Greece is not real (it’s nominal)

Lots of people believe the structural view of the current global recession; some of them are smarter than me.  But everywhere I look I see more and more evidence it’s a nominal shortfall, an AD problem.  Or at least 70% is demand-side.

I’ve already discussed:

1.  The LBJ argument.  He was much more a big government guy than Obama, and the economy boomed for the 5 1/2 years he ruled.  There were problems later, but that’s exactly my point.  Supply-side problems look very different from sudden recessions.

2.  The timing problem.  The big drop in housing construction occurred between January 2006 and April 2008, and yet unemployment was almost unchanged, as the laid off construction workers found jobs in other growing sectors.

3.  The no mini-recession argument.  If recessions were caused by real shocks, then mini-recessions should be much more common than actual recessions.  But we’ve had virtually none–unless you count the 1959 steel strike.  And that ended almost immediately.

4.  The David Glasner argument.  The stock market hated inflation in the 1970s.  Since 2008 stocks have been strongly correlated with TIPS spreads.  In other words the stock market started rooting for more AD about when market monetarists started arguing we needed more AD.

5.  And now we have Greece.  This tiny country is 2% of the EU.  If (God forbid) it was destroyed by an asteroid tomorrow, stock markets would soar upward all over the world.  The Greek crisis would be over.  Yes, banks would hold some worthless Greek debt; but with no further moral hazard concerns, the rest of the eurozone would gladly bail out their banks, and add that Greek debt to their own public debts.  Remember, Greece is 2% of the EU.

Why would stocks soar on the destruction of Greece?  Because it would end the uncertainty, the fear that a Greek departure from the euro would have a contagion effect.  People who talk about structural problems talk about things like malinvestment in too many houses or BestBuy stores, or Obama’s big government policies, etc.  But the markets don’t care very much about those things; they care about things like Greece.  And not because Greece is big enough to have a real effect on the global economy, obviously it isn’t.  Rather Greece matters because it could trigger a financial panic that would reduce AD all over the world.  That’s why global equity markets lose TRILLIONS of dollars when the Greek crisis intensifies.  The real problem is nominal.

Everywhere I look I see more and more evidence that the developed world has a massive AD problem.  Yes, individual countries (southern Europe, to a lesser extent the UK, and to a still lesser extent the US) also have some structural problems.  But the NGDP problem is both easy to fix and a big part of what’s hurting the world economy.  It’s frustrating to see us ignoring it.

It’s now far too big a problem to be addressed by any token fiscal stimulus that could come out of this recent Camp David push for “growth.”  Monetary policy is our only hope.


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96 Responses to “Greece is not real (it’s nominal)”

  1. Gravatar of Neal Neal
    19. May 2012 at 19:02

    Is this right?

    Markets fear a financial panic.
    Financial panics strongly reduce NGDP.
    Reduced NGDP causes AD, hence RGDP, to plummet.
    Therefore, markets fear the collapse of Greece.

    If the growth path of NGDP were stabilized, the financial panic triggered by the collapse of Greece would not strongly impact NGDP. Therefore, markets would ignore Greece.

  2. Gravatar of Sam Sam
    19. May 2012 at 19:18

    The destruction of Greece would end uncertainty about Greece but it wouldn’t solve the underlying problems in Spain/Italy/Portugal. The imbalances in the Eurozone would still be there, even if the most troubled country would no longer be there.

    In my thinking, it’s as if Greece, Spain, Italy and Portugal, etc. (rest of the EZ) are all dominoes in a row, with Greece the smallest and each subsequent country a slightly larger domino. If you take away the smallest domino, true, it’s going to take a greater force to knock them all down, but the issue of having a one-size-fits-all monetary policy (and at the moment, a terrible monetary policy at that) for dissimilar economies is still there. Which is why I’d take issue with the idea of Greece’s destruction as a panacea. Or am I missing something?

  3. Gravatar of dwb dwb
    19. May 2012 at 19:26

    markets panic because they #expect# the decline of AD.

    if ngdp path were stabilized, they would not panic. markets know what the ECB is not going to do, before they confirm they wont do it.

  4. Gravatar of Steve Steve
    19. May 2012 at 20:15

    “Lots of people believe the structural view of the current global recession; some of them are smarter than me.”

    At what? Chess? Trivial Pursuit? Cuz’ they sukk at monetary policy.

    We need a Grexit ASAP. Four trillion in wealth loss in the last few weeks? Gimme a break. Skip the meteor and devalue. I’d vacation in Mykonos over Nuremberg any day. I’d choose feta over liberty cabbage as well.

    The G-8 was embarrassing. Well, we need (fiscal) austerity and (fiscal) stimulus, but we don’t really like the implications of either one. Unless it helps us get votes with our electorates. So we’ll agree to “growth”. At least we are getting some Hollandaise sauce to ease the foul taste of AusterityKraut. Personally, I prefer monetary cookies.

  5. Gravatar of Morgan Warstler Morgan Warstler
    19. May 2012 at 20:52

    Until greece lives on its revenue the problem is structural.

    We will never print money to help them survive as they want to be.

    —–

    You can call it 99/1…

    Greece will BEND. California will BEND.

    They will be made an example of, and the moral hazard will evaporate. Getting rid of squirrels is easy, kill one and hang it in a tree.

    Scott, Cameron’s argument of fiscal spending cuts and monetary easing BECOMES MORE LIKELY if Greece is made to bend.

    Wisconsin is a LESSON. Tax increases in England were a LESSON.

    People learn.

    Lesson’s matter.

    We have only to ask ourselves, have the Greeks yet learned their lesson? Has California learned their lesson?

    We won’t go all wobbly. Nothing could be better than watching a 37 year old Greek Communist turn around and tell his people they have to BEND.

    It will be downright Clintonian of him.

  6. Gravatar of ChargerCarl ChargerCarl
    19. May 2012 at 21:20

    dwb,

    does NGDP decline because markets panic?

  7. Gravatar of Rien Huizer Rien Huizer
    19. May 2012 at 23:27

    Scott,

    Interesting. Especially your view on real shocks/mini recessions. And I wonder if the link between the big drop and housing construction and aggregate employment is really as you say it is (not influential).

    But apart from that I agree that “fiscal policy” is the wrong response to the political (unemployment is mainly a political problem once it reaches certain levels) problem of low output/high unemployment assuming that wages are quite sticky. Especially under the ECB regime. So the so-called austerity policies in EUR land are not that bad.

    There is two types of gvt spending (maybe financed by borrowing and accomodated by the ECB) could have a positive effect: infrastructure in peripheral countries by local labor and financed by CA surplus countries. Maybe those countries should then also manage those projects because otherwise cronyism would take the money to Switzerland.

    A second way to use surplus country fiscal resources would be to subsidize outbound investment of, eg the German private sector. German investors should be subsidized to, for instance buy the Greek railways, do all the firing, replace managers, buy shily Siemens rolling stock and triple the ticket prices. Without the subsidy, Americans would do this and there would be no benefit for the EUR as apolitical entity.

    For the rest, I am sure that a complete overhaul of the EUR banking system (IMF has decent but unworkable ideas, but something more politically feasible) and maybe a temporary nationalisation of the peripherals (with the promise of reprivatization later on) would ne more useful than “printing money” (of course, once the structural discrepancies within the EUR zone are reduced, there should be a decent monetary policy.

    And of course, the EURzone should maintain a high level of uncertainty. That would produce the mercantilistically desirable result of continued EUR (DM) weakness. Combines with low wages and German investment, that might turn things around within a single generation!

  8. Gravatar of Greece is not real (it’s nominal) | the ecoptimist Greece is not real (it’s nominal) | the ecoptimist
    20. May 2012 at 01:52

    [...] I enjoyed this post from Scott Sumner: This tiny country is 2% of the EU.  If (God forbid) it was destroyed by an asteroid tomorrow, stock markets would soar upward all over the world.  The Greek crisis would be over.  Yes, banks would hold some worthless Greek debt; but with no further moral hazard concerns, the rest of the eurozone would gladly bail out their banks, and add that Greek debt to their own public debts.  Remember, Greece is 2% of the EU. [...]

  9. Gravatar of Lorenzo from Oz Lorenzo from Oz
    20. May 2012 at 01:56

    Just read an issue of The Economist for the first time in a long time. Was struck by how little monetary policy was discussed in all the words on euro crisis and economic conditions. (Mining investment apparently saved Australia, for example.) Monetary policy was discussed somewhat, but hardly given centre place. So the Market Monetarist message has a way to go in the relevant media.

    Just been visiting Malta, which is Eurozone but has ‘help wanted’ ads in cafes, just like back home. Its public debt is about 70% of GDP, so low by Eurozone standards. Quite a few ‘for sale’ signs, but that is probably distressed Euro folk selling holiday homes. Plenty of tourists (Germans, Brits and Italians mainly) to keep demand up. The EU funds on refurbishing the fortifications are very visible, so probably help confidence.

  10. Gravatar of Slaval Slaval
    20. May 2012 at 02:09

    About Greece, did you see this : http://boilingfrogs.info/2012/05/13/greece-exit-eurozone/

    (an exit scenario that include strong monetary stimulus policies)

    The author doesn’t mention ngdp targeting, but i think het gets it.

  11. Gravatar of RebelEconomist RebelEconomist
    20. May 2012 at 03:15

    A bit of crude analysis of the Greek situation shows why monetary expansion is a poor solution to the eurozone crisis. Greece’s number one industry is tourism. According to the IMF, in 2011 Greek GDP per capita was $27,000. This is well above regional competitors for tourists, like Turkey ($11,000) or Croatia ($15,000). Not surprisingly, Greece has found it increasingly difficult to attract tourists. Fundamentally, the reason for the lack of aggregate demand in Greece is that its capacity is mispriced. The monetary solution, to accept prices (eg the price of labour) as sticky, and to pump up the other prices until Greece’s spare capacity gets used, seems a very blunt instrument. Given that much Greek wealth probably owes its existence to the tax evasion and inflow of borrowed money that is the source of Greece’s fiscal problems, surely the most just and efficient solution to Greece’s economic difficulty would be to cut taxes on income and increase taxes on wealth, if necessary aggressively pursuing offshore holdings. The Greeks need to accept being collectively poorer, but redistribute wealth to minimise the impact on the poor.

  12. Gravatar of StatsGuy StatsGuy
    20. May 2012 at 04:55

    Oil at 91.30; Brent at 107

    Looking at last year, we still need to get to 85 and 95 before the powers that be decide to permit inflation. From Team Obama’s perspective, we know that the stock market change in the 2 months prior to the election is most impactful, so they would aim for an initiation of an expansion beginning 3-4 months prior. I’m guessing Team Obama has some pull, because 2 more seats were finally appointed, and I have to imagine a deal occurred to allow that to happen. That puts us in maybe June at earliest… They aren’t going to wait till September this year. This year seems to be moving about 1-2 months ahead of last year in terms of cycle. US oil stocks are at a 22 year high (and I’m not even sure that counds the strategic petroleum reserve). The Fed needs to crash the commodity complex to provide breathing room for a QE cycle without exceeding their 2% inflation target too much.

