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

[EO 11110]

Krugman is a hack. Does he ever get anything right?

Of the guys I follow Marc Faber has been the most impressive.

 

[Gone4Good]

Krugman is a hack. Does he ever get anything right?

The Op Ed(s) in question were about interest rates, about which Krugman continues to be correct.

 

[Gone4Good]

One year later and the 10-yr rate on government bonds continues its downward trend. 1.92% today.

Maybe the bearded economist from Princeton actually knows something worth listening too, even by those who don't agree with his politics.

 

[chinaco]

...but too many folks ignore that in favor of some pre-set theory governed, it seems, mostly by politics....

Yes sir. but that is only if they need a plausible reason.... they find one to support their agenda and planned action. Most time their agenda is all the reason they need.

 

[haha]

One year later and the 10-yr rate on government bonds continues its downward trend. 1.92% today.

Maybe the bearded economist from Princeton actually knows something worth listening too, even by those who don't agree with his politics.

You are extremely cute, that is why I love your posts so much. I am most fond of your "nah nah nah nah na" numbers.

Time will tell, but speaking for myself I do not bet on interest rates, especially betting that low rates will go lower, or high rates higher. They may well, but it suffers from what any odds-on bet suffers from. The loss can be large, but the possible gain is capped. True that a trend will likely continue, but one must examine not only frequency, but also mathematical expectation.

True that I dislike Krugman's politics, but I would never bet with or gainst him. It just is not practical.

I notice that your posts are mostly about what others (like me) have got wrong. Why not tell us a little about your investing prowess?

Ha

 

[FinanceDude]

You are extremely cute, that is why I love your posts so much. I am most fond of your "nah nah nah nah na" numbers.

I notice that your posts are mostly about what others (like me) have got wrong. Why not tell us a little about your investing prowess?

Ha

 

[Gone4Good]

Why not tell us a little about your investing prowess?

Ha

I did well enough on an institutional credit trading desk to leave that job voluntarily and forever at the age of 38.

 

[Gone4Good]

Back on point . . .

Time will tell, but speaking for myself I do not bet on interest rates, especially betting that low rates will go lower, or high rates higher. They may well, but it suffers from what any odds-on bet suffers from. The loss can be large, but the possible gain is capped. True that a trend will likely continue, but one must examine not only frequency, but also mathematical expectation.

None of this was about betting on interest rates, but rather comparing two competing views of how the economy works (or doesn't work) at this particular moment in time. There are all kinds of ramifications based on which worldview is correct - from the economic outlook, to appropriate policy responses, to investment implications. Who's right matters. Fortunately, each view comes with specific predictions we can test against reality.

Thinking about these macro drivers led to this comment (and actual equity sales a few days earlier) back on April 24 when the S&P was ~1320

I do think we have an extended market and an economic slow down looming (largely due to the fiscal drag of expiring stimulus and budget cuts combined with the shock of a 35% yearly increase in gasoline prices). I don't think we're heading for recession, but we could easily see a repeat of last Spring when the economy also hit a soft patch and the S&P declined 15% or so.

 

[GusLevy]

Time will tell, but speaking for myself I do not bet on interest rates, especially betting that low rates will go lower, or high rates higher. They may well, but it suffers from what any odds-on bet suffers from. The loss can be large, but the possible gain is capped. True that a trend will likely continue, but one must examine not only frequency, but also mathematical expectation.

True that I dislike Krugman's politics, but I would never bet with or gainst him. It just is not practical.

Ha

Don't sell yourself short. The premise and conclusion of this current discussion is disingenuous at best and sneaky at worst: Krugman argued last year - as he always does - that monumental levels of fiscal stimulus was/is necessary to increase the supply function throughout the economy which would increase the demand function while the general price level will be finely tuned to the right temperature by the prescient actions of your Federal Govt. As a Keynesian, he argues that "output and employment potential" must be seeded by fiscal stimulus which would scientifically - not theoretically - lead the economy back to full employment and thus to happy village dances on weekdays and chickens in everyone's pots on Sundays - at the proper price, of course.

