Did you see the large turd which Niall Ferguson defaecated into the op-ed pages of today's Los Angeles Times?

http://www.latimes.com/news/printedition/opinion/la-oe-ferg6-2009feb06,0,5486779.column

"It began as a subprime surprise, became a credit crunch and then a global financial crisis... mostly the wise and powerful had decided to trust that John Maynard Keynes would save us all.

I heard almost no criticism of the $819-billion stimulus package making its way through Congress...

There is something desperate about the way economists are clinging to their dogeared copies of Keynes' "General Theory." Uneasily aware that their discipline almost entirely failed to anticipate the current crisis, they seem to be regressing to macroeconomic childhood, clutching the Keynesian "multiplier effect" -- which holds that a dollar spent by the government begets more than a dollar's worth of additional economic output -- like an old teddy bear.

They need to grow up and face the harsh reality: The Western world is suffering a crisis of excessive indebtedness."

So grow up, Dean, and face the harsh reality. OK?

anon- don't you know they are going to use magic dollars for the stimulus. they are going to drop from the sky!

yep, they will for practical purposes drop from the sky. The Treasury can borrow at almost no cost, as those who can read a newspaper know.

Dean,

How do we non-economists make sense of the various employment reports?

If the reports of over 500,000 new unemployment claims per week for the last two weeks in January are correct, how can the loss of only 600,000 jobs for the entire month be correct?

Just want to verify the meaning of this graph.
My eyeing of the bars for the 4 months combined is -220 for 2007-2008 and -170 for 2008-2009. So it's not a case of it being "not plausible that more jobs have been generated in new firms in the last four months than in the same months of last year" but that it's not plausible that more jobs were lost in the four months of a year ago compared with the most recent 4 months. Also, for Oct-Dec aren't the comparisons 2006-2007 vs. 2007-2008?

" The Treasury can borrow at almost no cost, as those who can read a newspaper know."

I read the new york times, how is unsustainable debt levels going for the times?

the Treasury can tax, print money or borrow. if you tax all you are doing is shuffling money from the private sector to public sector.

if you borrow you do the same thing PLUS you have to pay it back. that just shifts future demand to the present. we have pay interest also. that means less to spend in the future.

a tax cut might be saved but that would help recapitalize the banks!

we could simply print the money, but we just pay for that through inflation.

borrowing and spending beyond our means is what got us here. that's not the thing that's going to get us out.

you can't cure the problems of inflation with more inflation.

let's try a hypothetical. say a small downtown is rundown. the government wants to revive said small downtown. what do they do? they create a tax and give loans using the money. downtown is nice. magic, correct?

NO! all they did was shuffle money from consumers paying the higher sales tax and sent it downtown. business also had less money being spent in their businesses because of the tax politicians will marvel about how they remade downtown. all they did was shift money from consumers and businesses to downtown.

all we see is the money being spent on downtown, we don't see the jobs, income, businesses and other losses somewhere else.

the above wasn't a hypothetical, btw.

Japan has printed tons of money for the last 15 years. Please tell me about their inflation.

The idea that we will somehow benefit our children by running double-digit unemployment rates for long period of times is loony. At the moment, the inflation rate is near zero and possibly negative, and we're supposed to be worried about inflation? That's kind of like getting heat stroke in Antarctica in the middle of winter. It's not generally a major concern.

Japan?

Now all we need is over a decade of deflation and inferior growth ...

And let's remember that during the 90s Japan had an enormous trade surplus, a high savings rate and an improving world economy to sell into ... The US does not ...

The fact is that our 70% consumption, debt spiral, trade and budget deficit economy is broken ... kaput. Over $50 trillion in aggregate US debt, 3.5 times GDP is unprecedented and unserviceable ...

"Japan has printed tons of money for the last 15 years. Please tell me about their inflation."

I thought the Japan model was not what we want for the USA.

Since the Fed has already shoveled a trillion or so, maybe it's just sitting there waiting to buy long term Treasuries instead of redeeming the collateral the Fed got. If you're going to print money, why not go all out and just give every living person $10,000 in vouchers?

Is it true that homeowners took $9 trillion out of home equity in the decade through 2006?

I think an orderly devaluation of the dollar is coming. The U.S. is simply not competitive with the dollar at its current level. Manufacturing is getting slaughtered. Someone with better expertise can comment on the negative effects of an orderly devaluation, beyond the fact it will irritate dollar-holders/central banks around the globe and China with its yuan valuation. I'm thinking something along the lines of a Plaza Accord. Or maybe the rest of the world feels it can let the U.S. and its consumer drown this time; in that case, good-bye dollar hegemony (with its world-wide assets).

I didn't hear any complaining when Bush gave away the store but now that Obama is trying desperately to redistribute some wealth, you greedy f--ks start howling like the cry babies you are about fiscal irresponsibility, I hope he re-institutes the 97% tax rate on your asses!

"Bush gave away the store"...Yes, they all did, Bush, Congress, Democrats, Republicans...all part of the debt-at-no-cost mania. The notion that government debt is somehow free is ludicrous. There is a price to be paid. A heavy one.