    Also, if Greece finally leaves the Euro and devalues, and the EU establishes a firewall to keep Spain functional (the popular conservative pro-austerity govt makes this feasible) and France’s govt pulls German teeth to loosen up the ECB (one way or another) we’ll see a significant recovery.

    But not yet… the morality play needs to go at its own pace. Hey, at least this time I moved to 60% cash a month ago. (Now, if only I would stop buying individual stocks, which I know nothing about, and stick to macro investing…)

  13. Gravatar of dwb dwb
    20. May 2012 at 05:27

    does NGDP decline because markets panic?

    Markets are looking ahead, they see the decline coming. “panic” is the symptom not the cause. It’s not *totally* inevitable (think of it this way: even if I say there is a 70% chance the ECB would step in, than means that there is a 30% chance of a severe decline worth a steep selloff).

    Actually, right now though, I am very pessimistic- the Euro might be a zombie that just needs to be shot in the head before it eats more brains. Its hard to say, but the policy errors up to now might be cumulatively so severe that it will take an ECB miracle to save the project. Weidmann is out in the news today saying Greek exposure needs to be limited. my translation: Greece is Eurotoast.

    I am deeply skeptical that the political will is there to do what it takes.

    I have to think countries like Spain are looking at the Iceland example and wondering of they can weather it, and at what cost. Leaving the Euro and devaluing maybe will cost 10-15% of GDP over two years after which they return to growth. Staying in the Euro will cost what??

    I think markets understand this calculation and realize that “what cannot go on forever must stop”. The Eurozone recession could be 10%, Germany will get hit as bad as everyone else. Even a 50% change of a 10% ngdp decline deserves a pretty steep selloff.

  14. Gravatar of dwb dwb
    20. May 2012 at 05:50

    and the EU establishes a firewall to keep Spain functional (the popular conservative pro-austerity govt makes this feasible) and France’s govt pulls German teeth to loosen up the ECB (one way or another) we’ll see a significant recovery.

    a lot of ifs, the conditional probability of each is smaller and smaller.

  15. Gravatar of ssumner ssumner
    20. May 2012 at 05:56

    Neal, It seems obvious to me that the markets fear Greece because of spillover effects. Greece itself is very small.

    Sam, I never claimed it would be a panacea, but here you missed the point:

    “The destruction of Greece would end uncertainty about Greece but it wouldn’t solve the underlying problems in Spain/Italy/Portugal. The imbalances in the Eurozone would still be there, even if the most troubled country would no longer be there.”

    The imbalances of the eurozone were there a few weeks back when the Dow was 1000 points higher. What changed? One big factor was the Greece crisis intensified, making it more likely that Greece would leave the eurozone. You can’t look at markets just from a “Is there a problem or not?” perspective, there can be marginal changes in the expected severity of the crisis triggered by individual countries.

    BTW, I’m not claiming Greece was the only factor, worsening banking problems in Spain also played a role, so there would have been some decline even without the Greek crisis.

    dwb, That’s right.

    Steve, You said;

    “Skip the meteor and devalue.”

    I agree.

    Rien, Germany just spent a trillion or two bailing out the East. I can’t imagine they are enthusiastic about pouring even more money into boondoggle projects.

    Lorenzo, Interesting. One rarely hears about Malta or Cyprus, even though both are Southern eurozone countries.

    Morgan, You missed the point–I agree the Greek problem is structural for Greece, but the spillover on the US certainly isn’t structural.

    Slaval, Thanks for the link.

    Rebeleconomist. There are lots of flaws in that analysis. To start with, never think about macro problems from a micro perspective. Tourism tells us very little about how monetary stimulus would affect the eurozone. Monetary stimulus works through 100s of channels, for instance it raises incomes in Europe, which increases the demand for tourist services, but also for everything else Greece exports. But that’s just part of the picture. It increases asset prices, including the price of vacation homes in Greece. This would tend to increase housing construction. it lowers the real value of debts, which eases the debt crisis, making contagion less likely. It reduces the ratio of hourly wages to NGDP, which boost employment.

    BTW, I don’t think that any likely levels of monetary stimulus would be a complete gamechanger–I don’t think it would “solve” the problem. But that’s even more true of fiscal initiatives.

    The markets are telling us that monetary stimulus would help a lot. We should listen.

    Statsguy, I’m more worried about the contagion effect than you are, although I suppose that ECB easing could prevent it, as you say.

    I don’t understand this:

    “The Fed needs to crash the commodity complex to provide breathing room for a QE cycle without exceeding their 2% inflation target too much.”

    What does it mean to “crash the commodity complex?”

  16. Gravatar of JW JW
    20. May 2012 at 05:58

    Scott,

    I enjoy reading your blog and find your commentary on our current challenges to be enlightening. However, I must say that your point #5 today, that the destruction of Greece would cause markets to soar, is not correct and one of the weakest points that you have made in favor of your policy recommendations (with which I agree). I cannot imagine that the loss of 2% of the wealth of Europe (approximate) and the damage caused to European banks would lead to an increase in stock prices. As others have noted, Spain, Italy, and Portugal would remain in crisis. These countries are imperiled not because of contagion, but because of the policy choices of each country and Europe as a whole.

    The only way I can see that the destruction of Greece would lead to market increases would be if the disaster prompted European leaders to act more aggressively. If Europe responded with a dramatic easing of monetary policy then it is possible that markets would soar, but that is a different argument than the one you made, which was that the destruction of Greece on its own would cause markets to rise. That seems unlikely.

  17. Gravatar of genauer genauer
    20. May 2012 at 06:07

    Hi Rien !
    In principle your thought : German corportions like Siemens should invest in Greece is right. In fact our economy minister Rösler was there recently with a huge entourage of corporate leaders. The welcome was a little underwhelming. As long as they celebrate their xenophobic (especially against Germany) resentiments, it just don’t work.

    Germany has 170 tax specialists with greek background (2nd / 3rd generation from the folks who came in the early 60ties) on standby for them, since more than a half year. They don’t want that either.

  18. Gravatar of Neal Neal
    20. May 2012 at 06:39

    Scott, has anybody written a paper analyzing the distribution of recessions according to magnitude? Does your analysis of recessions square with, e.g., C. Romer’s study pointing out that variance of recessions did not change between the pre- and post-war periods?

  19. Gravatar of Ron Ronson Ron Ronson
    20. May 2012 at 06:50

    I would love the problems to be nominal as that would make them easier to fix and I mostly agree but I have one nagging doubt.

    Presumably an AD problem could be fixed by either an increase in the money supply or a fall in the prices level. We had a huge fall in NGDP in 2008 after which if began to increase again at pretty much the historic trend. Inflation rates since then have been low compared to trend. In these 3 1/2 years of NGDP growth and low inflation why have relative prices not adjusted and allowed some the RGDP shortfall to be made up? Are we to believe that prices and wages are so rigid that an NGDP shortfall in a single year stays in the system and restricts RGDP for ever ? Or are there other factors I am missing ?

  20. Gravatar of Morgan Warstler Morgan Warstler
    20. May 2012 at 06:56

    Scott, it isn’t that it won’t have a negative impact on the US.

    It will.

    BUT, that’s Obama’s fault… and you just admitted it in your Cameron article.

    The correct policy stance from Obama was Fiscal CONTRACTION, and Ben and the Fed would have kept inflation at 2%, and very likely would have gotten into the business of making sure NGDP stayed even.

    You refuse to imagine, that the Fed’s response to 2008 was really a response to Obama’s govt. take over strategy.

    Do you not listen to Fisher??? They do not want to REWARD bad fiscal (higher taxes, increase fiscal spending).

    —–

    Look, the logic flows my way under 2% inflation, under 4.5% NGDPLT, under any circumstance where the Fed has private sector preferences, etc.

    At the Fed… German thinking is in charge. Texas thinking is in charge.

    And as such, letting Obama suffer his mistakes, letting the LESSON be learned…

    That’s the best structural change you can make.

    this is what Obama wrought… mobs wielding hammers and batons in Chicago…

    http://www.suntimes.com/12640681-761/suspects-wielding-hammers-and-batons-attack-diners-at-tinley-park-restaurant.html

    In Texas, that whole crowd would be shit dead on the spot by diners.

    Let Obama suffer his choices. He was allowed to be Clinton, he did not, does not want to be.

  21. Gravatar of Bonnie Bonnie
    20. May 2012 at 07:05

    The point about Greece makes some sense, but it is over simplified. Spain is having another mini financial crisis, having to bail out major banks after more losses on bad real estate deals. It’s doubtful the markets would soar if Greece disappeared because the euro zone is a giant structural problem; it’s just the countries that have the most structural problems that are exposed first because they are less able to deal with the permanent gyrations around disinflation.

    Even Germany has a problem. It is just misidentified as being caused by the PIIGS, but if it were the last country standing in the euro, it would eventually implode. No one can survive on a scheme that relies on increasing AS with fiscal/pubic policy to keep AD from being chewed up in disinflation, and the only reason Germany doesn’t have so much of a problem yet is because they still have stuff to cut, markets to free, and a glut of weary investors looking for refuge. It is but a temporary condition that appear to be doing well.

  22. Gravatar of Rien Huizer Rien Huizer
    20. May 2012 at 07:16

    Genauer:

    Sure. But some people seem to find this situation depressing and I wanted to add a touch of levity. One of the last things German firms would like to do is to follow in the footsteps of their opas. But economically, it would make a lot of sense. Pity economics is only part of the problem

  23. Gravatar of RebelEconomist RebelEconomist
    20. May 2012 at 07:30

    So Scott, your solution to Greece’s economic problems is basically “inflate labor, inflate stocks, inflate the farmers, inflate real estate”?

  24. Gravatar of Steve Steve
    20. May 2012 at 08:11

    The political economy of Europe is toxic. The Euro imposes huge deadweight costs, while offering hidden and unappreciated subsidy to some. The GIPSIs are getting screwed by horribly sub-optimal monetary policy and they know it, while the German industrial exporters are getting huge cost subsidy that everyone pretends doesn’t exist. This isn’t a recipe for stability; it’s a recipe for antagonism.

    The US has horrible policy as well, but the politics is very different. Take ethanol. Agribusiness is getting a huge subsidy and they know it. They rest of us pay that when we buy gas or groceries, but the cost is mostly hidden. Politically its stable, because the people who need to get paid off do, while the cost to the rest of us is merely a nuisance.

  25. Gravatar of dwb dwb
    20. May 2012 at 08:28

    ” At the Fed… German thinking is in charge. Texas thinking is in charge.And as such, letting Obama suffer his mistakes, letting the LESSON be learned…”

    unfortunately, Fisher is not a good chess player. A responsible fiscal conservative unshackles the Fed. come november, Obama will whip out the WSJ graph and say,” be it not for the House cuts and their debt ceiling shenanigans we would have 7.1% unemployment.” a responsible fiscal conservative unshackles the Fed and says see the private sector can do it and declares victory. Even in Germany, Merkel is under fore for austerity. voters fear unemployment more than government and eventually say things were better when… the best argument is proof, which the Fed could deliver but isnt t.

