Author Topic: Krugman: "Depression Conditions" continue in the US  (Read 1344 times)


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Krugman: "Depression Conditions" continue in the US
« on: February 03, 2013, 11:40:05 PM »

Krugman: ‘Depression Conditions’ Continue in the US
Tuesday, January 29, 2013 01:31 PM
By: Michelle Smith

The U.S. economy is not ready to stand on its own, therefore the Federal Reserve should “keep the pedal to the metal” and continue quantitative easing (QE) well into 2015, Nobel Prize winning economist Paul Krugman tells Yahoo.

Krugman's arguments in favor of long term QE come as the Federal Reserve holds its first policy meeting of the year.

Economists are generally confident that the central bank will keep the aggressive bond buying programs in place — for now. But, the question plaguing the minds of many is when will it end?

Speculation that the Fed may wind down quantitative easing programs this year was driven by the release of minutes from the December Federal Open Market Committee meeting.

The minutes stated that “several [members] thought it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability and the size of the balance sheet.”

Krugman argues that the economy is still ailing and now is not the time for the Fed to give consideration to such ideas.

“Almost 4 million workers have been out of work for more than a year,” he tells Yahoo. “We haven't had anything like that since the 1930s,” he adds.

“If the Fed can convince people that it‘s going to keep the pedal to the metal … that still has some leverage on the economy,”

While many cite the possibility that the Fed's policy may spark inflation, Krugman notes that inflation of 3 or 4 percent could be helpful.

While he acknowledges that the economy is in the midst of a slow recovery, he says the United States continues to suffer from “depression conditions.”

He also dismisses the concerns over the federal deficit. Krugman argues that the Federal government, like the Fed, need not lend its ear to calls for tightening spending, but rather insists that the path to better economic conditions is paved by more spending.

“There is no good reason dealing with debt should be a priority today,” he says.

“A growing economy is the best solution to all our problems.”

Mr. Krugman continues to offer his dangerous advice and the Obama economy continues to falter.  I fear a great upheaval when this shell game with the value of the US Dollar crashes.

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Re: Krugman: "Depression Conditions" continue in the US
« Reply #1 on: February 04, 2013, 12:43:59 AM »
While I respect Krugman and I think he is beginning to wrong on this point.

Signs are becoming clear that the market has too much cheap money rolling around.  Bonds yields(fed, muni and corporate) continue to hover around record lows; the stock market is now reaching lofty, yet undeserving highs (S&P is trading around 15.5 forward earnings) on some rather mixed earnings reports; housing inventory is exceedingly low (which isn't actually too bad), lots of REIT investments are driving cap rates down to 2006-2007 levels on quality property assets.

While, the news of improving real estate, stock, and capital markets should seem like great news, I think it tells a tale of too much money chasing too few good assets.  It is not dissimilar to the bubble that popped in 2008.  Growing asset values are great when an economy has matching real GDP growth.  However, as Krugman is indeed admitting, economic conditions still aren't that good.  I personally don't see present conditions as despressionary, but rather that conditions are indeed continuing an slow and steady improvement.

My fear is all this cheap money is being disproportionately assigned to existing assets and not enough is being assigned (by corporations) to new capital investments and innovation.  Large companies still seem reticent to invest in new capital improvements and hiring.  Meanwhile, the race to devalue the currency and keep interest rates down is going to eventually lead to a hangover.  It is not far fetched to assume that 10 year Treasuries currently issued at 2% or below will not be refinanced at such low rates 10 years from now.  ...and in the meantime, with the Fed just reflating asset bubbles for the next few years, I find it difficult to imagine our economy growing enough to support the higher interest on these accruing notes.

The inflation that Krugman is trying to spark just isn't going to go into the correct assets.  Worse yet, it is also probable that capital will begin to flow into commodities in the not so distant future, which has the chance of causing 2008 like inflation in fuel, food, and other commodities that are needed cheaply to keep the recovery humming.

So, yeah, I think Krugman is wrong this time.  The Fed needs to start laying off the QE and let rates float up by a point or so and let the economy slowly recovery and let markets begin to properly allocate capital (rather than forcing them to allocate the capital due to capital flooding).  Its not 2008, 2009, or 2010 anymore.  The economy is much stronger now (thanks in part to Fed policies), but I fear they are beginning to overwater the plant.  I think the market needs unimpeded clarity so that companies  and capital venture firms can accurately identify market conditions and move on to fund new projects (not just prop up old assets).


