Wednesday, November 10, 2010

More gibberish from the Toronto Star

I don't know why I read the Toronto Star, I never seem to get anything from it other than relentless rage that motivates me to write on this blog. And that's what this is: another rebuttal to the Keynesian madness that is the Toronto Star's economic view.

Today's subject is an opinion piece by Arthur Donner and Doug Peters. One of these men work at the TD bank, the other is an economic consultant. Let's start with the very beginning sentence:

Canada is minor player in an economic policy drama being played out in Europe and the United States, where the main actors are governments and central banks.

In a world of increasing demand for natural resources like oil and gold, I don't see Canada as a minor player. We may be quieter than the louder actors, but that's just Canada's style.

Other players of note are consumers and businesses, with the financial sector occupying a key role in how the outcomes occur. And one would hope that this drama will dominate leaders’ attention at the G20 meetings this week in Seoul, South Korea.

I would think that consumers and businesses are the only players. Government is only an entity made up of individuals; without private wealth there can be no government services.

I hope no drama dominates leaders' attention at the G20. I hope common sense dominates their minds. Particularly the mind of Harper who should be allying this country with China while Japan cuddles up to the U.S. The U.S. will lose this currency war and we're apt to be dragged down too if we don't alter course now.

There is one central question: Can western economies grow at a sustainable growth rate and, at the same time, create meaningful numbers of jobs?

Absolutely we can. Just get government out of the way and return to sound money policies. If we used something other than debt-based paper as money and stop squandering billions on the federal level, we'd be okay. It'd hurt at first, but in the long run, we'd be okay.

Obviously a positive outcome requires major private sector participation. But what will spur businesses to invest and hire? Our answer is: only increases in total demand worldwide.

The entire recovery depends on the private sector. What will spur businesses to invest and hire will be a complete lack of interference from the government. Taxes and regulation don't help either. "increase in total demand" = lame justification for excess spending and loose monetary policy. It didn't work in the 30's, it didn't work in the 70's, it hasn't worked in Japan and it hasn't been working since '08.

Since the Great Recession ended in the middle of last year, deleveraging (paying down debts) has been the main priority of most Americans, Canadians and Europeans. But when everyone in the private sector simultaneously saves to repay debt, this weakens the economic recovery.

I know that "officially" the recession ended in June 2009, but let's discuss paying down debt.

Obviously paying down your debt is never a bad thing, in fact most sane economists will encourage it. Does this mean there's less money floating around for people to spend? Perhaps, but businesses and consumers that spend and spend without worrying about their debt will never lead to sustainable economic growth, let alone a sustainable system.

And spending doesn't drive economic growth! Going into debt leads to prosperity? That's bat-shit crazy.

When companies deleverage, this means they are under-investing in capital equipment and in new jobs. When households reduce debts, they constrain their expenditures on consumer items as well as housing.

They are three sentences above this. I could write absolute gibberish for now on and it would make more sense than what was just written above.

It is never a wrong time to save, and you can never save too much. Entrepreneurs can't rely on debt to finance their business and households can't continue going into debt forever. Since consumer spending doesn't drive economic growth there's no reason for them too. In fact it'd be better if they didn't.

The U.S. recovery is weak because there is too much saving at exactly the wrong time.

The U.S. recovery is weak because the Obama administration and the Fed keep getting in the way of the market correction.

The new frugality in the private sector also explains why government spending has been the only positive game in town since the financial crisis spread from the United States to other countries in 2008.

The government doesn't have money to spend. It only comes from two sources: the private sector and inflation.

The policy dilemma for governments and central banks is quite obvious. How do you stimulate an economy that is bent on saving to reduce debt?

It is quite obvious: get the fuck out of the way!

Despite the fact that high unemployment is a major problem in the United States, Canada and Europe, there is adverse public reaction to increases in government debt and indebtedness. As a result, many western governments (particularly those facing capital market problems) are “talking up” their deficit reduction strategies.

It should of read "in spite of..." because... well, yeah - obviously there's adverse public reaction to increasing debt. Why wouldn't there be?! Unless you're the one loaning out newly printed money that must be paid back with interest, then there is no joy in indebtedness.

However, this is exactly the wrong time to become preoccupied with high government deficits. Fortunately, the United States is less caught up in this hysteria, but the British coalition government recently announced a major austerity program.

And we'll see which country is better off in the long run. It probably will be the U.S. because of the real Tea Party and the resurgence of classical liberal ideas.

When interest rates are close to zero (as they are in the U.S., U.K. and the euro area), monetary policy, while not completely ineffective, is close to toothless.

Toothless? Ineffective? I'll repeat my previous term: bat-shit crazy. Because that's what it is. Low interest rates fueled the housing bubble and now the U.S. is doing the same thing with Treasury bonds. I can't imagine this turning out well for the rest of the world either; it's a race to the bottom of currency devaluation.

Economists describe this situation as akin to a liquidity trap. Yes, further quantitative easing (QE — printing money through expansion of the monetary base) helps in a liquidity trap but QE is no substitute for a vigorous new round of fiscal policy help.

What's that line from the Keynes vs. Hayek rap?

"Your so-called “stimulus” will make things even worse
It’s just more of the same, more incentives perversed
And that credit crunch ain’t a liquidity trap
Just a broke banking system, I’m done, that’s a wrap."

That pretty much sums it up right there.

But wait there's more!

We think that Bank of Canada governor Mark Carney was cagey in raising the Canadian overnight rate to 1 per cent in October. The increase hardly changed the low interest rate structure in Canada and likely was not a major deterrent to spending or investing. But it did provide the bank with the ability to spur the economy by lowering interest rates later, should it need to do so.

