Blog

The Recovery Cost Too Much

Wednesday, September 16, 2009, 4:03 PM

Now that Bernanke is taking victory laps for electro-shocking the economy back into an upright position, inquiring minds want to know what this statistical recovery has cost us.

The concern here is that a few hundreds of billions in temporary growth have been achieved at the cost of several trillions of dollars of stimulus and thin-air bailout money.

The calculations and the implications are explored below.  Here are the quotes around which this piece was written:

Fed Chief Says Recession Is ‘Very Likely Over’

WASHINGTON — The Federal Reserve chairman, Ben S. Bernanke, said Tuesday that it was “very likely” that the recession had ended although he cautioned that it would be many months before unemployment rates would drop significantly.

From a technical perspective, the recession is very likely over at this point,” he said, adding that “it’s still going to feel like a very weak economy for some time, as many people will still find that their job security and their employment status is not what they wish it was.”

What he means by this is that the myriad statistical shucks and jives applied to the economic body will come up with something that the government will gladly call "growth," but which many people, notably those living off of paychecks, will be hard pressed to detect in their daily lives.

The US is now in a managed recession.  While the government and Federal Reserve now have a firmer grip on the matter than they did a year ago, this management assures two things:  a very poor use and allocation of resources (along with the usual amounts of fraud and self-dealing), and an increase in the downstream risks that we face.

Where we faced a pretty dramatic set of events associated with the probable (and necessary) implosion of big chunks of an entirely too-bloated and redundant financial system, our fiscal and monetary authorities have willingly risked the US's solid credit rating for a temporary reprieve from economic pain.

Essentially, we traded a rapid return to growth (at any cost) for an increased chance of a future monetary crisis.  There are others who share this view, such as William White, the former chief economist at the BIS, who worries that past problems have been traded for future imbalances that are larger than what they replaced.

Of course, "growth" achieved at the expense of going further into debt is not really growth at all.

Here's what I mean:  Suppose that your salary had been cut, and you called this decline in income your personal 'recession.'  If you borrowed money to make up the difference, would you say that your income had 'grown'? Probably not, but the statistical wizards down at the BLS certainly would.  They do not factor out the impact of debt when measuring this thing they call growth.

I think that it is important to ask ourselves, "Okay, how much did we borrow, and how much 'growth' happened as a result?"

For the sake of argument, let's assume that the economy will grow by 3% this quarter and 3% next quarter.   On a roughly $14 trillion economy, that pencils out to a $420 billion yearly rate of increase in the economy.

And how much did it cost us to force this return to growth?

It came at the expense of a nearly 20% expansion in the total expenditures of the federal government.  If it were only this $512 billion increase in outlays, we might be tempted to think we got a good deal.

But between here and the end of the calendar year, another few hundred billion in deficit spending will occur.  So let's call just the increase in deficit spending alone an $800 billion dollar hit to the bar tab.

If that were all, we might still be tempted to call this a bargain.  But at the same time that outlays were increasing, revenues were plummeting.  As we see below, there was a more than 16% drop-off in federal receipts amounting to a shortfall of some $365 billion, which we must add to the tab.

Now the price of our $420 billion in economic 'recovery' is over a trillion dollars.  In fact, if we wish to just take the increase in federal debt this year, we might peg the price tag at $1.668 trillion federal dollars:

Is a $420 billion yearly increase in GDP worth a four-fold higher increase in federal debt?   Before we answer that, let's look at how much the Federal Reserve has poured into the furnace.

Off-The-Books Exposures

This $1.668 trillion (so far) increase in federal debt is just the tip of the iceberg.   Lurking beneath the waves are the implicit and explicit guarantees of several trillions of dollars worth of bank debt, Fannie and Freddie bonds and mortgage backed securities, FHA mortgages, and whatever has been promised to the Chinese (et al.) behind closed doors to keep them from fleeing the scene.

The total of all the off-the-books stimulus and various guarantees stands at more than $3 trillion right now.

The Federal Reserve

Of course, the federal government has not been operating alone.  The Federal Reserve has printed an unprecedented amount of money out of thin air which it has used to buy a lot of "assets" of questionable worth from stricken financial institutions.

As we can see below, another $1.2 trillion in 'funny money' needs to be taken into account when we are assessing the true cost of our economic 'recovery.'

(Source)

However, the chart above merely shows the amount of actual cash injected so far and leaves out the additional $5 trillion in other program commitments that the Fed has either promised or made.

Adding It All Up

In direct stimulus or bailout money, roughly $2.8 trillion has been spent so far, which has translated into the possible $420 billion in yearly economic expansion. vA further $8 trillion has been either made available or committed to be used if necessary.  $11 trillion exchanged for $0.42 trillion.

Does this sound like a good deal to you?

While it's easy to play Monday-morning quarterback, I am reasonably certain that if you gave me $2.8 trillion in cash and another $8 trillion in guarantees, I could have achieved a lot more than $420 billion of temporary incremental economic activity.

Of course, I wouldn't have poured a single dime of that money into any of the black holes masquerading as banks that are now, regrettably, even larger than too-big-to-fail.  Instead I would have poured the money into farms, communities, new forms of transportation, energy infrastructure and the like.

Unwinding The Mess

As I recently wrote, the notion of how to unwind all of the Federal Reserve thin-air money injections, plus reducing and then finally removing the federal government deficit spending from the economy, is going to be a tricky matter, indeed.

The NYT article continues:

Mr. Bernanke said the consensus of forecasters was for moderate growth for the rest of this year and next, particularly as credit markets thaw, consumer confidence takes time to heal, and the federal government begins to unwind a series of federal spending and lending programs intended to mend the economy.

