gregor: ignoring energy - the hollow keynesian/austrian debate

[c1ue]

Re: gregor: ignoring energy - the hollow keynesian/austrian debate

You must allow credit contraction to take place (and allow the corresponding liquidation in asset prices and also realize the debt impairment, as bankrupcy proceeds we will get our debt restructuring through market forces as Hudson has detailed in one of his audio interviews with EJ on this very site) Think of this as FIRE deflation.

I agree credit contraction must take place, but I absolutely do not believe it will ever happen except via inflation/hyperinflation.

As 'nihilist' pointed out - whoever or whichever political entity attempts this is going to be crushed like an ant at the polls; 90% plus of all those people out there whose pensions, savings, annuities, etc etc are destroyed in the process are going to vote with their fists.

SIMULTANEOUSLY, we must provide bottom up stimulus. (I've talked about how to do this earlier, along how this would correct the entitlements disaster). The key factor is that for some people this will be survivial money. But for people with good incomes/fiscal situations, this windfall provides a VERY necessary means of stimulating VC.

I fear that I do not agree with EJ on this issue. VC has its place and has benefits, but as Andy Grove pointed out - creation of new industries still doesn't create jobs.

So long as the taxation, housing, health care, and other FIRE boosted costs remain high - it is irrelevant except for the few core technologists in terms of employment.

Putting up import tariffs in turn to prevent this also has its downside: incentivizing domestic inefficiency via subsidy.

From my view, attacking the FIRE problem is at the core of how to return to a middle class society.

Private bank credit needs to die, and be replaced with something akin to Milton Friedman's 100% reserves banking concept. All loans are EQUITY loans, not debt loans.

I don't see how equity loans fix the problem. Debt loans worked for centuries - what screwed it up was removing the bank's penalty for making a bad loan both via TBTF support (later) and via securitization (first). Conversely removing both of these constructs seems an obvious fix.

We need to employ George Soros' "covered bond model" to return the housing market to private sector funding once again, and eliminate the role of the state in supplying asset price support.

Again, I do not see that the form of home loan is the issue. I see the issue is as Dr. Michael Hudson notes: the switch from property taxes as the primary form of state/local/municipal government income thus freeing up more cash for loan service.

The problem now isn't just TBTF and securitization - it is the prices of homes.

High priced homes = high labor costs = lower world labor competitiveness = no jobs.

The removal of government subsidies for home ownership would be nice too, but again it is a consequence of the FIRE game and not a driver.

Like income tax dies, corporate tax rate goes to 15%-25% on Net profit, period.

I don't disagree, but I will note that the only criticism of higher corporate tax rates which I can agree with is that the multinationals will just play more games to reduce their apparent profit in the US.

Thus a high corporate tax rate just handicaps domestic and smaller businesses vs. the MNCs.

Is this a good thing?

A carbon tax as EJ describes is also a necessity, he has detailed it very well and I'm not going to repeat it here.

I may be recalling incorrectly, but my understanding is that EJ believed a carbon tax was going to happen - NOT that it is a necessity.

And for the record - I would support having a tax, whether on gasoline or whatever - for the purposes of intelligently developing alternative energy.

I would not support throwing money at the problem - which is what is happening with existing alt-E programs.

Until a clearly articulated goal is set forth in terms of energy generation - as opposed to a negative carbon goal - there is no reason nor benefit to such a tax.

Property tax would have to be a national affair (with state revenue sharing, of course). It would only be re-indexed for owner-occupied housing when a sale takes place (so as to not place a confiscatory burden on "a man's castle". This ONLY applies to a single "Legal residence" not vacation or second, third, or fourth homes (these would be treated as "rentals" for all intents and purposes). For rental and commercial, the assesment would be indexed annually and whenever a sale takes place.

I disagree completely. The entire problem with Proposition 13 and its brethren is that you inherently distort the housing market via the cash flow subsidies that accrue over time.

These subsidies are a significant factor in driving up housing prices.

Systemically the only way to keep housing prices lower is annual assessments of housing price worth AND a discernable taxation level.

We would have to adopt the British model of "Loser Pays" for civil cases. That's the only legal reform we really need.

