Get ready for the inflation carnage

steve- wrong again on your FDR propaganda.

http://article.nationalreview.com/438347/on-fdr-shlaes-annotates-black/amity-shlaes

Roosevelt did fail to end the Depression, and we know that from common-sense measures. Most of us today define recovery as “getting back to where we were before.” Measures we use to gauge whether we have done that include unemployment, the absolute size of GDP or GDP per capita, and stock indices.

By these measures, FDR’s first term and most of his second were a flunk. Unemployment hung in the double digits during FDR’s first two terms. He won his third term in a quarter with one of the lowest unemployment rates of the decade, a still-atrocious 14.2 percent. . . .

In The Forgotten Man (and/or elsewhere), I do argue that monetary and bank tightening hurt the economy in the later 1930s. I also note that enormous spending can in general raise GDP for a year or two. But the gist of my argument, made in numerous places, is that the key event in bringing an end to the so-called Depression within the Depression of the late 1930s was the New Dealers’ exhaustion. Roosevelt and others turned away from the home front and looked to the war abroad instead. Finding itself a partner rather than a target, business revived. Another way to put it: The big question is not how World War II ended the Depression; it is why the Depression lasted until the war. All other things being equal, the U.S. economy likes to recover. Eventually, it opted to.

Fed easy money very much contributed to the current crisis. The Fed's failure to enforce HOEPA another factor.

I'll say it again, Housing price decine is not deflation, it just means there is too much supply.
And CPI under-states inflation.

We do not have deflation.

....but if people like you have their way, we will have a great deal of inflation.

If the Government could spend it's way out of recession, then why don't they just give everyone $10,000 or don't collect taxes for a year(same thing). This multiplier effect is non-sense.

Bloomberg continuously surveys 50 top economists as regards their inflation forecasts. The following is their current "average" forecasts:

2010, 1.60%
2011, 1.60%
2012, 2.35%

Although big increases in the monetary base is a worry, this has been offset by very low money velocity, very high excess capacity, and very low wage gains as a result of unemployment that is likely to decline very slowly. PIMCO's New Normal.

That said, the dispersion in analyst expectations is unusually high - which reflects the diversity of opinion on this site. One can make a case for preparing for "either" deflation or inflation - which might be the prudent thing. Probably one of the reasons that gold has been so strong as it has often done well in both environments - as strange as this might at first seem.

Worth keeping in mind that Japan had very high monetary base growth and huge budget deficits. But inflation there is non-existent.

Topper how accurate have these predictinos beeen? The way I see it these same economists missed the housing bubble... Economists are very good at helping to build models and do what ifs. They are terrible at predicting them.

Japan also has a huge current trade surplus. which has helped fund the government's deficit. We don't have that. And because of the world economic slow-down, yen are going back to Japan which is a huge source of downward prices.

The mistake Japan made that we are now making is not fully recognizing all the bad assets. The policy failure has been to not recognize the losses at the appropriate capital level(stock and bond holders).

How accurate have those been that have predicted inflation? Since 2008 we have heard that inflation is coming, inflation is coming. I am sure that it is right around the corner though. Eventually it will come, and you can say that you "called it."

Got that right!

I think we have recognized losses a good deal faster than Japan. That said, we do have a good deal further to go.

An advantage that we have that Japan doesn't have is that we are "the" world's reserve currency - which has allowed us to get away with a lot...at least in the past.

As regards accuracy of inflation forecaststs, I think they have been "fair" - kind of a B-minus grade.

Where these same economists have been "poor," or a solid "D."

Where these same economists have been "poor," or a solid "D" has been their interest rate forecasts.

(Sorry pushed the Reply button too soon.)

jhochle

Many of those that called subprime, Began taking positions and preparing two plus years in advance. These are not calls like heads and tails.

Leave it to LIC to post a post that proves my point, not his: "In The Forgotten Man (and/or elsewhere), I do argue that monetary and bank tightening hurt the economy in the later 1930s."

It was, in fact, government spending - deficits far greater than anything in the 1930's - that brought the economy out of the Depression. Read the 1930's newspapers: the deficit hawks back then were saying the same thing they are now; they're wrong now, too.

"Japan also has a huge current trade surplus."

Please explains what you think that means in terms of inflation.

We are already 2 plus years into the inflation is coming debate, and it isn't here. It also doesn't look like it is right around the corner. I think we still have 2 plus more years until 3%+ inflation, which itself would not qualify as "inflation carnage". Just like...the double dip is coming (okay maybe not this recession, but maybe the next one 10 years from now will be a double dip, and that means I still called it).

Yes inflation is coming, but if you are suggesting people need to "Get ready for the inflation carnage" maybe you should specify what that means.

jh, you're right there: all's quiet on the MMAfia front.

See above for another steve tactic- after he is proven wrong, he lies about what he had previously said. He had said that the Great Depression extended because FDR cut back spending, but now he agrees that it was monetary and bank tightening that hurt the economy.

This is a very good debate that is being argued about on the pages of the FT almost weekly with no side decisively winning. We won't solve it here.

"We won't solve it here."

... then let's not start irrelevant threads about it and its ilk.

"He had said that the Great Depression extended because FDR cut back spending, but now he agrees that it was monetary and bank tightening that hurt the economy."

I do agree that monetary and bank tightening hurt the economy in the 1930's, but so did decreased spending. As is said in the next line of your post, "I also note that enormous spending can in general raise GDP for a year or two."

