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The Warren Buffet Economy-Why Its Days Are Numbered (Part 2)

By indigenous follow indigenous   2015 Jun 9, 9:27pm 11,460 views   42 comments   watch   nsfw   quote   share    


There is no reason whatsoever to believe that the financial carrying capacity of the US economy—-or any other DM economy—-has improved since the 1980s. In fact, it has gone the other direction in recent years due to aging demographics, declining competitiveness versus the surging EM economies, dwindling rates of productivity growth and a dramatic increase in the leverage ratio against both public and private incomes.

All of these adverse macro-trends mean that the US economy’s ability to generate growth, incomes and profits has been significantly lessened. Accordingly, since its ability to service debt and equity capital at an honest market rate of return has diminished, the logical expectation would be that the finance ratio to national income would fall.

In fact, once Greenspan took the helm and his apparently atavistic embrace of gold standard money melted-down under the Wall Street furies of October 1987, the finance ratio erupted. As shown below, it has never looked back and at 5.5X national income has reached a point that would have been unimaginable on the morning of Black Monday.

Stated differently, under a regime of honest money and market determined financial prices, the combined value of corporate equities and credit market debt would not have mushroomed by 8X—- from $11 trillion to $93 trillion—- during the past 27 years. For crying out loud, the nominal GDP grew by only 3.5X during the identical span. In effect, the US economy has been capitalized at higher and higher rates for no ascertainable reason of fundamental economics.

Indeed, there is no reason why the 260% ratio of equity and credit market debt to GDP that was recorded in 1986 should have risen at all. At that point Paul Volcker had completed his historic task of extinguishing runaway commodity and CPI inflation and had superintended a solid recovery of real economic growth.

Arguably, therefore, the US economy was carrying about the right amount of finance. And, at that healthy ratio, today’s $17.7 trillion economy would be carrying about $43 trillion of combined market equity and credit market debt.

In a word, the Greenspan era of central bank driven price falsification and monetization of trillions of existing assets with credits conjured from thin air has generated a $50 trillion overhang of excess financialization. And that’s just for the US economy. In fact, the central bank error is global and the worldwide excess financialization is orders of magnitude larger.

To be sure, the Keynesian economists and power-seeking apparatchik who run the Fed do not openly admit to a massive falsification of financial prices and to responsibility for generating what amounts to a $50 trillion bubble in the US alone.

That’s because they are narrowly and mechanically focused on an altogether different, but impossible task. Namely, guiding the $18 trillion US economy to its full-employment potential. So doing, it pursues its so-called Humphrey-Hawkins “dual mandate” in a manner consistent with the strictures of its Keynesian DSGE (dynamic stochastic general equilibrium) model representation of the US economy.

Moreover, this particular iteration of god’s work is viewed by the monetary central planners and their academic and journalistic proponents as not being merely discretionary. That is, its not just an exercise in making the good, better.

Instead, by relentless and plenary interventions in the financial markets designed to smooth and optimize the business cycle, the Greenspan era central planners came to believe that they were actually saving capitalism from its own purported death wish. That is, an endogenous tendency toward instability, underperformance and depressionary collapse.

This whole story is a crock. Cutting to the chase, the Humphrey-Hawkins Act is one of the stupidest and most dangerous laws ever enacted.

It amounts to a plenary delegation of power to a tiny unelected and unaccountable posse of monetary bureaucrats who are free to define the key goals—-maximum employment and stable prices—-anyway they wish; and are then further empowered to manipulate—without standards or limits—-any and all financial prices in whatever arbitrary manner they choose in hot pursuit of the arbitrary quantitative metrics, whether efficacious or not, that they have slotted into the Act’s rubbery, content-free aspirations for societal betterment.

In plain English, 5.2% unemployment on the U-3 measure and 2% inflation on the core PCE deflator are economically meaningless targets. They are impossible to achieve through interest rate manipulation and the rest of the fed’s tool-kit, especially its wealth effects “put” under the stock market.

