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john p
Joined: 10 Mar 2006
Posts: 1820
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 Posted: Wed Aug 11, 2010 10:10 pm GMT Post subject: |
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I'm telling you, it's about Say's Law:
Current economic thinking seems to be a tug of war between the viewpoints of John Maynard Keynes and Milton Friedman. I've found a lot of traction in understanding what is going on in my readings of Jean-Baptiste Say (Say's Law). Say's Law isn't focused on simply printing money to move the economy, it is about increasing and balancing production and creating new products. "Products are paid for with products".
Think about the recent Internet Boom, that was a whole new universe of products that the economy could expand to. Because there was an initial shortage of skilled workers, they made a lot of money. As an industry matures, it settles. Templates are created and workers get paid like commodities. I think what we're seeing is a compression of wages as part of the settlement in product lifecycle maturity. Prior Booms were building our cities and modernizing infrastructure, building railroads, the newly created automobile industry, the airline industry etc. Because many of these investments have long life cycles from a production standpoint we have become bonded. However, the Eisenhower Infrastructure is on borrowed time. Also, at a certain point you just don't need any more stuff, and because stuff comes cheaply from China, what is it really that creates the incentive to work hard? Just working to maintain a boring lifestyle doesn't give people the get up and go energy to create the static head to push the economy upward.
Now think about the financial industry. They say the wealthy don't earn wealth, they invent it. Many have done so through new financial product offerings i.e. Mutual Funds, Financial Planning, Derivatives created in the Commodities Futures Modernization Act. Through creating new products, they invented wealth.
Without "Growth Industries" the rest of the industries mature and compress. This is how we get "Deflation".
We are a society that speaks about "Inflation" and "Deflation" as if we ignore the forces that make it happen. People think if you turn on the printing press you'll get inflation. Well, if there isn't any growth industries and we're sinking, printing money might just keep us afloat until the dead load of the debt sinks us. The "Dot-Com" Bubble was new growth in a new industry, so we got "Inflation". No new good ideas, no new products and things stagnate.
The lack in confidence is because people haven't a clue as to where growth potential is. |
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balor123
Joined: 08 Mar 2008
Posts: 1204
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| Posted: Wed Aug 11, 2010 10:51 pm GMT Post subject: |
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| john p wrote: |
Also, what do people feel will be the growth industries moving forward? |
Doesn't matter. It will be in India or China. And not just because they're cheaper. There's still a biotechnology revolution heading our way. IBM claims to be able to sequence a full genome for $100 within 10 years. That will make a big difference in quality of life but I think won't improve productivity much. Smart grid, alternative energy, and internet of things seem to be a big deal but not clear that they're revolutions like the internet or cars were. I believe that the big shift forward for the world in the next decades will be the mobilization of the rest of the world. That helps humans but not Americans.
Have you all seen this article btw?
[url=http://money.cnn.com/2010/08/11/news/economy/economic_collapse_GDP_unemployment.fortune/index.htm?section=money_latest&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+rss/money_latest+(Latest+News)]Is this finally the economic collapse?[/url]
| Quote: | | Lest our doom and gloom seem built entirely on technical measurements, what they boil down to is actually quite simple -- an idea about our country which dates back to 1835. Alexis De Tocqueville, author of Democracy in America, which was published that year, seemed to warn of this day when he wrote: "The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money." |
So true... |
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mpr
Joined: 06 Jun 2009
Posts: 344
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| Posted: Thu Aug 12, 2010 1:06 am GMT Post subject: |
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| balor123 wrote: | . Like any Ponzi scheme, it continues to work as long as only a small number of people try and tap that equity at the same time.
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Well in that sense any asset class at all is a Ponzi scheme.
| balor123 wrote: |
What determines prices is how the dumbest buyers spend their money and I'm certain that the dumbest ones are pushing the limits. When volume is back to pre-bubble days then we can talk about whether people are wealthier or have a high affinity for risk.
