Where Is the Outrage?

excerpt from Mish Shedlock:
Here is the full text.

I don't know about you, but I am outraged.

I am outraged and not just about Goldman Sachs, but about a process that allows, even encourages political pandering, by time and time again rewarding leveraged riverboat gamblers and failed institutions and at taxpayer expense.

I am outraged that real people are suffering massively while the influence peddlers have stolen the country for their own personal benefit.

I am outraged at a political system that is totally unresponsive to the American people.

I am outraged by campaign contribution and lobbying processes that allows corporations to buy votes with donations.

I am outraged how legislators ignored the wishes of the people who clearly did not want these bailouts in the first place.

I am outraged that very little of this is in mainstream media. Why is this stuff not on the frontpage of every newspaper in the country or at least in the editorial pages?

I am outraged that the average US citizen is not aware of any of this, instead depending on CNBC, or "The View" for their interpretation of the world.

I am outraged how special interest groups have exercised their power to monopolize the economy for the benefit of themselves, US citizens be damned.

I am outraged that all these bailout programs are doing nothing to alleviate the massive consumer debt problems. Every program, virtually every program was designed to bailout lending institutions, not consumers.

I am outraged at fees charged by banks receiving bailouts.

I am outraged over government pension plans and government pay scales massively out of line with the private sector.

I am outraged that Congress and this administration thinks the solution to massive budget deficits are still higher budget deficits in excess of a trillion dollars.

I am outraged about indictments. Paulson Admitted Coercion to force a shotgun wedding between Bank of America and Merrill Lynch yet no indictments were handed out. Let the Criminal Indictments Begin: Paulson, Bernanke, Lewis.

I am outraged that US citizens are not concerned enough and not educated enough to demand change.

I am outraged that the two party system has failed. Neither party has delivered meaningful change on budgets, on taxes, on social security, on deficit spending, on the size of government, on military spending, or fighting needless wars.

I am outraged at a Fed that purports to be "inflation fighters" when the only source of inflation in the word are central bankers, and their fractional reserve lending policies.

I am outraged that Greenspan and Bernanke could not see a housing bubble that 1000 bloggers could see.

I am outraged at the selective memory of Bernanke when speaking to Congress about these problems.

I am outraged that Bernanke's one sided response to asset bubbles, letting them grow without end, then bailing out the financial institutions that cause them.

I am outraged the Fed exists at all. It is a useless organization that cannot see bubbles, that panders to banks, that supports inflationary policies that are tantamount to theft by fraud.

I am outraged that the Obama Administration promised changed and did not deliver. "Yes We Can" was a lie. The reality is "It's Business As Usual, Only Worse, With Higher Deficits".

I am outraged there is not enough outrage over this.

Where the hell is the outrage?

Yield Curve Steepest in Nearly 30 Years!

from Mish Shedlock:

The bond market is starting to show signs of concern over budget deficits and the corresponding supply of treasuries. Please consider Treasury Yield Curve Steepest Since at Least 1980 After Auction.

Treasuries fell, with the gap in yields between 2- and 30-year securities reaching the widest margin since at least 1980, after a $13 billion offering of 30- year bonds drew lower-than-forecast demand.

The so-called yield curve touched 372 basis points, the most in at least 29 years, as the bonds drew a yield of 4.52 percent. The so-called yield curve has widened from 191 basis points at the end of 2008, with the Fed anchoring its target rate at a record-low range of zero to 0.25 percent and the Treasury extending the average maturity of U.S. debt.

Treasury officials on Nov. 4 announced a long-term target of six to seven years for the average maturity of Treasury debt and said the department wants to cut back on its issuance of bills and two- and three-year notes. The shift to longer- maturity debt has raised concern that investors will demand higher yields to offset the risk of inflation as government spending drives the deficit to a record $1.4 trillion.

“The market is continuing to worry about the massive amount of Treasury issuance that’s going to hit the market well into next year,” said Ian Lyngen, senior government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “In the very short term, part of it is going to be supply accommodation.”