Likewise, the so-called Humphrey-Hawkins targets have no discernible relationship to societal betterment—–since there is not a shred of evidence, for example, that wage workers are better off with 2% inflation as opposed to 1% or any other arbitrarily chosen value of a flawed price index over completely arbitrary, and usually unspecified, time frames and prices cycles. And, most crucially, forcing the macro-economy into adherence to these policy targets is utterly unnecessary because the predicate that capitalism has a death wish and is prone to depressionary collapse is dead wrong.

In truth, it’s a self-serving scary story peddled by the monetary central planners and their grateful Wall Street beneficiaries. I have addressed the myth of the foundation events—-the Great Depression of the 1930s—elsewhere. Suffice it to say that the modern Keynesian narrative has it precisely upside down.

The Great Depression did not stem from a fatal flaw of capitalism or the failure of the 1930-1933 Fed to crank up the printing presses or even Hoover’s allegedly benighted dedication to fiscal rectitude and honest gold standard money. Just the opposite. The Great Depression was owning to the excesses of state action—–the massive indebtedness and inflation of the Great War and the easy money credit bubbles of the Roaring Twenties—-not to its supposed deficiencies.

Likewise, the post-war business cycles prior to Greenspan’s accession were short-lived, well-contained and self-correcting; they were owing to the errors of state actions, not the inherent flaws of capitalism or an alleged business cycle instability that threatened an unstoppable downward spiral.

Specifically, two of these recessions were the temporary consequence of cooling-down red hot war economies in 1953-1954 (Korea) and 1969-1970 (Vietnam). The first one of these was self-cured by the inherent resilience of market capitalism and involved virtually no fiscal or monetary stimulus under the orthodox strictures of President Eisenhower and William McChesney Martin at the Fed.

Likewise, the post-Vietnam so-called recession hardly registered in the economic statistics—–save for a 70-day auto strike. That wasn’t even a business cycle, but a random shock from the complete shutdown of GM and its massive supplier base in the fall of 1970 at a time when GM was at its peak and occupied 45% of the entire US auto market.

Needless to say, that strike was eventually resolved by the parties involved, triggering a sold rebound immediately thereafter. There was no business cycle failure or threatened tumble into an economic black hole—nor did the fiscal and monetary authorities of the day do much to “stimulate” the natural forces of recovery.

By contrast, the two deepest recessions of the pre-Greenspan period—-the 1974-1975 downturn and the 1981-1982 recession—-were caused by a very evident villain. In those cases, you can pin the tail squarely on the donkey at the Federal Reserve itself.

As I demonstrated in the Great Deformation, the mid-1970s cycle was not caused by the 1973 post-embargo oil price surge; it was the result of Fed Chairman’s Arthur Burns abject submission to Nixon’s demand for a 1972 pre-election surge of the US economy.

As to the deep plunge of the early Reagan era, the Mighty Volcker was at the helm, of course, only because Arthur Burns and his successor, the hapless golf cart manufacturer, William Miller, had fueled a massive domestic credit expansion during the second half of the 1970s. The double-digit inflation that Volcker brought to heal was manufactured by the central bank, not by the OPEC cartel, silver and copper speculators or greedy consumers, as Jimmy Carter had it at the time.

As of Volcker’s turn at bat, there was at least a possibility that state policy might escape from the thrall of Keynesian economics. It had been installed on the fiscal side during the Kennedy-Johnson era, and embraced by Nixon himself when his itinerant policy groupie, George Schulz, professor of labor economics, persuaded him to adopt the full-employment budget concept.

That was pure Keynesian claptrap. It was predicated on the idea of a closed domestic economy that resembled a giant economic bathtub—–which needed to be filled to the brim with GDP for maximum societal welfare; and that the job of the state through the coordinated action of its fiscal and central banking branches was to pump aggregate demand into the tub until the economic experts averred that potential GDP and full employment had been achieved.

