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Rick Perry vs. Barack Obama The campaign has begun

#621 User is offline   y66 

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Posted 2012-May-08, 21:46

Meanwhile, In The Bond Market (from Krugman)

Quote

The real interest rate on 10-year US bonds is now firmly negative:


Posted Image


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This is as clear a demonstration as you can ever expect to see that the models some allegedly authoritative figures use to analyze the economy are dead wrong; it’s also an indication that obsessing over the deficit, and actually cutting back sharply on government investment, are crazy.

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#622 User is offline   mike777 

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Posted 2012-May-08, 22:46

1) we can debate what a neg interest rate means for the current and future economy.
2) Over the years here I have often said dont worry about the deficit in general.....
3) In any event we should discuss what disinflation means and whether that is good or bad right now rather than just assume.
4) fwiw I worry less about inflation and more about job creation.
5) Just not sure if the govt by spending more, redistibutes jobs rather than creates jobs.
6) OTOH I do think govt policy can lead to private job creation.
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#623 User is offline   kenberg 

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Posted 2012-May-09, 04:56

"real interest rate" means interest rate adjusted for (expected) inflation?
Ken
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#624 User is offline   phil_20686 

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Posted 2012-May-09, 06:48

View Postkenberg, on 2012-May-09, 04:56, said:

"real interest rate" means interest rate adjusted for (expected) inflation?


Yes
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#625 User is offline   ArtK78 

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Posted 2012-May-09, 06:50

It is basic economics that government spending has a larger stimulative effect on the economy than private spending.
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#626 User is offline   hrothgar 

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Posted 2012-May-09, 07:01

View PostArtK78, on 2012-May-09, 06:50, said:

It is basic economics that government spending has a larger stimulative effect on the economy than private spending.


Don't recall that this was part of the curriculum back when I was teaching Intro to Macro
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#627 User is offline   phil_20686 

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Posted 2012-May-09, 07:40

The problem with arguments about regulation is that they are the same in both directions:

In favour:
Look, obviously we need more regulations, you can tell because we didn't prevent this recession.

Against:
Look, obviously regulation don't work. You can tell because regulation didn't prevent this recession.

Everyone agrees that some financial regulation is desirable, efficient and effective. Unfortunately the world moves too quickly for regulation to effectively prevent recessions. I think its dangerous to pretend otherwise.

In so far as this recession has a cause, it is important to disaggregate the common factors. Firstly: what is a recession. I like Karl Smith's explanation of this, "a recession is when markets fail to clear", which means, essentially, that although we still have the capacity to make all the same stuff, but the prices aren't right so people are not buying.

A recession can have a variety of different causes, some have clear causes: the silver crises of the late eighteenth century, was caused by a shortage of the medium of exchange. In essence china ran a huge surplus and drained the silver currency out of Europe, creating deflationary pressure. Alternatively, sometimes `real shocks' can produce a recession. In these cases, normally caused by a shortage of a resource, the economy is badly wrong footed, and literally can no longer produce the same stuff that it could before. Such crises are normally associated with high inflation, which makes sense, as there is the same amount of money, but less stuff, so prices rise.

To understand a banking crises, we should understand that `money' is a broad and nebulous concept. For example, banks engage in `credit creation', by loaning money out, and as long as investors are happy that the loan will be repaid, they are often happy to treat the loan as a medium of exchange, and use it as an asset. In a banking crises there is a lack of confidence, and consequently investors will no longer treat loans or other securities as safe alternatives to cash. In our recession:

Posted Image


And you can see the collapse in the broad money aggregate caused by the banking crises. In practice, the decline shown here is more the fact that many of the securities' principle value, was that they could be used as collateral in repo transactions. Without that use, no one is buying them, and so there is less lending and this is what is showing up. This does not include the fact that the banks have on their balance sheets a massive number of financial instruments that they used to be able to use to raise liquidity, and in practice could treat exactly like cash, which are now effectively illiquid.