Yield Curve As Of December 10 2009



Historical Yield Curve



click on any chart in this post for sharper image

Chart Symbols
$IRX - The 3 month treasury - Brown
$FVX - The 5 year treasury - Blue
$TNX - The 10 year treasury - Orange
$TYX - The 30 year treasury - Green

A 2 year treasury symbol is not available.

The above chart shows the dramatic steepening in the yield curve since January 2009. This steepening is reflective of several things: An economy presumed to be improving but not at a very good rate, the Fed holding down short-term rates, and the huge pending supply of treasuries to finance the budget.

Judging from action in the 5-year treasury, it appears as if there is a long 3-to-5 year, short 30-year trade in play.

Even with that steep yield curve, banks are not lending judging by the plunge in consumer credit and small business loans.

Total Consumer Credit



click on chart for sharper image

Total Bank Credit



click on chart for sharper image

Total bank credit is starting to rebound but from depths never before seen.

US$ Weekly Chart



click on chart for sharper image

2010 Forecast - The Great Retrace



That segment with Aaron Task is from Mish: Nov. Jobs Report "Looked Fabricated", Expect Harder Times in 2010

From President Obama on down, Americans are hoping Friday's stronger-than-expected November jobs report marked the beginning of the end of our national unemployment nightmare. Looking beyond the November jobs data, Shedlock says the odds of the unemployment rate coming down anytime soon are remote.

As confident as he is about the grim outlook for jobs, Shedlock was very reticent to make market predictions in the accompanying video, taped Friday evening at Minyanville's annual Holiday Festivus in New York City.

In a subsequent email, Shedlock was more willing to take a position, as is more typical of the opinionated blogger:

"In the absence of a war outbreak in the Middle East or Pakistan -- and/or Congress going completely insane with more stimulus efforts -- I think oil prices are likely to drop, the dollar will strengthen or at least hold its own, and the best opportunities are likely to be on the short side," he writes. "2010 is highly likely to retrace most if not all of the ‘reflation' efforts of 2009. If things play out as I suspect, 2010 will be the year of the great retrace as the economic recovery disappoints."

If the US$ breaks North in a sustained way as it appears poised to do, and if treasury yields break higher as well (on that I have no firm opinion), 2010 is going to be one miserable year for nearly everyone.

Note that a seasonal favorable period for treasuries ends this month. Moreover, March-May is typically the worst period for government bonds because of budgeting and tax refunds. However, one should not lightly dismiss the possibility of another flight to safety play if commodities and equities head dramatically lower as I ultimately expect them to do.

Mish Shedlock Takes It to Cleveland Fed

from Mish Shedlock:
A couple weeks ago I received an email from the Cleveland Fed on A New Approach to Gauging Inflation Expectations.

People’s expectation of inflation enters into nearly every economic decision they make. It enters into large decisions: whether they can afford a mortgage payment on a new house, whether they strike for higher wages, how they invest their retirement funds. It also enters into the smaller decisions, that, in the aggregate, affect the entire economy: whether they wait for the milk to go on sale or buy it before the price goes up.

Real interest rates also play a key role in many economic decisions. When businesses invest—or don’t—in plants and equipment, when families buy—or don’t—a new car or dishwasher, they are making judgments about the real return on the object and the real cost of borrowing. As such, real interest rates can be an important guide to monetary policy. As Alan Greenspan once explained,1 keeping the real rate around its equilibrium level (which is determined by economic and financial conditions), has a “stabilizing effect on the economy” and it helps direct production “toward its long-term potential.”

I was told that I could set up an interview with Joseph Haubrich, vice president at the Federal Reserve Bank of Cleveland about his model. I tried to setup an interview but was directed to send my questions by email instead.

Here there are...

Inflation Expectation Questions For Joseph G. Haubrich

1. When was the last time you bought a computer? Did you expect prices to drop? Did you buy a computer anyway?

2. When was the last time you bought a flat panel monitor or TV? Did you expect prices to drop? Did you buy them anyway?

3. If you expected the price of steaks to keep rising, would you buy a years’ worth? Six months worth? Do you even have a freezer?

