Karl Denninger

[doodle]

Karl Denninger was one of the original founders of the Tea Party before it was hijacked by the Republican party. Anyways, a lot of what Karl writes makes a lot of sense to me. He has a blog where he posts quite frequently: http://market-ticker.org/

I think it is worth a read. Just another source of information to help understand the issues of the day.

[Gumby]

What about Denninger convinces you that he has any idea what he's talking about? Denninger uses ridiculous Reinhart/Rogoff arguments such as Debt-to-GDP ratio to make his case, along with making his readers believe that we're the next Greece.

Last month, Robert J. Shiller — who knows far more about economics than Denninger does — took those tired Reinhart and Rogoff arguments to task over the absurdity of magical debt thresholds:

Debt and Delusion

by Robert J. Shiller

Economists like to talk about thresholds that, if crossed, spell trouble. Usually there is an element of truth in what they say. But the public often overreacts to such talk.

Consider, for example, the debt-to-GDP ratio, much in the news nowadays in Europe and the United States. It is sometimes said, almost in the same breath, that Greece’s debt equals 153% of its annual GDP, and that Greece is insolvent. Couple these statements with recent television footage of Greeks rioting in the street. Now, what does that look like?

Here in the US, it might seem like an image of our future, as public debt comes perilously close to 100% of annual GDP and continues to rise. But maybe this image is just a bit too vivid in our imaginations. Could it be that people think that a country becomes insolvent when its debt exceeds 100% of GDP?

That would clearly be nonsense. After all, debt (which is measured in currency units) and GDP (which is measured in currency units per unit of time) yields a ratio in units of pure time. There is nothing special about using a year as that unit. A year is the time that it takes for the earth to orbit the sun, which, except for seasonal industries like agriculture, has no particular economic significance.

We should remember this from high school science: always pay attention to units of measurement. Get the units wrong and you are totally befuddled.

If economists did not habitually annualize quarterly GDP data and multiply quarterly GDP by four, Greece’s debt-to-GDP ratio would be four times higher than it is now. And if they habitually decadalized GDP, multiplying the quarterly GDP numbers by 40 instead of four, Greece’s debt burden would be 15%. From the standpoint of Greece’s ability to pay, such units would be more relevant, since it doesn’t have to pay off its debts fully in one year (unless the crisis makes it impossible to refinance current debt).

Some of Greece’s national debt is owed to Greeks, by the way. As such, the debt burden woefully understates the obligations that Greeks have to each other (largely in the form of family obligations). At any time in history, the debt-to-annual-GDP ratio (including informal debts) would vastly exceed 100%.

Most people never think about this when they react to the headline debt-to-GDP figure. Can they really be so stupid as to get mixed up by these ratios? Speaking from personal experience, I have to say that they can, because even I, a professional economist, have occasionally had to stop myself from making exactly the same error.

Economists who adhere to rational-expectations models of the world will never admit it, but a lot of what happens in markets is driven by pure stupidity – or, rather, inattention, misinformation about fundamentals, and an exaggerated focus on currently circulating stories.

What is really happening in Greece is the operation of a social-feedback mechanism. Something started to cause investors to fear that Greek debt had a slightly higher risk of eventual default. Lower demand for Greek debt caused its price to fall, meaning that its yield in terms of market interest rates rose. The higher rates made it more costly for Greece to refinance its debt, creating a fiscal crisis that has forced the government to impose severe austerity measures, leading to public unrest and an economic collapse that has fueled even greater investor skepticism about Greece’s ability to service its debt.

This feedback has nothing to do with the debt-to-annual-GDP ratio crossing some threshold, unless the people who contribute to the feedback believe in the ratio. To be sure, the ratio is a factor that would help us to assess risks of negative feedback, since the government must refinance short-term debt sooner, and, if the crisis pushes up interest rates, the authorities will face intense pressures for fiscal austerity sooner or later. But the ratio is not the cause of the feedback.

A paper written last year by Carmen Reinhart and Kenneth Rogoff, called “Growth in a Time of Debt,”? has been widely quoted for its analysis of 44 countries over 200 years, which found that when government debt exceeds 90% of GDP, countries suffer slower growth, losing about one percentage point on the annual rate.

One might be misled into thinking that, because 90% sounds awfully close to 100%, awful things start happening to countries that get into such a mess. But if one reads their paper carefully, it is clear that Reinhart and Rogoff picked the 90% figure almost arbitrarily. They chose, without explanation, to divide debt-to-GDP ratios into the following categories: under 30%, 30-60%, 60-90%, and over 90%. And it turns out that growth rates decline in all of these categories as the debt-to-GDP ratio increases, only somewhat more in the last category.

