US debt six times greater than declared - study

[head of joaquin]

Actually it tells you nothing about conservative policies. It tells you a great deal about people who quote data that they don't fully understand.

Reported inflation is a basket of goods. Some items are subject to deflation while other are showing signs of significant inflation. Monetary policy affects inflation, but it is only one factor. Prices aren't just a factor of money supply, but supply of goods as well. If you look at things where supply is constrained - gold for example - you have massive inflation. This is seen in medical costs, food, energy, and basic materials. On the other side my hockey tickets have fallen 60%. You see these things as washing out to no inflation.

Today there remains significant over-capacity in many industries such that no one has pricing power. As excess capacity is washed out, you will see inflation. The other factor is that the US remains the best house in a bad neighborhood. Most of the other countries are printing money as fast as we are. So we are still able to attract foreign capital.

Yeah, that's the thing. Excess capacity. Translated: lack of demand. That's what makes depressions. And despite pumping vast amounts of money into the system we still have virtually no inflation. That tells me that if we hadn't increased money supply (i.e., followed lumpen conservative policies), we'd be in a full blown depression right now, with deflationary spirals as far as the eye can see.

So Obama did exactly the right thing in increasing the money supply and running up deficits to get some velocity.

 

[head of joaquin]

Well actually the second bubble was just a rerun of the first and had pretty much the same cause. It just caused more damage, As far as the arguments about accumulation of wealt are concerned, I have not seen very much evidence of bubbles caused by the rich. Usually what I have seen were situations, where institutional investors (not wealthy people) had to find income that was not there, because their bonuses and jobs depend on portfolio performance. This drives nominal earnings, interest rates and risk premiums down below their real values. Which leads us back the the Fed pushing too much money into the system and the government overborrowing.

You haven't looked very hard.

1. Every single recession has been preceded by an increase in the income gap, putting more cash in the hands of the few. The bigger the gap, the bigger the recession.

2 Every study shows that the rich put lots of money in high risk "investments" (bets really), because of course they can afford to lose a lot, and if they win they get a huge return. Normal people can't take those risks. Indeed, they are often restrained from making such investments at all due to required floors, as in most hedge funds.

3. A case in point was the housing bubble, which if you bother to look at the data was fueled not by purchase money loans (they hardly changed during the 2000s). But refis. And refis were a function of (a) flippers on the borrowing end, and (b) investments in REITS and CDSs on the financing end. Needless to say, not too many normal working people invest in REITS and CDSs.

Conclusion: bubbles are caused by the accumulation of too much cash among the top bracket.

 

[JoeTheEconomist]

Not just excess money, but excess money pooled with the few, in amounts so staggering that those who possess this money loose there sense of value, and basically just want a place to stash it, almost without regard to the outcome. For someone who is perfectly happy living on a half million dollars a year, and who can acquire that half million, after tax, from just $10 million in conservative investments, everything over that $10 million is essentially excess, money that they don't need, and don't particularly care about, other than it represents "points" in the game of life.

Absolutely. And you stated that so plainly that even an idiot like me can understand.

I highly doubt that the problem is the uber-rich as much as it is the near-rich who desperately want into the party. It is the manic personality who measures his success in money that creates the problem. The uber-rich have their money in the bank. The banker is willing to lend it to anyone who promises to pay it back. These type of people are drawn to Wall Street and the opportunity to take risks with other people's money.

 

[JoeTheEconomist]

Yeah, that's the thing. Excess capacity. Translated: lack of demand. That's what makes depressions. And despite pumping vast amounts of money into the system we still have virtually no inflation. That tells me that if we hadn't increased money supply (i.e., followed lumpen conservative policies), we'd be in a full blown depression right now, with deflationary spirals as far as the eye can see.

So Obama did exactly the right thing in increasing the money supply and running up deficits to get some velocity.

Actually the excess capacity comes from supplying the bubble. The housing bubble created billions in imaginary income. The people who were making money from the bubble spent it. I don't imagine that there is a better sector than the restaurant business to demonstrate the outcome. This industry exploded to serve an economy of workers too busy to cook for themselves. Now the jobs that were created by the bubble aren't there, and there are a ton of restaurants that have empty tables. This isn't lack of demand. It is excess supply created to serve the bubble. As long as there are empty tables in the economy you will have very little pricing power.

If you think there isn't any inflation it is because you haven't been to the grocery store lately. Food is running something close to 10% inflation per year. Gas is up even more. It should tell you that there is something terribly wrong when we are seeing inflation of 10% in an economy that has 16% under-employment (U6). The government tells you that it is 7.5% but they count 30 hours a week at 7.25/hr as a job.

