Posts Tagged ‘stimulus’

Waste and Corruption Out of Thin Air

Friday, August 7th, 2009

If government proposed a “stimulus” program to give each American 50 million dollars, we’d immediately think of inflation.  At that scale, the proposal would meet its deserved ridicule.

However, I’d like to look at how it would work ex-inflation, so let’s pretend there is no inflation problem.  The Federal Reserve’s magic omnipotence determines that there’s “slack” in the economy so that government can create and give everyone 50 million dollars (and Goldman Sachs its commission), with no significant inflation.  We’ll make no assumption about ever repaying the 50 million per capita, which is a realistic expectation in the current real world of money and credit expansion anyway.

So with no inflation, should The Fed get really excited (they must have been at least starting to doubt the magic) and do it again?

No.  Even without inflation, the artificial abundance of credit money will cause plenty of other distortions to economic behavior.

For starters, some people will simply retire to become consumers only.  With their production removed earlier than it otherwise would have been while their consumption is still there (and may increase in early stage “stimulus” euphoria), over all wealth measured in production (rather than money out of thin air) has gone down.

In our decades long credit roller coaster this retirement miscalculation has certainly occurred, with credit expansion giving people false signals that they can retire or semi-retire when actually they still needed the economy and the economy still needed them (provided they could somehow have been directed to real production and not to bubbleland).

The scope of this gift from The Fed and the banking system to our seniors and near seniors is still unknown.  Some people soon to be forced into unretirement now that the credit veil has slipped will have skills they can market at the level they’re used to in the face of impaired economy headwinds, and some won’t.  Since that’s about all we can know for now, we’ll have to leave these folks high and dry where the helpful stewards of the economy have put them, and move on to other expansionary credit “life blood” effects.

With my 50 million, I’ll probably stop everything else to pursue a writing career.  Any other productive possibilities from me will be permanently (or at least until everything blows up even more) lost to society.

In the 50 million for everybody story, plenty of other part-time writers will join me in pursuit of the full-time dream.  Also, actors, film makers, dancers, models, painters, sculptors, chefs, fashion designers, musicians, and of course, singers.  American Idol will need at least a few extra rotations– maybe even its own network.

Something like this happens in real life credit expansion.  It’s not just directly bohemian pursuits, but other apparently more practical endeavors that become over indulged because of false expansionary signals: we get more retailers, restaurateurs, boutiquerateurs, financial and real estate tycoons in training, “internet marketing gurus”, advertisers, public speakers, and miscellaneous experts– every type and stripe of consultant who once did something successfully for a decade (or at least didn’t fail too publicly), and have now risen above doing the expert activity to advise others.

Pursuing the dream, or advising others on dream pursuit, isn’t bad as such (too late, I’ve insulted everyone– no one is reading anymore).  And it’s certainly not that many people in professions this piece may appear to denigrate aren’t exactly in their productive niche and awesome there.  However, regardless of whether we make those judgements that money and credit creation make the economy too fluffy, it clearly does make it too frothy– entrepreneurs get hasty in pulling the trigger, and then hang on waiting for the next boom that credit expansion signals have promised them.  This paper promise must eventually be broken since no amount of paper, nor any book keeping entry of whatever size, is ever going to eat a single restaurant meal, or otherwise consume anything except for a dwindling supply of economic clarity and perspective.

(It isn’t entirely a vacuumful of wishful thinking on the production side of course.  The psychological extremes of overreaching are naturally late stage, while consumers will all along have been helpfully translating their expansionary false signal receptions into “real” but ultimately regretted demand for dreamy non-essentials– the new era feedback loop that the Fed thinks it wants, and doesn’t really even seem to much doubt after it collapses.)

In the 50 million dollar story, Fed magic is still on the job, and there’s no collapse yet.  There are no laborers– everyone is retired, an artist, or an entrepreneur– but we still haven’t got to the true elephant in the central bank.

The “slack” has come out of the economy– at 50 mil per head, probably with a pop.  The artificial boom has ratcheted up the optimism of the players.  Those entrepreneurs with apparently successful businesses will be getting signals to expand them.  The Fed, not wanting to “choke off” the apparently vibrant economy, and getting plenty of cheerful feedback from the banking system that new credit can be “absorbed”, will feed the frenzy, as they were born and structured to do.

Now the future looks so huge that the entrepreneurs believe they can take on bigger and more distant expansionary projects.  Indeed, the situation seems to demand it.  The closer borrowed money gets to being free– a favorite central bank ploy– the more dangerous it seems to decline expansion.  Your competitor may be using the free money to grow to infinity and then smother you.

