Thinking the Unthinkable
By J.M. Hamilton (Originally Published 7-5-2010)
As stocks continue their downward decent (the S&P 500 is down 8.3% for the year), and unemployment remains recalcitrant (Shadow Government puts the U.S. unemployment/under-employment figure in excess of 20%), Keynesians, lead by Mr. Krugman, and Fiscal Conservatives, presently embodied by Mr. Paulson, are at war with one another.
Mr. Krugman is a Nobel Laureate, and a Princeton economist, and a long time advocate of the poor and the down trodden. His primary pulpit is the N.Y. Times editorial pages.
Mr.Paulson’s notoriety derives through that “market maker” institution – Goldman Sachs; Mr. Paulson, allegedly, hand-picked the deck in a CDO issuance, and walked away with extraordinary profits. A civil complaint has been filed against Goldman Sachs by the SEC, over this very same transaction. No similar filing, by the SEC, has been made against Mr. Paulson or his hedge fund.
The Keynesian Argument
Mr. Krugman is hammering for greater government spending to spur economic activity and to get Americans through the great recession. Mr. Krugman argues that we are not out this recession by a long shot; and only government spending can make up for, in terms of job creation and economic activity, the contraction in private sector spending and growth.
Keynesians argue that in the short run deficit’s don’t matter (as opposed to former Vice President Dick Cheney, who – when it’s politically convenient – is said to argue that deficits do not matter at all), and that deficit spending is a valid policy response to a down turn in the economy. They further argue that when times are good, government should rein in spending, and put money away for the next, inevitable, downturn.
Generally, many Americans would side with Mr. Krugman, were it not for the monstrous national debt visited upon this nation, by every administration from Reagan forward (the sole exception would be President Clinton, who actually ran budget surpluses). In fairness to President Obama, he inherited this fiscal nightmare, and gets a pass on deficit creation, at least in the short run.
Bottom line: There are two problems with the Keynesian argument: One, the second half of the Keynesian thesis simply falls apart in reality; that is to say, seemingly, no politician on earth, or all too few, has the self control to rein in government spending during the good times, and create budget surpluses. If the alleged keepers of the faith of fiscal conservatism, the Republicans, cannot rein in federal spending during prosperous times (e.g. witness Bush – Cheney, who actually expanded Big Government, with Entitlement D of Medicare), then how can U.S. citizens expect well meaning liberals to act accordingly? And two, the U.S. debt to GDP ratio is hovering around 90%… the servicing of such debt, and magnification of that debt, presents a huge fiscal drag on the U.S. economy, and other sovereign nations facing similar circumstances (witness the PIIGS in the E.U., and the fiscally “healthy” sovereigns propping up same).
Additional budget deficits at this point, although well meaning, may actually have a reverse effect, as businesses spend their time on alternative non-core pursuits, such as hoarding cash (to pay for inevitable higher taxes and worse economic times yet to come), hedging currencies, and loading up on gold.
Moreover, governments with sky high debt cannot continue to borrow forever to finance the Keynesian model, just ask Greece?
If the debt to GDP ratio wasn’t in the stratosphere, with the CBO and the OMB predicting trillion dollar deficits – seemingly in perpetuity, Mr. Krugman’s policy prescriptions would seem to make sense, in the short run.
The Fiscal Conservative Argument, or Let Them Eat Cake!
If one absolutely did not give a damn about the unemployed in this country, nearly 1/5 of all Americans, Mr. Paulson’s argument would be the way to go: simply rein in government spending, and cut social services – in order to get our fiscal act together . If one had a huge financial stake in perpetuation of the status quo – unemployed be damned – then Mr. Paulson’s “Pollyanna/rose colored glasses approach” would make perfect sense.
Who said Herbert Hoover is dead, why his spirit is alive and well in Mr. Paulson!
Mr. Paulson seems to be thinking (while not speaking it), if I may paraphrase and cut to the chase, ‘Heh, the economy is growing. The government largess, joy, and love showered upon the nation’s banking sector, seems to be a rising tide for me and my hedge fund, so why rock the freaking boat???’
