Inflation Hawks Lose Their Shirts

August 31st, 2011 at 1:12 am | 87 Comments |

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The Financial Times has a fascinating story about how Bill Gross and John Paulson, both the managers of large financial firms (Pimco and Paulson & Co. respectively) expected the United States to enter a period of inflation, planned accordingly, and got their bets completely wrong.

Paulson and Gross both made an error in judgement: they assumed that the Federal Reserve’s policy of quantitative easing would engineer inflation.

The FT reports on how this has affected their firms’ standing:

Mr Paulson’s flagship Advantage Plus fund was down 39 per cent for the year by mid-August, according to investors. Mr Gross, trailing his benchmark, slipped to 501st among his 584 bond manager peers, his status as a bond guru under threat.

In Paulson’s case, he not only got this judgement wrong, he got it wrong on the advice and consultation of former Federal Reserve Chairman Alan Greenspan:

According to a person familiar with Mr Paulson’s thinking, he was also exceptionally keen on gold. When the Fed began to buy bonds in 2009 in an attempt to stimulate the economy, he was advised by Alan Greenspan, former Fed chairman, that this would ultimately lead to higher inflation as the economy recovered. So his $35bn hedge fund decided to allow its investors worried about inflation to transfer their holdings from US dollars into gold, using derivatives that track the price of the precious metal.

Paulson is also notable for being profiled in a BusinessWeek article in July of 2010 where he was–as hindsight now shows us–excessively confident about the US economic recovery:

Paulson has a simpler view [thank Krugman]: Americans are starting to spend again, in ways not terribly dissimilar to the ways we did before, buying suburban homes and stuffing our Social Security checks into slot machines. There are pitfalls. As we work our way back to the old normal and demand picks up, the years of superlow interest rates will come back to smack us, fueling inflation that Paulson sees possibly reaching into the double digits within a few years. That’s why, in addition to Florida property, Paulson is heavily invested in gold.

Bill Gross to his credit is aware that the economy is weaker. He knows that the real reason that economy is doing poorly is because of low aggregate demand and has even argued that this is a bigger problem then America’s debt. Yet he also expected quantitative easing to be followed by inflation:

The value of a Treasury’s fixed interest payments is eroded by inflation. Mr Gross expected interest rates to rise when the Fed stopped buying bonds as part of its quantitative easing stimulus programme at the end of June, which would cause their price to fall.

Another person who got this call wrong is majority leader Eric Cantor, who famously invested with a fund that goes short on long-term government bonds on the expectation that the US will enter a period of higher inflation.

Instead, against the expectations of Johnson, Gross, and Cantor interest rates have been pegged low till the middle of 2013.

To be sure, core inflation is a little higher than expected. Yet as of this posting, the two-year “breakeven rate” (the difference between inflation indexed and non-inflation indexed treasury bonds) shows an inflation expectation of a little over 1% for two years and around 2% over ten years.

Markets rise and fall and August has been an exceptionally rough month. The psychodrama over the debt ceiling, the reduced GDP growth figures, and the renewed fear of a European debt crisis all did their part to make US debt seem like the safest possible investment, even in a post S&P downgrade world.

Inflation will return at some point, but not as soon as some on Wall Street expected it to.



Update: The description of Eric Cantor’s investment has been clarified.

Recent Posts by Noah Kristula-Green



87 Comments so far ↓

  • TJ Parker

    “Eric Cantor, who famously has shorted long-term government bonds”

    Clarification: he took a leveraged short position. Poor Eric. He’d be a better Shylock than Al Pacino.

  • Demosthenes

    Milton Friedman said “We are all Keynesians now,” a phrase that entered the popular lexicon when it was repeated by Richard Nixon. Surely Dr. Friedman did not mean that he agreed with everything J.M. Keynes ever wrote, far less with all the policy prescriptions of “Keynesian” economists. What, then, did he mean?

    At some point the GOP is going to have to recognize that Keynes is as inescapable in macroeconomics as Aristotle is in philosophy. You can agree or disagree with either of them, but by dismissing them out of hand the only thing you accomplish is making yourself look stupid and/or illiterate.

