deficit spending vs Capt. 00:00

It is however, a fallacy if anyone says that the Fed does not have influence on the M3. Industry’s and People’s perception of the direction of Gov, significantly effects the amount of TE and TL that Industry and People will invest in the US economy. Much like trying to pick up a gal with a good line of BS. She either buys it, or she doesn’t. Right now?...it appears she is yawning. Originally Posted by Rudyard K

LOL, but to comprehend that she's yawning, I don't need the M3. Even reading Krugman's blog would tell me that.

& Fed has no real control beyond M2.

& Fed has no real control beyond M2. Originally Posted by ..

But one of the problems is that they think they should directly control M3 -- see healthcare, financial service, energy, auto, ...etc.

RK: I'll drink to T&A!

I do not doubt it - Krugman is a serious economist - but I hold 99.9% of all economists in low esteem. Originally Posted by ..

Wow, double-dot. Not even I can get anywhere near 99.9%! (Although I don't know of many academic economists I hold in high regard.)

I hope you don't hold mathematicians in such low esteem!

Perhaps you might like this snippet from one of my posts from about a month ago:

...Just a couple of weeks ago, Kartik Athreya, an economist with the Richmond Fed, lambasted non-PhDs who opine about economic issues. Among other things, he said that no one who hadn't at least completed the coursework leading to candidacy for the doctor's degree has any business rendering opinions on macro policy of any kind. (By the way, you may have noticed that these geniuses at the Fed don't exactly have a sterling track record of getting things right.)

By Athreya's standard, no one should ever pay any attention to the musings of Adam Smith, David Hume, or Frederic Bastiat. They didn't do the coursework for PhDs in economics.

And it's amusing to note that John Maynard Keynes, at the altar of which many of these guys worship, didn't complete graduate-level coursework in economics! He studied mathematics, philosophy, and the classics. Originally Posted by CaptainMidnight

Many of these guys subscribe to schools of thought that have been wrong about everything for fifty years.

I'll take the advice of a successful professional investor, private equity manager, or VC any day over these economists who seem never to learn anything at all from what happens in the real world.

The author of the article posted by RK again makes the point that fiscal policy doesn't work as intended. But I'm afraid that when the economy weakens again, as I believe it will in '11, liberal politicians pull out that tired old playbook once again.

These people are like medieval "doctors" who practiced bloodletting. When the patient didn't get better, they thought it was because they hadn't taken enough blood!

LOL, but to comprehend that she's yawning, I don't need the M3. Even reading Krugman's blog would tell me that. Originally Posted by ..

Then don't use it. The US stopped posting it in 2006. But just because you can't see it does not mean that it is not indicative. It would appear it is not indicative to you. Fine by me. If all this was as simple as the red arrows and green arrows on that trading software program, then we could all do it.

& Fed has no real control beyond M2. Originally Posted by ..

Much like the "Codependant No More" craze some decade or two ago, that's a bit oversimplified. Since one party can't control the reaction of the other party to something done or said, the first party does not need to factor in the second party's perceptions. It might be great in theory, but it doesn't really work with human beings.

RK: I'll drink to T&A! Originally Posted by pjorourke

I'm with you there buddy....provided they are proportionate.

Well, since the very thread title involves my opposition to our out-of-control deficits, and since monetary aggregates have been mentioned, I thought I might describe how I think there may be a pretty strong relationship between the two. Bad fiscal policy, in my view, may be a major contributor to the aggregate shrinkage of the money supply.

It might seem mysterious and counterintuitive that we could have a falling money supply. After all, hasn't the Fed pumped tons of money into the economy with 19 months of ZIRP and massive purchases of treasuries, MBSs, and agency debt, fattening up its balance sheet by at least $1.5 trillion?

Yes, but money is two-dimensional: Quantity and velocity. Supply is being pumped out on a virtually unprecedented scale, but it is not acting like it usually does. For instance, much of it is going into the bond market. The multiplier effect of fractional reserve banking is not working in the usual way. That means that the "velocity" of a very big pile of money is abnormally low. That's where the quantity theory of money can break down (in the short run, especially) at times when velocity is very unstable.

There is a sense of foreboding setting in about the economy. The addition of more irresponsible deficit spending simply adds to concerns that the debt problem will need to be addressed sooner rather than later. Bankers know this and are all too happy to make easy money living off the spreads between borrowed money at near 0% and the yield on longer-dated stuff. Why should they not when they have the opportunity to do so and other "traditional" ways to make money look riskier than ever?

Nobody has any idea what this blizzard of anti-growth policy (stimulus packages, health care "reform" plans requiring Enron-style accounting to keep the 10-year cost estimate below a trillion bucks, a FinReg bill that completely fails to address the main problems, a possible cap-and-trade bill, etc.) is likely to do to the economy -- and to the "traditional" banking industry -- over the next few years, but fewer and fewer people think the outcome is going to be very good.

No wonder a lot of capital may decide to take an extended vacation.

Then don't use it. The US stopped posting it in 2006. But just because you can't see it does not mean that it is not indicative. It would appear it is not indicative to you. Originally Posted by Rudyard K

To a certain degree a broad money aggregate like M3 is indicative and useful; but only to a certain degree.

regardless of that, to me the article had absolutely no new insight. As I said, i got nothing new out of it. Even a blog junkie reading Krugman would have this insight.

