Comments for Credit Writedowns http://www.creditwritedowns.com Finance, Economics and Markets Wed, 23 May 2012 16:00:04 +0000 hourly 1 Comment on Hoover on austerity to balance the budget and defend the dollar in 1932 by Edward Harrison http://www.creditwritedowns.com/2012/05/hoover-on-austerity-to-balance-the-budget-and-defend-the-dollar-in-1932.html#comment-82423 Edward Harrison Wed, 23 May 2012 14:05:08 +0000 http://www.creditwritedowns.com/?p=44731#comment-82423 I think it's important to get the historical facts right instead of biasing them through an ideological lens. The fact is Hoover was not talking austerity in 1930 and 1931. His budgets for 1930 and 1931 did not have large deficits. Once the bank crisis hit, the 1932 budget was catastrophic and that's when the austerity rhetoric started. But in the end, he capitulated and as the crisis deepened, we never heard the austerity talk again. Hoover did not veto the spending. He signed off on it. As for your comments about what 'caused the depression, I don't think you have the Keynesian narrative right actually. It isn't the narrative I am 'struggling to support' either, probably because I'm not a Keynesian. The right narrative is that the depression was the result of significant malinvestment that was built up during the 1920s as a result of loose monetary policy at the Fed. Rothbard wrote "only by contriving for other countries, especially the U.S., to inflate also, could [Britain] check the loss of gold and therefore halt the collapse of the whole jerry-built international monetary structure." See here: http://www.creditwritedowns.com/2011/09/federal-reserve.html The question in the 1930s was how to eliminate the malinvestment and reallocate capital investment to useful productive enterprises without creating a deflationary spiral. When credit is written down, GDP drops and people are thrown out of work. That can be mitigated. It was bank runs that created the deflationary spiral that caused a Great Depression. So the answer is to write down assets and recapitalise the banking system quickly rather than dragging it out. In the context of bank runs, attempts at austerity made things considerably worse. Austerity is a failed paradigm. The government shouldn't have wasteful programs so there should be no need to cut them to cut a deficit. Moreover, the deficit is the result of an ex-post accounting identity between private savings, and current account and government balances. It makes zero sense to target the effect (deficits) instead of the cause (excess credit growth and malinvestment). I think it’s important to get the historical facts right instead of biasing them through an ideological lens. The fact is Hoover was not talking austerity in 1930 and 1931. His budgets for 1930 and 1931 did not have large deficits. Once the bank crisis hit, the 1932 budget was catastrophic and that’s when the austerity rhetoric started. But in the end, he capitulated and as the crisis deepened, we never heard the austerity talk again.

Hoover did not veto the spending. He signed off on it.

As for your comments about what ’caused the depression, I don’t think you have the Keynesian narrative right actually. It isn’t the narrative I am ‘struggling to support’ either, probably because I’m not a Keynesian. The right narrative is that the depression was the result of significant malinvestment that was built up during the 1920s as a result of loose monetary policy at the Fed. Rothbard wrote “only by contriving for other countries, especially the U.S., to inflate also, could [Britain] check the loss of gold and therefore halt the collapse of the whole jerry-built international monetary structure.”

See here:
http://www.creditwritedowns.com/2011/09/federal-reserve.html

The question in the 1930s was how to eliminate the malinvestment and reallocate capital investment to useful productive enterprises without creating a deflationary spiral. When credit is written down, GDP drops and people are thrown out of work. That can be mitigated. It was bank runs that created the deflationary spiral that caused a Great Depression. So the answer is to write down assets and recapitalise the banking system quickly rather than dragging it out.

In the context of bank runs, attempts at austerity made things considerably worse. Austerity is a failed paradigm. The government shouldn’t have wasteful programs so there should be no need to cut them to cut a deficit. Moreover, the deficit is the result of an ex-post accounting identity between private savings, and current account and government balances. It makes zero sense to target the effect (deficits) instead of the cause (excess credit growth and malinvestment).

]]> Comment on Ray Dalio on Deleveraging by fresno dan http://www.creditwritedowns.com/2012/05/ray-dalio-deleveraging.html#comment-82421 fresno dan Wed, 23 May 2012 13:05:05 +0000 http://www.creditwritedowns.com/?p=44756#comment-82421 Nice analysis and you bring up a critical point. Too much of the analysis is for the aggregates - Hey, GDP is back up, wonderful!!! But it ignores that there are 8 million fewer people in the US labor force. More income distributed too fewer hands. And yes, the bonuses at JPM easily offset inflation. But we can't mention the 99% whose income doesn't keep up with inflation... Nice analysis and you bring up a critical point. Too much of the analysis is for the aggregates – Hey, GDP is back up, wonderful!!! But it ignores that there are 8 million fewer people in the US labor force. More income distributed too fewer hands.
And yes, the bonuses at JPM easily offset inflation. But we can’t mention the 99% whose income doesn’t keep up with inflation…