You will at some point contract money supply. All you are doing here is trying to reinflate the bubble. Beyond Obama, this is the Bush economic policy. I am guessing that you think Bush was an economic genius as well. It is laughable to talk about austerity in a country that spends 1/2 a trillion dollars that it doesn't have.

 

[head of joaquin]

Actually the excess capacity comes from supplying the bubble. The housing bubble created billions in imaginary income. The people who were making money from the bubble spent it. I don't imagine that there is a better sector than the restaurant business to demonstrate the outcome. This industry exploded to serve an economy of workers too busy to cook for themselves. Now the jobs that were created by the bubble aren't there, and there are a ton of restaurants that have empty tables. This isn't lack of demand. It is excess supply created to serve the bubble. As long as there are empty tables in the economy you will have very little pricing power.

If you think there isn't any inflation it is because you haven't been to the grocery store lately. Food is running something close to 10% inflation per year. Gas is up even more. It should tell you that there is something terribly wrong when we are seeing inflation of 10% in an economy that has 16% under-employment (U6). The government tells you that it is 7.5% but they count 30 hours a week at 7.25/hr as a job.

You will at some point contract money supply. All you are doing here is trying to reinflate the bubble. Beyond Obama, this is the Bush economic policy. I am guessing that you think Bush was an economic genius as well. It is laughable to talk about austerity in a country that spends 1/2 a trillion dollars that it doesn't have.

The housing crisis had nothing to do with building houses. As I pointed out, but you ignored, there was only a small increase in purchase money loans during the 2000s. The bubble had to do with CDSs and REITS -- i.e., the investments that the rich indulge in.

As to inflation, if you think using volatile prices in energy and fuel measures inflation, let's discuss it next time diary farmers dump all their milk because prices collapse, or gas drops 50 cents a gallon.

Energy and food respond to unpredictable factors, like weather and political instability. Their prices have nothing to do with monetary policy -- except to the extent of core inflation, which right now is de minimus.

 

[JoeTheEconomist]

You haven't looked very hard.

2 Every study shows that the rich put lots of money in high risk "investments" (bets really), because of course they can afford to lose a lot, and if they win they get a huge return. Normal people can't take those risks. Indeed, they are often restrained from making such investments at all due to required floors, as in most hedge funds.

3. A case in point was the housing bubble, which if you bother to look at the data was fueled not by purchase money loans (they hardly changed during the 2000s). But refis. And refis were a function of (a) flippers on the borrowing end, and (b) investments in REITS and CDSs on the financing end. Needless to say, not too many normal working people invest in REITS and CDSs.

Conclusion: bubbles are caused by the accumulation of too much cash among the top bracket.

Again, it is common sense that #2 is a lot of envy. The rich do not put a disproportionate amount of wealth into risky investments - or the next bubble would wipe them out.

All bubbles stem from misplaced perception of risk, not money in the hands of the wealthy. Again there is some common sense to apply here. Bubbles create imaginary wealth, and concentrate that wealth into the hands of the players of the bubble. The Internet Bubble made IT people famously wealthy. The housing bubble made house builders wealthy. The crash in housing isn't because the bubble made the home builders wealthy. It is that the wealth created by the bubble is imaginary.

 

[head of joaquin]

Again, it is common sense that #2 is a lot of envy. The rich do not put a disproportionate amount of wealth into risky investments - or the next bubble would wipe them out.

All bubbles stem from misplaced perception of risk, not money in the hands of the wealthy. Again there is some common sense to apply here. Bubbles create imaginary wealth, and concentrate that wealth into the hands of the players of the bubble. The Internet Bubble made IT people famously wealthy. The housing bubble made house builders wealthy. The crash in housing isn't because the bubble made the home builders wealthy. It is that the wealth created by the bubble is imaginary.

In other words, you have no facts to rebut my rebuttal of your false claims.

Yeah, I thought so.

How many janitors invest in hedgefunds? Or the stock market for that matter?

 

[imagep]

...Food is running something close to 10% inflation per year. Gas is up even more. It should tell you that there is something terribly wrong when we are seeing inflation of 10%...

Although I agree that we have had some significant food inflation, I don't think it has been 10%/yr on a consistant bases. Gas hit an all time record high in July of 2008, we are more than 5 years past that point, and gas has never broke that record, and neither has oil. Obviously the price of gas fluxuates, but there hasn't been much of a general upward trend - and most experts are predicting an energy boom to happen during the next few years, so I doubt that we will break Bush's oil price record any time soon.

