Credit contagion

Well, three of five isn’t bad as the Eurozone is on the verge of melting down again:

The EU authorities have begun to vent their fury against Ireland over its refusal to accept a financial rescue, fearing that the crisis will engulf Portugal and Spain unless confidence is restored immediately to eurozone bond markets…. A simultaneous bail-out for both Ireland and Portugal might run to €200bn, depleting much of the EU rescue line. The European Financial Stability Facility (EFSF) can raise up to €440bn on the bond markets but only two thirds of this would be available. The IMF is expected to loan a further €3 for every €8 from the EU under the bail-out formula.

The great concern is that the crisis could spread to Spain, which has a far bigger economy that Greece, Portugal, and Ireland combined. Foreign banks have €850bn of exposure to Spanish debt.

In RGD, I correctly identified Ireland and Spain as the likely culprits for the modern version of 1931’s Creditanstalt collapse. But I have to admit, I did not see Greece or Portugal being a probable issue; Estonia doesn’t count because it is not part of the Eurozone until 2011, assuming that there is still is Eurozone in 2011. But Greece was faking its economic statistics – they released yet another and increasingly bad debt/GDP report yesterday and I only looked at Portugal’s real estate sector, so presumably their excessive debt was concentrated elsewhere.

“According to Austrian theory, the effects of the housing bust on the overall economy should be much greater in countries like Estonia, Spain, and Ireland than in Austria, Germany, and Poland, and to the extent that inexpensive debt was made available to that and other sectors of the economy, we would expect to see that signs of the resulting economic contraction are similarly greater as well. Therefore we should see unemployment rising faster, prices falling further, GDP contracting more, and government deficits growing larger in the three housing boom countries than in the three non-boom ones. Due to the Austrian doubts about the reliability of macroeconomic data, greater credence should be given to historical statistics that are less easily manipulated, such as government deficits and interest rates, rather than GDP, unemployment, and inflation.”

Ireland is right to refuse the EU-IMF bailout. Notice that the bailout is not, as it is improperly characterized, a bailout of Ireland per se. It is actually a bailout of the banks that invested in Irish government debt and it is intended to put the people of Ireland on the hook for it in much the same way that Americans were put on the hook for the cost of the TARP bailouts.

Although it isn’t mentioned in the article, I noticed that Australia’s bond spreads have risen even higher than Portugal’s in the two-year. Australia has had a serious housing bubble too, one that continued into 2010, so don’t be surprised if there is news of a Australian crisis in the near future.

Mailvox: reflections on RGD

Stilicho’s summary:

I received my copy of RGD on Friday and finished it last night. Excellent work. Funnily enough, just as I was starting to read the Saint Bernanke/green shoots scenario at the end, there was a power outage and I finished by flashlight. How apt. At any rate, I’m not sure I’ve grokked the full implications of your theories yet, but the first reading sure was an eye opener. There are a lot of thoughts I had while reading that are still bouncing around in my head that may take a while (and more reading) to fully digest, but I’ll share a couple with you:

1) The conventional Austrian theory that a switch from capital production to consumer production causes contractions doesn’t seem logical to me. Rather, it seems that such a switch would be a symptom rather than a cause. I don’t think you classified it as such, although you did express doubt that it was a casual factor. Why did the Austrian school think it was a casual factor?

2) I too was quite sympathetic to the WZI scenario until recently. I still think there may isolated incidents as certain industries or sectors experience mini bubbles induced by an excess of credit that is available and actually used in said industries/sectors. However, after reading your thoughts about the depth and breadth of secular debt issues, I don’t think that general inflation will be an issue for some time. If and when there is some recovery on the far side of TGD 2.0, do you think the WZI scenario is likely to occur given the monetary authorities adherence to neo-keynesian and monetarist theories?

3) I wonder how long we can keep limping along in what amounts to great recession mode until the bottom finally drops out? Isn’t that what Japan’s lost decade(s) amount too? A great recession scenario? But given the world-wide nature of the current crisis, you have convinced me that the bottom will drop eventually. How many bullets does Bernanke have left?

