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

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Gone4Good said:
True inflation transfers value from creditors to debtors. Whether it solves the problem depends on what the problem is. If the problem is that debtors can't deleverage because creditors won't dis-save, as we outlined in detail a couple of posts back, than transfering value from creditors to debtors, by inflation or some other means, absolutely solves the problem.
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I got your post and understood the story about Sarah and Brad. My point was that in real life inflation does not make the problem go away, it just makes someone else pay. Because most prices and wages rise, it is an illusion of prosperity or recovery.

Inflation is entirely possible in the US and it might help to reduce the consumer debt overhang, but I think there are deeper structural issues and debt is a consequence, not a driver, of these issues.
 
Last night I was thinking about this subject... and we keep getting examples of the last depression and WWII etc... but never was there and answer to the most recent example of stimulus...

So, one question that seems to go unanswered by the folks who would like stimulus.....

Why has it not worked in Japan:confused:


This is our most recent example... let's not go so far back in history where foreign workers did not make that much of an impact in a countries GDP... where companies could not offshore their work so easily... where money did not move at lightning speed... lets look at the last few decades and see what has happened...
 
MichaelB said:
I got your post and understood the story about Sarah and Brad. My point was that in real life inflation does not make the problem go away, it just makes someone else pay. Because most prices and wages rise, it is an illusion of prosperity or recovery.

Inflation is entirely possible in the US and it might help to reduce the consumer debt overhang, but I think there are deeper structural issues and debt is a consequence, not a driver, of these issues.
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We agree that inflation reallocates slices of the pie. Where I'm losing you is if the current allocation is a growth constraint, how reallocating to remove that constraint doesn't solve that problem.

Whether there are other structural issues (I imagine you're talking about balance of payments issues, but you don't say) they should be addressed too, but that doesn't make removing the consumer debt overhang irrelevant.
 
Texas Proud said:
Why has it not worked in Japan:confused:
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I haven't studied Japan enough to say. I do know that Japan is not the U.S. Their business and banking systems are different, their demographics are different, their employment policies are different (they never experienced 9.1% unemployment, for example), their approach to bankruptcy is different . . .

Demographics are a huge part of Japan's riddle. And while I don't normally like to link to stories about research (preferring instead to link directly to the research) here's an article about the work (conservative) economist Tyler Cowen has done suggesting that the difference between Japan's growth and that of the U.S. is entirely a function of demographics.

In non-population adjusted figures, Japan's real GDP grew by 26% in total these years [1990-2007], the lowest in the OECD. In comparison the figures are 63% for the U.S and 44% for the EU.15.

But during this period the U.S saw its potential labor force (the number of people between 15-65) increase by 23% and the EU.15 by 11%, while Japan had a decrease of 4%.

Between 1990-2007, GDP per working age adult increased by 31.8% in the United States, by 29.6% in EU.15 and by 31.0% in Japan. The figures are nearly identical! Japan has simply not been growing slower than other advanced countries once we adjust for demographic change.
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Gone4Good said:
We agree that inflation reallocates slices of the pie. Where I'm losing you is if the current allocation is a growth constraint, how reallocating to remove that constraint doesn't solve that problem.

Whether there are other structural issues (I imagine you're talking about balance of payments issues, but you don't say) they should be addressed too, but that doesn't make removing the consumer debt overhang irrelevant.
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When the value of the debt declines due to inflation the problem goes away for the homeowner. The pensioner who lent that money, however, now may not have enough to live on due to lost purchasing power. If the saver was a thrifty individual and the consumer an overspender, the wrong patterns of behaviour have been reinforced. The economy is not necessarily better off.
 
Texas Proud said:
Last night I was thinking about this subject... and we keep getting examples of the last depression and WWII etc... but never was there and answer to the most recent example of stimulus...

So, one question that seems to go unanswered by the folks who would like stimulus.....

