Monday, May 20, 2013

The Corruption of the Economics Profession

From a reader, answers I provided are italicized.  Figured this may address many questions people have about velocity, why there isn't inflation, the corruption of the economics profession, and let's not forget ripping apart the parasite classes of society:

Hello Captain,

Longtime reader of your site here. I remember when it had the black background. Back then, you used to do more econ heavy site, which is why I, as an economist, was drawn to it. Although you've since changed direction, I find myself still reading. I don't always agree with you, but I continue to read to get your take on things. 

I have some questions though that have been bothering me and I thought I'd send them your way to get some insights. Like you, I am libertarian minded when it comes to the economy. I favor smaller, decentralized government, a minimal welfare state, and balanced budgets.

I used to be a big Austrian. The Austrians, as you know, have been predicting for some time that massive inflation would follow the Fed's printing efforts. The logic, as I understand it, is that inflation is a monetary phenomenon, and the expansion of the monetary supply would accordingly result in massive price increases.

But... this hasn't happened. Except for in commodities like food (whose prices have been risen for a variety of supply reasons), inflation has been relatively stable. What gives? To paraphrase the Wendy's lady, where's the inflation?

1.  The reason we haven't see inflation is because the marginal propensity to consume and invest has gone way down.  In other words, Obama, the debt, and the general socialist direction we are going is scaring away any investors, businesses and entreprenuers.  Also, many people are just simply not spending any money as they're afraid of the cripplling effects of government debt AND the future taxation that would imply.  Because of this you can pump the banking system FULL of money, but that money will remain unlent and in reserves, never seeing the light of day in the real economy AND THUS not cause inflation.  Also, banks are pretty much prevented from lending out any money now due to Dodd Frank and their own incompetence (ever try to refi a house today?)  So in short, the money is tied up in the vaults of banks and not until it is lent out will it cause inflation.

TO see this look at the velocity of money at the FRED database.  This mathemtically shows just how little faith we have in the future.

My second question concerns the debt. With Reinhart-Rogoff's excel error, everyone is pronouncing the end of austerity. I don't think that's the case, but I'm starting to wonder whether the Keynesians have a point. It seems impossible to cut our way out of the debt. We're still paying off debt from WW2. Isn't the more logical answer to grow the economy, and thus reduce the size of the payments relative to GDP.
I am not stupid enough to recognize that growing the economy is easier said than done. Though I have been straying from the libertarian gospel for sometime now, I know that the government multiplier effect is non-existent at worst and exaggerated at best. Even if the Keynesians have a point about growth, they don't have a point about fiscal led growth.

2.  Yes, the logical choice is to grow the economy to dwarf the debt, but to do that in today's economy would require government spending because the private sector is basically scared into inaction.  Of course, there's a problem.  Government doesn't really produce anything.  AND on top of that the problem the Keynesians face is a psychological one.  Again, the debt, the general hatred towards production, success, wealth, and innovation Obama and leftists have in this country is scaring the producers into inaction, meaning most government spending will be symbolic, ineffectual, and never spurring real economic growth.  The pump will never be primed.

Another problem the Keynesians face is that to get the economy growing again means getting the productive people producing again.  But, bluntly, these are the enemies Obama and leftists hate and want to punish.  I don't credit Obama or the democrat leadership with the knowledge of economics or intelligence to piece this together and realizing they'll never get the economy to grow because their policies are antithetical to economic growth.  However, this no doubt is causing some traditional Keynesian economists (who DO want the country to succeed) to pull out their hair...or what little hair economists have.

 Finally, my last question concerns the heterodox nature of libertarian economics. Given that the economics field is dominated by neo-Keynesians or some variant of that, isn't it odd that the supposed correct answers, the Austrian/libertarian school, are so outside of the grain? I guess what I'm saying here is a reformatting of a tired leftist argument on global warming. So many of the experts believe it, therefore it must be true and if you deny it you are insane/stupid/ignorant/pick your slur here. How could it be that those who have dedicated their lives to the study of economics are so wrong about it, if they really are?