    • TJ Parker

      Dude, Economics is barely a science. Science is a science, and the GOP has denied: climate research and evolution, a 150-year old fact that is the cornerstone of modern biology and medicine. And I won’t even get into the origins of homosexuality.

      Now a better question is why this party – they can’t all be idiots – is willing to play dumb in public. Someone should study the brain and penis of Larry Craig to understand how these people function.

      • Steve D

        Isn’t it interesting how many conservatives will dismiss climate projections as unfounded but quote economic forecasts about how, say, Obamacare will wreck the economy as if they were gospel? But they won’t even take the Gospel as gospel if it conflicts with their agenda (Like Matthew 25:31-46).

    • ottovbvs

      “Surely Dr. Friedman did not mean that he agreed with everything J.M. Keynes ever wrote, far less with all the policy prescriptions of “Keynesian” economists.”

      Friedman disagreed with Keynes on the relative efficiency of markets but agreed with him that in times of economic distress government intervention was required. He just believed that such interventions could be entirely monetary rather than fiscal. The events of the past few years have proved a)that Keynes was much more right about the essential irrationality of markets and b) the limitations of monetary policy is a economic crisis are considerable.

    • JimBob

      You’re dumber than a load of bricks. I suggest you google Friedman we’re all Keynesians now.

      John Maynard Keynes is a cancer that needs to be cut out.

      • ottovbvs

        “John Maynard Keynes is a cancer that needs to be cut out”

        But he was the principal author of the Bretton Woods Agreement that you were applauding on a another thread. But then intellectual consistency isn’t exactly your thing is it Jimbo?

  • elfpix

    Check Paul’s blog this morning.

  • Smargalicious

    Love it when greedy a$$holes lose out when short selling bets on American failure.

    Soros, you’re next.

    • armstp

      Actually, Smarg you got that exactly backwards.

      They were beating that the economic recovery would take-off creating all kinds of inflation. There were betting for America’s success.

  • ottovbvs

    Nope the bond vigilantes didn’t show up. Hence the US can borrow long term for nothing in real terms. And sorry to disappoint you Smarg, Soros predicted this and no doubt profited from it.

    • Smargalicious

      Yep, he wins for now, but when the economic apocalypse comes his house and property will be one of the first to be sacked and pillaged by the same type of folks he championed.

      • ottovbvs

        “Yep, he wins for now,”

        Soros always wins, you’re the only loser.

      • TJ Parker

        Smegmalicious: as a former quant during the reign of Bush the Lesser and his regent the Dick of Cheney, I’ll remind you of this rule of the Street: Permabears never win, although their mounting losses continue to support their eternal whine. Hoard your gold; I’m sitting snug in AAPL, AMZN and GOOG.

        • ottovbvs

          Any theories on where the Dow has to be for the gold bubble to deflate? I have to smile when I see these weenies boasting about their gold piles which almost certainly means Kruger rands or similar for which they paid a premium over the weight.

  • D Furlano

    So the next big fallacy that needs to be eradicated is that a large debt/deficit is somehow an issue. With the current economy it will not cause inflation, deflation, or kill the sale of treasuries. Additionally, the current debt “issue” was not caused by entitlements or Fannie/Freddie it was caused by greedy wall street bankers that got bailed out.

    With that – the balanced budget amendment is akin to having a military and rationing bullets and bombs because of the idea some day we may run out of explosives. The idea is to do use what you need to use when you need to use it.

    • Elvis Elvisberg

      Additionally, the current debt “issue” was not caused by entitlements or Fannie/Freddie it was caused by greedy wall street bankers that got bailed out.

      I don’t think that’s quite fair…

      • D Furlano

        First off – I am talking about the debt.

        The financial crisis caused the current economic and debt issues.

        The financial crises cause 10% unemployment.

        The wars, tax cuts, and everything else existed before the financial crisis.

        • Elvis Elvisberg

          OK, I get what you’re saying.

          I think it’s fair to say that the long-term deregulatory trend preceded Bush, and also that he took an unusually slothful approach to enforcing the laws that did exist.

