Saturday, December 8, 2012

Another Summer of Discontent: The Four Factors that Explain Why What We’re Doing Isn’t Working

  • The imbalances between high-wage/current-account-deficit/balance-sheet-indebted nations and lower-wage, surplus nations have produced a glut of savings in the latter, relative to the opportunities offered for profitable investment of those savings in additional capacity either at home or abroad, given the absence of demand for such additional capacity.
(This is the global economy separating into Iv-B advanced economies and V-Bi emerging economies that lend their surpluses. This is not a natural economy because it treats the advanced economies as Iv-B but this was only a speculative boom as they are not really innovating as much. The subprime innovation was deceptive and opaque drawing in money like outsiders betting on a poker game.)

  • The excess savings have inexorably reduced the cost of money in the developed world to the historically low levels we again achieved this week.
(This is because the advanced economies have had the subprime deception exposed and so this money is afraid to go there now, it also has nowhere else to go as their own economies cannot grow fast enough to use it. Their growth came mainly from selling to the advanced economies after dismantling their own manufacturing industries.)

the sovereign debts of those countries that was taken on to subsidize internal welfare systems in lieu of, or in addition to, households taking on debt directly) is preventing the recovery of internal demand. Moreover, as the great Irving Fisher wrote during the Great Depression, the very act of attempting to reduce debt has once again ignited the paradox of reduced economic activity, employment and income causing consumers to become even more debt-dependent

(The advanced economies borrowed money to quench the effects of the Iv-B chaos, much of this from connections to the government to insure the losses of V. Now reducing debt in Bi-B is causing more collapses from the chaos not having enough Bi capital to quench it.)

For example, New Keynesian macroeconomists, as well as some of their post-Keynesian and Hicksian cousins (yes, I am including Paul Krugman in this category, much as he is to be admired for his outspokenness) have posited that gargantuan additional amounts of monetary expansion will succeed in overcoming the debt deflation.

(Not necessarily, a Roy economy has to minimize losses first before trying to restart profit. Also this money will go into regrowing Iv-B weeds because of weak I-O policing, for example stimulus projects going to cronies.)

efforts to induce inflation, and efforts to target and forcibly obtain high rates of nominal GDP growth (the hope of all who seek to induce debt-devaluing, and investment-inducing inflation/financial repression—see Christina and David Romer, Kenneth Rogoff, and his collaborator, Carmen Reinhart) are not working.

(This is because the Iv-B system crashed like a fallen tree or collapsed building, injecting money to prop it up just creates a zombie economy.)

In addition to historically low interest rates and a banking/credit system choking on un-lent, and foolish-to-lend, liquidity, we have the subsidizing effect of low interest rates on banks and corporations (and, to a far more limited extent because of the decrepitude of household balance sheets, consumers). We even have, as a result of the household debt crisis and the underwater mortgage crisis, 6.5 million households that are delinquent or in default on their mortgage and essentially living “rent free”—a most insidious form of subsidy.

(The money cannot get into most of the economy because the Iv-B roots and branches were broken in the crash, like a zombie patient with not enough blood vessels to move nutrients to revive them. The money then just pools like in the patient, also the Iv-B economy is still too deceptive to trust.)

In it, Krugman asserts that falling wages would precipitate “destructive deflation” and maintains that while wage cuts couldtheoretically be thought of as expansionary (because such cuts would notionally increase the demand for workers, thus creating jobs and increasing demand) they would exacerbate the debt problem, as households earning less would have a more difficult time deleveraging and between that, and the downward price adjustments that would need to follow wages, we’d be off on the road to Tokyo before long.

(This is the V-Bi and iv-B disconnect, some want to let wages collapse to get people working while others think it will cause more collapses in the economy. the result is vacillation between both policies creating zombies not killed off and not helped enough to revive.)

Irving Fisher taught that to prevent a deepening slump amidst a debt deflation we must stabilize economies and then go all-out to reflate them. The monetary authorities in the developed world have engaged in massive coordinated action to stabilize their financial systems and economies to prevent depression (at least so far). But they have not succeeded in being able to reflate the advanced economies—and will not be able to do so through a singular reliance on the blunt instrument of further monetary easing

(The economy cannot be reflated when it has too many holes in it still. The Iv.B economy is like pressurized pipes, as it overheats it eventually explodes and so any repressurizing with money pools or leaks away.)

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