Oct 31

Solutions for Everything, Answers to Nothing

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Could one day’s Financial Times be the best £2.50 humanity ever spends…?
 

WEDNESDAY we picked up an issue of the Financial Times, writes Bill Bonner in his Diary of a Rogue Economist – the so-called pink paper due to its distinctive color.
 
We wondered how many wrongheaded, stupid, counterproductive, delusional ideas one edition can have.
 
We were trying to understand how come the entire financial world (with the exception of Germany) seems to be singing from the same off-key, atonal and bizarre hymnbook. All want to cure a debt crisis with more debt.
 
The FT is part of the problem. It is the choirmaster to the economic elite, singing confidently and loudly the bogus chants that now guide public policy.
 
Look on practically any financial desk in any time zone anywhere in the world, and you are likely to find a copy. Walk over to the ministry of finance…or to an investment bank…or to a think tank – there’s the salmon-pink newspaper.
 
Yes, you might also find a copy of the Wall Street Journal or the local financial rag, but it is the FT that has become the true paper of record for the economic world.
 
Too bad…because it has more bad economic ideas per square inch than a Hillary Clinton speech. It is on the pages of the FT that Larry Summers is allowed to hold forth, with no warning of any sort to alert gullible readers. In the latest of his epistles, he put forth the preposterous claim that more government borrowing to pay for infrastructure would have a 6% return.
 
He says it would be a “free lunch” because it would not only put people to work and stimulate the economy, but also the return on investment, in terms of GDP growth, would make the project pay for itself…and yield a profit.
 
Yo, Larry, Earth calling…Have you ever been to New Jersey?
 
It is hard enough for a private investor, with his own money at stake, to get a 6% return. Imagine when bureaucrats are spending someone else’s money…when decisions must pass through multiple levels of committees and commissions made up of people with no business or investment experience – with no interest in controlling costs or making a profit…and no idea what they are doing.
 
Imagine, too, that these people are political appointees with strong, and usually hidden, connections to contractors and unions.
 
What kind of return do you think you would really get? We don’t know, but we’d put a minus sign in front of it.
 
But the fantasy of borrowing for “public investment” soaks the FT.
 
It is part of a mythology based on the crackpot Keynesian idea that when growth rates slow you need to stimulate “demand”.
 
How do you stimulate demand?
 
You try to get people to take on more debt – even though the slowdown was caused by too much debt.
 
On page 9 of Wednesday’s FT its chief economics commentator, Martin Wolf (a man who should be roped off with red-and-white tape, like a toxic spill), gives us the standard line on how to increase Europe’s growth rate:
“The question […] is how to achieve higher demand growth in the Euro zone and creditor countries. [T]he Euro zone lacks a credible strategy for reigniting demand [aka debt].”
It is not enough for people to decide when they want to buy something and when they have the money to pay for it. Governments…and their august advisers on the FT editorial page…need a “strategy”.
 
On its front page, the FT reports – with no sign of guffaw or irony – that the US is developing a “digital divide”.
 
Apparently, people in poor areas are less able to pay $19.99 a month for broadband Internet than people in rich areas. So the poor are less able to go online and check out the restaurant reviews or enjoy the free pornography.
 
This undermines President Obama’s campaign pledge of giving every American “affordable access to robust broadband.”
 
The FT hardly needed to mention it. But it believes the US should make a larger investment in broadband infrastructure – paid for with more debt, of course!
 
Maybe it’s in a part of the Constitution that we haven’t read: the right to broadband. Maybe it’s something they stuck in to replace the rights they took out – such as habeas corpus or privacy. 
 
We don’t know. We only bring it up because it shows how dopey the pink paper – and modern economics – can be.
 
Quantity can be measured. Quality cannot. Broadband subscriptions can be counted. The effect of access to the internet on poor families is unknown.
 
Would they be better off if they had another distraction in the house? Would they be happier? Would they be healthier? Would they be purer of heart or more settled in spirit?
 
Nobody knows. But a serious paper would at least ask.
 
It might also ask whether more “demand” or more GDP really makes people better off. It might consider how you can get real demand by handing out printing-press money. And it might pause to wonder why Zimbabwe is not now the richest country on earth.
 
But the FT does none of that.
 
Over on page 24, columnist John Plender calls corporations on the carpet for having too much money. You’d think corporations could do with their money whatever they damned well pleased.
 
But not in the central planning dreams of the FT. Corporations should use their resources in ways that the newspaper’s economists deem appropriate. And since the world suffers from a lack of demand, “corporate cash hoarding must end in order to drive recovery.”
 
But corporations aren’t the only ones at fault. Plender spares no one – except the economists most responsible for the crisis and slowdown.
“At root,” he says of Japan’s slump (which could apply almost anywhere these days), the problem “results from underconsumption.”
Aha! Consumers are not doing their part either.
 