4) The neo-keynesians must have an absolute disdain for microeconomics. Either that, or it would be just too damned inconvenient to acknowledge verifiable microeconomic principles that might cast doubt on their macro theories. A bit of both perhaps?

1) I simply don’t know. My feeling is that because so much Austrian theory was not developed ex nihilo as so much Marxian and Keynesian theory was, but built rationally on the work of previous economic theorists, the conceptual model was somewhat influenced and therefore limited by the various pre-classical, classical, and neo-classical ideas that influenced them. What is strange about it to me is that Rothbard points out the exact limits of demand that I propose as a causal mechanism, but he only applies it to the market for labor. In any event, I agree, the shift from one form of production to another is a symptom rather than a cause. This probably makes me impure from the doctrinaire Austrian perspective, but hardly a heretic. The model works to describe and correctly predict regardless of which mechanism is favored. The advantage of my “limits of demand” mechanism is the way it explains how Austrian theory applies to financial services and other markets in which there is no distinction between capital and consumer goods.

2) No, I think the entire structure will collapse of its own weight first. Debt implodes faster than money can be printed. And I reject what appears to be the revised inflationist notion that a deflationary loss of confidence in a currency can be reasonably labled hyperinflation.

3) Not long. Not any. Most of the positive exit scenarios involve the Federal Reserve being either thrown aside by the US government or supplanted by the IMF.

4) Yes, they have ever since Keynes first voiced the idea that perhaps a macroeconomy behaved in a different manner than a microeconomy writ large.

Interview with Vox Day part II

UPDATED (July 2): AS PROMISED, YOUR DOUBLE DOSE OF DAY. You’ve read the first part of my Vox Day interview on WND. Now to the sequel, exclusive to Barely A Blog:

• Ilana: To mention the Fed today as anything but a hedge against inflation is to qualify as “Worst Person in the World.” Early Americans were not nearly as baffled about what the Fed did. Comment with reference to the on-and-off attempts to eradicate this Federal Frankenstein. What good would an audit of the money mafia do?

Vox: Keith Olbermann should have stuck to sports. He has no idea what he’s talking about when it comes to economics. The Fed isn’t a hedge against inflation, it is the primary engine of inflation just as its three predecessors were. A genuine audit of the Fed will immediately end its political viability and probably its existence, which is why the Fed is fighting so desperately against the Ron Paul bill. But the end result is inevitable. The Fed can’t hide behind fictional statistics forever, as with the Soviet Union, people eventually begin to notice that they are not, in fact, wealthy and well fed.

Interview with Vox Day

The lovely and libertarian Ilana Mercer turns it around and interviews me about The Return of the Great Depression. This is the first part of a two-part interview:

The “infamous Internet Superintelligence,” Vox Day, author of “The Return of the Great Depression,” needs no introduction. My WND colleague and fellow libertarian dishes it out on the impending depression, D.C. dummies (down to their position under The Bell Curve) and a dark future. As always, Vox makes this glum stuff fun.

Ilana: Republican President George Bush was as good if not better than Clinton and Carter at laying the legislative foundation for the minority mortgage meltdown. Comment with reference to the thesis of your book (and mention some other Republicans who’d like ditto-heads to forget their political pedigree).

Vox: Like Carter and Clinton, George W. Bush pushed government programs designed to boost homeownership among low-income families that couldn’t afford to meet the debt obligations they were assuming. These programs were focused on minorities, particularly Hispanics, which is why the four states where the majority of defaults have been located to date are California, Arizona, Nevada and Florida. However, it should be kept in mind that these inept and bipartisan housing programs were not the cause of the core problem; they were merely a consequence of the overall problem of debt chasing a dwindling pool of borrowers.

I would be remiss if I did not point out, as noted in the book, that the heavy lifting on where the home defaults happened was done by Steve Sailer.

