So I want to read up on the German hyperinflation, what with that old adage about history repeating itself. I asked (who else?) David Gordon for a book recommendation, and he suggested Adam Fergusson’s When Money Dies.
As CNBC reports:
A new global reserve system is needed after the global financial crisis exposed the U.S. dollar-based system as flawed and risky, Nobel Prize-winning economist Joseph Stiglitz said on Friday.
The “dollar now is yielding almost zero return,” Stiglitz said in a speech at the United Nations regional headquarters in Bangkok. “The current global reserve system is fraying. It’s falling apart. The issue isn’t whether we go to a new system.
The question is do we do so in an orderly or disorderly way.” The build up of the U.S. deficit, debt and “the boiling up of the balance sheet” is cause for anxiety, he said.
But don’t get excited, Stiglitz isn’t a Free Advice reader:
Stiglitz urged rich nations to provide funds to help poorer countries avoid a steep crash during the financial crisis.
The group has called for global coordination to avoid competition to cut taxes, and for a worldwide increase in tax on high earners. Dubbing itself the “Shadow GN,” the group has urged governments to opt for bank nationalisations rather than bailouts in order to drive the pace of fresh lending.
Late payments on U.S. mortgages increased to a record in the second quarter, with almost one in eight homeowners delinquent or in the foreclosure process, the Mortgage Bankers Association said Thursday.
A sharp drop in subprime adjustable-rate mortgages entering the foreclosure process offset a surge on other types of loans, particularly prime fixed-rate loans, the MBA said in its National Delinquency Survey.
The percentage of loans on which foreclosure actions were started fell to 1.36 percent in the second quarter, down from an all-time high of 1.37 percent in the first quarter, but up sharply from 1.08 percent in the second quarter of 2008.
What’s really depressing is that I think most Americans–including supposedly no-nonsense businesspeople–can’t understand why this downturn doesn’t just bottom out, for crying out loud. I mean really, all the other recessions ended after a while, so surely this one has to, any day now?
And what’s really crazy is that if you pushed the average business owner or investor, and said, “Actually, this time is different–the government and the Fed have been doing things that they haven’t done since the 1930s,” then the response would probably be, “I know! That’s what’s so perplexing! Even with all of the government stimulus and Fed easing, for some reason this particular recession is dragging on forever. What the heck?!”
This has been floating around the internet (e.g. LRC), but I just watched it this evening. Rarely have I seen such a video clip packed so densely with economic fallacies and simple lies. But for our purposes, note the emphasis on protecting American workers and the dollar from international speculators. I think we will be hearing the same justification for some more government interventions into the financial system very soon.
UPDATE: After I posted this, I listened to it again. Wow, what a liar. At around the 2:00 mark, he says, “The effect of this action, in other words, will be to stabilize the value of the dollar.” In context, he is talking about domestic purchasing power; he at least admitted in the previous sentence that the dollar would buy less in terms of foreign goods.
OK Mr. President, let’s see how well your promise held up. You took the dollar off gold (“temporarily”…) in August 1971, in order to stabilize its domestic purchasing power. Let’s check out what happened to the annual percentage increases in the Consumer Price Index (CPI) twenty years before and after your merciful move:
Surprise surprise. It looks like when Nixon took away foreign central banks’ ability to turn in dollars for gold, that the Fed decided to print up a lot more dollars, which in turn caused US prices to soar. How odd.
A reader asked me to investigate this Krugman blog post. Echoing DeLong, Krugman is arguing that the fiscal conservatives are wrong to worry that Obama’s deficits will push up interest rates:
Brad DeLong has been writing about the falsity of the claim that large-scale government borrowing in a liquidity trap will lead to soaring interest rates. I was looking for some corroborating data, and came up with a picture that surprised me, though it shouldn’t have. Here it is:
Net federal saving is, roughly, the budget surplus (so it’s negative if there’s a deficit.) It turns out that there’s a strong correlation between budget deficits and interest rates — namely, when deficits are high, interest rates are low.
On reflection, it’s obvious why: a weak economy both drives up deficits and drives down the demand for funds, while a strong economy does the reverse. Thus the surpluses of the late Clinton years were associated with high interest rates, while the current recession has depressed both rates and revenues.
OK now I’m not sure that Krugman of doing this on purpose, but the time frame he chose for his data is very convenient. (On the one hand, I want to give him the benefit of the doubt, because the FGDEF series that he chose only goes back to 1999. On the other hand, I’m not sure how he even found that series on FRED; if you go through the obvious categories, the first series you find is FYFSD, which goes way way back.)
