Paul Krugman Right and Wrong

http://www.nytimes.com/2013/01/07/opinion/krugman-the-big-fail.html?_r=3&

In this essay in the New York Times dated 6th January 2013 Paul Krugman explains very nicely why austerity does not help and is in fact dangerous.

In that regard he is confirming everything that I have written right from the very start of the European Crisis.

I might say I was right about Cyprus too - but everyone was right about Cyprus except the people who made it happen.

BUT Paul Krugman is still clinging to the idea that the Obama Stimulus was right, not half right.

He writes:
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At that point governments needed to step in, spending to support their economies while the private sector regained its balance. And to some extent that did happen: revenue dropped sharply in the slump, but spending actually rose as programs like unemployment insurance expanded and temporary economic stimulus went into effect. Budget deficits rose, but this was actually a good thing, probably the most important reason we didn’t have a full replay of the Great Depression.

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He has not recognised that a bigger stimulus would not have saved the day because properties were still over-priced and low interest rates can only be temporary.

Unlike what he wrote at the start of the essay, economists do not have all the right tools at their disposal.

But I liked all the rest of his essay - it was very well put and totally fair comment. Here is some more:

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But it all went wrong in 2010. The crisis in Greece was taken, wrongly, as a sign that all governments had better slash spending and deficits right away. Austerity became the order of the day, and supposed experts who should have known better cheered the process on, while the warnings of some (but not enough) economists that austerity would derail recovery were ignored. For example, the president of the European Central Bank confidently asserted that “the idea that austerity measures could trigger stagnation is incorrect.”

Well, someone was incorrect, all right.

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I like to include myself among the some economists that gave warnings right at the start

Changing Human Behaviour is the next big thing in economics - IMF and EU

According to the BBC just now Cypriots are to pay 10% tax on their savings.

If economics is about managing human behaviour or allowing it to behave naturally, then why does Europe and the IMF want to discourage banking?

They are taxing bank deposits just once at 10% of the capital - a wealth tax on bank deposits. Just once, until next time.

How do we get rid of the new breed of economists and get back to sound principles?

I posted the above comment everywhere I could as soon as I heard about it.

Don't forget to read all the other snippits on this blog.

The ABOUT page explains.

450 Banks issue the same QE warning that I did

SNIPPITS ARE COMMENTARY ON CURRENT ISSUES.
There is an archive for every past month which you can explore.

This warning to cease QE has come from the Institute of International Finance, (IIF), which according to this source, is a group of 450 of the world's leading banks:

http://www.globalpost.com/dispatch/news/afp/130307/global-bank-group-warns-over-too-much-liquidity-0?goback=%2Egde_45061_member_220983030

The words could have been put together by someone that has been reading my Blogs and LinkedIn Discussions.

Perhaps that is what happened because the wording has striking similarities to what my readers have seen me write:

I have pointed out how rapidly mortgage costs can rise and property values and wealth invested in Bonds and Equities can can fall as interest rates revert to mean. The mean interest rate levels at which in a healthy economy where confidence is running high, the demand for money is held back by the cost of borrowing are far distant from their current levels; maybe around 7% for Mortgages, for example. 

The longer this QE distortion, or the longer any distortion continues, the more damage it does, and in this case at least, the more damage it may do as it unwinds. This is the fear.

Basically, there is a race going on: will the stimulation raise profits and incomes far enough to bring down the ratio of asset prices / incomes back into line, or will the asset prices race further ahead instead?

If the latter, then when the QE stimulus slows down or fades away, and when interest rates rise again, we will be back to 2006 /7 but without the extra hazard of Sub-Prime.

WHAT IS MISSING

What is missing is my alternative plan which readers can get some insight into from This Page of new financial products that are needed 
and of course, 

This Address which is the Home page of Macro-economic Design and lists the principles that are to be followed to make an economy easily managed.

American Paradox

Today The economist published an article entitled Rally Drivers.

It was writing about central bank strategy - QE and reviving the American Economy against headwinds of over-priced equities and bonds while profits are starting to stall.

They concluded:

The central banks are pursuing the right policy for a weak world economy, but it has risks... The kind of high-risk securities that marked the credit bubble are starting to reappear.

