Gavekal "France is heading for a depression"

[jpatter666]

Re: Gavekal "France is heading for a depression"

Yea the British were running around the US, eating dinner at the whitehouse and then burning it to the ground.

Only *after* France was brought to heel (again) -- War of the Hundred Days. Burning of Washington was 1814. Living here, I'm well familiar with *that* fact.

http://en.wikipedia.org/wiki/Burning_of_Washington

Peace was eventually made, then a exclamation point was put on it by Andy Jackson in New Orleans. Interestingly, I've seen a revival of interest in Jackson and his battles with the Bank of the United States (precursor to the Fed).

[GRG55]

Re: Gavekal "France is heading for a depression"

...Burning of Washington was 1814. Living here, I'm well familiar with *that* fact.

http://en.wikipedia.org/wiki/Burning_of_Washington

...

An early example of "broken window" economics apparently :-)

[ProdigyofZen]

Re: Gavekal "France is heading for a depression"

Only *after* France was brought to heel (again) -- War of the Hundred Days. Burning of Washington was 1814. Living here, I'm well familiar with *that* fact.

http://en.wikipedia.org/wiki/Burning_of_Washington

Peace was eventually made, then a exclamation point was put on it by Andy Jackson in New Orleans. Interestingly, I've seen a revival of interest in Jackson and his battles with the Bank of the United States (precursor to the Fed).

I am a big fan of Jackson; " Gentleman! I too have been a close observer of the doings of the Bank of the United States. I have had men watching you for a long time, and am convinced that you have used the funds of the bank to speculate in the bread stuffs of the country. When you won, you divided the profits amongst you, when you lost, you charged it to the bank.... You are a den of vipers and thieves. I have determined to rout you out, and by the Eternal, (bringing his fist down on the table) I will rout you out."

Obviously not everything he did was great, one of the big ones, the Trail of Tears but thats in hindsight. In that day and age attitudes were different.

[vt]

Re: Gavekal "France is heading for a depression"

Not just France
Try this GaveKal Report for more illumination. It's by Charles Gave.

GDP As A Concept: Misleading If Not Outright Criminal

If I receive a research piece by an economist who starts by giving me his “forecast” of the GDP for the next year or two, or who writes that the government should spend more money to "avoid a decline" in the GDP, or even worse, tells me that if the government starts cutting, GDP will collapse and that it would be a disaster, I stop reading immediately. Not worth my time.

GDP is a measurement system devised so economists could avoid thinking. It is misleading, if not outright criminal, because it treats the inputs of the private and public sectors as if they were equal, when in fact they are two totally incompatible.

The private sector contribution to the economy is judged using the marginal (or subjective) theory of value. It is based off of market transactions that only occur when the trade is subjectively determined to be mutually beneficial for both willing parties. Such free market activity produces meaningful price signals that facilitate the astute and profitable allocation of scarce resources.

By contrast, the public sector contribution is judged using a labor (or cost) theory of value. Since no free market transactions occur when the government is involved, the only way to judge public sector growth is through government expenditures, such as wages for public employees or the cost of a bridge to nowhere.

The Austrians taught us a century ago that value is subjective, and that the cost -based approach to value is wrong. It has led to historic disasters such as the Soviet Union, and yet we still use it.

If the private sector grows, the public sector can ride its coattails, provided it grows by less (UK from 1978 to 2002). If the public sector starts expanding faster than the private sector, then the private sector has to stall or shrink (the UK under Gordon Brown). And the explanation is simple: raising taxes to feed a bloated public sector amounts to a reduction in the amount of money available for the private sector to invest “astutely.” The result always and everywhere is lower private sector growth and from there a lower growth rate for the entire economy (see Sweden from 1980 to 1992 for a perfect example of what not to do and Sweden from 1993 to today for a perfect example of what to do). GDP, by its very construction, cannot mean anything, because it has no ability to capture the opportunity lost through public crowding-out.

If government has been wasting money (unlikely of course, but I remember a few examples), and if the politicians decide to cut government spending, then GDP contracts and economists respond with howls of despair regarding about the failure of the government to foster "GDP growth" (see the letter sent by 364 economists to Mrs. Thatcher in 1981 for a perfect example of this very smart point of view).

