In Which I Disagree With a Nobel-Winner

In Stiglitz Says U.S. Economic Recovery May Not Be ‘Sustainable’ , Bloomberg.com reports on the Nobel-winning economist as saying almost nothing that makes sense to this blogger. Here are some quotes (taken out of order as they appear in the writeup) in italics, with my comments in plain text.

Between the fall of the Berlin Wall and the collapse of Lehman Brothers was “the short period of American triumphalism, where we dominated the global scene. That period is over,” Stiglitz said.

His history is way off. The U. S. was the world's leading industrial power and leading exporter by World War I. Forget the fall of the Berlin wall: the U. S. has dominated the world scene at least after the events of June 6, 1944 and then the dropping of two A-bombs on Japan in August, 1945. Stiglitz sets up a straw man re "triumphalism". The dominance of the U. S. was demonstrated last fall, when the Great Financial Crisis that began here led to the strengthening of the U. S. dollar. The U. S. will dominate the world scene for years to come.

Stiglitz, who is a member of a United Nations commission that will study the global financial system and currency regimes, said “the logic is compelling” for a new global currency.

“In most quarters, there is a feeling we should move away from the dollar system. The question is do we do it in an orderly way, or a chaotic way,” Stiglitz said. “The size of the deficit and the size of the balance sheet of the Fed have just increased the anxiety and the desire that something be done.”

What are "most quarters"? Dollars to donuts not many of those "quarters" are found within the US of A. Unless it is bringing gold into a more prominent role in international finance, what would most Americans say to a world currency? Perhaps fuggedaboutit?

As far as what to do with the Fed's manic actions, that's an internal matter. Going to a global currency wouldn't affect that.

With so much excess capacity, the American economy faces a short-term threat of disinflation and possibly deflation, Stiglitz said. Wages may even decline, given recent high productivity and the likelihood of an extended period of high unemployment, he said.

Assuming the paragraph represents Dr. Stiglitz's views accurately, they appear to show that he has missed at least half a year and perhaps a year. Disinflation has been here since mid-2008 and is a good thing, not a "threat". Deflation (price declines) is here and now. It is incorrect to say that wages may decline; government statistics show that they are declining, through small wage increases combined with a decreased workweek and numerous cuts of wages to zero via layoffs and firings.

Stiglitz, 66, said that while $787 billion in federal government stimulus is propelling growth this quarter, there’s no guarantee the economy will maintain its momentum. On whether the U.S. needs another injection of stimulus, Stiglitz said it’s best to “wait and see.”

“We did have a very big stimulus, and that stimulus has added to economic growth and will be adding in the current quarter,” he said. “But the question going forward in 2011 is the stimulus is coming off, and that’s a negative.”

This expresses the typical distorted view of Keynes' thinking. We barely understand the economy at mid-year (did the "recession" end in June or not?), and the good doctor is already worrying about 2011?

Has any Keynesian ever thought that perhaps businesses are not investing in growth because they have enough capacity? Have they ever tried to reconcile being good to Mother Earth and not continuing to tear raw materials out of her, spend energy making things, etc., when maybe there's enough of those particular things? Have Keynesians forgotten that Lord Keynes was not advocating unending "stimulus" and debt without end?

Thus in the final quote from Stiglitz here, please ask yourself if we need to "consume" more and more autos and gasoline, cheeseburgers, etc., in a society with more motor vehicles than people and an obesity epidemic? (The second sentence in the paragraph is unobjectionable though speculative and is presented for completelness.)

Stiglitz said he sees two scenarios for the world’s largest economy in coming months. One is a period of “malaise,” in which consumption lags and private investment is slow to accelerate. The other is a rebound fueled by government stimulus that’s followed by an abrupt downturn -- an occurrence that economists call a “W-shaped’ recovery.

There really only was a paragraph or two of "news" in this lengthy article that taught no one any new facts.

The U. S. consumer is being force-fed autos on credit that many buyers already regret taking on. Home-buyers are back to 3% down mortgages and may use taxpayer money to use an $8000 per first home tax credit as a down-payment. In other words, the Merchants of Debt think they have won. I wouldn't touch their stocks, and neither would I short them. They are Sauron or in a more modern sense the Dark Lord Voldemort.
The times, however, may be a-changin'.

The more the dead hand of government "stimulates" the economy in whatever ways it wants, with minimal economic multipliers, the more it crowds out entrepreneurship and innovation. The tragic part of this is that a truly reformed financial system could be part of an economic rebirth rather than an agonizing coda to an era that ended with GM's bankruptcy and that should have ended with AIG's and Citigroup's bankruptcies. Instead the U. S. has gone the path of Japan a decade ago, with zombie banks and massive Fed money-printing that is not truly Zimbabwean printing of currency (which is inflationary) but which instead is debt that accrues rather than getting written down to realistic levels and therefore has proven deflationary to date. If you have not, please read when you have several minutes the now-classic Simon Johnson article titled The Quiet Coup from May 2009. It's the single most important article-length read of the entire past two years that I have seen.

There will be no willing reform in the U. S. Therefore there will be much more volatility and crises, but with a pattern that Big Finance will hide. Is resistance futile?

I think not. Traders should go with the flow and not fight the tape or the Establishment; investors should ignore all the chatter that is meant to distract them and get them to over-trade and doubt their decisions no matter how well-thought-out they are.

Copyright (C) Long Lake LLC

Looking for Good Sense in All the Wrong Places

It appears to be back to the 1960s and 1970s in Britain, laboring under the delusion that printing money can revive prosperity more than briefly, as noted tonight on Bloomberg.com in King’s BOE May Keep Up Money-Printing Plan as Economy Revives. Here is the opening of the article:

The Bank of England may keep up the pace of bond purchases today as officials weigh whether they are already printing enough money to revive the British economy. (Emph. added: hard to believe people are saying this sort of stuff.)

Governor Mervyn King’s forecasts last month showed it needs to spend 125 billion pounds ($207 billion) of newly printed money in U.K. debt markets to fight off the recession.

In the U. S., you have Mish leading me to this "marvelous" quote from MarketWatch in It's your problem, Bernanke tells Congress:

For its part, the Fed also faces having to make some tough choices. The U.S. central bank has lowered interest rates substantially and has expanded its balance sheet by about $1.2 trillion, effectively flooding the banking system with cash to keep the economy from collapse.

Once the economy can stand on its own, all that cash will have to be drained away.

Everyone knows this and accepts it in principle -- but in practice, it will come down to knowing when to let go.

DoctoRx here. Where does MarketWatch acquire the right to assert that "everyone" accepts "it" in principle? Forgetting the grammatical question of what "it" precisely refers to, I for one disagree that "cash" was in fact infused into the banking system or any other system. Credit hardly cash, and the wholesale granting of credit by the Fed to insolvent, poorly run companies was a mistake. Also, the lowering of consumer interest rates to virtually zero is unfair and another mistake, as it encourages speculation.

In interpreting the above, please remember that the Bank of Japan has not prevented chronic deflation and recurrent recessions despite buying massive amounts of Japanese Government bonds. The more our and the British Governments demonstrate both incompetence and unfair favoritism toward bankers, more and more people will lose faith in the future and may emulate the Japanese people and become more and more desirous of preserving their capital in the bank.

Copyright (C) Long Lake LLC 2009