For policy makers in Washington the more significant question than the actual date of the end of the recession will be when to begin unwinding the myriad of lending programs that were hastily created in response to the crisis.

(Same NYT source as above)

Even as economists in the US are beginning the long process of figuring out exactly how they are going to unwind the mess, there is another framework for understanding that suggests that their efforts are doomed to failure even before they begin.

For this story, we turn to an excellent article in the Boston Globe about Hyman Minsky, the economist who got it right, decades ago, and was completely ignored by the majority until very recently.

Why capitalism fails

Instead, Minsky drew his own, far darker, lessons from Keynes’s landmark writings, which dealt not only with the problem of unemployment, but with money and banking. Although Keynes had never stated this explicitly, Minsky argued that Keynes’s collective work amounted to a powerful argument that capitalism was by its very nature unstable and prone to collapse. Far from trending toward some magical state of equilibrium, capitalism would inevitably do the opposite. It would lurch over a cliff.

Minsky’s vision might have been dark, but he was not a fatalist; he believed it was possible to craft policies that could blunt the collateral damage caused by financial crises. But with a growing number of economists eager to declare the recession over, and the crisis itself apparently behind us, these policies may prove as discomforting as the theories that prompted them in the first place.

The notion here is that all of the rescue efforts so far, as well meaning and as clever as they may have been, amount to little more than scaling back up the cliff over which we just recently lurched.

Conclusion

The US, along with most of the rest of the world, is now rejoicing the end of the recession.  Growth has been forced upon the system.

However, this growth comes at an enormous cost, in terms of borrowed and dedicated funds, and only now are the early questions being asked about how to recall all of these extravagant gifts from the parties to whom they've been given.

We've achieved some very temporary economic growth, amounting to perhaps $420 billion, at the expense of $2,800 billion spent and another $8,000 billion committed.

Instead of using the crisis to ask some hard questions about the stability and sustainability of the prior system - and using the answers to make some quite obvious changes - the entire crisis seems to have offered little in the way of insight to those in charge.

As the prior stimulus and gifts are unwound from the system, a massive headwind to growth will result.  The alternative is a massive tailwind of inflation, the early signs of which we might already be seeing in our commodity and equity markets.

Both could have been avoided by recognizing that we were on an unsustainable path and allowing the unnecessary elements to die a dignified death.  Certainly, we would have lost an unneeded proportion of our financial machinery - and the attendant campaign contributions - but that would have ultimately proved to be to our long-term benefit.

Instead, we are left with an unchastened financial industry that is already back to slinging great globs of risk and surreal bonuses about as if nothing had ever happened at all.

And we are left with the discomforting notion, known well seemingly everywhere but in the public centers of power, that perhaps we have given up too much to obtain so little.

It recalls a quote by Benjamin Franklin that we might paraphrase into, “They who would give up future prosperity for temporary economic growth deserve neither prosperity nor growth."

Endorsed Financial Adviser Endorsed Financial Adviser

Looking for a financial adviser who sees the world through a similar lens as we do? Free consultation available.

Learn More »
Read Our New Book "Prosper!"Read Our New Book

Prosper! is a "how to" guide for living well no matter what the future brings.

Learn More »

 

Related content

31 Comments

Jeff Borsuk's picture
Jeff Borsuk
Status: Silver Member (Offline)
Joined: Jul 25 2008
Posts: 150
Re: The Recovery Cost Too Much

Thanks Chris! Fantastic read, as usual.

We have Bozo's running our financial machine...it's so disappointing.

Jeff

p.s. great Ben Franklin quote!

jasonpaige's picture
jasonpaige
Status: Member (Offline)
Joined: Sep 7 2008
Posts: 7
Re: The Recovery Cost Too Much

We either take the pain now, or we take even more pain later.  Thanks Chris, if only there were a few more people in our government who weren't on the take, and beholden to corporate goliaths (that will fail), we'd have a much brighter future in this country.  Unfortunately, we're all going to learn a hard lesson.

Alan_McCrindle's picture
Alan_McCrindle
Status: Member (Offline)
Joined: Jan 8 2009
Posts: 1
Re: The Recovery Cost Too Much

If you look at historical USA data on how much new debt is required to provide one dollar of new GDP growth you will see that in the 1950's one dollar of new GDP required about $1.25. In 2008 about six dollars of new debt was required.

 

What this means is that at 2008 rates, an additional $420B should have increased the debt in the economy by about six times that number - $2.52T. This is not far off  your estimates of the government spending of $2.8T.

The reason I bring this up is that this is the base line of our economic model - we have an economy where debt growth is faster than GDP growth.

When we factor in the impact of productivity growth into the economy due to new technology etc. we discover that the economy needs to grow by around 2.5% in order that unemployment levels stay stable. When this reality is factored into the mathematics of debt driven exponential debt growth the result is that someone either comes up with every increasing amounts of new debt - and the debt to GDP ratio keeps increasing - or unemployment keeps growing - a fantastic outcome for an economy where 70% of GDP comes from consumer spending.

