Author Archives: Yves Smith

Catch Us on Harry Shearer’s Le Show Today

Don’t miss our conversation about private equity and the super secret TISA trade deal on Harry Shearer’s Le Show today.

Links 6/28/14

Why Did GDP Fall So Dramatically Last Quarter?

Robert Pollin, professor of economics at the University of Massachusetts Amherst, gives a good high-level discussion of why the GDP results for last quarter were such a train wreck. Remember that analysts and economists were blindsided; no one expected to see GDP fall at that rate. As we wrote, the tendency among pundits has been to treat the results as of not much concern, since that period is past and some of plunge can be attributed to one-off factors, most importantly, abnormally cold weather. Pollin explains why this explanation is insufficient.

Why the Rich Aren’t Job Creators

This is a short talk by venture capitalist Nick Hanauer, who among other things, was the first non-family investor in Amazon. Hanauer in very simple and effective terms debunks the “rich are job creators” myth. Even though the video is going viral (now at over 1 million views on YouTube, it is important enough that I wanted to make sure NC readers saw it and circulated it.

Hanauer’s remarks illustrates the degree to which propaganda has overcome commercial common sense.

Randy Wray: Modern Monetary Theory – The Basics

How economists that are otherwise sympathetic to modern monetary theory nevertheless misconstrue some of its fundamental observations. For instance, those like Paul Krugman who are generally of the Keynesian persuasion like MMT’s “deficit owl” approach. Krugman acts as if he would really like to stop worrying about the deficit so that he could advocate an “as much as it takes” approach to government spending. The problem is that he just cannot quite get a handle on the monetary operations that are required. Won’t government run out? What, is government going to create money “out of thin air”? Where will all the money come from?

Links 6/27/14

Ignacio Portes: Paul Singer v. Argentina – A Thriller Reaches Its Climax

The protracted legal saga between Argentina and NML Capital, Paul Singer’s hedge fund, owner of a fraction of Argentina’s non-restructured, pre-2001’s default debt, went through a decisive moment last week, when the Supreme Court of the United States declined to hear Argentina’s appeal. With the “stay” order lifted after the Supremes Court’s decision, Argentina faced a huge conundrum that needs solving before June 30th, when an interest payment on its restructured debt is due.

Why Banks Must Be Allowed to Create Money

Ann Pettifor has penned an effective rebuttal of the Chicago Plan, which has been taken up in the UK as “Positive Money”. Its advocates call for private banks to have their ability to create money taken from them, and put in the hands of a committee, independent of the state, that would decide on the level of money creation. Banks would be restricted to lending money that they already have on deposit.

Pettifor explains how the enthusiasm for the Chicago Plan rests on a fundamental misunderstanding of the nature of money and confusion about its relationship to credit. While readers may not like the notion that credit, and therefore money creation, is best left in the hands of banks, the problem is much like the one that Churchill articulated about democracy: it looks like the worst possible system until you consider the alternatives.

Peter Van Buren: Shredding the Fourth Amendment in Post-Constitutional America

Yves here. Van Buren continues his examination of what he calls the “post-Constitutional era”. This post focuses on the loss of privacy, a presumption enshrined in the Fourth Amendment. Van Buren describes how Fourth Amendment rights have been eviscerated in the post 9/11 era, such as by permitting the surveillance state to pour through millions of records using subpoenas rather than search warrants.

Corporate Bond Trading a Casualty of QE and ZIRP

The Financial Times has an article on how corporate bond dealers are going to create a new trading hub to try to preserve their market position while “boosting liquidity” in the market. Narrowly speaking, there’s nothing wrong with the piece as a description of investor unhappiness and planned bank responses. But it curiously missed how Fed policy has helped generate conditions that are reducing corporate bond market liquidity.

Links 6/26/14

GDP Hits Air Pocket: Recession Warning or False Alarm?

In case you managed to miss it, the GDP revision yesterday morning was stunningly bad.

But after getting rattled, Mr. Market shrugged off the report. So what if we opened Schrodinger’s box and found out the cat was dead? That was first quarter’s cat. That cat might as well be dead for all we care now. Plus the weather was bad, so we’ll make all that up, and anyway, the Fed has our back, so if there really is something to worry about here, they’ll fix it, as least as far as security-owners are concerned. Right?

In addition to looking at the main elements of the GDP report, we’ve asked readers to report on what they see in their economy.

Philip Pilkington: ‘Uncertainty’ in Contemporary DSGE Modelling – Not Even Wrong

Yves here. This post might seem a smidge technical for generalist readers, but have faith. Pilkington uses DSGE models, a widely used type of macroeconomic forecasting model, to demonstrate the prevalence of intellectual bankruptcy in economics. As he writes,

The level of scholarship in contemporary economics is absolutely shocking. Contemporary theorists just pick up on buzzwords that they hear in the media and then assume that they have understood them. Then they scramble to build some arcane model or other in which they assure others that they have captured the meaning of the buzzword in question. The mathematics then becomes a cloak hiding the fact that they have never bothered to actually think through the concepts they are using.

This is frighteningly similar to something I wrote:

That was one of the scary things I finally figured out during my last visit to DC. I thought people constructed policy first and then reduced it to soundbites to sell it. I came to realize that most people in DC reason from soundbites (as in their analysis and policy design is constructed from soundbites from the get-go).

Wolf Richter: Bank Regulator OCC Details Crazy Risk-Taking, Blames Fed

Yves here. Former Fed Chairman William McChesney Martin famously said that the job of the central bank was “to take away the punch bowl just as the party gets going.” That line of thinking went out of fashion under Alan Greenspan. Now we have the perverse spectacle of the most bank-cronyistic regulator, the Office of the Comptroller of the Currency, berating the Fed for spiking the punch via overly accommodative monetary policy.

Mexican Shale Industry Hoist on Nafta-Induced Gang Violence Petard

There’s perilous little recognition in the US of how much of the rise in gang violence and drug wars, as well as much harsher economic conditions for ordinary people, is the direct result of Nafta. While the toll has fallen hardest on Mexicans, American businesses may see collateral damage in the form of not getting much access to Mexico’s shale gas. An industry that doesn’t hesitate knocking over countries to get what it wants seems a bit stymied in how to deal with drug thugs who control access to a resource the developers want and have no interest in playing nice.