Chatter from the Atlantic Monthly

Always interested in what smart people say about money and having a few theories of my own, This chatter from Meg McCardle's article in the Atlantic Monthly and the comments give a person a chance to think about things:

Money is Debt, if there is no capacity for Debt, there is no money. Haiti has no Debt, you can't borrow any money there. Therefore there is no money:

Money is debt. Before money was debt, when money was hard, based at least in theory on gold or silver, debt deflation periodically swept economic systems. And it was bad.

Now we are in debt deflation when all money in all places in all ways is based on debt. (If you don't understand this concept go study) The results are going to be horrific to a degree few can imagine.

In old fashioned debt panics, collapses, deflations; the money just went and hid. Now it is disappearing. Poof. Not only is there not enough money to pay off the debt there isn't enough money to pay all the regular bills, by a long shot.

Warren Buffet as a supporter of bad economic policy:

Warren Buffet is a great business man but an economic policy idiot. He has no faith in the market economy though he has great personal success operating within it.

Warren Buffet’s quote is hysterical, a quote from a frighten man, a man with much to lose and clueless as to how to save himself.

We are not standing around doing nothing so why his gratuitous statement? What are the “Hoover like” policies he references: Hoover’s higher taxes, protectionism or denigrating the employer/business man”? And since Obama advocates all three, at least in his campaign why did Buffet support Obama?

“… we don't know how effective in the short run we don't know how effective this will be and how quickly things will right themselves.” An incredibly idiotic statement for advocating policies that will cost $Trillions to heal the ailing economy (think of the economy as your sick child and your doctor making this statement about the surgical procedures he is about to perform); does Buffet make investment decisions in this manner?

Not surprisingly Warren Buffet can afford to be hysterical and idiotic. If the kitchen sink policies he wants us to implement make the economy worse, he can say “Sorry About That ... Never Mind” and still sip his favorite drink while the rest of us live in tents and eat at soup kitchens.

“We do know over time the American machine works wonderfully and it will work wonderfully again.” Wrong Warren, we can do permanent damage to the economy. Argentina under Juan Peron is the example of a vibrant American type economy destroyed by government leader who had no idea or did not care what he was doing as long as his supporters received benefits.

About the flaws inherent in John Maynard Keynes (Obama's favorite theoretical Economist)

Keynesian theory has no basis in microeconomics and is why policies based on it have never generated any economic benefits. Why then is the theory so popular among the current political establishment? Keynesian theory is an intellectual cover to justify coercive political power to take wealth from one part of society and give it to another. To a Keynesian, taxes on individuals do not matter, how individuals create goods and services does not matter and given the idea of the multiplier some in society are more worthy to consume the goods and services produced then others. Keynesian theory is a way to justify socialism, the modern form of slavery.

The stimulus package as currently proposed and widely advocated by Buffet will crush the economy; a worse replay of Hoover/FDR’s 1930s. A deficit must be funded by future taxes. Now who receives the current deficit spending benefits? Obama and his Democratic cronies certainly do not want the people who pay 50% if not the people who pay 95% of federal taxes to receive the benefits. So the people who drive the economy, the people who receive income from producing goods and services will today pay taxes, tomorrow pay taxes and tomorrow pay the tax surcharge that pays for today’s deficit spending.

The Obama stimulus policy is a massive tax increase with no offsetting benefits on the incomes of the people who could rebuild the economy (and no trickle down theory nonsense). Microeconomic theory points to the effects of changes in marginal costs. Taxes are a cost in producing goods and services. With a massive increase in future taxes due to today's stimulus deficit spending the marginal cost of producing goods and services in the future is rising by $Trillions. The massive spending today paid by the shifting of tax burdens will reduce the total quantity of goods and services produced today and the future.

NOT just complaining, but an answer:

There is a stimulative measure that could work. Create the deficit by not changing spending and create a tax holiday. At least the taxpayers, the people who produce goods and services do not have their taxes increased but just postponed. They would have an incentive to move production to today and stimulate the today’s economy at the cost of future production. Obama will never follow this policy. Democrats today have a very powerful incentive to recreate the “I am helping you through bad times policy” of FDR, bad times kept FDR in power. What worked once will work again.

“…not that long ago we had a lot of pretty good theories from very smart economists about how this sort of financial crisis couldn't really happen again in the first place.” Responsible economists and politician saw our crisis coming but the crony capitalism that (another implication of Keynesian theory) created FNMA and FHLMC in the 1930s sowed the seeds of the current crisis. And the more recent crony capitalism of Barney Franks, Christopher Dodd and rest of the Democrats prevented the Bush administration from taking crisis preventive measures in 2006. The current economic theories easily predicted what happen, we’ve been waiting for FNMA & FHLMC to fail for years and they set the example for private mortgage lending quality.

