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Krugman and Mish come to blows

June 26, 2010

This is an email I sent to my business partner. He and I have been disagreeing over the respective positions of Mish (Mike Shedlock) and Paul Krugman for months. Mish riled me up so much I had a reason to come back here and be the Political Bitch again after a very long hiatus.

CB —

I finally got around to reading your email (far) below. You are mis-led and Mish is an ideologue who prefers personal attacks to facts.

Krugman points out facts:

  • unemployment in the euro area still rising, and only slight labor market progress in the US (and he goes on to say these are not the times for austerity measures to rein in inflation which doesn’t exist now but some critics fear might possibly exist in the future, maybe

Mish picks on people:

  • The Keynsians are clowns and Geithner is a fool who should be fired
  • The only fact he points out is that the universal bank levy (tax) didn’t get passed

Twisted Logic and the Neocon

Mish says: “In addition, we tried all sorts of Keynesian nonsense like cash-for-clunkers and an$8,000 tax credits for houses. As soon as the tax credit expired housing went in the gutter.”

Ummm.. . . .  let’s recap. Consumers aren’t buying houses and cars. Consumer spending is 2/3rds of the US GDP so we need them to buy stuff. Government encourages consumers to buy stuff by offering tax credit. Consumers buy stuff.

Mish wants to believe government stimulus doesn’t work because consumers stopped buying when the incentives stopped. Actually, it’s crystal clear proof that government stimulus DOES work, and that the US consumer isn’t stupid. The government offered an incentive to buy, people bought. US consumers didn’t see a value in car prices without the tax credit. That’s just proof the car makers are overpricing their goods, not proof that tax credits don’t work.

Mish wants readers to believe that tax credits are a bad thing. In reality what was bad about them was their abrupt end. If the Feds had tapered the tax credits off gradually by lowering the amount of credit slowly over the course of several more months or several more years as conditions warranted, the abrupt ending of consumer spending would have been a soft landing instead of a brick wall.

The US economy over the past 3-5 years looks like an upside-down letter V. Massive mortgage defaults scared everyone into a “stop spending now!” mode. Then we all realized we acutally had just lost our access the The ATM House. Next thing you know, we’re in economic free fall.

Government stimulus spending to turn a death-spiral plummet into a mere bumpy landing is a GOOD thing.  

Mindful Dishonesty

In a different section, Mish says: “Bernanke will not know what hit him even though it is point blank foolish to stimulate housing when there is an ocean of housing oversupply already.”

Here Mish is just being purposely ignorant to try to make his point to people who don’t know enough about Econ 101. Not in Phoenix, but nationally there is an oversupply of homes FOR SALE. It’s intellectually dishonest of Mish to criticize “housing (stimulus) when there is an ocean of oversupply.”  The Feds didn’t  stimulating home BUILDING, they stimulated home BUYING. Which is exactly what needed to happen.

Let’s recap this one too: You’ve got too many houses for sale and not enough people who want to buy. Solution: keep mortgage rates super low, and offer people cash to buy one of the extra homes sitting around unlived in. Call it a bribe, call it a tax credit, call it government spending. Hell, call it communism for all I care. The simple fact is, it works. People bought houses.

You and I personally know that housing in Phoenix has ceased to need the $8,000 housing stimulus spending: we see owner-occupant, first time home buyers spending $75,000 to $100,000 on houses every day of the week. Home prices at the low end and mortgage prices overall have fallen to a point where the consumer perceives value. So they buy.

It’s not “The Economy, Stupid” ; it’s “The Ripple Effect, Stupid”

People who buy a house also buy a busload of stuff to go on, in, and around the house. About the only thing that stimulates the economy more than incentivizing home buying is offering direct cash benefits to the super poor, who end up spending that Welfare Dollar immediately at the local grocery store, coffee shop, daycare, gas station, etc., etc., etc., ad naseum. (you can check the CBO, and even conservative advisor Mark Zandi of Moody’s on that one – foodstamps and extended unemployment benefits return $1.73 and $1.64, respectively, for every $1 spent)

I think Mish is a lunatic. Here, he bashes the Shovel Ready money the Feds handed out by calling it “makeshift work”.  Whether it’s real work or make work is irrelevant and where the seed money to kick-start the economy comes from is completely beside the point.

One more recap: Feds offer jobs. Unemployed people take a job and go to work instead of loitering around on the street corners committing crimes or quietly getting drunk and depressed at home alone. The unemployed go to work and take home a paycheck. They spend the paycheck in the local economy. The local merchants don’t give a fig where the money came from. They only care that there’s additional disposable money being spent.

Gather enough gov’t backed paychecks in one place and pretty soon it ripples over into the private sector. More people have jobs — even if they’re Census Bureau jobs — and soon they start spending $4 here and there on a Starbucks coffee, or $9 lunch out with the gang at work instead of a PBJ brought from home.

Presto! Private sector jobs. Economic recovery.

Yes, the US economic recovery has been painfully slow. The economy was nosebleed high in 2006. We had a long way down. It’s going to take time to get out and the time for cutting off the federal gov’t spigot is after unemployment comes down significantly, not after 2 months of marginally better unemployment reports.

