Posts Tagged ‘money’

Galt strike or inadequate aggregate demand?

Friday, May 1st, 2009

The Randian concept of a Galt Strike is that if the elite slack off, the masses will be impoverished – that countries are rich or poor according to whether the elite is productive, while the masses and resources do not matter much, except in extreme cases such as oil rich sheikdoms.

There has been a large fall in GDP over the past six months:

The Keynesian explanation of this fall is inadequate aggregate demand – the economy could easily produce more, but no one is spending due to depression of animal spirits, in which case a big spending government will make everything rosy.

The Austrian and Chicago explanation is complicated, and perhaps confused.

The Randian explanation is that it is a Galt Strike – the elite are slacking off, and focusing on hiding their wealth and economic activities from the government, rather than creating value, in which case big government spending will merely result in inflation or massive borrowing from abroad.

Core CPI will in time tell us which account is correct. We will know by about November 2010.

  • If  late in 2010 core CPI is substantially higher, nominal GDP substantially higher, but real GDP still woeful, then Randians will have been proven correct.
  • If  late in 2010 core CPI is lower or unchanged, then both sides can argue they were right, and the Austrians will probably have some explanation that I will be disinclined to follow.
  • If  late in 2010 core CPI only rises moderately, but real GDP rises substantially, then Keynesians will have been proven correct.

I am betting on disturbing levels of core inflation with a distinctly unimpressive recovery in real GDP.

The crisis explained

Saturday, March 28th, 2009

I have been seeing a lot of references to “a speculative bubble”

Nope. They were not speculating.

The crisis consisted of people, mostly members of protected minorities with nothing to lose, buying houses they could not afford with borrowed money in the expectation that they would go up, and if they went down, it was the bank’s problem.

So the people who bought houses were taking no risk, since mostly they bought them with 100% loans, had no credit rating and no assets to lose.

So were the banks making the loans taking a risk?

No, because it was not the bank’s problem, because the loans were for the most part guaranteed by Freddy, or Fannie, or AIG – all of which had implicit government guarantees, and all of which had an AAA rating.

So why did AIG and the rest have an AAA rating?

AIG and the rest were issuing naked puts greatly exceeding their total capitalization, which pretty much guaranteed that sooner or later they would go broke in a big way. So why AAA?

Moody’s, who issued the ratings, was tweaked on this, and replied that it was unthinkable that the government would allow these institutions to fail. So it was not true that nobody knew what was happening. All the insiders knew what was happening, the regulators knew what was happening: they knew that businesses were taking big risks for big money in the expectation that if they won, they won, and if they lost, the government would take care of them. It was government policy. People have been complaining about this for years.

The fundamental cause of this crisis is government regulation: Governments cannot be trusted with money. They think only of short term political gain, so dispense money to the loudest pressure group, in this case those represented by ACORN, rather than to people who are likely to repay it with interest. In this case, the regulators decided that “traditional” standards of credit worthiness were racist and discriminatory, because too many Jews, and not enough Blacks, met “traditional” standards.

The Stimulus bill

Tuesday, March 3rd, 2009

Bryan Caplan wonders why Brad Delong cannot comprehend those who doubt the effectiveness of the stimulus bill.

Assume that creating value is easy, any brainless fool can do it, even the brainless fools at Washington Mutual. It is then immediately obvious that the government can make everything lovely by printing money and giving it to the morally worthy. Are car production lines shut down while unemployed workers idle? Just print money and give it to bureaucrats in government schools, or other similarly wise and worthy people, and lo and behold, those car production lines will start up again, and all will be well.

If, on the other hand, producing value is hard, then falling nominal GDP may well reflect the discovery that we were producing less value than we thought – that we were providing houses to people who were not in fact willing to pay for them, and building cars that were not in fact the cars that people wanted, in which case issuing enough money to stimulate the economy may well stimulate inflation, rather than the production of real wealth.

This brings us to Japan: Did Japan lose a decade because it refused to allow the free market to remove the power over assets held by incompetent people, or because it failed to borrow enough and spend enough?

Those who believe Japan failed to run a big enough deficit may well now get the chance to put their theory to the test in the US. If spending enough borrowed money to keep the incompetent running businesses stimulates the economy, then they will have proven themselves right.

commodity money

Sunday, March 9th, 2008

The subprime crisis represents massive unpunished malfeasance by financial intermediaries managing US dollars. This discourages people from using US dollars as money.

In 2008 January, the fed drove real dollar interest rates negative – only slightly negative, but negative interest rates suggest an intent to inflate away the dollar denominated liabilities of financial intermediaries until the real assets cover the dollar denominated liabilities. In the ensuing two months, all commodities that are readily storable and have large liquid markets, all commodities that can usefully function as a store of value, went up around twenty percent: aluminum, barley, cocoa, coffee, copper, corn, cotton, gold, lead, oats, oil, silver, tin, wheat, zinc.

This suggests that when fiat money collapses, a process likely to take place in fits and starts over a very long time rather than all at once, we will move towards a balanced basket of commodities, rather than return to the gold standard.