 

So I am not surprised by the government numbers - this is simply the level of new debt that is required to generate this sort of GDP. There is a structural problem with our economic model that is being ignored by economists. It is very disturbing that people who win the Nobel prize in economics don't seem to be able to do simple analysis

 

 

Woodman's picture
Woodman
Status: Diamond Member (Offline)
Joined: Sep 26 2008
Posts: 1028
Re: The Recovery Cost Too Much

That assumed 3% GDP growth probably includes the tytpical fudged adjustments too right? 

matthewr99's picture
matthewr99
Status: Bronze Member (Offline)
Joined: Jun 17 2009
Posts: 36
Re: The Recovery Cost Too Much

Chris I completely 100% disagree.  During the 1900's the US has lead the world to levels of material prosperity not before known by man.  Life expectancy has doubled due to incredible medical advance.  Why has this occured in the last 100 years and not the previous 1000's of years?  In other words if the current system is so terrible why has it lead to longer lives and greater prosperity for tens of millions of people.  Perhaps we will come crashing down but the advances and knowledge gained during the last 100 years is ours to keep.

2 Reasons for the crisis we all just witnessed....Overly easy lending to anyone and everyone.  Followed by an accoutning rule fasb 157 that basically forced the us from credit for anyone and everyone to no credit at all in the fall of 2008.  Setting off a panic not seen in over 100 years.  Bernake will be viewed as a hero.  As for a weak dollar.  Our exports on the margin will absolutely soar.  I do agree that we will be at the margin less consumer based and more export based going forward.  But keep in the mind the rest of the world over 2/3's have finally caught on to this thing called capitalism and it's tide will left millions into the middle class.  And peak whatever is an insane concept.  Why?? Because you cannot account for human ingenuity and ability to squezze 1million billion miles out of a sing carbon molecule.  Think that's funny?  Consider the computer you are pounding on used to require the a room the size of your house.  Consider that just 100 years ago air travel was still a dream.   Left to innovate human capacity is unknown...and to say peak anything is to no appreciation of that concept.  Chris I would love to debate you to as I think you do more harm than good as you keep people poor or atleast help them achieve a very poor return.

 

HarryFlashman's picture
HarryFlashman
Status: Bronze Member (Offline)
Joined: Aug 1 2008
Posts: 53
Re: The Recovery Cost Too Much

@Matthewr99,

 

Seeing as you obviously either haven't looked at the crash course and it's irrefutable facts and figures,and that you espouse a faith-based,technocornucopian,pie-in-the-sky ideology,I think (and I don't think I'm alone in this....) that it would be better if you showed more respect and called the author Dr.Martenson.He's entitled to that courtesy.

Also,debating Dr.Martenson would be a thankless and losing task as he has all the facts and you have a naive faith in 'human ingenuity'.Dr.Martenson would tear your metaphorical arm off and hit you with the soggy end.We had the ingenuity to poison the oceans and hunt the Whale to the point of extinction too,but does that make it a good thing?

Also,by system I suppose you mean capitalism(as practiced in the US,i.e. crony capitalism or an oligarcy).Yes the very system that thinks that going further into debt is the best way to solve a crisis caused by being in too much debt??????????God bless Ronald 'Macdonald'Reagan and his holy deficit(?) spending for creating a panacea of false and debt based prosperity!!!

First time posters,....Sheesh....

ckessel's picture
ckessel
Status: Martenson Brigade Member (Offline)
Joined: Nov 12 2008
Posts: 465
Re: The Recovery Cost Too Much

matthewr99,

On the upside I would say you have made it to the first stage of awareness. This is good. I strongly recommend one more time through the Crash Course and you can post your specific counterpoints for each chapter so the rest of us can learn from your own research as to why the outcome is other that stated.

Since Chris has managed to present the material and reference data in the videos of the CC I don't see the need for a debate. We can simply review your specific comments and references. Thanks for your comments.

Coop

rht1786's picture
rht1786
Status: Bronze Member (Offline)
Joined: Aug 13 2008
Posts: 36
Re: The Recovery Cost Too Much

Chris,

Great points. Great data. Great stuff.

However, I disagree with this Globe article on Minsky. I think that the author of the article is a little jaded in applying Minsky's work to the current situation on several points, which have been discussed in this forum and others recently:

Despite all the parallels drawn between our current economic situation and the economic situation in the '30s, the underlying macroeconomic situations are drastically different. Perhaps most importantly, in the early 20th century, the United States was a net exporter, domestic industry was booming, and debt levels were significantly lower. Today, the United States is a net importer, domestic industry is decrepit, and debt levels are through the roof. These differences are critical in assessing the situation, but seem to have been overlooked by the political actors who have been at the wheel.

Capitalism, by it's nature, is "inherently self-destructive and unstable". Yes, I can agree with this. However, the article and your mention of it in this post seem to support the fact that, because Capitalism is destructive and unstable, it has failed. This cannot be farther from the truth. The strength of Capitalism lies in its ability to leave businesses and individuals accountable for their individual actions. If an entrepreneur has a great idea, and implements it with business acumen and the correct methods, then he will find success. However, if he is lazy, sloppy and misallocates his resources or mismanages his business, then he will find failure. Because a business fails, doesn't mean that the system fails. In any economy, you can't expect everybody to succeed, all of the time. It is common knowledge that "people make mistakes". The Capitalistic system assures that when people make mistakes, they pay the consequences. Many motivational books and quotes mirror the idea that failure breeds success and that failure is a necessary step on the way to success -- "Why do we fall down? So we can get back up."

American culture has a tendency to "outsource" blame following failure. This mindset has spread into international business through globalization. The tendency is to attribute one's failures to other parties, other events, or the system, while taking all the credit for success. Unfortunately, reality is quite different. Many times failure is specifically the individual's fault, not because he is stupid, but only because he doesn't have the experience, doesn't have the knowledge, or doesn't have the tools required to find success. In this recession, capitalism and free markets have been the scapegoats. Unfortunately, this is a recipe for a progression towards totalitarianism and increased government control, and not a solution that will help us rediscover growth and prosperity.