The problem is the “voodoo economic theory” (read: laissez faire) that has been passed down for over a generation now, appears a bit tired and worn. Main Street is not profiting from the unprecedented bailout of Wall Street. And in fact the only parties that appear to be profiting from government intervention into the market place (TARP, TLGP, Fed Funds rate at Zero, Et Al.) are, ironically, the Wall Street banks, and their close associates.
The rising tide is not lifting all ships, thank you Mr. Paulson, nor can the 1/5 of American’s presently unemployed wait for crumbs to come trickling down. Mr. Paulson seems to have forgotten, conveniently enough, that the manner in which he’s made his extraordinary fortune, via an unregulated derivatives market and Goldman Sachs (now being pursued by the SEC), in short laissez faire capitalism run amok, are both primary contributors to the mayhem visited upon both the U.S. and world economies. Separately, one cannot recall Mr. Paulson calling for fiscal discipline during the peak of economic cycle, say around 2006 and early 2007. Why?
Mr. Paulson’s position, if allowed to play out, could lead to problems with the social fabric. For some reason, Americans have come to believe in the semi-egalitarian social construct of a middle class.
Monetary Policy
Another approach to our economic Hiroshima is through monetary policy, which posits that massive inflows of liquidity into the economy should stimulate growth and prosperity.
Note to readers, I am on my roof, nightly, feverishly scanning the horizon for Ben Bernanke and his helicopter to come to the rescue, and dump that load of cash right into my waiting arms. But alas, no Ben - only pigeons dumping an entirely different load.
Here again, a liberal monetary policy would work quite well if the nation had healthy banks and some semblance of a normal fiscal policy, but this perfect storm of a financial nightmare appears to have left monetary policy face down in the water.
That is to say, while Mr. Bernanke is busily printing money at the Fed, he appears to be “pushing on a rope,” in terms of stimulating the economy. Try as the Fed might, M3 is actually contracting at an alarming pace. The banks aren’t lending, at least not to small or mid-sized businesses, or individual consumers – the life blood of U.S. job creation and the engine of economic growth.
Instead, the Wall Street banks appear to have entered into a symbiotic relationship with the federal government, whereby the government provides them with free liquidity through the Fed Funds window, and severely watered down bank reform legislation, and in return the banks finance ever growing government debt.
Many banks balance sheets are still a wreck. And globally banks are so leveraged up with government debt that – going forward – when we talk about governments bailing out “the banks,” we really are talking about bailing out the international order or world governments, themselves. Governments and banks are more interconnected than ever, but I digress.
Thinking the Unthinkable: A Global Restructuring of Debt
So if all the economic answers (Keynesian, Fiscal Conservatism, and Monetary policy) are shot, dulled, or worse yet, may actually aggravate the situation, what then? What is left?
Here’s a hint: South and Central American countries have been known to do it from time to time, and some have done quite well, economically, after the fact.
Centrals bankers meet some weekend, ask the creditor nations to take a “haircut,” and abracadabra a new currency is born, Monday morning.
Of course, this could upset the international order of things. On the “con” side: Creditor nations might demand that in exchange for “haircuts” on debt, that the western democracies surrender the ability to print fiat currencies? Fiscal order might be pushed by creditor nations, and profligate government spending might be banished (e.g. the end of politicians making spending promises that have to be financed), but is that really a bad thing? After seeing the chaos within the E.U. and the lack of centralized political power over the euro, a real world bank might be created to control, monitor, and oversee a new world currency. The monetization of debt might no longer be available to many sovereign nations. The truly American value of living within one’s means, thrift and frugality, might be imposed, where our politicians have failed us.