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You're probably right that the low volume means there is a disconnect
between asking and selling prices. However the theory of markets
would contradict your assertion about the dumbest buyers setting the
price - assuming that is they are not so dumb that they cant distinguish
a lower price from a higher one
| balor123 wrote: |
There was a politician on NPR this morning arguing that he wouldn't have voted for the bailout. A few callers were jabbing at him. One called him "unserious" because there would have been a serious depression - a depression! He asked how given this outcome how he could not support the bailouts? Apparently, no amount of money is too much to avert a depression and that's my fear - we're not making calculated cost vs reward decisions but rather just looking at the rewards. His point was that outcomes were unknown. |
Good for those NPR listeners - obviously a sharp bunch !
Who was this clown ? I mean these "well we dont know what would have
happened" arguments are really the last refuge of the scoundrel.
I mean when a fire truck pulls up to a burning house, you dont start
discussing whether they should put the fire out because
"we dont know what will happen" (it could start raining I suppose).
We know that fires tend to do burn houses down if left unchecked.
As for cost and risk/reward, I wont repeat my earlier posts about the
nature of fiat money. Note though that the govt spent on the order
of a trillion dollars support the system, and the Fed printed about
1.5 trillion. This is not a true cost in the sense that your thinking about it. |
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admin
Site Admin
Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston
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mpr
Joined: 06 Jun 2009
Posts: 344
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| Posted: Thu Aug 12, 2010 2:33 am GMT Post subject: |
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| john p wrote: | | I I've been thinking about Say's Law |
John, this is a good paradigm in the sense that eit gets you to focus on
the fact that the economy is at base a collection of goods and services.
However it has at least two big pitfalls.
First it completely ignores the issue of communication and coordination within the economy, or in other words issues like the availability of credit. The economy is meant to magically reach its full potential independent of things like whether we are using sea shells or a sophisticated banking system for transactions. But we know that the latter works better than the former.
Still its useful because it helps to realize that all these questions about
interest rates, bailouts, principle forgiveness etc. Are issues of coordination
and not of production of goods and services.
Second, the assertion that Says law implies that the economy reaches its maximal potential on its own seems completely unjustified.
I mean Says law is a tautology if you have an equilibrium but its also completely consistent with 0 GDP and everyone living in caves. The statement that GDP necessarily increases to its maximum potential is not true, and you can see with some simple thought experiments:
Imagine a closed economy (no exports or imports) where the whole population is very conservative. They only ever spend (including
consumption and investment) 90% of what they earn. (They all post on bostonbubble.com). Absent government intervention
such an economy will necessarily shrink by 10% a year.
In 10 years most people will be living in caves.
On the flip side the government can sustainably run a deficit of 10% of GDP per year in such an economy - they simply deploy the spare production capacity which is not needed to satisfy private demand. Assuming
they have a fiat currency their growing "debt" is just a book keeping
entry. This is basically a toy model for Japan. |
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mpr
Joined: 06 Jun 2009
Posts: 344
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| Posted: Thu Aug 12, 2010 2:47 am GMT Post subject: |
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Yes its unfortunate that the administration lied about Iraq, but I'm
not asking you to take their word for it.
I mean what do you call investment banks collapsing, AIG basically
going bankrupt, all kinds of credit markets freezing up.
Doesn't this count as visible flames ?