This narrative is sometimes called the `lack of safe assets'. Demand for assets that can still be traded as a medium of financial exchange is what is driving German, Us and Uk bonds into negative real interest rates. If I am a bank that needs to raise some cash quickly, or needs to provide a security deposit for a loan, these are essentially the only securities that are being accepted.

If this recession can be said to have a proximate cause then, it is that the sudden change in the perception of systemic risk has led to a collapse of the broad money aggregates. This has led a a broad deflationary pressure, which shows up in broken markets. Suddenly demand for cash by financial markets is effectively driving up the price of labour. It is this that has driven the labour market out of whack. The correct policy response is to provide enough liquidity by having the central bank replace these securities with things that can be treated as money aggregates. You can do this monetarily, by having the central bank simply create currency to buy these securities and give the banks cash instead. Alternatively you can do it fiscally, since running a large budget deficit is effectively equivalent to large scale credit creation. You will be producing large amounts of a safe asset that the financial markets will treat as a medium of exchange.

Central banks the world over should be attempting to create inflation, merely to balance the deflationary pressures of deleveraging. The fact that long dated treasuries are looking negative, is a sure sign that no one is expecting the central banks of the world to succeed in this, or even to attempt it, since its impossible for a central bank to attempt inflation and fail. I do not believe inflation will rear its head until the deleveraging is complete. In fact, even after that, printing money will only lead to inflation if, after the old securities are liquidated into cash, there is an appetite for new securities which are again seen as safe enough to be treated as cash. If this does not happen, or happens slowly, there will be plenty of time for the central bank to adjust the money supply so as to prevent inflation. I suspect risk appetite will only return slowly, but that is really only a guess about the future.

EDIT: perhaps I should also have made the point that in none of the other recessions on the graph did the money aggregates decline: declining money aggregates tend to be signatures of banking crises specifically.
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#628 User is offline   hrothgar 

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Posted 2012-May-09, 07:56

View Postphil_20686, on 2012-May-09, 07:40, said:


A recession can have a variety of different causes, some have clear causes: the silver crises of the late eighteenth century, was caused by a shortage of the medium of exchange. In essence china ran a huge surplus and drained the silver currency out of Europe, creating deflationary pressure.


Guess its time to start exporting opium again
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#629 User is offline   ArtK78 

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Posted 2012-May-09, 08:32

View Posthrothgar, on 2012-May-09, 07:01, said:

Don't recall that this was part of the curriculum back when I was teaching Intro to Macro

The multiplier is far greater for government spending than for private spending.
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#630 User is offline   phil_20686 

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Posted 2012-May-09, 08:44

View PostArtK78, on 2012-May-09, 06:50, said:

It is basic economics that government spending has a larger stimulative effect on the economy than private spending tax cuts, when the economy is depressed.


FYP
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#631 User is offline   WellSpyder 

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Posted 2012-May-09, 10:57

View Postkenberg, on 2012-May-09, 04:56, said:

"real interest rate" means interest rate adjusted for (expected) inflation?

View Postphil_20686, on 2012-May-09, 06:48, said:

Yes

Except that the data are based on index-linked gilt yields so the "real" adjustment is for whatever actual inflation turns out to be, rather than for what people expect inflation to be. In other words, investors are saying that provided the gov't compensates them for future inflation they don't mind getting back slightly less than they have lent. The same phenomenon can be seen in the UK, and makes long-term low risk investment pretty tough!
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#632 User is offline   Winstonm 

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Posted 2012-May-11, 07:04

The question is what should be regulated.

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#633 User is offline   hrothgar 

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Posted 2012-May-11, 07:53

View PostWinstonm, on 2012-May-11, 07:04, said:

The question is what should be regulated.

Posted Image


Very timely cartoon given the big Morgan Stanley announcement

http://articles.mark...-morgan-stanley

There are direct allegations that Morgan Stanley incurred the loss because their trader made a series of large transparent trades which other folks capitalized on.
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#634 User is offline   Winstonm 

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Posted 2012-May-11, 12:33

View Posthrothgar, on 2012-May-11, 07:53, said:

Very timely cartoon given the big Morgan Stanley announcement

http://articles.mark...-morgan-stanley

There are direct allegations that Morgan Stanley incurred the loss because their trader made a series of large transparent trades which other folks capitalized on.


