Cure, effect, cause

A paper from the Levy Economics Institute is arguing (at least theoretically) for an extra US fiscal stimulus of 4% of GDP. That's $600 billion.

The authors say that the effect would be better if this reflation came in the form of additional direct government spending, though they acknowledge that it still wouldn't immediately halt the economic decline:

It is somewhat discouraging to see that even a relatively large stimulus plan will fail to prevent a substantial loss of output. But over the medium term, as the devaluation of the dollar and reduced spending begin to exert a moderating effect on the current account deficit, foreign trade will boost output and employment, providing the impetus for renewed growth.

Karl Denninger begs to differ (though in his case, he's still talking about transfers of money, rather than direct government expenditure):

But now we have reached the point where we need $5 in debt to create $1 worth of GDP. As debt levels rise this ratio goes parabolic and ultimately becomes impossible to sustain. That we have reached a 5:1 ratio means that the game is basically up, and the rapidly rising rate of defaults across all areas of consumer debt mean that this "engine" to fuel "growth" simply can't find any more fuel, despite the desires of the bankers and merchants to "make it so."

The Levy paper has echoes of FDR's 30s rescue, but Denninger is more concerned to compare the present mortgage bubble with the one that led to the Crash of '29:

...we've done this before... We saw, in fact, nearly the exact same pattern of practice, fraud and theft that were featured in the housing bubble during the years just before The Depression, and those "standards" in fact were a primary causative factor OF The Depression!

So maybe both parties are correct.




It's also possible that the Uk has got it wrong even worse than Uncle Sam. $600 bn is about £300 bn sterling, but adjusted for relative population size that's only equivalent to £60 bn pumped into the UK economy. We're already talking about a possible £100 bn-worth of mortgage garbage being swapped by HMG for government bonds - and our current fussing over Gordon Brown's crumbling reputation suggests that Prudence wouldn't dare try to reflate with even more direct government spending.

Besides, we are starting with a higher debt-to-GDP ratio than the USA, a State that consumes a bigger proportion of the economy, and a populace that suffers a significantly lower level of personal income on a Purchasing Power Parity basis.

Maybe that's why the pound is matching the dollar in its downward trajectory, and may even overtake it.

I've been wondering recently whether the ordinary investor of the future will be more interested to play in the foreign exchange markets, rather than stocks whose value is lied about, manipulated by rumour and sovereign wealth funds, and nibbled half to death by fees, commissions, taxes and inflation.

UPDATE - Karl Denninger is emphatic that it can't work:

Sack, no.

You can't spend $600 billion in deficits without it coming back SOMEWHERE.

Government spending is not a net positive. You can't only get to a net positive via growth in GDP.

Debt-initiated spending only returns $1 for every $5 taken on in debt.

Mortgage bond re-rating: reversing the rescue?

Karl Denninger notes that Moody's have re-rated previously "AAA" packaged mortgage products, and points out that since the Federal Reserve only accepts AAA, it may be forced to send much of this stuff back and demand better collateral. The banks' headache returns.

Second blow

TV ad tonight: Woolworths children's jeans £2. I said, you wouldn't have got a zip for £2 a few years ago. (So many Birmingham kids I used to teach years ago thought school didn't matter, they'd be getting a job at Tucker Fasteners anyway. That or Lucas' - now joining the list of nostalgia subjects.)

Then a thought: when the recession really bites, the price war will be unrestrained. I don't know what is still manufactured in Britain, but in the second phase, when the poor become acutely cost-conscious, I can't see domestic manufacturers staying in business.

Of course, with social benefits still generous, we're not there yet (they're still buying their kids Xboxes and Lacoste trainers, while SoSecurity lay on taxis to take the tearaways to school-for-the-expelled); but wait for the tax and benefit reviews when public finances finally unravel.

And if I ever do get another new car (the Fiat Brava is kept going on a radiator refill every Saturday), maybe it's the Tata Nano for me.

I'm looking at checkmate and trying not to believe it. But that's my problem; the difference between Western waster education and Chinese school is too clear. And we'll be a sort of nationwide museum of once-were-workers. But I don't want to live in the past.

Quality down, as well as prices up

Good article in iTulip about the symptoms of inflation to watch out for.