4. If you expected the price of milk to keep rising, how much supply would you keep?

5. Do you have a storage tank for gasoline when you expect gas prices to keep rising?

6. If your refrigerator was in good shape would you buy another one if you thought they were going up in price.

7. If your refrigerator, microwave, TV, or even car went out, would you buy them or wait if you thought prices would drop?

8. I keep hearing how inflation expectations will cause people to buy consumer items, or deflation concerns cause people to not buy consumer items, but in light of the above practical test questions doesn’t that seem to be a potty notion?

9. What about asset prices? Would people buy stocks if they thought they were going up? Houses? This one I will answer for you (you bet).

10. Does the Fed factor in asset prices into its inflation expectations? If so how? Did not the Fed completely ignore a housing bubble? In fact, isn’t it true the Fed could not see a housing bubble that 100 housing blogs could see?

11. Given that the Fed ignores asset bubbles, commodity speculation, etc (the only areas in which people actually do things simply because they expect prices to rise or fall) while focusing on consumer price expectations that have no bearing on what people do, doesn’t the Fed have its inflation policy ass backwards?

12. Isn’t it silly to actually think inflation expectations 30 years out matter one iota?

13. Given that the Fed has blown bubble after bubble of increasing amplitude, ignoring the problems until they blew up in the Fed’s face, with Bernanke denying there was a housing bubble, then denying there would be a recession, then coming up with preposterous unemployment expectations, pray tell exactly why should anyone believe the Fed can model inflation expectations or even inflation as it is actually happening?

14. If the Fed thinks that market expectations are important, why not simply let the market set interest rates?

15. How could letting the market set rates possibly be any worse than the repetitive bubbles the Fed blew under Greenspan and Bernanke?

16. Pray tell of what use is the Fed other than to bail out banks when they get in trouble? And of what use is that to anyone but the banks?

17. I would appreciate your comments on The Fed Uncertainty Principle, written Thursday, April 03, 2008, before the massive bailouts occurred.

The Observer Affects The Observed

The Fed, in conjunction with all the players watching the Fed, distorts the economic picture. I liken this to Heisenberg's Uncertainty Principle where observation of a subatomic particle changes the ability to measure it accurately.

To measure the position and velocity of any particle, you would first shine a light on it, then detect the reflection. On a macroscopic scale, the effect of photons on an object is insignificant. Unfortunately, on subatomic scales, the photons that hit the subatomic particle will cause it to move significantly, so although the position has been measured accurately, the velocity of the particle will have been altered. By learning the position, you have rendered any information you previously had on the velocity useless. In other words, the observer affects the observed.

Fed Uncertainty Principle: The fed, by its very existence, has completely distorted the market via self reinforcing observer/participant feedback loops. Thus, it is fatally flawed logic to suggest the Fed is simply following the market, therefore the market is to blame for the Fed's actions. There would not be a Fed in a free market, and by implication there would not be observer/participant feedback loops either.

Corollary Number One: The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn't know (much more than it wants to admit), particularly in times of economic stress.

Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Corollary Number Three: Don't expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.

Corollary Number Four: The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it's easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.

Those were my 17 questions for Joseph Haubrich and the Cleveland Fed. I sent them about a week ago. If I get a reply I will post it. However, I am not holding my breath.

The Muni Bond Bubble

from Mish Shedlock:

In New Jersey, governor-elect Christie opposes (and rightfully so), the state going deeper in debt but that is not stopping the current administration of Jon Corzine.

Please consider N.J. to Borrow $200 Million Amid Incoming Governor’s Opposition.

New Jersey, the third-most indebted U.S. state, will sell more than $200 million in bonds today to finance voter-approved capital projects a week after Governor- elect Christopher Christie said he opposed borrowing more money.

The state will issue $209.1 million of bonds, including $205 million of tax-exempt securities, the largest such competitively bid offering in the market today, according to Bloomberg data. Christie, a Republican who defeated Democratic incumbent Jon Corzine last month, said he opposed new bond sales after the state last week detailed $2.7 billion in borrowing it plans for the remainder of the fiscal year, which ends in June.