In reality, a decline in government spending can make people richer even while it drags down GDP, the reverse also being true of course (see France in the last ten years for an example of the bad outcome or Canada after 1994 for a good example). This is yet another factor conventional GDP measures cannot capture—GDP being a flow based concept does not take into account the deterioration of the balance sheet of the country.

Take France, for example, where for years politicians borrowed money instead of raising taxes. Government debt has tripled since 1992, and the size of government as a share of GDP has expanded by 12%; this has led to a decline in the French structural growth rate from 2.5% to less than 1% per year.

Or take Spain, which is in a debt trap today, as we all know. Industrial production is down -33% from the peak reached in 2007, unemployment has moved from 8% to 25% with the youth jobless rate at more than 50%, house prices are down 25% officially (and probably more like 40% in reality), the banking system is broke, the government debt ratio has expanded from 34% of GDP to more than 80%. A total disaster, by any measure, and yet GDP is down from the peak a remarkably low –6.5%.

What is the meaning of a debt to GDP ratio, if all the GDP is government spending financed by debt? This is almost hilarious. The reality is that GDP is an unthinking measurement system that favors an ever increasing growth of the public sector, and this is its only justification.

As the Swedish economist Knut Wicksell showed, long-term rates follow the structural growth rate of the economy. A declining growth rate has, for example, led to lower interest rates in France—though the debt- servicing costs have remained at virtually the same level for the last twenty years. And only the servicing of the debt, not its absolute value, is entered as an expense in the GDP calculations, the politicians have had the most marvelous free lunch that the world has ever seen.

Rising public spending leads to lower growth which leads to lower cost of money. This lasts as long as the country does not move into a debt trap...but the main motto of irresponsible politicians has always been "après moi le deluge".

Money managers should stop paying any attention to these numbers. Somebody has to say that the emperor is naked.

So what should investors do? Unite!

Which takes us to asset prices and portfolio construction. Almost all advanced-economy governments are following Keynesian policies to pump-prime growth. This is going to have a profound impact on relative and absolute prices of assets.

In an economic system there are two kinds of assets:
1. Those representing sustainable value creation by the private sector, with generally come in a very limited supply (nobody likes to lose ownership).
A flow based measurement system, like GDP, takes no account of how government weight in the economy can effect the stock of wealth
Does the –6.5% fall in Spain’s GDP from the pre-crisis peak reflect the reality of the collapse in property, credit and industrial production, or the surge in unemployment?

2. Those representing a promise to repay a fixed sum at some time in the future. This is a market dominated by the government. Here we can see a growing supply in the future as far as the eye can see. And as we all know, a Keynesian system can work only if the debt is either never repaid or repaid in a currency which will have lost most of its value by the time of the repayment (the “euthanasia of the rentier” dear to Lord Keynes).

Almost no new assets issued by the governments currently are used to invest into productive assets which could increase the ability to repay these debts in the future but are “printed” simply to bail out failed companies that should die, or to finance social transfers to a population getting older and older, and thus totally unable to repay these debts at the end. Considering that such assets are “riskless” makes me wonder.

Any reasonable human being should have zero assets in government bonds in the Western world (with a few exceptions such as Canada or Sweden) and all his assets in equities. But of course the governments are fighting back through laws and regulations that amount to legal theft, as they force savings into “riskless” (worthless) assets issued by them while the central banks do all they can to help.

The conclusion is thus very simple.
• Marx used to say: “Workers of the world unite!” This failed
• The Keynesians are saying: "Civil servants of the world, unite!" This will also fail.
• What any serious economist should say is: "Savers of the western world unite... and get the hell out of your bond markets, while you can."

Since a savers' strike was and remains the only way to bring the politicians to reason (as in the UK in 1977), then we might as well be the first ones to strike. The fight is going to be long and painful. One more reason to start now!

[EJ]

Re: Gavekal "France is heading for a depression"

Not just France
Try this GaveKal Report for more illumination. It's by Charles Gave.

GDP As A Concept: Misleading If Not Outright Criminal

If I receive a research piece by an economist who starts by giving me his “forecast” of the GDP for the next year or two, or who writes that the government should spend more money to "avoid a decline" in the GDP, or even worse, tells me that if the government starts cutting, GDP will collapse and that it would be a disaster, I stop reading immediately. Not worth my time.