]]> Comment on Hoover on austerity to balance the budget and defend the dollar in 1932 by Yossarian http://www.creditwritedowns.com/2012/05/hoover-on-austerity-to-balance-the-budget-and-defend-the-dollar-in-1932.html#comment-82417 Yossarian Wed, 23 May 2012 01:55:46 +0000 http://www.creditwritedowns.com/?p=44731#comment-82417 I honestly don't understand what you are arguing. The Keynesian narrative that you seem to be struggling to support is that Hoover's "austerity" brought about the Great Depression. But, as the facts show (and I think we agree on), there was no austerity, in fact quite the opposite, regardless of what Hoover may have wanted. Now I am no Herbert Hoover fan- I think he was as bad as Harding was good (very)- but since you cannot show his fiscal conservatism as successfully implemented, can you at least affirm his deficit hawk bona fides? Can you tell me whether Hoover vetoed any of these bloated Congressional budgets and in which years he was over-ridden? Thx... I honestly don’t understand what you are arguing. The Keynesian narrative that you seem to be struggling to support is that Hoover’s “austerity” brought about the Great Depression. But, as the facts show (and I think we agree on), there was no austerity, in fact quite the opposite, regardless of what Hoover may have wanted.

Now I am no Herbert Hoover fan- I think he was as bad as Harding was good (very)- but since you cannot show his fiscal conservatism as successfully implemented, can you at least affirm his deficit hawk bona fides? Can you tell me whether Hoover vetoed any of these bloated Congressional budgets and in which years he was over-ridden? Thx…

]]> Comment on Hoover on austerity to balance the budget and defend the dollar in 1932 by Edward Harrison http://www.creditwritedowns.com/2012/05/hoover-on-austerity-to-balance-the-budget-and-defend-the-dollar-in-1932.html#comment-82416 Edward Harrison Tue, 22 May 2012 23:07:45 +0000 http://www.creditwritedowns.com/?p=44731#comment-82416 See here: "You will recollect that the budget sent to Congress represented reductions in expenditures for the next fiscal year of about $365 million below the present fiscal year" http://www.creditwritedowns.com/2012/04/hoover-balancing-budget-least-increase-taxes.html You need to read the source documents to see what actually happened. You can't make assumptions based on top level data as you have done. See here:

“You will recollect that the budget sent to Congress represented reductions in expenditures for the next fiscal year of about $365 million below the present fiscal year”

http://www.creditwritedowns.com/2012/04/hoover-balancing-budget-least-increase-taxes.html

You need to read the source documents to see what actually happened. You can’t make assumptions based on top level data as you have done.

]]> Comment on Hoover on austerity to balance the budget and defend the dollar in 1932 by Edward Harrison http://www.creditwritedowns.com/2012/05/hoover-on-austerity-to-balance-the-budget-and-defend-the-dollar-in-1932.html#comment-82415 Edward Harrison Tue, 22 May 2012 23:03:15 +0000 http://www.creditwritedowns.com/?p=44731#comment-82415 I should also add that if you look at the line items, there were massive cuts in defense and education when the deficit exploded after FY 1931. The deficit for FY 1931 was only $129 million but exploded to 1.6 billion in 1932. Hoover got cuts in education, defense and general spending but these were offset by increases in welfare and transportation. Again, Hoover's proposed budget was to cut (and raise taxes). The budgetary process is where the additional expenditures were added. I should also add that if you look at the line items, there were massive cuts in defense and education when the deficit exploded after FY 1931. The deficit for FY 1931 was only $129 million but exploded to 1.6 billion in 1932. Hoover got cuts in education, defense and general spending but these were offset by increases in welfare and transportation. Again, Hoover’s proposed budget was to cut (and raise taxes). The budgetary process is where the additional expenditures were added.

]]> Comment on Hoover on austerity to balance the budget and defend the dollar in 1932 by Edward Harrison http://www.creditwritedowns.com/2012/05/hoover-on-austerity-to-balance-the-budget-and-defend-the-dollar-in-1932.html#comment-82414 Edward Harrison Tue, 22 May 2012 22:56:11 +0000 http://www.creditwritedowns.com/?p=44731#comment-82414 Your analysis is simply not granular enough. Hoover was a President but the budget must be passed by Congress. You need to look at the source data in terms of the discussions they were having to understand the context, particularly after the 72nd congress in 1930. You can't just quote headline numbers without knowing what actually transpired. That's sloppy scholarship. Your analysis is simply not granular enough. Hoover was a President but the budget must be passed by Congress. You need to look at the source data in terms of the discussions they were having to understand the context, particularly after the 72nd congress in 1930. You can’t just quote headline numbers without knowing what actually transpired. That’s sloppy scholarship.