Anyway, regardless of how he ended up with the above graph, it is nonetheless very misleading. As I alluded to in the parentheses above, we can’t use the exact same series to go back further in time, since the one Krugman chose for federal net savings doesn’t go back any more. However, we can switch to the nearly equivalent FYFSD (federal surplus or deficit), and we can see just how robust the apparent relationship above is.
First, let’s switch the series but keep the same time scale, so it’s clear that I’m not rigging the game. So below is the same chart as Krugman has above, except I’ve taken out his FGDEF series and put in the FYFSD series:
Not a perfect match, but close enough, right?
OK great, now let’s go back to 1962, instead of stopping at 1999 as Krugman did in his blog post:
Well how ’bout that. Over the whole period–as far back as the 10-year Treasury rate series goes on FRED–you don’t see the two lines moving in lockstep. If anything, they move in opposite directions. That is, in periods when the government borrows heavily, interest rates tend to go up, and in periods when the government runs a big surplus, interest rates tend to dip down.
Now of course, you could try to explain away the big moves. For example, in the early 1980s Volcker jacked up interest rates, and this pushed the country into a severe recession which then put strains of the federal budget.
OK that’s fine. But clearly, Krugman’s initial surprise was correct. In general, interest rates and federal savings rates do not move in lockstep. Supply and demand work, even when it comes to the government.
One last point: Brad DeLong did not, as far as I can tell, make a general claim about the two series. Rather, DeLong was merely saying that in a liquidity trap you get the abnormal result that government borrowing doesn’t push up interest rates. So DeLong is unscathed by the above.
But we can’t say the same for Krugman. Even though he used DeLong as a springboard, his explanation for his (initially surprising) graph was a general one about recessions and interest rates. He wasn’t limiting the discussion to rare periods of liquidity traps, unless every recession features a liquidity trap.
Back in late October, I wrote:
In a previous post, I admitted that I now feel quite foolish for being afraid that if Gore won the White House, he would have “wrecked the economy.” (Again, I didn’t vote for Bush, but I was rooting for him against Gore. I rooted for Kerry, though again I didn’t vote for Kerry.) I warned that those who are pro-Obama because he’s the “peace candidate” may have similar feelings, a few years from now.
So as a fun exercise, I would like the pro-Obama people to come up with specific things that would make them admit they are mistaken right now, in their advocacy of Obama. For example, if Obama orders the use of nuclear weapons on Iran, surely that would count, right?
The traffic shot up 732% that day, because the mighty blogger Andrew Sullivan took up my gauntlet, responding to the above by saying:
Er, yes. Jim Henley has made his list. Mine would include almost everything George W. Bush has already done. It couldn’t get any worse, could it? I mean: no liberal Democrat could spend and borrow more than this Republican could he? Pretty close to impossible. And conservatives would go nuts – unlike their shameful indifference for last eight years.
Now I’m not a regular reader of Sullivan, so I can’t tell if his post was 100% pure sarcasm. But if we take it at face value, then Sullivan has to disavow Obama. On the foreign policy and civil liberties stuff, Australian journalist (and socialist) John Pilger pulls no punches in his denunciation of Obama (HT2EPJ).
And on the spending side, it’s not even close. We already know that the deficit this year (FY 2009) will be at least $1.8 trillion, which I’m pretty sure is the biggest in world history, at least in nominal terms. (Here’s a cute story from
last July 2008, in which the Democrats were freaking out when the Bush administration predicted that the FY 2009 deficit would be $482 billion. Note, $482 billion << $1.8 trillion.)
Now yes, President Obama is not responsible for the entire $1.8 trillion deficit this budget year, which started back in October 2008. So perhaps a fairer assessment of his deficit hawkishness is the projections of his fiscal plans many years into the future. There are a bunch of different ways to gauge this, but here’s a quick and easy one: From the Summary page (Acrobat page 11) of the March 2009 CBO report [.pdf]:
The cumulative deficit from 2010 to 2019 under the President’s proposals would total $9.3 trillion, compared with a cumulative deficit of $4.4 trillion projected under the current-law assumptions embodied in CBO’s baseline. Debt held by the public would rise, from 41 percent of GDP in 2008 to 57 percent in 2009 and then to 82 percent of GDP by 2019 (compared with 56 percent of GDP in that year under baseline assumptions).
Now wait, hold on, don’t start looking up numbers to figure out the comparable stats for the Bush administration. If Obama is expected to raise the explicit federal debt as share of the economy, from 41 points to 82 points, then that means there must have been no federal debt when George Bush took office, in order for them to be equally profligate. So I don’t think we even need to consult the Statistical Abstract. Clearly Obama is going to add far far more to the debt–even adjusting for the size of the economy–than George Bush did.
Sullivan is definitely right that many conservatives who are freaking out about Obama’s deficits, were strangely silent during the Bush years. I am not one of those hypocrites; I called out Bush’s reckless deficits at the time.