GDP is a measurement system devised so economists could avoid thinking. It is misleading, if not outright criminal, because it treats the inputs of the private and public sectors as if they were equal, when in fact they are two totally incompatible.

The private sector contribution to the economy is judged using the marginal (or subjective) theory of value. It is based off of market transactions that only occur when the trade is subjectively determined to be mutually beneficial for both willing parties. Such free market activity produces meaningful price signals that facilitate the astute and profitable allocation of scarce resources.

By contrast, the public sector contribution is judged using a labor (or cost) theory of value. Since no free market transactions occur when the government is involved, the only way to judge public sector growth is through government expenditures, such as wages for public employees or the cost of a bridge to nowhere.

The Austrians taught us a century ago that value is subjective, and that the cost -based approach to value is wrong. It has led to historic disasters such as the Soviet Union, and yet we still use it.

If the private sector grows, the public sector can ride its coattails, provided it grows by less (UK from 1978 to 2002). If the public sector starts expanding faster than the private sector, then the private sector has to stall or shrink (the UK under Gordon Brown). And the explanation is simple: raising taxes to feed a bloated public sector amounts to a reduction in the amount of money available for the private sector to invest “astutely.” The result always and everywhere is lower private sector growth and from there a lower growth rate for the entire economy (see Sweden from 1980 to 1992 for a perfect example of what not to do and Sweden from 1993 to today for a perfect example of what to do). GDP, by its very construction, cannot mean anything, because it has no ability to capture the opportunity lost through public crowding-out.

If government has been wasting money (unlikely of course, but I remember a few examples), and if the politicians decide to cut government spending, then GDP contracts and economists respond with howls of despair regarding about the failure of the government to foster "GDP growth" (see the letter sent by 364 economists to Mrs. Thatcher in 1981 for a perfect example of this very smart point of view).

In reality, a decline in government spending can make people richer even while it drags down GDP, the reverse also being true of course (see France in the last ten years for an example of the bad outcome or Canada after 1994 for a good example). This is yet another factor conventional GDP measures cannot capture—GDP being a flow based concept does not take into account the deterioration of the balance sheet of the country.

Take France, for example, where for years politicians borrowed money instead of raising taxes. Government debt has tripled since 1992, and the size of government as a share of GDP has expanded by 12%; this has led to a decline in the French structural growth rate from 2.5% to less than 1% per year.

Or take Spain, which is in a debt trap today, as we all know. Industrial production is down -33% from the peak reached in 2007, unemployment has moved from 8% to 25% with the youth jobless rate at more than 50%, house prices are down 25% officially (and probably more like 40% in reality), the banking system is broke, the government debt ratio has expanded from 34% of GDP to more than 80%. A total disaster, by any measure, and yet GDP is down from the peak a remarkably low –6.5%.

What is the meaning of a debt to GDP ratio, if all the GDP is government spending financed by debt? This is almost hilarious. The reality is that GDP is an unthinking measurement system that favors an ever increasing growth of the public sector, and this is its only justification.

As the Swedish economist Knut Wicksell showed, long-term rates follow the structural growth rate of the economy. A declining growth rate has, for example, led to lower interest rates in France—though the debt- servicing costs have remained at virtually the same level for the last twenty years. And only the servicing of the debt, not its absolute value, is entered as an expense in the GDP calculations, the politicians have had the most marvelous free lunch that the world has ever seen.

Rising public spending leads to lower growth which leads to lower cost of money. This lasts as long as the country does not move into a debt trap...but the main motto of irresponsible politicians has always been "après moi le deluge".

Money managers should stop paying any attention to these numbers. Somebody has to say that the emperor is naked.

So what should investors do? Unite!

Which takes us to asset prices and portfolio construction. Almost all advanced-economy governments are following Keynesian policies to pump-prime growth. This is going to have a profound impact on relative and absolute prices of assets.

In an economic system there are two kinds of assets:
1. Those representing sustainable value creation by the private sector, with generally come in a very limited supply (nobody likes to lose ownership).
A flow based measurement system, like GDP, takes no account of how government weight in the economy can effect the stock of wealth
Does the –6.5% fall in Spain’s GDP from the pre-crisis peak reflect the reality of the collapse in property, credit and industrial production, or the surge in unemployment?