Mercifully, the primitive experiments with this during Johnson’s “guns and butter” policies after 1965, and the Nixon-Burns money printing spree of 1972-1974 resulted in the 1970s catastrophe of stagflation. Accordingly, bathtub based Keynesianism was on deaths door when Ronald Reagan arrived at the White House in 1981.

And the giant Reagan deficits notwithstanding, it was further buried by the roaring success of Volcker’s hard money policy and the Reagan’s administration resolute refusal to consider anything that smacked of proactive fiscal or monetary stimulus during the dark days of 1982.

The giant Reagan deficits were owing to an explosion of defense spending and a tax-cut bidding war that got totally out of hand in the summer of 1981, not any notion at all that capitalism needed the helping hand of the state in order to get back on its feet after a state sponsored credit inflation had set it on its heels.

Then came the 1984 election campaign about morning in America, which was mainly harmless political bloviating. But the White House politicians could not leave well enough alone. Soon followed the disaster of the Plaza agreement of 1985 designed to trash the dollar and artificially stimulate domestic economic activity, and then trasnpired the real calamity.

To wit, Ronald Reagan was tricked by Jim Baker and the Republican elders on Capitol Hill into forcing Volcker out of his job as chairman of the Fed. In Part 3 it will be shown that the double-talking, power-seeking, lapsed gold bug named to replace him brought Keynesian bathtub economics right back into the center of policy.

Yet in the world after Mr. Deng’s pronouncement that it is glorious to be rich, the idea of a full bathtub policy in a single country is absurd. It embodies the spurious notion that the primitive measures of labor and business capacity utilization published by the rickety statistical mills of government measure anything that is accurate or economically meaningful.

In fact, the U-3 unemployment rate and the Fed’s industrial capacity utilization figures amount to nothing but noise. The utilization rate of the auto industry, for example, might have been remotely relevant before 1980. Today it measures the same cycle over and over, but means nothing, as will be demonstrated in Part 3.

http://davidstockmanscontracorner.com/the-warren-buffet-economy-why-its-days-are-numbered-part-2/?utm_source=wysija&utm_medium=email&utm_campaign=Mailing+List+AM+Tuesday

#politics

3   indigenous   ignore (0)   2015 Jun 10, 9:03am     ↓ dislike (3)   quote   flag        

Yup Reagan was not as great as he was cracked up to be. Tip O'Neill had a lot to do with the spending though.

Volcker was the man. What he states is that Nixon got chairman Burns to go on a printing spree, he doesn't mention that LBJ got Martin to do the same thing, and that helped to finance the Vietnam War, not mention that Nixon took us off of Bretton Woods.

Going off of Bretton Woods was the real problem, which started coming into bloom under Reagan.

4   indigenous   ignore (0)   2015 Jun 10, 9:20am     ↓ dislike (2)   quote   flag        

Here is one of them graphs that you are so enamored with, notice what happens after 1971:

5   mell   ignore (4)   2015 Jun 10, 9:28am     ↓ dislike (0)   quote   flag        

indigenous says

So the question is, inflation or deflation? Stockman is saying deflation much like the Great Depression.

While it can be either when TSHTF it's more like painful, prolonged stagflation which we already have for years. It depends on what they do, if they keep printing money definitely inflation, if they at some point decide to stop and go with spending cuts, then deflation.

6   indigenous   ignore (0)   2015 Jun 10, 9:36am     ↓ dislike (2)   quote   flag        

mell says

While it can be either when TSHTF it's more like painful, prolonged stagflation which we already have for years. It depends on what they do, if they keep printing money definitely inflation, if they at some point decide to stop and go with spending cuts, then deflation.

They might try but inflation would get out of control, I'm guessing the other because of the entitlements and because of what Stockman says regarding how much excess money have been printed and that it is a world wide problem.

8   indigenous   ignore (0)   2015 Jun 10, 9:41am     ↓ dislike (2)   quote   flag        

Hmm it seems to be getting worse. Here comes the BRIC. Here comes inflation? maybe but that would be short lived to deflation that will make the Great Depression look like a recession. We need another FDR (8^()

9   Heraclitusstudent   ignore (2)   2015 Jun 10, 11:07am     ↓ dislike (0)   quote   flag        

indigenous says

The problem with this graph is you apparently think this represents an increase in something fixed, when in fact population and economy grow exponentially.

