Monty Pelerin's World

Economic, Financial and Political Analysis

Archives for Economics

A Crisis in Leadership

From Reader JJC:

The budget should be balanced. Public debt should be reduced. The arrogance of officialdom should be tempered, and assistance to foreign lands should be curtailed, lest Rome become bankrupt.
                         -Marcus Tullius Cicero
 
President Downgrade
As I write this, the Nikkei is just opening and is following a steady downward trajectory.  None of the overnights look better.
The table below is from the final bell on August 8th, and I have little confidence that even these depressing –make that scary- figures are going to hold.  In fact, if one were to expand this table to include overseas markets and indices, everything is a mess.
So far, no floor has been established and you can count on both professional traders and amateurs dumping stock like excess ballast on a leaking tramp steamer.  Best guess is the next price support is someplace in the high 900’s.
NAME
LAST
CHANGE
% CHANGE
10,948.35
-496.26
-4.34%
1,135.36
-64.02
-5.34%
2,400.70
-131.71
-5.20%
678.38
-36.25
-5.07%
11,852.38
-712.34
-5.67%
Karl Denniger at Market-Ticker does not think that this is “the big one”.  He may or may not be correct.  He feels it may rebound before collapsing without any near term reversal.  This author has no opinion except to say, again, that this volatility is not the behavior of a healthy and sound market.  The situation now is mostly driven by primal fear and frankly very bad market fundamentals.
The talking heads on TV seem unable to understand why this is happening.  Some are, remarkably, blaming the Tea Party. Some politicians are blaming this on conservative’s unwillingness to raise taxes.  All have given up the politically correct baloney about green shoots or a recovery summer.
No, this is something we haven’t seen in several generations.  We are seeing more than just an ordinary recession.  We are in the beginning of a world wide and quite systemic de leveraging recession.
Dick Morris reports in an interview with James Fitzbibbons of the Highlander Fund the followingt: http://www.dickmorris.com/blog/the-real-economic-story/
Now comes a truly terrifying email from James. He writes, “This is the start of the real deal.” The things I forecast six months ago are now obvious to some but still not all.” He writes that “We have begun the second phase of the meltdown.” He predicts that “Stocks, real estate will collapse and keep falling into 2013. The lows of 2009 will be easily taken out on the downside.”
From the start, Fitzgibbon has been impressing on me that we are not facing the normal business cycle of boom and bust, but that we are in the midst of a debt repudiation cycle which comes every fifty or sixty years as debt piles up so high that borrowers stop borrowing and lenders stop lending.
Our GDP to Debt ratio is 100%, but as Morris and others are pointing out, adding in Fannie &Freddie, it is larger than that.  Fannie and Freddie are two very expensive white elephants that, by virtue of portfolios stuffed with millions of underperforming loans backed by phantom assets, are rapidly burning through multiple billions of dollars.  Despite last week’s more positive unemployment report, the reality is that the labor force participation rate has dropped so considerably that it has actually reduced the official unemployment statistics.  Jennifer Rubin in the Washington Post stated this quite well earlier when she wrote:
When President Obama took office in January of 2009, the labor participation rate was 65.7 percent. Now, “The labor force participation rate is currently 63.9 percent. That is the lowest level since 1984,” says Matt McDonald, a communications and business strategist who previously worked in the Bush administration. “If the labor force participation rate today were 65.7 percent, there would be an additional 4.2 million people in the workforce.” In that case, the unemployment rate would be 11.5percent not 9.1 percent.
It seems that Mr. Obama is living in a parallel universe.  Just two months ago, Mr. Obama was telling giving us the word that everything was going along quite swimmingly:http://m.whitehouse.gov/the-press-office/2011/05/18/remarks-president-dnc-event-boston-massachusetts
Now, we have spent the last two and a half years cleaning up a big mess.  And some of the decisions we took were tough.  We had to move swiftly, we had to move boldly, and sometimes they were controversial.  But an economy that was shrinking at about 6 percent is now growing again.  Over the last 14 months we’ve created 2 million private sectors jobs, starting to recover some of those jobs that were lost during the crisis.  The financial system is stable.  The stock market has doubled.  We’re on track to enjoy in manufacturing, for example, some of the fastest growth and greatest expansion that we’ve seen in about a decade.
Of course, he basically went another direction at the delayed and very creaky press conference today.  He was unconfident, nervous, and typically insincere until he trotted out his solution to our markets in free fall:  class warfare and reheated wealth redistribution.  Sure, and how many people think higher taxes and greater confiscation of wealth from our citizens will fix this right up?  Regardless, he was confident in telling us that class warfare and higher taxes are just what the doctor ordered.  That material he does understand and does feel confident about because when it comes to confiscating people’s income and living off the hard work of others, he is a subject matter expert.
So where does this leave us?  We have a crisis of leadership and a crisis of vision leading to a crisis of confidence.  Partly as a result, we see markets panicking and nations including our own, becoming insolvent- right before our eyes.
This is a worry, because left unchanged it will lead to a loss of legitimacy of not only the man, and not just his office, but of our political institutions.

