is 25 dollars or more. Just basic stuff. Wow the bike center wants to be a millionaire and snob! Big city tycoon helps small town to rubble. And the police force also helped. Job opening in the big citys. I saw that on cartoons. Not in us news. Ohh ohh im sorry. I lost my kids to violent 30 year olds national gang. And my life. Cant have a gov that does not tax when it is needed. Temporary taxes is basic smart GOv!!!!!!!!!!!!!!Billionaires did not share, sell quality such as hibbet sp, such as too high costs for quaility tennis racquets, such as now small vehicles and the eco gov demanding high tech and diminshed products!! Well let you go. Teach sharing and investing. Rev 12 9 kjvz righteoussness not self. God probably didnt do it. Evil plots everyday. Snap out it. gal 3:3.Col 3:11. Cheaper rent man dang 350 dollars. Low prison for non serious, nice conditions jails, legailize low grade weed! Imprison gangs.

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