The state’s bond sale today will finance clean water and open-space preservation projects, according to a preliminary official statement. The state is also planning to sell $1.4 billion of bonds for transportation and $1.1 billion for school construction before June 30, according to a Nov. 30 report.

Christie, 47, a former U.S. attorney, told Bloomberg News last week that New Jersey “can’t have any more debt” and that any projections for borrowing will be “rendered meaningless” when he takes office on Jan. 19.

New Jersey has $36.5 billion of gross tax-supported debt, the third highest of the 50 states, according to a report released in July by Moody’s Investors Service. Moody’s rates the state’s bonds Aa3, the fourth highest ranking. California has the most, at $75.2 billion.

New York City is leading the municipal market this week as issuers seek to borrow more than $10 billion, according to Bloomberg data. New York, the largest borrower among U.S. cities, is selling $1.4 billion of taxable and tax-exempt securities, including $616 million of Build America Bonds. By yesterday, the city had taken orders from individual investors for $440 million of the tax-exempt bonds, and for $20 million in Build America Bonds that it expects to finish pricing on Dec. 10, according to Ray Orlando, a spokesman for the city Office of Management and Budget.

Yields on conventional 20-year municipal debt fell to an eight-week low of 4.24 percent, down 1.34 percentage points from a year ago, according to a weekly Bond Buyer index.

New Jersey Perspective

New Jersey has $36.5 billion of gross tax-supported debt.
California has $75.2 billion of gross tax-supported debt.
New Jersey has a population of 8,682,661.
California has a population of 36,756,666.

Let's do the math.
New Jersey has 23.6% of the population of California and 48.5% of the tax supported debt.

Municipal Bond Bubble

It is not just New Jersey going nuts, California clearly did as well, and cities like New York are in deep trouble.

The city of Vallejo, California fired a huge warning shot by declaring bankruptcy. However, that warning shot has largely been ignored.

Given there is no realistic way for this debt to be paid back, municipal bonds are in a bubble.

People are chasing municipals because of tax exempt status but they are not compensated for for the risk. Please consider the following table courtesy of Investing Bonds



Assuming a 28% tax bracket, the effective yield on a 4% yield muni is 5.56. 20 year treasuries are yielding about 4%. A lousy 1.5% is all you get for the additional risk that a municipal bond blows up. I hardly see how it can possibly be worth it.

Although there is no provision for states to declare bankruptcy (there should be), cities, municipalities, and counties can.

I expect several counties in Florida to default. Major cities like Houston are a distinct possibility as well. Please see City of Houston is Bankrupt (So are California, Oregon, and Pension Plans in General) for details.

When counties and counties start declaring bankruptcy, municipal bond yields are going to soar across the board.

If there is little to no compensation for this risk (and there isn't), then why take it? As with the "free lunch" of Asset Backed Commercial Paper, investors are going to learn the hard way once again.

Is Debt Deflation Still In It's Early Stages?

from Mish Shedlock:

Last Thursday I received an email from David Meier, Associate Advisor at the MotleyFool concerning Debt-Deflation.

David asked if I had any comments on his article Debt-deflation: Just the beginning? Here is a partial listing:

The debate rages on.

Is inflation or deflation the bigger threat? There are lots of people -- lots of smart people -- on both sides of the debate and they present lots of good arguments. One thing that I have not seen -- and maybe I just missed it -- was an analysis using Irving Fisher's debt-deflation framework. So I decided to put one together myself and to inject my understanding of what Bernanke is try to do to stop deflation from taking hold.

The question I keep coming back to, especially as I read more about the situation Japan faced (I'm reading everything I can by Richard Koo, including his book "The Holy Grail of Macroeconomics."

And just to make sure I am not being one-sided, I am countering my fears of deflation with "Monetary Regimes and Inflation" by Peter Bernholz, which should arrive next week.

Without further ado, below is my research on debt-deflation.