Has Sullivan done the same with Obama? Does he now regret his support for the Senator from Illinois?
As long-time readers know, I am very skeptical of the big deflation scare. The raw CPI numbers have risen at an annualized rate of 4.2% since December. The “seasonally adjusted” CPI numbers–what the press reports–are up only 2.4% (at an annualized rate) over the same period. Now it’s possible that it will all even out by December, but I have my doubts. (More precisely, I think they will revise the earlier “adjustments” so that the official headline inflation numbers won’t need to be as big in the last half of 2009 in order to reconcile the two series.)
Things are also fishy if we turn to the Producer Price Index (PPI). According to the latest press release, both the raw and the seasonally adjusted PPI fell 0.9 percent from June to July. I’m wondering when the positive seasonal adjustment is going to start kicking in, because here are the NSA and SA numbers for the year:
|Monthly Changes in PPI Index|
Unfortunately FRED doesn’t have both the seasonally and non-seasonally adjusted PPI series, so to generate the above table I had to go through the BLS archives of the PPI press releases each month.
Just to make sure you understand the significance of the above table: So far this year, the BLS has underreported the actual changes in the PPI by a cumulative 1.1 percent. (It’s probably not correct to just add those differences up, but you get the idea.) The whole rationale of seasonal adjustment is that price changes in one direction tend to be concentrated in certain months. So if, say, prices typically rise very quickly in the beginning of every calendar year, and then remain flat during the third and fourth quarters, the BLS doesn’t want to shock people by reporting the big jumps in the first quarter. So instead they smooth out the yearly increase, by adjusting the early months down and bumping up the later months. Since there had already been a cumulative 1.1 percent deficit going into this month, that’s why I was surprised to see no bumping up of the July numbers.
While looking through the BLS archives of previous PPI releases, I confirmed another suspicion I had had, regarding this month’s press release. I thought the 0.9 percent drop from June to July seemed excessive, so I wanted to look at the breakdown of the overall index into its categories. For example, I could look at what the BLS said happened to fuel costs, and I could compare that with the EIA’s records of actual gasoline prices.
Now in previous months, this would have been easy. Near the bottom of each press release, you can find Table 1 which has all kinds of information. (Check out July’s press release, for example.)
But even though the press releases from January through July 2009 all have a Table 1 with this non-seasonally adjusted breakdown, for some reason this month’s press release doesn’t have it.
That information is presumably still available somewhere in the bowels of the BLS website, but if it’s difficult to find, it discourages people from looking. Is that the point?
Last issue: I was also puzzled as to why the CPI numbers came out first this month, followed by the PPI. In previous months I thought the PPI always came out a day ahead of the CPI. I called the BLS and the guy there told me that yes, the PPI generally comes out first, but they are independent groups working on these numbers, and for whatever reason the PPI people were delayed this month.
Michael Pettis seems to think so, in this blog post (HT2 Tim Swanson):
…I was recently interviewed for a TV show about – yet again – the awful continuing prospects for the dollar as a the dominant reserve currency. Besides expressing my deepest skepticism that the most recent hullabaloo about the dollar was likely to be more reasonable than during all the previous the-sky-is-falling-on-the-dollar periods, I also said that it seems to me that the argument had somehow gotten backwards as far as its proponents and opponents were lining up.
In my view it is the US who should be agitating for an end to the US dollar as the default reserve currency, because this means that any time a country needs to grow reserves or turbo-charge domestic growth with mercantilist industrial policies, thanks to the flexibility of the US financial system and the foreign desire to accumulate dollars, it is almost always the US tradable goods sector that is forced to adjust. In a similar vein it should be foreigners, especially Asians, and most especially China, that should want to maintain the existing currency system.
Wow, isn’t that ironic? The US government shows the world who’s boss during World War II, and as its hegemony becomes apparent, it pushes through a new worldwide monetary system based on the US dollar. Normally when one country gains global dominance, you’d expect it to change the rules to favor its own interests. But we apparently had either altruists or dopes at the helm in 1944.
Pettis is relying on crude mercantilist and Keynesian notions in his post. Rather than pick apart the fallacies, let me try this approach: Suppose you have two printing presses. One of them cranks out US dollar bills, which are indistinguishable from the real thing. The other cranks out Monopoly money.
According to Pettis, you should prefer the latter machine, because there isn’t much demand for Monopoly cash. In the awful scenario where you were stuck with the machine that cranked out US currency, here’s what could happen: You print up say $400,000 in new currency this year, which other merchants are happy to accept. But if you don’t feel like consuming or investing more than $400,000 this year, you will have to quit your job, because of all the cash piling up in your house. Thus that cursed machine has thrown you out of work! Oh the humanity!