Now I will sound hysterical. Obama’s policies are destroying the American economy. We are on the path of becoming a third world country, Argentina the example. Obama’s economic policies are the horror stories of medieval medicine with our living standards the patient. The government must allow the people in this country who make the goods and services keep the value of their efforts in larger quantities now more then ever.

The wealth is gone and we need policies to recreate that wealth; a simple fact. Politically though the wealth creating class is despised, marked for punishment the fruits being an economy worse then 1930s.

Obama policies in this crisis is the end of the American Dream.

About Money Supply:

Setting aside that M1 is not the money measure to consider when talking about the monetary expansion engendered by fractional reserve banking the bigger question is how the worlds money supply approximately doubled since 2000. Fractional reserve banking does not provide that kind of monetary expansion.

So far the deflation has been almost exclusively in the price of assets. Commodity deflation has taken hold yes, after the huge bubble last year ending in July. That deflation is assets is justified and proper, since they were inflated terribly. The inflation of assets, stocks, real estate, rock star memorabilia, became the be all and end of of the economy.

It's crucial to understand that the rise in asset prices was never called inflation. It was always called increasing value. When stocks doubled and doubled again in the 90's Greenspan reliably went before congress and told how inflation was low.

Then when stocks crashed in 01 Greenspan's hair started blazing as he warned deeply of deflation. Funny thing that. He cut interest rates in a rush to 1%. That time it worked. For the last time. The chart above tells the tale.

Every dollar borrowed engendered less and less real growth.

Inflation is the increase in the amount of money vs economic output. World money supply possibly doubled from 2000 to 2008.

CPI inflation was moderate during most of the period except for the huge spike last year in commodities. What inflated was the price of financial assets, particularly newly minted debt paper and their derivatives, and real estate.

This is deflation and depression

It is verbotten to say price increases of assets are inflation. Home "values" rose. Stock "values" rose. Absolutely crummy securitizations were priced for perfection.

It is the price of assets which is deflating now. Without question the largest bout of deflation since the Great Depression. Deflation is the name for our current predicament. Truth be told the financial and monetary system cannot exist with deflation. Inflation is our friend. It is the grease which makes it move smoothly. Absent inflation the system seizes.

What your leaders are doing:

Bernanke and all the worlds central bankers and governments are madly attempting to reflate. A trillion here a trillion there. Yet the banks continue to collapse. Friedman, and Bernanke agreed, theorized that the Great Depression was caused by the Fed not flooding the system with liquidity and credit after the crash. Handily they ignore the cause of the crash. An unsound expansion of credit. They just propose papering it over with more money and credit. (Milt is headed for histories dust bin)

The cure here has amounted to the Treasury borrowing money and pouring it into the banks, which is a net wash. Not increasing systematic new credit or money. The Treasury has also issued guarantees on old debt which actually has no real backing. To make good on the guarantees they will have to ask congress to appropriate it and then borrow it. The entire exercise is a con game meant to restore "confidence".

The next step is to print money. The Fed has started doing this to the tune of $500 billion, this year it says, to buy up private not GSE mortgage backed securities. Some other printing may be going on as well in the alphabet soup of new Fed programs and facilities. It's possible this printing will stem the deflation in the financial sector but the amounts needed run to the trillions. None of which flows to the day to day real economy. (an imprecise label but valid I believe) I think this printing will fail. Others hope otherwise.

What can anyone do?

The dust up over the StimPak is driven by two things. First, libertarians and Austrian Schoolers think such things are simply evil and often think they won't work. Conservatives cannot accept giving money to people. Giving it to banks is bad enough, for some semi honest ones, but giving money to people is the last straw. Unacceptable. Give money to people and they will just buy beer and sit on the porch all day drinking it. They won't 'invest' it. Like our elites did with the $3 trillion Bush tax cut, into hedge funds. Which worked out so well.

Politics will surely demand money printing on vast scale. Probably some things will inflate to a degree of for a period as a result. When and what are unknowable. Will it be stocks or oil or CDO's or corn or houses. This cannot be predicted.

I think we need to think this thing thru Mr President. I don't expect that many liberals will grasp all this. If they did they wouldn't be liberals. The two (understanding economics and Liberalism) are diametrically opposed. Inversly proportional. Sorry if that sounds insulting, but it's true. Sheep to the slaughter. That's why Bernie Madoff was so successful with so many liberals. They believe in myths. The Bible even talks of this weakness:

But have nothing to do with worldly fables fit only for old women. On the other hand, discipline yourself for the purpose of godliness; 1 Timothy 4:7

AND

1 Timothy 1:4
4Neither give heed to fables and endless genealogies, which minister questions, rather than godly edifying which is in faith: so do.

Suckers are born every minute, but they don't have to stay that way. Don't. Get real.