"A landmark project for the new decade"

It may not have hit #1 like Aaron Klein’s new book, but recent events appear to be on the verge of proving the case made in RGD to be correct. You’ve probably noticed that no one is insisting that debt isn’t a big deal anymore.* Anyhhow, I somehow managed to miss this review of RGD, which appeared back in February courtesy of Jim Fletcher:

Vox Day, the Mensa-soaked columnist for WorldNetDaily, is one of those rare individuals who tells it like it is even when we don’t want to hear it. And once the pain subsides, we realize he might just have saved our lives.

His new book, “The Return of the Great Depression,” is that important.

Look, you can listen to MSNBC or read the dream weavers at the New York Times, who still worship the first non-American American president, but going to a place of fantasy in our minds is not going to help us fight our way to whatever economic recovery is possible.

For those who want to pretend that the Chinese don’t hold our debt in their hands … don’t read this book. If you still believe that entitlement programs – even those now for banks – is the way to go, read Oprah’s latest spiritual guru. Maybe that will make you feel better….

If I were an economics professor anywhere, I would make “The Return of the Great Depression” the capstone of my semester’s reading list. Vox Day has managed to make a real-life horror movie an absorbing page-turner. If you have been urged to read this book – and that’s exactly what I’m urging – and you don’t do it, you have only yourself to blame.

I fully expect this book to be a landmark project for the new decade.

And, of course, it’s like $2 on Kindle at Amazon…. By the way, the Dow just dropped nearly 900 points on word that European lending had frozen up.

*It may amuse some of you to note that I wrote this post about 90 minutes before the markets tanked.

UPDATE – I should have a better idea what’s going on tomorrow morning. As I wrote in RGD, the real problems are in Spain, Ireland, and the UK. Greece is small enough that it doesn’t matter except as the first domino.

UPDATE II – Our favorite Doommonger sees unmistakable signs of the Eschaton in all of this: “I doubt anyone’s enjoying the sound of ice cracking beneath our feet, but some of us are less surprised than others. We fans of Peter Schiff, Marc Faber, and Vox Day are just sitting at our desks nodding glumly and saying: Yep. Yep. … From Vox’s wonderful suicide-inducing new book, chapter title “What Can Be Done,” just the headlines:”

The calm before the storm

In response to Dr. Helen’s question, the answer is an unequivocal “yes”.

Glenn just got Vox Day’s new book in the mail, The Return of the Great Depression, so I picked it up and started reading. It is not for the faint of heart or the economically hopeful…. I have noticed that house sales (at least in the lower prices) in our area seem to be picking up and people seem to be out buying again–or at least, they are in the stores. I wonder if this is just the calm before the storm or whether things are improving?

This graph on debt outstanding by sector should explain why things look superficially as if they are improving, while they are actually doing absolutely nothing of the kind. Keep in mind that Q2 2010 – in other words, now – marks the beginning of the end of the massive federal stimulus plan that has allowed the substitution of G for C over the last six quarters. But as the first graph shows, that substitution cannot continue indefinitely. It would require deficits that are multiples of Obama’s record-setting 2009 and 2010 deficits and it wouldn’t ultimately work any better than either the Bush or Obama stimuli did.

And this is an amusing aside from Dr. Helen’s husband:

SORRY, WE’RE STILL SCREWED: Reihan Salam says we’re heading into a decade-long economic buzz saw. “We are propping up the most rotten sectors of the economy and diverting talent that would otherwise shift into the new interrelated systems that are slowly emerging—and this emergence will prove very slow indeed once the inevitable tax burden required to prop up aging yet politically powerful sectors hits.” Let’s hope this is wrong, but it’s basically an explanation of why a powerful federal government, unconstrained by traditional limits, is a bad idea. Oh, well, at least I’ve got Vox Day’s book to cheer me up . . . .

Expanding interest

It appears to be rather obvious that a lot of people are not buying into the recovery argument. I was surprised to learn today that six months after its release, The Return of the Great Depression is the #6#3 bestselling Kindle book in the Economics category and #37#10 in Business & Investing. That’s not bad at all for a book that has not been reviewed in a single mainstream news, business, or economics publication. And, much to my surprise, at $1.99 it’s not even the least expensive in the top ten as the Economic Report of the President by Council of Economic Advisers is free.