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Re: Krugman: "Depression Conditions" continue in the US
« Reply #2 on: February 04, 2013, 02:43:15 AM »
^^^Agreed.  Fed policy is directing money at assets, not investment in expansion, and it was an asset bubble that did get us into this mess into the first place (not saying that we are in a bubble, but we are not "recovering" in the way we should...i.e. income and employment growth).
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Re: Krugman: "Depression Conditions" continue in the US
« Reply #3 on: February 04, 2013, 09:51:15 AM »

Ben Bernanke's Quantitative Easing: The Monetary Policy Of The Adolescent

 For the naïve mind there is something miraculous in the issuance of fiat money. A magic word spoken by the government creates out of nothing a thing which can be exchanged against any merchandise a man would like to get. How pale is the art of sorcerers, witches, and conjurors when compared. – Ludwig von Mises

Chairman of Federal Reserve Board Ben Bernanke speaks during a news conference September 13, 2012 in Washington, DC. The Federal Reserve announced it will purchase additional agency mortgage-backed securities at a pace of $40 billion per month.

With the economy continuing to limp along, the Federal Reserve leaked to the Wall Street Journal last week its intent to further “stimulate” the economy in 2013; this after announcing a third round of quantitative easing (QE) in mid-September. The forward implications of such a move include currency depreciation, price increases in commodities such as oil, and a continued flow of limited capital into the hard, commoditized assets least vulnerable to the dollar’s decline.

  The naiveté of the Bernanke Fed’s reasoning would be funny if it weren’t so sad, and if it didn’t bring with it such negative consequences for real people. The case for its initiatives is based on a belief that mass creation of the “ticket” that is money will somehow produce economic growth. This is how an adolescent thinks, to borrow a line from frequent reader Brent Rice, and from a column on the Fed a little ways back by the Wall Street Journal’s Robert Pollock. Parents often tell their children that “money doesn’t grow on trees,” but that’s exactly the assumption on which the Bernanke Fed is operating.

Money without capital. Credit derives from the productive activity of households and businesses when they exchange the fruits of their efforts for money; as in tickets. By banking those tickets, they place capital at the disposal of those who can use it to fuel the economy.

Fed thinking, inexcusably, has left the production side of these linkages out of the equation. QE creates new money-tickets out of nothing and deposits them in the banking system in return for interest-bearing assets. Its actions create no new capital, and cannot add anything to the circulation of capital through the economy. The entire increase in reserves that the banking system has obtained from the Fed’s actions since 2008 still sits, idle and identified as “excess,” on banks’ balance sheets.

Empirical evidence reveals that new money creation leads directly to devaluation of the dollar. That’s already been a visible result of the Fed’s actions. The Fed is mistaken to presume, as a child might, that money is wealth. By producing vast quantities of it, backed by no real economic activity, it has reduced the meaning and value of each new and pre-existing ticket. In the four years since QE-1 was announced in the middle of the financial crisis, the gold value of the dollar has sunk more than 50 percent.

An inverse relationship between the issuance of paper by the state and the hard-currency value of that paper has been recognized for centuries, and it can be observed in U.S. history. Though the quantity of new money created in recent years is beyond precedent, there was already a longstanding inverse correlation between the monetary base and inflation, expressed in terms of official indices as well as gold.

Policymakers have been captured by the adolescent fantasy that money can be had free of labor. In reality, the greenback has value only to the extent that financial markets judge it to be a reliable store of that value. By divorcing money creation from the productive economy the Fed has reduced the markets’ trust in the role of paper money as a future store of value and medium of exchange. It has devalued the dollar.

Children seek to get their hands on as many dollars as they might in return for doing very little. Briefly dreaming of counterfeiting dollars in order to have more of them to spend, they learn from adults that private money creation is against the law. Later they come to understand that, if printing money by itself were enough to boost the economy, counterfeiting would be legal and widely encouraged.

Money and economic vitality. Investors do not ask themselves often enough how the economy’s producers will logically respond to the Fed’s childlike ways. In the real economy, our individual and collective labor and production is the source of our demand, and we therefore produce to attract as much income as we can in return. But if money is depreciating, the incentives for work and the mutual exchange that is the goal of work are compromised. Consider a contractor who does kitchen remodels. Why remodel a kitchen for $25,000 if the eventual payment for services rendered will come back in devalued dollars? An environment of unsound money fosters disharmony in production and trade. That is sand in the wheels of the economy.

