Jim's Blog

GDP is an ill defined quantity, for it counts cars produced, official credit ratings produced, and regulators producing regulation.  With the best will in the world, it is hard to say how it is changing, and lately we have been seeing some pretty bad will.  Attempting to calculate GDP is worse than adding apples to oranges, it is adding apples to moonbeams.

Supposedly GDP is growing, and growing fast – despite the fact that everyone is feeling poorer, and private sector jobs are declining.  An amazing productivity increase, largely reflecting amazing productivity improvements by government and quasi governmental employees.

So let us look for a different measure:  Taxable retail sales.  Which are stagnant or down.  Population keeps growing, but they are buying less stuff, in part because they are being taxed more.

TheMoneyIllusion nicely summarizes the financial reform legislation

I can’t see how it addressed ANY of the major causes of the 2008 fiasco. But easily the most inexcusable aspect of the bill was that it didn’t even address Fannie and Freddie. People excuse that on the basis that there is a lot of political support for F&F. But if you can’t reform them right after a $165 billion taxpayer bailout, when will they be unpopular enough that we can address their flaws? …

And no ban on sub-prime mortgages? I thought that was the cause of the crisis.

He misses, however, the biggest failure of the financial reform legislation – that the NRSROs are still in business, rather than in jail.

The government has decided to not reform the NRSROs – because any reform, we are quite truthfully told, would put them out of business.

In other words, their business is completely dependent on corruption and gross improprieties that have cost the taxpayer a trillion, possibly trillions.

Indeed, the regulations that Lawrence White complains about look very much as if they were passed to keep the NRSROs in
business.

As Lawrence White tells us (from behind a paywall):

By means of the high ratings that they awarded to subprime mortgage-backed bonds, the three major rating agencies—Moody’s, Standard & Poor’s, and Fitch—played a central role in the current financial crisis. Without these ratings, it is doubtful that subprime mortgages would have been issued in such huge amounts, since a major reason for the subprime lending boom was investor demand for high-rated bonds—much of it generated by regulations that made such bonds mandatory for large institutional investors. And it is even less likely that such bonds would have become concentrated on the balance sheets of the banks, for which they were rewarded by capital regulations that tilted toward high-rated securities. Why, then, were the agencies excessively optimistic in their ratings of subprime mortgage-backed securities? A combination of their fee structure, the complexity of the bonds that they were rating, insufficient historical data, some carelessness, and market pressures proved to be a potent brew. This combination was enabled, however, by seven decades of financial regulation that, beginning in the 1930s, had conferred the force of law upon these agencies’ judgments about the creditworthiness of bonds and that, since 1975, had protected the three agencies from competition.

Abengoa SA was offered a $1.45 billion loan guarantee by the U.S. Department of Energy to build a 250-megawatt solar plant in Arizona, and Abound Solar Manufacturing was offered a $400 million loan guarantee toward two plants where thin-solar panels will be manufactured.

The guarantees through the Recovery Act and other measures are expected by the awardees to create more than 5,000 jobs, according to a statement from the White House.

Government guaranteed loans usually wind up being repaid by the government. It is just a way of keeping expenditures off today’s books. So this works out as $370 000 per job.

But in fact the impact on jobs, and green energy, will probably be negative, as the firms that actually create jobs are less well connected, and will know better than to attempt to compete with a business that has such government favor.

The greatest limitation on the economic liberty of Chinese was capital controls.  Recently the party took a big step away from capital controls by allowing ordinary Chinese to buy and sell gold as an investment.  As Europe and the US moves towards capital controls, the party continues to move away from capital controls.

The Central Bank of China has announced:

Starting from July 21, 2005, China has moved into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies.

It still “managed” but in the west, everything financial is managed. We have not had anything remotely resembling a free financial market since Basel.

As I write this, Spain just ran out of money.  Presumably the European central bank is going to print up a whole lot of fresh money and bail them out, if it has not done so already.  If they are not swiftly bailed out, there will be a run on the Spanish banks, and the Spanish deficit will be instafixed as the government loses the ability to pay most people.

The underlying crisis is, of course, that the welfare state is broke.  Greece is more broke than Spain, Spain more broke than Germany, Germany more broke than the US, but all the major governments are in a very similar hole.

So can we print our way out the crisis?  So far, printing more money has been highly successful, but printing fresh money in such huge amounts is giving everyone an uneasy feeling.  Will it work forever?  Can it work forever?

Printing more money will eventually lead to inflation, other things being equal, but of course, other things are not equal.  We are seeing deflation, not inflation.

The value of fiat money is speculative.  It is valuable because people think it is valuable.  Properly managed, fiat money is bubble that never bursts.  Improperly managed, it bursts, and people start using gold, whiskey, ammo, and dried beans.  With more and more fiat money being issued, and the value remaining high, we are seeing bubble behavior.

Hyperinflations start off in series of abrupt bursts.  People notice that not only are prices rising, but that goods are getting short.  There is a mad rush to unload money and load up on goods.  For a little while, money becomes unspendable.  After a while, normality returns, but with goods at much higher prices.  Prices remain fairly stable for while, the government continues to issue lots of money, and then there is another burst.  After this happens several times, inflation starts to become continuous and extremely rapid, and people stop using the fiat money.

So the first hyperinflationary burst, if it happens, which I rather think it will, will rather sudden and shocking.  The warning will not be high inflation, but high inflation with shelves emptying.  If the governments then start balancing their budgets by laying off civil servants, and cutting civil servant pensions, then we will return to stability – at a substantially higher price level.  If, on the other hand, deficits continue, another burst will come soon after the first.