August 24, 2011

Economists and the Broken Window Fallacy

There has been a notable increase in the advocacy for some sort of disaster to befall the country in order to create a boom in post-disaster rebuilding.  This is an error that is known as the "broken windows fallacy", which refers to a parable in which Bastiat proved that repeatedly breaking a shopkeeper's window to force him to repair it was not ultimately economically stimulative.

For example, Paul "what we need now is a housing bubble" Krugman has been suggesting war, alien invasion, and most recently expressed disappointment that the recent East Coast earthquake did not cause more damage. I see little mention of the effects of the Japanese tsunami and nuclear meltdown.  According to the damage-is-good hypothesis, Japan should be enjoying a rebuilding boom.  Instead, its economy has been depressed since the tsunami event.  This is not surprising when you consider that massive amounts of assets and therefore capital was destroyed, but the Keynesian blind spot with respect to balance sheets prevents its advocates from understanding what really happens when you destroy infrastructure.

August 09, 2011

Joe Gagnon Says Print Big Money Until the Patient Recovers

Former Fed official Joe Gagnon has a posting that is making the rounds.  Basically he says stop futzing around and start printing dough like mad until all is right with the world.  Currency devaluation will help exports (except if everybody else does it too).  It reduces the value of existing debt.  Lowers your cholesterol.

He tops it off by showing that he still believes in the Philips curve despite its spectacular failure in the 1970s:
Inflation will never increase to a significant extent as long as unemployment lingers at this elevated level.
See, the key is that magic fairies transmute monetary inflation into employment and growth, according to the Philips curve and its dressed-up successor the imaginary NAIRU.

Risk of too much inflation?  Bah, we can quit anytime:
[...] the Federal Reserve could assuage the fears of the inflation hawks by stating clearly that its policy would be rapidly reversed in the unlikely event that core inflation rises above 3 percent on a sustained basis 
I'm sure everyone will believe the Fed at its word.  Massive money printing.  What could go wrong?  It's worked great historically, right?

August 08, 2011

It's the Fraud!

With worldwide markets going down in flames, the punditsphere is atwitter with attempts to change the narrative to the need for fiscal stimulus programs to create jobs.  Keynesian prayers won't save us now.

We are here because of an accumulation of financial fraud over decades by corrupt parties, and investors have lost confidence in the legitimacy of the game.  Stock markets are dominated by HFT algos, dark pools, and other shady casino operators.  Central banks are monetizing government debt in broad daylight, while handing largesse to favored banks, hedge funds, and any other players with influence.  Tax loopholes let corporations and the wealthy avoid taxation.  Financial players create unsecured credit at will and dump losses on the taxpayer if their plans go south.  Banks sold fake mortgage securities to investors and try to foreclose on homes they don't own.  Bonds have been turned into exotic synthetic instruments like CDS that represent bets instead of real investment in productive activities, and CDS writers find ways of avoiding payouts or dumping liability on the taxpayer.  Finally, the only thing that economists from Alan Greenspan to Paul Krugman agree on is that governments can just print money indefinitely.

We are here because of a total breakdown in the rule of law and the integrity of currencies.  The masses have lost faith in the legal system that is supposed to protect them from financial fraud.  They are now voting with their bank accounts.

August 07, 2011

S&P Sticks Its Neck Out; Government Parasites Freak Out

S&P has been threatening for months to downgrade the US credit rating and it finally did it.  Elites of all political stripes united to condemn them for daring to say the emperor has no clothes.  The reason you should pay attention to S&P is that they took this action at great political cost to themselves--governments in Europe are talking about stripping their ratings agency monopolies and replacing them with a pliant government ratings committee.  S&P bit the hand that feeds it at great political cost to itself.  This is a first step towards restoring the ratings agencies' credibility and should be respected.

Instead, the elites are howling about the agencies having no credibility and should just keep quiet.

Much is being made of a supposed error S&P made in referencing CBO deficit projections.  Essentially, they used a particular bogus CBO forecast when the CBO would have preferred they used a different inaccurate forecast.  This is obviously neither here nor there, but is being used to try to create doubt around S&P's downgrade or imply that they will withdraw it.

Hell hath no fury like a government bureaucrat (or academic) whose umbilical cord is being threatened.

August 05, 2011

The Debt Ceiling Deal Saved Us From Financial Catastrophe

To all those who were forecasting crashing markets if the US debt ceiling wasn't raised:

Ok, so the debt ceiling was raised and we got crashing markets anyway.  I thought the Tea Partiers were terrorists playing brinksmanship with the economy.  How come the deal didn't save us?