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mises
Joined: 05 Nov 2007
Location: retired
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 Posted: Sun Jul 12, 2009 8:00 am Post subject: |
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No. Can you learn?
This depression has been caused by a debt bubble. Virtually ALL gdp growth of the last 20 years was by in large taking growth from the future and spending it in the present. This has stopped because balance sheets are totally destroyed. Debt will be paid back. This means less consumption and growth. It's over. At least 15-20% gdp decline and a permanently (for us, anyways) more poor North America. It is over. Now, the "stimulus" (also debt) is going to replace the debt and help the economy "come back"? Good luck. Every new unit of debt now decreases GDP. The marginal productivity of debt is negative.
Stimulus. My arse. We will consume what we produce - debt servicing - saving. This pulls around 20% out of the economy. Math. |
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RufusW
Joined: 14 Jun 2008
Location: Busan
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| Posted: Sun Jul 12, 2009 8:06 am Post subject: |
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| mises wrote: |
| No. Can you learn? |
You're a bit prickly. Yes, I obviously can, I have a degree.
| mises wrote: |
| The marginal productivity of debt is negative. |
Source?
| mises wrote: |
| At least 15-20% gdp decline and a permanently (for us, anyways) more poor North America. |
When India and China catch up, the West is gonna be a hell of a lot poorer (relatively). |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Sun Jul 12, 2009 8:13 am Post subject: |
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http://www.financialsense.com/editorials/fekete/2009/0330.html
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THE MARGINAL PRODUCTIVITY OF DEBT
Why Obama�s Stimulus Package Is Doomed to Failure
The key to understanding the problem is the marginal productivity of debt, a concept curiously missing from the vocabulary of mainstream economics. Keynesians take comfort in the fact that total debt as a percentage of total GDP is safely below 100 in the United States while it is 100 and perhaps even more in some other countries. However, the significant ratio to watch is additional debt to additional GDP, or the amount of GDP contributed by the creation of $1 in new debt. It is this ratio that determines the quality of debt. Indeed, the higher the ratio, the more successful entrepreneurs are in increasing productivity, which is the only valid justification for going into debt in the first place.
Conversely, a serious fall in that ratio is a danger sign that the quality of debt is deteriorating, and contracting additional debt has no economic justification. The volume of debt is rising faster than national income, and capital supporting production is eroding fast. If, as in the worst-case scenario, the ratio falls into negative territory, the message is that the economy is on a collision course and crash in imminent. Not only does more debt add nothing to the GDP, in fact, it causes economic contraction, including greater unemployment. The country is eating the seed corn with the result that accumulated capital may be gone before you know it. Immediate action is absolutely necessary to stop the hemorrhage, or the patient will bleed to death.
Keynesians are watching the wrong ratio, that of debt-to-GDP. No wonder they constantly go astray as they miss one danger signal after another. They are sailing in the dark with the aid of the wrong navigational equipment. They are administering the wrong medicine. Their ambulance is unable to diagnose internal hemorrhage that must be stopped lest the patient be dead upon arrival.
Melchior Palyi�s early warning
In the 1950�s when the dollar was still redeemable in the sense that foreign governments and central banks could convert their short-term dollar balances into gold at the fixed statutory rate of $35 per ounce, the marginal productivity of debt was 3 or higher, meaning that the addition of $1 in new debt caused the GDP to increase by at least $3. By August, 1971, when Nixon defaulted on the international gold obligations of the United States (following in the footsteps of F.D. Roosevelt who had defaulted on its domestic gold obligations 35 years earlier) the marginal productivity of debt has fallen below the crucial level 1. When marginal productivity fell below $1 but was still positive, it meant that total debt (always �net�) was rising faster than GDP. For example, if the marginal productivity of debt was �, then $2 in debt had to be incurred in order to increase the nation�s output of goods and services by $1. An increase in total debt by $1 could no longer reproduce its cost in the form of an equivalent increase in the GDP. Debt lost whatever economic justification it may have once had.
The decline in the marginal productivity of debt has continued without interruption thereafter. Nobody took action, in fact, the Keynesian managers of the monetary system and the economy stone-walled this information, keeping the public in the dark. Nor did Keynesian and Friedmanite economists at the universities pay attention to the danger sign. Cheerleaders kept chanting: �Gimme more credit!�
I learned about the importance of the marginal productivity of debt from the privately circulated Bulletin of Hungarian-born Chicago economist Melchior Palyi in 1969. (There were altogether 640 issues of the Bulletin; they are available in the University of Chicago Library). Palyi warned that the tendency of this most important indicator was down and something should be done about it before the debt-behemoth devoured the economy. Palyi died a few years later and did not live to see the devastation that he so astutely predicted.