Dave

Dave's research is a 70 page Slideshow On Debt-Deflation that is easy enough to read or download from Scribd.

Here is my response ....

You should not be afraid of deflation.

You should be afraid of policies attempting to fight it.

Deflation (rather price deflation) is actually the natural state of affairs. As productivity increases, more goods and services are produced relative to the population and prices would therefore be expected to drop.

It is the Fed, along with misguided Keynesian and Monetarist economists who think falling prices are a bad thing. Who amongst us does not like falling prices (except of course on things we own like houses, but even then who is not sick of higher property taxes that result)?

The reality is inflation benefits those with first access to money. Guess who that is? The answer is easy: banks, government, and the already wealthy. Inflation is actually a tax on the middle class and the poor who get access to money last. During the housing bubble, by the time the poor could get access to to money easily, it was far too late to buy.

Given that inflation benefits those with first access to money, any targeted inflation at all is morally wrong.

Note that Congress has passed 300+ affordable housing measures over the years and all of them failed. The irony now is Congress has simultaneously passed measures hoping to prop up the price of homes while seeking still additional money to create affordable housing.

Home prices need to fall (and will fall) to levels of affordability based on wages and wage growth regardless of what the Fed does. Thus, efforts to prop up prices are triply stupid: They are costly; They they will not work (prices will fall to where they are headed anyway); and they will delay a recovery.

Deflation is only bad in the context of the short-term pain it will involve. Moreover, it is important to remember that the pain of deflation is relative to the inflation party that preceded it. That party must be paid for either in terms of time or price.

Following the Footsteps of Japan

The irony is Greenspan and Bernanke repeatedly criticized the Bank of Japan for not writing off bad bank debts. So what do we do?

We are Following the Footsteps of Japan even though we have proven without a shadow of a doubt it is economic insanity.

Psychology of Deflation Revisited

In January 2007, someone on the Motley Fool told me "Too even compare the citizens of Japan to the US is stupid, stupid, stupid Forest Gump!"

I was also told "Fannie Mae can revive the housing bubble" and that I "ignore an enormous amount of 1990s monetary theory by Bernanke and co about how they would have dealt with Japans deflation."

Inquiring minds can read Q&A on the Psychology of Deflation to see my replies.

It now seems that Things That "Can't" Happen, did happen.

Indeed Economic Madness Is Repeatedly Endless

Bernanke's Deflation Preventing Scorecard

In case no one is keeping track, Bernanke has now fired every bullet from his 2002 “helicopter drop” speech Deflation: Making Sure "It" Doesn't Happen Here.

Misunderstanding Japan's Lost Two Decades

Richard Koo of Nomura Research Institute Ltd. says U.S. Risks Japan-Like ‘Lost Decade’ on Stimulus Exit.

I say U.S. Faces Second Lost Decade "Because" of Misguided Stimulus

Real Lesson of Japan's Lost Decades

The real lesson is no matter how much money you throw around, economies cannot recover until uncollectible debts and malinvestments are written off. That is why you have “zero interest rates and still nothing’s happening.”

The moment fiscal stimulus stops economies are virtually guaranteed to relapse until asset bubbles deflate, and malinvestments and bad debts are written off.

Bailing out the banks did nothing to fix these problems. Consumers are still saddled in debt, in underwater mortgages, with no job. Moreover, there is no driver for jobs given rampant overcapacity in nearly every sector.

Banks do not want to lend in this kind of environment so they don't. Businesses do not want to expand in this kind of environment so they don't. Meanwhile the Obama administration is making matters worse by increasing taxes on small businesses and proposing everyone pay for health insurance, with businesses forced to offer a plan or pony up part of the cost.

This too is giving small businesses an incentive not to hire. Housing prices are too high yet the Administration and Congress are hell bent on propping up prices. The solution is to let prices fall until they are affordable.

Illusion of Stimulus

Recoveries based on stimulus are nothing but an illusion. Here is a snip worth reading from U.S. Faces Second Lost Decade "Because" of Misguided Stimulus written by my friend "HB" about Christina Romer, chair of Obama's Council of Economic Advisers.