  • zaybu

    We are in a period of declining inflation. The problem right now is not supply but demand. Corporations are sitting on billions of dollar in profits. They are not hiring or expanding because demand is weak. And since interest is low, we are in a liquidity trap, and the best and quickest way out is for the government to step in as the big consumer to raise demand. By expanding the money supply — putting more dollars in consumers’ hands, putting more people to work — we can turn the economy around into positive growth. If inflation shows its ugly head, we can start to slow down the economy by raising interest rates. It’s like driving a car, you’ve got to know when to press on the gas pedal and when to break. Timing and the right application will give you a smooth ride.

    • Steve D

      I personally “brake” my car. One concern is can our money managers “brake” the economy versus “breaking” it?

  • WillyP

    Well, I say, keep on spending! Those huge debts don’t seem to be affecting Europe at all… no.

    Inflation? Who worries about inflation? Only dinosaurs. This Frank Shostak, man, what a loser…

    “The yearly rate of growth of our measure for banks’ inflationary credit jumped to 8.2 percent so far in August from 4.3 percent in July. A visible strengthening in commercial bank inflationary credit, i.e., credit “out of thin air,” will provide the “necessary” monetary stimulus. This means that the massive amount of money pumped by the Fed since 2008 (over $2 trillion) is starting to be funneled into to the economy by the banks.”

    http://mises.org/daily/5597/The-Monetary-Tsunami-Is-Coming

    We’re in a depression for goodness sake. Now’s the time to print money! If not now, then when? Clearly there’s no consequence of inflation… do you see rising prices? Ignore energy and food – two utterly useless classes of products such as they are.

    Money printing not working? Banks not lending? Well, that’s why we have fiscal policy. Build roads. Build dams. Dig ditches and fill them up again. Whatever, so long as the money goes into the hands of “the workers.” Greedy capitalist corporations and bankers are hoarding the money. Rich get richer, poor get poorer, and we wonder why… umm hello! Have you seen the cash held by American companies?! I say seize it or make them spend it. It’s about time somebody took charge around here.

    Those stupid hard money advocates. Foiling a perfectly good recovery for political gain. We’re at 9% unemployment WITH all this stimulus! Imagine where we’d be without it! I can: no teachers, no police, no firefighters, no unions, no manufacturing, no healthcare. Instead of worrying about inflation, we should embrace it. Without the Fed and without Bernanke’s courage protecting our vital interests, we’d be in dire straits like some backward African nation, like Zimbabwe or something. Geesh!

    Obama and the Democrats are the only things standing between us and 1937. If the Tea Party gets its way, an invasion of space aliens, prompting massive military spending, will be our only hope.

    Do you, Michele Bachmann, want the United States dependent on space aliens? Do you, Rick Perry, want to outsource American sovereignty to Martians? Do you, Sarah Palin, want intergalactic war? I think you do.

    I’ve just laid out the last and best case for American liberalism. Beat that, Tea Party.

    • D Furlano

      WTH are you talking about?

      • WillyP

        Obviously, you’re not an economist. If you were, you’d know that we need politicians to fix our economy, not industry.

        Some people, ahem YOU, are simply unenlightened. As a bonafide liberal Democrat, let me generously (as is my nature) offer you some advice: go read Dr. Paul Krugman’s blog. He will be happy to set the record straight. You’ll see his data confirm that Obama has in fact been a boon the the economy, despite the naysayers.

        What people fail to realize is that once in a lifetime, a great leader comes along who is capable of ending depressions through sheer political will. FDR was such, as is Obama.

        • D Furlano

          I guess that means you can’t explain it.

          Not surprised since anything that comes of from von mises is typically incoherent babble.

          I don’t think there is one reference to anything that they actually ever got right?

        • satrap

          I do have to admit I get an enormous chuckle out of the Von Misers. “Money Tsunami! Money Earthquake! A Money HURRICANE is coming!” Run for your lives, because it IS coming!

          When is it coming, Mr. Hayek Von Midas?

          I don’t know exactly when, but our credit-thin-air-inflation index, coupled to our Rothbardian equivalence, says probably this month or 2019.

