How do you grow an economy to help get it out of debt?

[Loren Pechtel]

If the Fed can put money that they make out of thin air into the economy it should be easy for you to tell all of us exactly how they do it. I will start you off....

When the Fed wants to create inflation in order to debase the currency they create money and they ... (do what with it? Where do they put it?)

And what do you think QE was??? (Not that it caused inflation as the money supply was so far below where it should be that it wasn't detrimental.)

You are a hard man to agree with. You argue even when I say that you are right!

Ok, I guess our disagreement is over "botched". While what happened was bad for the people I don't believe it was botched, but rather the intended outcome. (With no regard for the consequences.)

Of course, the other countries won't accept their worthless currency. And why is the currency worthless?

Because the other countries wouldn't accept their currency they had to buy the currency of the other countries on the foreign exchange to use to buy food.

And what happened when they repeatedly bought dollars and rand to use to buy food?

The value of their currency went down.

What happens when the value of your currency goes down?

The things that you buy cost more.

What do economists call the condition when things cost more?

Inflation.

What happens when they have to convert more than 50% of their entire GDP into a foreign currency to buy food from other countries?

They currency goes almost to nothing against the currency that they are buying. What kind of inflation does this produce?

Hyperinflation.

No. It crashes the currency on the exchange market but it does very little to the internal value of the currency. It just causes the disappearance of the imported products.

In reality you always see it paired with high inflation because both fundamentally stem from the same cause: Economic mismanagement.

As you do for any wage increase that you received because of inflation. What is called a cost of living wage increase. Taxes are irrelevant in this discussion.

Capital gains: I invested $100k, I got back $110k after 10% of inflation. I made nothing, I paid $2k in taxes.

Income: Last year I earned $100k and paid $20k in taxes for $80k net. After 10% of inflation I earned $110k and paid $22k in taxes for $88k net--which is $80k in constant dollars. I'm at the same place as I was.

I don't mean to disagree with you here after you agreed with me that capital gains is inflation.

Much of capital "gains" is actually inflation, that doesn't mean that capital gains must be inflation.

Yes, you are right. Bonds held by foreigners are primarily held in the case of the US by foreign government and they represent our trade deficit. It is much more important for the US to try to reduce the trade deficit than to reduce the national debt.

Agreed.

We have had a historically unprecedented number of asset bubbles in the US over the last twenty five years. In the stock market, in commodities, in real estate, in art, in classic cars, etc. This is best explained by the tremendous amount of financial capital in the US over that period, about four times more than is spent on business investment each year. . Business investment in the US has declined in the US over this period, as a percentage of GDP. The money has to go somewhere to try to find returns. It goes overseas, it sits in banks here and in tax havens and it jumps from one asset bubble to another.

I think this is more due to people chasing the latest hot thing rather than a lack of sound investment options.

I was active in Republican politics for years here in Georgia when they were fighting the good old boy racist dixiecrats. Then overnight, they became we.

Yeah. My parents were active in politics, to the point of a hopeless run for office. (You don't unseat someone with 80% of the vote in the last election. By keeping him from running unopposed it kept him from spending his time helping other candidates, though. He picked up 5% of the vote despite being outspent 16:1.) His politics didn't change, the parties did--in his later years he voted Democrat.

The party has changed dramatically for the worse. They started to believe their own bullsh*t.

Yeah. They have their own echo chamber of Faux Noise.

What I meant was, climate change is a real problem and .nearly everyone has joined one of two groups, those denying the problem exists or those denying the most obvious solution, nuclear power.

Yeah, the left doesn't like nuclear power.

I'm pro-nuke, though.

 

[Loren Pechtel]

And how do we measure "high enough"?

Correlation with unemployment statistics would be the most obvious way.

That would work about as well as giving a blind man a laser rangefinder.

The problem is as of the last I checked at least only 1% of workers are at minimum wage. (Beware of "at or below"--that includes tipped people, many of which make well above minimum wage.) If 10% of them lose their job due to a minimum wage hike the effect you will see in the unemployment rate is: 1% * 10% = .1%--no greater than the noise level.