  26. Gravatar of Lorenzo from Oz Lorenzo from Oz
    20. May 2012 at 08:33

    Rebel economist, Malta has a per capita GDP of $25,428 and tourism is doing just fine.

    And a better way of thinking of what Scott is proposing is to increase the level of transactions, which increases incomes which makes debt more bearable. The “it’s all about inflating” approach commits the same underlying error as inflation targeting–worrying about the price level and ignoring the level of transactions.

  27. Gravatar of Morgan Warstler Morgan Warstler
    20. May 2012 at 08:49

    dwb,

    In less than 6 months Obama can be retired.

    Lesson learned.

    Clive Crook is required reading on the subject:

    “The astonishing enthusiasm for Obama in 2008 rested heavily on his promise to change Washington and unify the country. You can argue about whose fault it is that Washington is even more paralyzed by tribal fighting than before–in my view, it’s mostly (though not entirely) the GOP’s fault. For whatever reason, Obama failed to bring the change he promised. That would be forgivable, so long as he was determined to keep trying. But he isn’t determined to keep trying. His campaign message so far boils down to this: You just can’t work with these people. I tried, they’re not interested, so it’s war. If they want bitter partisan politics, they can have it.

    My instinct tells me this is a losing strategy.

    To me it seems so obviously the wrong strategy, in fact, that I struggle to understand what Obama’s people can be thinking. The fact that Republicans refuse to compromise is not, tactically speaking, a problem for the Democrats, but a wonderful opportunity. Offer centrist compromise proposals on the issues that confront the country–Bowles-Simpson on fiscal policy, to cite the most obvious instance–and let the Republicans reject them. Keep offering, keep being rejected. Don’t stop coming back with appeals for moderation and common sense, and let the GOP respond with promises to eliminate the federal government. See where that gets them.

    In the end, remember, Bill Clinton defeated Newt Gingrich. He had to stare down the base of his own party to do it–but he won.

    What you recommend is exactly what we have been doing, say many Democrats. No. The administration has accepted compromise in some areas, but always reluctantly, never at its own initiative. The advice from the base, which the White House now appears to be heeding, is that compromise gets you nowhere. As a result, Obama’s ownership of his own policies is cast into doubt. The outcomes in many cases may be Clintonian or “moderate conservative” (on health care, for example), but they weren’t celebrated by the administration as examples of the virtues of compromise. They were accepted grudgingly. We made concessions: this far and no further. And now the tacit message of the campaign is veering towards saying that traditional Old Democratic policies are the way to go. UAW, I love you. Just give us the votes, and the era of big government is back.

    That’s crazy. The middle of the country doesn’t want grinding paralysis, and it also doesn’t want a pre-Clinton Democratic program.”

    http://www.theatlantic.com/politics/archive/2012/05/why-i-think-obama-is-losing/257285/

    —–

    This is the world class Sumner-Warstler bet.

    I say that since Nixon-Reagan, when the right began to cut taxes and spend all the money on non-Dem voter policies, we have been charging at this cliff.

    Scott’s entire policy frame is shaded by his BELIEF that when the economy is in crisis govt. grows and never shrinks. Obama will be the next FDR.

    I believe once you spend all the money, as long as the Fed keeps inflation tight, the only way a Dem wins is when they make like Clinton and kick people out of the wagon.

    —–

    This is a crucial question, it describes for right minded conservatives whether Fiscal / Micro comes first or second in our strategy.

    It describes whether the Fed and economists in general are the bitch of the private sector or it’s only hope.

    I can SEE why Scott wants it to be his way. I just don’t believe it. I’m Reagan youth and so far my team is winning.

    It is a good bet. And if I lose I’ll adopt NGDPLT as my preferred method of political thought.

    If Scott loses, well he’s never going to hear the end of it.

  28. Gravatar of RebelEconomist RebelEconomist
    20. May 2012 at 08:53

    Lorenzo, $21,000 according to my source: http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)_per_capita But I did say my analysis is crude! The point is, which I think few would deny, that Greece has become uncompetitive, so to me it seems more efficient to tackle that problem directly.

    Why should the level of transactions increase rather than their price?

  29. Gravatar of Saturos Saturos
    20. May 2012 at 09:06

    Uhh, let me take a stab at this one. Maybe cause 21% of the Greek labor force is unemployed?

  30. Gravatar of dwb dwb
    20. May 2012 at 09:10

    the real fight is in Congress, not POTUS. obama is a one hit wonder from now on. i know a lot of independents who just took a big hit on jp morgan. overregulation? “jp morgan 2 bn” housing, cant get a refi? “jp morgan chase 2 bn” every issue now has a jp morgan taint, banking is radioactive. Dimon did more for Obama than 1 bn of superpac money. Bain-capital Romney is a zombie as far as i am concerned, they will tie the london whale around romneys neck and throw him overboard. Obamas got as much teflon as Reagan.

    trust me, im on your side. i want fiscal conservatives to win. Fisher is the enemy.

  31. Gravatar of dwb dwb
    20. May 2012 at 09:26

    heres the sports metaphor, cant resist since its sunday and i am in withdrawl: did you ever see Bellicheck tell Brady, dont throw you might be intercepted? no, you keep racking up the score. Shackling the Fed is playing to lose. the more private sector jobs created between now and november the stronger the argument against fiscal policy becomes ( govt employment is still declining).

  32. Gravatar of Philo Philo
    20. May 2012 at 09:46

    Could not Greece execute its own monetary policy, on a modest scale, without leaving the Eurozone? It seems to me that the government might issue drachmas, while announcing that the government itself would accept drachmas, one-for-one with euros, in payments to itself—tax payments, fines and court costs, payments for government goods and services, etc. If they didn’t issue *too many* drachmas, the ones they issued might trade at or close to parity with euros. The goal would be to expand the money supply in Greece, at least somewhat (while also giving the Greek government more spending power).
    Perhaps Greece, along with the other countries in the Eurozone, has committed itself not to do such a thing; but, after all, treaties were made to be broken, and here there seem to be strong reasons of state for Greek defiance of Brussels. And isn’t it likely that they would get away with it, and that it would make enough difference economically to be worth doing?

  33. Gravatar of genauer genauer
    20. May 2012 at 10:43

    @Scott
    real estate prices in Greece and Spain are still overvalued by a factor of 2. Their construction sectors will shrink much further.

    I put some numbers together at :
    http://marketmonetarist.com/2012/05/14/failed-monetary-policy-the-one-graph-version/
    please search for “2. real estate” , look up the links, and make up your mind

    What do you do, when you dont need any new houses for the next 15 years, and about 15% (10 direct, 5 indirect) were employed in this sector ?

    They now have a larger structural problem on their hands, compared to our “reunification”

    @dwb
    I am reading up on the papers (it is not 15 min and you are done : -), and, besides other things, IMF debt sustainability guides (2003 version Timmie Geithner). my response will come best case tomorrow night.

    @Morgan
    read:

    http://yanisvaroufakis.eu/2012/05/20/guest-post-today-germany-is-the-big-loses-not-greece-by-marshall-auerbach/
    It ends with “So who holds the gun now?”

    I am now really afraid, that very quickly we will not bitch much more about inflation and interest rates, but how to rescue parts of the principal.

    This now really becomes pretty clearly a question of not just bending the law, The Maastricht Treaty, a little bit, but just breaking it
    and giving in to neverending blackmail.

    In the last few weeks rich Greeks folks were in a buying panic for German real estate. Most folks interpret that so far as “rescuing their wealth in a difficult to seize way”. One can also interpret it as
    “preparing for exile in the coming civil war”.

    your shit dead in texas I would like to contrast with
    http://news.yahoo.com/german-police-used-only-85-bullets-against-people-155155175.html

    @Bonnie,
    Germany is about a factor of 2x more sensitive to the Global business cycle, as most other countries. We know that very well.

    We are working on the Demand side. Metal workers just got a 4.3 % pay raise, after encouragment from the government, which is in principle “rule violating”. Well, petty thoughts.

    The structural problem reunification was huge, to the tune of 100% GDP, and it is still not completely over.

    Thank God we have enough lignite.

    @Rien
    The Balkan is the same cesspool as it ever was. This is not only a Greek problem. A while ago a Romania discussion partner invited me to invest there, and I did look a little bit closer at the general settings, huugh.

    @Philo
    Greece will leave the Euro, thats sure now, probably even Europe (EU). My estimate for civil war / martial law three, end of this year, stands now at 30 %

  34. Gravatar of Major_Freedom Major_Freedom
    20. May 2012 at 11:52

    ssumner:

    1. The LBJ argument. He was much more a big government guy than Obama, and the economy boomed for the 5 1/2 years he ruled. There were problems later, but that’s exactly my point. Supply-side problems look very different from sudden recessions.

    Recessions are caused by supply-side problems revealing themselves when the central bank chooses saving the currency over hyperinflating the currency.

    2. The timing problem. The big drop in housing construction occurred between January 2006 and April 2008, and yet unemployment was almost unchanged, as the laid off construction workers found jobs in other growing sectors.

    This chart plots total non-farm employment, as well as total non-farm employment broken down into some major sectors, and finally nominal GDP.

    Starting in 2006, we can see that the rate of increase in total non-farm employment was already slowing down, eventually peaking at the beginning of 2008, after which it started a decline. This means that as unemployment in construction, durable goods and other capital intensive stages started to rise starting early 2006, it is not in fact the case that all the released labor from those sectors were “re-absorbed” into “other” growing sectors.

    When the rate of increase in total employment slows down, and eventually peaks, during a period where NGDP kept on increasing, tells us that problems were brewing in something other than aggregate spending. The only other thing that could have been problematic is the real side of the economy.

    Then if we look at the various employment sectors post 2008, we notice a clear pattern of some sectors having been laid waste relatively more than other sectors. Construction ended up hurting more than durable goods, durable goods more than non-durable goods, and non-durable goods more than retail.

    If aggregate spending falling is the problem, why did this distinct pattern emerge? Why didn’t all sectors decline to the same degree? Why did the capital intensive stages, the stages most sensitive to interest rate changes, suffer more than the less capital intensive stages, the stages least sensitive to interest rate changes?

    The reason why the construction and durable goods sectors started to decline in 2006 was because that was around the time the Fed raised the fed funds rate from previous historic lows. The released labor from the construction and durable goods sectors did not all get re-absorbed elsewhere. The rate of increase in total employment was slowing down.

    All of this was taking place even though nominal GDP didn’t start to decline until mid to late 2008.

    NGDP started to fall for the same reason total employment started to fall. NGDP falling didn’t cause employment to fall. They are both merely effects of the same underlying cause. A well structured economy has a healthy looking NGDP associated with it. A poorly structured economy has an unhealthy looking NGDP associated with it. NGDP falls as employment falls because a realization occurs for the majority of investors, employers, and entrepreneurs that there is a general lack of needed capital that was originally believed to have existed with lower interest rates, but did not in fact exist with higher interest rates. More money printing cannot solve this problem. It can only delude investors more by making them believe the non-existent capital does exist and thus prolonging the status quo.