        • WillyP

          Hey man, I just called Frank a loser. Don’t call me a von Miser. I’m with Barry. Me and another 38% of (truly smart) Americans.

    • armstp

      WillyP is being sarcastic….

      • D Furlano

        I really never understand what his point is… much like von mises.

        • WillyP

          My point is that only the dolts don’t see the genius of Obama, Reid, Pelosi, Frank, Dodd, and Bernanke. Quite clearly we’re a nation of morons, as only 38% approve of Barry’s stupendous leadership. Fat, stupid, lazy, and selfish people are wont to judge their mental superiors so harshly… look what they did to Socrates!

          Without the visionary leadership of these modern day saints, we’d be marching like lemmings into the jaws of the liquidity trap!

          You know what’s under my pillow? Not a rosary, no sir. A “Hope and Change ’08″ bumper sticker. The closest I get to idolatry, and I’m not ashamed to admit it!

        • D Furlano

          Well I agree with you if you are saying that the people you mentioned have not helped the economy.

          I also don’t necessarily agree with Krugman about a “liquidity trap”.

          But I also believe the only way to fix the economy is for the government to spend money. And I don’t agree that they actually tried to do that with the original stimilus or QE.

        • ottovbvs

          “I also don’t necessarily agree with Krugman about a “liquidity trap”.”

          Do you know what the definition of a liquidity trap is? This is Krugman’s.

          “Well, my definition of a liquidity trap is, purely and simply, a situation in which conventional monetary policy — open-market purchases of short-term government debt — has lost effectiveness. Period. End of story.”

          I’d say it exactly fits our current dilemma wouldn’t you? Btw Krugman also believes that in a liquidity trap fiscal stimulus (ie. the govt spending lots of money) is the most effective, indeed probably the only road out.

  • danimal

    Conservatives keep fixing the stagflation of the late 70′s with new tax cut schemes and vigilance against inflation. Unfortunately, it’s not 1979 and the solutions that may have worked then are not sufficient for today’s economy. Tax rates are at 50 year lows and the cost of borrowing is actually negative.

    • satrap

      Conservatives aren’t fighting anything except anything that is grounded in evidence/models/science/non-ancient publications.

  • JimBob

    Well I’m an inflation hawk and when the housing bubble burst in 2007 I started buying gold again. It was 800. Now it’s 1800.

    This Green kid doesn’t even know what inflation is.

    • TJ Parker

      Dude, you could have bought AAPL at 90$ very easily then, and now its 4x that. Or JPM at $16. Or Alcoa at $4. Or even B of A at under $4.

      The buying opportunity of a lifetime wasn’t in gold, it was in stocks.

      Oh, and your gold is taxed as a collectible, you know, right? No capital gains break for you! Cuz gold is not money and gold is not an investment.

      But I’m curious: when the bubble burst in 2000 and Alan Greensperm started printing money like mad, and indeed did create inflation (housing) and a credit bubble, why weren’t you buying gold like mad then? It went from $250 to $650+ during that period. And the unhedge gold miners (Goldbugs index, HUI) did a whole lot better. (Everyone else had to buy back their hedges.) That was the time to buy gold. Well, miners, unhedged.

      • ottovbvs

        Or Cat. It was at $23 now it’s $92 and has been at $113.

        • TJ Parker

          Or almost anything! A monkey throwing darts could have outperformed a gold investment. Especially considering the tax situation.

        • ottovbvs

          For a monkey my aim was pretty good! In fact gold in real dollars is nowhere near it’s peak which was around $2,300 from memory.

  • Steve D

    If all that funny money floating around were applied to trying to buy actual goods and services, we’d have inflation like you couldn’t believe. As long as it mostly goes toward trading with other holders of funny money, it’s isolated from the consumer economy and doesn’t cause inflation. Okay, so someone cashes in and upgrades his yacht. Big deal. I, too, expected hyperinflation, and I’m not totally sure we won’t see it yet.