Chris, you quoted several paragraphs from the article that were very accurate. Let me also quote two:

Minsky, however, argued for a “bubble-up” approach, sending money to the poor and unskilled first. The government - or what he liked to call “Big Government” - should become the “employer of last resort,” he said, offering a job to anyone who wanted one at a set minimum wage. It would be paid to workers who would supply child care, clean streets, and provide services that would give taxpayers a visible return on their dollars. In being available to everyone, it would be even more ambitious than the New Deal, sharply reducing the welfare rolls by guaranteeing a job for anyone who was able to work. Such a program would not only help the poor and unskilled, he believed, but would put a floor beneath everyone else’s wages too, preventing salaries of more skilled workers from falling too precipitously, and sending benefits up the socioeconomic ladder.

While economists may be acknowledging some of Minsky’s points on financial instability, it’s safe to say that even liberal policymakers are still a long way from thinking about such an expanded role for the American government. If nothing else, an expensive full-employment program would veer far too close to socialism for the comfort of politicians. For his part, Wray thinks that the critics are apt to misunderstand Minsky. “He saw these ideas as perfectly consistent with capitalism,” says Wray. “They would make capitalism better.”

I wholeheartedly agree that a "bubble-up" approach and a government backstop as employer-of-last-resort are solid ideas. However, what has been done in the present day is completely the opposite. Rather than provide jobs for the poor and unskilled, the government has funnelled money into the wealth and highly-skilled. The government has given money to the already-successful. This is counter to Capitalistic fiscal policy, which should seek to financially empower the poor and unskiled in order to enable them to compete with established business. This competition is what causes Capitalism to be "self-destructive and unstable", but I must mince words here, because the correct term for Capitalism's key characteristic is "creative destruction". It is this for an important reason. When Capitalism's fires cause unemployment and business failure, what rises from the ashes is stronger, more innovative, more ground-breaking, more prosperous, more efficient and more effective. This fire of Capitalism is the engine of the free market and it's what makes free market economics so profoundly effective.

After reading this article my strongest point of contention came with this second quote paragraph. Liberal American policymakers are not a long way from thinking about an expanded role for the American government. Liberal American policymakers, led by soon-to-be-infamous President Barack Obama, are driving the American government into massive, world-altering, never-before-seen levels of expansion. As you pointed out in this essay of yours, Chris, the US government is shoulder massive, MASSIVE amounts of debt - this is directly equivalent towards an "expanded role". I have read estimates on US government liabilities ranging from $3tn to $11tn to $100tn, depending on what you are including into the figure, but the simple point is that once the government eclipses a 30% debt-to-GDP ratio, it compromises its role as a lender-of-last-resort, as a bastion of stability, and as a rational policial, financial and economnic actor.

The government doesn't have to run the health care sector, the automobile industry, the banks, or any other sector to have those sectors be considered "government jobs". For all intensive purposes, those sectors could still be privately run and nominally be private sector jobs. However, when the government makes any policy actions that affect wages, supply and demand (including through tariffs or taxes), financial incentives (read: stock quotes rather than profits) or what-have-you, then the liberty of the entrepreneurs under consideration is increasingly compromised. The profit-seeking incentive that drives Capitalism and the free market is distorted by rules that change the game and distort the market, in effect placing these jobs on the same level as government jobs. While the American automobile, banking, and health care sectors are nominally privately held, the fact that the government intervenes so completely in creating an outcome inline with its agenda objectively makes them government-controlled.

I recently re-read Hayek, whose "Road to Serfdom" provides an economic reasoning behind the transition in Germany in the '30s and '40s to totalitarianism. While Minksy's work is strongly applicable to the situation we are in, Hayek's is even more so, for, as he writes, socialism is merely a transitory phase, a precarious middle-ground, between capitalism and totalitarianism. The path that the American government is on now is a one-way street to totalitarianism.

eb_riesling's picture
eb_riesling
Status: Bronze Member (Offline)
Joined: Oct 28 2008
Posts: 53
Re: The Recovery Cost Too Much

Matthewr99

 

Shake your head.

 

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: The Recovery Cost Too Much

a.) Mars or b.) Dennis Kneale?

We have north of 100 trillion in debt/obligations. Obligations that many elderly require to exist. We don't make squat. We take in 2 trillion and blow 4 trillion. Most of that deficit is no longer borrowed but monetized. "Bah bye" Uncle Buck.

I'd pull myself back to Earth and be thinking a.) insolvent and b.) Enron.

Bernanke a.) absolutly inept or b.) a well meaning deluded fool.

He is partially responsible for this disaster.

Too little regulation and too much money (I'll let you figure out the root origination of both) blew up the economy.

Your money, good luck, I would strongly advocate you watch the Crash Course.