Even with the bailout the economy took a big hit, so something was
happening right ? I mean yes you can claim that we dont "know"
if it would have been worse without the bailout, in the sense that
this is a sentence in the english language. But the mechanisms
which would have brought about collapse are not a mystery -
companies cant get credit, they have to lay off workers, consumption
falls, and the cycle repeats. You have the Great Depression as an
actual example of this. What more do you want ? |
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balor123
Joined: 08 Mar 2008
Posts: 1204
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| Posted: Thu Aug 12, 2010 3:30 am GMT Post subject: |
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| Sometimes when there's a bad fire firemen will start fires ahead of the blaze so that it will extinguish itself once it reaches that point. There's admin's point about not trusting the messenger, which I think is a valid one, but I don't dispute that things would have been bad had no action been taken. In fact, I agree that it probably would have resulted in a depression. My point is that there are worse things than depression and varying degrees of depression. Sure we put out the fire in the house but we burned the city to stop the blaze. A trillion dollars is an insane amount of money. How many decades of stagnation do we have to suffer through now in order to avoid a few years of depression? |
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admin
Site Admin
Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston
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| Posted: Thu Aug 12, 2010 3:30 am GMT Post subject: |
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| admin wrote: |
I mean what do you call investment banks collapsing, AIG basically
going bankrupt, all kinds of credit markets freezing up.
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A crisis for investment bankers.
Credit markets freezing up could be a call to action if that is actually what happened (see below).
| Quote: |
Even with the bailout the economy took a big hit, so something was
happening right ?
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Sure, something was happening, and we know that in retrospect. What that something was is a separate question as is what countermeasures would be appropriate.
| Quote: |
But the mechanisms
which would have brought about collapse are not a mystery -
companies cant get credit, they have to lay off workers, consumption
falls, and the cycle repeats. You have the Great Depression as an
actual example of this. What more do you want ?
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How about (before the bailouts) an open letter signed by the heads of the majority of Fortune 500 companies (or something to that effect) stating that these conditions actually were materializing and that the economy was in serious jeopardy? We actually got the equivalent of that with the WMD charade, if I remember correctly. I wasn't particularly satisfied with the explanation of how credit had "frozen" as opposed to rates simply rising higher than what many had become accustomed to paying in recent years of very loose credit, especially when the "frozen" rates weren't higher than historic norms (I think).
- admin |
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balor123
Joined: 08 Mar 2008
Posts: 1204
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| Posted: Thu Aug 12, 2010 3:34 am GMT Post subject: |
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| In any case, I think you're missing the point. The speaker's point was that he'd rather have taken his chances with the unknown than saddle generations of our children with our problems. I am of the camp that inaction and poor actions from the Fed in the 30s caused and/or worsened the depression but the economy was much better eventually for it. Compare that to the Japanese for example, which never purged the debt and 3 decades later are are still at square. My preference would have been to steer into the waves rather than trying to outrun them. |
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mpr
Joined: 06 Jun 2009
Posts: 344
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| Posted: Thu Aug 12, 2010 4:38 am GMT Post subject: |
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| admin wrote: |
I wasn't particularly satisfied with the explanation of how credit had "frozen" as opposed to rates simply rising higher than what many had become accustomed to paying in recent years of very loose credit, especially when the "frozen" rates weren't higher than historic norms (I think).
- admin |
This is a distinction without a difference. The bottom line is that
companies would have had to lay off many more workers and many
more had gone under.
However, let me note that it wasn't just a case of higher interest rates -
though that would have been enough in the extreme: money market funds
had runs on them, auction rate security auctions failed. These are
"disorderly" events beyond an increase in interest rates.
I think interest rates were above historical norms, but actually
this is irrelevant. The point is that the increase was sudden enough that
it would have lead to a dramatic dislocation in the economy.
I'm not sure I can say much more to convince you; I think there is
almost a cross ideological consensus that what I am saying is right.
(Of course you can always find a few idealogical nuts who will say anything).
Balor: I'm not missing your guys point at all. What he advocates
would have lead to massive hardship and impoverishment for many people
probably for many years. It would have been a much worse legacy to leave
to our children.
In some sense, its a sad comment on how unhinged the US political system
is from reality that this kind of talk is now mainstream. |
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admin
Site Admin
Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston
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| Posted: Thu Aug 12, 2010 1:03 pm GMT Post subject: |
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| mpr wrote: |
I'm not sure I can say much more to convince you; I think there is
almost a cross ideological consensus that what I am saying is right.