That's what it's supposed to do. The point is to be counter-cyclical. And most of the "bank tightening" in the Depression was letting banks go bust - another part of the Tea Party Platform - which sapped confidence from the banking system, and reduced the overall amount of deposits.

What you call a "Steve Tactic" is just quoting the nonsense that you post, in context.

And - if you read all what I wrote - it was the DEFICIT SPENDING in WWII that got us out of the Depression, nothing that "supply side" could ever do.

steve's answer to economic problems- wild amounts of government spending beyond what is affordable, and then inevitably have inflation or higher taxes. Ridiculous as usual.

George W. Bush's, George H.W. Bush's, and Ronald Reagan's "answer to economic problems- wild amounts of government spending beyond what is affordable, and then inevitably have inflation or higher taxes. Ridiculous as usual."

Because the history under the Democratic party is far different: balanced budget under Clinton, Volcker under Carter, low inflation and high growth under Johnson.

Wage and price controls under Nixon, "Whip Inflation Now" under Ford, deficits under George I, folly under George II and the worst economic downturn since the Great Depression...

...under Hoover.

It's great lines you spin, LICC, but it doesn't add up to the truth. Deficit spending is necessary now, just as savings and balanced budgets were necessary during George II's reign. Unfortunately, the Republicans always do the wrong thing, enamored as they are of an economic theory that fell out of fashion with Adam Smith, and/or Adam and Eve.

Volcker raised rates to kill inflation under Reagan. The Dems' current deficits are way beyond anything under Reagan. Wrong again steve, I guess you are used to that.

From the WSJ:

To put this in historical context, consider the nearby table that compares deficits as a share of GDP under Presidents Reagan and Obama. The 1981-82 recession was comparable in severity to the one Mr. Obama inherited and reached similar heights of unemployment. The deficits that resulted from that recession were the source of huge political consternation, with Democrats, the press corps and even some senior Reagan aides insisting that only a huge tax increase could save the country from ruin.

Yet as the table shows, the Reagan deficits never reached more than 6% of GDP, and that happened only in 1983, the first year of economic recovery. As the 1980s expansion continued, the deficits fell, especially as the pace of spending slowed in the latter part of Reagan's second term. Few remember now, but when Ross Perot won 19% of the Presidential vote in 1992 running more or less on the single issue of the deficit, the budget hole was only 4.7% of GDP.

The Obama deficits are double that, and more than one-third higher than even the Gipper's worst year. What explains this? Part of it is that Democrats are simply spending much more, sending outlays as a share of GDP above 25% for the first time since World War II. The White House now says outlays will be higher in 2011, at 25.1% of GDP, than at the height of the stimulus in 2009 and 2010.

I have to admit, watching LIC and steve argue is awful funny. Its like the special olympics (without the guilt).

Paging Manny Mota

http://moneywatch.bnet.com/economic-news/blog/maximum-utility/the-cost-of-convenient-optimism/733/

Marc Faber chimes in....

http://www.fool.com/investing/general/2010/07/26/marc-faber-sit-still-this-is-going-to-hurt.aspx

On what the Fed will do from here on out:

The easiest way to fix our debt problems is with 6% inflation per year. That bails out everyone in debt. Interest rates will stay at 0% in real terms forever, in my opinion. If inflation is 5% per year, the Fed will keep interest rates at 5%; that's how you get 0% real interest rates. Now, we could have debt contraction in the private sector, but it doesn't matter. It will be more than an offset with government debt creation. So it's not a good idea to be all in cash and out of stocks. Cash is very dangerous when central banks want real interest rates at 0%.

On deflation:

I'm a believer that the stock market lows of March 2009 will not be revisited. You have people like Robert Prechter who think the Dow will collapse to 700 because of debt deleveraging. Debt deleveraging could happen, but the Dow will not fall because of monetary policy. The Fed will keep everything inflated in nominal terms.

On the Fed:

The Fed doesn't pay any attention to asset bubbles when they grow. That's their official policy. But they flood the system with cash when bubbles burst. They only care about bubbles when they crash. It's a very asymmetric response and it has many unintended consequences.

http://www.ft.com/cms/s/0/b026f36a-98ce-11df-9418-00144feab49a.html

That is difficult. At one Congressional hearing, Mark Zandi, chief economist at Moody’s Analytics, said each dollar spent on infrastructure was creating $1.57 in gross domestic product within a year, and that without the stimulus there would be 2m fewer jobs today.

He was followed by John Taylor, an economist at Stanford University, who said government spending “had little to do with the turnaround in economic activity”. Mr Taylor estimated the effect of the stimulus at about 70 cents of GDP per dollar spent.

Many New Keynesian modellers estimate the effect of stimulus at between 50 cents and $1 per dollar spent in normal times. But the same researchers find numbers as high as $3.90 when interest rates are zero, as in 2009 and today, and the central bank cannot cut them to stimulate the economy.

"Volcker raised rates to kill inflation under Reagan."

Volcker was nominated by Jimmy Carter. That's when the rate increases began.

Sorry.

"What explains this? Part of it is that Democrats are simply spending much more, sending outlays as a share of GDP above 25% for the first time since World War II."

Right, and unfunded tax cuts and an unfunded & unnecessary war have nothing to do with it. In fact, the truth, according to LICC, is that the country was actually running a SURPLUS during the 8 years of George II, the tax cuts actually INCREASED the revenue, and there were weapons of mass destruction in Iraq.

Please. LICC, the truth shall set you free.

The problem in 1980 was stagflation. To correct the problem we needed to raise production and lower prices (supply side economics). We have a different problem now. We need to work through excess inventory and capacity in many areas of the economy without causing deflation (hopefully). The solution is not the same because the problem is not the same.

The current problem is excessive debt and assets that do not support the debt. This is why the Fed will find it necessary to create inflation.

The only other solution would be to force write-downs which is politically unacceptable to those in charge.

I'm sure glad that's settled. What's next?

I'm sure glad that's settled. What's next?

"The problem in 1980 was stagflation."

Right.

"To correct the problem we needed to raise production and lower prices (supply side economics)."

Gee, that sounds easy.

The main causes of stagflation in the 1970's were the removal of Nixon's wage & price controls, & the Arab oil embargo, which raised input costs and reduced demand. Nothing could be done about the former except let the economy readjust to equilibrium; regarding the latter, cartels don't last very long because the temptation to cheat is too great, and prices rise to the point that alternate sources become economically viable (assuming no legal monopolies). That effectively happened: OPEC fell apart in the 1980's, but the increase in oil prices prior to that made North Sea oil, among others, viable.

No one doubts that at the margin the monetarist theory that eliminating excessive regulation and lowering marginal tax rates works over the long-term to free markets and cure stagflation. The problem is that it has diminishing marginal returns: works great with regulated airlines and 90% marginal tax rates, not so much in an already relatively free market at 33% marginal tax rates. There is an equilibrium point - not enough regulation and very low marginal tax rates have their own unwanted externalities, principally a return to the wild days of the 19th century, which was marked by a series of booms and busts and inflation and deflation and cruel and inhuman working conditions that are unacceptable today.

Lowering marginal tax rates further will not get us out of this mess - it will only make it worse. Fiscal policy should be counter-cyclical, and the Bush tax cuts can in no way be said to have achieved their purported "goals," because we're worse off now than we were in 2000.

Hmmmm^^^ steve actually makes sense for once. Just look at Canada - more regulated, socialist, and with higher taxes than us...and producing more jobs than us in June. Not as a PERCENTAGE of the workforce...but in ABSOLUTE NUMBERS!!!! With 10% of our population. Oh, and they had no banking crises or housing bubble. You know who else is doing better than us right now? In terms of unemployment rate, not having had a housing bubble etc? The Scandies, the Dutch, and the Germans. "Old Europe."

You know who is doing worst among the PIIGS? Not Greece, but Ireland, the poster child for austerity and low taxes. You know who is doing better than all the PIIGS? Iceland.

So simply have laxer regulation and lower taxes did not prevent this crises for us, and why should we therefore assume it will get us out of it?

Candian economy has more exposure to Natural resources which has been a good area to be in..

"A stitch in time saved nine." LICC should look up the origin of that phrase.

He should also think through his "theories," such as they are: bizarrely, to support monetarist theory he quotes authors who acknowledge that tight monetary policy and bank failures worsened the effect of the Great Depression, and it was the public guarantee of banks and the public spending of WWII that got us out of the vicious spiral of deflation. Somehow, to him, that means that the correct policy today in the Great Recession is for the Fed to stop "printing money," for Congress to "rein in spending," and to allow banks "to go bust."

That is, we should do today precisely the things that made the Great Depression worse and longer than it had to be.

It should also be noted that the "Roaring 20's" were a time of excessive leverage, a housing price boom, and unfettered markets thanks to the Supreme Court (see above). It all sounds eerily familiar to 40x leverage, housing prices increasing by 50% a year, banking deregulation, and the Roberts Court.

Did we not learn enough in 1929, and/or 2008?

"Candian economy has more exposure to Natural resources which has been a good area to be in.."

Which is why Canada's home foreclosure rate is so low, n'est pas?

PLEASE.

jason makes an excellent point: the countries worst affected by the 2008 downturn were the ones that drank the most Dick Armey Kool-Aid of deregulation and leverage: US, Ireland, Iceland. Canada was doing just fine when oil was $33 a barrel in 2009.

This is always my point with RS: despite convincing theoretical and empirical evidence, he still holds to the Larry Kudlow / Steve Forbes / Ayn Rand / Rand Paul mantra that low taxes and deregulation cure all ills. They do not. They work at the upper margins, but at the lower margins they cause as much harm as good they cause at the upper margins.

Just look at the economic history of the 19th century, and the similarities between 1929 and 2008 for proof.

For prime mortgages the employment rate is an important factor in delinquencies..

There goes RS again, pulling straws out of a hat to try to explain what is otherwise easily explainable: neoclassical, monetarist economic theory does not work except at the extreme upper end, where an otherwise capitalist country imposes economic rules more similar to communism.

Free markets are good; unfettered markets are not. Low tax rates are good; extremely low tax rates are not. The government does some things very well; other things very poorly. Privatizing everything doesn't work; privatizing monopolies that are not natural monopolies or oligopolies does work. Mrs. Thatcher was so successful in Britain because she removed a lot of socialist and communist structures from the British economy, and was helped by the North Sea oil boom. The current government of Britain will fail, though, because it is cutting back spending and raising taxes at precisely the moment it should be doing the opposite.

"privatizing monopolies that are not natural monopolies or oligopolies does NOT work"

Ooops!

The economy in Alaska has done well too. When you have a lot of natural resources and low relative population, it makes things easier.

steve easily impresses himself with his straw man arguments. He makes up what I say, or he makes up economic theory and calls it monetarism, and then criticizes what he made up.

The theories he supports have failed. Government deficit spending, high regulation and high taxes have failed in the goal of economic growth. They failed in the 1930s, they failed in the 1970s, they failed in Japan, and they failed with the current stimulus.

After WWII, the U.S. was able to take advantage of its global dominant position to have a strong manufacturing economy. Europe and Asia were in shambles and global competition was scarce. That was an anomaly that could not last. Kennedy's tax cuts in the 60s helped extend a strong economy. The irresponsible federal and state budgets of the late 60s and 70s started big problems, that weren't fixed until Reagan's policies allowed business to flourish again. After a bump, Clinton got on board with Republicans and controlled government spending while cutting taxes on investment and implementing welfare reform. Bush's and Congress' irresponsible budgets and bad Fed policy in the early 2000s got us back into trouble and now Obama is taking bad policy to extremes.

Sorry steve, you are way behind the times when it comes to economic analysis.

"When you have a lot of natural resources and low relative population, it makes things easier."

Which is why Bolivia is doing so well, right?

Please.

"Government deficit spending" = Reagan, George I, George II.

"high taxes" are not something that I, or Keynes, would ever support.

"They failed in the 1930s, they failed in the 1970s, they failed in Japan, and they failed with the current stimulus."

Offer up the evidence, LICC, because what failed in each case was monetarist policy.

"Clinton got on board with Republicans and controlled government spending."

HAHAHAHAHAHAHAHAHAHAHAHAHAHA!

LICC, not even the people who believe in supply-side economics actually believe it:

http://blogs.ft.com/martin-wolf-exchange/2010/07/25/the-political-genius-of-supply-side-economics/

Full of magical thinking, just like convincing yourself that Long Island City is a nice place to live.

on February 4, 1936, the English economist John Maynard Keynes (1883–1946) published what soon became his most famous work, The General Theory of Employment, Interest, and Money. Few books, in so short a time, have gained such wide influence and generated so destructive an impact on public policy. What Keynes succeeded in doing was to provide a rationale for what governments always like to do: spend money and pander to special interests.

-R. Ebeling

jeremy grantham's quarterly newsletter. throwing in the towel on inflation.

http://www.gmo.com/websitecontent/JGLetter_SummerEssays_2Q10.pdf

"You don't have to be a passionate follower of Keynes to realize that to rapidly reduce deficits at this point is at least to flirt with a severe economic decline."

...

"this slowdown looks downright frightening."

This "R. Ebeling", LICC:

http://www.fff.org/aboutUs/bios/rme.asp

"Professor" at that bastion of higher education, Northwood University?

http://www.northwood.edu/

HAHAHAHA.

"What Keynes succeeded in doing was to provide a rationale for what governments always like to do: spend money and pander to special interests."

Governments don't need a "rationale" to do that - they need to be elected.

And there we have it, people: supply-side economics works because Northwood University - yes, THAT Northwood University - says it does.

History be damned.

Hi notaboutready! I was just about to post that!

Here's what R. Ebeling stands for, LICC:

"Thus, for well over a century, the American people said "No" to such anti-free-market government policies as income taxation, Social Security, Medicare, Medicaid, welfare, immigration controls, economic regulations, drug laws, gun control, public schooling, and foreign wars. Despite the tragic exception of slavery, the result was the most prosperous, healthy, literate, and compassionate society in history."

http://www.fff.org/aboutUs/index.asp

But of course it goes on:

"Unfortunately, in the 20th century, our country has moved in an opposite direction. Operating through the IRS, DEA, ATF, INS, FDA, FTC, and a multitude of other bureaucracies, our government has waged immoral and destructive wars on our freedom, our property, and our well-being."

Getting rid of the FDA, now, are we?

HAHAHAHAHA!

Moron.

bruce bartlett:

http://capitalgainsandgames.com/blog/bruce-bartlett/1873/time-new-thinking-stimulus?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CapitalGainsAndGames+%28Capital+Gains+and+Games+-+Wall+Street%2C+Washington%2C+and+Everything+in+Between%29

"In my 2009 book, The New American Economy, I went through the economic debate of the early 1930s very thoroughly. There were monetarists then too, the great Irving Fisher being the prime example. And there were also Austrian-types like Henry Hazlitt and Benjamin Anderson who kept crying “inflation” every time the money supply rose, even as the price level fell 25 percent between 1929 and 1933.

In my book I explain how virtually all economists, including Fisher, eventually came around to the view that monetary policy by itself was impotent in a deflationary situation because the money simply would not circulate by itself. It needed fiscal policy to generate spending in the economy to be effective."

hotproperty, i really do need to change the name, no?

How do you feel about dueling, LICC? I hear Aaron Burr was a fan.

Let us assume for a moment, LICC, that we get rid of the FCC. What will happen to our radios and cell phones and televisions, if there is no one to allocate the frequencies?

Supply-side economics is dead.

http://www.cnbc.com/id/38429491

Of course Robert Shiller from Yale is no match for that mighty economics thinker R. Ebeling, from Northwood University. Yes - THAT Northwood University!

stevejhx, you'd be better off reasoning with your cats than with LICcounty. They have greater analytic capabilities.