Your hero from the early 2000s

As for the FASB you may want to look at an email I got from a tax attorney I met. She buy the way bought a farm in the country side of France for when TSHTF.

t was great to meet you and share values-talk.  Here’s the article on the “Wells Fargo ruling” re: Wachovia  that I told you about;
http://www.washingtonpost.com/wp-dyn/content/article/2008/11/09/AR2008110902155.html?nav=most_emailed_emailafriend

And here’s what I’ve written about  the mark-to-market change of accounting to fair value crapola:
This is one of the astounding things that happened when no one was looking.  The Treasury Department and SEC were in cahoots to change the accounting rules.  Historically, companies have been required to value their assets at market value (i.e. "mark-to-market").  But the problem has been that the subprime mortgage market  was impossible to value because it's like shooting at a moving target - as the value of houses fall, how do you value all of the collateralized mortgage obligations (CMO's) that all of the banks and investment houses and insurance companies around the world own.  They have been able to make-up values as they please because there have been no real way to value them so most of them were carrying them on their books at 80-90 cents on the dollar.  But when the US allowed Lehman Brothers to go bankrupt it was a total disaster because the bankruptcy laws require that a bankruptcy trustee be appointed and the assets have to be valued in the
 "real world." That meant that the assets on Lehman Brothers books had to be auctioned off in the real world.  The day that happened, the assets were purchased at 8.2 cents on the dollar!!!!!!!!!!!!!!!  That meant that any institution in the whole wide world that was carrying similar type of assets had to change their books to reflect 8.2 cents on the dollar rather than the fake imaginary amounts that they had valued them at.  It was an absolute disaster for many reasons.  Firstly, all of those companies suddenly tanked on their book value and could never get credit for anything.  Worse than that was what happened to the fake "insurance" companies all over the world that had sold fake "insurance" contracts promising to cover any losses that these companies might ever have if these type of assets went south.  These "insurance" contracts (i.e. credit default swaps) enabled  insurance companies to collect huge premiums by promising to cover any losses for
 CMO’s but under a secret insert set into the law back in 2002 at midnight, they were deregulated from having to actually have cash reserves funds to cover these contracts.  So when Lehman Brothers went bankrupt and these type of assets were finally real-world valued at 8.2 cents on the dollar, it meant that companies like (you guessed it -  AIG!!!!!!!) had to cover the other 91.8 cents!!!!!  So guess where the missing 91.8 cents to the dollar came from (you’ve got it - your future and our current tax dollars).  That's why all of the financial gurus of the world went bizerko when the US government let Lehman go bankrupt and that's why the US government had to bail out AIG and still has to - because of all of the house-of-card toppling that the credit default swaps caused.

So to create yet another round of smoke-and-mirror fakery, the SEC and the Treasury decided  to change time-honored accounting methods for companies.  Instead of carrying assets at mark-to-market (which has historically been required)  they decided to give companies the ability (overseen by their “in their pocket-accountants”) to totally make up any numbers that they wanted based on what their best guess would be as to what these assets might be worth someday in the future when the "mature" and call it "fair value" accounting!!!!!??>>!!!

That way these companies could pretend that they had assets that actually had value and continue to get credit and survive.  Total utter bullshit!!!!  And FASB - the Financial Accounting Standards Board tried to warn Barney Frank that it was a "politicization of accounting standards" and not to allow it.  Normally, a change like this requires 90-120 days of comments from the public but in this case guess what the time-line was.   7 days!!!!!!!!!

Cute, huh!!!!!

>
http://www.fasb.org/fasb_staff_positions/prop_fsp_fas157-d.pdf
>
> Here's the response to Barney Frank re:  how
> politicizing accounting standards is going to screw investor
> confidence (re:  our discussion)
http://www.fasb.org/DenhamLetter_10-2-08.PDF
>
> Here's the SEC screwing with the rules:
http://www.fasb.org/news/2008-FairValue.pdf

Here’s the fast-track stuff:
http://www.webcpa.com/article.cfm?articleid=29478
http://www.webcpa.com/article.cfm?articleid=29465
http://www.webcpa.com/article.cfm?articleid=29415

Here’s what various financial opinionators have to say about this:
http://www.moneymorning.com/2008/10/08/fair-value-accounting/
http://latimesblogs.latimes.com/money_co/2008/10/with-the-house.html
International reaction:
http://www.ft.com/cms/s/0/b7bc1b2e-8f24-11dd-946c-0000779fd18c.html?nclick_check=1
http://www.ft.com/cms/s/0/4b4ca240-9f98-11dd-a3fa-000077b07658.html
And last, but not least, here’s what the accounting firms (otherwise known as predators) have to say :

http://www.mcgladrey.com/Resource_Center/Audit/Insights/Insights10_09_08.pdf
http://www.weil.com/files/Publication/875865e8-ef72-4152-a1f9-0f55761ebc80/Presentation/PublicationAttachment/49385777-6232-405d-b5be-149d80db6a78/WeilBriefing_SECCG.pdf
So now the latest is special accountant courses on how to be magicians by using this new deck of cards to create yet another house of cards:
http://www.execed.kpmg.com/Content/Static/240.pdf
http://www.nccetraining.com/fva.cfm
Have fun!   I look forward to checking out your blog.  Let’s stay in touch.
Best,

 

 

 

machinehead's picture
machinehead
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Re: The Recovery Cost Too Much
Alan_McCrindle wrote:

If you look at historical USA data on how much new debt is required to provide one dollar of new GDP growth you will see that in the 1950's one dollar of new GDP required about $1.25. In 2008 about six dollars of new debt was required.

Bingo. And now if one takes the higher-end estimates cited by Dr. Martenson, including debt guarantees and monetary expansion, the instantaneous slope of the debt growth to GDP growth function may have reached as high as 22 to 1.

Although it's taking place over decades, this exponentially-rising slope is indicative of the Ponzi-like characteristics of a fiat-based global economy.

No one knows the exact slope which will produce breakdown. But at some point debt service will require more than the entire economic surplus produced by the global economy. Someone, somewhere (who probably will get arrested) is going to cry 'DEFAULT!.' The subversive meme will spread electronically round the globe, faster than the 'authorities' can generate e-money to snuff it.

Lights out ... unless you're off grid.