On Wed, Jun 9, 2010 at 2:04 PM, CB wrote:

Looks like Mish & Krugman have just about come to blows.. I hate to say it, but I agree with Mish 100% on this one – makes it easier to understand why I can’t get behind Krugman’s posts; I just don’t believe he’s right..

-cb

 
 

Sent to you by CB via Google Reader:

 
 

Paul Krugman is quite upset with the deficit hawks at the G-20, so much so that he says Lost Decade, Here We Come

The deficit hawks have taken over the G20.

It’s basically incredible that this is happening with unemployment in the euro area still rising, and only slight labor market progress in the US.

The right thing, overwhelmingly, is to do things that will reduce spending and/or raise revenue after the economy has recovered — specifically, wait until after the economy is strong enough that monetary policy can offset the contractionary effects of fiscal austerity. But no: the deficit hawks want their cuts while unemployment rates are still at near-record highs and monetary policy is still hard up against the zero bound.

Utter folly posing as wisdom. Incredible.

G-20 an Amazing Success

In sharp contrast, I called the G-20 an Amazing Success

With all the heated debate and every country doing what they want, inquiring minds just may be asking “How the heck can you call this a success?”

That’s a good question so let’s highlight the positives.

Defining G-20 Success

  • Merkel and Trichet politely told Geithner to go to hell. Given that Geithner needs to be fired, this is a positive event.
  • Europe is more concerned about sovereign debt issues than stimulating growth. Only fools like Geither and the IMF would argue against that.
  • No one paid any attention to Geithner or the Keynesian clowns at the IMF, most notably, IMF Managing Director Dominique Strauss-Kahn.
  • There was no agreement on a universal bank levy. A universal tax is the wrong approach to risk management and it punishes banks with good lending practices.
  • Geithner made a complete fool out of himself.
  • A dozen cheers for German Chancellor Angela Merkel who said “We can only spend what we receive in income.” Finally someone gets it.

What more could you possibly ask for?

Predictable Reaction

Without mentioning Krugman specifically, I am not surprised by his reaction. Indeed, I predicted it on Saturday in G20 Heated Debates; Europe Politely Tells Geithner Where To Go.

Kiss the Illusion Goodbye

With global stimulus efforts playing second fiddle to default concerns, a double-dip recession is just around the corner. Please see Hungary Tries To Calm Markets; Europe Headed Back in Recession, US Will Not Decouple for further discussion.

The Keynesian clowns will be howling that reduced stimulus killed the recovery. However, the reality is there was no recovery in the first place, only an illusion caused by unsustainable stimulus.

Krugman’s Magic Mirror

Clearly one of us is wrong. But whom? Perhaps this image can help.

Throwing money at problems never works in the long run.

Japan tried that and now has debt to GDP of 200%. Because of its aging demographics, Japan is in serious trouble as soon as interest rates rise. Japan will not be able to finance its monstrous debt nor will it be able to grow its way out of the problem. Such is the nature of compound interest and unsustainable levels of debt.

Likewise, the US tried to spend its way out of the 2000-2001 recession.

Greenspan’s policies seemed to work, but it was nothing but an illusion. The real economy was taking a nosedive even as financial assets soared. It was a nice party, as all Keynesian parties are, but in the final analysis all Greenspan and Bernanke accomplished was to dig the deepest debt hole mankind has ever seen. The housing and debt implosion of 2007-2008 was the direct result.

Now Paul Krugman thinks it’s too early to shut off stimulus.

Hello Paul!

It will always be too early for you. There is no recovery nor will there ever be a recovery until there is genuine demand for goods and services at prices set by the free market not the government.

When the problem is debt, going deeper in debt cannot possibly be the solution.

Yes, Paul, we lost a decade. Yes, Paul, we are going to lose another, not because we failed to follow your recommendations, but precisely because we did!

We had a chance to write off the debt and to let the insolvent banks go under. Instead we wasted over a trillion dollars bailing out banks that still are not lending (and wisely will not lend) because we never purged the debts that needed to be purged nor did we reduce rampant overcapacity.

We could have and should have forced the bondholders of Citigroup and Fannie Mae to take a hit. Instead, taxpayers who cannot possibly afford it, bailed out wealthy bondholders.

In addition, we tried all sorts of Keynesian nonsense like cash-for-clunkers and an$8,000 tax credits for houses. As soon as the tax credit expired housing went in the gutter. It is about to do so for the second time.

Bernanke will not know what hit him even though it is point blank foolish to stimulate housing when there is an ocean of housing oversupply already.

By the way, how many roads can you pave? We paved roads in our area that did not even need to be paved. Now fooking what?

This is exactly the mistake Japan made. Yet you want to repeat it with more absurd makeshift work.

The stimulus money is nearly out and you want more. You will always want more for the simple reason there is no real demand for goods and services, only an illusion of a recovery that comes from passing out “free money”.

When you look in a mirror you see the illusion, what you should see is a Keynesian warthog. Substitute the words “Keynesian Economics” for “Real Economy” on that hag, and the picture is perfect.

As Europe found out, the will and the means to pass out “free money” is 100% guaranteed to end before a lasting recovery can take hold.

That dear Paul, whether you like it or not, is the mechanics of peak debt, compound interest, global wage arbitrage, and something you desperately need to learn: Austrian economics.

Recommended Reading List

Paul, you need help. I suggest a few books on my recommended reading list.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.
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