You need a really dramatic change for it to register.

- - - Updated - - -

Is your proposal to become more like China, where they build tons of buildings that remain empty for years on end for the sake of "investment"?

Actually, no. They don't build ghost cities for the sake of investment. They build ghost cities for the sake of avoiding an economic downturn.

It looks like they're going to get one anyway.

 

[Tigers!]

I am constantly amazed that political leaders understand that a family can not continually spend more than it earns without falling into serious financial problem however that reasoning completely escapes them when applied to countries. They only need to follow the advice they would give to a family that was in debt - tighten your belt, stop spending more than you earn, work out a repayment plan with creditors so you don't destroy your ability to borrow in emergencies.

Come on mate. Stop talking sense. This is the wrong forum for that.

 

[Tigers!]

Another practical problem would be reigning in creditors' expectations that they should get paid everything back after obviously lending someone too much money.

If the creditors stopped lending money to the debtors you would be on your high horse (http://thetoyfactory.com.au/) whingeing that the creditors are opressing the debtors.

 

[ksen]

Another practical problem would be reigning in creditors' expectations that they should get paid everything back after obviously lending someone too much money.

If the creditors stopped lending money to the debtors you would be on your high horse (http://thetoyfactory.com.au/) whingeing that the creditors are opressing the debtors.

I'm sure there's a middle ground between using marketing techniques to get people/organizations to take on too much debt and not loaning out any debt at all.

 

[Tigers!]

If the creditors stopped lending money to the debtors you would be on your high horse (http://thetoyfactory.com.au/) whingeing that the creditors are opressing the debtors.

I'm sure there's a middle ground between using marketing techniques to get people/organizations to take on too much debt and not loaning out any debt at all.

I reckon if there was we would know about it by now.

 

[SimpleDon]

I think you have pointed out SimpleDon that Corporate profits are at their all time highs. This would be a strong indicator that demand is there, but companies are hesistant to invest and hire. So the question is why.

No, it is an indication that demand isn't there. If the demand was there for the products the profits would be invested to build new production facilities or to improve the productivity of the existing ones.

You have to understand that economic demand isn't just the desire to own something, you also have to have the money required to pay for it.

In August we reached a telling milestone in our current economy. We have low unemployment, ~5%, and yet production utilization, ~77%, also dropped.

This means that we have as many people working who want to work and yet we have more unused production capacity than we had last month and, more telling for economists, we have more unused production capacity than we had at this time last year.

This means that we have reached the demand limit in the economy, more people are working and yet it hasn't translated into more demand for products. Not only is this an indication of an impending recession, we have never had a recession that wasn't preceded by this sign and we have almost never avoided a recession when this has happened.

 

[SimpleDon]

And how do we measure "high enough"?

Correlation with unemployment statistics would be the most obvious way.

I am not sure that this would show you anything.

Everyone, even those who argue that a minimum wage has to produce increased unemployment somewhere, agree that there has never been an increase in the minimum wage that has produced statistically meaningful unemployment. Everyone who has studied the question has had to resort to studies of small isolated populations of minimum wage workers, cross border studies of teenage workers, sometimes only in areas as small as a single county, for example. Even then the results have been mixed, with as many of these restricted and stylized studies showing no or even positive impacts as those ones that show that unemployment increases.

One way to decide how much to raise the minimum wage would be to study the history of the minimum wages to see what relative level the economy has been able to tolerate in the past. The current minimum wage is only about one half of the peak minimum wage.

This is not a minimum wage thread and we shouldn't turn it into one. It is a thread about government debt and the best way to get out of it, by austerity that shrinks the economy or by growing the economy through deficit spending. Considering where the economy is today the only things that will work are demand side, not supply side actions. If supply side worked in the current economy we would be sitting in the garden now.

We have to raise wages, which will lower profits. The minimum wage is just the start of that process.

 

[SimpleDon]

Occam's razor: greed

Companies don't want to invest and hire because "greed"?