Mike Pilat's picture
Mike Pilat
Status: Platinum Member (Offline)
Joined: Sep 8 2008
Posts: 929
Re: The Recovery Cost Too Much

Alan and machinehead:
This is a good article that gives a more graphical presentation of the historical trend in marginal GDP growth resulting from an increase in debt: http://seekingalpha.com/article/136058-the-declining-usefulness-of-debt

The data presented is pretty clear that we can now expect roughly 15% of our new debt to be converted to GDP growth. According to this, $1 Trillion in new debt will result in a $150 Billion boost to our economy's GDP. Depending on what regression you use (linear or quadratic) we are either headed to have zero return on new debt around the year 2015 or we have very nearly reached an asymptote of ~12% for this figure.

But numbers only tell so much. The point is we are on a strong downtrend that has been going on for over 4 decades now and continues to be pointed downwards. If and when we reach zero return on new debt, the government would quite seriously be better off distributing the money as fuel for heat, because it won't be doing anything to even nominally help our economy.

Mike

leweke1's picture
leweke1
Status: Silver Member (Offline)
Joined: Dec 18 2008
Posts: 101
Re: The Recovery Cost Too Much

Earlier this year economist Antal Fekete pointed out the hazard of taking on additional debt to increase GDP in the current environment--he terms it "Negative Marginal Productivity of Debt"

http://www.safehaven.com/article-12962.htm

Update...Sorry...I see someone already posted this at the end ...

anton95's picture
anton95
Status: Member (Offline)
Joined: Sep 29 2008
Posts: 22
Re: The Recovery Cost Too Much
matthewr99 wrote:

Chris I completely 100% disagree.  During the 1900's the US has lead the world to levels of material prosperity not before known by man.  Life expectancy has doubled due to incredible medical advance.  Why has this occured in the last 100 years and not the previous 1000's of years?  In other words if the current system is so terrible why has it lead to longer lives and greater prosperity for tens of millions of people.  Perhaps we will come crashing down but the advances and knowledge gained during the last 100 years is ours to keep.

2 Reasons for the crisis we all just witnessed....Overly easy lending to anyone and everyone.  Followed by an accoutning rule fasb 157 that basically forced the us from credit for anyone and everyone to no credit at all in the fall of 2008.  Setting off a panic not seen in over 100 years.  Bernake will be viewed as a hero.  As for a weak dollar.  Our exports on the margin will absolutely soar.  I do agree that we will be at the margin less consumer based and more export based going forward.  But keep in the mind the rest of the world over 2/3's have finally caught on to this thing called capitalism and it's tide will left millions into the middle class.  And peak whatever is an insane concept.  Why?? Because you cannot account for human ingenuity and ability to squezze 1million billion miles out of a sing carbon molecule.  Think that's funny?  Consider the computer you are pounding on used to require the a room the size of your house.  Consider that just 100 years ago air travel was still a dream.   Left to innovate human capacity is unknown...and to say peak anything is to no appreciation of that concept.  Chris I would love to debate you to as I think you do more harm than good as you keep people poor or atleast help them achieve a very poor return.

 

One is reminded of the character of Mr Mickawber in Charles Dicken's David Copperfield, whose catch-phrase as he moved from one financial crisis to another was "Something will turn up!".

By the end of the novel he was driven to observe: "Income 20 shillings, expenditure 19 shillings and sixpence, result happines.  Income 20 shillings, expenditure 20 shillings and sixpence, result misery."

Nobody is questioning human ingenuity in concept, but to use the sort of rhetorical argument you seem to enjoy: if we are sooooo clever, how come we are in such a mess (again)?

Agree with earlier poster - let's have your specific points, case by case.

Dogs_In_A_Pile's picture
Dogs_In_A_Pile
Status: Martenson Brigade Member (Offline)
Joined: Jan 4 2009
Posts: 2606
Re: The Recovery Cost Too Much
matthewr99 wrote:

Chris I completely 100% disagree.  ....

matthewr99 -

Hats off to you for coming out swinging. 

One question - have you watched the Crash Course in its entirety?

Coop thinks you are at awareness.  I think you are wavering between denial and bargaining.

Please reengage once you've watched Crash Course.

Hice 420's picture
Hice 420
Status: Member (Offline)
Joined: Sep 6 2009
Posts: 3
Re: The Recovery Cost Too Much

There is no doubt that the Crash Course provides a coherent and somewhat dispassionate explanation of the monetary system and the causal linkage to the overconsumption of the world's resources.  To that end it is very useful and I have been happy to direct friends and colleagues to it.

What is disheartening is the vitriol that is expressed on this site towards anyone who has a different perspective.  It now appears that only sycophants can refer to the author of the Crash Course as Chris while anyone who disagrees must refer to him as Dr. Martinson.  As he appears not to object one must assume that he concurs with this thinking.

One of the key elements that makes the Crash Course attractive is the statement that it is a work in progress; that new data may cause the author to change his mind.  That is a laudable approach but when one reads through the site it seems very clear that the blogs and comments are just one more search for evidence to support and ideology.  It’s a shame.  There is clearly some valuable information here but there is no room for debate and the exchange of ideas.

JAG's picture
JAG
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2492
Re: The Recovery Cost Too Much
matthewr99 wrote:

Chris I would love to debate you to as I think you do more harm than good as you keep people poor or atleast help them achieve a very poor return.

Personally, the assets that I purchased as of a result of Dr. M's work are up 11.57% in under 6 months time. And this doesn't even include the monumental losses that I would have taken without his access to his analysis.