When Franklin Roosevelt became president in 1933, the deficit was already running at 4.7 per cent of GDP. It rose to a peak of 5.6 per cent in 1934. The federal debt burden rose only slightly – from 40 to 45 per cent of GDP – prior to the outbreak of the second world war. It was the war that saw the US (and all the other combatants) embark on fiscal expansions of the sort we have seen since 2007. So what we are witnessing today has less to do with the 1930s than with the 1940s: it is world war finance without the war.

But the differences are immense. First, the US financed its huge wartime deficits from domestic savings, via the sale of war bonds. Second, wartime economies were essentially closed, so there was no leakage of fiscal stimulus. Third, war economies worked at maximum capacity; all kinds of controls had to be imposed on the private sector to prevent inflation.

Today’s war-like deficits are being run at a time when the US is heavily reliant on foreign lenders, not least its rising strategic rival China (which holds 11 per cent of US Treasuries in public hands); at a time when economies are open, so American stimulus can end up benefiting Chinese exporters; and at a time when there is much under-utilised capacity, so that deflation is a bigger threat than inflation.

Are there precedents for such a combination? Certainly. Long before Keynes was even born, weak governments in countries from Argentina to Venezuela used to experiment with large peace-time deficits to see if there were ways of avoiding hard choices. The experiments invariably ended in one of two ways. Either the foreign lenders got fleeced through default, or the domestic lenders got fleeced through inflation. When economies were growing sluggishly, that could be slow in coming. But there invariably came a point when money creation by the central bank triggered an upsurge in inflationary expectations.

In 1981 the US economist Thomas Sargent wrote a seminal paper on “The Ends of Four Big Inflations”. It was in many ways the epitaph for the Keynesian era. Western governments (not least the British) had discovered the hard way that deficits could not save them. With double-digit inflation and rising unemployment, drastic remedies were called for. Looking back to central Europe in the 1920s – another era of war-induced debt explosions – Professor Sargent demonstrated that only a quite decisive policy “regime-change” would bring stabilisation, because only that would suffice to alter inflationary expectations.

Those economists, like New York Times columnist Paul Krugman, who liken confidence to an imaginary “fairy” have failed to learn from decades of economic research on expectations. They also seem not to have noticed that the big academic winners of this crisis have been the proponents of behavioural finance, in which the ups and downs of human psychology are the key.

- Niall Ferguson

"Keynesian Clown"- that term seems to fit steve well:

I am sick of Keynesian clowns who do not know the cart from the horse, who think debt is a free lunch, who think spending and debt are the ways to get out of debt problems and most of all never say how this debt is going to get paid back.

What causes depressions is an unsustainable runup in credit and debt that precedes it, NOT a failure to go deeper in debt.

Anyone who understands 5th grade math should be able to figure that out. Unfortunately, Nobel prize winning economists can't.

"I listen to nonsense from some commentators claiming that if the US is not careful, it will suffer the same fate of Greece. Total rubbish." says Kolivakis.

Three Examples of Total Rubbish

People who think crack addicts can smoke crack to cure their addiction
Alcoholics who think they can drink their way out of alcoholism
Debt junkies (and Keynesian clowns) who think one can spend one's way out of a spending problem

In a sense all of the above ideas will "work".

In the first two cases the result is physical death, nature's way of solving the problem. In the third case, a bond revolt and economic death solves the problem.

. . .

Keynesian clowns want to keep spending until the bond market pukes. As I said in More Keynesian Clowns Come Out of Woodwork ... No policy ever performs badly enough to cause its disciples to abandon it.

Mike "Mish" Shedlock

ferguson. hi-larious.

http://delong.typepad.com/sdj/2010/07/matthew-yglesias-niall-ferguson-debates-himself.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+BradDelongsSemi-dailyJournal+%28Brad+DeLong%27s+Semi-Daily+Journal%29

Hmmm...now quoting a revisionist history professor on economic theory?

"[Ferguson] is best known outside academia for his revisionist views rehabilitating imperialism and colonialism... Within academia, his championing of counterfactual history has aroused debate..."

"In May 2009, Ferguson became involved in a high-profile exchange of views with economist Paul Krugman (then the most recent Economics Nobel Prize winner) arising out of a panel discussion hosted by Pen/New York Review on April 30 2009, regarding the U.S. economy. Ferguson contended that the Obama administration's policies are simultaneously Keynesian and monetarist, in an incoherent mix, and specifically that the government's issuance of a multitude of new bonds will cause an increase in interest rates. Ferguson's concerns in this exchange have been analogous to those expressed by Germany's Chancellor, Angela Merkel.

"Krugman has argued that Ferguson's view is "resurrecting 75-year old fallacies" and full of "basic errors". J. Bradford DeLong of Berkeley agreed with Krugman, concluding "Niall Ferguson does indeed know a lot less than economists knew in the 1920s""

http://en.wikipedia.org/wiki/Niall_Ferguson

You have to find someone more credible than a reporter for the Daily Mail, LICC.

mish? that's funny too. he's firmly in the deflation camp.

http://globaleconomicanalysis.blogspot.com/2010/03/marc-faber-and-mish-on-tech-ticker-mish.html

Really, LICC? Mish?

"Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction."

http://globaleconomicanalysis.blogspot.com/2008/06/about-mike-mish-shedlock.html

Why not ask Suze Orman? She's an investment advisor, too.

"I am sick of Keynesian clowns who do not know the cart from the horse, who think debt is a free lunch, who think spending and debt are the ways to get out of debt problems and most of all never say how this debt is going to get paid back."