And there are reasons to worry that stocks may be overvalued... indeed, profits growth has been slowing in recent months. For the current quarter, ending March 31st, profits of S&P 500 companies are expected to be only 1.2% higher than the previous year—and only 0.1% if financial companies are excluded from the total. All that leaves American shares looking off-puttingly expensive, with valuations around 40-50% above the long-term average (see article)... central banks can be excused for sitting back and enjoying the bull run, especially as any action they could plausibly take to halt it would damage a still-fragile economy.

A different paradox of thrift

...American pension funds should be aware that, with bond yields low and equity valuations high, future investment returns are likely to be low. They need to contribute more if pension deficits are to be reduced. Similarly, employees who are responsible for their own pensions via plans such as 401(k)s need to stump up more if they are to retire in comfort.

But here is the paradox. To rescue economies from the doldrums, central banks want companies and employees to save less in the short term, not more. Balancing the desire for short-term consumption and the need for long-term thrift is one of the trickiest issues for rich countries as they navigate their way out of the crisis.

Perhaps the Dow will resolve that paradox by continuing to soar. More likely, it will not.

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What are they thinking here?

If equities and Bonds are over-priced and this means that more should be saved then they will get to be even more over-priced, and the economy will not prosper.

On the other hand if these assets devalue so as to give a more meaningful return to investors, then it might be sensible to invest more in pension funds. And pension funds should then be lending to and investing in new enterprises and creating more jobs.

The facts are that there are too few people employed and for that reason there is too little spending in the economy and too little tax revenue to support the government's borrowing.

Normally when equity prices are high Rights Issues and New Issues come and mop up the surplus money, new jobs are created, and the stock market sinks. But that sinking process is blocked by QE.

QE and cheap money and over-valued assets is in fact the whole problem and always has been ever since the Chinese began buying USA Government Debt in large quantities making money cheap, interest rates low, and inflating every kind of asset value from property to bonds to equities.

Once you create a distorted economy, nothing works the way it should until the distortions unwind.
It is taking away the confidence people have in their savings and investments, because everyone knows, as the article started out by saying, things are not as they should be. They are wary of spending and they are wary of investing. The cash pile is mounting.

The longer this continues, the higher the price will be for unwinding.

I have put forward proposals on my Blogs and in my draft book which readers of the Blogs are welcome to read.

I need your email address, sent to me at:
eingram@ingramsure.com

Lies Damn Lies and Graphs - The Public Debt Illusion

Please read the ABOUT page. All archives are of interest.

Here are four graphs, any of which might be used to tell a story about the same data about UK Net Public Debt 1900 - 2011. Take your pick. Which is telling the truth? All of them, yes, but which one is driving policy?

All the graphs show net public debt or adjusted figures for that on the vertical axis over the period.

The top one is the favourite one for the media showing a catastrophe in the making. Good for headlines.

Below that is the log-scale showing that the debt has been growing steadily at 6.86% p.a. compound. A log scale is a straight sloping line for a steady compound growth rate.

I placed the wrong graph here - it looks the same but goes higher than the next graph. Sorry I will look for the right one.

The third graph shows the compound growth rate after allowing for the rate of growth of the population - showing the debt per person.

Finally we get the real facts: This is what the debt to income ratio would be if there was only one person in the UK. The Net Debt peaked in 1946 at 2.37 years' income and has now returned to the relatively low 0.6 years' income and rising.  

Or if you prefer this is the average net debt per person. Still, 0.6 is a lot less than 2.37.

There is also the question of how the debt is constructed - a subject that needs urgent attention because fixed interest debt can be very destabilising to an economy as explained in various blogs and essays of mine.

General Principles for Managing Economies

I can only advise readers to watch my somewhat better informed commentary (better informed than central bankers anyway) here on this Blog and to contact me for any further details they may be interested in.

My life's work has been the development of ways to avoid the kind of crises that we are now facing and fortunately it also reveals ways of handling them.

IMF admits Austerity Gaff

http://www.imf.org/external/pubs/cat/longres.aspx?sk=40200.0

NOW they say that cutting $1 reduces GDP by $1.5 as if that was not obvious in the first place from the way things have been going.

I said that was NOT the way to go in my screaming headlines on LinkedIn right from the start. See:

http://edward-ingram.blogspot.com/p/sovereign-debt-and-qe-edition-8.html