The following brief speech by Larry Summers given at the November 8 IMF Economic forum has been getting some attention in the blogosphere over the weekend.
The topic of Summers’ speech is the age-old debate of how to overcome the zero lower bound in which the global economy has, reflexively, found itself in over the past five years (today more than ever, with $160 billion in monthly flow from the Fed and BOJ for now, and the ECB joining soon) which incidentally is the outcome of 100 years of monetary distortions resulting from central banking and which has led to a perverted state in which the global economy is unable to revert to its trendline absent the perpetual reflation of new, bigger and better asset bubbles. “Reflexively”, because the “solution” to the problem merely makes it even worse, but we doubt even 5 more years of global QE will be enough for the world’s tenured economists and Nobel prize winners to figure that out.
Summers’ recommendation is simple: boost inflation (presumably through NGDP targeting, the same thing we said back in September would happen soon, which would unanchor 2% inflationary expectations as money literally dropped from the sky), and encourage a cashless society allowing the Fed to punish all deposit account holders through negative rates (or outright confiscation) forcing massive spending (see the Cyprus deposit confiscation and the subsequent London real-estate mega bubble as an example).
Of course, as any rational person understands very well, the above core problem will never be fixed unless the monetary excesses accumulated in the post Bretton-Woods era and mostly over the past three decades – beginning with Greenspan’s Great Moderation and ending with Yellen’s “I see dead bubbles” speech – are purged through liquidationist policies that allow the world’s balance sheet to revert to viable model. Unfortunately, at this point it is far too late to do “the right thing”, and the Fed is stuck with just one option: reflate or bust, because even the smallest risk price correction could spiral out of control and end the world’s biggest experiment in central planning.
There is nothing magical about this, and anyone who has even the faintest inkling of how traditional restructurings and reorgs work will tell you as much.
Which means certainly not Nobel prize winner Paul Krugman. For this “doctor” of voodoonomics, Larry Summers’ speech is profound and deep for the simple reason that Summers promotes the same policy that none other than Krugman proposed back in 2002, and whose implementation nearly resulted in the end of finance as we know it. Recall from a 2002 NYT editorial:
To fight this recession the Fed needs…soaring household spending to offset moribund business investment. Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.
Well, now Mr. Yellen needs to create the bubble of all bubbles to replace the housing (and credit) bubble which replaced the Nasdaq bubble and so on. And she is doing just that.
Which obviously is earning instapraise from Krugs:
We now know that the economic expansion of 2003-2007 was driven by a bubble. You can say the same about the latter part of the 90s expansion; and you can in fact say the same about the later years of the Reagan expansion, which was driven at that point by runaway thrift institutions and a large bubble in commercial real estate…. how can you reconcile repeated bubbles with an economy showing no sign of inflationary pressures? Summers’s answer is that we may be an economy that needs bubbles just to achieve something near full employment – that in the absence of bubbles the economy has a negative natural rate of interest.
In other words, you can argue that our economy has been trying to get into the liquidity trap for a number of years, and that it only avoided the trap for a while thanks to successive bubbles.
And if that’s how you see things, when looking forward you have to regard the liquidity trap not as an exceptional state of affairs but as the new normal.
Bottom line: the US economy can’t “grow” without bubbles, so we need a bubble.
In principle that’s great. The only problem is that the bubble reflation and bursting process always and without fail is destructive to those people who live within their means, and rewards those who spend like drunken sailors, who engage in reckless economic behavior, who build up massive debt burdens which can never be repaid, who misallocate capital and resources, and who become too big to fail and are allowed to hold the entire global economy hostage. For a great example of all of the above, see 2008.
We can assure everyone that the next bubble bursting process will be orders of magnitude worse, as yet another bubble will have to be reflated just to compensate for the Nasdaq, housing, credit and whatever it is that the current bubble is called: the Bernanke/Yellen double down, all-in gamble.