Why has it not worked in Japan:confused:
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Stimulus was working in Japan. When the economy began to recover the deficit spending was cut and taxes raised. This caused a premature end to the recovery and pushed Japan back into recession.
 
MichaelB said:
When the value of the debt declines due to inflation the problem goes away for the homeowner. The pensioner who lent that money, however, now may not have enough to live on due to lost purchasing power. If the saver was a thrifty individual and the consumer an overspender, the wrong patterns of behaviour have been reinforced. The economy is not necessarily better off.
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For this to be a factor, savers and borrowers in the economy need to be equally constrained. While it's easy to envision this on an individual basis (the fixed income pensioner) it's harder (impossible?) to envision on an economy wide basis.

If we go back to the example of Brad and Sarah, we see that Brad's consumption isn't constrained by his income. It can't be. He's got extra income to lend. If he didn't, there would be no demand for bonds.

One thing we do not suffer at the moment is inadequate demand for bonds.
 
Gone4Good said:
For this to be a factor, savers and borrowers in the economy need to be equally constrained. While it's easy to envision this on an individual basis (the fixed income pensioner) it's harder (impossible?) to envision on an economy wide basis.

If we go back to the example of Brad and Sarah, we see that Brad's consumption isn't constrained by his income. It can't be. He's got extra income to lend. If he didn't, there would be no demand for bonds.

One thing we do not suffer at the moment is inadequate demand for bonds.
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Demand for bonds would fall once inflation expectations picked up. A decade (or two) ago US consumption moved ahead of real earnings using home equity as a base for credit. Now that debt is holding back the US. After inflation, neither borrower (the consumer) nor lender (the bank) pays - but the pensioner (the investor) does. Serial inequality.

When consumer debt is caused by excess consumption and then inflated away the consumer is not punished for this behaviour and goes on to repeat it. Overall consumption needs to fall back in line with personal income or the consumer needs to increase real earnings to sustain the consumption. There is no easy or painless way out of this mess. It is more a question of who will pay.
 
MichaelB said:
Demand for bonds would fall once inflation expectations picked up.
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Which is exactly what we want.

MichaelB said:
When consumer debt is caused by excess consumption and then inflated away the consumer is not punished for this behaviour and goes on to repeat it.
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Viewing economics as a morality tale often leads us to wrong conclusions. Market economies have one function, to allocate resources. As much as some would like to think otherwise, their purpose is not to reward the virtuous and punish the wicked. Often times the wicked succeed and the virtuous fail. The economy doesn't care.

If only the indebted suffered, one could make the argument that doing nothing was just. But that isn't the case. As just one example, the unemployment rate for recent college graduates is at the highest level since the 1970's. 22 year-olds didn't cause this problem, and yet they suffer. And they'll continue to suffer if we pretend that the economy is dolling out justice, when all it is trying to do is allocate resources in the face of a broken pricing mechanisim.

My thoughts are that we need to fix the economy by fixing the pricing mechanism.
 
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Gone4Good said:
Which is exactly what we want.



Viewing economics as a morality tale often leads us to wrong conclusions. Market economies have one function, to allocate resources. As much as some would like to think otherwise, their purpose is not to reward the virtuous and punish the wicked. The economy doesn't care.

If only the indebted suffered, one could make the argument that doing nothing was just. But that isn't the case. As just one example, the unemployment rate for recent college graduates is at the highest level since the 1970's. 22 year-olds didn't cause this problem, and yet they suffer. And they'll continue to suffer if we pretend that the economy is dolling out justice, when all it is trying to do is allocate resources in the face of a broken pricing mechanisim.

My thoughts are that we need to fix the economy by fixing the pricing mechanism.
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No morality intended. We should avoid encouraging a behaviour which is destructive for overall economic performance. The "sufferers" should be those that borrowed beyond their capacity to pay and those that lent to uncreditworthy borrowers.

