A while back I pointed to (and demonstrated with not very pretty pictures) Randall Wray’s rather stunning observation: every depression in American history was preceded by a large decline in nominal federal debt.

And I puzzled about why this wasn’t true of our latest little…event:

 

We saw a decline leading up to 2000, but federal debt was on the rise when the big bang hit. If that 90s decline was the necessary (if not sufficient) cause of the crash, why was there an eight-year delay, unlike all the other depressions in our history?

Various have suggested in various ways what I’ve also presumed: that private debt carried us this time. For a while.

I think this chart may make that point better than any I’ve seen (click for source):

Those earlier depressions weren’t blessed with a mortgage industry engineered to pump newly-created bank cash to anyone who asked through home- and home-equity loans (or corrupt ratings agencies that were the crux enablers of that dynamic.) The false GDP from that new private debt issuance — new money flooding the system — floated us through those years. (This is just a variation of what Steve Keen's been saying all along.)

We’ve been in this woulda-been-a-depression since 2001. We just didn’t know it.

So it seems that Wray’s pattern holds, except — to quote dear Ophelia just before she drowned her sorry self — we wear our rue with a difference.

Cross-posted at Asymptosis.

 In this post, earlier today, I forgot to link to this article over at Naked Capitalism.

The salient point is, that specifically for investors, spending is related exclusively to income, never to wealth.

It goes on to posit that QE and monetary policy are killing demand. 

As Steve would say, "Go read it."

Noam Chomsky writes on the anniversary of Howard Zinn's death:

Howard's remarkable life and work are summarised best in his own words. His primary concern, he explained, was "the countless small actions of unknown people" that lie at the roots of "those great moments" that enter the historical record - a record that will be profoundly misleading, and seriously disempowering, if it is torn from these roots as it passes through the filters of doctrine and dogma. His life was always closely intertwined with his writings and innumerable talks and interviews

...

In those same years, Howard also became one of the most prominent supporters of the resistance movement that was then developing. He was one of the early signers of the Call to Resist Illegitimate Authority and was so close to the activities of Resist that he was practically one of the organisers. He also took part at once in the sanctuary actions that had a remarkable impact in galvanising anti-war protest. Whatever was needed - talks, participation in civil disobedience, support for resisters, testimony at trials - Howard was always there.

...  

Even more influential in the long run than Howard's anti-war writings and actions was his enduring masterpiece, A People's History of the United States, a book that literally changed the consciousness of a generation. Here he developed with care, lucidity and comprehensive sweep his fundamental message about the crucial role of the people who remain unknown in carrying forward the endless struggle for peace and justice, and about the victims of the systems of power that create their own versions of history and seek to impose it. Later, his "Voices" from the People's History, now an acclaimed theatrical and television production, has brought to many the actual words of those forgotten or ignored people who have played such a valuable role in creating a better world.

I haven’t posted on Nick Hanauer and Eric Liu’s stuff, and I should have, long ago. Nick, along with Bill Gates Senior, was one of the big proponents of the Washington State high-earner income tax initiative a while back (which failed utterly, I’m sad to say). As was I, in my little way.

I think this new Bloomberg piece says what they’re trying to say better than I could, so I’ll just say “go read it.” It’s short.

Economies Need a Gardener’s Invisible Hand: Hanauer and Liu – Bloomberg

Cross-posted at Asymptosis.

Eric Brynjolfsson and Andrew McAffee have a new Kindle instant book out, Race Against the Machine, that very nicely describes the issues related to technological unemployment. It’s well-written, content-packed, cogently argued, usefully hyperlinked, and well worth the $3.99 they’re asking.
But I think there’s one crucial topic they don’t address, highlighted by the following.
They deliver a quotation from Gregory Clark’s 2007 Farewell to Alms, speaking of the decline in employment of horses in England in the 19th and 20th centuries. The quotation concludes:

There was always a wage at which all of those horses could have remained employed. But that wage was so low that it did not pay for their feed.

The question that B&M fail to ask or answer: Why couldn’t those horses continue working for a living wage?
Answer: because they couldn’t upgrade their skills (to drive trains and tractors, or whatever). They were biologically incapable of “improving” themselves in such a way that they and the new machines were “complements.” So the machines replaced them instead of complementing them.
Imagine that those horses had been free to mate and have offspring at will (as opposed to the PRC-style, top-down population control imposed by breeders). They couldn’t work (nobody would hire them because their marginal productivity relative to machines was so low), so they couldn’t make any economic claim to a share of the (massively increasing) pie of production and prosperity.
They would have faced an unequivocally Malthusian situation: large numbers of horses would have starved.

More below the fold...

Usually my articles present facts and data and try to drive down to a conclusion. This time, I'm going to drive down to a couple of questions.

