Monday, June 21, 2010

Explain This Mr. Krugman

Another Monday about done. Summer Mondays are rough!

As an aside, it seems like Animal Planet here as of late. In the last two weeks I have seen in my back woods near the yard:
-Rabbits
-Fisher Cat
-White Tail Deer
-Wild Turkeys (about 6 of them in a group!)
-Marten
-Red Fox
-Red Tail Hawk
Maybe they can smell the Big Steel Keg when it's cooking?

Housing Issues are Still Not Going Away
One of the most deeply held beliefs of policy makers is that real estate was suffering from a liquidity shortage and that stop gap measures could support prices for a time until things got back to "normal". This has gone on a lot longer than they must have expected and looks at this point to be a multi year (decade?) phenomena. Nice effort though guys!

All kinds of stories today about hosing, and I will do a linkfest so I can focus on the main section.

Via Zero Hedge:
Spain Goes For Broke In Sweeping Toxic Crap Under The Rug For Second Time In As Many Years
You are really going to have to read this one, and try not to cry. Just unreal. I am so sure the Euro bank stress tests will cover all this, yuppers!

Calculated Risk takes a look at the HAMPer results and finds them unimpressive. Another waste of time, money, and effort:
HAMP Data Shows over 150,000 Trials Cancelled in May
I know, you are shocked.

More form CR, a guest post forecasts some problems for home sales next month:
Lawler: Home Sales in May; a Look at the Data
If the author is correct, this is going to miss expectations by a ton.

For comic relief, enjoy the NY FED's comic strip on how they handle inflation:
The Story of Inflation
No word yet on the release of the long awaited follow up work called "The Story of Failure".

Explain This Mr. Krugman
It has been a while since I have pointed out a Paul Krugman piece, and I think I even agreed with him a few times over the past few months! Miracles do happen! Tonight it seems I am back where I always end up with Krugman, in total opposition to anything he says.

One of the issues I often have with policy makers or mainstream economists is that they never have to really answer for real world data. All their exercises are theoretical and abstract. It can be frustrating.

Tonight I have a perfect example of this very thing.

Paul Krugman writes in a NY Times Op-Ed the following:
Now and Later
Spend now, while the economy remains depressed; save later, once it has recovered. How hard is that to understand?
Very hard, if the current state of political debate is any indication. All around the world, politicians seem determined to do the reverse. They’re eager to shortchange the economy when it needs help, even as they balk at dealing with long-run budget problems.

But maybe a clear explanation of the issues can change some minds. So let’s talk about the long and the short of budget deficits. I’ll focus on the U.S. position, but a similar story can be told for other nations.

At the moment, as you may have noticed, the U.S. government is running a large budget deficit. Much of this deficit, however, is the result of the ongoing economic crisis, which has depressed revenues and required extraordinary expenditures to rescue the financial system. As the crisis abates, things will improve. The Congressional Budget Office, in its analysis of President Obama’s budget proposals, predicts that economic recovery will reduce the annual budget deficit from about 10 percent of G.D.P. this year to about 4 percent of G.D.P. in 2014.
Unfortunately, that’s not enough. Even if the government’s annual borrowing were to stabilize at 4 percent of G.D.P., its total debt would continue to grow faster than its revenues. Furthermore, the budget office predicts that after bottoming out in 2014, the deficit will start rising again, largely because of rising health care costs.

So America has a long-run budget problem. Dealing with this problem will require, first and foremost, a real effort to bring health costs under control — without that, nothing will work. It will also require finding additional revenues and/or spending cuts. As an economic matter, this shouldn’t be hard — in particular, a modest value-added tax, say at a 5 percent rate, would go a long way toward closing the gap, while leaving overall U.S. taxes among the lowest in the advanced world.
If you just woke up from a coma this maybe all sounds reasonable and a good idea.

So let's dismiss the idea that budget shortfalls could be fixed by higher taxes, social security changes, or health care savings for a minute. While all may well be possibilities, it is not needed for this discussion.

What Mr. Krugman, as well as all the other Keynesian sort, leave out is historical fact. I get the idea, spend to cushion a bad economy and then pull back when the economy is good. Fair enough. What should have been included in the OP-Ed were these charts:
CBO's Estimate of Budget Deficit 1980-2020

Now I do not want to give too much weight to way off future projections, but at a minimum we have a solid 30 years of data here that shows a grand total of 4 YEARS where the US did not run a deficit. 4 out of 30. Call me crazy but I am pretty sure (correct me if I am wrong) that we have not had a "severe economic crisis" for 30 years. Well, I mean we have, but not the way it is defined technically!