Many other things have dropped in price, mostly high tech stuff, but also things that we really wouldn't expect to drop in price, like tires, medications, printed items (business cards, fliers, etc) and clothing.

I trust the guberments inflation figures, they seem realistic to me and in tune with my personal "basket of goods" inflation rate.

 

[imagep]

Again, it is common sense that #2 is a lot of envy. The rich do not put a disproportionate amount of wealth into risky investments - or the next bubble would wipe them out.

Of course they do. Who do you think it was purchasing CDOs? It certainly wasn't middle class smucks like me!

 

[JoeTheEconomist]

Of course they do. Who do you think it was purchasing CDOs? It certainly wasn't middle class smucks like me!

Of course they do. Who do you think it was purchasing CDOs? It certainly wasn't middle class smucks like me!

I beg to differ. Your 401K probably was lining-up to buy CDOs. The managers wanted guaranteed debt, which was rated AAA by the rating agencies. On top of the rating, they were able to buy a credit default swap, and still make money. The money that you put into the bank - if it was like Chase or Citi - was borrowed by the investment bank side of the house. Freddie and Fannie bundle this stuff up, and it looked like a Treasury with extra yield.

Prime today is probably 1-2%. They are borrowing at 2 1/2 say. Anything over that is pure profit. They can borrow money buy MRK, and the dividend is more than the cost of funds. You look at this and say there isn't much money there. The investment bank simply borrows a ton of money, at which it becomes profitable. The guy who founded LTCM described his firm as the world's largest vacuum cleaner sucking up every nickel on the planet. This works when there is only one vacuum. The more vacuums that get into the game mean that you start sucking up pennies instead of nickels. Then spread the dail a little wider, and you are sucking up garbage with the nickels. In the end, you turn the dail wider, and all you are doing is sucking in garbage.

Understand this at 30 to 1 leverage, it doesn't take a lot of vacuum cleaners to empty the entire investable universe.

 

[head of joaquin]

I beg to differ. Your 401K probably was lining-up to buy CDOs. .

How many Americans have 401(k)s?

 

[JoeTheEconomist]

Although I agree that we have had some significant food inflation, I don't think it has been 10%/yr on a consistant bases. Gas hit an all time record high in July of 2008, we are more than 5 years past that point, and gas has never broke that record, and neither has oil. Obviously the price of gas fluxuates, but there hasn't been much of a general upward trend - and most experts are predicting an energy boom to happen during the next few years, so I doubt that we will break Bush's oil price record any time soon.

Many other things have dropped in price, mostly high tech stuff, but also things that we really wouldn't expect to drop in price, like tires, medications, printed items (business cards, fliers, etc) and clothing.

I trust the guberments inflation figures, they seem realistic to me and in tune with my personal "basket of goods" inflation rate.

Oil was another bubble that burst before the financial crisis. I think oil hit $150/bbl. That price was in response to helicopter Ben pumping cash into the economy. You have to realize that bubbles draw people into a market that would never have been there. When oil hit $120 bbl, the TV commentators started talking about SouthWest Airlines hedging program to a point where CEOs who really weren't even in oil sensitive business were 'hedging their risks'. So I wouldn't blame Bush.

By the time that the financial crisis hit, we were paying about $2.50 a gallon here. Today it is $3.81. That is a hair under 10%. The foods that I watch are basically the same. peanut butter, cheese, bread, soup and the like. There is significant inflation there.

I wouldn't trust the government's numbers. My healthcare rose another 20% last year. So my guess is that inflation is x healthcare, x education, x oil, x gold. Honestly I don't pay attention to the government's statistics when elections depend upon those statistics.

 

[jag2594]

Oil was another bubble that burst before the financial crisis. I think oil hit $150/bbl. That price was in response to helicopter Ben pumping cash into the economy. You have to realize that bubbles draw people into a market that would never have been there. When oil hit $120 bbl, the TV commentators started talking about SouthWest Airlines hedging program to a point where CEOs who really weren't even in oil sensitive business were 'hedging their risks'. So I wouldn't blame Bush.

By the time that the financial crisis hit, we were paying about $2.50 a gallon here. Today it is $3.81. That is a hair under 10%. The foods that I watch are basically the same. peanut butter, cheese, bread, soup and the like. There is significant inflation there.

I wouldn't trust the government's numbers. My healthcare rose another 20% last year. So my guess is that inflation is x healthcare, x education, x oil, x gold. Honestly I don't pay attention to the government's statistics when elections depend upon those statistics.