    You believe that if only the Fed inflated more, to prevent NGDP from falling, that total employment would not have fallen as much as it did. How exactly would that money have entered the economy and how exactly would that have prevented unemployment from falling? In our monetary system, money is created through the banking system, which means lending, i.e. debt, would have had to increase. Why should lending increase when there is a problem with bad debts? You can’t say lending would have increased if only the Fed increased NGDP, because we just said that NGDP can only increase by way of more lending. NGDP doesn’t come from the sky, after which investors and lenders as a class have a source for investing and lending. No, NGDP increases in our monetary system is borne out of additional nominal investing and lending from the banking system. Your solution of “more NGDP” is really a call for “more debt creation”, and “more money backed by debt.” If you want the Fed to inflate more by buying more government treasuries from the banks, then you’re really just calling for additional bank lending, because that’s how the money the banks get from the Fed leaves the banks which is necessary for NGDP to rise!

    What NGDP targeting really is by its nature is a gradual increase in debt backed money relative to total money supply. Of course it can never reach equality with the total money supply, because of the existence of bank reserves, but the ratio of bank credit money to total money must keep getting higher. Every debt default shrinks the money supply and will put downward pressure on NGDP, and so there must be an increase in debt elsewhere to prevent the money supply from falling and thus preventing NGDP from falling. An advocacy of a 5% NGDP target is really an advocacy for total spending to rise by way of additional debt creation that will generate an increase in spending of 5%.

    Why do so many market monetarists believe that inflation enters the economy in a way other than debt creation? It’s like they really do believe inflation of the money supply is increased by way of being dropped from helicopters, thus boosting spending on everything directly.

    3. The no mini-recession argument. If recessions were caused by real shocks, then mini-recessions should be much more common than actual recessions. But we’ve had virtually none–unless you count the 1959 steel strike. And that ended almost immediately.

    Nonsense. We’ve had no less than 20 recessions since 1913. Arbitrarily separating these out into “mini” and “actual” is just hand waving away the number of recessions that have taken place.

    4. The David Glasner argument. The stock market hated inflation in the 1970s. Since 2008 stocks have been strongly correlated with TIPS spreads. In other words the stock market started rooting for more AD about when market monetarists started arguing we needed more AD.

    Glasner, and hence you, are misinterpreting the data. The market isn’t “rooting” for more inflation so much as becoming more and more dependent on accelerating inflation in order for investor’s unsustainable investments to be prolonged.

    This chart shows that the stock market hated NGDP in the 1970s, it loved NGDP starting in 1982, it hated NGDP starting in 1987, it really loved NGDP starting in 1995, it hated NGDP starting in 2000, it loved NDGP starting in 2002…

    And wouldn’t you know it? The love occurred when the Fed lowered rates, and the hate occurred when the Fed raised rates.

    5. And now we have Greece. This tiny country is 2% of the EU. If (God forbid) it was destroyed by an asteroid tomorrow, stock markets would soar upward all over the world. The Greek crisis would be over. Yes, banks would hold some worthless Greek debt; but with no further moral hazard concerns, the rest of the eurozone would gladly bail out their banks, and add that Greek debt to their own public debts. Remember, Greece is 2% of the EU.

    I think that bolded statement should be nominated for knee slapper of the year. Three cheers for no moral hazard and bank bailouts!

    Why would stocks soar on the destruction of Greece? Because it would end the uncertainty, the fear that a Greek departure from the euro would have a contagion effect. People who talk about structural problems talk about things like malinvestment in too many houses or BestBuy stores, or Obama’s big government policies, etc. But the markets don’t care very much about those things; they care about things like Greece.

    The Greek government IS a giant malinvestment!

    Notice how you’re contemplating/considering/dreaming about the liquidation of bad Greek debt solving problems, rather than advocating for more Euros to be spent in Greece, and yet you can’t even see that this is an advocacy for a removal of a structural problem to heal markets!

    Now take your nationalistic logic that you are using for Greece, and apply that to the Best Buys and to the houses WITHIN nationalistic boundaries, and you will see that markets do in fact care very much about malinvestments.

    And not because Greece is big enough to have a real effect on the global economy, obviously it isn’t. Rather Greece matters because it could trigger a financial panic that would reduce AD all over the world. That’s why global equity markets lose TRILLIONS of dollars when the Greek crisis intensifies. The real problem is nominal.

    But you just said the problem is structural. You’re saying that the structural problems of Greece are the ultimate cause for threatening the health of the world economy! You aren’t saying the problem is lack of enough Euro spending in Greece. You’re saying the problem is structural.

    You are even going so far as saying that Euro spending collapsing to zero in Greece, via an asteroid obliterating it, would make stock markets around the world soar. You are making my case for me! You are saying that a fall in Euro spending would be part of a process of healing the world economy so much that world stock markets would soar!

    Well, apply that same logic to events WITHIN country borders. If we liquidate the bad debts of the major US banks, some of the car companies, and so on, WITHOUT of course introducing NEW bad debts elsewhere in the economy by credit expansion, which caused the structural problems in the banks and car companies to begin with, then NGDP will fall as a part of the healing process, just like it would fall in Greece with an asteroid strike could be part of the healing process of the world economy.

    It’s incredible how you can make an argument about a problem being structural, and then at the very end of your explanation you end it with “The real problem is nominal.” I mean that’s hilarious. It’s like you’re a Catholic who preaches about abstinence and no condom usage, and then you end your sermon with “The real problem is not enough sex.”

    Everywhere I look I see more and more evidence that the developed world has a massive AD problem.

    That’s only because your a priori theory is that the problem is AD. That’s why you interpret historical data as evidence of an AD problem. I see the same evidence you are seeing, but because I use the a priori theory that the problem is structural, that I see evidence of structural problems.

    Why aren’t you calling for more Euro spending in Greece? Why are you saying the problem can be eliminated by using the Austrian prescription of liquidating bad debt?

    Yes, individual countries (southern Europe, to a lesser extent the UK, and to a still lesser extent the US) also have some structural problems.

    What is this, a weak attempt to deflect criticism away from the fact that you are a dogmatic NGDP fetishist? What structural problems are you talking about, and are they related to some productive stages of the economy expanding too much relative to other productive stages, thus making the entire economic structure unsustainable in its current configuration? If not, then what about the chart I posted that shows a distinct difference in the amount that each productive stage sector in the economy collapsed post 2008?

    But the NGDP problem is both easy to fix and a big part of what’s hurting the world economy. It’s frustrating to see us ignoring it.

    It will only bring about MORE malinvestment, the same way more lending to Greece just prolonged Greece’s problems, and why the solution is to liquidate bad debts, not encourage more of them by inflation in the form of credit expansion.

    It’s now far too big a problem to be addressed by any token fiscal stimulus that could come out of this recent Camp David push for “growth.” Monetary policy is our only hope.

    Nope. Our only hope is integrating money production into the division of labor.

  35. Gravatar of dwb dwb
    20. May 2012 at 12:14

    @genauer
    i honestly did not understand the analysis and i did not see the link between housing and demographics. there are 60 mm people in spain, 3 mm houses sounds like at most a couple years given the population is growing. prices are a function of income, so i did not get how they are “2x” overvalued. maybe you are much more familiar with european housing mkts (myself i dont) but the numbers you are quotimg for the us are way off. your statementsuspect that there is 20 yrs of empty housing is sispevt though.

  36. Gravatar of genauer genauer
    20. May 2012 at 12:14

    I say,

    the Greek problem is not structural in the classic meaning,
    at least as I know, but the opposite, the disfunctionality of structures, you always need, like the tax man, the cop, the judge.

    Spain is the poster boy of a “structural problem” with former 15% employment in a construction sector, nobody now needs for a long time.

  37. Gravatar of dwb dwb
    20. May 2012 at 12:28

    @genauer,
    sorry you did say 15 yrs of inventory. still, it does not make sense in two ways: 1. over 15 yrs there will be about 10 mm population growth;2. if spain were to depreciate, there would be lots of rich french and germans interested in a house in Spain. i love Barcelona, heck even Americans. there is some price at which construction starts again because the market clears. i dont understand your analysis.

  38. Gravatar of dwb dwb
    20. May 2012 at 13:14

    @genauer:
    I am now really afraid, that very quickly we will not bitch much more about inflation and interest rates, but how to rescue parts of the principal.

    yeah that’s what i keep telling you: the money is gone, the real estate collateral is worth much less, the banks are nearly insolvent. its a mistake to believe the money is coming back. its gone. the best hope for getting the money back is to reduce unemployment in the peripheral countries so they have the means to pay, and some inflation so they have less incentive to default. Germany could probably protect itself from the the inflation with property taxes and so on to keep a real estate bubble from forming, and labor market reforms to get more people to work.

    But i doubt there is the will at the ECB to do what it takes to keep Spain and Portugal and Ireland in the Euro.

  39. Gravatar of genauer genauer
    20. May 2012 at 13:17

    @dwb,
    we crossed our last posts, while writing, both 12:14.

    According to the CIA, Spain
    47,042,984 (July 2012 est.)
    Thats a 28 % difference to your 60 Mio.

    last years growth rate was 0.6 % (source CIA world factbook, an accumulation of OECD etc data, mostly), that was the 13 % empty houses, I translated into 15 years of inventory.

    What most US folks, probably you as well, dont know,
    fertility in all EU countries is very low (exception Ireland). CIA Spain 2000: 1.15 vs 2.07 needed for stability,
    Spain 2012 1.48 Spain gave already 2009 Africans cash incentives to depart. Quite frankly with 25% unemployment, riots, xenophobics (even at East coast IBM 1995 that was reported) I find even the 0.6 % (means 5 mm over 15 years) wildly optimistic.

    House prices 2x too high, foreign investors scared away with “missing building permits” for 20 year old houses, see at kantoos.

    for the 2x overvalued, go to the wiki pages and the price vs year plot http://en.wikipedia.org/wiki/File:Vivienda_n_jun2009.png

    Maroccan wet-foots will not buy 300 $ / sq ft McMansions
    2500 / sqm * 1.3 USD / EUR / 11 sqft / m2.
    How much is that in the US ? 100 $ / sq ft ?
    And even for filling this up, you dont need the 15% former construction folks.

    If Spain drops out of the Euro, devaluates by a factor or 1.5 – 2, new ball game. But certainly not a reason to buy there now. In 5 years I can have it for a 1/3 of the price now.
    And people will be nice, and not angry at me.

  40. Gravatar of genauer genauer
    20. May 2012 at 13:38

    dwb,

    most spanish and elsewhere debt is to their own banks and people, like pension funds.

    In the moment we give in to blackmail, as Greece tries it since July 2011, it would be just the end. We would have a common bankrupty in 5 years, and probably a European war based on well reasoned hatred.

    You mentioned a few days ago, that you see frequently people walk away from contracts. What do you do ?
    For me its clear, if I am very sure, that somebody tried very hard but really cannot, like with somebody 10 years ago, I let go. If I think, (s)he just gambles, the full legal machine comes upon him. it just clears the air and the mind.
    Bankruptcy provides closure.

  41. Gravatar of Scott Sumner: It’s insufficient aggregate demand, stupid. « Economics Info Scott Sumner: It’s insufficient aggregate demand, stupid. « Economics Info
    20. May 2012 at 14:00

    [...] Source [...]