(Of course you can always find a few idealogical nuts who will say anything).
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Like I said, what would have satisfactorily convinced me was an open letter from the heads of most Fortune 500 companies attesting to the exceptional gravity of the situation. It's very easy to claim that everybody agrees with you, but there was no effort to demonstrate this on the administration's part.
| Quote: |
In some sense, its a sad comment on how unhinged the US political system
is from reality that this kind of talk is now mainstream. |
What's sad is when people stop questioning the actions and claims of those in power and dismiss those who bother as "nuts" and "scoundrels."
-admin |
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balor123
Joined: 08 Mar 2008
Posts: 1204
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| Posted: Thu Aug 12, 2010 1:46 pm GMT Post subject: |
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To be fair, I don't think there was time to collect the data necessary to make a good decision. Asking Fortune 500 CEOs for letters would have taken days or weeks. Sometimes I think we forget that our leaders are not only human but live in cities with us, not some floating palace with a bird's eye view of everything. But that's just my reflection that we would have at least had a repeat of 1987.
In any case, I agree that had the bailouts not happened there would have been massive hardship and impoverishment for many people for years. That would have been temporary however! The bailouts have their consequences too. Not only did they cost a phenomenal amount of money but we lost the opportunity for meaningful reform or adjustments in the economy. The cost of the bailouts will be felt for decades! It's an opinion because it is hard to quantify the two options so I can sympathize with the supporters but I don't think that my stance is unreasonable either, if tough love. |
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john p
Joined: 10 Mar 2006
Posts: 1820
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| Posted: Thu Aug 12, 2010 2:13 pm GMT Post subject: |
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Somethings in the air, and man you guys are dialed into it. I believe you guys are getting a total feel for things. In the movie "The Blues Brothers", these two old guys saw this scrambling in the situation and said "Some Shit's going down Somewhere".
MPR: By the way, I love France. I had a Heineken on draught and these people on the sidewalk cafes were drinking out of little wine glasses. I asked for a larger size and I thought my hand gestures reflected a pint size. Well they came out with like a pitcher sized glass. It was an amazing buzz. I know what you're thinking "I'm so glad for you...", anyway I remember telling my wife, I'm as happy as a champagne bubble. I LOVE Paris, the south of France is absolutely amazing and being passionate about food, it was heaven for me....
Regarding you comment on Say's Law:
| Quote: | | First it completely ignores the issue of communication and coordination within the economy, or in other words issues like the availability of credit. The economy is meant to magically reach its full potential independent of things like whether we are using sea shells or a sophisticated banking system for transactions. |
You couldn't be more right. I guess what I'm trying to say is that when we have production and people buying stuff we still have those communication and coordination issues, you just don't recognize them as clearly.
Imagine a company that is in a boom cycle. People tend to get along and people who make mistakes are forgiven more easily and sometimes people without a lot of experience are handed the keys to the car. Now when the company is in leaner times, they can't afford as many screw ups, they can't carry as many patronage hires, etc. Bernie Madoff wasn't exposed when times were good; he was exposed when the market was going down. The sophisticated transactions and oversight weren't working and because the top line was going up and up and up nobody cared. It just goes to show you how unsophisticated we really are and perhaps how we maybe ought to deal with the world as it exists, meaning let's get back to more simplier transactions that are built on actual goods and services and purge out the casino nature. I say let some focus on the transaction infrastructure regulation and let others focus on moving the top line upward (Say's Law). I get that we're in a modern age, but human nature is not as sophisticated as what our technology is capable of. It's like we chopped off our fingers playing with power tools.
I want the wealth trapped in the derivatives atmosphere to trickle down to Main Street. I read recently that the FED is lending the banks for almost zero interest and instead of the Banks lending to companies that would invest and grow jobs, the Banks are actually buying long term US Treasuries where they get a 3-4% yield. You'd have to be a genius to even think that was possible. I think the brilliant people need to begin to learn from those that have a family budget and need to align their values around clothing that lasts, food that is good for you, and cheap hobbies that bring you closer to family and friends.
