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Euro crisis worse than plunging 'animal spirits'
By Shawn Mesaros |
November 15, 2012, Thursday
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Print Edition
Print Edition
IN an article published in Shanghai Daily ("False 'stories' fuel beliefs about global slowdown," 2012-11-6), professor Robert Shiller was essentially trying to have us believe that the continued European debt crisis is nothing but "animal spirits" gone wrong and that these people who cannot pay their bills for lack of cash are only fantasizing the extreme shortage of cash.
We could not disagree more.
Shiller: The ultimate causes of the slowdown are really psychological and sociological, and relate to fluctuating confidence and changing "animal spirits."
My argument: Slowdown comes from weaning oneself off of a path of overconsumption and spending versus savings and investment.
Without the "Great Depression" we can discuss how there's really no problem with interest payments at 17 percent of household income, which was the "peak" right before the Great Depression in America and interestingly - before the second Great Depression in America beginning in 2007.
In both cases, we saw policy that first favored large amounts of peacetime financial leverage and then in the case of the 1929 scenario, we saw a period of deleveraging that lasted for 12 years until sufficient savings and investment happened, which culminated in 1942 and preceded World War II, and then the rebirth of industrial manufacturing in America.
Debt isn't emotional. People who can't pay their bills are, expectedly, highly emotional, and we would suggest that these "animal spirits" are well placed indeed.
Shiller: The European crisis began with a Greek meltdown story, and it appears that the entire global economy is threatened by events in a country of only 11 million people.
My argument: Statistically correct but this is another cause and causation, which are clearly being written as a misinterpretation of the facts.
Academic policy was at the root of this crisis. The European Central Bank has ruled that so long as the ECB members acquire debt of the sovereigns within the eurozone, they may mark those bonds at par value. Imagine the joy I feel as a banker that I may mark all of my assets to US$1,000 per bond so long as I hold them to maturity? The problem: These bonds are nowhere near par value and when considering Greece, we may see 25 US cents on the dollar.
Austerity is good
Professor Shiller continues: People saw the Greek crisis not just as a metaphor, but also as a morality tale. The natural consequence was to support government austerity programs, which can only make the situation worse.
My argument: We actually see the idea of austerity as a great idea. We should not allow the system to continue under the guise of shopping, continuance of free government cheese, and shopping with fake government printed money.
Shiller: The European story is with us now, all over the world, so vivid that, even if the euro crisis appears to be resolved satisfactorily, it will not be forgotten until some new story diverts public attention. Then as now, we will not be able to understand the world economic outlook fully without considering the story on people's minds.
Debt is real
My argument: Debt is real, and the consequences of too much debt are not animal spirits or "stories" but of real consequences for very real actions. In the words of Benjamin Franklin: "Neither a borrower nor a lender be."
The United States has a budget surplus in the 1996-2000 time frame due to an unprecedented 20-year bull market for almost all stocks. Governments collected fewer income taxes and then collected capital gains taxes.
After 2001 and the "great correction of 2002," the United States could no longer rely on these tax revenues. Instead, the FED and Washington policymakers embarked upon affordable housing, ramped up Fannie Mac and Freddie Mac until, and under the repeal of Glass Stegal, we saw not only bank balance sheets explode but also consumer debt and consumer spending explode all along with it.
We call this "excess consumption" and by our own internal estimates, the marginal GDP or consumption created between 1997 and 2007 amounted to an incremental 1.5 percent annually beyond America's 200-year average. This meant that fully -15 percent of GDP would have to be extracted from the economy by some other means.
Today's deficit spending isn't as worthwhile as it used to be: Please reference our Shanghai Daily ("Debt Picnic") article dated September 10, 2012.
When the US Government borrowed US$100 billion in the past, we used to see a rather nice US$100 billion increase in GDP with reasonable expectation that it would pay for itself through long-term capital investment into the "real" economy. Today's deficit spending only adds back about 50 percent (or less) to total GDP as a contributor.
The law of diminishing returns is two-fold. When a government is used to spending "other people's money" it doesn't necessarily spend it on things that add long-term value.