Exactly - J.P Morgan (corrected) had $2 billion in losses in credit default swaps, the insurance-like derivative product that is not regulated as either insurance or a financial product due to the Commodity Futures Modernization Act pushed through by Ron Rubin and signed into law by Bill Clinton.

I agree that there probably is too much minute regulation - but there is also too little major regulation. Rescinding of the CFMA and restoration Glass-Steagall would go far in correcting the ills that are inherent still in the banking industry.
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#635 User is offline   PassedOut 

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Posted 2012-May-11, 17:28

View Posthrothgar, on 2012-May-11, 07:53, said:

Very timely cartoon given the big Morgan Stanley announcement

http://articles.mark...-morgan-stanley

There are direct allegations that Morgan Stanley incurred the loss because their trader made a series of large transparent trades which other folks capitalized on.

Morgan Stanley and J. P. Morgan are different companies, even though both company names contain the word "Morgan."
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#636 User is offline   mike777 

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Posted 2012-May-11, 17:40

btw for the quarter JP MOrgan is expected to still make 4 billion after tax.

As for what the multipler is for govt spending, would love to see some articles that discuss that.
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Robert Barro: Stimulus Spending Keeps Failing

If austerity is so terrible, how come Germany and Sweden have done so well?


http://online.wsj.co...2019129156.html
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#637 User is offline   kenberg 

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Posted 2012-May-11, 18:55

View Postmike777, on 2012-May-11, 17:40, said:



If austerity is so terrible, how come Germany and Sweden have done so well?

http://online.wsj.co...2019129156.html



This has occurred to me as well. I imagine that part of the answer, for both austerity and spending, is that it depends on how it is done. It's hard to believe that squandering money is a good idea. Spending it may well be a good idea, if carefully done, and then it may look a bit like austerity.
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#638 User is offline   awm 

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Posted 2012-May-12, 01:12

Austerity isn't "always bad" -- the claim is that its a bad response to a recession caused primarily by lack of demand.

Countries like Germany and Sweden are in good budgetary shape because they were more fiscally disciplined in the relatively stronger economic times of the 90s and early 2000s. Neither was hit too hard by the current crisis (relative to the rest of Europe) and neither has responded with massive cuts to government services.

A better comparison might be Iceland vs. Ireland.
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#639 User is offline   kenberg 

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Posted 2012-May-12, 06:00

There was a particularly bizarre artical in the Washington Post yesterday (May 11)

http://www.washingto...er?dt=2012-5-11

The gist appears to be that teh Romney camp is actually encouraging discussion of stupid things Romney did while in high school to show that he is really just a loose and cool sort of guy. Of course then other things get brought up Romney doesn't recall leading a pack of guys to hold down a presumed gay classmate with long hair and giving him a haircut. Just slipped his mind, apparently. But the Romney folks mention that he did really clever jokes such as pretending to open a glass door for a teacher and distracting him so that the guy ran into the door.

So: Everyone out there who had been planning on voting for Obama but now, after reading this article about what a clever guy old mitt was fifty years ago in high school now plan to switch sides, please raise your hands.


The Romney camp squeezed out the gay guy but kept the bozo who came up with tis vote getting strategy? Did he get a raise?


By the way, if doing stupid things as a teenager qualifies one for the presidency, write me in. My teenage idiocy lacked the sadistic touch however, instead it was just stupid, so maybe it doesn't count?
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#640 User is offline   Winstonm 

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Posted 2012-May-12, 06:46

View Postmike777, on 2012-May-11, 17:40, said:

btw for the quarter JP MOrgan is expected to still make 4 billion after tax.


That still doesn't explain why de facto insurance products (credit default swaps) are not regulated as insurance, thus eliminating the need for capital reserve requirements, and why they are not regulated as a commodity, eliminating all transparancy.

When trades can cause movements in a $2T market but no one outside the firm is allowed to know the parties involved or the bets, and there is no reserve requirement to cover possible losses, how can anything possible go wrong?
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