Monday, 11 May 2009

Hickey’s economic reality check

For all those blathering about “green shoots of recovery” and markets “starting to turn”,  Bernard Hickey’s Top Ten at Ten this morning should be sobering reading – or at least proof enough that these commentators are just talking their book.  The scale of this problem is not to be simply wished away or talked down by “confidence building” Pollyanna-ism. 

Here’s some of the “high”lights of Bernard’s reality check:

  • “ reports that the Federal Reserve initial results showed the biggest banks had massive capital black holes, but the Federal Reserve scaled their figures down dramatically after complaints by the banks. . . Yet somehow the markets rallied on this news. Who do the Americans think they are kidding? Their banks are still insolvent zombies and the credit crunch will not be over until they are sorted.”
  • Even Paul Krugman is starting to wake up?  “It’s not at all clear that credit from the Fed, Fannie and Freddie can fully substitute for a healthy banking system. If it can’t, the muddle-through strategy will turn out to be a recipe for a prolonged, Japanese-style era of high unemployment and weak growth. [Oddly, it’s been the very Austrian economists Krugman derides who’ve been pointing that out for some time.]  Actually, a multiyear period of economic weakness looks likely in any case. The economy may no longer be plunging, but it’s very hard to see where a real recovery will come from. [And the’ve been pointing that out too.]
  • Nouriel Roubini gives his 10 reasons why the stress tests are “schmess tests”. This is a comprehensive demolition of any credibility the stress tests have left. . . Meanwhile, Nassim Taleb, the writer of the ‘Black Swan’ book, reckons the current financial crisis is ‘vastly worse’ than the 1930s . . .
  • US economist Harry S Dent is predicting a full scale depression through late 2009 and into 2010 as the bear market rally peters out and the market collapses again . . .
  • “What the Federal Reserve and Treasury have set in motion is the mother of all crowdings-out. The Fed is compelled to buy substantial amounts of Treasuries to prevent the federal deficit from turning into a $1.8 trillion black hole that sucks in all the free savings of the world and then some. . . By ballooning the deficit and tying the credit of the United States to the balance sheet of the banking system, the Fed has avoided panic, but has crippled the economy for the long term. There is no way to finance the deficit except by suppressing financing for everyone else. . . “

Meanwhile, Karl Denninger at Seeking Alpha reports that “’Since the recession began in December 2007, 5.7 million American jobs have been lost. In April, job losses were large and widespread across nearly all major private-sector industries. Overall, private-sector employment fell by 611,000.’ The total number of unemployed rose to the highest recorded since the US Bureau of Labor Statistics began producing these figures - more than 40 years ago - surpassing all previous post-WWII recessions. . . ”

Ouch!  And “here's the problem - to have a healthy economic recovery you need to gain about 300,000 jobs a month.” 


Any good news in all this?  Only one.  The only place where a real recovery will come from is from businesses who work out how to do more with the smaller amount of money now available.  That’s essentially what it means to manage a recovery.  On that basis, those “bosses” Bernard mentions who “are using the recession to squeeze staff down to lower wages and longer hours” while hopefully continuing to produce are the benefactors of all of us.  All power to them.

Read all of Bernard’s roundup here, complete with links:
Top 10 at 10; Fed capitulated to bank complaints; Rental property investors hit by banks; Comments on QV stats.


  1. If you want to criticize Krugman, you should probably read what he says first.

    Because the quote you give is just him repeating what he has been saying over and over since the original Paulson Plan. He thinks that the US govt's interventions in the banking system are half-arsed: he think that the govt should not shove money at the banks they way they have. Krugman's argued that they should either declare a bank bankrupt, take it over, give the shareholders nothing (it's bankrupt!), fire the senior managers, stabilize its books and then look to sell it as soon as is practical - or leave it be.

  2. "The only place where a real recovery will come from is from businesses who work out how to do more with the smaller amount of money now available. That’s essentially what it means to manage a recovery"


    The recession is caused by a vast drop in demand. And your solution is to reduce wages, ie reduce demand.

    You're mistaking micro-economic changes with macro-economic outcomes. Unsurprising, since that's the classic blunder of Austrian economics.