Please Dr. M I beg you, please refrain from making me anymore money! Foot in mouth

Dogs_In_A_Pile's picture
Dogs_In_A_Pile
Status: Martenson Brigade Member (Offline)
Joined: Jan 4 2009
Posts: 2606
Re: The Recovery Cost Too Much

Hice -

Welcome to the site.

As long as different perspectives are brought to the table with verifiable and objective sources, debate is always welcome.  The problem is when belief and opinion are presented as facts that divisions take place. 

I wouldn't read too much into this one.

Mario Galante's picture
Mario Galante
Status: Member (Offline)
Joined: Oct 13 2008
Posts: 13
Re: The Recovery Cost Too Much

Hice 420:

I think we should all be grateful towards you for posting this wake-up call. Let's not fall into the trap of being condescending towards people who happen to have a different perspective. While I did not like matthewr99's posting and especially its conclusion (What's this about the site keeping people poor? This site was never about investment advice as far as I know.), and certainly do not share this overly optimistic point of view on human ingenuity, I think it is far preferable to refute the arguments than simply point to the Crash Course as a whole and call it a day. We can do better than that.

Matthewr99:

Chris has never presented a nihilistic point of view on the economy. He openly acknowledges the incredible advances in technology and medicine, but clearly feels that our society will have to make better choices and manage its resources better if it wants to build on these advances in the future. After all, it won't matter at all that we have the best technology in the world if we don't have any surplus energy to operate and deploy it.

JAG's picture
JAG
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2492
Re: The Recovery Cost Too Much

Hice,

Your perception that we "all" have jumped onboard Dr. M's bandwagon with blinders firmly in place is incorrect. Many posters here do not agree with everything Dr. M publishes. Take a little more time to look around and I think that you will find we have a very diverse community here.

Hope you hang around...Jeff

(edit:sp)

Mike Pilat's picture
Mike Pilat
Status: Platinum Member (Offline)
Joined: Sep 8 2008
Posts: 929
Re: The Recovery Cost Too Much

I think tone matters a little. Perhaps I will sound like a sycophant, but Chris has never been antagonistic. As he understands and explains so many of the manipulated statistics and raw data, I would say he has a lot more dissonance to deal with than any of us. I'm sure it's not easy for him.

During times of universal deceit, telling the truth becomes a revolutionary act. - George Orwell

All I would say is that disagreements on both sides of the table be measured, polite, and fact based. There is certainly a place to ponder "what-ifs?," to theorize on potential cause and effects, and to attempt to gauge and understand items that do not lend themselves to a numerical, black and white analysis. But these can't be presented as facts with the expectation that others should believe in them simply because they are asserted. If we are going to engage in theorizing future outcomes, then we have to take a more sophisticated approach than simply saying "that's the way it's always been." And if we are going to ask questions or raise doubts, they should be presented as such - knowing that doubts alone do not constitute proof or even evidence.

I think that making some predictions or working through hypothetical scenarios about the future can useful, particularly if the future comes and repeatedly gives us more evidence and facts to support our theories. But, in absence of evidence or facts, our future predictions are just dart tosses at the future and there isn't much to discuss about them until the future comes and either supports or refutes them.


wake-up-sheeple's picture
wake-up-sheeple
Status: Member (Offline)
Joined: Sep 11 2009
Posts: 5
Re: The Recovery Cost Too Much

They couldn't do a better job of crashing the US economy if they tried...or are they deliberately trying?

Who's benefitting from this crisis, anyway? Those who are benefitting should be the suspects at the top of our list. We have well-documented evidence of who is responsible (http://www.realityzone.com/creature.html) but they own the major media outlets so, to head off a grass-roots uprising, they pull out the old divide-and-conquer play out of their well-worn playbook: rich vs. poor, black vs. white, Republican vs. Democrat, young vs. old etc. Case in point: the recent dribble Jimmy Carter poured out regarding Rep. Joe Wilson's "you lie" comment.

We need to stop fighting amongst ourselves and recognize the true enemy.

Dogs_In_A_Pile's picture
Dogs_In_A_Pile
Status: Martenson Brigade Member (Offline)
Joined: Jan 4 2009
Posts: 2606
Wisdom of the Fat Man
"Somebody has to do something, and it's just incredibly pathetic that it has to be us." Jerry Garcia

 

 

Dogs_In_A_Pile's picture
Dogs_In_A_Pile
Status: Martenson Brigade Member (Offline)
Joined: Jan 4 2009
Posts: 2606
Re: The Recovery Cost Too Much
wake-up-sheeple wrote:

We need to stop fighting amongst ourselves and recognize the true enemy.

"It's pretty clear now that what looked like it might have been some kind of counterculture is, in reality, just the plain old chaos of undifferentiated weirdness."

Jerry Garcia

Mike Pilat's picture
Mike Pilat
Status: Platinum Member (Offline)
Joined: Sep 8 2008
Posts: 929
Re: The Recovery Cost Too Much

pretty much, we've been divided and conquered. Change will have arrived when Americans recognize the true enemies instead of misdirecting their efforts against those that should be their allies. A culture of entertainment (even of the political sort) does not lay the foundation for a more prosperous future.

If the past decade or so hasn't been enough to convince most Americans that DC is not going to generate meaningful and positive change on its own, then we should focus our efforts on other people. The path to solutions is to first seek answers, then identify problems, then finally propose evaluate potential solutions. We, as a nation, are not quite to step 1 right now...

Woodman's picture
Woodman
Status: Diamond Member (Offline)
Joined: Sep 26 2008
Posts: 1028
Re: The Recovery Cost Too Much
Hice 420 wrote:

...