I know Christina Romer best for her misinterpretation of what happened in 1937-38. She believes that the fallback into full-scale depression from 'depression light' (as evidenced by unemployment in 1938 almost returning to the highest levels of the depression trough 32/33) is proof that it was a mistake to tighten policy (fiscal and monetary) too early.

In other words, according to her, if the Fed had continued pumping as furiously as possible, then everything would have been alright.

In reality, the entire inflationary mini-boomlet-within-the-depression was simply an illusion. 'GDP growth' that is bought with monetary pumping and feckless fiscal spending only misdirects and ultimately consumes even more scarce capital.

Fiscal stimulus may temporarily give the impression of a recovery, but it is not a genuine recovery. It makes things worse. The moment the pumping is abandoned, the true state of affairs is simply unmasked. That is what happened in 37/38 - a slight tightening of monetary policy revealed the fact that the mini-boomlet was as unsound as its predecessor boom in the years prior to the '29 crash.

It would not have been possible to hide this reality forever. There is nothing, absolutely nothing, that government intervention can achieve in terms of 'fixing' the economy. The choice was in either abandoning the unsound policy and the unsound investments it produced, or careen toward a complete destruction of the currency system.

Once again, I stand amazed at how people can look at this, and look at Japan, and look at the housing bubble/bust sequence, and still believe that monetary pumping and deficit spending are viable tools of economic policy when a bust occurs. It really boggles the mind, reminding me of Einstein's definition of insanity, 'doing the same thing over and over again and expecting a different result'.

Understanding Velocity

David had several slides on velocity. The important point he missed is that velocity of money is a result not a cause of anything to come.

Velocity is falling because the Fed is printing hoping to stimulate the economy but banks are not lending because

1) credit risks are high
2) there is rampant overcapacity everywhere, thus businesses have no reason to expand
3) credit worthy consumers do not want to borrow

The attitudes of lenders and potential borrowers have changed. Under these conditions, the more Bernanke prints, the lower velocity will go.

Spending Collapses In All Generation Groups

Please consider Spending Collapses In All Generation Groups

It's no secret that boomers fearing an underfunded retirement have sharply cut spending. However, it's not just boomers cutting back. Consumer attitudes toward debt have changed across all age groups.

Bernanke can flood the world with "reserves" and indeed he has. However, he cannot force banks to lend or consumers to borrow.

Here is a simple analogy that everyone should be able to understand: You can lead a horse to water but you cannot make it drink. And if the horse does not want to drink, it was a waste of time and energy to lead the horse to the water.

In a debt-based economy, it is extremely difficult (by monetary policy) to produce inflation if consumers will not participate. And as noted above, demographics and attitudes strongly suggest consumers have had enough of debt and spending sprees.

Government bodies like Congress can theoretically produce inflation but Japan tried and failed for years.

Uncharted Territory

In the US and globally we are in uncharted territory. Odds are we will see many things we have never seen before as stimulus after stimulus fails to produce desired results.

I ask you to consider Twelve Reasons For A Job Loss Recovery.

Humpty Dumpty On Depression Conditions

The conditions now are very similar to what happened in the great depression, discounting for the moment this reflationary effort by the Fed that is doomed to fail.

For more on the conditions one would expect to see in deflation please consider
Humpty Dumpty On Inflation.

Some of those conditions have changed since December. However, bank failures, total bank credit, and short term treasury yields near 0% have not. Moreover, long term yields have ticked up but they are still at historic lows compared to anything but the lows last December.

It is important not to confuse a recovery in the stock market with an economic recovery.

Don't just take my word for it. Please consider Leading indicators and the shape of the recovery by Paul Krugman?