A longer term view:
Federal Budget Deficit 1930-2010

Again I find it hard to take Mr. Krugman seriously when the enormous weight of history shows he is as wrong as can be. Can you see the surpluses? You may have to squint. My point is that no one serious could write that Op-Ed and then present those two graphs and expect anyone to not think them a nut job. However, this is what passes today for mainstream economic thought, facts need not apply.

So how is it possible that the US can run these deficits for all time and nothing seems to come of it? It is a great question and there are numerous facets (reserve currency, idea of higher taxes in the future, leprechauns) to the final answer. I like to dumb things down because that is how I best understand them (insert joke here!) and so here goes:

In order for some entity (bond market, other countries, aliens) to call the US out on this fantasy land game of cheating someone has to have something to gain from the other side of that bet. So the US cannot really pay back their debt? Who cares? Refinance it and keep rolling it over and everyone gains. What would be the point of blowing the US bond market up? None at all.

It is a strange phenomena at work here. Unless a major world event occurs where there is a scramble for hard assets and hard money the US will continue to get away with this stuff. I actually have a fleshed out theory on this big picture wise, but I do not want to be called a conspiracy nut. If interested, email me and I will serve it up!

Of course, maybe at some point more than 100 people here in the US will figure this out and desire some real reform. I would not hold my breathe.

Have a good night.

33 comments:

Kid Dynamite said...

i hate to quote Karl Denninger, but i liked his reply to Krugman, regarding fiscal responsibility "tomorrow"... "Tomorrow never comes."

i have had hawks in my yard going apeshit - a pair of them flying around in circles and screeching every day. but i see nothing else. boo hoo.

getyourselfconnected said...

Ha, wait and you shall see moree animals!

Its liek that Garth Brooks song, "Tomorrow Never Comes".

Really, his article and those two graphs are so incongruous its criminal.

Thanks for stopping in and enjoy the show tomorrow!

getyourselfconnected said...

Wow, I really have to spell check my comments!

GawainsGhost said...

This is fiscal insanity. And there will come a time when it grinds to a hard stop, probably within the next few years. And then there will be much wailing and gnawing of teeth.

Anyway, yeah, I read those articles on housing this morning. I fully expect sales to slow to a crawl. Virtually all offers coming in at this time are either cash, FHA or Fannie Mae loans. (Fannie offers financing through HomePath, whereas Freddie does not; Freddie does offer HomeProtect though, which is a two-year home warranty.)

Housing sales are typically seasonal, with most people buying and moving in the summer, when their kids are out of school. But even with low interest rate mortgages and minimum down payments, given the expiration of the tax credit, I don't expect sales to improve much in the coming months. This will further depress prices, especially considering the amount of inventory on the market. Realistically, I doubt that we'll see a recovery in housing prices in the next decade.

The government may try this or may try that to provide incentives and prop up prices, but people have gotten wise to that game. There's too much fear about the economy and concern about the direction of the country, not to mention distrust of banks, for people to make a major investment like buying a home. And those trying to sell are going to be severely disappointed in the offers they receive.

Prices simply have to fall in line with levels of income, and given stagnant wages, we're nowhere near that point yet. So I expect to see declining prices for quite some time. Especially now that I'm looking at price reductions of $10,000 every other month on repos that haven't sold, and more and more going into auctions. It's a complete mess.

Howbeit, I'd love to read your theory, GYC, so shoot me an email.

getyourselfconnected said...

Gawains,
No problem, I will send it tomorrow.

Dave in Denver said...

Someone explain to me how the hell Krugman won any price, let alone the Nobel. He is retarded.

insanity shelter said...

save later...

And that's the problem. Never going to happen, until the wheels fall off the wagon.

getyourselfconnected said...

I had to stay way late and do a training at work that had nothing to do with my job so I am just getting in. No post tonight and I will try and answer the requests for my nut case theory tonight or tomorrow via email. Another wild day with plenty to catch up on; let me know what you are looking at tonight!

Dave in Denver said...

Dude, in lieu of it not being football season - which is a bummer - Red Sox in town for the 3 w/the Rockies. Should be a good series!

GawainsGhost said...

Yeah, well, I had the opportunity to watch the World Cup this weekend, but I was distracted by the sight of paint drying.

The Soothsayer will return to the web at the start of training camp, which is when real football begins.

getyourselfconnected said...

Football opening training is bittersweet; you know preseason is on the way and then the regular season, but that also means summer is passing by! Is it really July 4th weekend next week????

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