Is This It? Or Can They Fool Us Again?

John Rubino asks the proper question: “Is This It? Or Can They Fool Us Again?”

There is no where to go and no way out from where we are. After decades of tinkering, stimulating and intervening, the bailing wire is bursting. The issue, as Mr. Rubino describes it is not repair, but extend and pretend:

A stressful weekend for the world’s bankers and politicians, followed by a sleepless Monday, and all with a single question rattling around in their heads: How can we fool them again?

The damage done over decades is beyond repair. Economies of the world are built on foundations of Keynesian and Statist sand, not free-functioning markets. All economies in the developed world suffer from the same disease and they are all coming down. The question is whether they can defer it once more. But, that solves nothing.

Buying time is no economic solution. It produces more distortions and an ultimately greater correction. It is attractive from a political standpoint only because it extends the time in office. Eventually these poseurs and criminals will be run out of town on a rail.

In my opinion, there will be no recovery in the sense that the economy will begin to grow at 6% per quarter rates (which typically characterize recovery from recession). Instead we face one of two scenarios. First an economic stagnation, not unlike what has plagued Japan for the last two-plus decades and what has characterized our economy for the last couple of years. Alternatively, some upset condition (collapse of the banking system, collapse of the dollar or some other element) triggers an economic implosion of all world economies.

My guess is the latter outcome, although the stagnation phase (with possibly very high inflation) stage could last for a while.

You pays your money and you takes your chances!

The Rooster Crows But The Sun Doesn’t Rise

Keynesian economics is a fraud. It has neither theoretical coherence nor empirical support. It was adopted out of desperation in the 1930s.

Many contemporary economists of the time protested that the fundamentals of the theory were incorrect. Economists had rejected some of its premises more than a century before John Maynard Keynes was born. For a sampling of some of the reactions see The Critics of Keynesian Economics.

This article will explore the following topics:

  • How Keynesianism Was Accepted
  • The Case Against Keynesianism
  • How Politics Complicates Economics
  • Why There Will Be No Political Solution

Why Did Keynesian Economics Dominate?

Keynesian economics represented a major shift in economic thinking. To understand how it dominated, some commentary on paradigm shifts is useful.

Thomas Kuhn described how knowledge advances in the physical sciences. His work popularized the term “paradigm shift.” He asserted that more than just a crisis and “proof” was needed for a new paradigm to be accepted:

… crisis alone is not enough. There must also be a basis, though it need be neither rational nor ultimately correct, for faith in the particular candidate chosen. Something must make at least a few scientists feel that the new proposal is on the right track, and sometimes it is only personal and inarticulate aesthetic considerations that can do that….

Kuhn’s understanding of progress did not claim monotonically increasing knowledge. According to the Stanford Encyclopedia of Philosophy, Kuhn anticipated occasional loss with the adoption of a new paradigm:

… a later period of science may find itself without an explanation for a phenomenon that in an earlier period was held to be successfully explained. This feature of scientific revolutions has become known as ‘Kuhn-loss’ (1962/1970a, 99-100).

The social sciences are more complex, but presumably paradigms shift in a similar fashion. The degree of uncertainty regarding the interpretation of data in the social sciences complicates the problem. Some epistemologists argue that behavioral data cannot prove or disprove anything. Friedrich Hayek’s “scientism” was coined to describe the misuse of physical science methodologies to behavioral fields.

More variables, sometimes

Read the rest of this entry »

Economic Mess and Gold

Jim Sinclair and James Turk discuss the implications of the economic situation, especially as it relates to gold. They are both “gold bugs,” and they are bright guys with well-reasoned positions.

Here’s The Change; Where’s The Hope?

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