Recently, Noah Smith had a post on the subject of economic models titled Filling a hole or priming the pump?  It did quite a bit to restore my lack of faith in the pseudoscience of Economics, but that is more or less beside the point.  Roger Farmer, cited in the post, left a long comment that Noah hoisted up the main page.  Farmer concludes:

My reading of the evidence is that consumption depends primarily on wealth rather than income. That was the lesson of work by Ando and Modigliani, Modigliani, and Friedman in the 1950s. It is for that reason that I support interventions in the asset markets that try to jump-start the economy and reduce unemployment by boosting private wealth. That, in my view, is what quantitative easing has done.

Ok - I'm taking on decades of economic research here, but my first question relates to: "My reading of the evidence is that consumption depends primarily on wealth rather than income."

First, let's remember that wealth distribution is on the order of the top 1% owning 40% of the wealth, and the bottom 80% owning 7% of the wealth. And that 7% is not evenly distributed.  There are significant fractions of the population who have a) no wealth at all, or b) negative net worth. Either way, they are living hand to mouth.  This suggests that 1) they have unmet needs, and 2) will spend the next available dollar trying to satisfy one of them. 

More below the fold...

But Gingrich seems to have noticed that the key to his South Carolina landslide last weekend was overwhelming support from blue-collar and middle-class Republican voters. With those making between $30,000 and $50,000 a year, Gingrich crushed Romney by 20 points. With those making between $50,000 and $70,000, the margin was 16. But at the top end of the scale, it was a completely different story: Romney won by 15 points with voters making more than $200,000.
As I noted the other day, this same basic dynamic was evident in New Hampshire and Iowa, where exit polls found a direct relationship between enthusiasm for Romney and income level.
via Salon.

by Rebecca Wilder

European Daily Catch: Know Your Consumers Today’s European Daily Catch compares the aggregate implications of the reported January 1-point rise in French household confidence to the reported January stabilization of Italian consumer confidence. Specifically, French consumers could be ‘happier’ but that doesn’t necessarily mean they’re spending more, while Italian household confidence translates rather directly to aggregate spending patterns.

Domestic demand is a large contributor to GDP growth in both Italy and France. Therefore, inferring patterns of aggregate consumption from higher frequency leading indicators, such as confidence, is important. Confidence measures lead real retail sales numbers, and real retail sales lead the quarterly real consumption patterns. Annual real retail sales growth has a reasonably high correlation with aggregate consumption (the ‘C’ of Y=C+I+G+NX) in both Italy and France, 69%; so gauging real retail sales from consumer confidence could potentially be useful.

Consumer confidence could be a useful tool for predicting consumption, hence GDP, in France and Italy…

…but it’s not in France. See, with a correlation of just 38%, household confidence is a terrible coincident indicator of real retail sales and adds practically no predictive value for aggregate consumption or GDP forecasting. French consumers could be just miserable and still post relatively healthy retail sales and aggregate consumption numbers.

More below the fold...

by Dale Coberly

SOCIAL SECURITY
How They Lie To Us

The Wall Street Journal in the article Newtitlement State is unhappy with Newt Gingrich’s plan to privatize Social Security. Not only does it know that “privatization” failed when Bush offered it to the country, but they understand that most elected Republicans have distanced themselves from private-account carveouts as well.  Rather than embracing them, Florida Sen. Marco Rubio, whose election was one of the Tea Party's biggest victories in 2010, said during his campaign.

“Privatization of the accounts has come and gone. There are other alternatives, such as [raising] the retirement age, how you adjust payments in the future, 'need' measures, et cetera.

What this means is that “privatization” was never more than a political strategy to kill Social Security. It failed, and now we have a better plan to kill Social Security that won’t cost so much.

Here's what the Journal said about Gingrich's plan

The irony of Social Security is that its slow-motion solvency crisis is relatively easy to resolve—and the political system is moving toward consensus, if haltingly.... Personal Social Security accounts are desirable, but that doesn't mean it makes sense to reject compromises that reduce future liabilities. Yet Mr. Gingrich proposes no such changes in his plan, perhaps because they are politically unpopular. But such an abdication opens him up to charges that he's not serious about reform and that he has no plan to pay for the transition costs of going to personal accounts (that is, when younger workers put their money in their own accounts, rather than funding current retirees).

This is so subtle and so dishonest that I thought it would be worth the time to deconstruct it.

"Its slow-motion solvency crisis" ... note that this assumes there is a solvency crisis. In fact there is not one. Social Security is not insolvent and can never be insolvent. With no changes whatsoever it can pay future benefits that are adequate by today’s standards, benefits which will be in fact greater in real value than today’s benefits.

More below the fold...