Sishq, you’ve got to give in. You haven’t made a single point that isn’t trivially refuted but persist in making statement after statement. It doesn’t matter how many times you state your hypothesis about it all being the evil banks, you’re just creating a permanent record here of how you can’t back up your views.

I’m not going to bother answering your question on gold, except to say two things. Firstly, where did I say “gold has no place in society”? I’ve said more than enough here already (!) without you putting words in my mouth. Secondly, US Dollars have no intrinsic value, yet you can buy anything with them. Intrinsic value != perceived value. I’m not saying there is a bubble in the gold market (I don’t know) but you might find it interesting to read up on the Dutch Tulip Crisis to see how prices, perceived value and intrinsic value are not identical concepts.

Quick question and not meant to antagonise you as I see I have done enough of that already :

If gold has no intrinsic value and no place in society and very little industrial use, why is it currently at $1600 an ounce when in 2001 Gold was $268 an ounce ?

Now that’s a perfectly sensible position I can get behind – printing money does nothing to change structural problems, promote innovation or growth in economic capacity. I also believe that medium term there is plenty to suggest that mostly-free-market policies will allow businesses to create value and drive the economy in the long run – so I’m not so worried about the long-term prospects of the global economy. Our own South Africa is a different issue – we have massive structural problems that urgently need to get fixed.

Back to the US – the point around fiscal stimulus and liquidity is not about changing economic capacity, but rather to push the economy closer towards full employment. The very unfortunate reality is that debt levels are high – much higher than anybody would like. These arose from running deficit budgets in good times rather than paying down the debt in good times to keep more power dry for the inevitable busts. The US actually had a great history of doing this, until the Reagan-Bush-Bush tax cuts and spending, including necessary/unnecessary (you pick) wars. The Clinton era gave us budget surpluses and an economic boom – exactly the way it should be. Tuck away money in the good times, pay down the debt so government can promote full employment in the tough times. (A sad comparison is how South Africa increases welfare payments at every opportunity rather than focussing on fixing education, skills, transport, regulatory red tape etc. because they’re more popular political options.)

But, we have the economy and the deficit we have. And the lesser of two evils is dealing with more stimulus and debt in the short term, but with a clear path for return to balanced (and surplus!) budgets in the medium term when unemployment isn’t catastrophic. See my next post (next couple days probably) for a couple charts and figures showing exactly how awful the situation in the US is. The negative impact of debt will be higher if the policies adopted kill off any remaining economic growth and put more people in the unemployment queues. That’s a path to recreate the Great Depression in spite of all we have learnt since it.

Thanks for the comment Jon – I’m only not gentle when guys who have read one random internet post too many have “all the answers” based on long-repudiated stories, manufactured statistics and red-bull-infused zeal.

Interesting article, thanks for the link. Dalio doesn’t support your arguments though. He does support many of mine. But why we are using a single hedge fund manager as the “owner of the truth” is beyond me.

Firstly, as a hedge fund manager, Dalio is actually part of the leverage / deleverage cycle. Not blaming him, just pointing out the irony.
Secondly, Dalio is a hedge fund manager making calls on investable assets (currencies and bonds in particular). He isn’t talking about what is best for the economy or for employment so this article, while interesting, is really a bit of an aside. His views on potential, future, currency and bond market problems from future money supply increases do not equate to “economic collapse by early 2013” and is silent on economic growth, employment and welfare. This is a pretty fundamental point

Dalio states quite clearly that he views reflation, currency devaluation and government intervention as helping recover from the recession and crisis

the financial deleveraging causes a financial crisis that causes an economic crisis. . . . This continues until there is a reflation, a currency devaluation and government guarantees of the efficacy of key financial intermediaries.

He isn’t calling for mass bank failures and “purging of the system”.

Dalio believes countries unable to manage their money supply due to currency pegs / participation in the Euro will face more severe recession as well. Can’t and “won’t” manage money supply amount to the same thing here.

Other developed countries, particularly those tied to the euro and thus to the European Central Bank, don’t have the option of printing money and are destined to undergo “classic depressions,” Dalio said

Dalio, according to this article anyway, has been long US treasuries. Hardly the position of someone who is concerned about inflation.
Peter Schiff, another doyen of the Austrians, has famously been horribly wrong in most of his economic predictions since 2008 and is on record as saying his clients have lost money. Again, I don’t place too much weight on this because he’s a hedge fund manager not a policy economist. (I was going to find some links, but it only takes a 2 minute google to find plenty of evidence of Schiff’s incorrect predictions.) But it does show that picking a particular hedge fund manager who has made some successful predictions is no guarantee that the predictions will continue to be correct. Did I mention that Dalio’s predictions are more in line with my views than yours in any case?

Dalio does not support your views.

You keep saying “it’s clear”, but you don’t provide valid reasons why.

If you actually read my blog and my posts you’ll see that I don’t think policy reactions have been right at all! The thing is, governments are not doing what is prescribed by the economists who’s models work. Don’t judge my policy views by the current situation – I don’t think the policy responses have been correct.

Ray Dalio, founder of the world’s biggest hedge fund with $80 Billion under its control, sees “Economic Collapse” due to money printing by early 2013.

How could he be so wrong ?

I challenge you to deny that the economic situation is getting worse !

