Posts Tagged ‘Bond Vigilantes’

Not understanding how money works creates Constitutional Problems

July 8, 2011 26 comments

The 14th amendment argument has moved from the fringe to the mainstream.  In doing so, its highlighted the fact that understanding how money works is crucial to the proper execution of our government.

Laurence Tribe says the debt ceiling is perfectly constitutional.  Why?  Here is the core of his argument:

“This argument goes too far. It would mean that any budget deficit, tax cut or spending increase could be attacked on constitutional grounds, because each of those actions slightly increases the probability of default. Moreover, the argument is self-defeating. If it were correct, the absence of a debt ceiling could likewise be attacked as unconstitutional — after all, the greater the nation’s debt, the greater the difficulty of repaying it, and the higher the probability of default.”

Note that his misunderstanding of money drives his entire argument that the debt ceiling is constitutional.   He clearly hasn’t read solvency and value, insolvency and debasement.    The U.S. is never in danger of insolvency.   We cannot go broke.  If you doubt that article, you need to know the the mainstream understanding of Government Budget Constraints is based on a belief in ghosts.

So his arguments based on the possibility of the U.S. not paying its debts are wrong.  The first argument is wrong because spending more, or lowering taxes does not slightly increase the possibility of default, because we cannot default.  The second argument is wrong because it is not harder to repay the debt if the debt gets higher for the United States.  The 14th amendment argument isn’t self defeating.

I hate to call a prominent Harvard professor clearly and undisputedly wrong.  But he is. Lawrence Tribe is wrong. He doesn’t understand money and sovereign money, so his legal arguments and theories are incorrect.

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Debt Ceiling Unconstitutional

July 5, 2011 34 comments

This idea has legs.  Tom Hickey pointed out a few weeks ago that the idea was getting a bit of attention.   I thought that would be the last we see of the idea.

But people are looking at this closely.

Brad Delong calls it Plan B.

Firedoglake hears rumors that Tim Geithner is thinking about this option.

Mike Konczal seems to think it is viable.

I sure hope someone keeps this meme going.

[Update from Tom Hickey:  People are keeping this going, and prominent conservatives are signing onto the idea.   Plus, I forgot that this was THE 14th amendment.  The 14th is the the one that abolished slavery, and made it clear that traitors to our great nation should not be allowed to hold any government power in the U.S.

Traitors…hmmm.  Why would opposing paying the debts of the United States be so closely associated with opposition to human freedom, and being a traitor to the United States?  It’s almost as though opposing paying government debt is strongly associated to being a traitor to the United States.]

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Peak Grover Norquist?

June 7, 2011 1 comment

Grover Norquist is likely to be far less powerful.  Here is something from my last post that I want to expand a bit.

For example – Grover Norquist is currently a very powerful person.  But as it becomes widely recognized that Grover Norquist believes in unicorns, he will become much less powerful.  His entire career is built on making people believe something that cannot be true.  Take away the potential for default, and the obsession with trying to make the government smaller through a U.S. default does not make sense at all. It’s like going around claiming the sky is falling or something equally preposterous. Grover Norquist will be a much less powerful person in the near future.  He has reached his apex of power, and in 5 years, his message will seem anti-U.S., because his basic framework will be recognized as factually incorrect.

It is impossible to lead a fight against taxation as being bad when the most people accept that the government is not spending constrained, but rather inflation constrained.

The U.S. government is not spending constrained and this idea is rapidly becoming conventional wisdom.  When John Boehner starts to say “The U.S. cannot default.”, the days of an anti-government, anti-spending crusader are numbered, no matter how funny the guy is.

When the debate moves to inflation rather default, the idea that lower taxes are usually good will become far less contentious.  This too will be accepted as conventional wisdom.

Mr. Norquist’s major idea is to keep his party pushing for tax cuts, but to blame democrats for spending. But in the new world where everyone recognizes default is impossible, the backlash from spending will become much smaller.  His entire strategy to push for republican dominance over the political process loses is animating force, because the backlash from spending won’t be that great.

So he changes from a visionary, to a hard money crank.   But that doesn’t sell very well in the homeland over any 10 year period.

Bond King Bill Gross uses a false story about frogs to promote a false story about bonds

June 2, 2011 7 comments

I was unable to find a picture of a real world frog accepting its boiling fate. I had to use a picture of a plush toy to illustrate my sophisticated point about financial markets and economic reality.

You’ve probably heard about the recent missive from bond king Bill Gross, the largest bond fund manager in the world.  He compares bond investors to boiling frogs.  We’ve all heard the story of the boiling frogs, how they will just sit in a pot of gradually heating water until they perish from the heat.

Unfortunately, this well known story about Boiling Frogs is not true at all.

Here’s Paul Kedrosky at Bloomberg pointing this out:

“This is me being more than a little pedantic, but I’m picking a personal nit here. In his latestmissive, PIMCO bond guy Bill Gross tells the following well-worn story:

Put a frog in a kettle of boiling water and he’ll jump out faster and further than any of those blue ribbon winners at the Calaveras County jumping frog contest. Put him in a pot at room temperature, however, slowly turn up the temperature to boiling, and you’ll have frog legs for dinner. This latter, more unfortunate toad temporarily adapted to his external environment, which seemed like a practical thing to do, until – well, until he reached 212° at which point he was cooked.

Gross goes on to suggest that bond investors are acting the same way, that the environment is becoming more hostile and yet they wait and are steadily being boiled, so to speak. Well, Gross must be the last person on earth who still thinks that old boiled frog story is true, because it isn’t. Frogs don’t behave that way, even if it’s lovely fun to pretend they do.”