£50 billion liquidity injection - what does it mean?

£50 000 in £50 notes weighs about 1.3kg. So £50 bn = 1,300 tonnes, or 1,279.46 British long tons, of paper.

In 1936, the Aga Khan was presented with his weight in gold, then 220 lb, or c. 100 kg. Gold currently sells for £14,891.58 per kilo, making the Aga Khan's weight in gold worth £1.49 million in today's prices. However, 100 kg of £50 notes is worth £3.85 million. The £50 notes would weigh as much as 13,027 Aga Khans, but would be worth 33,576"gold-priced Aga Khans".

Or, in pre-crash property terms: it is reported that Sheikh Hamad paid £100 million last year for a penthouse overlooking Hyde Park. Mervyn King has just pledged 500 "Hamads" (or over 700 "Updown Courts", if you prefer).

Or, in height terms:

1 ream of paper (500 sheets) is 5.4 cm thick. So 1 billion £50 notes would make a pile 108 kilometres, or 67.1 miles, high.

Were the Aga Khan of that time to have been the height of the average British man of today (5 ft 9 in, or 1.753 metres), £50 billion would equate to a stack of "gold-priced Aga Khans" (without shoes) almost 59 kilometres high. *

The lowest layer of the Earth's atmosphere, the troposphere, varies from 8km at the poles to 16km over the equator; the ionosphere starts at an altitude of about 80 km, and the US Air Force considers "space" to begin at 81 km.

Perhaps it would be simpler to use a new unit: the "government fudge", one box of which costs £50 billion.

By the way: hands up all those who believe the Prescott bulimia story, of which up to now there was not one breath? Now, hands up all those who have an explanation as to why this story should appear this weekend?


* I think this shows that the Aga Khan was worth twice his height in £50 notes.

Trade deficit, undesirability of

(Click to enlarge.)

On freedom

Freedom is not a solitary journey through a desert, where every error and deviation may be fatal; it is found between the hedges and walls of a populous land, defining sovereign islets that combine in mutual defence and succour.

Like a musical string, its harmony relies on bounds. It is the tension between tyranny and anarchy, a common land affording refuge from public and private oppression. It is not lawless. Liberty is to defy another's rule; freedom, to obey one's own; free doom, the "freo la3e" of La3amon's Brut. No law, no freedom.

And now, confusedly and perhaps too late, we must begin to defend our freedom. Here in the once United Kingdom, our self-rule is fragmenting and being sold piecemeal to an unlicked bear-whelp of an aggregated foreign power; in the United States, many of the people and a handful of their representatives are calling for a rally around the principles of the Constitution, while the government becomes forgetful of its foundation. In both, there is economic mismanagement and perilous concentration of wealth. The Big Brother of a political power cutting itself free from popular franchise has his arm round the shoulder of Big CEO, whose business no longer depends on the community from which it sprang. The land will be cleared or peopled at its masters' pleasure; they will move us between their pastures for their profit. The movement will show us that the earth is not ours. We shall be rootless. We shall be dispossessed, wanderers, desperate hired men, like the landless Gregora of Scotland.

This is where we were some two centuries ago. It must all be fought for again, but perhaps, like the valiant tailor, we shall again find a way to overcome the rich and powerful who ravage our lands. Long before the battle, the American Revolution began to assemble its forces among a rabble of pamphleteers, philosophers, dissident clergy, smallholders, inventors, dreamers and adventurers. Every voice, however small, adds to the chorus.

My brother became an American citizen yesterday. Part of the ceremony was a homily, in which the presiding official said (was it a quotation from Jefferson?) that liberty was not passed down to one's children by nature, but by one's actions.

Although my brother has his own views on religion, and although I feel that America has, and has always had, much to learn in its foreign relations, it is without irony that I wish a blessing on America and the American people, and my newly American family.

UPDATE

Not Jefferson:

"Freedom is never more than one generation away from extinction. We didn't pass it to our children in the bloodstream. It must be fought for, protected, and handed on for them to do the same, or one day we will spend our sunset years telling our children and our children's children what it was once like in the United States where men were free."

Ronald Reagan 40th president of US (1911 - 2004)