On the “pro” side: The crushing debt with which western democracies are presently faced with might be wiped out, or eliminated to a large degree. The government deficits, and debt, that are such a drag on the world economy, could be eliminated. Governments, no longer faced with catastrophic debt, would no longer have to deploy contractionary fiscal policies during the ongoing economic crisis, such as tax increases and reductions in public spending and social services, so that debt loads could be serviced. The social order could be preserved. Governments – no longer dependent upon banks to buy their debt – could, in turn, install mark to market accounting and let the chips fall where they may among banks.
In short, no more propping up banks so that they can finance sovereign debt, the mess that we are presently in. Banks that survive mark to market accounting would be free to lend to the private sector, again, instead of being tied up financing government debt. With bad banks washed away, and healthy banks free to lend, a floor could be established in the real estate market, a huge driver of economic activity, job creation, and wealth creation. As real estate makes a comeback, government, the Fed, Freddie/Fannies, and the banks may actually make a buck off of what is presently referred to as toxic assets.
Protectionist forces might be held at bay.
Basically, we are talking about clearing the decks for global economic activity. The global economy may enjoy a renaissance, and economic growth could be explosive! Today’s creditor nations, post restructuring, could be primary beneficiaries of rapid worldwide economic growth, especially the export lead Pacific Rim (i.e. China). Multi-national business would flourish, having to worry less about hedging currencies and escalating taxes. Global banking could be significantly simplified. Business could expand globally, as they would no longer have to worry about market instability and problematic currencies.
Main Street could return to a preeminent position of economic activity, and Wall Street could return to its secondary position of supporting Main Street. The “pros” of a global restructuring, at the end of the day, could overwhelmingly outweigh the “cons.”
Reactionary Forces
To be sure, there would enormous political pressure not to engage in such an enterprise, much of the pressure deriving from the banking sector, hedge funds, politicians, and some sovereign nations (admittedly, a fierce crowd). The old international order of nation states might come under fire, to some degree, as they surrender some economic power to a global bank; but many nations/states have already surrendered banking authority to some centralized power, such as: all 50 states that make up the United States, or members of the E.U.
The need for many disparate powerful private banking enterprises, and the incumbent global systematic risk and moral hazard, might also come to an end – or be mitigated; and with it, the tremendous sway the banks hold over the political and economic processes, particularly within democracies.
There would be many intended and unintended consequences from such a proposal, but if we are truly honest with ourselves, isn’t this what the world is headed towards anyway, a global financial restructuring? The only question is will it happen sooner rather than later, after considerable economic suffering and hardship. Is it more advantageous for the U.S. to engage in restructuring negotiations now, while the dollar is still strong, or to wait until such time as there is a global run on the dollar?
Apparently, the only reason the dollar is strong is due to the collapse of the euro – the catalyst for the euro down fall occurred when Goldman Sachs sold Greece derivative products, all the better to obscure Greek financials for E.U. admittance. Up until the fall of the euro, presumably more than one hedge fund and more than one Wall Street bank (and perhaps some U.S. politicians) were gambling that the dollar was in the decline, and in the long run, they, unfortunately, are correct.
The point at which nations can no longer finance their debt load is near for many countries around the world. And how will each country handle their respective crisis(?), by printing paper! Either that, or wealthier nations will have to come to the table to bailout nations with problematic financials, but in doing so, the financially stronger nations will only weaken themselves (German citizens appear well aware of what is happening in the E.U. and many are perfectly prepared to walk away from the Euro). And we wonder why corporations are hoarding cash!
And the alternative to a global restructuring? Well, read the press, take a walk in your local mall, look at the stock market, stagnation and decay are appearing everywhere, as is substandard economic growth, except in the golden halls where Mr. Paulson operates.
The Fourth of July is all about Freedoms: Economic, Political and Spiritual. A global restructuring may serve to better preserve those freedoms, as well as greater economic opportunity, for the many rather than a few! The real question is will politicians surrender power, the ability to monetize debt, and global economic hardship, so that the world economy can take off again? World-wide economic recovery is being held hostage by crushing sovereign debt and an exceptionally nasty private sector debt hangover, in the incarnation of banks and the real estate bubble. A world economy deserves a global banking system.