For completeness I should note that Sishq replied to the above, but the post was rejected as spam by Akismet, perhaps partly because large chunks of it were copied and pasted off the web. If I wanted to know what Aristotle thought of money (I don’t because his appreciation of economics and money is a little out of date) then I would read up the same tired theories all over the web. Sishq points to the deflation in the US in the mid 1800s and asks why it didn’t lead to a depression – well, it did.

Sishq also holds onto the fantasy that hold has “intrinsic value” – you can’t eat it and it has only limited industrial uses. The “intrinsic value” there is no more than scarcity.

The interesting thing about the Great Depression and the gold standard is not only do almost all economists agree with the theory of how sticking to the gold standard and shrinking money supply in the face of losses of gold reserves damaged the economy, there is also a great built-in experiment. As countries in turn abandoned the gold standard, so was the order of their recovery. This is a great summary paper outlining some of the mechanisms of the great Depresison, the gold standard, international trade and monetary policy with a good reference list.

Sishq refers to the debunked theory of “real balance effect” without description of why there is no evidence for this in Japan’s case.

Finally, Sishq ends with the curious comment:

Here’s the deal….

1. You cannot save a village by destroying it.
2. You cannot save capitalism by destroying it.
3. You cannot save a free market when you don’t have one in the first place.

Didn’t quite know what it meant – then I found that it was written by at least one person before, Mike “Mish” Shedlock. Shedlock is also quoted as saying “95% of Russian banks defaulted in 1998 and an economic boom followed”, which is also simply not true and also repeated verbatim by Sishq (without referencing it) as supporting evidence. Only a small number of banks were allowed to fail and still the economy contracted by nearly 6%.

It’s bad enough failing to see the numerous errors in logic and historical fact, but blatantly copying and pasting from places all around the web is disappointing.

Study the Great Depression and you’ll see exactly what massive bank failures, tight monetary policy, a gold standard and deflation do to an economy. You’re confusing deficit spending with quantitative easing. You are focussing on a very limited component of the money supply and using the tired analogy of “cranking the presses” showing a lack of understanding of what money is in an economy.

Economists knew that the $700bn stimulus package was too small from the moment it was announced – it’s easy enough to calculate what the shortfall in demand was an it was always clear that that would be insufficient. I don’t know where you get your argument that it’s just about more and more spending. The economy is not some mythical, magical creation but a very complex, sensitive system.

The tax cuts for the rich are not miniscule – due to income inequality in the US, those tax cuts affected a large amount of tax revenue.

The actual bail-out funds are small compared to the impact of automatic stabilisers (unemployment benefits and lower tax revenues through unemployment and lower corporate profits) and the spending on the various wars. Further, the decline in GDP has pushed up the ratio of Debt/GDP significantly, which is not a question of debt but a question of economic growth. If we have deflation, nobody is encouraged to spend – money will be kept because it automatically increases in value. If nobody spends, nobody can earn. You and I would both soon be out of work. Your solution would be catastrophic for employment and welfare.

You say that unemployment in the US is structural, but without explaining why. The US doesn’t have pockets of unemployment with other sectors experiencing full employment (as structural unemployment does, since there cannot be a mismatch in every geographic area, every industry of the US). Debt can’t cause structural unemployment since structural unemployment is a mismatch between skills supplied and skills demanded, exacerbated by wage stickiness.

Wages declined in the last BLS report. Wages are declining, which makes us a hairs-breadth away from deflation and you’re worried about inflation?

You talk about structural unemployment in South Africa, but somehow forget to talk about physical and human capital, about the education and skills we need to employ our citizens productively, high transport costs and those who are almost unemployable through decades of unemployment. At what point in our history did debt cause our structural unemployment problems? Was it the years when we ran budget surpluses perhaps?

Long-term borrowing rates in the US are about 3% – short term rates are basically zero even with the prospect of debt-ceiling-inspired-default. So you say “nobody is voluntarily taking the other side” but in truth that’s exactly what is happening. Investors are lending to the US as much as the US wants to borrow at record LOW levels of interest.

My contention is that Japan fell into a liquidity trap and should have combined additional quantitative easing with more significant fiscal stimulus and a commitment to modest inflation in the medium term (say, 4%) to discourage hoarding of cash and encourage spending in the economy. Japan also had to deal with the re-emergence of China and the competitive threats from Taiwan and Korea but they experienced more pain than was necessary.

What is true to say is that because of our fractional reserving system and generally free capital flows, an increase in debt and strong capital inflows can be a warning sign for financial crisis. This doesn’t make all levels of debt “bad” and it doesn’t mean that additional deficit spending can reduce balance sheet constrains and ultimately lead to great economic growth and less public debt in the long run. Destroying the economy is one sure-fire way to make the debt to GDP levels skyrocket.

Finally, your advice is to just let all the banks fail? Businesses that depend on financing to fund working capital would close. Banks that couldn’t roll over medium term debt would fail. Those employees would lose their income and spend less, default on their loans. With low spending, other businesses will fail. And so on. Your solution is the single most dangerous economic idea that could be implemented – and those who have studied economics and performed research in this area all agree with that conclusion.

Boosting employment and demand, weakening balance sheet constrains through modest inflation and government spending will lead to economic growth and an ultimate restoration of public debt to sustainable levels. Wallowing in a liquidity trap and repeating all the mistakes of the Great Depression will not help.