Summers, Wolf, Plender and the “pink paper” have a solution for everything. Unfortunately, it’s always the same solution and it always doesn’t work.
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Oct 13

FT’s Martin Wolf in "Not Wrong" Shocker

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Today’s debt bubble is a real problem, says a key cheerleader…
 

AS WE predicted, volatility is rising. Investors are beginning to squirm, writes Bill Bonner in his Diary of a Rogue Economist.
 
Why?
 
The Fed is ending QE. And it could hike short-term interest rates as soon as next year. The EZ money is getting scarce.
“We are trapped in a cycle of credit booms,” writes Martin Wolf in the Financial Times.
Wolf is wrong about most things. But he is not wrong about this.
“On the whole,” he writes, “there has been no aggregate deleveraging since 2008.”
Wolf does not mention his supporting role in this failure. When the financial world went into a tailspin, caused by too much debt, in 2008, he joined the panic – urging the authorities to take action!
 
As a faithful and long-suffering reader of the FT, we recall how Wolf howled against “austerity” in all its forms.
 
His solution to the debt crisis?
 
Bailouts! Stimulus! Deficits! In short, more debt!
 
Since then, only America’s household and financial sectors have deleveraged…and only slightly. Businesses and government have added to their debt.
 
Overall, the world has much more debt than it did six years ago – more than $100 trillion worth.
 
Wolf has come to realize where his own misguided policy suggestions lead.
 
As a recent paper by banking think tank the International Center for Monetary and Banking Studies put it, fighting a debt crisis with more debt leads to a “poisonous combination of higher and higher debt and slow and slowing real growth.”
 
That is the world we live in. Thanks a lot, Martin.
 
The future is a blank slate. It whacks us all – but differently, depending on how exposed we are. What can we do but try to protect our backs…and squint, peering through the glass darkly ahead.
“These credit booms did not come out of nowhere,” writes Wolf. “They are the outcome of previous policies adopted to sustain demand as previous bubbles collapsed.”
Why sustain unsustainable demand? Why not just let the bubble collapse?
 
Under oath in a New York courtroom, two former US secretaries of the Treasury have told us why.
 
Not bailing out AIG would have been “catastrophic,” said Hank Paulson on Monday. A failure of AIG would have led to “mass panic,” chimed in Timothy Geithner on Tuesday.
 
At least they had their story straight. But it is not hard to connect the dots. When a credit bubble pops, it causes fear and panic. The authorities take action to stop it.
 
What can they do?
 
Whatever it takes, is their answer.
 
What does it take to stop a deflating credit bubble?
 
More money! More credit! More debt!
“We need to escape this grim and apparently relentless cycle,” Wolf concludes.
Meanwhile, “IMF warns of third Euro-zone recession since financial crisis,” reports the FT elsewhere.
 
The IMF also downgraded its forecast for world GDP growth to 3.3%.
 
High debt. Slow growth. And another colossal crisis coming.
 
No wonder investors are nervous.
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Sep 02

About That GDP Revision

Gold Price Comments Off on About That GDP Revision
Strong GDP data hide the failure of QE and zero rates to juice the real economy…
 

The FIRST REVISION of the GDP numbers for the second quarter wasn’t what we expected, says Bill Bonner in his Diary of a Rogue Economist.
 
We expected the data to show substantial weakness. Instead, they show what looks like strength. The US economy expanded at a 4.2% rate in the second quarter, adjusted for inflation.
 
The economy may be growing. Stocks may be near a record high. But the typical American owns no stocks and his prospects are depressing. Here is a report from the New York Times:
“For five years, the United States economy has been expanding at a steady clip, the stock market soaring, the headlines filled with talk of recovery. Yet public opinion polling shows most Americans still think the economy is pretty miserable.
 
“What might account for the paradox? New data from a research firm offers a simple, frustrating answer: Middle-class American families’ income is lower now, when adjusted for inflation, than when the recovery began half a decade ago.”
This is hardly news to us. We’ve been following the real economy – as best we could – for the last 15 years. Dear readers already know household income, hourly wages and household wealth were all down – for most people.
 
The averages are distorted by the few at the very top, but the typical American suffered a big plunge in wealth in 2008-09…and has never recovered. In fact, he is worse off today than he was at the bottom of the hole in 2009.
 
In June of that year, according to Sentier Research, the median family earned $55,589. Today, that figure is $53,891, adjusted for inflation. That “median” family is right at the middle of all US households. So, half of the people you see on the streets or in the shopping malls have suffered even bigger income losses.
 