One of the key elements that makes the Crash Course attractive is the statement that it is a work in progress; that new data may cause the author to change his mind.  That is a laudable approach but when one reads through the site it seems very clear that the blogs and comments are just one more search for evidence to support and ideology.  It’s a shame.  There is clearly some valuable information here but there is no room for debate and the exchange of ideas.

I have observed a tremendous amount of debate and exchange in ideas in observing this site for over a year that I could never piece together just on my own; for example; the current inflation vs deflation debate thread.   What makes Chris's message and this site so powerful in my opinion are the references to data to backup facts, opinions, or beliefs.  As an engineer and scientist, I base my conclusions on what the data supports and refrain  where there is no data yet to allow conclusions.  I will review any differing opinion that includes data to backup that opinion. 

Tom

okubow's picture
okubow
Status: Bronze Member (Offline)
Joined: Aug 16 2009
Posts: 67
Re: The Recovery Cost Too Much
cmartenson wrote:

I wouldn't have poured a single dime of that money into any of the black holes masquerading as banks that are now, regrettably, even larger than too-big-to-fail.  Instead I would have poured the money into farms, communities, new forms of transportation, energy infrastructure and the like.

Here, Here!!

I don't particularly appreciate the tone of Mathewr99, (seems wild, emotional and bordering on disrespectful), but I do like to here a voice of decent from time to time. (Keeps things fresh and stirs things up imo.)

I'm an English teacher (from the USA) teaching English in Warsaw, Poland. One of my clients is a bank manager at ING. I've presented some of the ideas from the crash course to him and he hasn't been very receptive (surprise, surprise). Luckily he hasn't been offended and has taken up the challenge of an intellectual debate with me while simultaneously improving his English.

Many of the things he's said are things which I know to be false, but one of the most interesting points he's made in our discussions so far is how, following the French revolution, some Frenchman calculated that the world could only support 1 billion people (sorry for the lack of source here). The point is, that even though the Frenchman's calculations were apparently very accurate at the time, he made them in the early 1800's based on 1800's farming techniques and average yields etc. He did the best he could with the data he had to work with, but he had no way to predict the future and to take future innovations into account while he was doing his calculations. (Who could!?)

I believe Dr. Martenson, has offered us the best he has, and for this reason he has my respect and my attention. However, I've by no means become some sort of faithful religious follower of Dr. M. As much as I respect the producer of the crash course and all of his work, I know that he puts his blue jeans on just the same as I do. (If writing that last sentence makes me lose points in someone's eyes, I don't care.) I'm not here to win brownie points or brownify the tip of my nose. I'm here to learn, share and read and sometimes challenge the anti-status quo status quo. Smile

The Capitalism Debate

I don't know anyone who would refer to capitalism as a "perfect" system. Many that I know agree it's the best we've got so far. By the same token, I'm glad to see the debate. I'm surprised that Mathewr99 puts so much faith in the promise of new technology and in the same breath completely discredits the idea that human beings could and can create an even better system than capitalism. Why limit human ingenuity to airplanes and electronic gadgets? What if we could apply some of our current boldness to compassion and courage as well. Just imagine some of the huge breakthroughs we could have in better understanding our own psychology and physiology.

I'm currently living in a former Communist country (Poland) and it's hard to believe how bad things were here before 1989. I would attempt to draw the debate away from Capitalism = Bad vs. Capitalism = Good to a more important debate over the relevancy of our current fiat monetary system.

As you all know, the word fiat is Latin for "let it be done." It is money declared money by whatever ruling body or power wants it to be money. This idea of printing phony, Peter Pan, ponzi scheme monopoly money out of thin air for all eternity is childish. Let's get real.

Edvard's picture
Edvard
Status: Member (Offline)
Joined: Sep 16 2009
Posts: 3
Re: The Recovery Cost Too Much

"I recently re-read Hayek, whose "Road to Serfdom" provides an economic reasoning behind the transition in Germany in the '30s and '40s to totalitarianism. While Minksy's work is strongly applicable to the situation we are in, Hayek's is even more so, for, as he writes, socialism is merely a transitory phase, a precarious middle-ground, between capitalism and totalitarianism. The path that the American government is on now is a one-way street to totalitarianism."

Amen Brother.

Edvard's picture
Edvard
Status: Member (Offline)
Joined: Sep 16 2009
Posts: 3
Re: The Recovery Cost Too Much

Mike,

 

I've seen this plot before and it looks to me that it is nonlinear, more like a step function than a smooth curve.  This looks like it would correlate well to certain political regimes since the US came off the gold standard.

Edvard's picture
Edvard
Status: Member (Offline)
Joined: Sep 16 2009
Posts: 3
Re: The Recovery Cost Too Much

Mike,

I've seen this plot before and it looks to me that it is nonlinear, more like a step function than a smooth curve.  This looks like it would correlate well to certain political regimes since the US came off the gold standard.

SteveS's picture
SteveS
Status: Gold Member (Offline)
Joined: Sep 6 2008
Posts: 358
Re: The Recovery Cost Too Much
okubow wrote:

following the French revolution, some Frenchman calculated that the world could only support 1 billion people (sorry for the lack of source here). The point is, that even though the Frenchman's calculations were apparently very accurate at the time, he made them in the early 1800's based on 1800's farming techniques and average yields etc. He did the best he could with the data he had to work with, but he had no way to predict the future and to take future innovations into account while he was doing his calculations. (Who could!?)

In the end, he may be proven right.

Remember most of our progress since that time has been built on non-sustainable methods, using energy that is not renewable. It is the same as receiving an inheritance and, as you spend it down, marveling at how your standard of living has improved. Yes it has, for a while.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments