I Love Larry Kotlikoff(Partly Because He Can't Stand Krugman)

[GusLevy]

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Originally Posted by Gone4Good Quote: Originally Posted by GusLevy Output and employment will be close to full potential" is what Krugman argued in his article if the Fed Govt injected massive stimulus into the econom. Talk about disingenuous. Here's what he actually said upon the passage of the stimulus bill in 2009: Two and one half years later this looks like a pretty prescient assessment and yet nothing at all like your portrayal.

"The American Republic will endure until the day Congress discovers that it can bribe the public with the public's own money." - Alexis de Tocqueville

"Am I going MAD, or did the word "think" escape your lips?" - Vizzini

My quotation which summarizes Krugman's Keynesian belief regarding positive growth and full employment from fiscal stimulus is taken directly from his Op/Ed piece from July 2010 which you linked to earlier in this discussion (post #8). The fact that you now link to an earlier Krugman Op/Ed piece (Feb 2009) to state that he believes that the Obama $800B stimulus of 2009 is insufficient to achieve significant economic growth and to full employment is truly bizarre stuff. Most of the Fed's mtge buying of QE1 and their subsequent buying of UST in QE2 - to the tune of an additional $1.85T (trillion!!!) - in addition to the $800B from Obama occurred between the writing of both Krugman pieces. Therefore, are you claiming that Krugman also believes that Federal fiscal stimulus of at least $2.65T within the span of two years is still insufficient to stimulate significant growth in output and employment which would make his July '10 piece an ex post facto pat on his own back to say $800B was not enough was correct? But then that can't be correct because we and he (Krugman) would have to pretend that QE1, QE2, HOME, HAMP, etc., etc., etc., never occurred either.

You yourself claim and suggest in several instances earlier in this very discussion that since interest rates are low that all of the massive federal stimulus has in fact been working like a charm just as Krugman predicted in his July '10 piece! So in Krugman's view - and effectively your view - $800B was not enough in Feb '09 but at least $2.65T by July '10 was. Well, everything worked except for the minor part about economic growth and higher employment, of course.

[Gone4Good]

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Originally Posted by GusLevy are you claiming that Krugman also believes that Federal fiscal stimulus of at least $2.65T within the span of two years is still insufficient to stimulate significant growth in output and employment which would make his July '10 piece an ex post facto pat on his own back to say $800B was not enough was correct?

Are you claiming that monetary policy is "fiscal stimulus." You seem to be mixing up two very different things. And no, QE1 & QE2 don't invalidate the argument. After all, the desire for fiscal stimuls arrives due to the impotence of monetary policy to influence the real economy when short term rates reach zero. (Not that it matters, but QE1 took place in 2008 before the Krugman Fed 2009 Op Ed)

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Originally Posted by GusLevy My quotation which summarizes Krugman's Keynesian belief regarding positive growth and full employment from fiscal stimulus is taken directly from his Op/Ed piece from July 2010 which you linked to earlier in this discussion (post #8). . . . You yourself claim and suggest in several instances earlier in this very discussion that since interest rates are low that all of the massive federal stimulus has in fact been working like a charm just as Krugman predicted in his July '10 piece!

I'd be delighted if you can pull out exact quotes where either of us said either of those things.

I'm happy to discuss this further with, but not if you're going to simply make things up.

[FinanceDude]

Only one problem, Keynesian economics have never worked, ever. Case in point are all the European countries that are in trouble who have been running the Keynesian playbook for some time now. How is that working out in Greece, Italy, etc?

I expect a round of QE3 and then QE4, etc. Ben Bernanke will go down as the worst Fed chairman ever. His toolbox is empty except to keep printing money and on the other hand keep interest rates artificially low. We all know how well that's going to end.............

I guess that's ok. The Dow can be at 3000 but I'll be able to buy 12% corporates and 10% short term Treasuries, life will be good........

[nun]

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Originally Posted by FinanceDude Only one problem, Keynesian economics have never worked, ever. Case in point are all the European countries that are in trouble who have been running the Keynesian playbook for some time now. How is that working out in Greece, Italy, etc? I expect a round of QE3 and then QE4, etc. Ben Bernanke will go down as the worst Fed chairman ever. His toolbox is empty except to keep printing money and on the other hand keep interest rates artificially low. We all know how well that's going to end............. I guess that's ok. The Dow can be at 3000 but I'll be able to buy 12% corporates and 10% short term Treasuries, life will be good........