The 22 year olds, like everyone else, are out of work because there is insufficient aggregate demand in the US and their price of labor is globally uncompetitive. Borrowing to finance a fiscal deficit may employ them but it also returns us to the same behaviour that led to this problem in the first place. At some point the US, both households and public sector need to live within our means.
 
MichaelB said:
The 22 year olds, like everyone else, are out of work because ...
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If I was a 22 year old and couldn't find a job I would join the military.
You get paid, you get experience, and you get benefits for the rest of your life, not mention you can serve your country.
It's a win-win-win
TJ
 
teejayevans said:
If I was a 22 year old and couldn't find a job I would join the military.
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You aren't the only one . . .

Army Exceeds Recruiting Goals

In the active component, the Army sought 54,200 recruitments through July. It gained 55,131 -- 102 percent of its goal. The active Navy, Marine Corps and Air Force all hit the 100-percent mark. The services are also on track to meet their yearly retention goals, according to the release.
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I'd like to see statistics on how many people applied and were turned away, versus say 2007.
 
teejayevans said:
If I was a 22 year old and couldn't find a job I would join the military.
You get paid, you get experience, and you get benefits for the rest of your life, not mention you can serve your country.
It's a win-win-win
TJ
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However short it may turn out to be...
 
explanade said:
Another Nobel laureate economist that certain factions oppose for ideological reasons:

Peter Diamond withdraws Fed nomination with scathing attack on GOP - Political Hotsheet - CBS News
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The Nobel prize is a political award and is almost meaningless.

See latest news about the fed wanting to do more monetary trickery to get us to leverage up, while the rest of us are trying to de-leverage. Clearly we have a disconnect between us and the economists with PHDs from the ivy league schools.
TJ
 
teejayevans said:
The Nobel prize is a political award and is almost meaningless.
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+1

See latest news about the fed wanting to do more monetary trickery to get us to leverage up, while the rest of us are trying to de-leverage. Clearly we have a disconnect between us and the economists with PHDs from the ivy league schools.
TJ
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The Fed is drunk with power..........:mad:
 
teejayevans said:
Clearly we have a disconnect between us and the economists with PHDs from the ivy league schools.
TJ
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My late sister was a PhD. She said that the adage of PhD as "piled higher and deeper" was not as outlandish as you might think. Or as she put it after an international conference: "Just another big meeting where the smart people showed how dumb they really were"..........:ROFLMAO::ROFLMAO:

Man, I miss her! :)
 
teejayevans said:
the fed wanting to do more monetary trickery to get us to leverage up, while the rest of us are trying to de-leverage.
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Yep...... Unless we have some unanticipated technological breakthough regarding energy or food production, it may be time to realize that the growth days here on planet earth are over and it's time to make the best of and conserve what we have left. Im content to see things level off in terms of both population and economic production. The fed seems intent on stimulating growth fueled by additional borrowing.
 
youbet said:
Yep...... Unless we have some unanticipated technological breakthrough regarding energy or food production, it may be time to realize that the growth days here on planet earth are over and it's time to make the best of and conserve what we have left. Im content to see things level off in terms of both population and economic production. The fed seems intent on stimulating growth fueled by additional borrowing.
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Good luck with that...

I would argue, though, that the FRB is not so much trying to stimulate growth as it is trying to prevent disinflation.
 
HFWR said:
Good luck with that...

I would argue, though, that the FRB is not so much trying to stimulate growth as it is trying to prevent disinflation.
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I suppose you could make that case and I respect your opinion. I'll stick with my opinion that they're trying to stimulate growth and will likely become more and more aggressive in that regard unless political tides stop them.
 
youbet said:
I suppose you could make that case and I respect your opinion. I'll stick with my opinion that they're trying to stimulate growth and will likely become more and more aggressive in that regard unless political tides stop them.
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+1 Right now I think the Fed is more powerful than Congress, they act like we should all genuflect at the feet of Ben Brenanke and his "computer models".............
 
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