Yes, but money is two-dimensional: Quantity and velocity. Supply is being pumped out on a virtually unprecedented scale, but it is not acting like it usually does. For instance, much of it is going into the bond market. The multiplier effect of fractional reserve banking is not working in the usual way. That means that the "velocity" of a very big pile of money is abnormally low. That's where the quantity theory of money can break down (in the short run, especially) at times when velocity is very unstable. Originally Posted by CaptainMidnight

Word! And this is by now really well known and accepted as a fact. Not really news, even Krugman writes: "everything changes when you’re in the liquidity trap." [0]

And I guess also avatar THH would agree on that. The problem however is, how to get out of this fucked situation, and here our opinions and beliefs diverge.

[0] http://krugman.blogs.nytimes.com/201...eflationistas/

Krugman continually writes about liquidity traps and how he feels they are difficult to exit. His policy prescription involves blasting out by pouring in enough government spending to fill the output gap. Now he feels that we are entering a Japan-style situation. But Japan spent money like there was no tomorrow, tripling its debt/GDP ratio! And all to no avail; their economy has been mired in stagnation for almost 20 years.

I wonder what Krugman would have said if he'd been around 90 years ago. In 1920-21, we had a severe deflationary recession. The stock market dropped in half. Industrial production declined by about 30% and the unemployment rate quickly rose by several percentage points. Year-over-year deflation was about 13%, and wholesale prices dropped even more than that.

A truly scary situation. In fact, by many measures it was even worse than the first year of the Great Depression.

But in those days, no one had thought of the idea of massive government intervention to mitigate the severity of a recession. We have had recessions, depressions, speculative booms and busts, inflations, deflations, bank panics, and all sorts of other things since the founding of the republic. The economy always recovered, often quickly and robustly.

Warren Harding was president at the time. He insisted that we cut taxes and cut government spending! That probably would have seemed like lunacy to Krugman, who almost certainly would have thought that we needed to combat the inevitable liquidity trap by scattershooting borrowed or printed money into every county across the land.

But the economy rebounded quickly, and we later began referring to that decade as the "Roaring Twenties."

.., I've never heard of John Geanakoplos. I know someone in the Obama administration who knows and thinks highly of Peter Diamond. Obama nominated him to a Fed position and I don't know where that nomination is now.

Daniel Kahneman I know a fair bit about. He wrote some pioneering work on cognitive bias and bounded rationality. in economics with Amos Tversky. That work is very influential with lots of neo-Keynesian right now and is quite interesting. Especially the bounded rationality material. If you're interested in that sort of cognitive bias in economics stuff, you should definitely read How Markets Fail: The Logic of Economic Calamities, by John Cassidy. A very interesting book that talks a lot about Kahneman and Tversky.

http://www.amazon.com/How-Markets-Fa...0557166&sr=8-1

And one of my economics professors favorite quotes, attributed to various people, most notably George Bernard Shaw, was "If all the economists in the world were laid end to end, it would be a good thing."


As to Kartik Athreya's idea that only PhD economatricians should be allowed to have opinions, that's the kind of stupid shit that got us into this problem to begin with. We have far too many economatricians who are all too wrapped up in their economometric models, and not enough people with a good background in theory who can sit back and say, "But that doesn't make any sense! Just think about it for a second and ignore the pretty math." And I know a number of PhD economists who share that view.

I have heard of Geanakoplos, but mostly because he won the U.S. Junior (under 21) Chess Championship in 1970 at the age of only 15! It has always seemed to me that players who were that good at an early age are often very imaginative thinkers. And it certainly appears that Geanakoplos has done an impressive body of work.

Another well known economist who is an even better chess player is Harvard's Ken Rogoff. In fact, Rogoff interrupted his early educational and professional career to become a FIDE-titled International Grandmaster while he was in his 20s.

Recently he and Cuban-born Carmen Reinhart have teamed up to do some excellent work on the history of financial crises going back hundreds of years. One of their key points is that countries tend to have great difficulty digging out when they allow their debt/GDP ratios to approach 100%, and that such a level of debt lessens prospects for robust, sustained growth. They note that Japan, while in deep trouble, may have an easier time getting away with this sort of thing than we would, since most of their debt is domestically held -- just as ours was when we financed World War II.

Rogoff certainly does not support the Krugman prescription and warns against what he calls a "panicked fiscal surge."

Maybe his chess experience serves him here. It is not uncommon for a player to sacrifice a pawn (or two) in return for a strong initiative or attacking chances. But if you fail to win in the middlegame, you face the bleak prospect of going into the endgame material down. Against a good player, that's virtually hopeless.

In Japan, we've clearly seen the metaphorical equivalent of failing to win in the middlegame; that is, a failure to punch the economy into sustained growth with a huge fiscal jolt. Rogoff is apparently concerned that we are at risk of doing that.

I might suggest that if we took Krugman's advice, instead of inexorably heading for the endgame a pawn down, we might be a rook down!

As to Kartik Athreya's idea that only PhD economatricians should be allowed to have opinions, that's the kind of stupid shit that got us into this problem to begin with. We have far too many economatricians who are all too wrapped up in their economometric models, and not enough people with a good background in theory who can sit back and say, "But that doesn't make any sense! Just think about it for a second and ignore the pretty math." Originally Posted by TexTushHog

Ain't that the truth!

Did anyone hear about the Blinder-Zandi paper that just came out a couple of days ago? These guys actually argue that the fiscal portion of the policy response was working because their models said it would work! Seriously, you can't make this stuff up. But I suppose it's hard to find anything else that buttresses their claims. Of course, Zandi is the guy who said last year that giving away food stamps, according to his model, gives you a fiscal multiplier of 1.73! Since they were two of the leading cheeleaders for the whole idea, I guess it's understandable that they would try to paint some sort of happy face on it.

And one of my economics professors favorite quotes, attributed to various people, most notably George Bernard Shaw, was "If all the economists in the world were laid end to end, it would be a good thing." Originally Posted by TexTushHog

LOL!