3.  Economics, like all the other liberal arts, has been co-opted and hijacked by lesser minded people who use it as a means to avoid real work.  It is no coincidence they spew (typically) leftist solutions because that is how they get paid in government-financed academia, leftist-non-profit think tanks, and government itself.  What angers me most is the hypocrisy and arrogance of these people.  On one hand they claim to be trying to help people, but while on the other hand they are selling nearly a billion westerners down the river so they can advance their own faux career.

The end WILL COME and I say that not out of some kind of religious zealot prophecy, but simply because their current economic model/system/ideology is not sustainable.  With no production and government expected to resolve all problems AND having that government merely act as an agent for wealth redistribution one of these days our creditors will turn off the line of credit, call our debts due and the life blood that supports the system (other people/countries' monies) will stop flowing and the system will crash. 

I believe this is the way to go because, as you point out, everybody is believing the lie and the stupidity.  And not just the professionals and leaders of our country, but the idiotic masses of voters who are truly some of the dumbest people in the history of human kind.

So I say light up a cigar and enjoy the decline.  There's nothing you or I can do to stop stupid or ignorant.  But we can enjoy watching the welfare class revolt when their EBT cards don't buy jack or their welfare checks bounce OR there just plain isn't anything in the shelves of grocery stores to buy.



Anonymous said...

Modern derivatives trading, interest and credit default swaps, currency trading houses, and so on, really blunt the historical power of the money printers. So much is already hedged, and even proles own gold. If the state wants to dictate its money's strength, it has to be far more aggressive and unpredictable, like what happened to Cyprus. Or, other forms of defaulting without legally doing so, to screw over investors.

A highly efficient market is hard to twist around. The state has to figure out how to "cheat", and do so without damage. It fails.

On top of all this, the international bankers themselves are very willing to use force as well, to get what they want. There's something very Mexican standoffish about it.

Macroeconomics as a field is starting to look like a legacy. It's obsolete, in the face of demographics and geopolitics, killed by too much easy information.

Anonymous said...

So if I understand this correctly, we don't have inflation because much of the freshly printed money is being held out of the economy (more or less by the Fed buying gov't securities) and what little is in the economy isn't moving "fast" enough to have an impact.

Would it follow that under current conditions if the economy recovered (money moves faster), we would see inflation almost immediately as all that money started moving?

The follow on question would be - what does the trend of money moving slower and slower indicate within the economy?

- Cave Pilot

Anonymous said...

One of the reasons Harry Dent gives for the lack of inflation is that the baby boomers are now saving all their money for retirement instead of spending.
Not only are they not spending, they're using their money to pay down personal debt, basically cancelling out money in the system.
He believes that the WE'd were more about trying to cancel out the negative effects of so much money disappearing more than anything else.

Captain Capitalism said...

Cave Pilot,

Correct, but I fear even if the economy were to "improve" the banking industry is so

and now
heavily regulated

capital just plain won't get to where it needs to be to boost the economy.

I've wondered what if all the refi programs Obama put together as well as the lower interest rates would have worked in boosting the economy if they hadn't been so fucking complicated and time sucking. Practically no one got any help in refinacing through HARP I or II to the point it was just easier to default.

Unknown said...

Bob Murphy explains the lack of inflation here as well.

What do you think about the whole idea that the United States has always been in debt since its inception? I've seen certain left wing types try to argue that point. They also like to say that the government is different from the individual and how the whole notion of a government going bankrupt or insolvent doesn't apply to it and emphasize balance sheets and all that jazz. These people also want more regulation for the banking industry and the list goes on and on.

Maybe it really is true that social democracy is just a form of soft communism no matter who controls it. It's not like we can even own private property fully anyway. That in a way is collectively owned by the government in the form of taxation and trying to distribute such wealth around.

sth_txs said...

No inflation! Seriously, what planet does this guy live on?

I have to order chemistry laboratory related supplies; everything is up, up up!

Building materials? More than they were not long ago. I guess he does not have a house to maintain.

Thomas Smith said...