There is also the issue of reverse causality. Debt-to-GDP ratios tend to increase for countries that are in economic trouble. If this is part of the reason that higher debt-to-GDP ratios correspond to lower economic growth, there is less reason to think that countries should avoid a higher ratio, as Keynesian theory implies that fiscal austerity would undermine, rather than boost, economic performance.

The fundamental problem that much of the world faces today is that investors are overreacting to debt-to-GDP ratios, fearful of some magic threshold, and demanding fiscal-austerity programs too soon. They are asking governments to cut expenditure while their economies are still vulnerable. Households are running scared, so they cut expenditures as well, and businesses are being dissuaded from borrowing to finance capital expenditures.

The lesson is simple: We should worry less about debt ratios and thresholds, and more about our inability to see these indicators for the artificial – and often irrelevant – constructs that they are.

Robert J. Shiller is Professor of Economics at Yale University.

Source: http://www.project-syndicate.org/commen ... 78/English

Denninger relies on misguided fear-mongering tactics to make his case. As Shiller shows us, those scary thresholds are absolutely meaningless.

[moda0306]

No sector of the economy, nor the economy as a whole, can acquire debt at a faster rate of growth than productive output increases in the economy.  This is mathematically proved up in literal seconds and no amount of political or monetary manipulation can change the eventual outcome if this path is undertaken.  

Those who claim otherwise are the ones with the burden of proof to show exactly how, in detail, one can avoid the inevitable outcome that the laws of mathematics demand.

Productive output doesn't have to increase for Nominal GDP to increase... it's called inflation.

"Inflating our way out of debt" may have its drawbacks, but it pokes a big hole in his argument about the box we're in.  Like many MMT articles have pointed out, we're not in a gold standard or pegged currency box.  We don't have to service debt in the original productive value it was issued at... we can effectively service greater amounts of debt through the same (or lower) real GDP.  Also, we're unlikely to ever get into the Greece default risk vicious cycle that makes rates go up to begin with.. there simply appears to be no catalyst for that type of reaction to occur.

So his "law of mathmatics" is faulty.

Further, I've noticed a certain narrative out of certain conservatives. First, they say that we have to cut the deficit... for all the reasons MMT has pointed out, this is flawed, or at least arguable.

Then they go on to say, "but we could never close the deficit through taxation, so we can only cut spending."  

It's just awful convenient logic.  "We MUST balance the budget, lest we see fiscal armageddon, and because it will be almost impossible to do that through taxation, we must cut spending... sorry, it's just math."

It's lazy thinking, and while it's arguably with good intentions, it seems a lot more to serve to whip up mass-support for their ideological agenda of low taxes and small government, not necessarily give a good argument for those policies.

That said, I'm not saying there aren't very important conversations to be had about the role of government, just that these guys shouldn't be leading it.  

[moda0306]

I guess here's the thing that pisses me off a lot.  I'm not saying Karl should read MMT or listen to Paul Krugman and instantly join the liberal ranks or ignore deficits... but PLEASE, acknowledge some of these macroeconomic observations when deciding if austerity (but no tax hikes... conveniently) is absolutely necessary.  Don't quote me mathmatical certainty when we aren't in the box you try to put us in.  He's missing a huge piece (sovereign fiat currency) part of the equation. 

I still have concerns that I'm not seeing the full picture here and am missing something, but I acknowledge those and welcome debate.

But the complete lack of consideration that Karl gives to any ideas outside the "US is a household" box shows to me that they're probably not worthy of controlling the debate.

[MediumTex]

Denninger reminds me of a grumpy clown.

The more his mental model of the way the markets are supposed to work doesn't perfectly align with reality, the grumpier he gets.

[doodle]

You know, all of this "money" debate is exhausting. Nietzsche characterized nihilism as emptying human existence of meaning, purpose, comprehensible truth, or essential value. We seem to be living in an age of economic nihilism.

I am on the precipice of giving up on trying to understand what the hell is going on with the economy. The huge number of variables combined with an ever changing political and regulatory landscape make trying to grasp much of anything impossible. I honestly wonder if anyone has a handle on what is going on.