Ha!  Bill Gross is comparing the behavior bond investors to a behavior of frogs that doesn’t exist in the real world!  It’s almost like believing a story about insolvency that cannot exist!  Or believing in something we can never know!  Or denying that Debt to GDP and Bond Yields are negatively correlated!

I’d like to point out that I can hardly wait until Bill Gross is the last person on earth to believe that government deficits cause higher bond yields.  We will all be much better off.

BTW, I said a a month ago Bill Gross will be the one to push bond yields down to the post crisis lows when he has to cover his huge mistake in getting rid of Treasuries.  Mike Norman’s picked up on it.

The answer to Bill Gross’s question of “Who will buy bonds when the Fed doesn’t?” is: Bill Gross

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Hey Bond Vigilantes: You are wrong

June 2, 2011 7 comments

The empirical data has an anti-Bond Vigilante bias

What are these guys smokin’?  You’d think they would at least try to see if there was any relationship between what they think and the real world.

But they didn’t even bother getting off the couch after smoking that bong hit of fine neo-classical.  That’s the only conclusion you can draw from looking at this chart.  They didn’t even bother to look at the data.  They didn’t do the reading.

Over the last 60 years, there is a very, very strong correlation between total government spending and bond yields.  I started off with this simple, easy to follow chart. It shows the relationship between total spending as a % of GDP, and how much the U.S. government pays investors to “borrow” the money.

Only, this strong relationship just happens to be the exact opposite relationship that 99% of financial people think is the case.  Higher levels of government spending have resulted in lower bond yields for the last 50 years.  Lower levels of government spending resulted in higher bond yields over the last 50 years.  The data isn’t really disputable.

It turns out we can use math, too.  According to R, this correlation is strongly negative.  It’s -.60.  The R squared is significant at the 95% level.

But I am not here to geek out.  I am here to slam Bond Vigilantes.  These people are wrong.  They do not know the historical record, they are empirically wrong.  We have 60 years of data easily available, and more if you want it for the United States.  They could look up these numbers very easily from FRED.

Bond Vigilantes are Wrong over Generations of data

We have a cool chart that shows how crazy these people really are.  I chose Niall Ferguson as the poster boy, because of his insulting rant about how Austerity is working for the U.K and destroying the value of the U.S. Dollar.  His only problem is the anti-Bond Vigilante bias to the facts: The U.K. is rapidly falling into a recession caused by government austerity measures.  Mr. Ferguson teaches history, but doesn’t seem to know the most obvious relationships between government spending and the real world.

If you don’t know Niall Ferguson, he is a Harvard professor of economic history.  He is important and influential person, and he’s objectively wrong over a period of generations.

Does this mean we should spend, spend, spend?  Of course not. Remember, Past performance is not indicative of future results.

“It is, instead, a grotesque abdication of responsibility.”

May 30, 2011 4 comments

There are 44 Million People on Food Stamps in the Richest Country in Human History

Paul Krugman hits another one out of the park today.  Talking about the number of people that are unemployed, he says this:

“So someone needs to say the obvious: inventing reasons not to put the unemployed back to work is neither wise nor responsible. It is, instead, a grotesque abdication of responsibility.”

It’s true.  It’s a tragedy of vast proportions that we allow this much unemployment.  I shudder at the number of families that are being broken up now – today, as I write this – due to the mom and dad fighting about money.

It’s actually even worse than Mr. Krugman thinks.  The mainstream economics profession makes a huge mistake when it assumes the no-Ponzi assumption is knowable. The no Ponzi assumption is the beating heart of the Government Budget Constraint, and the government budget constraint is the reason bond vigilantes are rumored to exist, and the reason James Carville wants to come back as the bond market.

But mostly, the Government Budget Constraint is why we allow force tens of millions of people to live lives of worry and misery rather than as productive adults.   And the Government Budget Constraint is wrong.  It’s frackin’ wrong.

This is not  just some academic argument – this bullshit assumption makes hundreds of millions – even billions –  of people far more miserable than they need to be.  People are suffering because the economic profession assumes something to be true which is worse than false.

With the no-Ponzi assumption in place, there is and must always be a tradeoff between inflation and putting people to work.  And the no Ponzi is wrong.  It’s frackin’ wrong.

We can put people to work without worrying about inflation.  This is truly a “grotesque abdication of responsibility.”

[Update:  Tom Hickey points out that Greece is likely to give up sovereignty to appease creditors.  Let’s hope we are witnessing the “blow-off top” of this horrible non-idea.]

Can a Sovereign Debt Jubilee Work for the Eurozone?

May 28, 2011 7 comments

This is one of the most interesting articles I’ve read about the crisis, How to destroy the web of debt.

The article makes a series of bold claims:

  • The Eurozone could reduce its overall debt to GDP ratio from 40% to 15% by canceling interlinked debt.
  • Ireland could reduce its debt/GDP from 130% to under 20%
  • 6 countries – Ireland, Italy, Spain, Britain, France, and Germany – can reduce their debt/GBP by over 50%
  • France can be virtually debt free, with 0.06% debt/GDP

In real world terms, what would be done is make a trade between countries for each others debt, and then just cancel the debt because in some real way, you can’t owe money to yourself.  So Ireland would trade with Greece – Ireland would give Greece its debt back in exchange for Greece giving Ireland its debt back.

Image from NYT

In some cases, it would require a three way trade. For example, look at the interaction of Ireland, Portugal, and Spain.  Portugal could reduce its debt by $80bn – or over 25% – just by netting out the debt it owes to Spain and Ireland with the debts owed among the countries.  Ireland would get a $40 bn reduction.

These are not trivial amounts of money.

All of this relies on the realization that the taxpayers are both the ultimate owners of the debt and the ultimate debtors.  German taxpayers owe a bunch of money to German pension funds, which are owned by German taxpayers.  The same idea can be applied across borders.

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