Follow-up. This crisis will kill Keynesianism. It so clearly exhibits its fatal weakness - an utterly naive belief in government, bureaucrats, politicians and all their works. Hayek made this point early on in debates with Keynes. It was ignored. As far as politicians and officials are concerned the theory is too good to miss. Obama is into something that is over his head. His stimulus is a scandal and America will rue the day it was passed.

Donald, I don't know if it'll kill Keynesianism, but with luck it'll kill the shoulda-been-dead-decades-ago Efficient Market Hypothesis for good. In my dreams we'll even get a permanent global ban on mentioning the words "Fama" and "Nobel" in the same sentence.

anon@07:01PM: The Western world is suffering a crisis of excessive indebtedness.

An entirely reasonable theory ... except for one eensy, teensy, problem: why are you firing the people who have to pay the money back? Sort of self-defeating, don't you think?

What has Keynes got to do with this ? He was about "balancing" trade.

His prescription was that trade surplus countries had to stimulate demand for imports from trade deficit countries, while deficits countries had to stimulate exports and cool demand for imports. Steven Roach has been saying this for at least six years.

America has been spending way too much on imported goods by borrowing. The cows have come home. Without a functioning exchange rate system, there is no way to rebalance other than collapse, which we are experiencing, and or trade regulation. This is not my idea, it is basic mathematics.

Economists have been making it up as we go for the last 30 years. Without trade re-balancing, the current prescription is anti-keynseian.

The trade imbalance should have been dealt with in 2001. But, the Fed engineered the credit bubble to get consumption going again. The unfinished business has come back around with a vengeance.

John,

the comparisons are of the jobs imputed for Oct-Jan 2008-09, with the same months of 2007-08. The loss shown in January reflects a seasonal story (the data are not seasonally adjusted). Many firms layoff workers or shut down after the holidays.

Ron,

the unemployment claims are people who have lost their job and are filing for benefits. There are also some people getting hired (even in these times), so it is not a net measure of the jobs lost in the economy.

Dan, you "get it."

2001 was the year. We had balanced the federal budget and balancing the trade deficit should have been next on the list.

With a vengeance indeed, I wonder what it will be like after all of this 'stimulus' money flies out to Canada, Germany, Mexico, OPEC, and Japan and China.

Dean,

You probably know Randall Wray personally, but if you have not looked at Chartalism as an explanation of the money creation mechanism, you should. It is the only one that makes sense.

Money is created by deficit spending. Money is given value through taxation.

Let me explain the process of money creation. I know the traditional method (well explained recently at econbrowser) is that the fed buys treasuries and money is created through that channel. This explanation assumes that the treasuries exist.

In a balanced budget world, treasuries do not have to exist. In fact, if we had run balanced budgets since inception, there would be no treasuries for the fed to purchase. How then could money be created in a balanced budget world?

Additionally, what happens when the treasuries are paid back? The money is destroyed. Because the fed is a bank, that means that their assets and liabilities should net to zero. This is standard credit money creation, which means that assets and liabilities net to zero. While the fed is trading longer term liabilities for the shortest term asset, it does not net create money, it changes the term structure of money.

Credit extended by banks can create money, but that must net to zero. For banks, liabilities equal assets. (You, of course are aware that our problem today is that it does not net to zero, as the underlying assets the money was created against are now not worth as much money as was created. This is another discussion...)

In the real world, money is created when the government deficit spends - that is, spends money and does not ask for it back in taxes. Treasuries only effect the term structure of interest rates, nothing more than that.

In a simple model world, with a central bank, a treasury, and 1 outside entity, think about how money might be created. If in that world, we attempt to borrow money from the outside entity - where does it get the money? Basically, the treasury must spend money first, prior to tax collections, or borrowing. In the next, slightly more complex world, imagine that there is a single private bank in addition to the other three players. In this world, the outside entity might trade an asset for currency loan from the bank. Money is created, but no net money. The bank has an asset balanced by a liability. The outside entity has an asset balanced by a liability.

Now if the treasury borrows currency from that single outside entity, how can the money ever be repaid to both the private bank and the treasury at the same time and have money be created? If the treasury pays back its loan, the proceeds must have been paid for with taxes collected from the outside entity (the balanced budget model). If all of the accounts balance at the end of the day, there is no money created in this model. You can extend this to any number of private banks and outside entities - no net money is created if the accounts balance.

In this world, either the private bank or the outside entity must constantly be loaning money in perpetuity for money to be in existence, as the total money available is not sufficient to pay back the private bank loan and the outside entity simultaneously and there be any money in circulation.

Now if the government deficit spends, that is, spends more than it asks for back in taxes, money is created. In the model described above, deficit spending would allow savings.

"Japan has printed tons of money for the last 15 years. Please tell me about their inflation."

dean, japan exported their inflation via the yen-carry trade. they helped inflate asset prices all around the world for years. they had the benefit of declining commodity prices from 1990(when the crisis started) until around 2002. they also had a great savings base, we don't but we're starting.

