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tjscott0
Joined: 17 Nov 2004
Posts: 414
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 Posted: Sun Jul 25, 2010 11:48 am Post subject: Interesting Depressing Opinions of Lacy Hunt |
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http://www.dallasnews.com/sharedcontent/dws/bus/columnists/sburns/stories/DN-burns_25bus.ART.State.Edition1.3e82b9d.html
| Quote: | Lacy Hunt...economist for Hoisington Investment Management
"This wasn't a Black Swan," Hunt said in a recent interview, referring to the current recession. "It was highly predictable. We had a long period of overindulgence in debt. Now we're living with the consequences."
The most recent Hoisington newsletter, for instance, points out that private debt declined by a stunning $2.235 trillion over the last four quarters. This was $789 billion faster than government debt grew during the same period.
Even as Treasury yields and home mortgage rates approach new lows, Hunt believes they can go materially lower. This has not been the conventional wisdom. The conventional wisdom holds that we can't have such a gigantic federal deficit and so much new federal debt without having inflation. But the conventional wisdom has been wrong. And it may soon be wrong again.
Most of the modern period, Hunt explains, has been based on Keynesian economics – the idea that government could stimulate demand with deficit spending.
That spending, funded through larger government debt, was supposed to have a multiplier effect. For every dollar of deficit spending, according to the theory, there would be several dollars of new economic activity. The multiplier effect is an idea politicians love because it makes government the hero-spender of economic recoveries.
There's just one problem, Hunt says. "It's wrong."
"Deficit spending, rather than energizing the economy, is debilitating," he said. "Worse, after the spending is
done, the private sector has to service the new debt." |
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tjscott0
Joined: 17 Nov 2004
Posts: 414
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| Posted: Sun Jul 25, 2010 12:12 pm Post subject: |
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Don't know what happened, but I screwed up the original post.
http://www.dallasnews.com/sharedcontent/dws/bus/columnists/sburns/stories/DN-burns_25bus.ART.State.Edition1.3e82b9d.html
| Quote: | Lacy Hunt...economist for Hoisington Investment Management
"This wasn't a Black Swan," Hunt said in a recent interview, referring to the current recession. "It was highly predictable. We had a long period of overindulgence in debt. Now we're living with the consequences."
The most recent Hoisington newsletter, for instance, points out that private debt declined by a stunning $2.235 trillion over the last four quarters. This was $789 billion faster than government debt grew during the same period.
Even as Treasury yields and home mortgage rates approach new lows, Hunt believes they can go materially lower. This has not been the conventional wisdom. The conventional wisdom holds that we can't have such a gigantic federal deficit and so much new federal debt without having inflation. But the conventional wisdom has been wrong. And it may soon be wrong again.
Most of the modern period, Hunt explains, has been based on Keynesian economics – the idea that government could stimulate demand with deficit spending.
That spending, funded through larger government debt, was supposed to have a multiplier effect. For every dollar of deficit spending, according to the theory, there would be several dollars of new economic activity. The multiplier effect is an idea politicians love because it makes government the hero-spender of economic recoveries.
There's just one problem, Hunt says. "It's wrong."
"Deficit spending, rather than energizing the economy, is debilitating," he said. "Worse, after the spending is
done, the private sector has to service the new debt."
"Taxes have a negative multiplier," he said. Research now shows that a $1 tax increase will put a drag on the economy of between minus $1 and minus $3. "The sun setting on the 2001 and 2003 tax cuts will yield $1.5 trillion over the next 10 years. Another $500 billion in tax increases is in the health care legislation. That's $2 trillion in tax increases."
"If you put a midrange negative multiplier of minus 2 on that, it is $4 trillion out of the economy, or about $400 billion a year," he said. To put that $400 billion in perspective, he pointed out that the growth in gross domestic product in the last four quarters was – you guessed it – $400 billion.
I asked how much lower interest rates could go and whether lower rates would eventually turn the economy around.
"I don't think there is a rate level that will turn us around. What will turn us around is deleveraging the economy," Hunt said. "We're going to have to go through a period of national austerity; we're going to have to write down the excess assets
One possible saving grace is that declining interest rates often mean higher stock prices. But they don't mean that in an overindebted economy. Two examples show history. From 1929 to 1941 in the United States, interest rates fell while government debt as a percent of gross domestic product soared – but stock prices fell. From 1989 to 2009 in Japan, it was the same. Interest rates fell, government debt soared and stock prices plummeted. |
If Hunt is correct; we could be in for a decades long decline of US stock market. Which means eschewing US stock market for international stock markets that contain nations with low debt/GDP ratio. |
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Mike
Joined: 23 Jun 2004
Posts: 3454
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| Posted: Sun Jul 25, 2010 4:07 pm Post subject: |
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There is a negative multiplier effect for any debt not used for productive activity. The negative effect is magnified many fold by printing debt. The more they print, the slower the economy. The more private/public debt there is, the slower the economy. Excess printed debt tends to get wasted on unproductive activity. The economy improved very fast in the 1950s and 1960s, but the rate of improvement has gradually slowed as printing built up unproductive private debt in the economy. Now the printers are insisting that the public borrow all of the new debt they are printing, which has historically slowed economies even more. Printing is the reason that the country needs so much de-leveraging now.
The historical record is that economy cannot improve at its maximum rate unless they tame the printing press, and eliminate/minimize capital gains/dividend taxes. Germany has no capital gains tax, and its productivity is widely acknowledged to be the best in Europe. Germany also has a long policy of a stable currency. That is, Germany is anti-printing. Both of these are important factors in Germany's productivity. Both printing and capital gains taxes divert resources away from useful capital formation. Printing debt has cumulative effects over time. As debt builds up, the rate of economic improvement slows more and more. At some point, unproductive debt builds up so much that a credit crises eventuates. |
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Mike
Joined: 23 Jun 2004
Posts: 3454
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| Posted: Wed Jul 28, 2010 3:31 am Post subject: |
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The WSJ had an article on the stimulus debate. The debate seemed to hinge on the completely unproven multiplier theory.
1) If there is a positive multiplier effect, stimulus will be effective.
2) If there is a negative multiplier effect, stimulus will actually slow the recovery. Enough stimulus can even cause a depression.
| Keynes wrote: | | Pyramid-building, earthquakes, even wars may serve to increase wealth. |
This statement seems nutty to me. Pyramid building resulted in large numbers of people being whipped into moving huge blocks with manual labor. It was a grueling ordeal for those forcibly made to build what were essentially useless artifacts. The ordinary Egyptian gained nothing for all of the extra harsh labor they endured. The earthquake in Haiti did not exactly make the Haitians rich. Just the opposite. WWII was complete disaster for Europe that no sane European would want to repeat. I just don't get Keynes. Some of Keynes statements are so absurd that one has to wonder if his stimulus theory makes any sense at all. |
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