|Double or quits
By Chan Akya
That's sealed it - the United States jobs report for September showed a decline
of some 263,000 jobs for the month, much worse than the consensus estimate of
Wall Street economists who had looked for a decline of 175,000. This marked the
second month in a row that jobless numbers had been worse than Wall Street
More importantly, this capped the number of US economic figures that had been
coming out worse than expectations since the third week of September.
As with any economic trend, this one bears watching not so much because Wall
Street economists got it wrong - they are paid to paint a rosy picture of the
economy in order to get more unwary investors to purchase risk assets such as
stocks and corporate bonds after all - but because of the reaction from
Keynesian economists who had been calling for greater government intervention
in the economy.
In a recent article, I wrote the following:
If governments in these
countries had simply allowed many of the banks to fail, while protecting retail
deposits, the capitalist solution would have worked out perfectly well:Sure
enough, my idea of the perfectly moronic Keynesian, Paul Krugman, immediately
obliged with the following article in the New York Times, on October 2, the
same day that the US jobless reports were released (perhaps the professor was
given advance warning):
1. Balance sheets of banks would have shrunk;
2. Borrowers would have been forced to cut their debts;
3. Worldwide deflation;
4. Unprofitable and overleveraged companies would have been closed down;
5. Economies would have contracted to the point where (some) capacity
became profitable again;
6. Higher returns from such activity would have prompted new investments
from surviving capitalists;
7. Economies would have resumed profitable growth, albeit in the lower
Instead, we are left with the Keynesian nonsense of:
1. Government debt has ballooned to the point of no return across G-8;
2. Banks continue to have significantly overextended balance sheets;
3. Loan losses are being suppressed by irresponsible lending and vast
quantities of money floating around;
4. Investors have resumed random gambling - also known as the stock
5. All this activity has created enough noise to warrant calls for a new
global economic recovery.
The point isn't so much that the above situation isn't sustainable - even a
10-year-old can figure that out - but that a failure from this stage will not
resurrect the capitalist spirit. Rather, we should expect people to wail for
more government aid, higher allocations to certain industries and jobs and so
on. (We are all
Japanese now, Asia Times Online, September 5, 2009).
... A new report from the International
Monetary Fund shows that the kind of recession we've had ... often leads to
long-term damage to a country's growth prospects ... The same report, however,
suggests that this isn't inevitable: "We find that a stronger short-term fiscal
policy response" - by which they mean a temporary increase in government
spending - "is significantly associated with smaller medium-term output
This is hilarious stuff
for all us non-Keynesians, of course. Not only do the likes of Krugman wish to
admit it when they get something totally wrong, they would also be out there
calling for a "double or quits" strategy.
So we should be doing much more than we are to promote economic recovery, not
just because it would reduce our current pain, but also because it would
improve our long-run prospects. But can we afford to do more ... yes, we can.
... You see, spending money now means a stronger economy, both in the short run
and in the long run. And a stronger economy means more revenues, which offset a
large fraction of the upfront cost ...
That is a perfectly rational course of action, provided you are China.
In other words, if you were spending your own money, and decided to increase
the quantity of government stimulus (we will discuss the quality of
the Chinese government actions in a different article) to avoid a downturn
caused by something like exports, that is a perfectly rational idea.
However, Krugman and his like are recommending this course of action for the
United States. A country with dual deficits on the fiscal and current account
side - at least one of which looks like it is becoming a structural imbalance.
In other words, I think that there is no way for the US to ever repay
the debt being taken on now.
Think of how much the Keynesians have achieved so far. A couple of trillion
dollars of stimulus spending, and all that they have to show is a job market
that is doing worse than expected; investments from companies that are
drying up quicker than expected and overall, the likelihood of an adjustment to
a lower level of output.
The breaking point will only come when debt investors go on strike. In
particular, when buyers of US Treasury bonds refuse to take additional risks,
you will suddenly see the Keynesians on the back foot.
The problem is that the markets will need debt investors to strike against
another country first, because US debt markets are too big to ignore otherwise.
In my opinion, the first stop will be the UK: as I wrote earlier this year, it
is highly possible that the true test of investor risk appetite on soaring
government debt will be Britain. Here is an excerpt from the article:
Not being complete imbeciles, the UK government also recognizes that its
actions will cause a significant financial hardship. Additional borrowing that
doubles last year's total will fill this gaping hole of 220 billion pounds
sterling in this year's budget. Mind you, this from a country that has already
had the ignominy of a failed auction; and perhaps a whole lot more to come its
way once the rating downgrades are baked into the cake.
Put simply, Krugman and his like will have their strategy aired, and many
government officials in the US as well as various European countries will buy
into the notion of a "bigger stimulus" in coming weeks and months. That will
continue though until the first cracks show - which is most likely to happen in
the case of the UK.
How does it choose to counter the costs of bailing out: does it suggest a means
of wiping out government waste (if you will pardon the tautology) or does it
plan to provide greater incentives for savings? Neither, as it turns out: the
government's magic bullet is to actually increase the top tax rate in the
country from 40% to 50%, in a move designed to raise a further 6 billion pounds
in taxes (a piffling 3% of the government deficit).
So let me get this right. You are the finance minister of a country where the
number of people making a decent disposable income, say over US$100,000 per
year, has sharply declined over the past year. You have already spent hundreds
of billions on bailing out your sick banks and even sicker industrial
companies. Now, facing a deep recession, you choose to actually further reduce
the disposable income of your most productive citizens in order to drive home a
To paraphrase Churchill, the UK economy is now a disaster, wrapped in a
catastrophe inside a calamity. And someone just flushed the key down the
G-8's first bankruptcy, Asia Times Online, April 25, 2009).
So there you have it - watch UK debt auctions from now. At the first signs of
trouble, that is, investors not buying enough pound sterling-denominated debt,
it will be time to start selling down your US Treasury holdings.
Disclaimer: All my usual health warnings apply here. Don't listen to a
pseudonymous commentator like me without consulting an appropriate adviser, and
if you cant find one use your common sense.
(Copyright 2009 Asia Times Online (Holdings) Ltd. All rights reserved. Please
contact us about
sales, syndication and
All material on this
website is copyright and may not be republished in any form without written
© Copyright 1999 - 2009 Asia Times
Online (Holdings), Ltd.
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110