After that, there are quite simply no companies and no jobs without saving. Someone, somewhere, must delay consumption and place part of his or her income with a financial intermediary in order for there to be credit for businesses eager to grow. In quantitative easing, the Fed acts as though credit can be created simply through low interest rates, and that no business or startup will go wanting. Near explicit in the Fed’s rationale is the charitably juvenile assumption that saving is superfluous when it comes to credit, that savers are almost irrelevant when the central bank is ready, willing and able to create dollar credit out of thin air. This is the stuff of economic fabulists, and should horrify us all considering the world’s foremost central bankers actually believe what is so plainly absurd.

One of the Fed’s QE goals is to drive up stock prices, at which point newly flush stockholders are supposed to exchange their shares for cash in order to spend the proceeds on consumer goods. Here too, the role of production and exchange is ignored in the belief that financial wizardry can take its place. Commentators point to the 2.4 percent advance in stock prices that took place in September, anticipating and following the announcement of QE-3 on September 13. They have paid less attention to the fact that the price of gold advanced by more (7.7 percent) in the same time frame. Investors should not need to be reminded that, over the four years during which QE-1 and QE-2 were at work, the S&P 500 is up little while the price of gold has doubled. In short, investors have lost ground since QE began; any increase in the dollar value of the S&P having been more than fully erased by dollar devaluation.

Money and saving. Missed by our central bankers is the fact that we stand on the shoulders of parsimonious giants. Past saving has led to the creation of the cars, planes, computers and medical innovations that make our lives more productive, easier, and healthier. The message from a policy of zero interest rates and devaluation to those whose prudence might otherwise fuel future production, and with it a true multiplication of credit, is that saving is for fools. Better to consume now and reduce the capital stock. Fed policy does not reward thrift; and worse, it results in dollars that buy even less down the line.

That’s how young people view thrift similarly. Unformed in terms of experience yet full of wants, they spend with abandon until they realize that consumption not only leaves them penniless, but puts bigger-ticket items out of long-term reach. They first require disciplined thrift.

Prodigality weakens the individual. We know that rampant consumption on its best day empties our pockets, and on its worst day will reduce us to beggary. Our government lacks that insight. Sadly, the Fed acts to nullify the lessons about saving that we learn as children. Spend with abandon, because “in the long run we’re all dead.”

Just as a lack of thrift compromises the economic freedom of the individual, spread over the economy the Fed’s attempt to stimulate consumption leads to hardship for all, followed by reduced production and, as a result, a reduction in society’s standard of living. The drivers of economic advancement include thrift, sound money in exchange, and future production opportunities fueled by capital from the fruits of past enterprise. We can ill afford to blunt them.

Money and the reputation of the Fed. Childhood is a dress rehearsal for adulthood, an opportunity to begin to learn from past mistakes. But the Fed’s actions are those of a child placed in the driver’s seat of the family car. On the bright side, right now the U.S. economy is the victim of central bank errors that are happily alerting the electorate to the damage that a quasi-independent monetary authority can do.

The silver lining amid these troubled times is that the Bernanke Fed is being discredited right before our increasingly adult and wary eyes. The country’s prolonged malaise will be the undoing of the Fed as we know it.

Indeed, largely hidden ahead of the looming failure of a new round of quantitative easing may be relief from this most destructive of governmental entities. The unflattering light to which the Fed is being exposed by its own flashlights points to eventual reform that will ensure, at least until these lessons are once again forgotten, great restraints on the destructive powers of our central bank. In time, the correction of today’s mistakes will contribute to our economic revival.


We are playing a dangerous game with our currency.  Like the debt issue, we are selling out our children.  This is far from "the greatest generation".  This is "the selfish generation".
« Last Edit: February 04, 2013, 09:58:29 AM by NotNow »
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Dog Walker

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Re: Krugman: "Depression Conditions" continue in the US
« Reply #4 on: February 04, 2013, 12:52:32 PM »
Go back and read some of the Forbes editorials from 2007-2008.  It will show you what good predictors of the future of the economy their editors are.  The answer is not good at all.