You apparently think this money is a limited resource that was lost when the gov spent it and will have to be earned back cent by cent through hard work. This is not the case: the money is still there. It was printed into existence and injected at the government's convenience into the economy, it can be taxed out of existence at will by the government. The money was spent, created jobs, as long as it keeps being spent it creates jobs. If not spent, it can be taxed back any time. Or more of the same money can be created at will. There is no big hole here that will swallow us. There is just a deficient fiscal policy, that leaves money accumulating in places where it is not used.

10   Heraclitusstudent   ignore (2)   2015 Jun 10, 11:26am     ↓ dislike (0)   quote   flag        

indigenous says

Here comes inflation? maybe but that would be short lived to deflation that will make the Great Depression look like a recession.

You worry about inflation? The entire problem we have is there is no inflation.
The entire issue with printing money is precisely that this is done in a way that doesn't cause inflation.

12   Tenpoundbass   ignore (16)   2015 Jun 10, 5:36pm     ↓ dislike (1)   quote   flag        

Most people don't realize, If Warren married Elizabeth and took her last name, he would be Warren Warren.

13   indigenous   ignore (0)   2015 Jun 10, 5:47pm     ↓ dislike (0)   quote   flag        

Heraclitusstudent says

You worry about inflation? The entire problem we have is there is no inflation.

The entire issue with printing money is precisely that this is done in a way that doesn't cause inflation.

Why is inflation good?

14   control point   ignore (0)   2015 Jun 10, 6:44pm     ↓ dislike (0)   quote   flag        

indigenous says

Volcker was the man.

Volcker did more to gut the middle class than anyone in post WW2 America. He was (and is) a wolf in sheep's clothing if there ever was one.

indigenous says

Why is inflation good?

Nice strawman.

15   indigenous   ignore (0)   2015 Jun 10, 6:51pm     ↓ dislike (1)   quote   flag        

control point says

Volcker did more to gut the middle class than anyone in post WW2 America.

Splain me

16   control point   ignore (0)   2015 Jun 10, 7:03pm     ↓ dislike (0)   quote   flag        

indigenous says

Splain me

Funny thing is, I see this as:
1. You made a claim without support.
2. I made a counterclaim, without support.

I'll provide support for my counterclaim just after you provide support for your claim, how is that?

17   indigenous   ignore (0)   2015 Jun 10, 7:30pm     ↓ dislike (0)   quote   flag        

control point says

you provide support for your claim, how is that?

.

The Volcker recession
Who beat inflation?
Mar 31st 2010, 19:49 BY R.A. | WASHINGTON
Timekeeper
I MENTIONED yesterday that I had the chance to hear Paul Volcker speak on financial reform. Mr Volcker has had a distinguished career in public service, but he is perhaps best known for his time as Fed chairman, during which he famously quashed inflation, in the process sending America into what was previously the worst recession of the postwar period. The Fed began raising interest rates in 1977, and the American economy tipped into recession in 1980, at which point the central bank took its foot off the brakes. But inflation rates continued to rise, and so shortly after the economy recovered (briefly) in July of 1980, Mr Volcker orchestrated a series of interest rate increases that took the federal funds target from around 10% to near 20%.

18   control point   ignore (0)   2015 Jun 10, 7:33pm     ↓ dislike (0)   quote   flag        

indigenous says

but he is perhaps best known for his time as Fed chairman, during which he famously quashed inflation, in the process sending America into what was previously the worst recession of the postwar period.

You are providing support for my claim...

19   indigenous   ignore (0)   2015 Jun 10, 7:39pm     ↓ dislike (2)   quote   flag        

control point says

You are providing support for my claim...

You think inflation benefits the middle class?

20   control point   ignore (0)   2015 Jun 10, 7:42pm     ↓ dislike (0)   quote   flag        

indigenous says

You think inflation benefits the middle class?