WTF. Where does that come from. Isn't it your religious belief that companies exploit workers and rip off investors?

First you say Puerto Rico is suffering because of higher taxes on corporations and now it;s corporations aren't greedy enough to exploit workers?

Sounds like your indoctrination needs a touch up. Get thee to a Bernie Sanders rally.

The corporations are acting as they are suppose to act. They are maximizing their profits. But it is also shows us that there has to be adult supervision in the economy too, when the economy isn't producing the results that we have to have to provide for society.

There is no reason for the corporations to be earning four times more profit than the amount of business investment in a year, and there is no reason to do it year after year.

We need a balance of supply and demand, of profits and wages, respectively. Too much of either and the economy doesn't perform as well as it can and right now we have way too much of the nation's income going to profits, going to the supply side, and not enough going to wages. We are passed the point that the excess financial capital, the excess supply, causes continuous asset bubbles. We are at the point where the only way that we can show anything approximating real growth we have to have an asset bubble.

 

[SimpleDon]

Companies don't want to invest and hire because "greed"?

Large shareholders don't want companies to invest and hire because "greed".

Carl Icahn open letter to Apple's Tim Cook

It is truly impressive that, despite severe foreign exchange headwinds and massive growth in investment (in both R&D and SG&A), the company will still grow earnings by 40% this year, according to our forecast.

. . .

We are pleased that Apple has directionally followed our advice and repurchased $80 billion of its shares (yielding the company’s shareholders an excellent return), but the company’s enormous net cash position continues to grow while the company’s shares are still dramatically undervalued. With Apple’s shares trading for just $128.77 per share versus our valuation of $240 per share, now is the time for a much larger buyback.

He views continued investment in the company the same as "severe foreign exchange headwinds" and wants Apple to use its cash not to grow the business but to almost double the share price through stock buybacks.

There are limitations in the US on how much of its own stock a corporation can hold, so-called Treasury stock. Someone more knowledgeable could tell us how much this is. But certainly there are ways to get around the limit too, probably involving foreign holding companies.

In the US corporations can't own themselves. Treasury stock is like all of the outstanding stock, it's considered to be a liability of the corporation. If the corporation did manage to buy all of its stock it would be the same as liquidating the corporation. It would have to sell all of its assets to buy itself and it would still have the same liabilities, the Treasury stock.

By foreign exchange headwinds he is talking about the appreciation of the US dollar and the reduced demand for US made products. This is a little disingenuous because few of Apple's products are made in the US. Most of the US dollar content is overhead costs and profits.

 

[SimpleDon]

Large shareholders don't want companies to invest and hire because "greed".

Carl Icahn open letter to Apple's Tim Cook

It is truly impressive that, despite severe foreign exchange headwinds and massive growth in investment (in both R&D and SG&A), the company will still grow earnings by 40% this year, according to our forecast.

. . .

We are pleased that Apple has directionally followed our advice and repurchased $80 billion of its shares (yielding the company’s shareholders an excellent return), but the company’s enormous net cash position continues to grow while the company’s shares are still dramatically undervalued. With Apple’s shares trading for just $128.77 per share versus our valuation of $240 per share, now is the time for a much larger buyback.

He views continued investment in the company the same as "severe foreign exchange headwinds" and wants Apple to use its cash not to grow the business but to almost double the share price through stock buybacks.

It's almost as if there is a balance between too little investment and too much investment.

Are you under the delusion that all investment is good no matter the quality of it?

Is your proposal to become more like China, where they build tons of buildings that remain empty for years on end for the sake of "investment"?

I have met Carl Icahn. [/gratuitous name dropping]

He was a huge stockholder in our company. I was in charge of research and long range planning and was asked to make a presentation to Icahn personally along with some of his analysts. About 90 seconds before I was introduced my CEO said that whatever I do I wasn't to mention what industries we were currently working in, I wasn't to tell them any acquisitions we were looking at (this one I knew) and I wasn't to mention what countries that we currently were working in or which ones we that we are targeting for future business.