What's happening in Europe right now is showing that Krugman is right about this one.  The middle of a recession is not a good time for austerity and "budget balancing".
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Re: Krugman: "Depression Conditions" continue in the US
« Reply #5 on: February 04, 2013, 01:54:15 PM »
I don't think the Forbes article or NN is trying to advocate for austerity, but rather a tightening of current Fed monetary policy. 

I think very highly of Krugman and he was correct during a good deal of the crisis.  However, it is not hard to recognize the marginal benefit of continued bond purchases by the Fed has had ever diminishing returns and if left unchecked, such continued purchases are going to create inflationary headwinds for the economy (some immediate and some 5-10 years down the road when current bonds go to roll over).

The federal government clearly shouldn't engage in austerity right now.  You are right regarding any fiscal tightening, as Europe is learning a hard lesson right now.  However, the Fed needs to play a  delicate balancing act here and begin to reduce the money supply it is flooding into the economy.  As clearly seen by recent asset inflation, we don’t have a problem with money supply.  Rather, we have lingering problems with the slow velocity of money transfers.  The only way to increase such velocity is by expanding investment and economic growth.  As Simms pointed out, the money is flowing into existing assets and not new investment.

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Re: Krugman: "Depression Conditions" continue in the US
« Reply #6 on: February 04, 2013, 02:54:01 PM »
In a deflationary economy, which we are in now, you have too many goods and assets being chased by too few buyers and investors.  Why should I open more stores or expand my factory when people have slowed down buying stuff?

We should have revived the CCC and the WPA and put more people to work to put more cash into the consumer economy and reduced people's fear of being laid off from their job.  Since that didn't happen, the Fed is doing what it can to prime the pump.
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Re: Krugman: "Depression Conditions" continue in the US
« Reply #7 on: February 04, 2013, 03:05:49 PM »
Funny enough, just saw the follwoing article on Yahoo showing how large companies like Ford and Boeing are having to put more money into their Pension funds (and not new investments) in order to secure the pension funds will deliver the correct return rate when needed.  In short, they are having to overfund pensions due to the prolonged exceedingly low interest rates by the Fed.


Low Rates Force Companies to Pour Cash Into Pensions

Ford Motor Co. (F) expects to spend $5 billion this year shoring up its pension funds, almost as much as the auto maker spent last year building plants, buying equipment and developing new cars.

The nation's second-largest auto maker is one of a who's who of U.S. companies pouring cash into pension plans now being battered by record low interest rates. Verizon Communications Inc. (VZ) contributed $1.7 billion to its pension plan in the fourth quarter and—highlighting companies' sensitivity to this issue—Boeing Co. (BA) now reports "core earnings" to separate out pension expenses.

"It is one of the top issues that companies are dealing with now," said Michael Moran, pension strategist at investment adviser Goldman Sachs Asset Management.

The drain on corporate cash is a side effect of the U.S. monetary policy aimed at encouraging borrowing to stimulate the economy. Companies are required to calculate the present value of the future pension liabilities by using a so-called discount rate, based on corporate bond yields. As those rates fall, the liabilities rise.

Of course, low interest rates also help companies. Ford, for instance, can borrow money cheaply and use it to offer cut-rate loans or other discounts to help sell its cars. Ford borrowed $1.2 billion to contribute to its pension.

When interest rates rise again, the pension shortfalls should narrow and could even become surpluses. But when that will happen is difficult to predict. The Federal Reserve has committed to keeping rates low for another two years at least.

Pension plans became popular in the U.S. in World War II as a means of compensating workers rather than using pay raises.

As the workforce grew, these pension plans grew enormous. They started to fall out of favor because of their large balance sheet liabilities and costs in the 1980s. Companies shifted from defined benefit plans—those that manage the investment portfolio and guarantee set payments to retirees—to defined contribution schemes like 401(k) retirement savings plans, where the retirees are responsible for their own investment decisions.

Jeff Chiappetta, 66, a retired plant manager at Chrysler Group LLC, watched a portion of his pension designated for management-level workers disappear in Chrysler's 2009 bankruptcy proceedings. He watches keenly what is happening to pensions.

"Luckily, the majority of [my pension] made it through bankruptcy," he said. "Do I feel lucky to have grown up in an era where I had a pension? Definitely. But can that be sustained? It looks like it can't."

Today, many of the companies contributing to the pensions are struggling with the costs but don't offer defined benefit plans to new workers.

