Four Deformations of the Apocalypse

[ParanoiA]

David Stockman wrote a scathing indictment of the republican party - and not just the new guys, this is going back 40 years. It also repudiates Krugman's dismissal of deficit and insistence that we continue to play with fire and take more spending chances in the face of the largest deficit ever. Stockman apparently isn't impressed with appeals to economic plaques and prizes as he squarely blames Friedman in part one.

 

Here's a guy that calls for austerity yet doesn't fit the Krugman accusation of "do it cuz pain is good for our fiscal religion". He calls for it because it's the heart of the problem - a nation spending more than it earns; living beyond our means.

 

Instead of the four horsemen, we have the four deformations. Cute. Not bad either, and the first one kind of surprised me. The rest, not so much.

 

http://www.nytimes.com/2010/08/01/opinion/01stockman.html

 

The first of these started when the Nixon administration defaulted on American obligations under the 1944 Bretton Woods agreement to balance our accounts with the world. Now, since we have lived beyond our means as a nation for nearly 40 years, our cumulative current-account deficit the combined shortfall on our trade in goods, services and income has reached nearly $8 trillion. Thats borrowed prosperity on an epic scale.

 

It is also an outcome that Milton Friedman said could never happen when, in 1971, he persuaded President Nixon to unleash on the world paper dollars no longer redeemable in gold or other fixed monetary reserves. Just let the free market set currency exchange rates, he said, and trade deficits will self-correct.

 

It may be true that governments, because they intervene in foreign exchange markets, have never completely allowed their currencies to float freely. But that does not absolve Friedmans $8 trillion error. Once relieved of the discipline of defending a fixed value for their currencies, politicians the world over were free to cheapen their money and disregard their neighbors.

 

That sounds awfully similar to the austrians claim about fiat currency.

 

The third ominous change in the American economy has been the vast, unproductive expansion of our financial sector. Here, Republicans have been oblivious to the grave danger of flooding financial markets with freely printed money and, at the same time, removing traditional restrictions on leverage and speculation. As a result, the combined assets of conventional banks and the so-called shadow banking system (including investment banks and finance companies) grew from a mere $500 billion in 1970 to $30 trillion by September 2008.

 

But the trillion-dollar conglomerates that inhabit this new financial world are not free enterprises. They are rather wards of the state, extracting billions from the economy with a lot of pointless speculation in stocks, bonds, commodities and derivatives. They could never have survived, much less thrived, if their deposits had not been government-guaranteed and if they hadnt been able to obtain virtually free money from the Feds discount window to cover their bad bets.

 

I see some of bascule's arguments buried in these statements. I also see some more austrian brow beating, as well as my own, pointing out unnatural conditions that undermine free market design and accountability. And I love the "wards of the state" comparison.

 

In my opinion, this is a great summary of the republican party of late. Somewhere in the article he refers to fiscal principle being replaced by slogans and hype. Damn, that fits.

 

Thoughts?

Edited August 13, 2010 by ParanoiA

[Pangloss]

Sounds right. In terms of the tax cuts, for the GOP that's a wagon with no horse. There's no reliable evidence for positive economic impact, and although I completely agree that out-of-control entitlement spending is the real problem, our bills are already overdue. Pay them, then cut spending, then cut taxes.

 

I'll read the rest of his article as soon as I can.

[JohnB]

I can't speak for how well it applies to any political party.

 

I find it echoes something I've been worried about for some time. The drain on a national economy by these protected financial institutions is I think, larger than most believe.

 

Compare the original form of the Stock Market and the one that exists today. Those who make large amounts of money from "trading" actually contribute nothing to the economy. I'm separating here those who move their money between companies to maximise their investment potential and those who profit from the action of trading alone. One stimulates business and investment and the other is simply a parasite on the economy.

 

Of course it shouldn't come as a surprise that the economy has evolved to suit "money men", accountants and lawyers when the majority of politicians are accountants or lawyers and are all backed by "money men".

[Realitycheck]

Those who make large amounts of money from "trading" actually contribute nothing to the economy.

 

 

They pay taxes and make large capitol purchases.

[JohnB]

One could argue that the taxes are a drain and don't contribute to the economy.

 

Either way, taxes would have been paid from the dividends of the company and the company also pays taxes.

 

The best way to get my meaning is to turn the question around.

 

Of what use to the economy are those who speculate on share etc values? Note that these people do not invest in companies with the intent of the company providing a return, they simply hope to find somebody to buy the shares later at a higher price.

 

When a "bubble" bursts it is always due to speculators driving up the prices to unrealistic levels first. We saw it in the dot com bubble and we see it all the time in real estate.

 

Speculators who invest contribute greatly to the economy, speculators who trade are parasites that serve no useful purpose.