Michael Shedlock has an awesome takedown of ECRI’s claim that its indicators (a) have successfully predicted turning points in the past (b) point to a sold recovery now. I’d add that this is a really, really bad time to be relying on conventional indicators.
Why? Basically, because in a zero-interest rate world — the three-month rate was .066% last I looked — especially one that’s suffered from a collapse of the shadow banking system, conventional indicators don’t mean what they usually mean. Increases in the monetary base aren’t especially expansionary. The yield curve more or less has to slope up, even if no recovery is expected. And so on.
So historical correlations, to the extent that they exist — and as Shedlock points out, ECRI is claiming a much better record than it really has — can’t be counted on to prevail. There’s really no alternative to making fundamental analyses of the macro situation.

One important point to note is this is a credit bubble bust, similar to the Great Depression, not an earnings scare recession, or a routine business cycle recession.

This is a once in several generational event. I bet the ECRIs leading indicators applied in April of 1930 would have looked quite similar.

One thing is for sure, is that Krugman does not hold any grudges. I sure have to give him credit for that. I also happen to agree with Krugman when it come to free trade for which we are both strong proponents.

Unfortunately however, there is a rising tide of protectionism in Congress and this Administration. Note that the Smoot-Hawley Tariff Act is one of the things that made the Great Depression much worse.

States are repeating another mistake by raising property taxes.

Keynesian Model Broken Beyond Repair

The Keynesian and Monetarist models are broken beyond repair.

It is amazing that so much love exists for a man whose ideas have been thoroughly discredited on many occasions. Here is a little blurb from the American Journal of Economics and Sociology.

The crisis policy devised by John Maynard (Lord) Keynes, which seemed to work well during World War II and in postwar reconstruction, met its nadir in 1975. Contrary to Keynesian theory, formalized in the Phillips Curve argument that inflation and mass unemployment are mutual trade offs, double digit inflation and record unemployment made further deficit spending an impossible policy.

In case you fail to understand the implications, Keynes is arguing one cannot have a recession and inflation at the same time.

Did The Keynesian Economists Give Up Their Theories Confronted With Japan?

The answer is no. Stagflation in the 70's discredited Keyensian theory as did Japan's building bridges to nowhere.

Keynesian economists now say the problem was Japan simply did not act fast enough.

The amount of global monetary stimulus thrown at curing the deflation problem is staggering. Yet here we are with the same debt overhang, no jobs, and no way to pay off that debt. Deflation looms larger than ever because of Central Bank efforts to fight it.

Let's return to the beginning. It's important to remember that inflation and deflation about not about prices but rather about the expansion of money supply and credit. Concern over prices is putting the cart before the horse.

Fantasizing In Academic Wonderland

Keynesian academic models do not work in a real world, with real people, where attitudes and global forces such as global wage arbitrage are in play. The Fed cannot force consumers to borrow or banks to lend. Nor can the Fed create jobs. Congress can create makeshift jobs but as we have shown above, makeshift jobs cannot possibly create a solid economic foundation.

In response to the above someone is sure to tell me how negative interest rates could be used to force banks to lend. My response is forcing banks to lend cannot and will not work in actual practice.

One reason Bernanke wanted to pay interest on reserves was to slowly recapitalize them over time. One cannot achieve that while forcing them to lend. Moreover forcing banks to lend will do nothing but increase further writeoffs.

Again, it is important to look at how things operate in a real world model, with real consequences, as opposed to fantasizing in academic wonderland about how to force banks to lend.

Fiat World Mathematical Model

Logically speaking, when the problem is debt is to high, it is insane to think a spending spree will fix the problem. Even a 6th grader would be able to understand this, but Keynesian and Monetarist academic wonks just cannot manage the task.

Greenspan stimulated the economy in 2002 and all we have to show for it is a collapsing housing bubble and still more debt.

Instead of following a Keynesian model that does not work, please consider a Fiat World Mathematical Model.

I believe Steve Keen and I have it correct. In a credit-based, fiat-currency model, deflation will always manifest itself as debt-deflation. Price deflation is a meaningless sideshow.

I am not sure how far along we are with debt deflation given that much depends on how far and how long the Fed and Congress attempts to fight it. The preliminary results however, do not look very good. I expect a second lost decade in the US, just as happened in Japan.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com