Monday, September 17, 2012

The Plan, American version

Bernanke announced that the Fed will print up $40B a month and buy mortgage-backed securities with it. The European Central Bank is doing essentially the same thing, printing up money to buy the bonds of its laggard members at their nominal value.

It won't work here either. What happened in 2008 is what should have happened in 2008. The FIRE sector was ridiculously overvalued and should have been liquidated. Murray Rothbard explained it all in 1963 and it's no less true today. Where the Fed thinks they have outsmarted the old Austrian model is in providing a secondary market for the supply side as opposed to merely stoking demand. They will cover up the hole in nominal wealth by printing money and buying the toxic assets and stowing them on a balance sheet somewhere, and wait for the economy to grow us out of the hole in the meantime.

The problem is that the Fed is continuing to pour false savings into the same errors that real savings were sucked into from the beginning. Liar loans and 4/2 houses miles away from economic centers were never worth as much as the market said they were. Now that the iron laws of supply and demand are reasserting themselves, we're much poorer than we think. The aggregate demand which the Keynesians are banking on is shot, as consumers continue to labor under massive debt loads and declining real wages.

The hoped for growth will not happen. The false savings will outbid the real savings for capital, and the malinvestments in housing and finance will continue, not to mention the increasing tax and regulatory burdens on US business and downward pressures on US consumption. So the private sector continues to sit on overseas cash and buy Treasury bonds yielding zero real interest. The heavy hand of the Fed and foreign central banks of net exporting nation is felt there as well, buying up T-bills from the secondary market so they can continue to honor the US government's checks. The countervailing motivation is for the Fed's open market policy to chase investors into higher-yielding corporate bonds and equities. Again, it won't happen because the private sector is not spending, waiting for the next fiscal or monetary shoe to drop. The whole scheme is a ridiculous house of cards.

If, $2T later, all these markets (FIRE, student loans, sovereign debt) still require so much intervention, isn't economic reality trying to tell us something?

Wednesday, September 12, 2012

Isn't this kind of a big deal?

Historically, I thought when your ambassador gets shot in the head and dragged into the street in front of a picture-taking rabble, there had to be some pretty serious grovelling unless you wanted a few cannonballs lobbed at your border towns. So far, this is apparently all the Barack Hussein administration can muster in the way of outrage:
Tommy Vietor, a spokesman for the National Security Council, said "it would be premature to ascribe any motive to this reprehensible act," but other U.S. officials said they couldn't rule out the possibility of a link to al-Liby's death or the Sept. 11 anniversary, saying the attack was too sophisticated to have been spontaneous...

"While the United States rejects efforts to denigrate the religious beliefs of others, we must all unequivocally oppose the kind of senseless violence that took the lives of these public servants," Obama said in a statement.

Vice President Joe Biden, meanwhile, insisted the U.S. wouldn't be driven from the country.

"We never have been, and we never will be, run off, period," Biden said at a campaign event in Dayton, Ohio. "That's not who we are."

Secretary of State Hillary Clinton said Wednesday that the attack "should shock the people of all faiths around the world."

"I ask myself, how could this happen? How could this happen in a country we helped liberate, in a city we helped save from destruction?" she said. "This question reflects just how complicated and, at times, how confounding the world can be."

Never fear America, with these gimlet-eyed practitioners of realpolitik at the helm!

The media, for its part, doesn't seem to view this as much of a game-changer, other than to ponder the irreparable damage to the Romney campaign for their reaction to Libyan nationals executing the US's top emissary in his own (apparently unguarded) consulate.

The background of course is a long history of US meddling in places it doesn't understand and does not belong, and a film made by an ethnic group with a history of militant grievances against Islam (whom we have allowed to settle here in substantial numbers, along with Libyans).

The US has sent gunboats to the Libyan coast, doubtless to support troops in another planned foreign occupation. Of course, foreign aid will not be cut off, Libyans will not be deported, and well-intended, naive and muddled bureaucrats will continue to be assigned to Libya.

"The State has suddenly and quietly gone mad. It is talking nonsense and it can't stop." --G. K. Chesterton

UPDATE: no sympathy from the Russians:
Yevgeny Y. Satanovsky, president of the Institute of the Middle East in Moscow, said American leaders should not expect “one word of sympathy” from their Russian counterparts.

“It is a tragedy to the family of the poor ambassador, but his blood is on the hands of Hillary Clinton personally and Barack Obama personally,” Mr. Satanovsky said. He said Russian warnings against intervention in the Middle East came from the bitter experience of the Soviets in Afghanistan.

“You are the Soviet Union now, guys, and you pay the price,” he said. “You are trying to distribute democracy the way we tried to distribute socialism. You do it the Western way. They hate both.” He said dictators were preferable to the constellation of armed forces that emerges when they are unseated.

“They lynched Qaddafi—do you really think they will be thankful to you?” he said. “They use stupid white people from a big rich and stupid country which they really hate.”

Saturday, September 8, 2012

The Plan

From Tyler Cowen's Marginal Revolution.

Long story short, the ECB will print money to purchase its less responsible member-states' bonds to keep borrowing costs low and banks' balance sheets positive. This is basically what the Fed did in 2008 when the banking system realized that all those $300K houses out there weren't actually worth $300K. So they printed $2T to buy up all the worthless MBS's and other financial instruments so banks wouldn't have to show that they were insolvent. The Fed is still doing this with USG bond purchases. I read somewhere that the Fed purchased 60% of UST's in 2011, which is why the government is essentially being paid to borrow money. Krugman thinks that's great and from the taxpayer's perspective, he's right.

The new money is "sterilized" per the linked article through complex transactions designed to keep the new money from flooding the economy and showing up in far higher real prices. These methods include just keeping the assets stowed on the central bank's balance sheet, paying higher interest on the member banks' own deposits with the central bank, and requiring that the assets be repurchased when, presumably, the banks' balance sheets are stronger.

Mainstream economists all seem to agree it's A New Era and this can be done. The goal is apparently to paper over the liquidity shock until the real economy strengthens and the new money can be absorbed without sparking inflation.

Instinctively, this doesn't seem sustainable or we surely would have figured this out by now. The Austrians would say that we need to think forward to all possible effects from the central banks' actions. My stab at this would be that productive sectors continue to be starved of capital and outbid for resources by the unproductive sectors. The real economy continues to hollow out as productive sectors fold and labor/capital stays in subsidized industries like health care and education, FIRE sectors which should have been liquidated in 2008, public works, etc. Demand is maintained but on the supply side, interest rates do not reflect real world events like no outlet for culinary school grads, China's used up all the concrete, consumers are tapped out, etc. (Sorry--that's the best I can do on such a complex issue). So the central bank has to continue its easing to maintain the structure of production in a nominal state as if the real world events weren't happening.

At this point, economic reality should hit. Investors should dump the government bonds and other instruments knowing that current yields will never be positive in real terms. Rates jump sharply to reflect the reality, the sectors coasting along on continued artificially cheap credit go up in smoke, asset values collapse, and we are back where we started. What does the central bank do then, print up quadrillion Euros/dollars?

BUT, this hasn't happened and according to mainstream economists, it doesn't have to. They claim their models are good enough and that they can keep demand up without inflation. We seem to be muddling along without $10 bread so far, and sovereigns all over the globe are still being paid to borrow money.

So, what am I missing? Do the central banks really, finally have it all figured out?