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Monday, June 15, 2009


not staying the course

on the heels of g8 noises -- ed harrison with a very reasonable view of the likely path of the western balance sheet recession.

Going forward, in all likelihood, we are going to see a move toward fiscal prudence and policy normalization. Stimulus will be seen as irresponsible. This is already the view amongst many politicians in the U.K., the U.S., and Germany (and the Czechs have been making the same noises in Central Europe). So, when the U.S. and global economy relapse into depression because we did not stay the course, you will know why.

it boggles the mind to think that what we are experiencing could be so poorly understood in the halls of power. caution in spending is certainly warranted -- particularly in public recapitalizations. but squelching fiscal stimulus is the height of irresponsibility in economic management, and one must hope that larry summers is both smarter than that and carries the day against transient political exigencies.

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"but squelching fiscal stimulus is the height of irresponsibility" WHAT??? Over-leveraged consumption is the real height of irresponsibility and the current fiscal stimulus is both a moral hazard, and a full-on excuse for irresponsible politicians to spend even more money that doesn't exist. You are a full-fledged idiot, and when the economy continues to drop from here, you will blame a lack of stimulus when in fact a further drop is inevitible - the correction must happen to clear the toxics.

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hj, you have to consider the consequences of reining in government spending.

this country's GDP is the aggregate of: consumption -- business investment -- government spending -- and net exports.

net exports are crashing with global trade. this is unlikely to reverse.

consumption is set to contract protractedly for the first time since the great depression, with household balance sheets a wreck.

business investment has gone deeply negative in the face of massive excess capacity.

if government spending was now contracted as well, the result would be nothing short of apocalypse -- the united stats could easily see (-10%) rates in GDP. i wager you even food would start to become a concern with a little time.

why is reining in government bad? after all, don't we need to contract debt? the answer is NO, and the rationale is obvious on insight:

contracting GDP means contracting incomes in the private sector. this means contracting tax revenues, contracting deposits, contracting credit and contracting monetary velocity -- in a word, a terrible depression. under such circumstances, GOVERNMENT DEFICITS WILL BE WIDER THAN WE ARE NOW SEEING. if you are in favor of small deficits, i'm afraid the choice is not to contract government spending, however counterintuitive that is -- the lessons of both the US in the 1930s and japan in the 1990s show convincingly that CUTS in government spending will result in BIGGER deficits, as incomes and tax revenues will crash with amazing speed.

ON THE OTHER HAND, if we expand government spending, we basically facilitate a debt transfer from households and businesses -- who pay down their debts or default on them -- to government -- who spend the money that becomes the income for the now-tapped-out private sector. government is in a good position to do so, with a debt load of less than 50% of GDP.

THIS IS NOT CREATING MORE DEBT -- indeed i think it's inevitable that total debt will contract somewhat even as government debt is skyrocketing, as with the collapse of trade we won't be able going forward to rely on the use of foreign deposits through the capital account surplus.

this would instead transfer a sizable chunk of debt to the public balance sheet, where (once the crisis has passed and the private sector has repaired its balance sheet) it can be paid down over time with tax revenue. MOST IMPORTANTLY, it would prevent a complete crash in incomes and deposits that would render impossible any kind of meaningful private sector balance sheet repair short of widespread defaults and shoe-leather-eating depression. that same sustaining of incomes would at least moderate the final degree of the massive asset price crash now underway, likely preventing a titanic number of unnecessary defaults (beyond the considerable number of necessary ones) from entities who can instead then repair out of income.

"clearing the toxics" is certainly something we have to do. the question, however, is really whether we want to clear them by a massive series of defaults, destroying the united states economy entirely and potentially moving into a state of civil warfare -- because i think, given the degree of the problem, that's exactly what would happen -- or by trying to pay as much as we can out of income, mitigating defaults as best we can and tyring to maintain some semblance of a functioning economy, however dyspeptic. fwiw, hj, it's my opinion that those who want to cut government spending and kickstart a massive liquidation cycle have not sufficiently considered how they're going to eat and where they're going to hide in such a sequence.

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Yes, it is a bit scary to think that Those-in-Charge don't understand the problem any would talk about reducing deficits at this point. I prefer to think that it is just that--talk--perhaps to soothe bondbuyers. I mean, if you're going to keep borrowing money from people you do want to have them think they might get paid back, lol.

Then again, maybe they figure they've created enough of a diversion to allow them to rescue the bulk of their own assets and now is the time to let the flood take its course--while the trusting volunteers are still filling sandbags, of course.

If and when I figure it out I'll send you a carrier pigeon message from the bunker :>)

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"fwiw, hj, it's my opinion that those who want to cut government spending and kickstart a massive liquidation cycle have not sufficiently considered how they're going to eat and where they're going to hide in such a sequence."

Gaius, you have truly convinced me on this point to come around to Koo's general argument. I was fully for nationalizations last year and hoping for revenge on these institutions. I purchased multiple assasult weapons for the coming chaos. Now I am faced with putting those instruments to use. At the end of the day, I would rather take higher taxes any day. I don't want to be fighting for food and fuel. Anyone that would advocate a route for the economy that MIGHT end in that scenario is suffering from madness.

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I think we need some balance. Sure we need some temporary and measured government spending and tax cuts to keep us from going of a cliff. But this money should be targeted towards letting people who act responsibly rebuild their savings and make productive long term investments. But giving non productive handouts to companies and individuals who acted irresponsibly is not a good thing.

We need to allow some clearing and not just paper over everything. If we just spend like crazy, we will just move on to a bigger and more distructive bubble. So we need to be more moderate with the expansion of the deficit.

Otherwise we will end up like Japan. They now must face the burden of their large government debts. Eventually Japan's interest rates will increase and they will be unable to repay their debts. Koo never talks about the long term consequences of Japan's massive government debt.

But then again almost all politicains and bureaucrats never worry about the long term. Besides we are all into instant gratification and don't want any pain.

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Madness, robert, I agree. I hope never to see another act of violence, however necessary.

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With all deference, anon, this is less a moral argument than a mathematical one. Need of balance suggests competing political or philosophical views which must be accommodated. In this case, though, there is less left or right than right or wrong. The difficulty is in affirmatively distinguishing the wrong from the right.

I won't pretend to be certain. But I am confident that accommodating deficit hawks as regards fiscal stimulus (as opposed to capital transfers) is akin to accommodating the flat earth society. Cutting spending or raising taxes amid private sector balance sheet repair will increase the size of government deficits by destroying the tax base.

Fwiw, I sincerely hope we can reach a denouement that looks as good as japan or post-ww2 britain. Don't underestimate the depth of our trouble. Such things are to be hoped for - and may not be attainable.

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