  42. Gravatar of dwb dwb
    20. May 2012 at 14:40

    @genauer,
    I thought German banks had on the order of EUR150 Bn of exposure to spanish banks and the private sector. My point about the EUR150 Bn EUR German exposure to Spain (if thats what it is) is that it is probably worth a lot less than face value because of the real estate collapse.

    It sounds to me like a lot of people bought second homes. My point is that the real estate prices are endogenous: they are a function of nominal gdp. nominal gdp drops, so do prices, until they are cheap enough that people want second homes again. Think of it somewhat differently. suppose home prices and construction wages dropped to 1EUR. then home demand would pick up and most likely people would want lots of them. There are no empty homes at 1EUR. So, the excess supply is a function of the price; there is some price where all the supply is taken because people want 2nd, 3rd, etc homes. It’s not “structural”. there might be 10 years of supply at current prices but 0.5 year of supply if prices dropped 50% (because people want 2, or they are valuable as vacation rentals, etc.). If they dropped 75% (along with wages) there would be lots of construction workers swinging hammers again.

    unfortunately, you are making an excellent case for Spain to leave the Euro – Spanish real estate prices will decline in relative terms until enough Germans and French and Americans want second homes in Spain. At that point, people will get back to work building new ones.

    i am sorry, whats the benefit to Spain of Spain staying with the Euro??

  43. Gravatar of Morgan Warstler Morgan Warstler
    20. May 2012 at 15:05

    Folks, this is what matters:

    http://rwer.wordpress.com/2012/03/02/current-account-deficits-in-europe-5-charts/

    AS LONG AS you are able to credibly live on your taxes collected, the Euro is going to keep you around.

    If what you want is the immediate freedom to not to do, you are screwed.

    Life is really pretty simple, debt can be forgiven, but you only forgive someone’s debt when they are back on the straight and narrow.

    Is it a moving target, do your tax receipts shrink? Yes.

    But the point is Greece can be made an example of, adn then a ECB guarantee can be put out to drop the cost of borrowing AS LONG AS your country keeps privatizing and cutting the public sector.

    Look boys, a business can start OVERNIGHT. It can do so without any regulations, licensing, or rules.

    Growth can happen OVERNIGHT, you just have to DO SHIT BUREAUCRATS DON’T LIKE.

    New rule: everything is legal as long as you pay your taxes. Caveat Emptor. Wild Wild West. No more vacations. No more senority.

    Problem solved.

    Getting down into the weeds where you don’t think way outside the box, means you will keep running into brick walls.

  44. Gravatar of dwb dwb
    20. May 2012 at 15:15

    But the point is Greece can be made an example of, adn then a ECB guarantee can be put out to drop the cost of borrowing

    yeah, i completely agree, i just dont think the political will is there for an ECB guarantee. If the political will was actually there, they would announce it today: greece get out, the rest of you we guarantee your debt as long as you cut your deficit, and interest rates are zero. the leaders are holding on to this bizarre notion that the situation will resolve itself without ECB intervention of some kind.

  45. Gravatar of Morgan Warstler Morgan Warstler
    20. May 2012 at 16:20

    dwb,

    We haven’t reached the endgame.

    Greece has a communist who is about to not be able to pay his public employee salaries.

    Looking at those numbers it seems like Portugal gets read the riot act as well.

    And everyone has to make another 2% in cuts, fire some more public employees and the ECB will do what Cameron suggests on a eurobond.

    I suspect Greece has to default before the endgame really begins.

    Personally, I think Greece is going to bend, for the same reason I think Walker will win and Obama will lose.

    I think deep down their voters KNOW deep down what it is going to take to survive, and no one actually deep down trusts public employees to be anything other than incompetent.

    “Good easy hard-to-get-fired jobs” are just a luxury item that everyone is willing to throw away, and the people screaming for those jobs, well they aren’t the kind of people that impress anyone.

  46. Gravatar of dwb dwb
    20. May 2012 at 16:47

    Greece is a bad bad situation. With a primary deficit and corrupt tax system and unwillingness to cut, He will have to resort to drachma printing, which will eventually fuel domestic hyperinflation unless they cannot fix their problems. I personally think they are out no matter what and they have barely weeks as the banks crumble, the question is do they survive as a democracy or something else- its not so long ago that they had a military dictatorship – i would not rule out a totalitarian situation. I think Tsiras is a good bluffer, but also thinks he can control the genie once its out, and i think he is overestimating how much Germany wants Greece in: Germany wants Greece out, they just don’t want to be seen pushing them. If Tsiras was serious about tax reform he’d allow 168 German tax experts come in an overhaul the system. thats never going to happen.

  47. Gravatar of StatsGuy StatsGuy
    20. May 2012 at 17:04

    Per 2008, the Fed feels the need to generate a sudden and sharp drop in the commodities complex, that is the futures markets in all major commodities, which is a primary instrument of inflation hedging/betting. West Texas Crude has dropped from 107 to 91.3 in a matter of a month… Anyone can argue about speculators or not affecting long term prices, but there’s little doubt that speculators control price at the margin in the short run. Speculators typically use leverage – a sufficiently large drop in price will force leveraged buyers to sell (not unlike a margin call). With wages well under control (unemployment), the primary threat to 2% inflation is thus the commodities complex.

    I don’t agree with this (yes, a steady rapidly-updating NGDP target would be better), but Fed action is entirely consistent for the past 4 years with this thesis. My guess, however, is that we’re going to soon head into a period of excess production in commodities due to massive investment in the past 5 years (after a long period of under investment and massive industrialization in BRIC and other countries, which is now abating somewhat).

  48. Gravatar of dwb dwb
    20. May 2012 at 17:05

    ^^ i always hope i am wring when i say things like that.

    Intrade:
    walker 88% to win (i agree, most polls have him up 5% or more)
    obama: 57% to win (but only 97.3% to win the nomination Hillary is 2%- i said my peace here).

    Rubio and Portman are the top for VP slot.

  49. Gravatar of ssumner ssumner
    20. May 2012 at 18:16

    JW, You said;

    “As others have noted, Spain, Italy, and Portugal would remain in crisis. These countries are imperiled not because of contagion, but because of the policy choices of each country and Europe as a whole.”

    Those countries were in crisis when the S&P500 was at 1400. Read my response to Sam, I think you missed the point of my post.

    Neal, I’m sure people have discussed this issue, as it’s obvious if you look at a series for monthly unemployment rates, and compare it to a random walk like the DJIA. There’s no conflict with Romer’s research, as far as I know.

    Ron, Unemployment in the US has fallen from 10.1% to 8.1%, so I think some of the shortfall has been made up. But more would have been made up if NGDP had been growing at trend. It’s actually been growing below trend.

    Morgan, You said;

    “Scott, it isn’t that it won’t have a negative impact on the US.
    It will.”

    Isn’t that exactly what I said?

    Rebeleconomist, No, inflate NGDP.

    Steve, Wasn’t the ethanol subsidy abolished?

    Morgan, That’s a good Clive Crook article, but it’s not your style.

    dwb, Good point.

    Philo, I don’t think that would work–Gresham’s Law.

    genauer, You said;

    “real estate prices in Greece and Spain are still overvalued by a factor of 2. Their construction sectors will shrink much further.”

    That’s what falling NGDP will do. So why don’t we reverse that?

    MF, You said;

    “Recessions are caused by supply-side problems revealing themselves when the central bank chooses saving the currency over hyperinflating the currency.”

    So the government decided not to hyperinflate the currency in 2008?

    Statsguy, You said;

    “Anyone can argue about speculators or not affecting long term prices, but there’s little doubt that speculators control price at the margin in the short run.”

    Short term prices are closely related to expectations of long term prices. If you scare speculators out of a market, prices are just as likely to go up as down.

    But I still don’t see your point about monetary policy. Are you claiming the Fed is targeting some sort of commodity price index?

  50. Gravatar of Major_Freedom Major_Freedom
    20. May 2012 at 19:01

    MF, You said;

    “Recessions are caused by supply-side problems revealing themselves when the central bank chooses saving the currency over hyperinflating the currency.”

    So the government decided not to hyperinflate the currency in 2008?

    Obviously. They chose a relatively mild recession instead of accelerating inflation even more than they did and avoid any correction whatsoever, which is what you believe is possible with the magic printing press.

  51. Gravatar of Saturos Saturos
    20. May 2012 at 20:28

    Major Freedom’s world: http://www.youtube.com/watch?v=0zfC_KHgmkI

  52. Gravatar of Steve Steve
    20. May 2012 at 20:59

    “Steve, Wasn’t the ethanol subsidy abolished?”

    More like hidden than abolished. The cash subsidy was replaced with a “mandate” (kind of like health care!) requiring that blenders purchase a minimum of 13.2 billion gallons of ethanol, requiring 37% of the national corn crop. Add in import taxes and…

    The way I see it, if the health care mandate is a tax, then the ethanol mandate is a subsidy. Why should I be deprived of my freedom to choose ethanol-free gasoline?

  53. Gravatar of Rien Huizer Rien Huizer
    20. May 2012 at 22:10

    Scott,

    Can good monetary policy defeat bad government?

  54. Gravatar of Saturos Saturos
    20. May 2012 at 22:26

    Depends how bad the government is. At the limit, the government expropriates the central bank: http://marketmonetarist.com/2012/03/30/the-worst-central-banker-in-the-world/

  55. Gravatar of Saturos Saturos
    20. May 2012 at 22:27

    http://thefaintofheart.wordpress.com/2012/03/30/this-is-what-happens-when-the-president-controls-the-central-bank-good-for-a-big-laugh-before-argentina-becomes-the-next-zimbabwe/

  56. Gravatar of Joe S Joe S
    21. May 2012 at 04:05

    How does Greece and the Euro area relate to the “Sumner Critique”? The ECB is inflation targeting, and so fiscal stimulus, in aggregate, won’t work – or at least it wouldn’t have a material impact. But what about relative deficits?

    Could Greece take a larger piece of the EU growth pie by doing exactly the opposite of what the EU is demanding? Not that they can or will. Though, it seems like the growing influence of the radical left in Greece could make fiscal stimulus (or less austerity) possible, with the threats of defaulting on their debts if financing stops.

    I liked this quote from Tim Duy last week: “Europe and the Greece are locked in a battle of mutually assured financial destruction.”

  57. Gravatar of genauer genauer
    21. May 2012 at 06:12

    @ dwb
    Yesterday you said at some point, that you had difficulties with the numbers I gave you.
    Still anything open ? I think, I gave official references for everything, what can not be said about you, or Scott.

    where do you have the 150 b from ?

    This purely theoretical argument with the 1 Euro home is the same as your 80 % of GDP is oil import, just completely theoretical.
    If you want to cure a 2x in real easte prices by inflation (or NGDP, how you call it), we will not take it, because it devalues the savings contracts
    and bank accounts in Germany by that factor.

    People who default on their first mortgage, will not buy second homes. Germans who like to have a home in Spain, bought them 20 and 10 years ago,
    when they were cheap. People can read house price charts.

