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Thoughts from the Frontline

Economic Singularity

October 15, 2012

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"Concern about politics and the processes of international co-operation is warranted but the best one can hope for from politics in any country is that it will drive rational responses to serious problems. If there is no consensus on the causes or solutions to serious problems, it is unreasonable to ask a political system to implement forceful actions in a sustained way. Unfortunately, this is to an important extent the case with respect to current economic difficulties, especially in the industrial world.

"While there is agreement on the need for more growth and job creation in the short run and on containing the accumulation of debt in the long run, there are deep differences of opinion both within and across countries as to how this can be accomplished. What might be labelled the 'orthodox view' attributes much of our current difficulty to excess borrowing by the public and private sectors, emphasises the need to contain debt, puts a premium on credibly austere fiscal and monetary policies, and stresses the need for long-term structural measures rather than short-term demand-oriented steps to promote growth.

"The alternative 'demand support view' also recognises the need to contain debt accumulation and avoid high inflation, but it pushes for steps to increase demand in the short run as a means of jump-starting economic growth and setting off a virtuous circle in which income growth, job creation and financial strengthening are mutually reinforcing. International economic dialogue has vacillated between these two viewpoints in recent years."

– Lawrence Summers, The Financial Times, October 14, 2012

There is indeed considerable disagreement throughout the world on what policies to pursue in the face of rising deficits and economies that are barely growing or at stall speed. Both sides look at the same set of realities and yet draw drastically different conclusions. Both sides marshal arguments based on rigorous mathematical models "proving" the correctness of their favorite solution, and both sides can point to counterfactuals that show the other side to be insincere or just plain wrong.

Spain and Greece are both examples of what happens when there is too much debt and austerity is applied to deal with the problem. One side argues that the cure for too much debt is yet more debt, while the other side seemingly argues that the cure for a lack of growth is to shrink the economy. It is as if one side argues that the cure for a night of drunken revelry is a fifth of whiskey while the other side prescribes a very-low-calorie diet of fiber and veggies.

Both sides have arguments that are intellectually appealing, yet both cannot be right at the same time. What I think we need to consider is the possibility that there is something that is happening outside of traditional economic theories, which will mean that following either traditional policy solution could lead to disaster.

But is there a third alternative? If we want to find one, the first thing we need to do is to properly diagnose the problem. In today's letter we begin to explore why the models aren't working. Sometimes the best way to understand a complex subject is to draw an analogy. So with an apology to all the true mathematicians among my readers, today we will look at what I will call the Economic Singularity. And maybe we'll have a little fun on the way. Let's jump right in.

The Economic Singularity

Singularity was originally a mathematical term for a point at which an equation has no solution. In physics, it was proven that a large enough collapsing star would eventually become a black hole so dense that its own gravity would cause a singularity in the fabric of spacetime, a point where many standard physics equations suddenly have no solution.

Beyond the "event horizon" of the black hole, the…

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Stephen Davis

Oct. 17, 2012, 12:52 a.m.

The reason Japan can get away with a high debt/GDP is because of their ability and willingness to service that debt internally.  The Japanese public buys an exorbitant amount of their Government debt.  Once this, again, hits a tipping point, the advantage reverts to market forces.

One other thing,  a policy measure that does not get discussed is corporate structure and tax rates.  Allow tiered tax rates on size and encourage additional “spin offs” such as Kraft and Occidental Petroleum.  Allow the pieces to have a more favorable tax rate than the whole.  Allow for favorable cap gains rates on the gains from any spin off.  This creates jobs since it acts in reverse of takeovers in a sense that redundancy (jobs) must now be created rather than be destroyed.  The Kraft spinoff created jobs and more could be created as policy dictates.

Dallas Kennedy

Oct. 16, 2012, 4:12 p.m.

I see many have already made the point I was going to make, so I won’t belabor it. Keynesian economics is mostly hokum—there’s no “stimulus,” just a “countercyclical cushion,” perhaps. Using “stimulus” implies that it “stimulates” growth, which it doesn’t. I notice that Summers carefully uses the phrase, “demand support”—that’s quite clever and slick of Dr. Summers. There’s never been any evidence of “stimulus,” and Summers knows this. All those Keynesian multipliers are just a mixed-up version of money multipliers.

The solution isn’t austerity exactly, although we do need to start living within, or even under, our means. The longer run solution is to increase our means, and that’s a supply problem, not a demand one. The existing stock of debt simply paralyzes much of the economy and prevents any further borrowing. With the debt-driven model that we have, this is a problem. We need a model that doesn’t make borrowing its centerpiece.

(BTW, the singularity in a black hole is at its center, not at the event horizon, or Schwarzschild radius. The apparent singularity at the event horizon is an artifact of how you pick your coordinate system. Only the center is truly singular. That’s not to say strange things don’t happen inside the event horizon—strange, acausal things. But it’s not singular.)

Nedland Williams

Oct. 16, 2012, 10:57 a.m.