Krugman argued that there should be no fear of "bond vigilantes" as they would be compelled to accept the Fed Govt's proper price levels and interest rates and have no serious ability to unleash monetary inflation problems as full employment will have the ultimate say on interest rates rather than the market. The current claims in this discussion that Krugman has been correct for the past year because interest rates are low today is giving him credit for an outcome that arrived from a route that Krugman did not predict: The unemployment rate is at even higher levels despite massive fiscal stimulus spending in addition to Queen Elizabeth I and II. Furthermore, to suggest that the fact low interest rates in the US are due to anything but the incredible flight to safety trade as a result of fiscal policy mistakes not only domestically but also globally is laughable. The forward rates curve, TIPS yields, Gold, etc. are indeed direct statements from the "bond vigilantes" that the various stimulus programs are failures. The fact that spot curves are low today simply means that US Trsys are the least ugly girl in the Ugly Girl contest right now as global investors need to park cash somewhere - wait til She's the only one left on stage.

"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 economy: M2 growth looks like El Capitan these days but we are on the brink of recession and unemployment is actually higher now compared to back then. And yet TIPS are straddling negative while Gold is really, really expensive...

 

[Gone4Good]

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:

The stimulus bill looks helpful but inadequate, especially when combined with a disappointing plan for rescuing the banks.

The Congressional Budget Office, not usually given to hyperbole, predicts that over the next three years there will be a $2.9 trillion gap between what the economy could produce and what it will actually produce. And $800 billion, while it sounds like a lot of money, isn’t nearly enough to bridge that chasm.

So far the Obama administration’s response to the economic crisis is all too reminiscent of Japan in the 1990s: a fiscal expansion large enough to avert the worst, but not enough to kick-start recovery; support for the banking system, but a reluctance to force banks to face up to their losses. It’s early days yet, but we’re falling behind the curve.

Two and one half years later this looks like a pretty prescient assessment and yet nothing at all like your portrayal.

 

[explanade]

Yup, Krugman has been saying that the politicians have been focusing on long-term debt problems instead of immediate needs to get the economy out of a liquidity trap.

It seems the more credentialed and accomplished the source, the more apt some people are to ignore and reject what they're saying.

 

[haha]

Yup, Krugman has been saying that the politicians have been focusing on long-term debt problems instead of immediate needs to get the economy out of a liquidity trap.

Oh absolutely. Notice how rapidly our government debt is being retired?

The easiest thing is always to say "What we did was correct. We just needed to do much much more." But perhaps what was done was wrong, and more would just dig a bigger hole?

Now, I don't want to be home when the pig comes, so you guys carry on without me, OK?

 

[explanade]

Oh it's his fault that politicians aren't retiring govt. debt?

 

[Gone4Good]

The easiest thing is always to say "What we did was correct. We just needed to do much much more." But perhaps what was done was wrong, and more would just dig a bigger hole?

Which is why I look to objective measures to assess these things. Negative real rates all the way through the 10-yr part of the curve tell you something very specific . . . more bonds please! If someone has a different interpretation, they'll have to walk me through the specifics.

PS - "Flight to quality" is actually a fundamental part of the liquidity trap thesis, not a refutation of it.

 

[M Paquette]

Oh absolutely. Notice how rapidly our government debt is being retired?

Heh. It's consumer and personal debt that drive a liquidity trap. Think of it as waking up one day and realizing you're in over your head in debt, or have underwritten too much debt, and freezing up at the thought of borrowing or lending more.

Why isn't government debt a big factor? When was the last time you saw government say "Oh dear. We've too much debt, and had best slow our spending and balance our books." The debt just doesn't induce the fear it does in Ma and Pa.

Now here's the fun part. If the government decides to join in the fun and start an austerity program, the liquidity trap doesn't get better. Government employees get laid off, and the ones left behind get nervous. They spend less. Contractors get nervous. Some lose contracts. They spend less. That pesky liquidity trap gets worse. (See also "The Great Depression")

Ideally a government would run balanced over the long run, and would plan on running a deficit when the overall economy was in a liquidity trap, and a surplus during good times. Some governments actually do this. Is that weird, or what?

 

[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]

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)

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]

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]

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]

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]

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]

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.

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]

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]

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?