UPDATE: It would appear InstaPundit is the culprit. Thanks, Glenn!

Second run

I heard from my editor at WND Books yesterday. It seems that RGD has been “doing very well” and is going into its second print run. I don’t know if I’ll have a chance to correct the errata or not, but I have requested the opportunity to do so. I would like to thank all of you who supported that first foray into writing about economics.

Another RGD error

GL spots a problem on page 70:

“The unemployment rate is the third major statistic that is considered to be fundamentally unreliable, and like the previous two it is closely watched by politicians, economists, and Wall Street. Like GDP and CPI, it is an estimate, though it is theoretically a little less difficult to estimate due to the obvious fact that there are far more economic actions and goods being sold than there are people in a national economy, so the challenge of figuring out how many of those people are working is somewhat reduced. This does not mean that it is difficult, though, since the definition of employment can vary greatly from one individual to the next.”

The last sentence should read: “This does not mean that it is not difficult….” I appreciate the correction. Those inclined to a critical perspective should feel free to commence arguing how this proves that every economic prediction in the book is false, Keynes and Friedman were both correct, Ben Bernanke saved Western civilization, now is the right time to invest in equities, and the global economy has recovered.

RGD: a rather good review

An academic economist reviews RGD:

The book is simply a brilliant masterpiece. It is written remarkably well and gets you to read more and more. It provides a balanced mix between telling a story and zooming in on the economic fundamentals. Right from the very beginning, it becomes perfectly clear to the cognoscenti that Vox is a member of a small, ultra-elite club that has figured out the fundamental flaws of our modern-day Keynesian economic dogma, as well as the finest points of the Austrian school that only few people in the world are familiar with and understand. As an Austrian myself, it is easy to see how sophisticated Vox is in the area.

I am a professor in Economics who has been trained in and disillusioned from the mainstream economics. As an economist, I was completely reborn when I became an Austrian 7-8 years ago. Ever since, I have been teaching economics and finance mostly as an Austrian. During the Spring semester of 2008, I was teaching a course on the Financial Crisis at the American University in Bulgaria. My biggest regret is that I did not have at that time available to use Vox’s book for my course. It would have been perfect. The book may be somewhat difficult for first year Econ 101, but it is absolutely perfect for juniors and seniors – it could well be the book that will make them rethink their mainstream economics foundations. For my course, I had to use Peter Schiff’s “Crash Proof” as the very best available at the time. If I had to do it today again, I would use “The Return of the Great Depression” as my primary book. When combined with “Crash Proof”, it provides a killer combination that would open the eyes to any student willing to read. My third choice would be, without doubt, “Meltdown” by Thomas Woods.

Enough praising Vox and his book. Do not hesitate to get your copy and read it – I guarantee that you would be glad you did it.

This is without a doubt the best book review I have ever received from Bulgaria. Possibly the most interesting thing about Dr. Petrov’s review is that I happen to know he does not agree with me on the most important question of the day, inflation vs deflation. But, as I have said many times in writing about the issue, including in RGD, there are very smart and informed individuals on both sides of the issue and it is only the less sophisticated observers who think that the issue is simple enough to be critical of the other side for the way they interpret the available evidence. While I think that evidence of the last fifteen months has tended to favor the deflationary scenario, I don’t regard the matter as settled. And I certainly don’t think any less of excellent economic observers such as Marc Faber, Jim Rogers, Peter Schiff, the Mogambo Guru, or Dr. Petrov due to their expectation of a Whiskey Zulu situation.

Economics is a complex science wherein the timing remains an art. This means everyone gets something wrong sooner or later; even when you have interpreted all the evidence correctly you can still get the timing fatally wrong. I very much appreciate Dr. Petrov’s review, as it is great to see academics who have opened their minds to Austrian School economic theory. But, to return to the inflation/deflation matter, this chart on the diminishing marginal utility of debt nicely illustrates why I fall on the deflationary side and why I am confident that we are still in the early stages of the Great Depression 2.0.