Can't rich collecting wealth cause low monetary velocity. What about redistributive effect, people are saying how it can create long economic growth.

http://www.imf.org/external/pubs/ft/sdn/2011/sdn1108.pdf

 

[JoeTheEconomist]

Can't rich collecting wealth cause low monetary velocity. What about redistributive effect, people are saying how it can create long economic growth.

http://www.imf.org/external/pubs/ft/sdn/2011/sdn1108.pdf

The link doesn't work, and neither does redistributing money if the goal is longterm growth. Growth depends upon investment and returns. If you don't get to keep the returns why are you going to make the investment. If monetary velocity could over come the disincentive to work, Socialism would work.

 

[JoeTheEconomist]

How many Americans have 401(k)s?

Fidelity alone has 12 million 401K participants.... Retirement savings the last time I looked was around 15 trillion dollars.

 

[joG]

Which do you think created the risk (a) excess money in the system (b) the risk-reward for senior managers at investment banks. For a standard manager, the risk is measured in other people's money. They borrow massive amounts of money to throw it at low margin investments. If you lose, the bond lender loses. If you win you collect a massive bonus. Virtually no one is going to jail for the Financial Crisis. When you combine option B with subsidized interest rates, you get option A as an outcome. Investment managers will borrows insane amounts to through it at anything above the cost hurtle.

For what it is worth, I manage wealth for conservative investors. I do the last paragraph for them. What makes them conservative is the time horizon and leverage. We use 50% leverage. People like me are driven out of the market by people who are willing to leverage themselves by a factor of 20 and 30 times capital.

The PIIGS are backed by us. So their internals will not change or need to change until we are unwilling to subsidize their excess.

I think that different risks were created by excess money and the reward systems in banks. But the all encompassing risk was the amount of money. That must create inflation of one type or another and again each with its own risks attached. The bankers should be held responsible for any breaches of the law. No question. 405 is absolutely relevant. But the most important rule for any economy must be Caveat Emptor.

Yep, determining your position on the risk/reward curve is a real issue. I have not had much to do with privat individuals ie retail investors. But the position of institutional investors has been preety bad and has forced many to buy things, they really should not have done. This was not forced on them by the bankers. It was their own internal structures, market pressure and poor regulation and enforcement.

At 30 times capital you want to understand, what you are doing.

 

[joG]

The dot.com bubble wasn't really a bad thing. It set the stage for the current productivity of the internet.

But if you want to prevent bubbles, the solution is easy -- raise taxes on the top bracket. Top bracket dollars is the source of virtually all bubbles.

Naw. That won't work. The bubbles I have seen were mainly driven by institutional investors.

 

[JoeTheEconomist]

I think that different risks were created by excess money and the reward systems in banks. But the all encompassing risk was the amount of money.

One is gas and the other is a spark. The risk-reward of the managers is what creates the problem. Excess money will look for a place to go, but here the manager is actively trying to acquire it because there is no downside. In that senario, you really don't care what you are doing at 1, 5, or 30 times leverage. Your only goal is that the leverage doesn't implode while you are still at that job.

Your institutional investor faces a client who wants better returns. You see the ranking of investment managers by return. Rarely does anyone mention anything about risk in the ad. #1 manager, and magically money flows to you. So there are incentives in the system to be stupid. Bernanke forcing interest rates into the ground has magnified this problem. There is a phrase, the ABC's of investing - Anything But Cash. So the government is literally pushing risk into the financial markets.

 

[JoeTheEconomist]

The dot.com bubble wasn't really a bad thing. It set the stage for the current productivity of the internet.

Really?

The productive part of the internet would have been developed anyway. The bubble brought us the collective crap like Boo.Com with first class tickets and five star hotels for everyone. These projects tended to draw value resources away from doing productive things.

I happen to have seen the consequences first hand. As you draw resources away from doing productive work, productive businesses have a more difficult time finding employees. Our good employees were drawn away by the promise of equity which was in truth worthless. We tried to compete with cash, but in the end all bubbles draw in the truely stupid. Our management joined bubble-mindset at the very end, giving stock incentives to new employees. The managers had no idea what these options were worth and made massive empty promises. At the end, we had staffed something like 15 teams probably 3 times what we needed with marginal employees who had no work because businesses cut the cap-ex on which our sales depended.

We had a solid product which couldn't compete in a stock-option world because stock-options distort the allocation of resources. Once we joined, the distortion bled straight into our employee mix and we never sold another dollar of new product.

 

[joG]

You haven't looked very hard.

1. Every single recession has been preceded by an increase in the income gap, putting more cash in the hands of the few. The bigger the gap, the bigger the recession.