For the Criminal Justice system, tri state logic needs to apply (tri-state logic is optimal if you didn't already know). Three verdicts are possible Guilty, Not Guilty (double jeopardy applies), AND, NOT PROVEN (double jeopardy does not apply).

That is one way.

Another way is to change the legal system so that both prosecution and defense are primarily charged with discovering the truth. Penalties apply to EITHER side if any attempt to distort or conceal the truth is demonstrated.

Similarly there should be contempt of court charges for judges as well.

For Political reform, please see this (sorry FRED for the ZH link, it is necessary) and please observe the 100% fee on private campaign contributions (this is the "WINNER, WINNER, CHICKEN DINNER" of campaign finance reform).

I disagree with this also. Just because you put a up tax and redistribute does not mean the original big spender doesn't still have a massive advantage over the rest.

Secondly this doesn't do anything about 'soft' money - ads by 'nonprofits' which happen to agree with specific candidates.

It would be far more productive to ban all private money for campaign purposes period.

If some rich person wants to blow it all on campaigning, more power to him so long as said money was at least earned by him.

But of course it is unfair to just pick on what you wrote.

From my view, a 50% reduction in purchasing power is the minimum 'crash' that we'll see. The problem is that accompanying this will be another 20% reduction in average living standards.

The combination of slashing savings in half (along with the debt) and the loss of the dollar reserve currency/deficit spending/trade deficit portion of the US standard of living will mean massive political and social upheaval.

And from that - there can be no prediction. An economic Cincinnatus might spring up, but more likely a fascist.

[Fiat Currency]

Re: gregor: ignoring energy - the hollow keynesian/austrian debate

... From my view, a 50% reduction in purchasing power is the minimum 'crash' that we'll see.

Jim Richards agrees with that as I posted over here

[dogster]

Re: gregor: ignoring energy - the hollow keynesian/austrian debate

A lot of what I happen to read focuses on what should be done now with regard for the US economy/unemployment/recovery from recession/debt bubble. Gregor summarizes the two arguments: stimulus or austerity and says neither is correct.

So what is the best answer? It will surprise me if I find the best answer on itulip, but why not give it a try.

Productivity has been growing in the US at about 2.5%/year for quite some time now The problem with productivity growth is that it leads to wage share erosion, as predicted by the Goodwin model. Wage share erosion is further exasperated by inflation.

if u = wage share = wL/paL, then du/u = dw/w - dp/p -da/a, where w is wages, a is productivity and dp/p is inflation.

George Selgin, an Austrian economist from the University of Georgia in the US, has been advocating a money policy of gradual deflation to mitigate growth of productivity effects.

I have run simulations using the Goodwin model to compare inflationary money policies with deflationary policies and posted the results here and here.

Rising energy prices are a deflationary pressure, but not enough to cause the global finance crisis. To deal with the impending depression I suggest:

Unemployment will hit 30%, the Dow will go below 4000. When that happens, this should happen:

1. The Fed should raise interest rates to stimulate savings and investment;

2. The treasury dept should print up some negative interest Gesell money and pay all govt employees, contractors, welfare benefits and unemployment benefits with it. They wouldn't have to print up too much because of its high velocity. The value of the money would go to zero after 5 years. It would have no inflationary impact; see here

3. After unemployment is stable and under 10% again, The Fed should pursue a deflationary money policy a la George Selgin.

Additional point about a deflationary Fed money policy:

As the Goodwin model simulation shows, a deflationary money policy will lead to a large increase in real wages. This will afford the workers greater opportunity to save and invest. This will create a demand for "free banks".

Lending by free banks will be on real bills and good commercial paper. This new lending will not be inflationary because it will be based on real growth, as Adam Smith and some other classical economists have stated.

The quantity theory of money only applies to monopoly fiat legal tender.

[aaron]

Re: gregor: ignoring energy - the hollow keynesian/austrian debate

jtabeb, this post could be the outline of a very good book.

[Mega]

Re: gregor: ignoring energy - the hollow keynesian/austrian debate

Morpheus
You need to clear your in box out
Mike

[jk]

Re: gregor: ignoring energy - the hollow keynesian/austrian debate

to try to return this thread to its original topic, i'd like to point out that gregor appears to be saying that the stimulus/austerity debate is IRRELEVANT. the constriction of energy supplies implies an at-best flat global economy for the foreseeable future. the gradual re-emergence of coal as the primary source of energy [via electricity generation] will accompany rising transportation costs and de-globalization.