But it wasn’t just the damage done by the crisis of 2008-09 that has lowered incomes. The problem is bigger, deeper. It’s the core defect in the debt-fueled growth model.
 
As we explore in our new book, Hormegeddon, a little bit of debt may be a good thing. But add more, and it depresses growth. Keep adding debt, and the whole shebang blows up.
 
Sentier’s numbers show the deterioration in household income began at least 14 years ago. Today, the typical middle-income family earns less than it did when the 21st century began – despite the biggest wash of cheap credit the world has ever seen.
 
In other words, policymakers’ efforts to increase real demand have failed miserably. Go figure.
 
But our guess is the feds will not spend much time figuring out why their “stimulus” model doesn’t work. It’s the only tune they know. As it fails, they will merely keep singing, louder.
 
How?
 
Bypassing the banks, they will put their newly digitized money directly into the hands of the people whose votes they need to buy. This kind of flagrant money creation is becoming intellectually respectable, as a kind of final solution to the problem of insufficient demand.
 
Martin Wolf, the influential chief economics commentator at the Financial Times, has already suggested it publicly. Now, here comes an article in Foreign Affairs magazine titled: “Print Less and Transfer More: Why Central Banks Should Give Money directly to the People.”
 
Recognizing that QE and ZIRP are not making it to the top of the charts, the establishment is getting behind more direct inflationary measures. The article explains:
“It’s well past time, then, for US policymakers – as well as their counterparts in other developed countries – to consider a version of Friedman’s helicopter drops. […]
 
“Many in the private sector don’t want to take out any more loans; they believe their debt levels are already too high. That’s especially bad news for central bankers: when households and businesses refuse to rapidly increase their borrowing, monetary policy can’t do much to increase their spending. […]
 
“Governments must do better. Rather than trying to spur private-sector spending through asset purchases or interest-rate changes, central banks, such as the Fed, should hand consumers cash directly.”
Are you still holding government bonds, dear reader? Make sure you get rid of them before the music stops.
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Jun 09

The Euro’s Insane Negative Rates

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Truly, the European Central Bank is pushing us all further through the looking glass…
 

IF IT LOOKS like insanity, smells like insanity, tastes like insanity, feels like insanity and struts about barking “This is insanity”, then perhaps it might just be insanity, writes Tim Price at ThePriceOfEverything.
 
Consider these three little words from the Financial Times‘ resident inflationist-in-chief, Martin Wolf: interest rates could be made “even more negative” if the ECB thought fit. We are truly through the looking glass.
“We were in the jungle. We had too much money. We had too much equipment. And little by little, we went insane.”  
Not the words of Mario Draghi – yet. They are the words of film director Francis Ford Coppola in relation to his magnum opus, Apocalypse Now, a film that so outrageously exploded beyond its budget and beyond any reasonable compass that during its making it started being referred to as ‘Apocalypse Later’. Coppola’s unique vision came at a price. What was expected to be a 14-week shoot in the Philippines ended up taking more than a year.
 
Coppola fired his leading man, Harvey Keitel, after just two weeks. His replacement, Martin Sheen, turned out to be fighting alcohol addiction and suffered a heart attack on set. Numerous members of the crew went down with tropical diseases. At key points, helicopters hired for pivotal action sequences were suddenly redirected to quell a revolt in the southern Philippines. Then a typhoon hit, the set was destroyed and the production was shut down. 
 
Throughout all of it, Coppola was dealing with increasingly worried money men back in Hollywood as the film’s budget ran dry. As the film’s scriptwriter, John Milius, pointed out:
“Studio executives, you know, are not noted for their social courage”.
And then Marlon Brando arrived on set, so hugely overweight as to be almost unrecognisable. He didn’t have the barest knowledge of the script. And there were actual dead bodies on the set, bought to add some ‘atmosphere’ from a local who turned out to be a grave-robber. Then Brando shaved all his hair off and insisted on improvising all of his scenes. 
 
Coppola had sunk his own life savings into the film. He faced financial ruin if he couldn’t finish it. He suffered a nervous breakdown and on at least three separate occasions allegedly threatened to commit suicide.
“My movie is not about Vietnam,” he once explained, “my movie is Vietnam.”
The markets are not about Vietnam. They are Vietnam. There’s a difference, of course. When a film studio runs out of capital, the production gets shut down. Corporate resources can only ever be finite. But when a government runs out of capital, it simply borrows more. Or taxes more. Or both. At least for as long as it has access to credit by way of maintaining the confidence of the bond market. 
 
Practically every western government has got its finances into a desperate mess. In the words of US fund manager Paul Singer of Elliott Management, 
“America is deeply insolvent, and for that matter, so are most of continental Europe, the UK and Japan.”
For as long as governments can perpetuate the illusion of solvency, they can continue to borrow, and therefore also to spend. But once the illusion is broken…?
 
 
The chart above, courtesy of Incrementum AG and Ronald Stoeferle, shows the extent of the problem. We all know that Japan is drowning in debt, which makes Japanese Government Bonds about the most dangerous asset in the world right now, especially given the Bank of Japan’s pledge to double its monetary base, ensuring that holders of JGBs will be paid back in ever less valuable currency.
 
The vulnerability of the UK’s creditworthiness is less widely appreciated. Pimco’s Bill Gross, still clinging on to the $229 billion remaining in his Total Return bond fund, referred to UK Gilts as “resting on a bed of nitroglycerine” as far back as 2010. The UK is hardly alone in running its national treasury on empty. Not one single major western government possesses a stable balance sheet. Everybody has thrown caution to the winds, in the illusory hope that ultimately somebody will pay. If you hold western government bonds, that somebody is likely to be you.
 
Actions have consequences. Governments are no different from individuals or corporations or film studios in this respect – they can merely perpetuate the myth of solvency for longer, given the credulity of global capital markets and of agency investors with no real skin in the game in their bond portfolios. But at some point, the piper must be paid. Which is why every major western government is determined to inflate, and pay the piper (bondholders) in ever more worthless paper money. And this is why Mario Draghi has now driven interest rates to below zero.
 
The natural corollary to universal currency debasement is to own a currency and durable store of value that cannot be printed on demand. If only we could find one.
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May 15

M.Rentier & M.Charlatan

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Maybe the FT‘s star columnist doesn’t really believe his position either…
 

The OXFORD ENGLISH DICTIONARY defines rentier simply as “One who makes an income from property or investment,” writes Tim Price on his blog, The Price of Everything.
 
We must suspect that Martin Wolf has a somewhat more morally judgmental definition, as befits someone who does a passable impression of being a confused Marxist.
“Low interest rates are certainly unpopular, particularly with cautious rentiers. But cautious rentiers no longer serve a useful economic purpose. What is needed instead are genuinely risk-taking investors. In their absence, governments need to use their balance sheets to build productive assets. There is little sign that they will. If so, central banks will be driven towards cheap money. Get used to it: this will endure.”  – Martin Wolf, ‘Wipe out rentiers with cheap money‘, Financial Times, 6 May 2014
In any event, his recommendation that rentiers should be ethnically cleansed from the economy was not met with universal acclamation by FT readers. Here are some of the fruitier reader responses:
“The FT at its worst, from the stable of big brains and small minds. Summary – stuff all savers and pensioners; reward stupid and feckless borrowers, especially governments. MW misses the essential point that if savers are paid even modest interest rates they will have money to spend which unlike the feckless they deserve and are likely to spend wisely. This spending will boost consumption and investment in the economy, instead of being used to support lost causes and fools.” 
 
“All you have to offer the world is more of the same unsustainable credit booms ! You and your profession failed before the crisis and do so now.” 
 
“This is a frightening and surreal article from a failure in an utterly discredited profession. Shameful.” 
 
“This is why economics as a subject at university must be abandoned…there is just no point to its study.” 
 
“I’ll be sure to tell my grandparents they need to become ‘genuinely risk-taking investors’.”
 
“Blow it all up with cheap money. Perfect strategy, perfect execution. Bravo!”
 
“Thank you so much for reducing the endeavour and purpose of my entire life to nought, with one casual phrase. Those who have worked hard all their lives and saved do have feelings, even if despised by you.”
 
“So Wolf wants to reduce pensioners to abject poverty unless they take equity risk. Does the FT offer a defined benefits scheme?”
 
“I often think MW inhabits a different universe from me. One in which the Soviet Union had never existed. Where the Japanese hadn’t blown 100% of GDP or more on government-sponsored infrastructure. Where the Chinese hadn’t spent the last six years specifically following the hackneyed Keynesian prescriptions of Wolf and the IMF and astonishingly now found itself with a colossal Pandora’s box of insolvencies…”
 
“The rentiers in this system are those feeding off QE – not those trying to squeak a living on savings.” 
 
“It appears that what the readers have to endure and get used to is the stuck record Martin Wolf droning on and on about increased government spending being the solution to everything, no matter what the question being asked.” 
 
“As usual Mr Socialist you have no clue. I love reading you just to know the depth of the bankruptcy of the intelligentsia.” 
 
“You, Mr Wolf, are a disgrace and may I say a Quisling hiding in the propaganda press. This is no longer a free press, it does the bidding of its masters in the corporate world who own you.” 
 