]]> Comment on Hoover on austerity to balance the budget and defend the dollar in 1932 by Yossarian http://www.creditwritedowns.com/2012/05/hoover-on-austerity-to-balance-the-budget-and-defend-the-dollar-in-1932.html#comment-82413 Yossarian Tue, 22 May 2012 20:11:44 +0000 http://www.creditwritedowns.com/?p=44731#comment-82413 From BLS: http://www.whitehouse.gov/omb/budget/Historicals Total Outlays 1929-1935: 3,127->3,320->3,577->4,659->4,598->6,541->6,412 Tax Receipts 1929-1935: 3,862, 4,058, 3,116, 1,924, 1,997, 2,955, 3,609 Surplus to Deficit 1929-1935: 734, 738, -462, -2,735, -2,602, -3,586, -2,803 GDP 1930-1936: 97.4, 83.9, 67.6, 57.6, 61.2, 69.6, 78.5 So show me where the draconian austerity is? Seems Fed govt increased outlays until 1934 (where it plateaus), increased deficits until 1935. Austerity is an economic reality that can only be cured with real growth or masked with inflation. Govt spending is rarely a path to real, sustainable growth so deficits plus debt monetization raise taxes on the poorest among us via inflation (or preventing necessary decline in price of goods). I you want to see real austerity look here: http://www.project-syndicate.org/commentary/asia-s-take-on-austerity From BLS: http://www.whitehouse.gov/omb/budget/Historicals

Total Outlays 1929-1935: 3,127->3,320->3,577->4,659->4,598->6,541->6,412

Tax Receipts 1929-1935: 3,862, 4,058, 3,116, 1,924, 1,997, 2,955, 3,609

Surplus to Deficit 1929-1935: 734, 738, -462, -2,735, -2,602, -3,586, -2,803

GDP 1930-1936: 97.4, 83.9, 67.6, 57.6, 61.2, 69.6, 78.5

So show me where the draconian austerity is? Seems Fed govt increased outlays until 1934 (where it plateaus), increased deficits until 1935.

Austerity is an economic reality that can only be cured with real growth or masked with inflation. Govt spending is rarely a path to real, sustainable growth so deficits plus debt monetization raise taxes on the poorest among us via inflation (or preventing necessary decline in price of goods).

I you want to see real austerity look here: http://www.project-syndicate.org/commentary/asia-s-take-on-austerity

]]> Comment on Ray Dalio on Deleveraging by Edward Harrison http://www.creditwritedowns.com/2012/05/ray-dalio-deleveraging.html#comment-82411 Edward Harrison Tue, 22 May 2012 18:50:23 +0000 http://www.creditwritedowns.com/?p=44756#comment-82411 Agree 100%. Agree 100%.

]]> Comment on Ray Dalio on Deleveraging by Dave Holden http://www.creditwritedowns.com/2012/05/ray-dalio-deleveraging.html#comment-82410 Dave Holden Tue, 22 May 2012 18:19:57 +0000 http://www.creditwritedowns.com/?p=44756#comment-82410 Yes, my thinking though is not only are wages held down by deleveraging but the increased pool of Labour. Therefore both QE and fiscal type operations will struggle to make it through to wages in developed economies. Yes, my thinking though is not only are wages held down by deleveraging but the increased pool of Labour. Therefore both QE and fiscal type operations will struggle to make it through to wages in developed economies.

]]> Comment on Ray Dalio on Deleveraging by Edward Harrison http://www.creditwritedowns.com/2012/05/ray-dalio-deleveraging.html#comment-82409 Edward Harrison Tue, 22 May 2012 17:48:43 +0000 http://www.creditwritedowns.com/?p=44756#comment-82409 Wages may be sticky but you are not going to get wage gains in a deleveraging situation. That's the real story here; this environment is fundamentally deflationary unless it is countered by government propping up demand for employment and wages. until the deleveraging has happened, none of the money printing is going to feed through into embedded inflation. That's the big contrast between the inflationary depression of the 1970s and the episodes now and in the 1930s. Wages may be sticky but you are not going to get wage gains in a deleveraging situation. That’s the real story here; this environment is fundamentally deflationary unless it is countered by government propping up demand for employment and wages. until the deleveraging has happened, none of the money printing is going to feed through into embedded inflation. That’s the big contrast between the inflationary depression of the 1970s and the episodes now and in the 1930s.

]]>