07
Aug
2014
David Stockman on Debt-Fueled Growth
From a recent post at David Stockman’s blog:
“Monetary central planning is failing to achieve Keynesian “escape velocity” because it has deeply impaired the engines of capitalist enterprise. Nowhere is this more apparent than in the grotesque financialization of American business that has occurred since the 1980s. As usual, this deformation is rooted in the massive growth of debt carried by non-financial businesses.”
Remember everyone, David Stockman (plus Tom Woods and other Austrian speakers) will be in Nashville for our annual “Night of Clarity” event August 15. Details here.
Hmm.. precisely the same problem as in your previous post.
Where in Keynesian theory — either the neoclassical or heterodox varieties — is it stated that the way Keynesians wish to stimulate the economy is by massive private debt or asset bubbles? It isn’t.
The standard Keynesian prescription for recession or involuntary unemployment is fiscal stimulus.
The things Stockman speaks of — asset bubbles and financialisation.– are consequences of the dismantling of previously effective systems of financial regulation. Both old neoclassical synthesis Keynesian and Post Keynesian theory have also criticised the bubble economy and the turn to financialisation as opposed to real capital investment.
Asset bubbles and financialization are consequences of fiat funny money loans. There would no need to “regulate” loans for anything other than fraud in absence of fiat money loans. Further, simply by altering the (or any) constitution to allow “proper” Keynesian interference, ALL MANNER of violent intervention is now permitted. Once the courts and society have accepted the bogus argument that the market (and thus the protections of private property and contractual obligations) has failed, the legislature is deemed all-wise in its pursuit of violent intervention. If it sounds good, they can do it and you have a dictatorship of the majority mob.
Since laissez faire has never existed historically, one cannot claim that it has failed using historical anecdotes. Unless laissez faire has failed and will always fail, there is no need for Keynesian “stimulus” which does nothing but allow the mob in office the ability to shift assets to supporters of the regime and further distort prices and economic calculation.
And if anyone is sick of me bringing up economic calculation, I’m sick of the rest of you not bringing it up. Everyday.
“There would no need to “regulate” loans for anything other than fraud in absence of fiat money loans.”
The Dutch tulip bubble and Australian 1880s real estate bubble say otherwise.
It being the season of summer reruns…..
Here’s a quote from a paper with a relatively positive view of the free banking era, which nonetheless notes the systemic collapse of 1893:
Australia provides a textbook example of free banking in practice. One writer on the subject commented that in Australia “the legal framework with which banks operated was perhaps the least restrictive of any on record” (Dowd 1992).Butlin (1953),commented that “there was no tender law, no central bank, no legal control over the total volume of bank loans, and only a very primitive control by the banks themselves through a loosely applied rule of thumb (cash reserves should be to one-third the sum of deposits and notes) concerning reserves against all liabilities”.
the 1840 Colonial Bank Regulations issued by British Treasury governed colonial banking. The requirements included that: capital should be a determinant amount and must be fully subscribed; total debts must not exceed three times the paid up capital and that all notes were to be payable on demand in specie at the place of issue. Failure to pay on demand for a total of 60 days in any year entailed forfeiture of incorporation. Personal liability for bank shareholders was capped at an amount equal to twice capital and loans against real estate, shops or merchandise were to be prohibited. Amendments to the regulations in 1846 limited the note issue to the amount of paid up capital.
Banking was not substantially affected by the regulations, however. For example, the restrictions on total debt and note issue were largely ignored (Butlin 1986). Likewise, banks found loopholes around the prohibition on lending for land (Pope 1989). In practice, Australian colonial banks were allowed to raise the limits on note issue by including coin and bullion in paid-up capital. Over time, even this stricture was relaxed; by 1856 the Bank of Australasia secured a licence to print private notes up to the value of three times its specie and bullion holdings. Reserve requirements were easily met as “double counting” was permitted: reserves used to back the note issue were simultaneously used to provide liquidity in the event of a deposit withdrawal. Rules limiting total indebtedness were also no threat because deposits were excluded.
This freedom of note issue was, however, accompanied by strong liability provisions. In most colonies by the late 1860s, shareholders had unlimited liability for their note issue (Pope 1989).
Source is OPTIMAL REGULATION OF ELECTRONIC MONEV: LESSONS FROM THE “FREE BANKING” ERA IN AUSTRALIA
by
THOMAS A. ROHLING AND MARK W. TAPLEY*
Economic Papers: A journal of applied economics and policy
Volume 17, Issue 4, pages 7–29, December 1998
http://tinyurl.com/3lw67uw
The historical anecdotal method fails again.