“I called Martin Wolf a socialist in a comment last week and was firmly put back in my box by Mr.Wolf when he called me ‘a misguided human being’. The tone of the comment was pretty unpleasant (because he disagreed with my point of view). But the views/suggestions he puts across do to me seem of a socialist bent rather than a capitalist one, in that I don’t read him supporting ideas such as reduced taxes, reduced government, reduced government borrowing, reduced taxes, reduced red tape, reduced governmental interference in fact he seems to propound more of these which to me is socialism but heh ho I may be wrong:-) but if he is a capitalist I do wish he would use his position to support us!” 
 
“It is time for Mr.Wolf to retire. You are proposing disincentives for accumulating capital. Money printing is not capital and since when is it the government’s right and obligation to tell us what to do with our money? Neo liberal economic policy is left wanting after 6 years of experimentation and now you propose something more radical? Let markets decide where capital should go. Your proposal is dangerous and foolhardy.”
 
“It never ceases to surprise me that people who utter these things are allowed to work in the finance industry. If you were a bridge engineer your bridge would have fallen and your licence for ever revoked…luckily you are an economist (socialist/communist) so with a bit of luck you will be nominated for a Nobel prize.”
 
“But why let facts get in the way of a tired, 3rd rate article? Having said that I have trouble believing even MW believes this garbage, so presumably it’s all just click-bait…”
 
“When you say ‘cautious rentiers’ are not serving any economic purpose, I think you are saying that after a financial crisis caused by individuals, banks and governments who over-leveraged themselves and brought on 5 years (and counting…) of financial repression, there is a long way to go to economic recovery and the debtors of this world deserve a still longer break so that they can sort themselves out at the expense of creditors. Oh, and please could the people who stayed sane and sensible please put a bit more risk on while you’re at it?”
 
“Please – do not use ‘rentier’ as a substitute for ‘saver’. I have not come across a good definition of ‘rentier’ yet – if the word is to be used, it needs to be backed by a good definition and any definition will fall short unless it captures the idea that the rentier is earning returns which are somehow unearned. In the meantime, ‘cautious savers’ trying to make a return on money saved out of fully taxed employment income deserve better from the FT than suggestions that they should be ‘wiped out’.”
Economist Shaun Richards responded to Martin Wolf’s article with this eloquent rebuttal. Our own perspective is as follows.
 
Policy interest rates throughout the developed world are at all-time lows and must remain there for some time in order to reflate a broken banking system. Central banks are desperate to avoid true deflation since that would threaten the very existence of their grossly indebted client governments. Savers (the class of people we presume Martin Wolf refers to when he uses the disdainful term ‘rentiers’) are the blameless victims who must pay the price for unprecedented government and banking sector overspending.
 
Government is not the solution, it is the primary cause of the problem. And government does not create wealth, it merely redistributes it. The rational investor of today faces an almost insoluble dilemma: shelter in cash-type investments whose purchasing power is being eroded on a daily basis by explicit inflationism; or pursue returns from risk assets which have been inflated artificially higher on a bubble of monetary stimulus. We believe the rational response is to combine diversification (across asset classes that include hard assets) with concentration (on compelling deep value). 
 
‘Rentier’ is a word with French origins. Another word with French origins is ‘charlatan’.
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Apr 24

Only the Sane Fear Hyperinflation

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Contrary to the Financial Times’ Martin Wolf, rising prices are already causing madness…
 

KEEP interest rates at zero, writes Tim Price on his ThePriceOfEverything blog, whilst printing trillions of Dollars, Pounds and Yen out of thin air, and you can make investors do some pretty extraordinary things.
 
Things like buying shares in Just Eat, for example, the takeaway food ordering site, floated this month for £1.47 billion, over 100 times its earnings.
 
But arguably more egregious was last week’s launch of a €3 billion five-year Eurobond for Greece, at a yield of just 4.95%. UK “investors” accounted for 47% of the deal, Greek domestic “investors” just 7%.
 