  3. Krugman has been offering up random nonsense (a bit like you) for some time. He has no idea what's occurred or what its causes were/are (a bit like you).

    So, illuminate us with your insight. If recovery does not come from businesses (adapting to do more with less), then where will recovery come from exactly?


  4. "- or leave it be."

    The day Krugman advocates the government leaving anything be I'll kiss your virtual ass. Like any Progressive, his whole being is tied up with denying free choice to those engaged in trade.

  5. Here's my lengthy reply to to our two Anonymites:

    First, it's rather hard to take any comments seriously when commenters are too scared even to put a name to them. Harden up.

    Second, yes I will criticise Krugman. He deserves it. And yes, I'm fully aware of what he's been saying. As I said in the post, it's the very Austrian economists Krugman so frequently derides who’ve been pointing out for some time that there is no choice about experiencing the pain of retrenchment and slump -- the only choice is whether recovery is allowed to be short and quick by rapid liquidation of malinvestmentsand or, like Japan in the nineties, those malinvestments are propped up like corporate 'Weekend at Bernies' survivors thsat drain the economy for years to come.

    That even Krugman is finally starting to wake up to the truth of that, even partially (since he gave it no credence a year or so ago when Jim Rogers et al were making that case) is actually reason not to criticise him in this case -- which is why I didn't. At least, not explicitly. :-)

    Third, piffle. Yes, piffle is certainly a very good short summary of your mainstream economists' understanding of depression economics. You mistake so called "macroeconomics" for something fundamentally separate from "microeconomics," hiding all the important economic 'news' beneath your aggregates, and then you and your colleagues wonder why so called "macroeconomics" is in crisis.

    Who's the fool here?

    As Ayn Rand said, Macroeconomics is in effect

    "a science starting in midstream: it observed that men were producing and trading, it took for granted that they had always done so and always would—it accepted this fact as the given, requiring no further consideration—and it addressed itself to the problem of how to devise the best way for the "community" to dispose of human effort. . .
    "But, in fact, consumers qua consumers are not part of anyone's market; qua consumers, they are irrelevant to economics. Nature does not grant anyone an innate title of "consumer"; it is a title that has to be earned—by production. Only producers constitute a market—only men who trade products or services for products or services. In the role of producers, they represent a market's "supply"; in the role of consumers, they represent a market's "demand." The law of supply and demand has an implicit subclause: that it involves the same people in both capacities.
    "When this subclause is forgotten, ignored or evaded—you get the economic situation of today.

    True, huh?

    You say, whatever-your-name-is, that "The recession is caused by a vast drop in demand."

    Not much of an analysis, is it? But that's the only answer your mainstream economists have got. That's really the best they can do.

    In fact, the Depression isn't caused by a vast drop in demand at all -- that's in fact part of what, by definition, constitutes a Depression. It's actually one of the defining characteristics of a Depression. And so far from being a primary cause, it's actually a result of earlier actions. But your mainstream economists know nothing about that.

    * What caused the slump itself? Don't ask a mainstream economist, they have no idea.
    * What caused the drop in demand? Blank out.
    * How should buinesses respond to such an economy-wide drop in demand? Blank out.
    * In which part of the capital structure has the drop in demand been greatest? Blank out.
    * What are the implications of a greater demand drop in the earlier p[art of the capital structure? Blank out.
    * What's a capital structure? Blank out?
    * How come those mainstream economists who were in the driving seat, who never even saw it coming -- who had no idea then it was about to happen and no idea now what to do -- how come it's those same mainstream economists who are still in the driving seat now (fixing the mess they had no idea they were even creating) whereas those who did see it coming and know what needs to be done now are derided as cranks.

    Doesn't that strike you as something worse than "piffle"?

    You might deride Austrian economics as "piffle," but frankly on all these important questions above the Austrian school has answers where your mainstream boys don't even know there are questions -- and what the mainstreamers do know (or think they know) amounts to less than piffle.