Baylor:
I know you're from Texas. The Governor doesn't want the State Bailout Money because the Federal Government is putting strings attached i.e. mandating that whatever money they supply for Education will be covered in future years. Texas's State Constitution has two important relevant laws: First, ONLY the State Government determines the Budget Terms, and second, that one Legislature can not make decisions for a future Legislature. I understand how culturally this may not align (making decisions for a future generation), however Bush did it when he cut taxes during a War.
MPR and Baylor:
Why I think aspects of Say's Law are relavent is that while on the one hand, Democrats like Krugman say "We need stimulus big time to keep the current amount of employment or otherwise the slow down will put people on the street", and you've got Ronald Reagan's disciples saying "No, the way you grow the economy is cutting taxes and let the jobs creators have more ammunition". a period just to catch your breath (even though I am the KING of runon sentences).... It doesn't fucking matter which path you take, if there is no new industry out there the economy won't move. Let's say an IT Professional was making $175k per year during the Internet Bubble, and today because they have software and templates to do a lot of that specialty work, they can get a guy to do it for $75k, do you actually think that a company that has to pay less taxes is just going to pay that guy an extra $50k? Now let's say that we stimulate the economy by printing money, you get what we're currently seeing which is the Banks would prefer the 3-4% return on Long Term Debt than to Invest in the private sector. I mean they're basically fucking saying, no I don't need a ride in your car, I'll walk instead.
Baylor:
I get that growing the emerging markets is the new explosion of growth. I believe that what we need to do is do what Krugman is saying in creating a Stimulus, but be strategic about it. Just giving it to the Banks so they can sit on it makes no sense. If it does go to international corporations it will go to where the growth is (overseas). What they need is a coordinated effort to create a growth industry in a local market where it is difficult for foreign companies to compete. For example, if they pumped the money into infrastructure or gave subsidies for tearing down old buildings and rebuilding with new energy code compliant ones that creates jobs and we don't have to wait for someone to build an electric car that works, because we already have the technology and know-how to build efficient buildings. And I know for sure that you guys aren't happy about the overpriced junkboxes. What if we got to tear down these junk boxes and build new cool houses or cool neighborhoods. Do you think a contractor from India is going to come to Boston and take that job away? In all the other scenarios the money just goes out the window to the emerging markets.
Obviously, I am an architect so this is just one example that is in my view and this could be installing a new electric grid or whatever... |
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john p
Joined: 10 Mar 2006
Posts: 1820
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| Posted: Thu Aug 12, 2010 2:19 pm GMT Post subject: |
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| Oh, and last night I cut up some pineapple and added the Vodka. I'll let you know how it comes out after the weekend after it has a little time to infuse. |
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admin
Site Admin
Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston
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| Posted: Thu Aug 12, 2010 2:23 pm GMT Post subject: |
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| balor123 wrote: | | To be fair, I don't think there was time to collect the data necessary to make a good decision. Asking Fortune 500 CEOs for letters would have taken days or weeks. Sometimes I think we forget that our leaders are not only human but live in cities with us, not some floating palace with a bird's eye view of everything. But that's just my reflection that we would have at least had a repeat of 1987. |
OK, that's plausible. It might actually still be beneficial even now for those in office to cultivate such a letter as it would provide concrete evidence of consensus and deflect some of the public's anger. It would still be an argumentum ad populum, but the sources would at least be more credible.
Then to re-answer mpr's question, assuming this to be the case, for you to convince me that the situation was that dire would also likely take days or weeks of pouring over data. You gave some plausible starting points, but they need to be backed up by (extensive) numbers. I am by no means suggesting that you attempt this as I am sure you have better things to do with your time, I'm just answering your question about what it would take to convince me. And to clarify, I'm not arguing that the situation wasn't dire either, just that I don't trust the messengers.
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