UK, Ireland, Greece etc are not stimulating their economies they are trying to reduce deficits through Government cuts and thus taking money out of the economy and have zero growth. The US has small positive growth.....we can argue about the reasons for that, but to describe the reaction to the European debt crisis as Keynesian is incorrect.

[Gone4Good]

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Originally Posted by FinanceDude Only one problem, Keynesian economics have never worked, ever. Case in point are all the European countries that are in trouble who have been running the Keynesian playbook for some time now. How is that working out in Greece, Italy, etc?

So by this are you referring to the austerity programs that began in March 2010? Or maybe tight money policies for everyone but Germany that have been in effect for basically forever. Or maybe you're thinking pre-crisis where Italy was running budget surpluses and lowered its debt / GDP ratio to ~20%?

[FinanceDude]

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Originally Posted by nun UK, Ireland, Greece etc are not stimulating their economies they are trying to reduce deficits through Government cuts and thus taking money out of the economy and have zero growth. The US has small positive growth.....we can argue about the reasons for that, but to describe the reaction to the European debt crisis as Keynesian is incorrect.

I didn't say the debt crisis reaction was Keynesian, I said what got them to this point was Keynesian economics.......

[FinanceDude]

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Originally Posted by Gone4Good So by this are you referring to the austerity programs that began in March 2010? Or maybe tight money policies for everyone but Germany that have been in effect for basically forever. Or maybe you're thinking pre-crisis where Italy was running budget surpluses and lowered its debt / GDP ratio to ~20%?

Austerity programs are the end result of using Keynesian economics. You are agreeing with Krugman that the economy needed almost $3 trilion in stimulus and we would better off. I would like to see some proof that stimulating an economy by flooding the money supply and massively growing govt has worked. If you have a white paper on that I would be more than happy to read it. The US is headed in the same direction unless we quit printing money and tackle our unfunded entitlements. Do we really want austerity in the USA?

[Gone4Good]

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Originally Posted by FinanceDude I would like to see some proof that stimulating an economy by flooding the money supply and massively growing govt has worked. If you have a white paper on that I would be more than happy to read it.

Proof in economics doesn't exist. I can direct you to research, but that won't suffice. Conflicting research also exists. But if you're predicting 10% treasury rates (as you did above) and if you've been making those predictions for a long while (as you have) - you may want to reconsider the underlying premise that led you to make those predictions in view of the fact that those predictions have failed for nearly three years running.

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Originally Posted by FinanceDude The US is headed in the same direction unless we quit printing money and tackle our unfunded entitlements.

I don't think anyone disagrees with the need for entitlement reform.

On the other (and all the rest) it's worth pondering what separates the U.S., U.K. and Japan from Spain, Italy, Greece, etc. Compare deficits, debt balances, whatever statistics you want, between all of these countries and answer a simple question - "Why are the European countries facing a sovereign debt crisis while investors are throwing money at the U.S., U.K. and Japan, even at negative real rates of return?"

There is an answer and it has nothing to do with "just wait."

[nun]

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Originally Posted by FinanceDude I didn't say the debt crisis reaction was Keynesian, I said what got them to this point was Keynesian economics.......

Keynesian success

A Keynesian Success Story: Germany's New Economic Miracle - SPIEGEL ONLINE - News - International

Greece, Ireland etc got into trouble because of the financial bubble, excessive borrowing and massive tax evasion. Anything done to excess is a bad thing IMHO, be it Government control of the economy or laissez faire Chicago school economics. To take a dogmatic stance when increasing the amount of money in the economy is the right action in some circumstances and restricting the amount of money is right in other circumstances doesn't seem sensible.