Others have come to the same conclusion in other ways. Peter Warburton in his book Debt and Delusion: Central Bank Follies ThatThreaten Economic Disaster (see references below) envisages the same outcome, although without the benefit of the concept of the marginal productivity of debt.
The watershed year of 2006
As long debt was constrained by the centripetal force of gold in the system, tenuous though this constraint may have been, deterioration in the quality of debt was relatively slow. Quality caved in, and quantity took a flight to the stratosphere, when the centripetal force was cut and gold, the only ultimate extinguisher of debtthere is, was exiled from the monetary system. Still, it took 35 years before the capital of society was eroded and consumed through a steadily deteriorating marginal productivity of debt.
The year 2006 was the watershed. Late in that year the marginal productivity of debt dropped to zero and went negative for the first time ever, switching on the red alert sign to warn of an imminent economic catastrophe. Indeed, in February, 2007, the risk of debt default as measured by the skyrocketing cost of CDS (credit default swaps) exploded and, as the saying goes, the rest is history.
Negative marginal productivity
Why is a negative marginal productivity of debt a sign of an imminent economic catastrophe? Because it indicates that any further increase in indebtedness would necessarily cause economic contraction. Capital is gone; further production is no longer supported by the prerequisite quantity and quality of tools and equipment. The economy is literally devouring itself through debt. The message, namely that unbridled breeding of debt through the serial cutting of the rate of interest to zero was destroying society�s capital, has been ignored. The budding financial crisis was explained away through ad hoc reasoning, such as blaming it on loose credit standards, subprime mortgages, and the like. Nothing was done to stop the real cause of the disaster, the fast-breeder of debt. On the contrary, debt-breeding was further accelerated through bailouts and stimulus packages.
In view of the fact that the marginal productivity of debt is now negative we can see that the damage-control measures of the Obama administration, which are financed through creating unprecedented amounts of new debt, are counter-productive. Nay, they are the direct cause of further economic contraction of an already prostrate economy, including unemployment.
The head of the European Union and Czech prime minister Mirek Topolanek has publicly characterized president Obama�s plan to spend nearly $2 trillion to push the U.S. economy out of recession as �road to hell�. There is absolutely no reason to castigate Mr. Topolanek for this characterization. True, it would have been more polite and diplomatic if he had couched his comments in words to the effect that �the Obama plan was made in blissful ignorance of the marginal productivity of debt which was now negative and falling. In consequence more spending on stimulus packages would only stimulate deflation and economic contraction.�
Karl Denninger envisages unemployment in excess of 20%, with cities going �feral� as showcased by downtown Detroit (see References below).
What has all this got to do with the marginal productivity of debt? Well, once it is negative, any further addition of new debt will make the economy shrink more, increasing unemployment and squeezing prices. Bernanke can create all the money he wants and more, but he cannot make it flow uphill.
Bernanke is risking something worse than a depression
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Ya-ta Boy
Joined: 16 Jan 2003
Location: Established in 1994
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| Posted: Sun Jul 12, 2009 2:16 pm Post subject: |
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| Kuros wrote: |
| Ya-ta Boy wrote: |
The stimulus is very likely a good illustration of one of the pitfalls of democracy-- the opposition stands in the doorway and blocks up the hall so that what is done is too weak right from the start to be successful...and then they whine that it didn't work, just like they predicted all along. |
I think you have it backwards. Proponents of the stimulus had better justify it in the face of this: Debt Clock
And Obama spent us into a $1.7 trillion deficit, which is well over 10% of U.S. GDP.
Some of the opposition is honestly concerned, has been concerned well before Obama came into office, and would be no matter whether the President had a -D or an -R next to his name. |
Nah.
It would be easier to buy the opposition's concern about debt if they hadn't sat around applauding Reagan's quadrupling the national debt in the 80's and whatever multiple it is for Bush II's increase this decade.
I'm also concerned about the debt--and have been since the 60's, but don't see any viable alternative at this point. PS: Not all debt is equal.
One place to start saving money is by closing a good share of those 100+ military bases scattered over the world. |
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Fox
Joined: 04 Mar 2009
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| Posted: Sun Jul 12, 2009 4:55 pm Post subject: |
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| Kuros wrote: |
| Some of the opposition is honestly concerned, has been concerned well before Obama came into office, and would be no matter whether the President had a -D or an -R next to his name. |
Some of the opposition is based on honest concern, but most can be correctly labelled as simply obstructionist. There's very little intellectual honesty in our nation's Congress, because our voting base doesn't value it.
