June 24, 2017

Lost In A Keynesian Puzzle Palace

A weekend topic starting with Bloomberg. “Robert Litan and Ian Hathaway, writing in Harvard Business Review, surmised that many American entrepreneurs are no longer looking for ways to produce more useful stuff, and are instead looking for new techniques for extracting money from each other and from the government. In other words, crony capitalism may be slowly cannibalizing productive capitalism. Litan and Hathaway draw on an argument by the late economist William Baumol, who warned of the possibility that entrepreneurs could turn their energies toward useless rent-seeking.”

“As examples, Baumol cited historical cases of business people who found novel ways to sue their competitors out of existence. Litan and Hathaway, noting a slowdown in U.S. entrepreneurship, fear that something similar might be happening today. If big companies are using new and creative ways to crush the competition, it’s bad news for economic dynamism.”

“So which companies are sucking rents out of the productive economy? Litan and Hathaway don’t point fingers, but it’s easy to make an educated guess. In an influential 2014 paper, Thomas Philippon speculated that financial industry profits and salaries rose spectacularly since 1980 because banks, securities firms and fund-management companies found new methods for extracting rent.”

From David Stockman. “The American people are being brought to ruin by three institutions that are mortal threats to liberty and prosperity. To wit, the Federal Reserve, the military/industrial/surveillance complex and a sinecured Congress that is burying unborn generations in debt — even as it sanctimoniously presumes that it is doing god’s work by servicing the beltway racketeers who keep it perpetually in office.”

“On the latter score, it is worth reminding once again. An incumbent House member standing for reelection has a smaller chance of losing his seat than did a Politburo member during the heyday of the post-war Soviet Union.”

“Perhaps by the looks of today’s sea of red, the whopper told by Yellen during her presser yesterday may finally be sinking in. Our clueless Keynesian school marm not only falsely claimed ‘mission accomplished’ and that the US economy is heading for the promised land of permanent full employment and unprecedented prosperity. She also claimed that the Fed would soon begin normalizing its balance sheet to the tune of $50 billion per month of bond holdings runoff (i.e. effectively bond sales) — ultimately shrinking its holdings by more than $2 trillion — and that there would be nary a negative ripple effect thereupon.”

“As we will soon document further, the first part of Yellen’s proclamation is a risible lie. But the real whopper was her assurance that the Fed’s balance sheet normalization would be of no more moment than ‘watching paint dry’ on a wall.”

“The fact, is when there are no new breadwinner jobs, there is no gain in living standards or real prosperity. Indeed, Janet Yellen is lost in a Keynesian puzzle palace — and that is extremely bad news for the casino punters who still refuse to acknowledge the obvious.”

From Professional Adviser. “Société Générale’s bearish analyst Albert Edwards has said the ‘unelected and unaccountable’ central bankers who caused the global financial crisis will be - and ’should be’ - the next casualty of the current political landscape. Edwards said central bankers would be ’sacrificed at the altar’ as political turmoil continues to shows no sign of waning.”

“He said: ‘There is no recognition at all by central bankers that it may well be their own easy money and zero interest rate policies that are actually causing the stagnation in growth while at the same time wealth inequality surges to intolerable heights. Yellen et al will inevitably be sacrificed at the altar of political expediency as citizen rage explodes. And if I am right and it is clear for all to see that the central banks have caused yet another global financial crisis (GFC), of 2008 proportions, I personally believe central banks deserve to lose their independence.’”

“Edwards said the next financial crash as a result of another global asset bubble bursting is ‘inevitable’ and politicians will once again look for a scapegoat, like they did with the bankers in 2008. He went on to criticise central banks’ policy of quantitative easing, saying it had only created further bubbles.”

“‘The problem in creating asset bubbles to try and reflate the economy is that when the asset bubble bursts and blows up the economy, you are more likely to get the very deflation outturn that you were seeking to avoid in the first place. Even after the GFC these dudes simply have not learnt that loose money policies to blow asset price bubbles is a catastrophic policy destined to end in failure.’”

From Rupert Hargreaves. “The problem with market bubbles is they are hard to spot. Even for those investors who have experienced market booms and busts in the past, market bubbles can creep up on them as there is really no definitive way of predicting them. This collection of quotes from some of history’s greatest investors, policymakers and economists discusses market bubbles and how to prepare for them.”

“‘Fear and euphoria are dominant forces, and fear is many multiples the size of euphoria. Bubbles go up very slowly as euphoria builds. Then fear hits, and it comes down very sharply. When I started to look at that, I was sort of intellectually shocked. Contagion is the critical phenomenon which causes the thing to fall apart.’ — Alan Greenspan.”

“‘Investment bubbles and high animal spirits do not materialize out of thin air. They need extremely favorable economic fundamentals together with free and easy, cheap credit, and they need it for at least two or three years. Importantly, they also need serial pleasant surprises in such critical variables as global GNP growth. Bubbles have quite a few things in common, but housing bubbles have a spectacular thing in common, and that is every one of them is considered unique and different.’ — Jeremy Grantham.”