"The idea that we will somehow benefit our children by running double-digit unemployment rates for long period of times is loony. At the moment, the inflation rate is near zero and possibly negative, and we're supposed to be worried about inflation? That's kind of like getting heat stroke in Antarctica in the middle of winter. It's not generally a major concern."

sure inflation is not a concern right now and we'd like to keep it that way. one way to do that is let the economy heal in a real way. borrowing a lot of money to literally paper over problems is not the way to go. you can't solve the problem of inflation(Fed-created over the last 30 years or longer) with more inflation.

the idea that we can benefit our children by borrowing and spending and continually devaluing the dollar is ludicrous. no matter what scenario you can construct it's nothing compared to a problem with the bond market or a currency crisis. think iceland.

inflation got us here and inflation will not save us. we are in this mess right now BECAUSE of inflation in housing caused by the Fed trying to "cure" the 2001 recession. massive deficit spending will just kick our economic problems down the road.

why can't people see that?

"That's kind of like getting heat stroke in Antarctica in the middle of winter. It's not generally a major concern."

dean, don't you watch man vs. wild on tv? you don't have to get heat stroke to get in trouble in the winter. bear grylls says if you sweat during in the winter you can get in serious trouble because that will cool your body.

"why are you firing the people who have to pay the money back? Sort of self-defeating, don't you think?"

they'll learn the most valuable lesson of all- don't go into debt because you might lose your job. we'll end up with a much more stable economy in the end. the kind of economy our grandparents had because they didn't go crazy with debt. my grandparents all died with a paid off houses, cars and very little other debt. in fact, they both built the very first homes they owned. constrast that to today's(or maybe yesterday's thanks to the recession) culture of a new car, 3 homes and 5 figure credit card debt by the time you're 25.

they'll learn the most valuable lesson of all- don't go into debt because you might lose your job.

Whether the lesson is learned or not, the debt still must be paid.

Explain, please, how throwing them out of work will achieve this end.

http://www.youtube.com/watch?v=lI3P9VnY4Kc&feature=channel_page

http://www.youtube.com/watch?v=Zow8lj2q7GE&feature=channel_page

Check out my two, cool videos on the economy. Enjoy.

It's nice to see an actual economist rip into the BLS data for the fraud it is.

If more economists did this more often, it would probably cause people to trust economists more, and may lead to the government reporting more accurate numbers.

It's almost certain that if we had used house prices instead of OER for inflation calculations, the housing bubble wouldn't have been allowed to get so bad - so this is not just about honesty in government, it's also a matter of good governance of the economy.

"Explain, please, how throwing them out of work will achieve this end."

1. they'll cut spending

2. they'll pay down debt

3. they'll be more frugal in the future

4. they'll sell stuff

It's not like you'll never find a job again. in a bubble or a recession it's more about reallocating people to jobs we need.

my family member was recently laid off from a national homebuilder.

should congress pass a law that only people with no debt should get laid off?

1. they'll cut spending

With an income of zero, debt must increase with any non-zero spending. Cutting the spending only slows the debt increase.

2. they'll pay down debt

How? Do recall they are out of a job.

3. they'll be more frugal in the future

Again, whether this is true or not, the debt payments are due today.

4. they'll sell stuff

People who are living in a "culture of a new car, 3 homes and 5 figure credit card debt by the time you're 25." almost certainly have a negative net-worth. This means they could sell everything and still be unable to pay the debt.

It's not like you'll never find a job again. in a bubble or a recession it's more about reallocating people to jobs we need.

Ok, then, how much time being unemployed are the creditors supposed to tolerate? Can these people approach their mortgage holders and explain that no further debt payments will be arriving until a new job is found? Do you think the banks will be receptive to the macro-economic argument that "payments will return to previous levels when the economy reallocates resources accordingly"?

Or what?

should congress pass a law that only people with no debt should get laid off?

Given that "debt is the problem", this certainly sounds like a solution. The fiscally delinquent can keep their jobs (however they are 'allocated'), paying down their debts, as well as contributing to the general welfare of those who lost their jobs, due to no fault of their own, and who managed their finances properly all these years. In short, it would punish, today, those who made bad choices and reward, today, those who managed themselves well.

It's about time that they adjusted the birth/death model. This has been spouting net job growth since last February in many of the areas that are obviously down. For a while they were up 150,000 net new jobs in construction & 300,000 net new jobs in leisure.

It's just another way to manipulate the rate to make it look better than it is. I get tired of the 'there's only 6% unemployment' media babblers. What would be the reaction of our politicians if the actual underemployment rate of around 20% was publicized?

I completely disagree with the endorsement given to Chartalism by Mike S above. Reasons are set out in my blog: http://chartal.blogspot.com/

A ha ,I agree with you.It's just going to be awful, terrible, and absolutely dreadful to possibly have a Supreme Court justice who isn't going to decide in favor of the powerful all the time.Nobody ever mentions this when they use this case as a parable of liberal excesses, but when the city threw out the results of that test and didn't promote anyone, what did they do next? The case was in litigation for years, they could hardly abolish their whole org chart while it was pending. Did they have a new test, and if so, who passed it?