    But it becomes more and more clear that NGDP and MMT just want to obscure everything.
    Inflation, Cost / earnings relations. When we have tons of houses, nobody needs, we dream up some phantasies with prices a factor 1000 off.

    So let me turn the table a little bit, what exactly is the benefit of Germany to just watch that other, criminal people break the Maastricht treaty?

    It would cost us a lot of money, it makes us then vulnerable to endlessly more blackmail, whatever one nation gets, the others will demand immediately
    and it would for sure not only destroy any feeling of european togetherness, but create hate, how it is drummed up in the moment in Greece.

    Why not insist on the law upheld, and let others decide, how they want to behave ?

    What I find really interesting is, that somehow many people seem to believe, that defaulting on your debt against the 2/3 or larger majority of northern Europe will not have consequences, which will be painful.

    Like Reinhart and Rogoff said, if sovereign default seemingly goes unpunished, why doesnt it happen a lot more often ?

    Lets have a look at Argentina, who are preparing for their 3rd default in a row now

    http://soberlook.com/2012/05/argentina-is-not-making-many-friends.html?utm_source=BP_

    Please take a look at:
    http://www.dallasfed.org/research/eclett/2012/el1204.cfm
    They managed to have their capital stock down to 1.4 GDP, less than half they typical 3 + x, mature countries have.
    Put this also on contrast, to how the habitual Krugman paints this story.

    @Morgan
    with your entrepreneurial dreams for Greece ….. these people have long left Greece. What is left is the brooding left masses.

    @both of you
    You seem to believe that Tsipras is in charge in Greece. Fact is nobody is in charge there, and I think that was the intention. Nobody will be responsible, when they run out of money, THIS week.

  58. Gravatar of dwb dwb
    21. May 2012 at 06:58

    @genauer:
    Der Spiegel: Spanish money owed to German banks, EUR 156 Bn
    http://www.spiegel.de/international/europe/0,1518,692666,00.html

    real estate prices and demand are endogenous (a function of ngdp path). Yes, there must be a mechanism to write down debt (bankruptcy?)

    If the ECB was targeting the prices of domestically produced goods (the things it can actually control) policy would be a lot better.

    “So let me turn the table a little bit, what exactly is the benefit of Germany”

    I think you have to weigh the costs and benefits. If Spain leaves the Euro and devalues (say) 30%, that’s 50 Bn EUR owed to German banks that gets wiped out.

    And if Spain goes so does Ireland, Portugal and many others. I think a reasonable case is that 200 Bn EUR owed to German banks is wiped out.

  59. Gravatar of Greg Ransom Greg Ransom
    21. May 2012 at 07:41

    Fact: Laid off construction workers did NOT find jobs in other growth sectors.

    There was significant and escalating construction / housing / housing sales / housing furnishing unemployment in the construction boom “sand states” from 2007. And a full quarter of all _long term_ unemployed are in the construction sector, and unemployment in the “sand state” construction zones are still higher than in other regions.

    If you don’t get the facts straight — or if you simply don’t know the facts — why should we pay attention to your “empirical” arguments, when they are extensively padded with “information” which doesn’t reflect what actually happened.

    Scott writes,

    “The timing problem. The big drop in housing construction occurred between January 2006 and April 2008, and yet unemployment was almost unchanged, as the laid off construction workers found jobs in other growing sectors.”

  60. Gravatar of Greg Ransom Greg Ransom
    21. May 2012 at 07:45

    A malinvestment boom and bust has geographical characteristics.

    If you care about the facts — do you? — you can look for and find animated graphics which chart the march of the recession with the sand state construction boom zones & the transportation boom zones hit first and hardest, slowly spreading to the other parts of the country.

    There’s no “timing problem”. There a “Scott twisting the data” problem.

    Scott writes,

    “The timing problem. The big drop in housing construction occurred between January 2006 and April 2008, and yet unemployment was almost unchanged, as the laid off construction workers found jobs in other growing sectors.”

  61. Gravatar of dwb dwb
    21. May 2012 at 08:12

    explain to me clearly and slowly why prices and construction wages did not drop to the point where (for example) people buy more homes for vacation and 2nd homes or retirement. explain to me clearly and slowly, since FL 18+ population has increased since 2006, why there is no need for housing. if you can explain the structural and “malinvestment” argument in terms of demographics, preferences, etc., with data, then maybe I’ll buy it. in other words, excess supply is merely a sign that prices are too high, they need to decline.

  62. Gravatar of Greg Ransom Greg Ransom
    21. May 2012 at 08:19

    Unemployment bottoms out in Orange County, CA in Dec. 2006 at 3.1%

    Unemployment in Orange County, CA hits 9.6% in Aug. of 2009, close to it peak.

    40-45% of all unemployed are in the construction industry.

    And _many_ of the unemployed in construction have simply left the county, moving to cheaper non coast cities with 25-35% percent unemployment rates.

    Many others move back to Mexico, and other country.

    NOTE WELL — when a house is “completed” that is NOT the end of the new housing caused employment period — for the next year or two front yards and backyards must be put in, shutters installed, construction mistakes corrected, businesses build to support the new communities, etc., etc. etc.

    Your story about “construction” and unemployment is simply a very bad and false story, Scott.

  63. Gravatar of Mike Sax Mike Sax
    21. May 2012 at 09:06

    “The fact that Republicans refuse to compromise is not, tactically speaking, a problem for the Democrats, but a wonderful opportunity. Offer centrist compromise proposals on the issues that confront the country–Bowles-Simpson on fiscal policy, to cite the most obvious instance–and let the Republicans reject them. Keep offering, keep being rejected. Don’t stop coming back with appeals for moderation and common sense, and let the GOP respond with promises to eliminate the federal government. See where that gets them.”

    Morgan Obama tried to do the Grand Bargain. What’s amazing is that it wasn’t the GOP leadership that said no-Boehner and Mitch McConnell said yes though McConnell did say it would never pass.

    But Cantor and GOP Senator John Kyle-the litueanants both balked and the rest is history. Obama tried that.

  64. Gravatar of ssumner ssumner
    21. May 2012 at 11:09

    Steve, Thanks for clearing that up, I should have known the story was too good to be true.

    Rien, It can’t defeat it, but it can help expose it.

    Joe, I think there may be some regional effect. But of course it’s a moot point, as Greece is broke.

    Greg, While you talk about the unemployment rate in Orange County, I talk about the national unemployment rate, which was almost unchanged for the first 27 months of the housing bust. There’s a difference between microeconomics and macroeconomics.

    You said;

    “Your story about “construction” and unemployment is simply a very bad and false story, Scott.”

    Which one of the statistics I cited is wrong? You are citing data for 2009 which I’m quite sure you know has absolutely no bearing on my claim. So why do you cite it?

  65. Gravatar of StatsGuy StatsGuy
    21. May 2012 at 12:01

    Scott –

    I’m claiming the Fed is targeting inflation, and since AD is flattish, housing is flattish, and wages are well controlled, the primary concern is cost-push inflation from other sources – and the primary factor there is commodities – oil, food, etc. The Fed is not formally targeting inflation, but effectively it is because that’s the variable component in the input.

  66. Gravatar of genauer genauer
    21. May 2012 at 12:31

    @dwb

    now we are getting somewhere !

    When you give me a reference, I can comment on it, and this is extremely often much better / efficient in these discussions.
    That is why I am giving so many links, although I languish for that “in moderation” : – ). I mean, how could I exclude the chance that I misunderstand something, I mean, just theoretically? , LOL : – )

    But first:
    1. Spiegel International produces a ton of cleverly biased stuff. At some point I found out that folks in an Irish economist blog actually believed, that our poor folks would die now 2 years earlier, what is of course complete nonsense. A very interesting study, how Spiegel International engineers a story that way.

    2. Your link is over 2 years old. For fiscal balances this is ages in times like now. The IMF is taking the Greek financial heartbeat daily now.

    Second:
    the classical mechanism ( I know of) for reducing debt are 7 ( I started the list with just 2: b and c, but I am getting good at that):
    a) paying down, huugh , this option still exists, and I would say, not only theoretically; as hard as that seems to believe : – )
    b) Inflation, the classical favourite of southern Europe
    c) default
    d) burning the books a.k.a. “Grundbuch”, “land registration”, “cadastre” (the communist solution after 1945 in Germany) , and the owners with them (the Nazi solution before 1945)
    e) jubillee (I think they did this back in babylonian times 5000 AD)
    f) financial repression / “growth”, from a certain viewpoint a combination of a) and b), typical example the US after WWII, basically “negative real interest rate”
    g) there are no laws and titles in the first place, which actually seems to be the norm in most “emerging countries”, according to “arrival city”,
    in constrast to our “western civilization”

    Any further ideas from you ?

    Third:
    your 200 b Euro write off proposal

    I would take that in a second. I would personally call all my contacts to get this through German parliament ASAP.
    Bankruptcy provides closure, and we would not call this that.

    Provided, that this a a honest, final, total solution, that all GIPSIs get out of the Euro, and the Maastricht treaty is kept perfect forthe remaining countries.

  67. Gravatar of genauer genauer
    21. May 2012 at 12:47

    @ Greg, Scott

    I plotted the S&P Case / Shiller home price index together with the OFHEO / FCHA index,
    together with the official classical “U-3″ unemployment AND the “U-6″ “under-utilized” a few days ago for another discussion.
    Please take a look, to get agreement on the precise timing.

    http://www.slideshare.net/genauer/house-prices-12869340

  68. Gravatar of dwb dwb
    21. May 2012 at 13:19

    @genauer,
    my fault – actually i read it in FT, but since its paywalled i tried to give a link that was free and did not pay attention to the date since the numbers looked similar. I checked the the BIS data and it still shows a similarly sizeable gap as well as of the end of 2011.

    the 100-200 Bn EUR, is not “write-off” per se: its how much new capital German banks will need to raise (because their loans are devalued). I have seen wildly varying estimates for this. Even 100 Bn is a pretty sizeable fraction (~3%) of German GDP, no? Seems pretty plausible to me Germany would have to spend at least 3-5% of GDP recapitalizing banks. Plus, devaluation will hit German-EU exports, how much is that?

    you are still missing my point: you are looking at this through a “moral” lends and not doing a real cost benefit analysis.