Funny, that. Keynes DID NOT espouse debt, or spending as a way to get out of debt. Neither do I.

Ronnie did, as did George I and George II, as that's where the mess came from.

This is all a fantastic projective identification: what Keynes argued was that it was wrong to cut back on government spending during a recession because it is not counter-cyclical, and doing that will cause things to get worse. This has been borne out by the Great Depression, the Great Recession, Japan, and Volcker. No one has yet to prove that it works, because it doesn't.

It's championed by people who don't know any better, like a professor at Northwood University - yes, THAT Northwood University! - a revisionist professor of history, and a certified financial planner.

Will LICcounty cite the Rice Twins next?

I think that knowing the authors of LICC's quotations demonstrates how outlandish they are, how extreme and out of touch they are with facts. Supply-side economics is a political theory, not an economic one, that promises the very "free lunch" that Mishy up there rails against: that the more the government lowers taxes, the more taxes it generates.

That might be true at a 99% tax rate, but it is not ALWAYS true.

If you like mercantilism, import-substitution, colonialism and imperialism, then these theories are right up your alley. Voodoo is, after all, magical thinking, so there George I was right: Reaganomics was magical thinking, believing in your heart of hearts that deficits don't matter (a quote from Dick Cheney, BTW) UNLESS they're convenient politically.

But deficits DO matter - they're needed during recessions, and should be paid back during flush times. Exactly the OPPOSITE of what Republicans have done.

You know, "We hate government-run health care, but DON'T TOUCH OUR MEDICARE!"

And, "The enemy is the government," EXCEPT if it's the police or the army.

So, like, is Reaganomics sort of like, like, a 125% LTV interest-only no-doc mortgage with a bank-friendly appraiser? Works for me, and I can just sell my Reaganomics in a couple of weeks when it's worth way more.

Reaganomics is like Larry Kudlow, self-admitted alcoholic and cokehead, who said that Michael Phelps should be thrown in jail for taking a hit from a bong: what's okay for me isn't okay for you.

From a review of Hazlit's critique of Keynesianism:

Basically, Keynes ideas boil down to the following:

When an economy is left to the free market, it reaches a natural equilibrium where the employment level is below "full employment"
There exists a deficiency of demand in this equilibrium
Savings are a waste of capital
Deflation is a problem because wages just can't move downwards, even if the price level moves down.

The Keynesian cures:

Inflation to force real wage rates down
A central bank to lower interest rates, which reduces savings.

Governments using fiscal stimulus, even running deficits, to stimulate current consumption.

Every other critic in the book seems to land a solid blow against Keynes and his assumptions.

Jacob Viner attacks his definition of involuntary unemployment and the rigidity of wages
Etienne Mantoux does an excellent job of demolishing the idea of a multiplier as follows:
"Given the definition of the multiplier, the propensity to consume therefore becomes equal to (1 - 1/k), which amounts to saying that as the propensity to consume approaches unity, the secondary effects of a primary investment would approach infinity. Remarkable !"
Franco Modigliani reproduces the Keynesian model as a set of simultaneous equations, but adopts the classical theory of the supply of labour function where wages are no longer downward-rigid... the conclusions and outcomes from this are very un-Keynesian -
"The liquidity preference theory is not necessary to explain under-employment equilibrium; it is sufficient only in a limiting case: the "Keynesian case". In the general case it is neither necessary nor sufficient; it can explain this phenomenon only with the additional assumption of rigid wages.
Many other critics nail the point home, some of them short and easily understood, like Mises and Hayek, others doing a lengthy methodical deconstruction of Keynesian assumptions and claims.

Keynes seems to be the biggest source of all economic fallacies in the modern era.

You cannot spend your way to prosperity. You cannot turn a stone into bread. You cannot pump-prime an economy perpetually, stimulate consumption, and not suffer any negative consequences. Inflation is not costless. Deflation is not an eternal spiral. Prices can indeed adjust to balance the supply and demand of labour and savings.

LICcounty's "free market":
http://www.nd.edu/~amcadams/CP142/Industrial%20Revolution.jpg

Steve = 10
Riversider/licc =0

1minute warning.

Oh we're playing soccer.

Let me give the citation for your yet-another-ridiculous post:

http://doublethinkblog.blogspot.com/2009/07/critics-of-keynesian-economics.html

Then, "Basically, Keynes ideas boil down to the following..."

NOT ONE of those things is true.

"The Keynesian cures...."

NOT ONE of those things is true.

Then, the editor, "Henry Hazlitt (November 28, 1894 – July 8, 1993) was a self-educated...."

Apparently he skipped the second on economics, though he did write a textbook that nobody reads:

http://books.google.com/books?id=c2j494_m84IC&printsec=frontcover&dq=henry+hazlitt&source=bl&ots=V28DTiMwa4&sig=TCQvKe_n80bsMdkHu57CfStfvF8&hl=en&ei=DAVPTNrOEoL_8AbUzZjXDQ&sa=X&oi=book_result&ct=result&resnum=12&ved=0CFYQ6AEwCw#v=onepage&q&f=false

Please, LICC - get real. You're wasting our time quoting jackasses.

"the second" = "the section"

Ooops!

Reaganomics sort of like, like, a 125% LTV interest-only no-doc mortgage with a bank-friendly appraiser

No that happened under Clinton and George W. Subprime was barely a twinkle under Reagan

Notice how steve cannot respond to the substance of the critiques against Keynesianism.

w67- if you are keeping a tally of stupid comments, I agree with you.