2 Every study shows that the rich put lots of money in high risk "investments" (bets really), because of course they can afford to lose a lot, and if they win they get a huge return. Normal people can't take those risks. Indeed, they are often restrained from making such investments at all due to required floors, as in most hedge funds.

3. A case in point was the housing bubble, which if you bother to look at the data was fueled not by purchase money loans (they hardly changed during the 2000s). But refis. And refis were a function of (a) flippers on the borrowing end, and (b) investments in REITS and CDSs on the financing end. Needless to say, not too many normal working people invest in REITS and CDSs.

Conclusion: bubbles are caused by the accumulation of too much cash among the top bracket.

That is a cool chart. I do not, however, accept the conclusion. It is clear that rising prices for assets will make groups holding those assets wealthier. That does not mean it is them driving the bubble. Since wealthy people hold assets, it only seems natural that they would profit, when the asset price goes up. The graph would then show the burden of wealth and not its evil.

As a matter of fact, it would appear to me, that if a relatively small group of persons were causing a risk for themselves, they would coordinate to avoid the bubble. It would certainly be interesting to model this and see where which optimum would be.

 

[JoeTheEconomist]

That is a cool chart. I do not, however, accept the conclusion. It is clear that rising prices for assets will make groups holding those assets wealthier. That does not mean it is them driving the bubble. Since wealthy people hold assets, it only seems natural that they would profit, when the asset price goes up. The graph would then show the burden of wealth and not its evil.

As a matter of fact, it would appear to me, that if a relatively small group of persons were causing a risk for themselves, they would coordinate to avoid the bubble. It would certainly be interesting to model this and see where which optimum would be.

I tried to make the same point. He said "In other words, you have no facts to rebut my rebuttal of your false claims." No facts. Just common sense that is completely wasted.

 

[joG]

Your institutional investor faces a client who wants better returns. You see the ranking of investment managers by return. Rarely does anyone mention anything about risk in the ad. #1 manager, and magically money flows to you. So there are incentives in the system to be stupid. Bernanke forcing interest rates into the ground has magnified this problem. There is a phrase, the ABC's of investing - Anything But Cash. So the government is literally pushing risk into the financial markets.

Actually the situation here was worse. The institutions that bought most of the riskier ABS over here were Landesbanks. They belonged to the states in a relatively direct way and were guarantied by the states. The EU said that the guarantees was illegal and forbade them but allowed grandfathering and a year during which the LBs could emit further paper so that they could adjust. Naturally they sold as much paper as possible and needed other paper to lock in a profit. So they bought AIG guarantied AAA ABS to the hilt. They were not the only banks here to buy the stuff as we are over banked and there are too few assets to go around.

 

[jag2594]

The link doesn't work, and neither does redistributing money if the goal is longterm growth. Growth depends upon investment and returns. If you don't get to keep the returns why are you going to make the investment. If monetary velocity could over come the disincentive to work, Socialism would work.

check this links

http://elsa.berkeley.edu/~saez/pikettyqje.pdf

http://www.imf.org/external/pubs/ft/wp/2010/wp10268.pdf

Both of these links suggest income income inequality cause recessions. What about the people who cannot investment, your thinking only of one aspect of growth. Your missing all the low to middle class.

Disincentive work doesn't imply the workers, cause they are already working with lower wages and salaries.



if those links don't work try these and click on the first ones

Kumhof and Ranci?re (2010) - Google Search

Piketty and Saez (2003) - Google Search

 

[head of joaquin]

Naw. That won't work. The bubbles I have seen were mainly driven by institutional investors.

Generally not true, but this is your second fallacy -- that institutional investors aren't funded by the rich. You probably think every working American has a 401(k) with $500,000 in it. A typical rightwing myth.

 

[head of joaquin]

That is a cool chart. I do not, however, accept the conclusion. It is clear that rising prices for assets will make groups holding those assets wealthier. That does not mean it is them driving the bubble. Since wealthy people hold assets, it only seems natural that they would profit, when the asset price goes up. The graph would then show the burden of wealth and not its evil.

As a matter of fact, it would appear to me, that if a relatively small group of persons were causing a risk for themselves, they would coordinate to avoid the bubble. It would certainly be interesting to model this and see where which optimum would be.

Not only is it a cool chart, but joined with the fact that the rich do most of the investing in bubbles, the causation is complete.

The bigger the income gap, the more money that's taken out of the real economy and put into bets. Every recession shows that. Indeed, you can predict the recessions depth by the size of the income gap preceding it.