According to the most recent statistics by the U.S. Department of Labor, the number of defined benefit plans fell to 46,543 in 2010 from 103,346 in 1975. Many of the largest companies are still carrying the funds on their books. Consulting firm Towers Watson (TW) tallies 584 of the Fortune 1000 companies had defined benefit plans at the end of 2011, down from 633 in 2004.

Andrew Liveris, chief executive of Dow Chemical Co. (DOW), which posted a loss of $716 million for the fourth quarter, said the company faces a "massive pension headwind" because of the change in the discount rate that added $2.2 billion to its pension liability. Pension expense this year is going to rise between $250 million and $300 million.

"Other companies have got it, and so we're not alone, but clearly those are big numbers for us," Mr. Liveris said.

Overall, pension plan funding fell by $79 billion last year at about 400 large companies with defined benefit plans, according to preliminary estimates by Towers Watson. The total estimated deficit at those firms now stands at $418 billion, 23% more than in 2011, and the highest since the firm began tracking.

Companies, which by law must keep defined benefit pension plans funded within a certain period of time, are taking a variety of paths to address the issue. They are buying out pensioners, unloading pension accounts to third parties and upping their contributions.

Ford's unfunded liability expanded to $18.7 billion at the end of 2012, despite a series of efforts by the company to get a handle on the problem. "It has got to be a problem for any large company that has a defined benefit plan," said Ford Chief Financial Officer Bob Shanks.

Ford embarked on a pension buyout plan for salaried workers, which knocked out $1.2 billion in liabilities through year-end, and it will continue trying to buy out workers this year.

Ford also contributed $3.4 billion into the funds—$2 billion more than legally required.

In the end, however, falling interest rates in the U.S. and Europe, where Ford has had operations in England for 100 years, erased its gains. Ford's pension plans had strong real-world returns—up more than 14%. But the company had to lower its discount rate to 3.84% from 4.6%, which created a bigger liability on its balance sheet.

Ford, intent on hitting a goal of getting to a fully-funded pension by mid-decade, is committing to spend $5 billion on its pensions this year. It is using $1.2 billion in borrowed funds to pay into the accounts, as well as cash on hand.

In the U.S., Ford and its Detroit rivals, General Motors Co. (GM) and Chrysler fought with the United Auto Workers union for years to reduce retiree health-care expenses. All three U.S. companies were able to off-load the expenses to union-run trust funds. But the bulk of union pension plans remained the responsibility of auto makers, even surviving the government-backed bankruptcy proceedings of General Motors and Chrysler. Ford didn't seek bankruptcy-court protection.

GM has off-loaded its entire salaried worker pension fund, which represents about 110,000 retirees, to Prudential Insurance Co. Even so, GM still has a much larger union worker fund that was underwater last year and is expected to be underfunded as of the end of 2012.

Boeing also is pouring money into its pensions. The Chicago aerospace company plans to spend $1.5 billion in cash to shore up its fund in 2013 after putting in $1.6 billion last year. The fund currently stands at 26% below the liability.

The pension's drag on earnings is so great, Boeing started to break out "core earnings" for investors to give a snapshot of the business that excludes its pension expenses.

"The continued decline in the pension discount rates, driven by the unprecedented low interest rate environment, has caused a significant noncash increase in our pension expense," said Greg Smith, Boeing's CFO.

Telecommunications companies AT&T Inc. (T) and Verizon Communications both reported big hits to recently released fourth-quarter results because of the effect of low discount rates on their pension plans.

AT&T posted a loss of $3.9 billion, but most of the loss came because the company lowered its discount rate, and therefore increased its liability. Last fall, AT&T said it would contribute $9.5 billion in company stock to its funds in an attempt to shore them up.

Verizon, which took a $4.4 billion charge for pension valuation changes and other expenses, took a path similar to GM last year. It sent $7.5 billion in pension funds to Prudential to manage.

While pensions may be an anchor on capital for many companies, for hundreds of thousands of workers, they represent deferred pay and a commitment that kept them working at a particular company when other offers were dangled.

The promise of a pension kept Weldon Gorlich, 80, working for Ford for 30 years as a tool maker at two plants in New Jersey that are no longer open.

He had a chance to move to General Motors, but wanted to get his pension and stayed. "That's very true, that and the medical benefits," said the Florida resident.

"I thank God every morning to wake up with what I have."

—Jon Ostrowercontributed to this article.


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