    One moral is that some of the stuff we see about a minority holding so much wealth is moonshine. The fact that a minority is holding all the fluff money, rather than dumping it into the consumer economy, is a good thing. If they really wanted to screw the poor, they’d triple their workers’ wages. Short term, we’d see some recovery. Long term, prices would skyrocket and you’d have workers demanding additional pay raises to cover the higher prices. And raising taxes to help the poor in such a climate would be out of the question. (Some of us remember the ’70′s.)

    I’d love to see some way to sever the fantasy economy from the real one and leave the derivatives traders holding worthless Monopoly money, but I don’t think it can be done. There are too many places where it’s interfacing the real economy to permit a surgical removal.

    • TJ Parker

      “If all that funny money floating around were applied to trying to buy actual goods and services, we’d have inflation like you couldn’t believe.”

      You’re forgetting deflation. Lots of money still going to money heaven, apparently faster than the Fed can print it.

      Isn’t everyone who lived through the Weimar Republic dead already?

      • armstp

        You need to get your facts straight. The Fed does not “print money” as you say. Go look it up and educate yourself.

        • WillyP

          “The Fed regulates financial institutions, manages the nation’s money and influences the economy. By raising and lowering interest rates, creating money and using a few other tricks, the Fed can either stimulate or slow down the economy. This manipulation helps maintain low inflation, high employment rates, and manufacturing output.”

          http://money.howstuffworks.com/fed.htm

          Yes, the Fed does “print” money. They tell you that using the euphemism “create.” Don’t be a complete obscurantist.

        • D Furlano

          I thought you were an economist? Referencing “how stuff works” is kind of funny. Why not look at treasury.gov?

          BTW: only a very small percentage of money today is actually printed. Treasury.gov reports that number. Money today is mostly electronic transfers to reserve accounts at the central banks.

          You need to get your head out of the 1940′s.

        • WillyP

          That’s funny. I always thought when I paid with a debit card (“electronic money”) that I was actually paying. But no – you’ve enlightened me, and now I understand that cash and checkbook money are materially different. On that note, I’m going to buy a Ferrari after work today.

          I referenced howstuffworks because it’s in plain English. If you don’t believe me, check the Federal Reserve’s website. It says the same thing.

  • CO Independent

    Once again, Kristula-Green proves he is the dumbest writer on the internet on matters economic. Did he even read the FT article which you reference, or is he simply not capable of reading comprehension?

    Paulson’s losses were attributable almost entirely to bad bets on bank stocks, primarily Bank of America, and on some investments in Chinese companies that turned out to be fraudulent. This has all been well documented in the financial press. Paulson’s only saving grace has been gold. In other words, the ONLY bet that made Paulson any money was the inflation bet.

    The price of gold in any given currency always adjusts over time in proportion to the money supply of that particular currency. Like JimBob I began buying silver and gold in 2007, when it was apparent that the solution to the banking crisis was going to be the transfer of bad debt from the private sector to the public sector, followed by monetization by the Fed. It was a very profitable bet.

    • ottovbvs

      “Once again, Kristula-Green proves he is the dumbest writer on the internet on matters economic.”

      Well on another thread you’ve claimed currency isn’t money and gold is, so
      Kristula-Green may not be on his own. Obviously currency is money (ie. a medium of exchange) whereas gold is not since it isn’t legal tender. Gold is a relatively rare precious metal that outside of jewellry and some industrial uses has no utility. It does however in the minds of many represent a store of value and thus can be used speculatively as a hedge against the devaluation of other asset classes. Why golden balls types keep claiming it’s money is beyond me because it makes them look silly when in fact it’s actually an entirely respectable asset class.

      Now as to why it’s seen a big run up in this period of uncertainty and fear, this is basically because the opportunity cost of holding it is small when the returns on the safest other asset classes in the world (eg. long dated US bonds) are effectively zero in constant dollars. There’s nothing wrong using gold as a hedge in these circumstances but you can bet Paulson and co will be the first people out the exits when the bubble deflates as it will leaving the gold bugs holding the baby.

      • CO Independent

        Otto, if you took econ 101, which you obviously did not, you would know that according to the classical definition money has three defining characteristics: a medium of exchange, a unit of account, and a store of value. Fiat currency meets the first criteria, and properly managed by a disciplined responsible monetary authority can in theory meet the second and third criteria. In practice, however, every single fiat currency in the history of mankind has failed precisely because monetary authorities cannot maintain monetary discipline.