2. Those representing a promise to repay a fixed sum at some time in the future. This is a market dominated by the government. Here we can see a growing supply in the future as far as the eye can see. And as we all know, a Keynesian system can work only if the debt is either never repaid or repaid in a currency which will have lost most of its value by the time of the repayment (the “euthanasia of the rentier” dear to Lord Keynes).

Almost no new assets issued by the governments currently are used to invest into productive assets which could increase the ability to repay these debts in the future but are “printed” simply to bail out failed companies that should die, or to finance social transfers to a population getting older and older, and thus totally unable to repay these debts at the end. Considering that such assets are “riskless” makes me wonder.

Any reasonable human being should have zero assets in government bonds in the Western world (with a few exceptions such as Canada or Sweden) and all his assets in equities. But of course the governments are fighting back through laws and regulations that amount to legal theft, as they force savings into “riskless” (worthless) assets issued by them while the central banks do all they can to help.

The conclusion is thus very simple.
• Marx used to say: “Workers of the world unite!” This failed
• The Keynesians are saying: "Civil servants of the world, unite!" This will also fail.
• What any serious economist should say is: "Savers of the western world unite... and get the hell out of your bond markets, while you can."

Since a savers' strike was and remains the only way to bring the politicians to reason (as in the UK in 1977), then we might as well be the first ones to strike. The fight is going to be long and painful. One more reason to start now!

I agree virtually word for word with David Gave's thoughts, philosophically. I have wanted to be in equities since 2000 when I got out of the equity markets. A gold and bonds portfolio has handily beaten stocks ever since.

But the reasons why this is so are not addressed by Gave. It's yet more as-if analysis, no matter how ideologically appealing.

The limitation is the Keynesian versus Austrian argument framework. Change that to finance/rentier economics versus production/profit economics and you have the basis for a rational discussion.

Yes GDP is now a nonsense concept but not for the reasons Gave explains. It's not because bureaucrats want to extract more in taxes from the private sector, it's because the economy has become too dependent on cash flows from asset price inflation, both directly from bond yields and indirectly via capital gains on asset price inflation. Asset price inflation is conflated with economic output that is profits generated by productive enterprises in the private sector.

Economies so structured have to be reflated in a particular way subsequent to an asset price collapse triggered by a liquidity crisis. Here's how the U.S. managed it.

Fed Funds rate target dropped from 5.25% to 1% in 2008 then target dropped and replaced by 0% to 0.025% min/max ranges.
Deficit spending increased from -$184B to -$1.3T annual rate. Remains at $1.1T four years later to close $1T output gap.




For historical perspective, the original bubble popping rate hike to 6.5% from 5% from 1999 to 2000 set the asset price deflation ball
in motion after the FIRE Economy began to produce massive asset price inflation starting in 1983.

Yes this did involve a Keynesian style increase in deficit spending. But Keynes never would have conceived of this sort of application of his theory. The idea of using public sector finance to reflate a property bubble would have never crossed Keynes' mind.

The relevant issue is the FIRE Economy portion of GDP rather than the Keynesian vs Austrian conception of private and public sector accounting. David Gave misses the whole point. Applying an Austrian cure to a FIRE Economy crisis is like bleeding a patient with a heart condition. The treatment may satisfy the doctor's penchant for tough love cures, but it's a 19th century treatment for a distinctly 21st century problem of elected officials and their central banks abetting asset price inflation via modern finance to generate GDP growth and all the political benefits that this artificial number bestows upon them.

[vt]

Re: Gavekal "France is heading for a depression"

So Keynesian won't work, and the Austrian method won't either. How will the Janszenian method get us out of this mess?

[GRG55]

Re: Gavekal "France is heading for a depression"

So Keynesian won't work, and the Austrian method won't either. How will the Janszenian method get us out of this mess?

http://www.amazon.com/Post-Catastrop...5689327&sr=8-1

[vt]

Re: Gavekal "France is heading for a depression"

I've read it a couple of times; hoping for an update Maybe a new edition?

[GRG55]

Re: Gavekal "France is heading for a depression"

I've read it a couple of times; hoping for an update Maybe a new edition?

Who knows. Maybe we are all destined to become nostalgic for those days of serial asset bubbles and "wealth creation"...