  69. Gravatar of dwb dwb
    21. May 2012 at 13:35

    BIS Data:
    http://stats.bis.org/bis-stats-tool/org.bis.stats.ui.StatsApplication/StatsApplication.html?query=eJxllE2S0zAQhTuqgdTAhi07VqxJJoG1JNuyY8txLDkmoVK5B5fjANyAM3AIvs6EzcxUaVr9995rSbHI4svn3z8%2FyQfXpLl0V29z8nUZS%2FmImzLu1TeuuzbuWthsq24%2FC3%2FvRZa%2F7vYP9u1iwf838ngrzqehxF3IIslyLIerz6ebb7ZW3j2XWNfda6wsj0261%2FwVUwYxQxKTvJjzLGayYhy%2BK8SM%2BMdezC6KiZ2YFpv25LKYnrp0ZL%2FD4q%2BJl%2FRNJ%2BpGMRt6G%2FyoOYctxXiw1viBXk9ND%2BZugF9zE%2F1o6NGTqAv0BPgm%2FIiWDH4m7yrqqLf0pgZLPOE34O3YV%2BiJtZgncBM8GY0dNpBfoalDUw1%2BZrXU7ZQbnJ56B9ess5%2BJYQc4Ovpretf4LbNl8D35wH6N5j0aA%2Fpq5orsM6sj14Dfo7dVXPZeNcCT0RDBtPA6XWjoWvJwT%2BA65vbgJWxF%2FYG%2Bgnip50ivZ%2F6KOSOaCvoaanv8gb2D9wnOiN9hV%2FQddT7igX6n9%2FgdDXAV7GewnJ4fvRPz9WBm5UZTQ75mvoqY1z64Wz0n1ga8gZwFc0Bfxz7D1ei9MGskH1Ub55dZBRyW%2FABvc6CfegeeA6sC%2B4gf8Ad9G%2Foe0eW1F9%2Byz3pGetc6KzgneAY4tnBY1Ygt9N7ZJ9ULn6enJr7GZmJneNacScD3nH9AR4BjhV6rd6ZvFr4C7C11W%2FwBTb2%2BLeKdnh%2BztvCP8LTkVnq%2F5I%2F6W9B3q%2BdNrNT3ou9LY2h2%2BKO%2BJ7ijvmfqt3COeo%2F61llJ3xp3flYsZkuql74IpsUGPdt%20ZHqqxPDz%2Fkg%2F6ETCsh9sH5Rr%2Ffzt%2BfL28jGxeRbavIqvLDfdF9NtF%2FgHdi8JX

  70. Gravatar of dwb dwb
    21. May 2012 at 13:49

    just to be clear about my second point: if all debts in the Eurozone were written down to the value of the collateral and the banks recapitalized, don’t you agree this would significantly reduce “imbalances”?

    Now, inflation accomplishes the same thing in a more coordinated way.

    Exit from the Eurozone *also* accomplishes this goal by forcing countries to devalue their currency.

    I think you have to weigh the costs of each. Its not a morality or punishment play, pure economic decision.

  71. Gravatar of genauer genauer
    21. May 2012 at 14:06

    @dwb,

    I really like your effort to avoid paywalled references. I assume there are other readers of our exchange as well.
    And I see our exchange as very constructive. Talking such things with real numbers.
    It also helps me, to find errors in my thinking and making my arguments “hard”.
    And I did not dispute this special number, to be clear. Actually I “feel” (erm, “I am to lazy to look it up”) it was higher inbetween,

    but this has changed a lot with the recent 1000 billion LTRO of the ECB. Which I think could actually work in a way to actually work
    as a kind of “our” compromise, without instigated national emotions.
    If some x country y bank defaults on them towards the ECB, and not country z specific, like z=Germany, the blame can be focused on those anonymous bankers, and not country x.

    Do you understand me ? This is Europe.

    In such a way Moral, treaty, is perfectly preserved.

    If your point would have been, that I am getting scared by some one-off 3% GDP loss into endless, unlimited entanglement,
    then we do CBA in different ways : – )

    Book tip: Sten Nadolny, “Die Entdeckung der Langsamkeit” , and within that the “Franklin System”

  72. Gravatar of genauer genauer
    21. May 2012 at 14:36

    @ dwb

    we time cross (correct spelling ????, tell me!) our postings in the moment a little bit.

    The reunification did cost us integral 100 % GDP over 20 years. Way more expensive than most thought.

    a) we did not have a choice, we were 100 % “hostage” of our own constitution.
    Eastern Germany voted on that, Western Germany could NOT vote on that.
    In fact the nowadays Communist Lafontaine actually tried to turn the 1990 vote into that.

    b) we had 100 % control over that. The western Germany system was moving in with about 200 000 people (1% “ruling class”),
    who were just working that down in a 1:1 system setup, laws, bankruptcy regulations, social minimum payment system, everything a 100 % copy exactly.
    Like Colin Powells false “Barnshop rule”: “you break it, you own it”

    Summary:

    The rest of Europe now is completely different from conditions a and b.

  73. Gravatar of dwb dwb
    21. May 2012 at 15:13

    genauer:

    i have seen many estimates, dont forget ensuing recession and decline in exports. i have seen as high as 15%.

    i think, yes, using the ECB (LTRO) as a compromise is better than the alternative.

    (basically, LTRO is back-door quantitative easing monetary policy): inflation.

    “you break it you own it”: ancient (?? i could not find the source) proverb, not Colin Powells.
    that was Lars point: the ECB broke it with too low inflation, now they have to fix it.

  74. Gravatar of genauer genauer
    21. May 2012 at 16:17

    @ dwb

    Your BIS link is interesting,
    but the way it pops up here, you missed a factor of 10.

    The German claims “to the world” are not your 200 b, but 10x larger: 1,908,4721,908,472 for 2011 Q4
    Unit: Millions of US dollars
    Basis, measure: Consolidated Statistics, Immediate Borrower Basis

    Do we see the same page with this link ?

    for the false Powell proverb:
    http://en.wikipedia.org/wiki/Pottery_Barn_rule
    and the guy died for me on the day he gave knowingly false witness at the UN

    And I think in general it is very easy:
    US and UK do what they want,
    people who dont like the Euro / Maaastricht treaty rules,
    leave it and get a departure present.

    And we do what we want, live by our own old rules with real inflation accounting and a central bank not doing anything beyond keeping that under control, as enshrined in the treaty, and not subject to majority vote or US public heckling. The ECB performs its obligation, and checks up interest rates to the traditional 4%, as it suits the remaining faithfuls.

    Everybody is happy with his own thing, no crime.

    And that is it.

  75. Gravatar of genauer genauer
    21. May 2012 at 16:22

    to check on this typo ?? (1,908,4721,908,472 for 2011 Q4)

    2,106,220 [Mio] for 2011-Q3

  76. Gravatar of dwb dwb
    21. May 2012 at 16:30

    i was only looking at southern europe and Ireland (for example, claims against Spain of 146 bn).

  77. Gravatar of dwb dwb
    21. May 2012 at 16:31

    i dont think we see the same table.

  78. Gravatar of dwb dwb
    21. May 2012 at 16:50

    (Foreign Claims, millions of USD)
    Spain: 146,096
    Greece: 13,355
    Ireland: 95,329
    Italy: 133,954
    Portugal: 30,208

    To get this i created a custom query on “consolidated-ultimate risk basis” with reporting country “Germany” and counterparty location = the above countries.

    This is banking exposure, not total private sector exposure.

    “you break it you buy it” is far older than Pottery Barn (my parents knew this saying back when i was a kid, and I have seen it in old movies. Colin Powell just made it famous). I cannot find a reference though.

  79. Gravatar of Greg Ransom Greg Ransom
    21. May 2012 at 16:58

    Scott, you’re just failing to engage my argument and the empirical phenomena I’m drawing attention to, i.e. you are begging the question at issue.

    And I’ve pointed out why Aug. 2009 unemployment numbers are relevant.

    Construction employment doesn’t end when a house closes, and construction layoffs continued in Orange County and the “sand states” well past 2008.

    Macroeconomic patterns are merely products of countless microeconomic relations.

    Any other “mechamism” is magic land, it’s not a the causal stuff of the real world.

  80. Gravatar of dwb dwb
    21. May 2012 at 17:05

    @genauer,
    this is one of the estimates I’ve seen on the way high end (25% of gdp).

    http://www.washingtonpost.com/blogs/ezra-klein/post/could-germany-just-leave-the-euro-not-easily/2011/11/28/gIQAhvjn5N_blog.html

    there is a link to a UBS presentation.

  81. Gravatar of genauer genauer
    22. May 2012 at 00:46

    @dwb
    The exchange with you is extraordinary fruitful! I havent seen this in a loing time.

    1. BIS data pulling
    And with your help I understood the GUI very quickly. I succeeded in pulling the same data as you.

    I made 2 changes, which I thing are important:
    a) take all foreign claims, and not just banking
    b) offset the reverse claims of the GIPSIs

    and I arrive at :
    2011-Q4 (Mio)
    total 121304
    Spain 91607
    Greece 10331
    Ireland 92193
    Italy -100480
    Portugal 27653

    and again, even those data are now 5 month old, and we head the 2nd 500 000 Million LTRO in the meanwhile.
    I do in fact expect these data to be about half now.

    And, what do you think, would we just sit still, while folks are stiffing us?

    2. The UBS study
    I remember having read this or something very similar back then. The numbers are just pulled out of thin air.

    But it has a reference to Art 50 of the Lisbon treaty,
    if somebody wants to leave, she has to negotiate, as I said, and this (could) mean also leaving the EU.

    Soo, what is Greece doing, if there is no more money from the ECB in Frankfurt ?. Some of their banks are already cut off.

    And, before I forget this, the Greek 10 b are already settled via the private debt default.

    3. Bank recapitaliziation
    Unfortunately we had to do this already with the Hypo Real Estate (HRE) / commerzbank disaster, to the tun of 200 bn Euros. Lax or non-existing oversight in Ireland, and our primary mortgage (re)insurer /holder “DePfa” Deutsche Pfandbriefanstalt got screwed up. Private Stock holders were pushed out, A US guy names Flowers tried to muddy the waters, and I think came very close to have a European arrest warrant put out for him.

    4. next steps
    a) just disentangle things further, and

    b) clean the air of these blackmail arguments, this is incredible destructive for mutual trust

    c) and then sit together in the EU, and talk about who wants to have what more fiscal integration

  82. Gravatar of dwb dwb
    22. May 2012 at 04:55

    @genauer

    whether netting is appropriate is debatable: banks have assets in devalued assets, liabilities in EUR. they may have to pay back the liabilities with EUR, some other currency (DM) or not at all (bankruptcy). Hard to say, depends on the scenario. The Bundesbank will take a share of any loss on LTRO and other ECB operations. very messy, the numbers are out of thin air because nobody really knows.

    I don’t think there will be “negotiating” out of the EU: markets will anticipate the outcome long before agreement, and capital will move to Germany, or depositors will withdraw money (this is already happening in Spain and Greece actually).

    Like i said, i think the best option is for the ECB to stabilize nominal income, which would provide the time to “sit together in the EU, and talk about who wants to have what more fiscal integration”

  83. Gravatar of Tom Tom
    22. May 2012 at 08:45

    The US labor lists the total civilian labor force as 152 mil in April, 2011, to 154 mil in 2012.
    http://www.bls.gov/news.release/empsit.t01.htm

    Scott, what if the actual working labor force in 2006 was some 10-15 mil higher than the official labor statistics — with these illegals, undocumented, not being captured in statistics but nevertheless adding to most GDP figures, and mostly being in construction.

    Then, in 2006, the illegals took a 10 mil hit on jobs, but few applied for unemployment and so were not counted. Yet the total real wages went way down … and it took 2 more years before the lost illegal wages was more reflected in the real economy of lost demand for everything Americans (plus illegals) had been buying under the bubble trend.

    You put far too much weight on your #2 timing: The big drop in housing construction occurred between January 2006 and April 2008, and yet unemployment was almost unchanged, Insofar as illegals lost jobs but were not counted in unemployment numbers, your national rate “which was almost unchanged for the first 27 months of the housing bust.” (comment) is false, and not merely false, but almost invalidatingly false.