O.T. You should have come storm chasing in Oklahoma, I could've treated you to a glass or two of 18 year Glenlivet and we'd have gotten to see Moore erased again. Goddamn what a mess.

‘Reality’ Doug said...

The decline in the velocity of money makes a lot of sense to me. What happens when people unload it when they decide it's better to get 'em to smoke 'em if you got 'em.

I also looked at M2 Money Stock (M2SL):

It appears the QE took off in November of 2008, but M2V is quarterly, so:

Type; 2008-10-01; 2013-01-01; % (=opp%)
M2SL; 7941.5B; 10448.6B; +31.6% (-24.0%)
M2V; 1.752; 1.533; -14.3% (+16.7%)

Per FRED, the -14.3% is short the full offset of -24.0% by 9.7% which I suppose would be essentially price inflation over the 4.25 year period unadjusted for change in wealth supply and not on an annualized basis. That comes to 2.2% price inflation before wealth change adjustment.

I don't trust the GDP numbers because fiat economic activity in counterproductive and really negative GDP, but maybe of the 4.24 year period the relative change is about right. 2.2% annual inflation would be rather tame, essentially goldilocks inflation as desired.

I'm not digging around forever to nail inflation. Found the BLS inflation calculator:

$100 in 2008 is equivalent to $106.64 in 2012, so a 4 year period not 4.25, and over that 4 years a price inflation of 6.6%, close to but short of the expected prorated 9.1% We do suppose the inflation numbers are low, a la shadow statistics:

The chart shows CPI-U ranging -2.0%--5.5% and SGS Alt ranging from 1.4%--9.0%, going by my eye guestimation. Now my 2.2% average annual inflation from M2SL-M2V effect, if my math is right, seems reasonable. If I made a technical mistake, I will concede if it makes sense to me. It's quite possible. Not reviewing this comment. Here goes nothing...

Fred Z said...

I have a problem with your collapse scenarios.

We are enormously, gigantically, hugely productive, and getting more so every day. Our real problem is economic surplus.

42 Koreans and a bunch of robots are realistically capable of building every TV mankind could ever use. Likewise a couple of thousand farmers with gigantic machines could grow most of the grains needed for us all. Exaggeration? Not that much.

So we can pay off the stupids, buy them plenty of drugs and booze, encourage them to use birth control or abort their infants and breed them out of the race, all the while using them as cannon fodder labor. Disgusting, innit? Even so, I have 2 people working for me that are useful because of physical strength and energy, but are so damned stupid that I often contemplate murder.

Or we can watch what really happens in evolution, which is not one species dying, but rather a new species separating. Will it be Eloi or Morlocks? Who can tell? Who cares?

Ah well, more Argentinian Tempranillo, it cures what ails you.

Moishe said...

I don't think that banks holding off on lending will continue for very much longer.

Eventually, the "vaulted" money will be released to the masses, but not before the desired effect of "those who inflate and deflate" will be implemented, or at least a stage of it.

Money manipulation moves in stride with the stages of measures the despots implement. Hoard the cash, and then hold politicians hostage to destructive political policies like mass amnesty for illegals.

There is an inherent danger in the way you think Mr Clarey, firstly, in that when someone becomes resentful of a certain group of people (And you should not be blamed for doing so), they tend to 'rejoice' at their downfall.

I, like you, am attempting to enjoy the decline, but I take no pleasure in the downfall of my brothers.

‘Reality’ Doug said...

Since price inflation is in the direction of M2SL growth, I think I should have calculated 31.6%-16.7% = 14.9% over 4.25 years, 3.3% average annual rate of price inflation. Makes sense that the government dollar data would fit the government inflation data I suppose.

Anonymous said...

We are experiencing inflation, but in a way that is "hidden" and has not been brought up.

Compared to a few years ago, product downsizing has us paying more for at least 10% less of what ever product we are buying. Food being at the top.

Heiki said...

Hi, I started reading your book "Worthless". I wonder if you have clarified somewhere to what extent the arguments presented apply to another education system (other than US) where there is more state subsidies, ie so that you'll spend a lot less money by studying humanities?

Anonymous said...