Let's add "self-educated economist who wrote a book nobody reads" to the List of LICC heroes: a professor at Northwood University - yes, THAT Northwood University! - a revisionist professor of history who extols the virtues of imperialism, and a certified financial planner who writes a blog.

My favorite quote thus far of LICC's BFF's is: "Despite the tragic exception of slavery, the result was the most prosperous, healthy, literate, and compassionate society in history."

That's right, folks! If it weren't for that teensie faux pas of slavery, 19th century America would have been the "most compassionate society in history."

And it was "the most prosperous," except all of the prosperity was held by the Rockefellers, the Vanderbilts, the Goulds, the Fricks, and the Astors. Everybody else lived in squalor.

"The healthiest": Thank g-d that Sarah Barton lived in the 19th century!

"The most literate"?

"The proportion of young people enrolled in school remained relatively low in the last half of the 19th century. Although enrollment rates fluctuated, roughly half of all 5- to 19-year-olds enrolled in school. Rates for males and females were roughly similar throughout the period, but rates for blacks were much lower than for whites. Prior to the emancipation of Southern blacks, school enrollment for blacks largely was limited to only a small number in Northern states. Following the Civil War, enrollment rates for blacks rose rapidly from 10 percent in 1870 to 34 percent in 1880.

"However, in the ensuing 20 years there was essentially no change in the enrollment rates for blacks and the rate for whites actually fell. The beginning of the 20th century brought sustained increases in enrollment rates for both white and minority children. The overall enrollment rates for 5- to 19-year-olds rose from 51 percent in 1900 to 75 percent in 1940. The difference in the white and black enrollment rates narrowed from 23 points in 1900 to 7 points in 1940."

http://nces.ed.gov/naal/lit_history.asp

OMG, LICC! What a f'ing maroon.

"Notice how steve cannot respond to the substance of the critiques against Keynesianism."

I did. Not one of them is a factual statement. If you come up with a factual statement, I'll be glad to address it.

Arguing economics with LICC & RS is like arguing the Scopes Trial again - with a monkey.

Steve
Are you as smart as you think you are?

If you mean, RS, am I smarter than you are, then yes, I do.

This could be the problem you can't parse.

steve, do you think a combination of asset deflation and food/energy inflation is likely during this decade?

developing countries will keep on demanding more of those while the deleveraging process in the developed world continues

"This could be the problem you can't parse."

It might be that I do more than parrot novels, and actually think about the consequences of what I espouse.

Don't bring your wife into it!

that's a joke, by the way...

Interesting that steve has no clue who Hayek, Mises, Modigliani are, yet he thinks he understands economics.

"Interesting that steve has no clue who Hayek, Mises, Modigliani are...."

Who says I don't, and who says that they understand anything about economics?

Vienna, here I come!

Or, maybe, "How does a world-class think tank end up in east Alabama?"

It doesn't.

notadmin, the developing world has its issues. you might find this interesting.

http://www.foreignpolicy.com/articles/2010/07/21/the_consumption_gap?page=0,1

Riversider, what part of "like, like" don't you understand?

clinton? you like ritholtz, right, RS? from his book, Bailout Nation, page 120.

"Starting in the early 2000s, conservative lending became unfashionable and aggressive risk taking appeared. Fiscal prudence was replaced with weakened (and eventually, irresponsible) lending standards. It soon reached a point where much of the industry tossed out the garden-variety mortgages that had served them so well, and replaced them with jungle-variety loans.

In the new era of banking, "lend to securitize" became the industry's standard operating procedure, and the subprime mortgage machinery's assault on suburban America began."

"jungle-variety? WTF? Thatz one racist comment. I demand that guy be FIRED!

I do like Ritholtz, quotes like this are no better than videos of Shirley Sherrod speeches. The quote does not tell the story of what occured. Lending standards did not suddenly switch from conservative to reckless the day George W got elected. This was a process which started under Clinton.

actually, not really. buy the book.

"Lending standards did not suddenly switch from conservative to reckless the day George W got elected."

I think it would be fairer to say that the problem started with Dick Armey's Congress & Clinton & Co. went along with it. The true problem there wasn't the party, but the actual degree of deregulation that was allowed. Very Wild Wild West, which definitely got worse under George II.

Bubbles take time. What happened is classic Minsky.

Minsky, Pinsky ... it was classic John Birch.

From Steve Pearlstein:

In the 1950s, as socialism was gaining credence around the world and Keynesian thinking dominated economics textbooks, Friedman's skepticism about government management of the economy was viewed as nothing short of heresy. But by the mid-1970s, as the country was beset by stagnant growth and high inflation, it became clear the Keynesian model had played itself out. Suddenly, Friedman's ideas didn't look so kooky.

"I grew up in a Keynesian household," recalls Larry Summers, the former Treasury secretary and Harvard president whose mother and two uncles were respected economists. "And as an undergraduate, I was taught an economics that had demand but no supply." But in time, says Summers, it dawned on him and most others in the profession that Keynesian theory was not so much wrong as incomplete.

With his focus on the overall demand for goods and services in the economy, Keynes overlooked the importance of the supply of money in circulation. Friedman argued that controlling that supply was a better tool for managing the economy than taxation and spending policies.