        The modern US Dollar, the Federal Reserve Note, has lost approximately 98% of its value since its inception in 1913. It fails the store of value test, and therefore must fail the unit of account test. It cannot be considered “money” according to the classical definition.

        Monetary authorities create currency, or more accurately in modern times they create credit, which is ultimately converted to currency. They cannot and do not create money.

        Here’s a link to a wonderful little story in which Milton Friedman is forced to confront personally the errors of his beliefs in programmatic monetary expansion. I suspect its meaning will be lost on you.
        http://whiskeyandgunpowder.com/my-friendly-fights-with-milton-friedman-part-ii/

        • ottovbvs

          “Otto, if you took econ 101, which you obviously did not,…..you would know that according to the classical definition ”

          Yeah I often wonder how I got that rather good pass in PEP too. I got news for you, in 2011 purist classical economic definitions are as relevant to current conditions as Edison’s gramophone cylinders. Happily we’re not practicing classical medicine either. Those leeches. Yuk. All you say about the relative values of gold and paper currencies may be entirely correct, but it doesn’t alter the simple fact that fiat currencies are money (ie. our preferred medium of exchange and unit of account) whereas gold has ceased to be so. It has now become purely an asset class prized as a store of value certainly and therefore as I indicated used speculatively as a hedge against inflation or market uncertainty (ie. the devaluation of other asset classes). I suggest getting in your time machine and moving out of the 19th if not the 18th century. And while you’re on the journey read the chapter on purchasing power. If the events of the last few years have proved one thing it’s that Ricardo’s ideas about perfect markets and much else are bunk. Not that there wasn’t plenty of evidence from the 30′s.

        • ottovbvs

          CO Independant:
          I know this is painful but apparently it has to be done with you.

          mon·ey   [muhn-ee] Show IPA noun, plural mon·eys, mon·ies, adjective

          noun
          1. any circulating medium of exchange, including coins, paper money, and demand deposits.

          2.paper money.

          3. gold, silver, or other metal in pieces of convenient form stamped by public authority and issued as a medium of exchange and measure of value.

          4.any article or substance used as a medium of exchange, measure of wealth, or means of payment, as checks on demand deposit or cowrie.

          5.a particular form or denomination of currency.

        • JimBob

          thanks for the link!! great story!

        • ottovbvs

          Yeah a great story if you didn’t know what the US median income was in 1912 and 70 years later.

        • JimBob

          Median income has gone up due to productivity gains. Printing money had nothing to do with it.

        • ottovbvs

          “Median income has gone up due to productivity gains”

          Whatever the reasons, it’s gone up. Ergo the difference between purchasing power in 1912 and 70 years later makes the comparison in that anecdote ridiculous. Gawd it’s painful having to explain the most simple facts.

  • armstp

    Paulson and Gross should have hired Krugman as a consultant. Greenspan has been nothing but wrong for the last 30 years.

    • ottovbvs

      “Greenspan has been nothing but wrong for the last 30 years.”

      While not a great fan of the Maestro I think this an exaggeration. Easy Al screwed up big time during the Bush admin on everything from regs, through not speaking out against the Bush tax cuts to easy money. But prior to then his record wasn’t bad. Which is why everyone thought he walked on water.

      • armstp

        You need to go read what economists have thought of Greenspan since the 1970s. He has been completely wrong during his entire career.

        Here read this book:

        http://www.ravibatra.com/gsfrd.html

        “People called him a maestro, a visionary, the best economist ever. But who was this person who had catapulted into the spotlight from virtually nowhere? Did the world really know Alan Greenspan?…He may be a legendary figure in the eyes of many but when you carefully explore what he has wrought, the aura of public reverence around him can evaporate quickly…”

        .
        .

        “Greenspan was exceptionally skilled at pushing his image of economic genius, particularly since his performance as an economic prognosticator was awful at best. “He was supposedly the smartest man in the the world,” laughs economists Brian Wesbury today. “He was the greatest, the Maestro. Only if you look at his record, he as wrong about almost everything he ever predicted.”