I think Ben Bernanke might have the steering wheel in his hands....but what few realize is that it isn't connected to the steering column anymore. I guess there is nothing much to do but just buckle into the Permanent Portfolio Mobile and hope the airbags deploy on impact.

[melveyr]

Yeah Ben can't really do much at this point. He can only really make credit cheaper. The problems is that people want less debt, they don't care about the interest rate. We are de-leveraging.

Doodle, you seem confused about the future of our economy. I am too. You seem ready for the PP, as prescribed by Harry Browne. Thirty year treasuries and all 

[stone]

I get the impression that collectively we don't want to face up to reality so we conjure up complexity to act as a veil to prevent us from seeing what is going on. The whole paying off debt by devaluation charade might be thought of as a comforting "white lie" that we play on ourselves but my fear is that it has an achillies  heel which is increasing financialization of the economy.

[moda0306]

doodle,

It's exhausting, to be sure, but it's really what everything comes down to nowadays given the political debates happening.

Also, I think you have posted several articles or at least new topics of conversation that center around how screwed the dollar is and gives predictions about where our fiscal situation will lead us.  This invites the same criticisms we've made over and over again... basically, that for all the problems we might face and all the ills that may be associated with taxing and spending, it is unlikely we get into a rate-hike/default-risk-hike spiral that Greece is seeing.

So I guess, if you want to stop having these gut-wrenching discussions about money and our currency and solvency, stop posting yet another argument for deficit hawkery that seems to be just like the last one.

We'll probably continue to respond with the same things we've said over and over about how our currency doesn't work like other currencies.

stone,

What is the "conjured up complexity" you speak of?  To me, one big thing "conjured up" that we need to be nervous of is the idea that we can default on our debt or will quite soon see exponentially increasing interest rates.  The people arguing this are also attaching broad-based policy suggestions along with them that appear to fall squarely into the camp of benefitting the wealthy (usually).

PS, what is an "increasing financialization of the economy?"  I didn't say there aren't problems with monetizing debt, but simply that our ability to do so 1) prevents default risk, and 2) makes previously obtained debts servicable at a lower real GDP than they otherwise would be.

There's obviously more layers to this to be examined, but just because I haven't been able to dive into every possible negative future outcome doesn't mean I should just accept that our deficits are our biggest economic problem and quit thinking.

[doodle]

Moda,

I guess here's the thing that pisses me off a lot.  I'm not saying Karl should read MMT or listen to Paul Krugman and instantly join the liberal ranks or ignore deficits... but PLEASE, acknowledge some of these macroeconomic observations when deciding if austerity (but no tax hikes... conveniently) is absolutely necessary.

If it makes any difference, Denninger takes it to the Republicans just as much as he does to the Democrats. He also writes that tax revenue is going to have to be part of the solution.

I think the main issue that Denninger sees relates to the amount of tax revenue necessary to cover the interest on the debt. For example, if interest rates rise in Japan this is going to be a big problem as they won't be able to afford to spend 50% of tax revenue paying interest on debt rather than using that money to fund defense, education, medical care etc.

How does MMT make a difference when the issue isn't looked at from the size of the debt, but rather the size of the interest payments as a percentage of GDP? Does that not make a difference?

[stone]

Moda what I meant by financialization of the economy was a shift from the "real economy" to the "FIRE sector" economy
http://en.wikipedia.org/wiki/FIRE_economy

Although expansion of "net financial assets" (ie government debt) does not normally cause much consumer price inflation it does cause asset price inflation. The massive growth of the FIRE sector is basically just an artifact of that asset price inflation. All the people who in a sane world would be involved in devising new energy systems or whatever instead get employed devising ways to harvest asset price inflation in investment banks etc. The asset bubbles and busts devastate the economy.

When I said that I thought our monetary system has wanton "conjured up complexity", I meant that paying off debt by dilution and devaluation is simply wealth transference. If wealth transference is what should be done why not just do it by a straightforward tax and payment system rather than by an underhand way that distorts the economy and gets subverted.

[doodle]

If wealth transference is what should be done why not just do it by a straightforward tax and payment system rather than by an underhand way that distorts the economy and gets subverted.

That would require politicians to grow a pair and tell people the truth. IMO..not going to happen.

[stone]

doodle "For example, if interest rates rise in Japan this is going to be a big problem"

I think the crucial point is just there. I get the impression that with a free floating currency, no amount of bond market vigilante-ism will be able to push up interest rates. Interest rates just end up getting pushed down by the increasing government debt (the complete converse to the situation with a pegged currency). So increasing government debt may weaken the exchange rate but that  will be no more hazardous for bonds than for cash.

