More Mish on the failure of Monetarists and Austrian economics

Clearly, the path forward in economic theory involves the incorporation of Minski's models of debt.  Unfortunately, the group that has a lot of insights to add otherwise, the Austrians, make themselves irrelevant with their doctrinal stances vis-a-vis the gold standard and constant ravings about "fiat money". 

 

I find it illuminating that even Mish is fed up with their illiteracy regarding real economics, as on almost every other measure, he is an ideologically pure Libertarian.  Read for example his recommendations at the end of the article quoted below.  Mish would essentially institute a Libertarian Utopia (canceling drug laws, wage laws, union powers, tariffs, foreign wars, etc). 

 

Mish also mentions the K-wave cycle, the long wave cycle of debt-caused depressions.  I would like to point out that the Jubilee cycle of debt cancellation would perfectly eliminate the K-wave cycle of debt depressions. 

 

Since even Mish highlights the fact that the problem is high debt levels, it is telling that he does not make the obvious call for debt cancellation.  All of his recommendations would work to get the economy going strong, but none of them would directly address the debt problem.  Basically, Mish's pure brand of Libertarianism prevents him from recommending the violation of any contracts, which most people think debt cancellation would involve (my Jubilee plan pays off debt payments through electronically-issued checks, in other words honoring the debt, not cancelling it).   

 

 

 

the rest is a quoting from Mish:

 

But what has occurred as a result of Fed and Government "solutions" again is a classic macro deleveraging cycle response - a devalued currency and negative real interest rates has driven investors into inflation hedge assets such as gold, oil, ag assets, etc. at the margin. As opposed to having achieved the stated goal of fostering employment growth, credit creation and raising aggregate demand, etc., Fed QE has essentially succeeded in raising the cost of living in a cycle characterized by generational labor market and direct wage pressure among the middle and lower class wealth demographic.

 

 

 

As discussed above, monetary stimulus negatively affects the real economy for the temporary benefit of the financial economy and Wall Street. The tradeoff was not worth it except through the perverted-eyes of Wall Street.

Telling action in bank stocks says the limits of helping Wall Street may have even run out.

Many point to excess reserves as a sign of future inflation. I point to excess reserves as a sign of failed Fed policy. Commentary from Austrian economists shows they fail to understand how credit even works.

The idea those excess reserves are going to pour into the economy in a 10-1 leveraged fashion is simply wrong. Banks do not lend when they have excess reserves. Banks lend when they have credit-worthy borrowers, provided they are not capital impaired.

It is time Austrian economists finally wake up to this simple economic truth.

Economists of all sorts stick to failed models.

• The Monetarist currency cranks want more monetary stimulus even though it is counterproductive
• The Keynesian clowns simply will not admit end-game constraints
• The Austrians for the most part either ignore credit or incorporate failed models of credit expansion into their theories.

Each camp points the finger at the others as to why the others are wrong. Ironically, none of the camps seems to understand the combined mechanics of debt-deflation, deleveraging, and attitudes.

 

http://globaleconomicanalysis.blogspot.com/2011/09/bernankes-waterloo-midst-of.html

Monetarist theory of deflation is dead, dead, dead

Occasionally you will still see some libertarian-leaning web site quoting Friedman,  "Inflation is always and everywhere a monetary phenomenon."

 

This has lead to a great deal of anticipation in the last few years for an extreme bout of inflation, as the Fed Reserve has continued to print out new money to capitalize the otherwise-insolvent banking industry. 

 

Popular economic theorist Mike Shedlock has a great article concerning how both the Monetarists and the Austrians have been subject to numerous false inflation calls because of their theory of money.  Quoting Mish:

 

Although the Keynesian and Monetarist economists have missed the boat on what is happening and why, Austrian minded folks who fail to understand the importance of credit and how little the Fed can do to revive it have blown the call as well.....

 

Focus on Money Supply Alone is Fatally Flawed

Deflation is about credit, it is also about attitudes that govern the demand for credit.

As I have stated many times over the years, and as stated above in the Contrary Investor, there is nothing the Fed can do to force businesses to expand or banks to lend.

That point explains why Austrian economists who focus on money supply alone have failed and will continue to fail.

Until consumer demand returns, businesses would be foolish to expand. Unfortunately, the Fed's misguided easing policies have stimulated commodity speculation thereby increasing manufacturing costs, while simultaneously clobbering those on fixed income and reducing final consumer demand.  http://globaleconomicanalysis.blogspot.com/2011/09/bernankes-waterloo-midst-of.html

 

 

In other words, the key element in our modern economy is the debt demand/credit supply, which is much larger and more influential than the strictly-money supply. 