Copyright JM Hamilton Publishing 2013
As stocks continue their downward decent (the S&P 500 is down 8.3% for the year), and unemployment remains recalcitrant (Shadow Government puts the U.S. unemployment/under-employment figure in excess of 20%), Keynesians, lead by Mr. Krugman, and Fiscal Conservatives, presently embodied by Mr. Paulson, are at war with one another.
Mr. Krugman is a Nobel Laureate, and a Princeton economist, and a long time advocate of the poor and the down trodden. His primary pulpit is the N.Y. Times editorial pages.
Mr.Paulson’s notoriety derives through that “market maker” institution – Goldman Sachs; Mr. Paulson, allegedly, hand-picked the deck in a CDO issuance, and walked away with extraordinary profits. A civil complaint has been filed against Goldman Sachs by the SEC, over this very same transaction. No similar filing, by the SEC, has been made against Mr. Paulson or his hedge fund.
The Keynesian Argument
Mr. Krugman is hammering for greater government spending to spur economic activity and to get Americans through the great recession. Mr. Krugman argues that we are not out this recession by a long shot; and only government spending can make up for, in terms of job creation and economic activity, the contraction in private sector spending and growth.
Keynesians argue that in the short run deficit’s don’t matter (as opposed to former Vice President Dick Cheney, who – when it’s politically convenient – is said to argue that deficits do not matter at all), and that deficit spending is a valid policy response to a down turn in the economy. They further argue that when times are good, government should rein in spending, and put money away for the next, inevitable, downturn.
Generally, many Americans would side with Mr. Krugman, were it not for the monstrous national debt visited upon this nation, by every administration from Reagan forward (the sole exception would be President Clinton, who actually ran budget surpluses). In fairness to President Obama, he inherited this fiscal nightmare, and gets a pass on deficit creation, at least in the short run.
Bottom line: There are two problems with the Keynesian argument: One, the second half of the Keynesian thesis simply falls apart in reality; that is to say, seemingly, no politician on earth, or all too few, has the self control to rein in government spending during the good times, and create budget surpluses. If the alleged keepers of the faith of fiscal conservatism, the Republicans, cannot rein in federal spending during prosperous times (e.g. witness Bush – Cheney, who actually expanded Big Government, with Entitlement D of Medicare), then how can U.S. citizens expect well meaning liberals to act accordingly? And two, the U.S. debt to GDP ratio is hovering around 90%… the servicing of such debt, and magnification of that debt, presents a huge fiscal drag on the U.S. economy, and other sovereign nations facing similar circumstances (witness the PIIGS in the E.U., and the fiscally “healthy” sovereigns propping up same).
Additional budget deficits at this point, although well meaning, may actually have a reverse effect, as businesses spend their time on alternative non-core pursuits, such as hoarding cash (to pay for inevitable higher taxes and worse economic times yet to come), hedging currencies, and loading up on gold.
Moreover, governments with sky high debt cannot continue to borrow forever to finance the Keynesian model, just ask Greece?
If the debt to GDP ratio wasn’t in the stratosphere, with the CBO and the OMB predicting trillion dollar deficits – seemingly in perpetuity, Mr. Krugman’s policy prescriptions would seem to make sense, in the short run.
The Fiscal Conservative Argument, or Let Them Eat Cake!
If one absolutely did not give a damn about the unemployed in this country, nearly 1/5 of all Americans, Mr. Paulson’s argument would be the way to go: simply rein in government spending, and cut social services – in order to get our fiscal act together . If one had a huge financial stake in perpetuation of the status quo – unemployed be damned – then Mr. Paulson’s “Pollyanna/rose colored glasses approach” would make perfect sense.
Who said Herbert Hoover is dead, why his spirit is alive and well in Mr. Paulson!
Mr. Paulson seems to be thinking (while not speaking it), if I may paraphrase and cut to the chase, ‘Heh, the economy is growing. The government largess, joy, and love showered upon the nation’s banking sector, seems to be a rising tide for me and my hedge fund, so why rock the freaking boat???’