Just in case anybody hasn’t been keeping up with current events, Greece, which is rated Caa3 by Moody’s, defaulted two years ago. In the words of the credit managers at Stratton Street Capital:
“The only way for private investors to justify continuing to throw money at Greece is if you believe that the €222 billion the EU has lent to Greece is entirely fictional, and will effectively be converted to 0% perpetual debt, or will be written off, or Greece will default on official debt while leaving private creditors untouched.”
In a characteristically hubris-rich article last week (‘Only the ignorant live in fear of hyperinflation’), Martin Wolf issued one of his tiresomely regular defences of quantitative easing and arguing for the direct state control of money. One respondent on the Financial Times‘ website made the following comments:
“The headline should read, ‘Only the EXPERIENCED fear hyperinflation’. Unlike Martin Wolf’s theorising, the Germans – and others – know only too well from first-hand experience exactly what hyperinflation is and how it can be triggered by a combination of unforeseen circumstances. The reality, not a hypothesis, almost destroyed Germany. The Bank of England and clever economists can say what they like from their ivory towers, but meanwhile down here in the real world, as anyone who has to live on a budget can tell you, every visit to the supermarket is more expensive than it was even a few weeks ago, gas and electricity prices have risen, transport costs have risen, rents have risen while at the same time incomes remain static and the little amounts put aside for a rainy day in the bank are losing value daily. Purchasing power is demonstrably being eroded and yet clever – well paid – people would have us believe that there is no inflation to speak of. It was following theories and forgetting reality that got us into this appalling financial mess in the first place. Somewhere, no doubt, there’s even an excel spreadsheet and a powerpoint presentation with umpteen graphs by economists proving how markets regulate themselves which was very convincing up to the point where the markets departed from the theory and reality took over. I’d rather trust the Germans with their firm grip on reality any day.”
As for what “inflation” means, the question hinges on semantics. As James Turk and John Rubino point out in the context of official US data, the inflation rate is massaged through hedonic quality modelling, substitution, geometric weighting and something called the Homeowners’ equivalent rent.
“If new cars have airbags and new computers are faster, statisticians shave a bit from their actual prices to reflect the perception that they offer more for the money than previous versions…If [the price of ] steak is rising, government statisticians replace it with chicken, on the assumption that this is how consumers operate in the real world…rising price components are given less relative weight…homeowners’ equivalent rent replaces what it actually costs to buy a house with an estimate of what homeowners would have to pay to rent their homes – adjusted hedonically for quality improvements.”
In short, the official inflation rate – in the US, and elsewhere – can be manipulated to look like whatever the authorities want it to seem.
 
But people are not so easily fooled. Another angry respondent to Martin Wolf’s article cited the “young buck” earning £30,000 who wanted to buy a house in Barnet last year. Having saved for 12 months to amass a deposit for a studio flat priced at £140,000 he goes into the estate agency and finds that the type of flat he wanted now costs £182,000 – a 30% price increase in a year. Now he needs to save for another 9 years, just to make up for last year’s gain in property prices.
 
So inflation is quiescent, other than in the prices of houses, shares, bonds, food, energy and a variety of other financial assets.
 
The business of rational investment and capital preservation becomes unimaginably difficult when central banks overextend their reach in financial markets and become captive to those same animal spirits. Just as economies and markets are playing a gigantic tug of war between the forces of debt deflation and monetary inflation, they are being pulled in opposite directions as they try desperately to anticipate whether and when central bank monetary stimulus will subside, stop or increase.
 
Central bank ‘forward guidance’ has made the outlook less clear, not more. Doug Noland cites a recent paper by former IMF economist and Reserve Bank of India Governor Raghuram Rajan titled ‘Competitive Monetary Easing: Is It Yesterday Once More?‘ The paper addresses the threat of what looks disturbingly like a modern retread of the trade tariffs and import wars that worsened the 1930s Great Depression – only this time round, as exercised by competitive currency devaluations by the larger trading economies.
“Conclusion: The current non-system [a polite term for non-consensual, non-cooperative chaos] in international monetary policy [competitive currency devaluation] is, in my view, a source of substantial risk, both to sustainable growth as well as to the financial sector. It is not an industrial country problem, nor an emerging market problem, it is a problem of collective action. We are being pushed towards competitive monetary easing. If I use terminology reminiscent of the Depression era non-system, it is because I fear that in a world with weak aggregate demand, we may be engaged in a futile competition for a greater share of it. In the process, unlike Depression- era policies, we are also creating financial sector and cross-border risks that exhibit themselves when unconventional policies come to an end.”
There is no use saying that everyone should have anticipated the consequences. As the forrmer BIS General Manager Andrew Crockett put it:
“Financial intermediaries are better at assessing relative risks at a point in time, than projecting the evolution of risk over the financial cycle.’ A first step to prescribing the right medicine is to recognize the cause of the sickness. Extreme monetary easing, in my view, is more cause than medicine. The sooner we recognize that, the more sustainable world growth we will have.”
The Fed repeats its 2% inflation target mantra as if it were some kind of holy writ. 2% is an entirely arbitrary figure, subject to state distortion in any event, that merely allows the US government to live beyond its means for a little longer and meanwhile to depreciate the currency and the debt load in real terms. The same problem in essence holds for the UK, the Euro zone and Japan. Savers are being boiled alive in the liquid hubris of neo-Keynesian economists explicitly in the service of the State.
 
Doug Noland again:
“While I don’t expect market volatility is going away anytime soon, I do see an unfolding backdrop conducive to one tough bear market. Everyone got silly bullish in the face of very serious domestic and global issues. Global securities markets are a problematic ‘crowded trade’. Marc Faber commented that a 2014 crash could be even worse than 1987.
 