I think Ya-Ta's point about the opposition deliberately trying to ruin things so they can crow about how it didn't work applies much more nicely to examples like health care than the stimulus, though. Even if a public option ends up passing, those in the pocket of the private health care industry will do everything in their power to sabotage it so that it ends up a shoddy mess that appears to "prove" the need for health care to remain private. |
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mises
Joined: 05 Nov 2007
Location: retired
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RufusW
Joined: 14 Jun 2008
Location: Busan
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| Posted: Sun Jul 12, 2009 9:49 pm Post subject: |
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Krugman argued for a bubble to bring the economy out of a recession, not for continuing policies when unnecessary. I presume if you can create a bubble you can also deflate it instead of letting it go bang.
| Quote: |
| Greenspan caused [the recession] with excessively cheap money, but Krugman played some role in helping it along its way with his less than subtle encouragement. |
That may be so, but you're hardly going to argue Republican/Bush economics didn't play a part in this recession.
To the layman we can conclude this new administration should at least be given a fair chance to work. The argument that we should wait for a majority of stimulus money to be spent seems fine. |
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lithium
Joined: 18 Jun 2008
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| Posted: Sun Jul 12, 2009 10:34 pm Post subject: |
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| VanIslander wrote: |
expected talking points:
- the economic mess inherited from the Republican administration was worse than thought
- the unemployment rate would have been worse without the stimulus package, maybe in the 11% range, in any event some good was done, but the road is long, the journey is hard
- many of the items in the package were said to take a year or two to kick in, and the investments made were for the future, so it'll take more time
- another stimulus package would be about finishing the job that was started, committing to seeing it through, getting it done |
The struggling economy has been made worse by Obama....no doubt about it. At some point, you liberals have to admit that the Bush era is over and you are responsible. Keep in mind that the Congress has been in Demacratic hands since 2006.
Obama said that the unemployment rate would reach 8% if the stimulus was not passed; we are now at 9.5%. He has no idea what he is doing, and it appears that the public is starting to see this as his poll numbers are beginning to fall.
Where in the heck are we going to get the money for another stimulus? We can not keep borrowing from the Red Chinese. |
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Kuros
Joined: 27 Apr 2004
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| Posted: Sun Jul 12, 2009 10:44 pm Post subject: |
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| Ya-ta Boy wrote: |
| Kuros wrote: |
| Ya-ta Boy wrote: |
The stimulus is very likely a good illustration of one of the pitfalls of democracy-- the opposition stands in the doorway and blocks up the hall so that what is done is too weak right from the start to be successful...and then they whine that it didn't work, just like they predicted all along. |
I think you have it backwards. Proponents of the stimulus had better justify it in the face of this: Debt Clock
And Obama spent us into a $1.7 trillion deficit, which is well over 10% of U.S. GDP.
Some of the opposition is honestly concerned, has been concerned well before Obama came into office, and would be no matter whether the President had a -D or an -R next to his name. |
Nah.
It would be easier to buy the opposition's concern about debt if they hadn't sat around applauding Reagan's quadrupling the national debt in the 80's and whatever multiple it is for Bush II's increase this decade.
I'm also concerned about the debt--and have been since the 60's, but don't see any viable alternative at this point. PS: Not all debt is equal.
One place to start saving money is by closing a good share of those 100+ military bases scattered over the world. |
I'm not convinced you have an able grasp of just how much $1.7 trillion is.
US Taxpayers supporting over 1000 bases abroad
| Quote: |
| According to Rumsfeld's estimates, we could save at least $12 billion by closing 200 to 300 bases alone. |
Let's mulitply that $12 billion figure by something generous, say 25 (even though 1000/200 = 5), that'd be $300 billion, or just about half of our military spending.
You'd still need to wait six years (that's not including the short-term expenses from shutting down those bases) just to recuperate the $1.7 trillion shortfall from 2009 alone.
Ya-Ta Boy and Fox, I'm not going to let you guys point to the wingnuts and say that they're only in opposition because they'd be in the opposition anyway. The fact is, our budget crisis is dire and ominous. I rather expect this kind of non-chalance from Ya-Ta Boy, who won't be alive to pay off the debt. But the rest of us are too young; we should understand who is paying for this.
| RufusW wrote: |
That may be so, but you're hardly going to argue Republican/Bush economics didn't play a part in this recession. |
Weak. Weak. Weak. So weak.