Sadly, the downside is the loss of the reserve currency status of the dollar: something economists are completely unable to grasp, but which China, and its 100 tons of monthly gold imports understands very well.
However, none of the above is the actual topic of this post: we will leave it to others to debate the idiocy of summoning yet another bubble to fix the disastrous consequences brought upon by previous bubbles.
What we did want to highlight is that it now has become perfectly clear just what the source is of “profound” insight for such brilliant economists as Summers and Krugman. That source is… The Onion. In this case from July 18, 2008.
WASHINGTON—A panel of top business leaders testified before Congress about the worsening recession Monday, demanding the government provide Americans with a new irresponsible and largely illusory economic bubble in which to invest.
“What America needs right now is not more talk and long-term strategy, but a concrete way to create more imaginary wealth in the very immediate future,” said Thomas Jenkins, CFO of the Boston-area Jenkins Financial Group, a bubble-based investment firm. “We are in a crisis, and that crisis demands an unviable short-term solution.”
The current economic woes, brought on by the collapse of the so-called “housing bubble,” are considered the worst to hit investors since the equally untenable dot-com bubble burst in 2001. According to investment experts, now that the option of making millions of dollars in a short time with imaginary profits from bad real-estate deals has disappeared, the need for another spontaneous make-believe source of wealth has never been more urgent.
“Perhaps the new bubble could have something to do with watching movies on cell phones,” said investment banker Greg Carlisle of the New York firm Carlisle, Shaloe & Graves. “Or, say, medicine, or shipping. Or clouds. The manner of bubble isn’t important—just as long as it creates a hugely overvalued market based on nothing more than whimsical fantasy and saddled with the potential for a long-term accrual of debts that will never be paid back, thereby unleashing a ripple effect that will take nearly a decade to correct.”
“The U.S. economy cannot survive on sound investments alone,” Carlisle added.
Congress is currently considering an emergency economic-stimulus measure, tentatively called the Bubble Act, which would order the Federal Reserve to† begin encouraging massive private investment in some fantastical financial scheme in order to get the nation’s false economy back on track.
Current bubbles being considered include the handheld electronics bubble, the undersea-mining-rights bubble, and the decorative office-plant bubble. Additional options include speculative trading in fairy dust—which lobbyists point out has the advantage of being an entirely imaginary commodity to begin with—and a bubble based around a hypothetical, to-be-determined product called “widgets.”
The most support thus far has gone toward the so-called paper bubble. In this appealing scenario, various privately issued pieces of paper, backed by government tax incentives but entirely worthless, would temporarily be given grossly inflated artificial values and sold to unsuspecting stockholders by greedy and unscrupulous entrepreneurs.
“Little pieces of paper are the next big thing,” speculator Joanna Nadir, of Falls Church, VA said. “Just keep telling yourself that. If enough people can be talked into thinking it’s legitimate, it will become temporarily true.”
Demand for a new investment bubble began months ago, when the subprime mortgage bubble burst and left the business world without a suitable source of pretend income. But as more and more time has passed with no substitute bubble forthcoming, investors have begun to fear that the worst-case scenario—an outcome known among economists as “real-world repercussions”—may be inevitable.
“Every American family deserves a false sense of security,” said Chris Reppto, a risk analyst for Citigroup in New York. “Once we have a bubble to provide a fragile foundation, we can begin building pyramid scheme on top of pyramid scheme, and before we know it, the financial situation will return to normal.”
Despite the overwhelming support for a new bubble among investors, some in Washington are critical of the idea, calling continued reliance on bubble-based economics a mistake. Regardless of the outcome of this week’s congressional hearings, however, one thing will remain certain: The calls for a new bubble are only going to get louder.
“America needs another bubble,” said Chicago investor Bob Taiken. “At this point, bubbles are the only thing keeping us afloat.”
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What can we say in conclusion but… Krugmerica: where satire is now cutting edge economic thought.