It is common for elder statesmen and ivory-tower academics to believe that the real world is a fantasy when, as most theoretical economists will tell you, they don't live in the real world from a policy perspective at all, and work off of nuances and models which often don't apply to the world as we see it at all.
The author is managing director of Pamria Asset Management Strategies. Shanghai Daily condensed the article.
We could not disagree more.
Shiller: The ultimate causes of the slowdown are really psychological and sociological, and relate to fluctuating confidence and changing "animal spirits."
My argument: Slowdown comes from weaning oneself off of a path of overconsumption and spending versus savings and investment.
Without the "Great Depression" we can discuss how there's really no problem with interest payments at 17 percent of household income, which was the "peak" right before the Great Depression in America and interestingly - before the second Great Depression in America beginning in 2007.
In both cases, we saw policy that first favored large amounts of peacetime financial leverage and then in the case of the 1929 scenario, we saw a period of deleveraging that lasted for 12 years until sufficient savings and investment happened, which culminated in 1942 and preceded World War II, and then the rebirth of industrial manufacturing in America.
Debt isn't emotional. People who can't pay their bills are, expectedly, highly emotional, and we would suggest that these "animal spirits" are well placed indeed.
Shiller: The European crisis began with a Greek meltdown story, and it appears that the entire global economy is threatened by events in a country of only 11 million people.
My argument: Statistically correct but this is another cause and causation, which are clearly being written as a misinterpretation of the facts.
Academic policy was at the root of this crisis. The European Central Bank has ruled that so long as the ECB members acquire debt of the sovereigns within the eurozone, they may mark those bonds at par value. Imagine the joy I feel as a banker that I may mark all of my assets to US$1,000 per bond so long as I hold them to maturity? The problem: These bonds are nowhere near par value and when considering Greece, we may see 25 US cents on the dollar.
Austerity is good
Professor Shiller continues: People saw the Greek crisis not just as a metaphor, but also as a morality tale. The natural consequence was to support government austerity programs, which can only make the situation worse.
My argument: We actually see the idea of austerity as a great idea. We should not allow the system to continue under the guise of shopping, continuance of free government cheese, and shopping with fake government printed money.
Shiller: The European story is with us now, all over the world, so vivid that, even if the euro crisis appears to be resolved satisfactorily, it will not be forgotten until some new story diverts public attention. Then as now, we will not be able to understand the world economic outlook fully without considering the story on people's minds.
Debt is real
My argument: Debt is real, and the consequences of too much debt are not animal spirits or "stories" but of real consequences for very real actions. In the words of Benjamin Franklin: "Neither a borrower nor a lender be."
The United States has a budget surplus in the 1996-2000 time frame due to an unprecedented 20-year bull market for almost all stocks. Governments collected fewer income taxes and then collected capital gains taxes.
After 2001 and the "great correction of 2002," the United States could no longer rely on these tax revenues. Instead, the FED and Washington policymakers embarked upon affordable housing, ramped up Fannie Mac and Freddie Mac until, and under the repeal of Glass Stegal, we saw not only bank balance sheets explode but also consumer debt and consumer spending explode all along with it.
We call this "excess consumption" and by our own internal estimates, the marginal GDP or consumption created between 1997 and 2007 amounted to an incremental 1.5 percent annually beyond America's 200-year average. This meant that fully -15 percent of GDP would have to be extracted from the economy by some other means.
Today's deficit spending isn't as worthwhile as it used to be: Please reference our Shanghai Daily ("Debt Picnic") article dated September 10, 2012.
When the US Government borrowed US$100 billion in the past, we used to see a rather nice US$100 billion increase in GDP with reasonable expectation that it would pay for itself through long-term capital investment into the "real" economy. Today's deficit spending only adds back about 50 percent (or less) to total GDP as a contributor.
The law of diminishing returns is two-fold. When a government is used to spending "other people's money" it doesn't necessarily spend it on things that add long-term value.
It is common for elder statesmen and ivory-tower academics to believe that the real world is a fantasy when, as most theoretical economists will tell you, they don't live in the real world from a policy perspective at all, and work off of nuances and models which often don't apply to the world as we see it at all.
The author is managing director of Pamria Asset Management Strategies. Shanghai Daily condensed the article.
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