The problem is the “voodoo economic theory” (read: laissez faire) that has been passed down for over a generation now, appears a bit tired and worn. Main Street is not profiting from the unprecedented bailout of Wall Street. And in fact the only parties that appear to be profiting from government intervention into the market place (TARP, TLGP, Fed Funds rate at Zero, Et Al.) are, ironically, the Wall Street banks, and their close associates.
The rising tide is not lifting all ships, thank you Mr. Paulson, nor can the 1/5 of American’s presently unemployed wait for crumbs to come trickling down. Mr. Paulson seems to have forgotten, conveniently enough, that the manner in which he’s made his extraordinary fortune, via an unregulated derivatives market and Goldman Sachs (now being pursued by the SEC), in short laissez faire capitalism run amok, are both primary contributors to the mayhem visited upon both the U.S. and world economies. Separately, one cannot recall Mr. Paulson calling for fiscal discipline during the peak of economic cycle, say around 2006 and early 2007. Why?
Mr. Paulson’s position, if allowed to play out, could lead to problems with the social fabric. For some reason, Americans have come to believe in the semi-egalitarian social construct of a middle class.
Monetary Policy
Another approach to our economic Hiroshima is through monetary policy, which posits that massive inflows of liquidity into the economy should stimulate growth and prosperity.
Note to readers, I am on my roof, nightly, feverishly scanning the horizon for Ben Bernanke and his helicopter to come to the rescue, and dump that load of cash right into my waiting arms. But alas, no Ben - only pigeons dumping an entirely different load.
Here again, a liberal monetary policy would work quite well if the nation had healthy banks and some semblance of a normal fiscal policy, but this perfect storm of a financial nightmare appears to have left monetary policy face down in the water.
That is to say, while Mr. Bernanke is busily printing money at the Fed, he appears to be “pushing on a rope,” in terms of stimulating the economy. Try as the Fed might, M3 is actually contracting at an alarming pace. The banks aren’t lending, at least not to small or mid-sized businesses, or individual consumers – the life blood of U.S. job creation and the engine of economic growth.
Instead, the Wall Street banks appear to have entered into a symbiotic relationship with the federal government, whereby the government provides them with free liquidity through the Fed Funds window, and severely watered down bank reform legislation, and in return the banks finance ever growing government debt.
Many banks balance sheets are still a wreck. And globally banks are so leveraged up with government debt that – going forward – when we talk about governments bailing out “the banks,” we really are talking about bailing out the international order or world governments, themselves. Governments and banks are more interconnected than ever, but I digress.
Thinking the Unthinkable: A Global Restructuring of Debt
So if all the economic answers (Keynesian, Fiscal Conservatism, and Monetary policy) are shot, dulled, or worse yet, may actually aggravate the situation, what then? What is left?
Here’s a hint: South and Central American countries have been known to do it from time to time, and some have done quite well, economically, after the fact.
Centrals bankers meet some weekend, ask the creditor nations to take a “haircut,” and abracadabra a new currency is born, Monday morning.
Of course, this could upset the international order of things. On the “con” side: Creditor nations might demand that in exchange for “haircuts” on debt, that the western democracies surrender the ability to print fiat currencies? Fiscal order might be pushed by creditor nations, and profligate government spending might be banished (e.g. the end of politicians making spending promises that have to be financed), but is that really a bad thing? After seeing the chaos within the E.U. and the lack of centralized political power over the euro, a real world bank might be created to control, monitor, and oversee a new world currency. The monetization of debt might no longer be available to many sovereign nations. The truly American value of living within one’s means, thrift and frugality, might be imposed, where our politicians have failed us.
On the “pro” side: The crushing debt with which western democracies are presently faced with might be wiped out, or eliminated to a large degree. The government deficits, and debt, that are such a drag on the world economy, could be eliminated. Governments, no longer faced with catastrophic debt, would no longer have to deploy contractionary fiscal policies during the ongoing economic crisis, such as tax increases and reductions in public spending and social services, so that debt loads could be serviced. The social order could be preserved. Governments – no longer dependent upon banks to buy their debt – could, in turn, install mark to market accounting and let the chips fall where they may among banks.