“To be sure, today’s incredible backdrop with Trillions upon Trillions of hedge funds, ETFs, derivatives and the like make 1987 portfolio insurance look like itsy bitsy little peanuts. So there are at this point rather conspicuous reasons why Financial Stability has always been and must remain a central bank’s number one priority. Just how in the devil was this ever lost on contemporary central bankers?”
 
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Feb 20

Enslaving Our Robot Overlords

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The FT’s Martin Wolf might want to watch a robot doesn’t steal his column…
 

IT CAN BE so much fun to point out others’ faults…and give them helpful advice, writes Bill Bonner in his Diary of a Rogue Economist.
 
Imagine you are in a restaurant. You see a fat man ordering a chocolate fondant dessert. Go over and offer to eat it for him.
 
Or imagine you are in church. You have heard that Mr. Montaigne is fooling around with Mrs. Mordant. It is practically your civic duty to say something to them both. Or imagine that your wife has gotten distracted and has burned the broccoli. Surely, it will do her good to remind her to pay attention when she is cooking you dinner.
 
On a personal level, this sort of helpful comment is not always appreciated. On a public level, it’s much easier.
 
Remember from last week David Brooks was concerned that people were not moving house often enough. He had a solution too: Give them moving vouchers.
 
Brooks’ colleague at the New York Times Tom Friedman is a great source for this kind of helpful thinking, too. In one of his editorials for the newspaper he determined that people weren’t driving enough electric vehicles.
 
Solution? Give them free parking!
 
In another classic, he suggested setting up a “National Commission on Doing Things Right“. We don’t recall what particular things he thought the nation was doing wrong at the time, but we are sure that had the Bush administration taken his advice more seriously, the mistakes would have been corrected years ago.
 
And now, in the Financial Times, Martin Wolf calls attention to the failure of working class people everywhere: They can’t compete with robots, he says.
“Enslave the robots and free the poor,” he proposes.
What’s Wolf got against robots?
 
He must see them as mechanical scabs. They don’t go on strike. They don’t talk back to you. They make fewer mistakes. They don’t get drunk on the job. They work holidays. And they can be programmed to be polite as well as competent.
 
Hey, any robot who wants our job can have it. No need to enslave the poor thing. Just let him compete for it fairly. We will gladly yield to any machine that can do it better. It would be nice if one would take Wolf’s job, too.
 
But where we see an opportunity, Wolf sees a problem. Forty-seven percent of jobs are threatened by automation, he says. Then what will happen to the wages?
 
You have to look no further than slavery to find out. Slaves – human or robotic – are a form of capital. After the cost of maintenance, the profits from their work go to their owners.
 
Wolf does not mention it, but the robots should say a prayer to central bankers. By reducing interest rates, they also reduce the cost of capital.
 
At zero rate of interest, for example, the real cost of a robot is zero. And if that robot can replace an average, marginally competent employee with a bad attitude, the employer makes a profit of $42,000 (or whatever he would have paid the human)…not counting health insurance and the parking place.
 
The lower the cost of capital, the more robots take their place in the labor force…and the more labor costs drop.
 
And now, instead of slaving all day in a noisy factory, the former assembly-line worker could be at the library, studying ancient Aramaic or perfecting a non-polluting air-burning motor in his basement.
 
But wait. Wolf reckons there could be:
“…a large adjustment shock as workers are laid off; the market wages of unskilled people might fall far below a socially acceptable minimum; and combined with other new technologies, robots might make the distribution of income far more unequal than it is already.”
The specter of unequal incomes is so alarming Wolf doesn’t wait for the robot invasion. He wants us to be ready for them. He gives us five things that we should do…or at least think about.
 
First, we need to “shape” the good new robots…and manage the bad ones, whatever that means.
 
Second, education is “not a magic wand.” We never thought it was. And in any case, you can probably teach a robot faster and cheaper than you can teach a 10-year-old.
 
Third, we have to “let people enjoy themselves busily.” Again, we have no idea what he is talking about. People don’t need Wolf’s permission to enjoy themselves, busily or lazily.
 
Fourth (uh oh) “we will need to redistribute income and wealth.” Now Wolf comes to the point: He wants to control where the money goes. Maybe “the state [should] obtain an automatic share of the profits from the intellectual property it protects,” he says.
 
Fifth, let’s not forget the need to “ensure that demand expands in tandem with the rise in potential output.”
 
Remember all that stuff you learned about how an economy works? About how supply and demand regulate themselves? When supplies are short…prices rise…and producers get busy. When prices fall, producers slack off.
 
Well, forget it. Wolf thinks supply and demand should be controlled. So they both go up at the same pace.
 