The end will come but not for awhile. USD is the least ugly sister in the room. The USD will strengthen alot before 2015. Watch for gold at $1000 or less because of this.
Remember not everyone can be right about the gold trade. If everyone is on the buy side, who is selling? How will gold go up if there is no inflation?

Pax Empyrean said...

I've got a few things to add. I'll paraphrase questions for the sake of brevity.

"Where's the inflation?"

If the marginal propensity to consume and invest has gone down, the only other outlet for cash is basically to just hoard it, or to pay down existing debt if you feel like counting that separately from investment spending.

While that has certainly happened, it doesn't account for the size of the change in the velocity of money. It's not just that firms and consumers aren't spending the extra money they get; rather, the money isn't even entering circulation in the first place. It's sitting in banks as excess reserves. Look at the kink on this hockey stick:

Presumably, when banks start putting this money out into circulation we'll see the attendant price rise. As it stands, this money is still counted when calculating the velocity of money (or anything else that requires a measurement of the money supply) but it might as well be stuffed under a mattress for all the impact it's having on the economy.

We can look at all of this together. In the last five years, M2 has increased by about $3 trillion. In that same time period, excess reserves went from basically zero to $1.8 trillion. Roughly 60% of the increase in the money supply has gone straight the banks' mattresses. If the changes in banks' liquidity and reserve requirements keep them from ever spending this money, it ceases to be economically relevant and we'll never see inflation from it.

"Isn't the more logical answer to grow the economy, and thus reduce the size of the payments relative to GDP."

This isn't an either/or thing. Even after the Excel error in the work by Reinhart-Rogoff is accounted for, there is still a negative correlation between debt and growth. It doesn't take off at a specific debt level; it's a gradual thing. One can make the argument that a country goes into debt during times of slow growth, but that mostly just highlights the weakness of empiricism in economics. All of this stuff happens within a specific historical context and the relevance of various factors is always debatable. That's how we have various schools of economic thought that all value empiricism and still disagree about practically everything.

In my view, there is a very simple way to look at this: when the government debt in the country that has the printing press for the world's premiere reserve currency gets downgraded, somebody has fucked up horribly.

I think in the long run, damaging the reputation of the US dollar as the world's uncontested reserve currency of choice will be the biggest consequence of Obama's fuckups. Up until now we've basically been collecting seigniorage from the whole world. Our trade deficit is financed by a combination of a direct investment surplus and a whole lot of US dollars that we send out which don't ever come back.

"Why are Austrians so far outside the mainstream?"

I think the roots of this are in Austrian methodology. People hire economists because they want fortune tellers who pretend they can perform mathemagical rituals to predict the future. Who wants to hire an Austrian economist who simply says, "Your models are worthless because they are based on historical events." The Austrians' total rejection of empiricism makes Austrian economics wholly unsuitable to making any sort of quantitative predictions. Other schools of economics are very often wrong, but they pretend that they're doing rigorous empirical science.

In short, Austrian economics doesn't claim to be more useful than it is, while mainstream schools of economics oversell themselves. If you got a job answering phones at the Psychic Hotline and told your callers that psychics are bogus, you wouldn't have a job there for long. Politicians love Keynesian economics in particular because it gives them handy excuses to blow money on whatever they want.

Joe America said...
This says we lost a years GDP.
I am much more interested in the comments.

You may have heard of Michael Burry, he ran a hedge fund that directly shorted the housing market via credit default swaps. Many of his investors tried to sue him to get out of his fund. They got out with around a 400% profit.

I remember telling people who were buying a house in 2007 not to do it. I told them the market was for sure going to get cut in half. I could not convince them.

What do it see now:
Everyone says don't buy a house, its the opposite of 2007.
The FED keeps on printing.
In my opinion a big part of the so called recovery was defaulting on debt that was impossible to service. (PS I think in the future there will be a big student loan debt forgiveness thing)

Here is my actionable idea to make money, buy a house and don't over pay.
Why, because all the same morons who said buy in the housing run up are all saying don't now. And very significant inflation is coming thanks to the FED.