Tuesday, October 16, 2012

Where’s the Help When You Need It?


The fellows who won the Nobel Prize for Economics, Alvin Roth and Lloyd Shapley, got the prize for a Micro Economic/mathematical analysis. They came up with models/algorithms that make the process of connecting needs to resources better/faster. This appears to be promising stuff that will have broad applications in years to come. The award sure sounds important:

“For the theory of stable allocations and the practice of market design.”  

The 2012 Nobel for Economics is not unlike the prize that was awarded to Myron Scholes and Bob Merton for their pioneering work back in 1997. The description from the deep thinkers in Stockholm for that award:

“For a new method to determine the value of derivatives”

The Black-Scholes model is the basis upon which 100s of trillions of derivative contracts have been created. We know what an important contribution to growth and prosperity derivatives have proven to be, right?


Forget Micro economists. What the world needs is a few Macro guys who can provide some direction for the incredible number of economic problems that are at hand (and the bigger ones that are looming).  Damn near every country on earth is staring critical issues in the face.

Where are the economists that have creative and viable solutions?  There aren’t any. The reason is, there are no creative and viable solutions. There are only two schools of thought:

Austerity – This sounds good, but it has been a miserable failure so far. Look at Spain, Ireland and Greece. Think about what the Fiscal Cliff will do for America. If the US goes down the road of austerity on 1/1/2013, the immediate consequence will be a substantial recession. Unemployment would rise, tax receipts would go down, budget deficits would balloon. Nothing would be accomplished by American austerity, other than more pain and more red ink.

Keynesian Economics – This takes many forms, but ends with the same thing; Governments borrow money in an effort to maintain demand. Keynesian pump priming works for your garden variety economic slowdown. But there is nothing about the past four years that is garden variety. Deficit spending may have blunted the global decline for a few years, but at what cost? In the USA, federal debt has risen from $9.2T to $16.2T in the past four years. It may have “felt good” when the borrowed money was being spent, but it will hurt like hell as the interest and principal has to be paid back for the next twenty years.


There are a lot of good economists working at the Central Banks. They have short-term solutions for long-term problems. They have been applying those short-term solutions for four years now. Guys like Bernanke have promised that short-term monetary measures will be continued for at least another two more years. No doubt, oodles of zero cost money can provide a boost to an economy, but at what cost?

If you break your leg, you go to the emergency room, get a cast and begin the process of healing. Monetary policy is not unlike the emergency room. Y0u get patched up, and shortly thereafter you have to start walking on your own. The Fed moved at ambulance speed in 2008/09 to provide much needed emergency treatment. Four years later Bernanke has moved the patient to a hospice. The patient is receiving constant doses of morphine. The palliative care has made the patient comfortable, but death is inevitable and the clock is ticking.

Want proof? Look at Japan. Twenty years of ZIRP has translated to 300% Debt/GDP. Japan is an accident waiting to happen.  The USA is (functionally) in year eleven of the Japanese experience.

The fact is, western economies have to adjust to the realities of a rapidly aging population. China has its own set of aging issues as the one-child policy is now creating a shortage of young people to support old. These forces are far more powerful than the puny tools of the the Keynesians and the uber-monetary policy wonks.

We need a few economists to step forward to acknowledge the aging trap. The “deciders” of global monetary and fiscal policy have been constantly sending the same message:


Give us another year or two, and we’ll have all the problems licked!


There is not a chance in hell that they will succeed. It’s as if they don’t understand the essence of the problem.

A friend sent me some thoughts related to this. Quite dismal, but accurate:


The only way to have a soft landing is to accept a global recession as a consequence of the fiscal and monetary consolidation needed to get the world on a sustainable path.  It’s either that, or blast off and nuke the place from space, it worked in Aliens, maybe that’s what we need here.








  1. But What Do I Know? says:

    Can we stop worrying about the national debt? Governments that issue their own currencies do not need to borrow–they only do it by choice! Interest and principal do *not* have to be paid back in anything other than our own currency.

    I realize that this creates (or has the potential to create) inflation, but really, until such time as it does appear, why worry about it? As to the question of fairness–well, government created money sure isn’t, but then again neither is banker-created money.

    Persisting in the fallacies of classical monetary theory will blind you to possibilities outside the Austrian/Keynesian dichotomy.

    • I’ve realized that fact over the two years. I had been operating under the preconception that the US gov’t debt was like household debt and that we could run out of money. Inflation, or in the extreme, currency collapse, are the main threats.