(My CEO was afraid that some article in the Wall Street Journal would say that industry X was dying or that country Y was unstable and a poor risk and remembering that I said that X or Y was critical to us he would dump our stock that he held.)

These restrictions took out about eleven and a half pages out of a twelve page presentation on research and long range planning. But it also shows how little he and his analysts knew about the company in which they had hundreds of millions of dollars invested.

There is no balance between too little investment and too much investment. Our economy is now largely demand driven. Investments are only made if there is unfulfilled demand for the additional product that the investment will produce.

The only supply side investments made are for a completely new product, rare, for a productivity gain, also rare to find one that justifies itself without increasing production, or for an investment to fulfill an externality burden like adding pollution controls or to meet safety or health requirements, becoming rarer, we've been there, done it, and it is increasingly becoming hard to impose new externalities, for example for climate change, because of the politics involved.



I have been in line to get a service dog. We found out in August that they had found a dog for us and my wife and I have been going to the trainer for weeks now learning how she is trained, training us how to handle her and to be able to reinforce her training and to add to it. They just called and said that they have decided that she and I are far enough along that she can finally come to live with us. She is a beautiful, smart, one year old Golden Retriever. I am in love. I am very happy.Pictures will follow.

 

[ZiprHead]

I have been in line to get a service dog. We found out in August that they had found a dog for us and my wife and I have been going to the trainer for weeks now learning how she is trained, training us how to handle her and to be able to reinforce her training and to add to it. They just called and said that they have decided that she and I are far enough along that she can finally come to live with us. She is a beautiful, smart, one year old Golden Retriever. I am in love. I am very happy.Pictures will follow.

Congratulations, SD. Very happy for you.

 

[Canard DuJour]

Correlation with unemployment statistics would be the most obvious way.

That would work about as well as giving a blind man a laser rangefinder.

The problem is as of the last I checked at least only 1% of workers are at minimum wage. (Beware of "at or below"--that includes tipped people, many of which make well above minimum wage.) If 10% of them lose their job due to a minimum wage hike the effect you will see in the unemployment rate is: 1% * 10% = .1%--no greater than the noise level.

You need a really dramatic change for it to register.

"Really dramatic change" is precisely what we were talking about.

 

[Canard DuJour]

Correlation with unemployment statistics would be the most obvious way.

I am not sure that this would show you anything.

Everyone, even those who argue that a minimum wage has to produce increased unemployment somewhere, agree that there has never been an increase in the minimum wage that has produced statistically meaningful unemployment.

Yup, however we were talking hypothetically about just such a dramatic increase.

Everyone who has studied the question has had to resort to studies of small isolated populations of minimum wage workers, cross border studies of teenage workers, sometimes only in areas as small as a single county, for example. Even then the results have been mixed, with as many of these restricted and stylized studies showing no or even positive impacts as those ones that show that unemployment increases.

One way to decide how much to raise the minimum wage would be to study the history of the minimum wages to see what relative level the economy has been able to tolerate in the past.

Sounds a lot like correlation with unemployment statistics.

The current minimum wage is only about one half of the peak minimum wage.

This is not a minimum wage thread and we shouldn't turn it into one. It is a thread about government debt and the best way to get out of it, by austerity that shrinks the economy or by growing the economy through deficit spending. Considering where the economy is today the only things that will work are demand side, not supply side actions. If supply side worked in the current economy we would be sitting in the garden now.

We have to raise wages, which will lower profits. The minimum wage is just the start of that process.

Yup.

 

[Loren Pechtel]

In August we reached a telling milestone in our current economy. We have low unemployment, ~5%, and yet production utilization, ~77%, also dropped.

This means that we have as many people working who want to work and yet we have more unused production capacity than we had last month and, more telling for economists, we have more unused production capacity than we had at this time last year.

This means that we have reached the demand limit in the economy, more people are working and yet it hasn't translated into more demand for products. Not only is this an indication of an impending recession, we have never had a recession that wasn't preceded by this sign and we have almost never avoided a recession when this has happened.

What you are seeing is major underemployment.