        Fed watchers and Greenspan critics all seem to share a passion for picking out which of Greenspan’s erroneous predictions was most ridiculous. One of his most famous was his pronouncement in the New York Times in January 1973: “It’s vey rare that you can be as unqualified bullish as you can now,” he said. The market proceeded to lose 46 percent of its value over the next two years, plunging from above 1,000 the day of Greenspan’s prediction to 571 by December 1974.”

        etc. etc. etc.

        .
        .

        No credible economist has ever taken Greenspan seriously.

        He was wrong on Ayn Rand in the 60s, wrong on his economic predictions in the 1970s, wrong on deregulation in the 80s and 90s and wrong on the housing market in the 2000s.

        He even admitted that basically his whole economic free market thinking was flawed in front of Henry Waxman’s committee.

        • ottovbvs

          “No credible economist has ever taken Greenspan seriously.”

          This is an utterly ludicrous statement. All Fed chairman have their critics, Bernanke has plenty. Chesney Martin had legions of them and he was chairman for 20 years. I could probably find books criticising the sainted Volcker. Until four years ago Greenspan was perceived to walk on water and to claim otherwise is absurd.

        • armstp

          Let me re-phrase: “no credible economist have take his predictions seriously”. Sure they have taken his often wrong headed actions seriously, as you have to given its potential to both positively and negatively impact the economy, but no own took his predictions very seriously. He had a long track record of being entirely wrong.

          Name me one credible economist who has taken Greenspan’s predictions seriously?

          By the way the criticism I refer to is not necessarily related to his policy actions (much of that was wrong too), but his ability to get things right. Greenspan was notorious for making statements that turned out to be completely wrong. That is very different than a critic of Volker’s 1970s interest rate policy. No one is criticizing Bernake today for making wildly inaccurate predicitions and statements, but they are criticizing him for his policy prescriptions.

          This is all besides the point. My original statement stands: “Greenspan has been nothing but wrong for the last 30 years.”

          If you can point to anything he got right in the last 30 years I would like to know it… about the only thing anyone points to that he may have been successful at is his comments around the 1987 stock market crash.

          look up “moral hazard” and “the Greenspan Put”….

        • indy

          “No credible economist has ever taken Greenspan seriously. ”

          Yeah, I’ll second Otto here. Of course they took him seriously. Now, looking in the review mirror, they claim they didn’t really take him seriously. It’s human nature, not economics.

        • ottovbvs

          Let me re-phrase: “no credible economist have take his predictions seriously”.

          A significant difference but even this is a total exaggeration. I don’t dispute some of his predictions were off the wall but that doesn’t mean that credible economists didn’t take them seriously. The number of credible economists let alone commentators or politicians questioning The Maestro was very small indeed. In the 90′s the economic team of Summers, Greenspan and Rubin was deemed to be largely responsible for producing a low interest regime, budget surpluses, growing real incomes, and effectively handling crises like the Mexican bailout and LCM. I await your denunciations of Summers and Rubin.

  • minefield

    The reason quantitative easing did not cause inflation, is because instead of spending it in ways that it would end up going to the middle and lower class, it was given to the ultra rich. Who promptly stuffed it in their pockets. So the actual amount of money in circulation never went up, thus no inflation.
    Once the ultra rich start selling their gold, that is when we will see inflation.
    The fed can print as much money as they want, but if it keeps going to the ultra rich, it makes absolutly no differnce to the economy.

    • ottovbvs

      It wasn’t principally the ultra rich so much as the banks. There’s been a huge expansion of M3 over the past three years but most of it is sitting in the Fed bolstering bank ratios.

    • JimBob

      Of course it created inflation. The price of oil went over 100 dollars a barrel and in some regions gas climbed above 4 dollars a gallon. Now that QE2 and stopped the price of oil has been coming down .. Also food riots around the world.