Credit is monetary and has nothing to do with real growth in the economy.  The economy has X resources.  Over time X increases, based on net population growth and productivity improvements.  A monetary change only affects prices.  Credit, whether in the public or private sector, only affects the allocation of the country’s X resources by expanding the resources available to one group over another.
If we could wipe out all debt, we would still have X resources, but ownership gets confusing.
The way to fix our problems is to fix the underlying structure, beginning with the tax code (see 10-25 Plan and “Painless Tax” to get rid of capital gains taxes), tort reform (see “Less Reasonable Pays” solution) and a new healthcare system (see “Group Self Insurance”).  It is not to expand borrowing.

Nedland Williams

Oct. 16, 2012, 10:41 a.m.

I strongly disagree with your statement that “One side argues that the cure for too much debt is yet more debt, while the other side seemingly argues that the cure for a lack of growth is to shrink the economy.”
The cure for lack of growth is not to shrink the economy, but to allow the private sector to allocate resources rather than the government.  If government shrinks by 8% of GDP, the private sector grows by more than that amount, since the private sector allocates resources more efficiently.

Bob Ritter

Oct. 16, 2012, 12:52 a.m.

So now the edge of the cliff has its own gravity, and just getting too close to it dooms one to fall. Boy things just keep getting better. Got any good ideas for a parachute?  It seems like we’re going over, or in, depending on which metaphor one prefers.  I think most folks agrees on the gravity or seriousness of the problem, as we go over the edge fighting about the solution.  Look out belowwww….

Frederick Shanbour II

Oct. 15, 2012, 6:14 p.m.

Sorry, but I don’t see the kids under the dome cooperating on the lunch menu, let alone the weightier tasks associated with getting debt and deficit under control.  We need a President that can force the imps to compromise.  I don’t see Obama doing anything of the sort, and Romney is an unknown quantity in this regard.  I’ll hunker down and we’ll see…

Paul Orme 33276

Oct. 15, 2012, 6:02 p.m.

Summer was kick out of Harvard. ... with Rubin got rid of Glass Steigal which allowed the banks to take on HUGE RISKS and leverage 30 to 1 and we are going ask him anything other than where is the Men’s room

Oct. 15, 2012, 3:12 p.m.

One thing that I do not see in many (most) economic discussions is the role of demographics.  The “baby boom” generation is either approaching or has already approached retirement.  Most, like myself, are at a point where they are cutting back on consumption.  As the population gets older, they no longer feel the need to trade up, or buy more and more.  Unfortunately, this makes it more and more difficult to “grow our way out”, as long as we are in a consumer society.  In other words, the nation is already in an austerity situation as a great portion of the population has decided, for one reason or the other, to cut back on spending.  Nor can we save our way out as interest on savings, dividends paid, or other sources of income dwindle.

Lawrence Glickman

Oct. 15, 2012, 2:45 p.m.

Wow! All those contacts, education and a reunion to boot and still the obvious eludes you. You and I are of the same generation and when we were born the USA had about 150 million people and most of the world lived on dirt floors. This is a simple matter of arithmetic plus the internet. The advantages of the developed world’s technologies have been and will be obviated by the instantaneous transfer of knowledge over the internet. The world’s population has more than tripled since we were kids and they want their share of the world’s resources. That’s it that’s the whole “mystery”. There is no problem to solve it’s a natural inexorable shift and the “developed” countries will de-leverage to the level required by that shift. Money and resources are fungible and like water will seek their own level and profitability. We just have to get on with it and tell the truth to the people of the developed world. No “QE” or other economic parlor tricks will stop the process. Time to pay the bill and start over. The good news is that we have our frontier history as a guide. For example is a degree at Rice better than starting a small business and having a four year head start on a group that probably won’t be able to pay off their college debt or get a job? Rude comment or the new reality?

Oct. 15, 2012, 12:36 p.m.

“The US still has the chance to pursue what I call the “glide path” option.”

This is so wrong on so many counts that it is beyond ludicrous.  We could have avoided this bubble 10 or 12 years ago, and even 6 or 7 years ago by stopping ALL deficit spending and balancing the budget forever going forward.  But there are multiple Ponzi schemes at work that are hemmoraging money at geometric rates (Social Security, Medicare, Medicaid, ObamaCare, other entitlements) while the economy is locked down at negative growth except for the phony GDP element of government spending, now at 24% of GDP.  People forget (or are too obtuse to understand) that every dollar of government spending has to be either taken from the private sector in the form of taxation or printed.  Either of those are disastrous at levels we presently have.  Raising taxes is irrelevant without offsetting spending immediately (not 10 years down the road that NEVER HAPPENS).  Politicians are whores and can-kickers.  They don’t care about a collapse.  They only care about votes and power.  Out of 435 Representatives and 100 Senators, there are maybe—maybe 4 or 5 that get it—obviously both parties are Stage 5 infected and malignant.

If the budget was cut 50%, there would be a DEPRESSION.  That would be the best case scenario.  We are MONTHS, not YEARS from collapse, because the printing will never stop and the dollar is doomed.  Period.

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