Inflation, it turned out, wasn't as benign an antidote to unemployment as Keynes had thought, nor was there necessarily a trade-off between the two, as he presumed.

And many Keynesian policies meant to correct for very real imperfections in the marketplace turned out to have big imperfections of their own.

The intellectual roots of Friedman's "economic liberalism" run back to Adam Smith and Alfred Marshall, and were spun out at the University of Chicago with his pal George Stigler and intellectual superstars including Ronald Coase, Zvi Griliches, Gary Becker, Robert Lucas and Kevin Murphy. But even as the profession moved toward fancy mathematics and modeling, Friedman went the other way, constantly striving to connect theory with people and policy.

stevejhx is stuck in 1950s socialism theory.

... and shortly thereafter Larry Summers was brusquely fired from Harvard by a near-solid bloc of students, faculty, trustees and alumni.

And socialism was gaining credence around the world in the 1950s? Really?

from tanta, who before her death contributed at calculatedrisk, discussing subprime in the 1990's. subprime loans tend to go bad within a year or two. if we had had much of an increase in them in the 1990's, we would have felt the effects much earlier.

http://www.calculatedriskblog.com/2007/11/what-is-subprime.html

"Whatever else it was, subprime lending just wasn’t much of a purchase-money business. When it was, you had things like down-sizing (a borrower who got in trouble owning the big house, sold it, and is buying the new affordable house but now has a dreadful credit history), amateur rehabbing (intentionally buying substandard properties), or generally bizarre transactions (non-arm’s-length deals, buyouts of contracts for deed, seller carry-backs, blanket mortgages, what have you). Plus the mobile homes. In other words, not just marginal deals, but deals involving a tiny margin of the real estate market. Until a few years ago, the idea that subprime lending could have real, measurable impact on the broad existing or new home sale market was, well, laughable."

The more sophisticated Keynesians, if that isn't an oxymoron, will come back with the argument that while they really do agree with you in cases when the economy is experiencing "full employment," your point doesn't apply when there are "idle resources." In that case, we can "stimulate" those idle resources into action without drawing resources out of alternative employments. These resources currently have no alternative employments.

Nice try. But whatever projects our wise planners come up with to put these "idle resources" to work will inevitably draw complementary resources away from alternative employments that are more urgently desired than what the government intends to use them for. Resources will unavoidably be drawn from current employments in the attempt to kick-start "idle resources." So the "idle resources" argument doesn't really manage to evade the opportunity-cost problem.

Beyond that, pro-stimulus thinkers show remarkably little curiosity about why the so-called idle resources are idle in the first place. They are idle because of some previous entrepreneurial miscalculation. What might have caused systemic miscalculation of this kind? Could it be the Federal Reserve's manipulation of interest rates, which leads investors to make incorrect assessments of profitability and provokes false economic booms, as F.A. Hayek won the Nobel Prize for showing in 1974?

-Tom Woods

Really, LICC, you should quote passages in their entirety:

"Friedman wasn't always right. His dogmatic monetarism clouded his economic predictions during the 1980s and '90s, in part because of globalization and new financial instruments that made it difficult to measure the money supply, let alone control it."

http://www.washingtonpost.com/wp-dyn/content/article/2006/11/16/AR2006111601779.html

Taking a eulogy written by a newspaper columnist and trying to pawn it off as a constructive criticism should be beneath even your limited sense of ethics, LICC.

However, I do agree with this: "But in time, says Summers, it dawned on him and most others in the profession that Keynesian theory was not so much wrong as incomplete."

That is precisely what I've been saying: the theory works at the margin, but not on the whole. Under certain circumstances reducing tax rates WILL increase revenue.

Just not when those rates are 33%.

AR, RE: The Consumption Gap, They thought Asia would save the world economy. They were wrong.

It'll not save it at all, but it will stop providing deflationary forces through imports (check the wage increases of late in china's manufacturing sector, 30-35% spreading fast). and the bulk of the incremental demand on food and energy is coming from them, i don't expect that to diminish (maybe on the protein side a bit?). mmm, what do you think about deflation on assets and inflation on food/energy? japan has had these combination for years already.

Now Tom Woods? Do you even have 1 decent reference, LICC, rather than pure right-wing diatribe?

"Woods is a convert to the Roman Catholic Church and author of The Church and the Market: A Catholic Defense of the Free Economy. He was associate editor of The Latin Mass Magazine, which advocates traditional Catholicism, for eleven years. As a traditional Catholic, he advocates the Extraordinary Form of the Mass and cultural conservatism. His 2005 book, How the Catholic Church Built Western Civilization, is the basis for The Catholic Church: Builder of Civilization, a thirteen-episode television series airing on EWTN in 2008. The series examines the Church's influence on law, morality, science, and scholarship."

He's half a room to the right of Mel Gibson.

No one doubts that Milton Friedman made some contribution to economic science - his findings contributed to areas where Keynes may have been weak, or where the economy had changed since Keynes' day. But it is not a full theory, as is stated: if Keynes focused on demand to the detriment of supply, Friedman necessarily did the opposite. But the Laffer Curve - as apostsatic as The Rapture is to what the Bible actually says - is not part of Friedman's theory, and it in no way predicts or proves that cutting taxes is ALWAYS the right thing to do. When money isn't moving the money supply doesn't matter; there is no "crowding out" when there is nothing to "crowd out." If LICC and RS think that Low Taxes are all there is, they should move to Alabama and see the results of such a policy:

Squalor.