[patrikkorda]

Re: Gavekal "France is heading for a depression"

The relevant issue is the FIRE Economy portion of GDP rather than the Keynesian vs Austrian conception of private and public sector accounting. David Gave misses the whole point. Applying an Austrian cure to a FIRE Economy crisis is like bleeding a patient with a heart condition. The treatment may satisfy the doctor's penchant for tough love cures, but it's a 19th century treatment for a distinctly 21st century problem of elected officials and their central banks abetting asset price inflation via modern finance to generate GDP growth and all the political benefits that this artificial number bestows upon them.

I can't help but agree. Politicians and economists alike seem to think the economy is like a child. If the child shows up home late (crisis), then the remedy is to first feed the child and make sure he/she is okay (stimulus), followed by taking away his/her smartphone and grounding them (austerity).

Could we expect interest rates to rise for 3 decades, as they have fallen for the past 3? What are the ramifications of this? Decades of asset-price deflation and consumer price inflation? Combining this with PCO, the reality seems pretty grim, especially for those already living at the margin in Africa, Europe, and Asia.

[gwynedd1]

Re: Gavekal "France is heading for a depression"

I agree virtually word for word with David Gave's thoughts, philosophically. I have wanted to be in equities since 2000 when I got out of the equity markets. A gold and bonds portfolio has handily beaten stocks ever since.

But the reasons why this is so are not addressed by Gave. It's yet more as-if analysis, no matter how ideologically appealing.

The limitation is the Keynesian versus Austrian argument framework. Change that to finance/rentier economics versus production/profit economics and you have the basis for a rational discussion.

Yes GDP is now a nonsense concept but not for the reasons Gave explains. It's not because bureaucrats want to extract more in taxes from the private sector, it's because the economy has become too dependent on cash flows from asset price inflation, both directly from bond yields and indirectly via capital gains on asset price inflation. Asset price inflation is conflated with economic output that is profits generated by productive enterprises in the private sector.

Economies so structured have to be reflated in a particular way subsequent to an asset price collapse triggered by a liquidity crisis. Here's how the U.S. managed it.

Fed Funds rate target dropped from 5.25% to 1% in 2008 then target dropped and replaced by 0% to 0.025% min/max ranges.
Deficit spending increased from -$184B to -$1.3T annual rate. Remains at $1.1T four years later to close $1T output gap.




For historical perspective, the original bubble popping rate hike to 6.5% from 5% from 1999 to 2000 set the asset price deflation ball
in motion after the FIRE Economy began to produce massive asset price inflation starting in 1983.

Yes this did involve a Keynesian style increase in deficit spending. But Keynes never would have conceived of this sort of application of his theory. The idea of using public sector finance to reflate a property bubble would have never crossed Keynes' mind.

The relevant issue is the FIRE Economy portion of GDP rather than the Keynesian vs Austrian conception of private and public sector accounting. David Gave misses the whole point. Applying an Austrian cure to a FIRE Economy crisis is like bleeding a patient with a heart condition. The treatment may satisfy the doctor's penchant for tough love cures, but it's a 19th century treatment for a distinctly 21st century problem of elected officials and their central banks abetting asset price inflation via modern finance to generate GDP growth and all the political benefits that this artificial number bestows upon them.

I don't know why I never spent enough time composing this sentence:

"It's because the economy has become too dependent on cash flows from asset price inflation. "

I know I have said it over and over again without being so concise.

Its like the entire economy is run on FIRE waste heat blown off from the condensor. It really is.

[gwynedd1]

Re: Gavekal "France is heading for a depression"

So Keynesian won't work, and the Austrian method won't either. How will the Janszenian method get us out of this mess?

Same way the 19th century progressives suggested. Shift taxes on assets and off labor and industry. Increasing the money supply with deficits on real infrastructure would create real infrastructure and replace cash flows which would now be taxed away from assets. Not hard once you know what the problem is. We need to replace cash flowing from asset inflation with cash flows from wealth creation. Asset prices also need to fall to the real market value and stay there.

[Polish_Silver]

Re: Gavekal "France is heading for a depression"

So Keynesian won't work, and the Austrian method won't either. How will the Janszenian method get us out of this mess?

I am not sure we have much choice. EJ has acknowleged that the US will need real positive rates to stabilize the dollar and bond markets. That's what the Austrians want, too.