The "previously worst recession of the postwar period" certainly does not help the middle class.

21   indigenous   ignore (0)   2015 Jun 10, 7:46pm     ↓ dislike (2)   quote   flag        

control point says

The "previously worst recession of the postwar period" certainly does not help the middle class.

But double digit inflation does?

Read this article:

http://www.zerohedge.com/news/2015-06-10/oops-fed-admits-qe-widens-inequality

22   control point   ignore (0)   2015 Jun 10, 7:48pm     ↓ dislike (0)   quote   flag        

indigenous says

But double digit inflation does?

Causing a recession to combat inflation helps the middle class like cutting off a finger helps someone with a hangnail.

indigenous says

Read this article:

http://www.zerohedge.com/news/2015-06-10/oops-fed-admits-qe-widens-inequality

And read my response on that thread:
http://patrick.net/misc/Oops!+Fed+Admits+QE+Widens+Inequality

23   indigenous   ignore (0)   2015 Jun 10, 8:16pm     ↓ dislike (2)   quote   flag        

Read it, nonsense.

You subscribe to the demand is everything meme, you also believe that there should be no business cycle.

24   control point   ignore (0)   2015 Jun 10, 8:27pm     ↓ dislike (0)   quote   flag        

indigenous says

Read it, nonsense.

You subscribe to the demand is everything meme, you also believe that there should be no business cycle

Those were quotes from the paper itself. I was merely pointing out the blog you told me to read claims a fed paper says one thing, but if you read the paper, the claim is the opposite.

The fed paper actually supports my counterclaim that Volcker trashed the middle class. So thanks for continuing to provide support for my argument, when are you going to support your claim?

25   indigenous   ignore (0)   2015 Jun 10, 8:36pm     ↓ dislike (0)   quote   flag        

control point says

The fed paper actually supports my counterclaim that Volcker trashed the middle class.

so you buy that?

26   control point   ignore (0)   2015 Jun 10, 8:44pm     ↓ dislike (0)   quote   flag        

indigenous says

so you buy that?

Obviously, it was my COUNTERCLAIM.

27   indigenous   ignore (0)   2015 Jun 10, 8:56pm     ↓ dislike (1)   quote   flag        

As a former Austrian you know the drill, malinvestment caused by lose monetary policy.

28   control point   ignore (0)   2015 Jun 10, 9:23pm     ↓ dislike (0)   quote   flag        

indigenous says

As a former Austrian you know the drill, malinvestment caused by lose monetary policy.

That isn't an argument, nor is it support for why Volcker was "the man."

29   indigenous   ignore (0)   2015 Jun 10, 9:28pm     ↓ dislike (2)   quote   flag        

control point says

That isn't an argument, nor is it support for why Volcker was "the man."

Sure it is

30   control point   ignore (0)   2015 Jun 10, 9:42pm     ↓ dislike (0)   quote   flag        

indigenous says

Sure it is

So Volcker is "the Man" because he reversed loose monetary policy which was causing malinvestment? Malinvestment being bad for the economy, right?

An economy that was growing a a 3.2% annual real rate and had added 2.2M jobs (~2% increase in the labor force in one year) with unemployment hovering in the mid 5% range.

By the way, Reagan's best years, 1983/84 after recovering from the Volcker recession (and he snuffed out all the malinvestment after all) didn't create that many jobs.

Like I said, he cut off a finger to cure a hangnail. The resulting trickle-down, supply side revolution that followed has us EXACTLY where we are today, living in a low-tax, low regulation country (relative to where we were 1932-1979).

31   indigenous   ignore (0)   2015 Jun 10, 9:55pm     ↓ dislike (0)   quote   flag        

And how long do you think that utopia would have lasted with double digit inflation? Remember these fixed rate mortgage:

32   control point   ignore (0)   2015 Jun 10, 10:04pm     ↓ dislike (0)   quote   flag        

indigenous says

And how long do you think that utopia would have lasted with double digit inflation? Remember these fixed rate mortgage:

Business Cycle 101 - the "utopia" (and inflation) would have lasted until the demand for capital fell driven by natural market forces. I.E less demand for goods, = less demand for labor = less demand for capital = lower interest rates.