Perhaps a future column will explain how that will work.
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Aug 22

Europe Trembles

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Europe seems bound for austerity.

Success will not distract Germany from its austerity program…

IT’S NOW BEEN
65 years since Europe’s last major war, writes Bill Bonner in his Daily Reckoning from Ouzilly, France.

Still, when Germany gets up off its knees, the continent trembles. And last week, the Berlin government announced the best results since the wall fell in ’89. From the first quarter to the second one the republic’s GDP rose 2.2%.

At that rate – about 9% a year if it continues – Germany is running neck and neck with China. Compared to France and the US, Germany is flying nearly 4 times as fast. Greece meanwhile is backing up. Its economy shrank 1.5% last quarter.

Histocially, the Teuton tribes were an aggressive lot. The Usipetes, Tenchteri, Batavi, Cherusci, Chatti, Vandals, Goths, Franks, Alans, Suebians – all jostled each other for centuries. They must have gotten a taste for competition. And when Rome wheezed her last gasps they fell on her like French tax collectors on a widow’s estate. The Vandals pushed all the way across Gaul and Iberia, crossed to North Africa, and from their new base in Carthage, continued to tickle the old Empire until it rolled over on them.

Everybody has his elbows out. But competition takes many forms. Better to build Audis and Mercedes than Tigers and Messerschmitts. Better to race for market share than for the Champs Élysée. Whatever form it takes, competition isn’t likely to stop. Happily, most of the time, it is a boon to everyone – even to the losers. That’s why Germany’s current success is only a threat to the economists and commentarists who’ve been giving her advice. The rest of us hold our breath and hope for more.

It was only a month ago that Martin Wolf led a “great debate” on how governments should react to the financial crisis. Of all the ideas to come out of financial crisis of ’07, Wolf proposed one of the most remarkable. He illustrated it with the fable of the ant and the grasshopper. He saw two types of economies. There were those that produced and those that consumed. The trouble, according to Wolf, was that the two didn’t compete at all. Instead, they lived in a kind of symbiotic parasitism. The grasshoppers lived off the labors of the ants. Not only did the grasshoppers make the things that the ants used, the ants took the grasshoppers’ money and lent it back to them, so they could buy more. The grasshoppers were ruining themselves. But the ants were making a mistake too. They were building up capital, but what could they do with it? There was no point in expanding output capacity; arguably, they already produced too much. And what could they buy? The grasshoppers had nothing to sell.

That was not the worst of it. When the grasshoppers had spent too much, said Wolf, both bugs were trapped. If the grasshoppers in Spain and Greece were forced to spend less, the ants in Düsseldorf were condemned to sell less. Their economies were doomed to go down together, like galley slaves chained to a sinking ship.

In any case, it looked like the sort of thing the fixers could fix. Germany is all make. Greece is all take. The system was out of whack. Trade flows must balance out to zero, so Wolf et al concluded that the problem could be corrected on either side. Germany could stop working so hard and exporting so much stuff it didn’t want. Or, Greece could stop spending so much money it didn’t have. Since any slowdown in spending threatens the “recovery,” it would be better for Germans to do more spending themselves. They should raise wages and encourage their own people to buy more Audis…more ouzo…and more pointy shoes with curled up toes. This was no time for austerity.

They misunderstood the problem. Imagine two men marooned on an island. They barely survive. One works hard, hunting, gathering, and planting. The other dances on the beach like Zorba, depending on the kindness of his companion for his daily rations. The problem is not the lack of balance. The problem is the slacker. You could redress the balance between them by getting the productive one to slack off too. But then, they’d both starve.

The Euro was seen as part of the problem, too. It was either too low for Germany or too high for Greece, said analysts. In the good old days, Greece could have pulled a fast one, devaluing its currency to make its citizens poorer, and their labor and exports cheaper. But now, there is no cheap and easy solution.

Which set us to a-wondering about how the world possibly got to where it is. For the hundred years from the end of the Napoleonic Wars to the beginning of WWII, Europe was rarely happier, more prosperous…or more at peace. Yet during that time, money was even more inflexible than the Euro. Governments did not commit premeditated murder of their own currencies. Instead, the value of paper money was protected by gold. People competed by working harder, saving more, and figuring out how to produce more with less – just as the Germans are doing now.

This week, the Merkel team followed up. “The lady’s not for turning,” Ms. Merkel might have said, taking a line from Margaret Thatcher’s Brighton conference speech of 30 years ago. With the pressure off its budget, the commentators thought the Germans might be tempted to ease up on their austerity program. Instead, the German government will continue to pursue cuts to military and social spending, she said.

Success will not distract Germany from its austerity program. Whether failure will send it off the rails is a question to be answered later.

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