(1) so you agree the Dutch tulip bubble proves you wrong?
(2) on Australia, even if the restrictions on total debt and note issue were completely adhered to, that would still not have stopped the bubble.
So thanks for proving that there was no fiat money in Australia in the 19th century, and that your statement “There would no need to “regulate” loans for anything other than fraud in absence of fiat money loans” is wrong.
Using notes that purport to represent immediate claims to actual presently existing savings but issued in multiples of those actual savings is a procees that is going to seriously distort the pricing process.
Neither you nor the other Keynesians, “progressives” and monetarist types seem able to understand that argument.
“Using notes that purport to represent immediate claims to actual presently existing savings”
A private banknote does not “purport to represent immediate claims to actual presently existing savings”.
It is a mere IOU, and a promise that a bank will repay a debt on demand.
I get it. I finally get it!
Simultaneously….
1. FRB causes no problems at all.
2. FRB caused the Austrialian crisis of the late1800s.
3. FRB causes so many problems, it requires wise and omniscience overseers. Like LK.
From an impeccable source, we can determine that there was no historical “gold standard”.
http://socialdemocracy21stcentury.blogspot.com/2013/03/the-classical-gold-standard-era-was-myth.html
Therefore, since it never existed, it could not have failed.
Actually, Stockman holds a position similar to LK’s in claiming that the guys running the Fed back in the 50s were not about to allow runaway loans and asset bubbles.
LK:
“Where in Keynesian theory — either the neoclassical or heterodox varieties — is it stated that the way Keynesians wish to stimulate the economy is by massive private debt or asset bubbles? It isn’t.”
Hmmm, same problem as your previous attempt to hand wave away Keynesian advocacy.
Once again, Keynesianism does call to stimulate the economy via debt and asset bubbles. It does so, again, by calling for the cause of them. When Keynes called for “even lower interest rates” to force a permanent quasi-boom, the way this is done is by the Federal Reserve System expanding more credit and putting more and more upward nominal demand pressure on assets.
“The things Stockman speaks of — asset bubbles and financialisation.– are consequences of the dismantling of previously effective systems of financial regulation.”
As explained previously, regulation cannot stop the effects of the cause of asset bubbles and growth in credit expansion. It is a myth. You conceded this when you admitted 1945-1970 was a period of bubbles and busts.
“Keynesianism does call to stimulate the economy via debt and asset bubbles. It does so, again, by calling for the cause of them.”
So it follows that since M_F supports free, voluntary and honest debt instruments and FR banking free of government, he is calling for stimulation of the economy via debt and asset bubbles? He does so, again, by calling for the cause of them.
“You conceded this when you admitted 1945-1970 was a period of bubbles and busts.”
I conceded no such thing. Lying only proves you have no argument.
“this deformation is rooted in the massive growth of debt carried by non-financial businesses.” DS
“The standard Keynesian prescription for recession or involuntary unemployment is fiscal stimulus.” lK
So where does this debt and fiscal stimulus come from? Are they both not created at the same place?
Government isn’t nonfinancial business, Gamble.
I was trying to make a different point. Guess I am not making any sense so I will have to leave it at that.
What? What evidence is there that non-financial corporations are carrying massive levels of debt?
http://idiosyncraticwhisk.blogspot.com/2014/06/risk-valuations-part-3-low-interest.html
I just purchased a new vehicle at .9%. Heck, I had them finance the taxes…
Are you a non-financial corporation?
Debt as a percentage of enterprise value is at cyclical and secular lows and is declining, even before adjusting for all the cash on their balance sheets.
Do you think debt would be even less, if interest rates were higher?
Guess there is just no/finite opportunity right now.
My link is to my post where I argue that corporate leverage is higher when interest rates are higher, possibly due to tax effects.
Some debt, like mortgage debt, goes up when rates are low, but that might simply reflect the changing value of homes due to the changing discount rate. Now, though, mortgage debt is low by just about any measure.
By the way, I also frequently hear that corporations have a bunch of cash on their balance sheets. It seems to me that either they are sitting on a lot of cash or they are sitting on a lot of debt. It seems unlikely that both would be a problem at the same time.
Same with the housing bubble. David Stockman talks about this in his book. Housing prices were increasing faster than housing debt.