    • I really disagree with the MMT take on this. Seriously. To claim that there’s no default risk because we can just print to our hearts content is asinine. There are consequences.

      Here’s the Artemis’s vol guy’s take on U.S. default risk:

      “I think it is funny when academics claim that the US government will never default because it can just print
      money to pay off its debt obligations. That is the logical equivalent of saying my house will never be burglarized because if someone tried to break in I could just light it on fire.”

  2. OK, Mr. MMT fellow, perhaps you can enlighten us as to the cult’s current thinking. Are you advocating running up the national debt and assuming away the “tail risks” (capital flight, currency collapse, high inflation), or would you settle for measured doses of unsterilized money printing? Extra credit: would you be willing to see Federal spending capped and the helicopter money distributed to individuals instead of used to retire Treasury debt?

    • But What Do I Know? says:

      I assume I’m the “MMT guy”–not really, more of an MR (monetary realism) guy–the MMT full employment idea strikes me as completely unworkable in practice. But let’s understand that the national debt is “run up” by choice, not by necessity. That is, the government does not need to issue debt to spend money; it can simply spend it (with the complicity of the central bank). The government makes a choice to issue debt. If you can’t agree with this then there is no point in continuing as we’re simply talking past each other.

      Now, saying that the government does not need to issue debt does not mean that there are no consequences to its actions. If the government were to create excessive amounts of currency it would no doubt lead to inflation. But this is where some understanding of “excessive” is necessary–and I don’t think anyone has a good handle on what that would be, but apparently we haven’t gotten there yet.

      IMHO, this is the real question–the national debt is just a sideshow for people who want to complain that the government is going to spend too much money on people other than themselves.

      • Whether you prefer MMT, MR, or some other label, I completely understand the underlying “thesis.” Yes, Virginia, we can print money, but I think you’re avoiding both questions. The effects of printing money and printing credit have very different effects, so it’s reasonable to ask–based on a few assumptions and a back-of-the-envelope calculation–which we should be doing right now. Helicopter money to the masses and retirement of Treasury debt represent very different political philosophies, so it’s reasonable to ask which version you’d propose.

        • But What Do I Know? says:

          There’s a vast middle ground between “helicopter money to the masses and retirement of Treasury debt.” Why not just keep doing what we’re doing–i.e., running deficits to send Social Security and Medicare checks out as promised?

  3. Bruce-

    There is a relatively clean, elegant solution that does entail some short term pain but long term puts a sustainable base of prosperity in for America:

    Cede reserve currency status of the USD to the only currency it can be ceded to for geopolitical reasons: Gold.

    Revalue gold to $100,000/oz, with the Fed making a market in it at those levels. Let’s look at ramifications:

    1. National debt completely collateralized, along with the USD.

    2. Gold becomes the de facto global reserve, which would explain why even US client states like Mexico & South Korea, to say nothing of China, have been buying it like their lives depend on it for the past couple yrs. This means nobody’s currency reserves are hurt – in fact, the Euro’s, which are 70% gold, skyrocket in value, solving the Euro debt crisis as well.

    3. The FDIC & BIS advocated for gold be reweighted to a tier 1 asset under Basel; the bullion banks will be instantly recapitalized by virtue of this move; and other banks hurt by it can be easily folded into the bullion banks in the US & Europe given the recapitalization of the bullion banks, via some RTC solution. Easy to do.

    4. Because the dollar/US Treasuries are no longer the global reserve asset, oil prices in USD’s skyrockets overnight to say $200-300/bbl. Consumer-related companies & the stock market tank in the short term. However, 45m Americans are already on food stamps. What is the difference if it is 80m? The national debt has been cancelled out by the gold revaluation, & so we can afford it.

    5. Americans hock their wedding rings en masse to reduce credit card, HELOC & mortgage debt, offsetting a large portion of the disposable income hit from higher gasoline & Food costs.

    6. Now that oil is $200-300 in USD, the heretofore uneconomic tight oil plays in the Western US are now economic. This leads to a “Bakken Boom” all over the west – high paying jobs, manufacturing boom to support it, retooling detroit to build nat gas cars…filling stations…pipelines…this move would overnight shift the US from a major consumer to a major producer & take it out of debt.

    7. The skyrocketing price of oil initially causes a steep recession & stock market sell off in the US. However, the high price of oil in dollars drives an energy & manufacturing renaissance in the US & by the time 2016 hits, the US economy has been successfully restructured & is exporting product all over the world.