You want a free market going one way but not the other, its fucked up.

33   indigenous   ignore (0)   2015 Jun 10, 10:13pm     ↓ dislike (0)   quote   flag        

control point says

Business Cycle 101 - the "utopia" (and inflation) would have lasted until the demand for capital fell driven by natural market forces. I.E less demand for goods, = less demand for labor = less demand for capital = lower interest rates.

You are assuming that the Fed did not cause the inflation in the 1st place, which is specious.

LBJ, the Vietnam war, Chairman Martin, Nixon and Chairman Burns caused the inflation basically to pay for the war.

What you are saying would be true if the interest rate was left to it's own natural devices. The money supply does not need to change one iota.

34   control point   ignore (0)   2015 Jun 11, 5:46am     ↓ dislike (0)   quote   flag        

indigenous says

You are assuming that the Fed did not cause the inflation in the 1st place, which is specious.

LBJ, the Vietnam war, Chairman Martin, Nixon and Chairman Burns caused the inflation basically to pay for the war.

The Fed didn't cause inflation, because as I've shown you many times, money supply and price levels are not correlated.

The largest cohort in history becoming working age and actually finding jobs, evidenced by the 25MM jobs created (a 30% increase the the size of the labor force) in the 70s, including households becoming dual income in large numbers for the first time (i.e more family discretionary income) had more to do with price inflation that anything else.

To compare to today, the labor force has grown 30% since mid-1988. Basically, an equivalent amount of wage demand was inserted in 10 years that has been inserted in the last 27 years. CPI has increased 199% since mid 1988. It increased 210% 1970-1979. That is not a coincidence.

35   indigenous   ignore (0)   2015 Jun 11, 6:42am     ↓ dislike (0)   quote   flag        

With all due respect, CP you have been duped by the Keynesians.

Socrates called:"The beginning of wisdom is the definition of terms.”

"Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term `inflation' to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation. . . . As you cannot talk about something that has no name, you cannot fight it. Those who pretend to fight inflation are in fact only fighting what is the inevitable consequence of inflation, rising prices. Their ventures are doomed to failure because they do not attack the root of the evil. They try to keep prices low while firmly committed to a policy of increasing the quantity of money that must necessarily make them soar. As long as this terminological confusion is not entirely wiped out, there cannot be any question of stopping inflation."

https://mises.org/library/defining-inflation

The importance of this is purported by the Fed itself and is very self serving and of course the upper 1%.

One of the biggest lies in our country, of Gary proportions.

The 1% profit in the margins, you cannot go back and look at this over a long term as the profit is in the margins in the short term ahead of the trickle down.

36   mell   ignore (4)   2015 Jun 11, 6:49am     ↓ dislike (1)   quote   flag        

control point says

The Fed didn't cause inflation,

Their 2% target inflation rate doesn't agree with that statement.

37   indigenous   ignore (0)   2015 Jun 11, 6:50am     ↓ dislike (1)   quote   flag        

mell says

Their 2% target inflation rate doesn't agree with that statement.

Nice, good point.

38   Heraclitusstudent   ignore (2)   2015 Jun 11, 10:46am     ↓ dislike (0)   quote   flag        

indigenous says

Why is inflation good?

I didn't say it is good.
Inflation means wages are growing. That means increase demand, the lack of which is the problem now.
It means money circulating through the economy.
It means nominal growth.
It means past debt decreasing in value relatively.

The entire idea of printing money is to create inflation.
Printing money while making sure wages are not growing is like handing cash to asset owners.

39   NoCoupForYou   ignore (5)   2015 Jun 11, 10:58am     ↓ dislike (0)   quote   flag        

Venezuela had high inflation before Chavez entered office.

We only hear of high inflation in non-neoliberal regimes.


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