[clifp]

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Originally Posted by Gone4Good Are you claiming that monetary policy is "fiscal stimulus." You seem to be mixing up two very different things. And no, QE1 & QE2 don't invalidate the argument. After all, the desire for fiscal stimuls arrives due to the impotence of monetary policy to influence the real economy when short term rates reach zero. (Not that it matters, but QE1 took place in 2008 before the Krugman Fed 2009 Op Ed) I'd be delighted if you can pull out exact quotes where either of us said either of those things. I'm happy to discuss this further with, but not if you're going to simply make things up.

But isn't the roughly 4 trillion dollars of cumulative deficits we've incurred from 2009-2011 a fiscal stimulus? It has been a while since I've take Macro, but I thought government deficit spending was a stimulus? Or is there some magic,that unless a government spending isn't lumped together and called a stimulus bill, it doesn't have any impact on the economy?

[Gone4Good]

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Originally Posted by clifp But isn't the roughly 4 trillion dollars of cumulative deficits we've incurred from 2009-2011 a fiscal stimulus? It has been a while since I've take Macro, but I thought government deficit spending was a stimulus? Or is there some magic,that unless a government spending isn't lumped together and called a stimulus bill, it doesn't have any impact on the economy?

That's a fair question.

And the answer is that some is and some isn't.

The deficits we were running in 2007 (2.5% of GDP) at full employment haven't gone away. They're part of the debt we've incurred over the past three years. But they're also part of pre-recession GDP output. We can't add them again as new "stimulus." They're already baked in the cake.

What about the 4% of GDP increase in deficits due to declining revenues? That's not stimulus either. Consider someone who loses his job and moves from being a taxpayer to not a taxpayer. Does his lower tax burden increase his economic activity? Of course not.

So here we've accounted for 6.5% of GDP, out of a peak 10.6% deficit, that isn't stimulus. The balance mostly does support economic activity to varying degrees and has some stimulative impact.

But remember, too, that the ~$3T output gap projected back in 2009 already assumed much of these higher deficits. Whatever stimulative effect they have, was known even then to be insufficient.

Here, BTW, is a chart of the contribution from Government Consumption and Investment to GDP. This isn't from some liberal economist, but from the actual GDP data reported by the BEA. What you'll see is a small spike in the 2nd Quarter of 2009, which was the Stimulus Bill and then a declining trend thereafter. You'll also notice that government has been a net drag on growth in each of the past three quarters.

[explanade]

Remember also that they put on the books the cost of running the two wars, which had not been accurately accounted for previously.

Maybe the money being poured into those countries are stimulative over there.

[GusLevy]

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Originally Posted by Gone4Good Are you claiming that monetary policy is "fiscal stimulus." You seem to be mixing up two very different things. And no, QE1 & QE2 don't invalidate the argument. After all, the desire for fiscal stimuls arrives due to the impotence of monetary policy to influence the real economy when short term rates reach zero. (Not that it matters, but QE1 took place in 2008 before the Krugman Fed 2009 Op Ed) I'd be delighted if you can pull out exact quotes where either of us said either of those things.

Good morning.

Mon frere, if the Fed cuts the discount rate 25bps we have monetary policy: If the Fed buys almost $2T of marketable assets via their iMacs then we have something completely different...but it ain't monetary policy. You prefer not to call it "federal stimulus" but if it runs like a rat, chews like a rat, smells like a rat...let's at least call it a hamster.

Basically each one of your posts in this current discussion - which began last yr! I did not read it then - highlights the fact that we have low interest rates as the Bearded One predicted. Implicit in his Keynesian economic view and thru the Op/Ed pieces that you linked to is clearly the fact that he believes that the economy would grow significantly and that we would get higher employment through massive stimulus - the logic is that low interest rates will be the result of stable supply and demand functions which are created by full output and full employment in the economy. We are now at least 2.5 yrs into various stimulus and hamster programs and yet the economy is perilously close to recession and unemployment is at generation highs: But we do have low interest rates so let's claim victory!

You and I both know that the "bond vigilantes" are indeed predicting higher rates when we look at Gold, Tips and forward curves. The QE programs, European crisis, recessionary domestic conditions, etc. in the near term are why we have low spot rates obviously - not exactly how the General Theory of Employment, Inflation and Money would have predicted despite all this massive stimulus recently.

I ask you: When will the economy grow to full output and full employment in the Keynesian worldview of Obama, Krugman and yourself? Another Trillion? Another $5 Trillion? More?!