[stone]

doodle, "That would require politicians to grow a pair and tell people the truth. IMO..not going to happen."

The whole MMT narrative seems to be a plea for collective deception:- "Please lets all swindle ourselves"

[moda0306]

doodle,

The size of the interest payment is one I've thought about, especially in the context of the US vs Japan, where our payments would be exiting the country much moreso than theirs.

The first thing I'd say is that this seems unlikely when we are trying to repair our private-sector balance sheets in the US... without prosperity and/or inflation, I don't see the mechanics of this happening... when you have more funds trying to be saved and very few wanting to take on new debt, that creates a supply/demand scenario that would seem to encourage VERY low interest rates... but we're not here to be lazy thinkers are we, so let's assume for a second that rates DO rise...

Unfortunately, our fed/treasury operate through back-door MMT style mechanics where they don't print to finance government, but print to buy back debt already issued, so this makes things a little less convenient... but let's start in a  world where the US DOES print to spend, and doesn't do it like we do now by purchasing bonds.

In this world, we simply make the payments by printing the money... further, we can also let bonds (in this world, they're interest-rate controlling tools) go to maturity without refinancing them, reducing the demand for loanable funds (which is already incredibly low), and maybe that could work to decrease rates... but in the end, if rates increase, we simply make the payments with printed money.

The unfortunate thing with increased rates paid to foreign debt-holders, though, is the fact that it is "printing money" (aka, generating inflation, possibly), but instead of being paid to our populace, it's being paid to China and the like (or at least moreso than we'd like... we still have a LOT of domestic-held debt).

This will be unfortunate in that we're generating inflation by giving foreigners printed money, but I can't see how that gets us into some kind of catastrophic self-fulfilling fiscal nightmare.  Simply, it will be generating inflation that WE don't see the benefits of through domestic tax-cuts or spending increases.  In many ways though, this happens to some degree anyway, because when we print money to spend IN the U.S. or give a tax-break, it usually pretty quickly ends up going overseas anyways.

This changes a bit when you simply buy back bonds instead of direct government funding, but I don't see how that fundamentally changes anything... it's just a back-door way to do what we would do if we funded by printing, and simply issued bonds to control rates and allow savers to earn interest.

[doodle]

Interest rates just end up getting pushed down by the increasing government debt (the complete converse to the situation with a pegged currency). So increasing government debt may weaken the exchange rate but that  will be no more hazardous for bonds than for cash.

I would say this sounds right....except that Japan's currency has been getting stronger.

Basically, I am just confused as heck about what is going on...or what needs to be done. Even economists can't agree what we need to do, as evidenced by dissent among Fed governors.

Nevertheless, if there is something that I have learned in life, it is that it is generally hardest to do the "right thing". Sometime, somewhere, somebody is going to take some pain.

[moda0306]

stone,

The point of MMT, to me, is not collective deception, but at least building our decision-making model on sound footing.

If we have, in our country, a "trifecta of unmet demands," in that 1) businesses, first and foremost, want demand for their goods, and they are well under full capacity, and therefore don't want loans (other than short-term cash flow smoothers) for expanding their business, nor do they need more applications for employees... they want demand, pure and simple, 2) people with time on their hands, bills to pay, and a debt-overhang, and, like businesses, don't want to take on debt at this point, and 3) interest-seeking savers that are earning pathetic interest because nobody wants to borrow money from them.

Now here's a chance for government to step in and meet three unmet demands simultaneously by deficit spending  and borrowing.

But we're being told we can't do that because we don't want to get into a situation where our national finances go to crap, much like a business or household trying to make sure their balance sheets look good for future financial stability.

I think the collective deception is within the austerity club.  When a big chunk of our sovereign non-pegged national debt is held by foreign carriers, are we really "swindling ourselves" by using our currency accordingly, or are we doing so when we are afraid to run deficits until we reach full employment for fear of bond vigilantees from overseas?  

I can understand that using our currency in such a way may bring about some speculative tomfoolery, but I think peoples' will to buy things that don't carry the fundamentals at a given price (greater fools theory) will exist in any world, and even more so in a deregulated one.

[stone]

doodle, although the Yen has been getting stronger that is not to say that it wouldn't have got stronger still (due to the trade surplus) had they not had an increasing government debt. I think they want to have a weaker currency so as to boost exports and safeguard jobs.