    If only 8 mil lost jobs out of 160 mil workforce, that’s a 5% increase (from about 5%) — uncounted. I find it highly plausible that 2006 was the bubble pop, but official statistics LIE (er, fail to capture the truth) and thus, analyses based on these official statistics fail to solve the problems.

    I still support NGDP targeting, but Greg R’s micro notes on housing, along with how money actually works ONLY in a series of micro-financial decisions, is a strong critique of your crisis analysis.

    My question: how many illegals would have to have lost their jobs in 2006, without being counted in unemployment numbers, to invalidate your timing point #2?

  84. Gravatar of ssumner ssumner
    22. May 2012 at 08:45

    Statsguy, But those components are only “well controlled” if the Fed is targeting them. So you can’t argue “they are well controlled, hence the Fed is targeting something else.”

    But I won’t dispute that they respond to oil price shocks.

    genauer, Thanks, but I much prefer the earlier posts I did, comparing US housing construction to the US unemployment rate.

    Greg, You said;

    “And I’ve pointed out why Aug. 2009 unemployment numbers are relevant.”

    If you think that then you obviously don’t understand my hypothesis, because it also predicts high unemployment in August 2009. More interestingly, my theory doesn’t predict high unemployment in April 2008, and your theory does.

  85. Gravatar of ssumner ssumner
    22. May 2012 at 08:55

    Tom, You said;

    “Scott, what if the actual working labor force in 2006 was some 10-15 mil higher than the official labor statistics — with these illegals, undocumented, not being captured in statistics but nevertheless adding to most GDP figures, and mostly being in construction.”

    First of all, it does no good to assume things that are clearly false. It doesn’t advance your argument. I don’t know how many illegals worked in construction, but the number was certainly much smaller. Second, you ought to focus on housing construction, as other types of construction did fine 2006-08.

    Third, I’d get the same answer if I looked at total employment (which would include illegals) or RGDP, rather than total unemployment. Fourth, the emigration of illegals back to their home country affects AS, not AD.

    Greg has micro anecdotes from Orange County. You can’t do serious macro with anecdotes, you need aggregate data (and I agree the aggregate data is highly flawed.) It comes down to this. I have an explanation that is consistent with the data, and he doesn’t.

  86. Gravatar of genauer genauer
    22. May 2012 at 09:34

    @dwb,

    1. your view
    You made your case very clearly, that you think Germany is already vulnerable to financial blackmail. And that this would increase tremendously with any further step down this slippery slope. You are certainly not alone with that assumption. It seems that now a solid majority in Greece believes that too, and want to continue with their strategy of “make promises, take the money, and then just renege”.

    In this case, stabilizing or even increasing “nominal income” (rapidly in Germany) makes sense.

    2. my view
    I think Germany is not vulnerable, yet. We discussed the numbers and how they compare to economic potential and similar situations in the past. And I really want to emphazise my legal argument. In the moment you start giving in to a little crime here, next a little larger crime there, and so on, then a little extra-legal retaliation here, and the larger counter strike there, ….., you will end in an incredible mess, which will make everybody a lot worse off.
    The rule of law is a lot more important than optimizing the last few percent of GDP.

    In this view the Ordnungspolitik, the current rules and institutions, (mostly) work as they should. The structural problems have next to nothing to do with (the monetary policy of) the ECB and have to be adressed by (mostly national) financial polices. I think we went through this with the Spanish example, for the IMF cases I have a credit rating history link for you http://www.slideshare.net/genauer/credit-ratings-cds-history-gipsi I see this in rough agreement with capital markets, credit rating organisations, and how they address risk (e.g. via CDS rates) and how the IMF debt sustainability views look. I think it is not a secret, that Germany is pushing since a long time for stricter capital market regulations and oversight, to contain and to prohibit financial panics like 2008.

    3. lars site
    I will not respond there. It would be a long link-fest to postings I did somewhere else, and we would basically reiterate the same differing views of the same events.
    Over and over again.

    4. Next steps (from my side)
    I think the real discussion is not about cases like Portugal. The fundamental difference is more about the underlying growth and society models between Ordnungspolitik and NGDP / MM / MMT. But this needs more time to be worked out properly, and certainly not primarily in a blog setting.

    I am sure we will meet again in one blog or the other, and I am looking forward to it. It was a nice, civilized chat.

  87. Gravatar of dwb dwb
    22. May 2012 at 10:08

    @genauer,

    thanks.

    want to emphazise my legal argument. In the moment you start giving in to a little crime here, next a little larger crime there, and so on, then a little extra-legal retaliation here

    just remember: incentives matter more than the law. we have many people who will risk prison and death to transport and sell drugs, because they command a high price. When incentives are aligned with the law, people follow the law. when incentives are aligned against the law, they break the law.

    blackmail only works when they have something to hold against you. blackmail no longer works when everyones incentives to do the right thing are aligned.

  88. Gravatar of Major_Freedom Major_Freedom
    22. May 2012 at 12:01

    ssumner:

    Austrians don’t argue that the housing collapse caused the market to collapse, in which case we should see a correlation between decline in construction and overall unemployment. The housing collapse was a symptom of the same cause that made the economy collapse. More misallocated sectors than just housing would have collapsed if the government had a hands off policy after late 2008. But because they printed and spent money, we just saw a large decline in housing.

  89. Gravatar of D R D R
    22. May 2012 at 12:28

    How many jobs were lost in residential construction from January 2006 to the start of the recession? About 100,000? In an economy of 135 million?

    The economy had little trouble handling that shock because it was… what’s the word… miniscule?

  90. Gravatar of Major_Freedom Major_Freedom
    22. May 2012 at 13:14

    D R:

    How many jobs were lost in residential construction from January 2006 to the start of the recession? About 100,000? In an economy of 135 million?

    The economy had little trouble handling that shock because it was… what’s the word… miniscule?

    The loss of jobs in the housing sector were a symptom of a more fundamental problem.

    The question no market monetarist is asking is why was there problems brewing in housing, as well as construction and durable goods manufacturing already underway in 2006, despite the fact that NGDP kept chugging along until 2008?

  91. Gravatar of dwb dwb
    22. May 2012 at 13:41

    The question no market monetarist is asking is why was there problems brewing in housing

    actually wrong: lax regulation was the issue. The Fed responded in 2008 opposite to the way they should have, by responding to oil prices rather than stabilizing ngdp (or even domestic prices), so it compounded its error with another one. If the fed had been ngdp targeting 2006-2009 the downturn would have been significantly less severe.

  92. Gravatar of ssumner ssumner
    23. May 2012 at 06:03

    DR, Exactly.

  93. Gravatar of Major_Freedom Major_Freedom
    25. May 2012 at 11:01

    dwb:

    actually wrong: lax regulation was the issue.

    Of COURSE!!! Any problems in the market are never caused by monetary policy when NGDP is chugging along all nicely. It MUST be “not enough regulations!”

    North Korea has lots of regulations. They certainly don’t have “lax” regulations. They must be doing awesomely.

    The Fed responded in 2008 opposite to the way they should have, by responding to oil prices rather than stabilizing ngdp (or even domestic prices), so it compounded its error with another one.

    You’re presupposing your theory is true. That’s what has to be proven however.

    If the fed had been ngdp targeting 2006-2009 the downturn would have been significantly less severe.

    Oh but then the downturn would have been the result of lax regulations. Wait what? Oh, right, I can’t play that game, but you can. Forgot.

  94. Gravatar of Major_Freedom Major_Freedom
    25. May 2012 at 11:06

    dwb:

    Are you saying there was “lax regulation” in durable goods and construction in general? Notice how you said “lax regulations” and then quickly moved on to NGDP post 2008?

    Back it up. Why did construction, and durable goods, start slumping in 2006? What “lax regulations” are you talking about in construction and durable goods, and why didn’t “lax regulations” represent a problem in retail and service sectors?

    This is where NGDP goes boom, and where market monetarists can only use the old crusty age old ancient “lack of regulations” blame game.

  95. Gravatar of Major_Freedom Major_Freedom
    25. May 2012 at 11:26

    DR:

    How many jobs were lost in residential construction from January 2006 to the start of the recession? About 100,000? In an economy of 135 million?

    The economy had little trouble handling that shock because it was… what’s the word… miniscule?

    ssumner:

    DR, Exactly.

    “The decrease in consumption comes only as a result of unemployment in the heavy industries, and since it was the increased demand for the products of the industries making goods for consumption which made the production of investment goods unprofitable, by driving up the prices of the factors of production, it is only by such a decline that equilibrium can be restored.”

    “If the real trouble is that the proportion of the total output which, as a consequence of entrepreneurs’ decisions, has become “nonavailable” is too great relative to what consumers are demanding to have “available”; and if, therefore, the production of “nonavailable” output has to be cut down, then, certainly, the resulting unemployment is due to more deep-seated causes than mere deflation and can be cured only by such a reduction of consumption relative to saving as will correspond to the existing proportion between “available” and “nonavailable” output.”

    “I do not deny that, during this process, a tendency toward deflation will regularly arise; this will particularly be the case when the crisis leads to frequent failures and so increases the risks of lending. It may become very serious if attempts artificially to “maintain purchasing power” delay the process of readjustment — as has probably been the case during the present crisis. This deflation is, however, a secondary phenomenon in the sense that it is caused by the instability in the real situation; the tendency will persist so long as the real causes are not removed.”

    “Any attempt to combat the crisis by credit expansion will, therefore, not only be merely the treatment of symptoms as causes, but may also prolong the depression by delaying the inevitable real adjustments. It is not difficult to understand, in the light of these considerations, why the easy-money policy which was adopted immediately after the crash of 1929 was of no effect.”

    “It is, unfortunately, to these secondary complications that Mr. Keynes, in common with many other contemporary economists, directs most attention. This is not to say that he has not made valuable suggestions for treating these secondary complications. But, as I suggested at the beginning of these reflections, his neglect of the more fundamental “real” phenomena has prevented him from reaching a satisfactory explanation of the more deepseated causes of depression.”

    “The theory which has been guiding monetary and financial policy during the last thirty years, and which I contend is largely the product of such a mistaken conception of the proper scientific procedure, consists in the assertion that there exists a simple positive correlation between total employment and the size of the aggregate demand for goods and services; it leads to the belief that we can permanently assure full employment by maintaining total money expenditure at an appropriate level. Among the various theories advanced to account for extensive unemployment, this is probably the only one in support of which strong quantitative evidence can be adduced. I nevertheless regard it as fundamentally false, and to act upon it, as we now experience, as very harmful.”

    What’s that sound? That’s the sound of the notion of employment being supported by aggregate demand, and NGDP targeting, fizzling when market monetarists use Hayek as a spokesman.

  96. Gravatar of What’s keeping unemployment up? It’s the demand, stupid. What’s keeping unemployment up? It’s the demand, stupid.
    21. August 2012 at 06:57

    [...] like Paul Krugman and Larry Summers. Yet even monetarists, the Keynesians’ main critics, agree that most recessions are due to a lack of [...]

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