I end with a quote:
“We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and now if I am wrong somebody else can have my job. I want to see this country prosper. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. I say after eight years of this administration, we have just as much unemployment as when we started. And enormous debt to boot." - Henry Morgenthau, Treasury Secretary under FDR for two terms

[Gone4Good]

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Originally Posted by GusLevy Good morning. Mon frere, if the Fed cuts the discount rate 25bps we have monetary policy: If the Fed buys almost $2T of marketable assets via their iMacs then we have something completely different...

Really? How does the Fed effect a discount rate cut of 25bps? Google "Open Market Operations" and get back to me.

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Originally Posted by GusLevy You and I both know that the "bond vigilantes" are indeed predicting higher rates when we look at Gold, Tips and forward curves.

Really? I see 10-yr TIPS inflation break-evens of 1.95%. I see 10-yr nominal yields near record lows. I see 30-yr treasury bonds at 3.3%. How is any of this reflective of a bond market fearing either inflation or significantly higher rates?

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Originally Posted by GusLevy The QE programs, European crisis, recessionary domestic conditions, etc. in the near term are why we have low spot rates obviously - not exactly how the General Theory of Employment, Inflation and Money would have predicted despite all this massive stimulus recently.

No, this is pretty much exactly how theory envisioned things would work.

I recall hearing all of the predictions that rates would soar when QE2 ended. Some of us said no they wouldn't. QE2 ended, and rates didn't soar. Do you think anyone who thought they would has changed their minds? Neither do I?

Recessionary domestic conditions? Yup, that's exactly what everyone on this side of the argument has feared. Not 1970's stagflation, but a good old deflationary recession/depression.

Welcom to Japan.

[GusLevy]

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Originally Posted by Gone4Good Really? How does the Fed effect a discount rate cut of 25bps? Google "Open Market Operations" and get back to me.

So cutting the discount rate to member banks or the fed funds rate for member banks is the same as buying marketable securities from the member banks?! What the hell are you talking about?

When the Fed becomes an ACTIVE market participant that is Keynesian policy and not open market policy.

[GusLevy]

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Originally Posted by Gone4Good Really? I see 10-yr TIPS inflation break-evens of 1.95%. I see 10-yr nominal yields near record lows. I see 30-yr treasury bonds at 3.3%. How is any of this reflective of a bond market fearing either inflation or significantly higher rates?

1) TIPS are priced on growth expectations and inflation expectations so obviously the low break-evens suggest high growth expectations or high inflation expectations...I'll let you decide which one the market is predicting.

2) Discounting the fact that Europe is imploding and that growth is not out of 1st gear domestically, the Fed did just buy a few $Billion or so of marketable UST, did they not?!

The bond market...ahhh, those crazy vigilantes - what active manager is actually long their benchmarks these days?!

[Gone4Good]

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Originally Posted by GusLevy So cutting the discount rate to member banks or the fed funds rate for member banks is the same as buying marketable securities from the member banks?! What the hell are you talking about? When the Fed becomes an ACTIVE market participant that is Keynesian policy and not open market policy.

I know Google is advanced technology, but I'll help out . . .

Open Market Operations

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Open market operations (also known as OMO) is the buying and selling of government bonds on the open market by a central bank. It is the primary means of implementing monetary policy by a central bank.

[Gone4Good]

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Originally Posted by GusLevy 1) TIPS are priced on growth expectations and inflation expectations so obviously the low break-evens suggest high growth expectations or high inflation expectations...I'll let you decide which one the market is predicting.

Between the last post and this one, it is pretty clear what the problem is.

I'm done.

Have a nice day.

[GusLevy]

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Originally Posted by Gone4Good I know Google is advanced technology, but I'll help out . . . Open Market Operations

There you go again, trying to be sneaky. Open market operations have what to do exactly with the setting of discount or fed funds (which is monetary policy)? Open market operations are by definition Keynesian policy as the Govt is directly involved in the market, no?

[FinanceDude]

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Originally Posted by Gone4Good I know Google is advanced technology, but I'll help out . . . Open Market Operations

That was not necessary.........