    Here's an example. Let me give you some 'Austrian' answers to those questions:

    Q: So what caused the original slump then?
    Well, it sure as hell wasn't laissez-faire!
    But let's face it, your "demand drop" theory has a very real problem in getting traction: you see, it only explains what happened after the crash, after the bubble burst.
    But what caused the bubble to inflate in the first place?
    What fed the bubble for years? (Yes, that is a pun.)
    What organisation and which mainstream economic theory was fundamentally responsible for the economy-wide misallocations of credit, and consequently for all the malinvestments[1] for which there is now too little demand?
    If you don't know the answer, then why not read those (unlike Krugman) who did know it before it happened. Check out those classic 2006 videos of Peter Schiff for example[1], or the writings of Austrian economists like Stefan Karlsson, Mark Thornton, Thorstein Polleit et al, who were saying this back in at`least 2003[2] (or George Reisman, who was saying it back in 1975!). Or Ludwig von Mises, the development of whose business cycle theory[3] won Hayek his Nobel Prize, and who predicted the 1929 crash and resulting slump -- and whose theory was used by the economists above to make their forward assessment.

    [1. "Malinvestment" at Mises Made Easier.
    2. There's a link to Schiff compilation video here.
    3. Check out the Mises Bailout Reader: Scroll down to 'Who Predicted This?'
    4. Check out the Mises Bailout Reader: Scroll down to 'The Austrian Theory of the Business Cycle']

    Q: So what caused the subsequent drop in demand?

    Fundamentally, it's because
    i) a substantial amount of real capital was destroyed in all those collapses, bankruptcies and malinvestments -- things that looked profitable on the back of all the counterfeit capital flooding out of the central banks -- and the pool of real savings has now been largely consumed. (Which means that for recovery to happen, the existing capital has to be entrepreneurially reallocated, and the pool of real savings will have will now need to be built up anew.)
    ii) because in a slump there's more demand for money than there is for goods -- which in mainstream terms is to say that both the "velocity" and quantity of money has dropped. People want to hold more money to protect themselves from job uncertainties and the like, and banks (particularly in the inherently fragile fractional reserve banking system) need to urgently rebuild their own reserves (and not just with little bits of new printed paper) and are reluctant to lend out what they do have on bad risks.
    But note again that none of this caused the crash: this is the result of the crash.

    Q: So how should businesses respond to such an economy-wide drop in demand?To state the problem precisely is to see the remedy clearly.
    First of all, bear in mind what demand actually is: it's desire backed by the means to pay. Fundamentally, that means exchanging real goods and services for real goods and services. Now that real capital has been wiped out, and both the quantity and "velocity" of money have diminished, the "means to pay" has diminished and goods and services now are no longer worth what they were before.

    So it's not that demand itself has now dropped, it's that demand at the prices now being offered has dropped.

    Fundamentally, the only way to sell now is to lower prices to meet the new lowered level of demand. (Remember the simple equation, Prices = Demand/Supply?). And since to sell goods and services at that new level means essentially selling at a loss (another defining characteristic of depressions) then we see the urgency of businesses adapting to the new lowered level of demand by lowering their costs to suit the new economic realities. It's either adapt or die.

    It's in this way that "deflation" (as you and your colleagues would call it) is not the cause of the problem, but actually the solution to getting things back on track again.[5]

    But, you might object, why not just reinflate the world's various money supplies, as all the world's central bankers are now trying to do (the most vigorous along these lines being Mr Bernanke and Mr King)? Because, to paraphrase Ludwig von Mises in a similar context, trying to reinflate the money supply in the hopes of achieving economic recovery is like backing over a man you've just run over in in the hopes of effecting a medical recovery.

    The eggs are already scrambled -- the body is already mangled. Reinflating simply exacerbates every problem, and sustains every zombie malinvestment, and puts every unstable position on life support -- not to mention the new misallocations brought about by the new bubble and the enormous sums now being printed.

    This is fundamentally what Japan tried in the nineties -- and Roosevelt tried in the thirties. Didn't work then, won't work now. The "lack of purchasing power" is not the fundamental problem[6]; the consumption of capital and the diminution of the pool of real savings is.