In short, no more propping up banks so that they can finance sovereign debt, the mess that we are presently in. Banks that survive mark to market accounting would be free to lend to the private sector, again, instead of being tied up financing government debt. With bad banks washed away, and healthy banks free to lend, a floor could be established in the real estate market, a huge driver of economic activity, job creation, and wealth creation. As real estate makes a comeback, government, the Fed, Freddie/Fannies, and the banks may actually make a buck off of what is presently referred to as toxic assets.
Protectionist forces might be held at bay.
Basically, we are talking about clearing the decks for global economic activity. The global economy may enjoy a renaissance, and economic growth could be explosive! Today’s creditor nations, post restructuring, could be primary beneficiaries of rapid worldwide economic growth, especially the export lead Pacific Rim (i.e. China). Multi-national business would flourish, having to worry less about hedging currencies and escalating taxes. Global banking could be significantly simplified. Business could expand globally, as they would no longer have to worry about market instability and problematic currencies.
Main Street could return to a preeminent position of economic activity, and Wall Street could return to its secondary position of supporting Main Street. The “pros” of a global restructuring, at the end of the day, could overwhelmingly outweigh the “cons.”
Reactionary Forces
To be sure, there would enormous political pressure not to engage in such an enterprise, much of the pressure deriving from the banking sector, hedge funds, politicians, and some sovereign nations (admittedly, a fierce crowd). The old international order of nation states might come under fire, to some degree, as they surrender some economic power to a global bank; but many nations/states have already surrendered banking authority to some centralized power, such as: all 50 states that make up the United States, or members of the E.U.
The need for many disparate powerful private banking enterprises, and the incumbent global systematic risk and moral hazard, might also come to an end – or be mitigated; and with it, the tremendous sway the banks hold over the political and economic processes, particularly within democracies.
There would be many intended and unintended consequences from such a proposal, but if we are truly honest with ourselves, isn’t this what the world is headed towards anyway, a global financial restructuring? The only question is will it happen sooner rather than later, after considerable economic suffering and hardship. Is it more advantageous for the U.S. to engage in restructuring negotiations now, while the dollar is still strong, or to wait until such time as there is a global run on the dollar?
Apparently, the only reason the dollar is strong is due to the collapse of the euro – the catalyst for the euro down fall occurred when Goldman Sachs sold Greece derivative products, all the better to obscure Greek financials for E.U. admittance. Up until the fall of the euro, presumably more than one hedge fund and more than one Wall Street bank (and perhaps some U.S. politicians) were gambling that the dollar was in the decline, and in the long run, they, unfortunately, are correct.
The point at which nations can no longer finance their debt load is near for many countries around the world. And how will each country handle their respective crisis(?), by printing paper! Either that, or wealthier nations will have to come to the table to bailout nations with problematic financials, but in doing so, the financially stronger nations will only weaken themselves (German citizens appear well aware of what is happening in the E.U. and many are perfectly prepared to walk away from the Euro). And we wonder why corporations are hoarding cash!
And the alternative to a global restructuring? Well, read the press, take a walk in your local mall, look at the stock market, stagnation and decay are appearing everywhere, as is substandard economic growth, except in the golden halls where Mr. Paulson operates.
The Fourth of July is all about Freedoms: Economic, Political and Spiritual. A global restructuring may serve to better preserve those freedoms, as well as greater economic opportunity, for the many rather than a few! The real question is will politicians surrender power, the ability to monetize debt, and global economic hardship, so that the world economy can take off again? World-wide economic recovery is being held hostage by crushing sovereign debt and an exceptionally nasty private sector debt hangover, in the incarnation of banks and the real estate bubble. A world economy deserves a global banking system.
Copyright JM Hamilton Publishing 2013
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