Who cares!? Mark Carney is Goldman Sachs scum and nothing will stop the Canadian housing bubble from bursting! Ha-Ha-Ha-Haaa!!!

There is much to learn from Japan’s recent experience with a liquidity trap. Japan’s economy fell into a period of prolonged stagnation in the 1990s despite the presence of near-zero interest rates. Since interest rates could not fall below zero, Japanese monetary policy proved nearly impotent, as is the case today in the United States.

There is much to learn -- over ten years of failed policy in Japan has made the case crystal clear: cutting interest rates will prolong the depression. Stimulus, bailouts, "quantitative easing" will only worsen the situation and make it that much longer.

In Japan’s liquidity-trap case, large government deficits didn’t translate into either high inflation or high interest rates. The analogy with the U.S. may not be perfect, but it similarly implies that high U.S. government deficits will likely not escalate long-term bond rates because of fears over higher inflation. Indeed, the risks are entirely in the opposite direction, a deflation risk and low interest rates.

That's correct, the U.S. government deficits will not escalate long-term bond rates, but the Fed printing money will. That's what QE2 was.

And the risks are not in the opposite direction. There is no deflation risk, hyperinflation is the name of the game. I can see deflation in some areas, but it's hardly worth noting. No one cares if iPods are $20 when everyone is trying to get their hands on food that keeps rising in price. Unless you buy your food before hand, or grow it. Then you can spend all your silver on an internet connection.

John Maynard Keynes pointed out in the 1930s that the most relevant policy instrument for creating and sustaining jobs in a liquidity trap is fiscal policy. Unfortunately, there is little hope of seeing a new round of fiscal stimulus in any of the G7 countries.

I stopped reading when I saw the name John Maynard Keynes. Everything that man wrote has been debunked. You can read it here for free.

In a world awash with too much savings, the governments of the large economies need to run large fiscal deficits until the private sector (consumers and companies) are ready to spend again. Only when private sector spending is sustainable should governments stop running budget deficits.

Canada and the U.S. don't have high personal savings rate
so I don't know where Donner and Peters get the idea that there are "too much" savings. It is our savings that encourage private investment. Taxes and low interest rates discourage savings. One does not need to be an expert in economics to realize this.

When western economies are operating at strong and sustainable growth rates, deficits will automatically start falling and cuts to government spending will not hinder a continued economic recovery. Until that time, cuts to government spending will only delay the economic recovery.

I don't think I've ever witnessed deficits that automatically fall. But I'm young so what do I know?

Well I do know that cuts to government spending actually promote economic recovery, even if the short-term environment is less than favourable. One can look at the Great Depression of 1920-21 to prove this. I'm sure there are other examples where prolonged government interference inhibited economic recovery.

The G20 summit meeting this week is important with respect to the outlook for the global economy. Considerable attention will, no doubt, focus on the American central bank’s recent announcement of a second round of quantitative easing, which will likely weaken the U.S. dollar against the currencies of most of its trading partners.

I hope by the end of the week China will announce that they will no longer finance America's debt and use force against the American people. This force will be in the form of a dictatorship headed by Ron Paul.

But we hope that quantitative easing and currency issues do not sidetrack the leaders from addressing the real fundamental issue: The global recovery is weak because of too much savings and too rapid a pace of debt repayment by consumers and businesses.

Flip that sentence and we're good. We hope "too much" savings and debt repayment doesn't sidetrack the leaders from addressing the real fundamental issue: The global recovery is weak because of quantitative easing and all the other moronic things the U.S. is doing.

(and shouldn't it be written "too many savings" rather than "too much"?)

Canada -- let's not follow suit. What we need are some good Canadian economists in government. The kind that are well-read. If Canada returns to a gold standard, then the rest of the world will follow suit and the quicker we can get on with things.

I have a bad feeling that Finance Minister Flaherty is taking advice from these Keynesian hacks.


  1. Caleb excellent article as per the usual, but this?!!?
    "I hope by the end of the week China will announce that they will no longer finance America's debt and use force against the American people. This force will be in the form of a dictatorship headed by Ron Paul"

    ..just seems a little out of character from your writings. I understand the frustration which could lead to this result. Heck I think it preferential to the current paradigm.

    I'm a strong defender of Hoppe's Democracy, the god that failed, yet I'm not sure if this would be the best approach for a successful implementation of Paul's ideals.

    The concern is over forced libertarianism which may have unintended consequences - if the 'sheeple who doubt' - do not experience the horrible consequences of current fedgov policies, whether here in Canada, or the U.S.

    Rather than creating a grass roots spontaneous order of Paul values; any and all nails thrown on the road by statist saboteurs would bombast from the media as being the fault of Paul's policies.

    In a sense I'm reminded of a line I quote.
    "Liberty lies in the hearts of men and women; when it dies there, no constitution, no law, no court can save it.... While it lies there, it needs no constitution, no law, no court to save it.

    In our current state of affairs I'm convinced that at the moment it's better that we have RP at the sidelnes, albeit front row seats, throwing barbs into the colisium that is fedgov rather than setting him up as the gladiator with a red bullseye on his back.

    I fear this rigged game is even to much for a man with whom I deeply respect.

  2. It was meant more as a tongue-in-cheek comment than anything serious. Although I don't support the initiation of force, if the Chinese ever did invade the US and establish a libertarian government in order to create wealth and pay them (the Chinese) back... in the odds of that happening, it'd be hard not to support the Chinese. Consider it a "Blockian" lesser-of-two-evils choice.