Because the credit is artificially created, it can signal temporary enthusiasm, but it can’t signal an actual match up to future available resources.  The flashing, screaming pedal to the metal promise of future resources to complete every entrepreneur’s project is a screaming pedal to the metal lie that no actual arriving future can possibly fulfill.  (For one thing there aren’t any laborers, somebody’s bound to notice that eventually.)

This is where the true “confidence” issue shows up.  It doesn’t matter if players are confident that government “will provide liquidity”.  Speeches, guarantees, backstops and loans of last resort don’t help– in fact make it worse, because these are rational doubts about what is and is not being produced from finite resources, how much of the future is being crammed into the present, and when exactly this denuded future will make it’s appearance (or from where we are at the moment, its curtain call).

No Bernanke or Geithner speech can address this, because all they can produce is debt and more speeches, and all that brings is economic and political miscalculation, waste, instability, and possibly on top of that, inflation.

By Les Lafave
Monetary and Banking Reform –
Originally Published at Strike The Root

Stimulus: Still Stupid the Second Time Around

Saturday, February 14th, 2009

No one would ever wish for a crisis, but the one good thing about it is that everyone starts to pull together.  Unless of course, you’re not asleep and dreaming about another country in another era.

Pulling together would interfere with self-indulgent, short-sighted, partisan ignorance.  The only positive to me, is that I now know that I won’t have to worry about my immediate personal safety if I’m ever in a crowded life boat– I can relax and wait while the children are thrown overboard, maybe even before the lifeboat becomes crowded.  (Sure, they said it was just a drill, but why take chances?  Maybe they were afraid we’d panic– maybe it’s a fractional reserve lifeboat.)

What about the consumer– if the consumer isn’t confident, surely that’s an excellent excuse to live in the present? Doesn’t the future depend on living well now?

It’s very convenient to believe that an economy depends on consumption– it’s what you’d expect the self-centered and intellectually lazy to believe in.

“You mean, my idle whims and self-indulgence are good for the economy?  The world is my smorgasbord?  I don’t have to think about anything, or prioritize, or save for a rainy day?”

Sir or madam, you are correct– economics tells us so.  Logically, even your bodily functions are good for America, so drink a keg, eat a pizza, take a laxative– economics and Uncle Sam will love you the more– because by a curious coincidence, the exact economic theory that one would expect that a lazy, selfish moron would wish to be true is the exact, prevailing economic orthodoxy in America.  What extraordinary luck!

Confidence can have an impact in any endeavor, but it seems like another non-coincidence that economics shares the same obsession as pop psychology.  What matters more than confidence is reality.  You might be able to hypnotize somebody stranded in the 100 degree desert– no food, water, shelter– into believing it’s all an air-conditioned Swedish embassy party, but that “confidence” won’t accomplish much for his or her “economy”.

Stimulus is a trap.  It can only work when the confidence is already there, waiting to come out– stimulus “works” as long as you don’t need it.  If you’re in the desert and need to reassess, stimulus is a disaster– it prevents the reassessment from taking place.  That’s really all the self-styled confidence building actions of government economists come down to in the end.  Since our method to inspire confidence is to prevent analysis, that ultimately must inspire no confidence at all.

By Les Lafave

Repeal the Federal Reserve Act –

Public Works (and Won’t Works)

Friday, December 19th, 2008

The unknown cost of economic stimulus is somewhere down the unmeasured road, while stimulus’s close cousin, public works, would appear to be the next Keynesian cluster bomb to be fired at the yet defiant real world.

Illusion enablement aside, a public works infrastructure concept is a modest improvement over raw stimulus.  In public works there’s at least tangential acknowledgement that it may be a good idea to have some sort of output– contrasted with stimulus which has an even closer cousin, the broken window fallacy.

Public works has a more hopeful sound.  Stimulus could be just a giveaway to Wall Street.  Public works is stuff—concrete and steel. If Wall Street is going to get hold of public works money, at least they’ll have to work to come up with a twisted scam– it won’t be just “injected” onto their balance sheets.

But if we can’t keep that concept of output always uppermost– and the evidence so far is that we can’t– the happy, hopeful sound of public works will be another money pit.

The base assumption is already glib– that public works are just something the government does in tough times (and easy times and medium times), to create jobs, stimulate the economy, build infrastructure and give people hope.  But what are we talking about?

It’s not like we can put together teams of unemployed stock analysts and drywallers and send them off to build bridges. Subtleties like this can get lost in politics, but bridges, I’d point out, are best built by those who know how to build them. Most such people are not hanging around the donut shop waiting for Congress’s call– they’re out there now, building and repairing bridges at the rate society had previously chosen.  Stomping on a bridge building accelerator will have a lot of slippage– as for example, when a previously active engineer is lured away to teach due to an accelerated demand for new engineers.