 

The current economic catastrophe is due to a Deflationary Depression, caused by real-estate speculation, i.e., the build up of a debt bubble based on the monetization of real estate.

 

The best cure for this type of Debt-collapse Deflationary Depression is to liquidate the bad debt as quickly as possible.  Unfortunately, our public policy today is the exact opposite of that. 

Marketwatch's Bret Arends calls for national Jubilee

Bret Arends is the latest to publicly call for national Jubilee.  He sells the idea as a parallel to bankruptcy, and highlights the way in which excessive debt prevents economic activity, thus actually harming the economy and making us all poorer. 

 

His article is also very good for directly answering many of the objections to debt-cancellation.  He does not, however, present a practical plan for debt cancellation, just the need to do it. 

 

As far as I know, I am still the only one who, following an analysis of the debt-based problem, has put forth a realistic and simple plan for accomplishing it.   Please help spread the word.  The need for Jubilee is reaching a public-awareness critical mass.   We need to transition the public mind onto the ease of doing it. 

 

The Jubilee Solution is simplicity itself:

 

1) The federal government issues electronic checks to pay off all debt.

 

2) The banking reserve ratio is raised by a proportional amount to soak up the liquidity (trapping the extra money in the banking system). 

 

Viola!   All debts cancelled, the economy reset for takeoff. 

 

Debt cancellation, without violation of contract, without inflation. 

 

IT CAN BE DONE!!!!

 

 

 

Here is his description of how the debt overhang prevents economic activity:

 

We have tens of millions who cannot repay their debts. But they are all trying to. That sucks huge amounts of money out of the economy. And that means these people cannot function properly as consumers or workers. That's the reason people aren't coming into your restaurant. It's the reason people aren't taking your yoga class. It's the reason they haven't hired you to redo the kitchen.

And so tens or hundreds of millions of perfectly responsible business owners and employees are also suffering from this slump. That's the reason we have a shortage of demand. That's the reason no one is hiring.

Even worse: People who are underwater on their mortgage, but who do not want to default, cannot move to where the jobs are either. They are stuck with their home.

You want to break this logjam? Try Chapter 11 for the nation. Massive defaults. Clear the decks, clean the books.

 

http://www.marketwatch.com/story/massive-default-is-best-way-to-fix-the-economy-2011-09-12

John P. Hussman calls for (partial) Jubilee

Hussman points out the fundamental choice now facing government policy makers: defend the money-ed powers, or defend the common good.  So far, of course, our gov't has been in the pocket of the financial parasites, and I don't see much prospect of change until a people's populist party rises up to challenge the current system.  But here is Hussman's analysis:

 

The global economy is at a crossroad that demands a decision - whom will our leaders defend? One choice is to defend bondholders - existing owners of mismanaged banks, unserviceable peripheral European debt, and lenders who misallocated capital by reaching for yield and fees by making mortgage loans to anyone with a pulse. Defending bondholders will require forced austerity in government spending of already depressed economies, continued monetary distortions, and the use of public funds to recapitalize poor stewards of capital. It will do nothing for job creation, foreclosure reduction, or economic recovery.

The alternative is to defend the public by focusing on the reduction of unserviceable debt burdens by restructuring mortgages and peripheral sovereign debt, recognizing that most financial institutions have more than enough shareholder capital and debt to their own bondholders to absorb losses without hurting customers or counterparties - but also recognizing that properly restructuring debt will wipe out many existing holders of mismanaged financials and will require a transfer of ownership and recapitalization by better stewards. That alternative also requires fiscal policy that couples the willingness to accept larger deficits in the near term with significant changes in the trajectory of long-term spending.

We cannot simply shift to a high-level equilibrium (consumers spend because employers hire, employers hire because consumers spend) until the balance sheet problem is addressed. This requires debt restructuring and mortgage restructuring. ... To believe that bondholders simply cannot be allowed to sustain losses is an absurdity. Debt restructuring is the best remaining option to treat a spreading cancer. Other choices are fatal.

 

 

quotes from here: http://www.hussmanfunds.com/wmc/wmc110905.htm

Charles Hugh Smith calls for Jubilee

Smith reprints an excellent article on his website, by Zeus Yiamouyiannis, Ph.D., read it here: http://www.oftwominds.com/blogsept11/Zeus-debt-forgiveness-9-11.html

 

 

exerpt:

 

Debt forgiveness simply calls out either the inherent systemic inability to make good on debts or the recognition that debt was produced through fraudulent means. In the present situation, both conditions obtain. There has likely been no point in world history where debt forgiveness has been so comprehensively merited. The only speculation from my point (barring world-wide global feudalism and eternal debt slavery) is whether we will initiate such forgiveness or be forced into it.