Neither Mises or I were supporters of Bush's fiscal policy. $1.7 trillion in deficit. At what point is Obama accountable for the decisions he makes?
Last edited by Kuros on Sun Jul 12, 2009 10:46 pm; edited 1 time in total |
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lithium
Joined: 18 Jun 2008
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| Posted: Sun Jul 12, 2009 10:44 pm Post subject: |
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| Tiger Beer wrote: |
When you had 8 years of NO domestic focus whatsoever, and watching everything slide down to nothingness...a stimulus package to get it going simply isn't going to reverse it within 4 months. IF that were even possible, we'd have the greatest country of all time. Just destroy yourself for 8 years, push a button, and back to perfect health in 4 months.
To the details. First off, most of that money is to invest in future technologies and industries that will later get America back on track. It is also going to rebuild deteriotating bridges and infrastructure that eventually needs to be repaired regardless anyways.
The 'check in the mail' concept of Bush's stimulus packages is a bit different. An investment in the future oriented one, one that must be done anyways and for the long-term best interest of all of us, doesn't simply 'stimulate' the economy in 4 months time and everyone is once again living well beyond their means again. |
Remember that the majority of the Bush era was filled with an economic boom. Unemplyment was in the low single digits and we successfully rallied back from the terrorists attacks. Saying that we had 8 years of declination is far from correct. |
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bacasper
Joined: 26 Mar 2007
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| Posted: Sun Jul 12, 2009 10:52 pm Post subject: |
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| lithium wrote: |
The struggling economy has been made worse by Obama....no doubt about it. |
As it also was by Bush. BOTH of these Obushamas presided over a multi-hindreds of billions or trillions of dollar bailout.
Someone please remind me again, what is the difference? |
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RufusW
Joined: 14 Jun 2008
Location: Busan
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| Posted: Sun Jul 12, 2009 11:27 pm Post subject: |
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| Kuros wrote: |
| At what point is Obama accountable for the decisions he makes? |
In about 3 years and 4 months :) |
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visitorq
Joined: 11 Jan 2008
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| Posted: Mon Jul 13, 2009 1:30 am Post subject: |
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| mises wrote: |
No. Can you learn?
This depression has been caused by a debt bubble. Virtually ALL gdp growth of the last 20 years was by in large taking growth from the future and spending it in the present. This has stopped because balance sheets are totally destroyed. Debt will be paid back. This means less consumption and growth. It's over. At least 15-20% gdp decline and a permanently (for us, anyways) more poor North America. It is over. Now, the "stimulus" (also debt) is going to replace the debt and help the economy "come back"? Good luck. Every new unit of debt now decreases GDP. The marginal productivity of debt is negative.
Stimulus. My arse. We will consume what we produce - debt servicing - saving. This pulls around 20% out of the economy. Math. |
This is exactly correct. Except that the entire debt is based on an epic fraud, and all our money is worthless. It is over, but there is nothing inevitable. The permanent assets of the nation and of millions of individuals are still being hijacked by the banker criminals (in your face high seas piracy) as we speak - at some point violent revolution becomes likely. |
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ChopChaeJoe
Joined: 05 Mar 2006
Location: Seoul
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| Posted: Mon Jul 13, 2009 3:40 am Post subject: |
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Man the U.S. really screwed itself up, eh? It happens. The government didn't help much back in '29 either.
Well, like Joel Stein said (massive paraphrase), if living a lifestyle as close to the max as possible results in a depression every 80 years then it's worth the cost.
The Bush era was a massive boom? For whom? no one I know got rich. Maybe the rich got richer and the poor got...children.
Now the Clinton years, that was a boom. Dudes quitting jobs at coffeeshops to make $4k a month manipulating HTML code....
Last edited by ChopChaeJoe on Mon Jul 13, 2009 3:43 am; edited 1 time in total |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Mon Jul 13, 2009 3:41 am Post subject: |
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| RufusW wrote: |
Krugman argued for a bubble to bring the economy out of a recession, not for continuing policies when unnecessary. I presume if you can create a bubble you can also deflate it instead of letting it go bang.
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And then cause a recession? Why not just have the recession the first time. We keep building up more and more garbage that needs to be cleaned out and covering it up with pump priming (be it low interest rates, QE or "stimulus").
Governments do not want to make the right choices because the right choices are painful in the short term.
PK has one answer for everything: Stimulus. That's all he knows. He's a Keynesian. They don't even consider debt in any of their models. It doesn't exist to them. Unfortunately, it exists in reality and has a massive impact on the economy. |
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