[Jim Nickerson]

Re: gregor: ignoring energy - the hollow keynesian/austrian debate

The original topic was "ignoring energy," it looks as if most comments here are appropriate.

Actually if oil depletion were not an apparent reality, would the world right now be much different with regard to the problems that exist with unemployment, over-indebtedness and looming either deflation or inflation?

[jk]

Re: gregor: ignoring energy - the hollow keynesian/austrian debate

The original topic was "ignoring energy," it looks as if most comments here are appropriate.

Actually if oil depletion were not an apparent reality, would the world right now be much different with regard to the problems that exist with unemployment, over-indebtedness and looming either deflation or inflation?

if oil depletion were not a reality, oil prices would be lower and people would have more to spend on other things.

[GRG55]

Re: gregor: ignoring energy - the hollow keynesian/austrian debate

There is no best answer, just worse options.

I think mankind has a degree of arrogance. We attribute too much of industrial civilization's rise to mankind's ingenuity, and not enough on the practically free and abundant energy source that got us here these past 100 years. Technology, without the energy to run it, is but a diagram on a blackboard. The cost of energy determines the availability of any given technology.

I would also like to mention that the cost of oil is much greater than we see. We have never factored in the costs of Gulf War I and the subsequent war on terror wars - Afghanistan and Gulf War II, as well as the costs of maintaining a military presence in the middle east to ensure a supply of cheap oil for the global economy. These costs have yet to be realized due to a fantasy based fiat debt model of petrodollar recycling. If or when that system collapses... the average consumer will better understand contemporary oil's true cost.

I think $75 to $80 per barrel oil in the midst of the deepest global economic downturn since WWII is doing a fine job pricing in what you list above...

I might also point out that it was mankind's ingenuity that has, and continues, to figure out how to find, extract and convert that "practically free and abundant energy source that got us here" into useful and usable products. Without mankind's ingenuity we might all have met the same fate as various well preserved dinosaurs when we first encountered the tar pits...

[GRG55]

Re: gregor: ignoring energy - the hollow keynesian/austrian debate

as i understand, oil didn't collapse because opec slashed production?

OPEC production averaged 35.02 million barrels per day in 2007, rose to an average of 36.09 million barrels per day in 2008 and dropped to an average of 33.7 million barrels per day in 2009. That's a decrease of 6.6% between 2008 and 2009...hardly what could be called "slashing" production. Currently OPEC output has been averaging over 34 million barrels per day in recent months, not much lower than the OPEC average since 2005.

[All figures are from the Paris-based International Energy Agency]

[jtabeb]

Re: gregor: ignoring energy - the hollow keynesian/austrian debate

It's all correct C1ue. You can check with anyone. It's ALL CORRECT.

[gnk]

Re: gregor: ignoring energy - the hollow keynesian/austrian debate

I think $75 to $80 per barrel oil in the midst of the deepest global economic downturn since WWII is doing a fine job pricing in what you list above...

I might also point out that it was mankind's ingenuity that has, and continues, to figure out how to find, extract and convert that "practically free and abundant energy source that got us here" into useful and usable products. Without mankind's ingenuity we might all have met the same fate as various well preserved dinosaurs when we first encountered the tar pits...

The oil price alone is irrelevent in the grand scheme of things. Theoretically, we can have a deflationary collapse so severe, that oil at $25 a barrel is deemed a luxury.

I'm not knocking mankind's ingenuity. I'm knocking the belief that it is this alone that produced the world we live in today. The internal combustion engine evolved in different forms centuries before we stumbled upon using oil to fuel it. Ingenuity processed oil for ICE use, but it did not create oil in the first place.

Even the steam engine had its roots centuries before coal was used by people. The steam engine, in rudimentary form, was but a novelty pre-coal.

Basically, I'm recognizing the fact that non-renewable resources play a significant role in today's society.

Jared Diamond's Guns, Germs, and Steel, in my view, illustrates how the environment, and the resources contained in it, affects technological advances, and thus societal complexity.

I'm not ruling out the eventual possibility of a new energy system that can replace our oil or nonrenewable energy reliance. I'm doubting the timing of the discovery, and thus, I fear a transition will be far from smooth. The current resource wars are but a sign of the future, IMO.