If there’s a big ramp up, someday there will be a ramp down.  Some of the “created” jobs will be uncreated, and ripple effects will cause other loss.  (And we shouldn’t get too excited that only some of the created jobs will be lost.  We can’t know if it’s a gain over jobs that would have been created by some other plan, or by no plan.  However, the more splashy and political a job creation plan becomes, the less probable the sustainability becomes.)

A subtle ramping up in infrastructure isn’t going to be the payoff that politicians will be looking for.  They’ll want a voter attention grabbing splash.  The reaction in politics to a slower than wishful expectations infrastructure start will be to stomp on the accelerator even harder.  (Hopefully in the case of bridge building, we won’t get the splash literally.)

New projects have an unfortunate high profile over repairs and maintenance.  It seems rather muddled to consider ourselves caroholics and in need of more road infrastructure at the same time, but contradictory rationalizations are becoming an American specialty.  Thinking about interest groups now fine tuning their “infrastructure” proposals is frightening.

Congress appears to be at least as confused as anyone else.  And we can always be sure that whoever they decide to listen to, it will be based not on common sense persuasion, but on political connectedness and popularity.

Robert Poole in a Wall Street Journal piece, “Stimulus Shouldn’t Be an Excuse for Pork”, focused on U.S. Conference of Mayors requests, and concluded that, “It is clear that any infrastructure stimulus money given to the country’s mayors will lead to thousands of tennis centers to nowhere.”  Other advocates, public and private, aren’t going to have any more trouble than the mayors in seeing their porkish proposals as “infrastructure” and “job creation”.

That tradition– incorrectly considering pork spending as if it’s economically additive, has moved from the realm of the disgusting to the dangerous.  (Especially if all those tennis courts distract us from the study of safe, proper food rioting techniques.)

Consequences for off the charts government spending and borrowing are somewhere between uncertain, and certainly bad– so justifiability for public works projects on their own merit, ex any consideration of “stimulus” or “job creation”, should be a bare minimum for any infrastructure proposal.

By Les Lafave

Abolish the Federal Reserve –

Paul Krugman’s Circular Reasoning Returns

Saturday, November 15th, 2008

There was a Paul Krugman Op-Ed in The New York Times November 14, 2008 titled, “Depression Economics Returns”.

I’m not sure that I’ve ever met a pure Swede, and if I do I may not be offered a prize, but to me the title of the Nobel laureate’s editorial was the last part of the piece that made any sense.

Professor Krugman’s argument is that the character of policy action in “normal times” shouldn’t be repeated in an economic crisis like this.  Now before anyone shouts, “At last, someone sensible!”, and leaps to his or her feet to applaud, I should clarify what these characteristics of past political policies are according to Krugman.  Have you guessed them yet? They are: modesty, prudence, caution, fear of “doing too much”, “fear of red ink”, … is there anyone who isn’t laughing yet?

It’s quickly rather sobering to see Krugman write that, “… in normal times modesty and prudence in policy goals are good things”, if you consider that it’s possible that some policy makers might read the New York Times.  One can almost hear the cheer going up in the beltway, “Hurray! Finally we’ve got some abnormal times, and can let go of all that egomaniacal imprudence we’ve kept bottled up for so long!”

The irony is, that Professor Krugman’s life can’t have allowed him much conception of normalcy.  A person living a normal American life can instantly see that there’s no modesty or prudence in Washington (and will have unfortunately had to instantly see it incessantly for their entire life).  Krugman must indeed be living in a rarified, insular, policy making zone.

Since the things that Professor Krugman describe as virtuous economic policies in “normal” times haven’t been tried for about a century, and all of his recommendations are exactly what has been tried, I believe he would have been more descriptive to title his Op-Ed, “I’m a Nobel Prize Winning Economic Dinosaur; Don’t Listen to Me”.

However, since he did mention depression economics, I should mention that there was one-twelfth of a sentence (yes, I measured it) in the body of the editorial that made sense.  The phrase, with the inanities about “stimulus” on either side of it removed, was, “…greater aid to those in distress…”

(So the final version of the professor’s editorial if I’d been his editor, leaving dinosaurism aside, would be:

Depression Economics Returns

Greater aid to those in distress.”

I’d have to admit that Times circulation could slide under my charge.)

While “greater aid to those in distress” is something for good societies to do, it isn’t directly a matter of economics.  It should be done with the “aid” and the “distress” in mind, not with any imaginary “stimulus” goals layered on top.  To pick up Professor Krugman’s normal times theme– in normal times, delusions of stimulus merely politisize the provision of aid to those in need– the aid, the politics, and the supposed stimulus are casually absorbed by economic vibrancy that has little to do with any of these other things.