    8. Whoever either Romney is re-elected in a landslide or a new democrat replaces Obama in a landslide in 2016 as the economic boom that results from the above restructuring pays off.

    If you pay close attention to what is going on around the world, many/most of the elements of the plan above are being put into place…from people like Dalio & Gross advocating for gold…to Chrysler building nat gas Ram Trucks…to CNI testing nat gas trains…to the US military testing biofuels for jets, tanks & boats…to foreign creditors & central banks buying tons & tons of gold…

  4. Hi Bruce, This is starting to do my head in. Sitting here in the cheap seats in the remains of Christchurch, NZ & had been thinking NZ & Aus were going to dodge the worst of this. Fundamentally, where do I go to hide? I own my house outright, have zero debts, have a small business that consumes no capital, no fixed assets. Have maybe $850k in the house and another ~$750K squirreled away in super & so on. I am getting so edgy that I am thinking seriously about cashing it all in and buying gold bars to hide under the mattress as the only store of value that won’t be stolen by stealth. OK, eventually, they will come for the gold bars. Any thoughts? Cheers, Tony

  5. Bruce what makes you think the US will EVER pay off the principal value of its debt of the next 20 years? This has a sub zero chance of happening. The US has no capability of extinguishing public debt, only rolling it over a lower and lower rates.
    Bernanke will keep rates so low that all that will occur is rollover and debt addition. Extiguishment will never happen.
    Since the Fed can and does print they dont care if China buys the debt. People dumb enough to buy US debt get what they deserve. It would be of more comfort to keep your cash in a mattress. It will earn the same interest as Treasury bills and bonds.

  6. BK So true,ru kidding people,nobody is going to buy US debt at some point,anymore than Germanys after WW1 and we all know what happened then.WWIII anyone.Yeah and you want to know why some cling to their guns and religion.Better be as far away from large cities when the s–t hits the fan and all the gold in the world will not help you if there is no food or water to buy.No im not an anarcist,just know history.

  7. Jim,MtnView,Ca,USA says:

    This site is Ron Paul econ site, which is offputting to some (heck, it’s offputting to me). Nonetheless their comments on these winners are interesting and, I think, insightful.
    Bottom line: Tabarrok is hailing two Noble prize winners for some work that really doesn’t even need to be done, if the free market were allowed to operate. Tabarrok knows this but fails to mention it at all in his comments on the award to Roth and Shapely. The danger in the award to Roth and Shapely is that it is suggesting a non-market design for, in this case, kidney transplants, can be developed and it is somehow an important thing, although, it would seem obvious that a financial compensation system for kidneys would bring a lot more on the market. Thus, hailing Roth and Shapely misleads people from understanding what the best solution is: free markets.

    What’s most alarming is that (at least) Roth, as I pointed out earlier, seems to think his non-market designs can be done on a much grander scale. Thus, another mad scientist playing with the people on the planet.

  8. There is a new(ish) theory which is considered bunk by Keynesians and the neo-Keysnesian synthesis people like Krugman. Its called Modern Monetary Theory. Check it out. Warren Mozer is a big proponent.

  9. This is the myth of smart.

    No one has the answers anymore than de Leon can find the fountain of youth. That one person is going to come up with a *theory* on how on billions of people need to act in order to fix some problem is ridiculous on the face of it.

  10. The public is misled by statistics for government spending, because this increases GDP by accounting definition, no matter what is built. In reality, if you spend money (use resources) to dig a Keynesian ditch and refill it, then you starve, as the ditch fails to produce the food and other things which you really want.

    Most government spending is false GDP, leading to nothing of value. A recession based on a decrease in this type of “production” is good for the future, not an economic disaster. It is the Keynesian spending which represents midirected resources and fruitless activity.

    False Austerity
    5/23/12 WSJ – David Malpass
    === ===
    Economics has often ignored the critical distinction between austerity for the government and government-imposed austerity on the private sector. In the former, governments which are over-budget sell assets, restrain their hiring, and limit their mission to essentials. That’s growth-oriented austerity.

    In the private-sector version of austerity, governments impose new taxes and mandates on the private sector while maintaining their own personnel, salaries and pensions. That’s the antigrowth version of austerity prevalent in Europe’s austerity programs.

    Many economic models, including the U.S. Congress’s budget scoring system and Keynesian stimulus, ignore national debt levels and disregard whether spending decisions are made by the private sector or the government. This creates the absurd result that an economy in which the government spends and invests increasing amounts—even 100% of GDP—has the same projected growth rate as an economy where the government spends and taxes less.
    === ===