[stone]

moda, I'm with you about the problem being a collapse in demand. I'm just saying that the essence of the MMT remedy is to transfer purchasing power to those with a propensity to spend. MMTers say that a deficit is needed but in fact it is just the spending side of the equation that is needed. Taxing assets and paying out a citizen's dividend with a balanced budget would be a simple, comprehensible, non-distorting way to address the demand shortfall. The MMT perpetual deficit idea does not create anything other than deception. It just transfers wealth. Why not call a spade a spade. If the monetary system is simple enough, then everyone will understand what does what and people who do something useful will prosper. If the monetary system is an incomprehensible hall of mirrors, then only financial specialists will understand the system and they will use that information advantage to parasitically bleed the rest of the economy.

[moda0306]

I do say, I like the idea of a "citizen's dividend."

I also like the idea of using fiscal policy first, not monetary policy... fiscal policy puts cold hard cash in peoples' hands... monetary policy tries to get people to borrow money and make purchases because they it's cheap and we might see inflation.

Very simplified, but that's how I see it.

[stone]

moda, I think monetary policy gets put to the fore because people can't disentangle fiscal policy from government meddling. As far as I can see, if fiscal policy was in the form of a citizen's dividend, then the perils of  "command economy socialism" would be avoided. Ben Benanke gets slagged off for messing things up but I blame those who leave it to the Fed to "ensure full employment" (as the Fed mandate dictates) whilst knowing that the Fed only has monetary policy tools. At one point, the Fed themselves said that fiscal policy was needed didn't they?

[moda0306]

I'm not sure what the fed said about fiscal policy, or even if "they" say anything... I think they often disagree.

But yes, stimulus could be done in many "free" ways that put money in peoples' hands to do with as they please... and I don't think paying down private-sector debt is a bad thing, so I don't even see that as a negative... it improves private-sector balance sheets and restores sustainability to the system.

I know a real liberal would tell me that this won't work as well as a WPA program, but at least it keeps liberty and free choice in the equation.

I think the only "stimulus" that we'd actually be able to pull off now, now that Obama's basically ruled out any more mass deficit spending, but we know the right loves tax-cuts, is a payroll tax holiday... much moreso than the current one.

I'd like to see SE tax & FICA & Medicare taxes cut at least in half over a 3 year period... it would get a lot of money into the economy, but moreso at the middle-class level than other tax-cuts, and is the only politically viable form of "stimulus" we have in our quiver at this point.

[stone]

moda "I know a real liberal would tell me that this won't work as well as a WPA program",

I guess the issue is what is the aim? Public works programs obviously create jobs with 100% efficiency but is that really the aim we all want? If the aim is to free up exchange of what people want to provide and what people desire, then a publics works program might be very inefficient at that. The closest thing we have had to a WPA in the UK is the National Lottery. To be honest it scares me off the whole public works program idea. The funded projects seem to reflect such a narrow segment of taste and ironically I get the impression that the funded projects only appeal to those least likely to buy lottery tickets. WPA enthusiasts probably have their pet projects and would wring their hands at the idea of a citizen's dividend getting spent on false eyelashes or whatever but why should they dictate?

[Gumby]

Stone, I'm not sure where you think MMT is being deceptive. There are no MMTers in the US government. MMTers would prefer to simplify the system to what it really is. The reason why it's currently so confusing is because our currencies used to be pegged to gold. So, we have all of these laws and a legacy bond market that were designed to allow a reserve-constrained country to borrow money. Instead of tearing down those laws and institutions when we became fiat, our officials simply re-engineered them to work with our fiat dollars. Most politicians and pundits are either confused by the system (which is understandable) or they are confusing the public on purpose. That's not MMT. That's just a f*cked up fiat system. MMTers would rather simplify everything, grow the economy, and focus on keeping inflation in check.

[moda0306]

Stone, I'm not sure where you think MMT is being deceptive. There are no MMTers in the US government. MMTers would prefer to simplify the system to what it really is. The reason why it's currently so confusing is because our currencies used to be pegged to gold. So, we have all of these laws and a legacy bond market that were designed to allow a reserve-constrained country to borrow money. Instead of tearing down those laws and institutions when we became fiat, our officials simply re-engineered them to work with our fiat dollars. Most politicians and pundits are either confused by the system (which is understandable) or they are confusing the public on purpose. That's not MMT. That's just a f*cked up fiat system. MMTers would rather simplify everything, grow the economy, and focus on keeping inflation in check.

Boom!