    Real capital has been consumed. Stimulunacy won't help that; quite the reverse. Printing more little bits of paper won't replace that -- and you'd have to be a very special kind of fool to delude yourself that they could[7].

    [5. See especially George Reisman's 'Falling Prices Are Not Deflation but the Antidote to Deflation.'
    6. No, it's not. At lower wage rates, more workers are emplyed and total wage payments actually increase -- as mainstream macroeconists would understand if they looked beyond their phony aggregates. See George Reisman's 'Standing Keynesianism on Its Head: as Employment Increases in Response to a Fall in Wage Rates, the Rate of Profit Rises, Not Falls'
    7. See for example George Reisman's 'Capital, Saving and our Economic Crisis.']

    Q: What are the implications of a greater demand drop in the earlier part of the capital structure? What's a capital structure?No, these are not questions mainstream economists are even asking, are they - as Austrians from Robert Murphy to Mark Skousen point out it's their blanket ignorance of this whole field that is a fundamental part of the problem, since at the end of the day it's misallocations in the capital structure brought about by all that counterfeit capital that kick off all the problems in the first place.[8]

    But everyone from Chicago school economists to Keynesians to neo-Keynesians to the so-called Rational Expectations wallahs seemingly have no idea it even exists -- they think you can subsitute the simple number 'k' for what is essentially the engine of the whole economy, the place where in fact over two-thirds of all spending actually does happen -- which is, as I say, really the problem here. Ignoring the structure of production (to use Skousen's title[9]) or the Macroeconomics of capital Structure (to use Roger Garrison's[10]) is just downright ignorance, and allows alleged economists like yourself, sir, to cite the easy Keynesian gloss of "a drop in demand" (what kind of demand? in what areas of the capital structure? demand backed by what?) as the leading cause of our economic collapse.

    [8. See Robert Murphy, 'The Importance of Capital Theory.'
    9. Mark Skousen, The Structure of Production10. Roger Garrison Time & Money: The Macroeconomics of Capital]

    In fact, the leading cause of our economic collapse is the fundamental intellectual bankruptcy of all schools of mainstream macroeconomics.

    They didn't see it coming.

    Their own economic models were responsible for it happening.

    And now they've caused it, they're still in the driving seat trying to effect a cure with the very means by which they caused the problem in the first place.

    As Thomas Woods says in his excellent book-length summary of the whole sorry saga, Meltdown[11], it's like watching medievalists applying leeches.

    [11. Thomas E. Woods Jr., Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse. ]

  6. PC said...
    Their own economic models were responsible for it happening.I thought you have mentioned a few times here in your blog that the main cause was government interference and not the models. Am I right? Which is it, the models or state interference?

  7. FF: It's both.

    The fallacious economic (and moral) reasoning was and is responsible for so much of the govt interference responsible -- and so many of the state institutions responsible.

    To cite just a small list, in roughly chronological order we have:

    Fractional Reserve Banking, the Federal Reserve Bank, the abandonment of the Gold Standard and the institution of artificially cheap credit, which were supposed to lead to milk and honey, but led instead directly to the Great Depression.

    And have led now to a dollar worth roughly ninety-five times less than it did a century ago, and a culture of irresponsibility and moral hazard in which the govt acts as "lender (and bailer-out) of last resort.

    The failed (and still failing) Keynesian model of the economy -- essentially just a justification for profligate deficit spending and rampant inflationism -- and is now the basis on which so much of the stimulunacy is based.

    The Welfare State, which the Keynesian model supposedly makes economically possible, and for which so much of the govt's economic superstructure was created.

    The failed Friedmanite explanation of the first Great Crash, which actually expains nothing of what happened to cause it, and only marginally what happened afterwards - yet is now the basis on which so much of today's money printing is based.

    The creation of Fannie Mae and Freddy Mac -- and the Community Reinvestment Act, and govt mandated affirmative action in lending.

    "Pro-ownership" tax codes.

    The idea of "deregulation," without any rational basis for deciding what should be regulated and what shouldn't.

    The "too big to fail" mentality (which should really be called "too big to keep alive") -- which is now the basis on which so much of today's bailouts are based.

    There's just a few examples showing how bad models lead to bad state interference.


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