Historically, much of technological innovation was not created in a necessary, urgent timeframe to avoid an impending disaster... it just happened, and societies and economies adapted and evolved from that point on - ever more reliant on that technology, the resource(s) that fuels it, and the complexity it creates.

[GRG55]

Re: gregor: ignoring energy - the hollow keynesian/austrian debate

...Historically, much of technological innovation was not created in a necessary, urgent timeframe to avoid an impending disaster... it just happened, and societies and economies adapted and evolved from that point on - ever more reliant on that technology, the resource(s) that fuels it, and the complexity it creates.

Your argument doesn't wash with me. If you are correct I suggest that we all head to the beach [and by "all" I mean all of mankind] and take the rest of our lives off, because whatever the future holds and any "advancements" that occur will apparently "just happen" regardless of what we do.

I lived for almost eight years in the Persian Gulf. That part of the world is filled with people that believe that everything that happens in their lives is pre-ordained at the moment of their birth...that whatever happens is "Allah's will". They may be right for all I know. But I have my doubts...

[jtabeb]

Re: gregor: ignoring energy - the hollow keynesian/austrian debate

I lived for almost eight years in the Persian Gulf. That part of the world is filled with people that believe that everything that happens in their lives is pre-ordained at the moment of their birth...that whatever happens is "Allah's will". They may be right for all I know. But I have my doubts...

Pre-ordained and active choice are NOT mutually exclusive. Just because the outcome IS known in God's frame of reference (see Einstein's theory of relativity) does not mean that WE CAN KNOW the outcome in OUR frame of reference, THEREFORE, Active choice is required in OUR FRAME of reference. (Unless one wishes to commit blasphemy by placing oneself on an equal pedestal with God). What a lot of Muslims in the middle east fail to understand about this concept is that THEY ARE COMMITTING A SIN by PRESUMING to know what ONLY God can know.

Basically, YES, God knows the outcome your life in advance, BUT YOU DON'T!!

Active choice forces us to shape our own destiny. To us it appears to be free will and IT IS, in OUR FRAME of reference. But to GOD, in HIS frame of reference, your life appears as the manifestation of a preordained path set forth by him.

Failing to ACTIVELY CHOOSE is a SIN! BECAUSE you are trying to circumvent God's will BY PRETENDING TO KNOW GOD's WILL! (God's will is but known to God)

Many Muslims around the world think that failing to make active choices in their lives is the highest proclamation of fealty to God (Iman) when in fact the opposite is true! (It is the worst form of Kufr).

I just wish more people understood this.

Insha'Allah, they will.

[gnk]

Re: gregor: ignoring energy - the hollow keynesian/austrian debate

Your argument doesn't wash with me. If you are correct I suggest that we all head to the beach [and by "all" I mean all of mankind] and take the rest of our lives off, because whatever the future holds and any "advancements" that occur will apparently "just happen" regardless of what we do.

I lived for almost eight years in the Persian Gulf. That part of the world is filled with people that believe that everything that happens in their lives is pre-ordained at the moment of their birth...that whatever happens is "Allah's will". They may be right for all I know. But I have my doubts...

You're taking my argument to a far extreme - I'm not being a defeatist. And our lives are far from being pre-ordained.

What I am saying, is that people have this over-reliance and overconfidence on mankind's ingenuity, and as as result, overconsume nonrenewables. I'm not saying we give up and go to the beach.

I'm saying it's entirely possible that we continue to innovate, yet be wiser stewards of the resources we find. I don't believe those two goals are conflicting. The transition from oil needs innovation AND conservation to make the transition smoother - or as smooth as we can possibly make it.

Isn't it possible that our "can do" attitude just replaced the old "god's will" attitude? That both have elements of reliance on pre-ordained results? That is, one view is overconfidence in god, the other view is overconfidence in man's innovation.

It's time to be conservative with the resources of the world. We really don't know if the transition will be a smooth one, and thus a two pronged attack - innovation and conservation are needed. And vigilance, not hubris will be needed.

Neither of us have a predictable timeline of how this plays out. When I lack information, I take the cautious view. I think most are not cautious, and they believe that we'll pull a rabbit out of a hat just in time. That's the basis of my concern.