In these abnormal and less than economically vibrant times, actually helping people, rather than helping economies, ideologies, corporations, houses or jobs, could provide easy policy guidance for modest government action (modest at least, by the nation busting standards of even just the current bailouts).  Too easy for Professor Krugman.  He’d rather help politicians do what they’ve always done, but with a firm warning not to be timid this time.

Why is Professor Krugman so sure that the “normal times” economic policies aren’t the cause of the abnormal economic times?  After all, those were the policies that were used, and here we are.

The radically different policies that we should try involve honest money and credit, with not only individuals, but also societies earning what they spend.

As long as it’s earned, it can probably be spent either timidly or boldly without the country crashing down on our heads.

By Les Lafave

Banking Reform –

Globalization: Spreading the Wealth (of Mistakes)

Monday, November 10th, 2008

What would the U.S. be doing now if the rest of the world wasn’t infected by our credit collapse?

Probably a good imitation of an old fashioned emerging market collapse, which is a good imitation of a fire in an over-crowded roller skating arena, just after the concession has spilled a vat of popcorn machine butter in front of the only unblocked exit.

Right now the U.S. economy is getting an odd, two pronged support from the export of the credit crisis– demand for dollars from foreigners struggling to support and pay down dollar denominated debt, plus foreign central banks throwing up their hands and cutting interest rates, narrowing the differential with U.S. rates.  (I recently saw business analysts debate whether the Bank of England would cut a half point or three-quarters of a point– they cut one and a half points.)

If not for the remnants of the dollar’s reserve currency status, the credit collapse in the U.S. would have much more of that emerging market bubble flavor (possibly without the imitation butter)– among the primary features, a crashing currency and soaring interest rates.

The circulation of the credit collapse has to seem pretty sickening overseas, but the apparent high dollar, low interest boon for the U.S. is in fact a slow motion tragedy.  Our leaders are grabbing the wrong signals with desperate enthusiasm, trying to recover the past and oblivious to the future.

As bailout and stimulus trial balloons expand absurdly, but with little or no reaction yet from the U.S. dollar and interest rates, a new level of hubris sets in.  Astoundingly (or perhaps typically, it’s hard to choose), most politicians and market players are again getting trapped by a perception of limitless American government power.

Charts of the U.S. monetary base at this point basically show a line going straight up– disinflationary head winds better not let up for a second, or we’ll need Zimbabwean advisors at the U.S. Bureau of Engraving and Printing.

On the subject of U.S. interest rates, Michael Pento from Delta Global Advisors says, “One of the major ramifications of having our national debt move above the $10 trillion mark is that the sustainability of the government, consumer spending and the economy rests on the continuation of artificially low interest rates. In fact, low rates that are the result of money printing have become our addiction… it is only because interest rates are at record lows that the debt service is still manageable.”  Pento doesn’t believe this can last.

The temporary artificial strength from U.S. dollars and bonds means that these key yardsticks are being misread by our leaders.  There should be huge storms smashing these markets every time there’s a prominent discussion of another hundred billion of stimulus or bailout– dramatic signals that even politicians and Wall Street bankers could understand. Instead, by the standards of the times, these markets remain placid.

If American politicians were giving any consideration to what could happen if foreigners turn away from the U.S. dollar, they couldn’t possibly contemplate any more “stimulus” or bailout packages.  The mind set of American leaders is that of complacently snooty parents; the U.S. dollar their sheltered spoiled brat who’s about to launch into real world competition brimful of bratty misplaced confidence.

Sometime soon there won’t be enough economic actors able to suspend disbelief at the mismatch between the fatuous talk of ever expanding bailouts and stimulus plans, and the reality of destroyed real capital and already unmanageable (to say the least) debt.  We’re looking at another pop, and as scary as a stock market collapse or even a credit collapse can be, a currency collapse can be worse.

Politicians have been saying that “of course” the current economic crisis is not analogous to America’s Great Depression.  I think that secretly most now believe that this crisis is like the Great Depression, but they’re actually taking a kind of comfort from it– to many of them, the New Deal is familiar ground.

Certainly if we’re talking about its expansionary credit causes, this crisis is indeed analogous to the Great Depression.

While there are some ways in which this situation is better thus far than the Great Depression (not exactly a point of pride), there’s at least one potentially scary difference.  The New Deal programs that didn’t work the first time when government was smaller, “only” causing an unprecedented “double dip”, will not work when tried the second time, but with our enormous indebted government, will gift us a black box launcher of waves of venomous black swans (a weapon that the Pentagon may have actually been working on, but it looks like other Feds are working overtime with the mixed economy to beat them to it).

If a black box launcher of waves of venomous black swans sounds worse than a double dip, it may well be (depending on the venom of the swans).  A possible next salvo is a crack in the dollar or a spike in interest rates.  Only the box and the swans know for sure.

By Les Lafave

Banking Reform –