  • cdorsen

    The truth is Keynes was neither wrong or right. The question of whether to be Keynesian or not to be is…it depends. Businesses make this decision all the time. It all comes down to the accuracy of your growth projections. When businesses are down and not selling, they often make the decision to a) buckle down, reserve our cash and not over leverage to weather the storm, or b) borrow a bunch of money, invest it, and try to grow out of the slump. In a micro level, choice b is really just taking a Keynesian approach. And, if the business takes choice b and is successful, large bonuses for management. If they take b and fail, they look for jobs elsewhere.

    What it all comes down to is their growth projections. If they borrow $100,000 and project 10% growth, they estimate that they will grow revenues enough to pay back the $100,000 and make a reasonable return as well. Anything above that is gravy. If they grow at 8%, they break even. Anything less than that is loss and represents money that they can now not easily pay back. This type of planning happens all the time.

    I realize this is an over simplification and that there are several factors that were left out, but on a micro level it represents exactly what we did. We borrowed trillions of dollars (yes trillions if you include more than just the $800B bailout). Had our economy grown at a reasonable rate, tax revenues would have increased considerably, we would not be in a huge debt hole, and we would all be better off. What actually happened is, at best, we staved off further decline, but achieved no growth which means no growth in revenue to pay back what we borrowed and no improvement in the economy.

    You can argue that, as many business leaders would if it was a company, that the reason was that we didn’t spend enough or that we didn’t spend it right. Neither of which is patently false or patently true. There is no way to go back and prove it. All we do know is that we didn’t achieve the anticipated and needed growth projections leaving us far over leveraged and without many tools, but than to hope that things pick up for outside reasons. If this were a business, Obama would be looking for a new job in 2012. Only time will tell if things work at the ballot the same way they do in the board rooms.

    • D Furlano

      I am not sure what your point is? Are you comparing a business to the federal government?

      • cdorsen

        The point is this. Taking on a load of debt to invest in growth is not a strategy foreign to business, the government, or even private investors. People, businesses, and governments do it all the time. Sometimes it works; sometimes it doesn’t. If it does work, those who implemented will be seen as heroes. When it doesn’t work, those who implemented it will be seen as villains.

        It goes the same for the “do-nothings”. If things do pick up and crisis is averted, they look like the great wise ones for not panicking and waiting for the natural correction that was bound to come. When they are wrong, they are equally villains for refusing to do anything in the middle of a disaster.

        Neither way is a winner 100% of the time. There are several factors for examining which strategy is best and those that make the right decisions look at all of them and with a little luck get it right. Those that don’t, lose credibility and are sent packing.

        • D Furlano

          There is a big difference between being a currency user (a business) and a currency issuer (fed). The fed government is not revenue constrained.

          So yeah a business can take a chance with debt and lose but that does not make them pro or con anything but risk.

    • ottovbvs

      “The truth is Keynes was neither wrong or right. The question of whether to be Keynesian or not to be is…it depends.”

      Oh boy.

      • cdorsen

        Oh boy?

        Not sure what you mean by that, but it hardly seems a reasoned argument either in agreement or disagreement. But, the context usually is one of exacerbation leading me to believe that you think I have made an outlandish statement. If so, what? The whole point that I was making is that no particular philosophy covers every situation. Sometimes leveraging investments works if you use the debt wisely, make sound investments, and project your growth path correctly. You come out on top with more than enough money to pay back your debt. Other times, either you do not spend the money wisely, do not borrow enough, or the playing field is just too rough altogether and no amount of money would change course. In this case, you end up insolvent. Am I not making a rational statement?

        • ottovbvs

          Keynes in common with other groundbreaking economists like Smith, Hayek, Schumpeter, Friedman produced a body of work which attempted to explain how the economic process worked. Was his analysis of every aspect of the process correct? Probably not. On the other hand were the majority of his macroeconomic ideas as they related to the inefficiency of markets; the need for active responses by govt to manage fiscal and monetary policies to stabilize output over business cycles; the paradox of thrift; demand management; etc etc broadly correct? Undoubtedly imho. And since they have been further refined by the so called modern Keynesians who use a lot more microeconomic analysis which has become possible with computers and the greater availability of statistical data. In this context statements like “Keynes was neither right or wrong” are simply absurd. One either accepts his “demand management” approach or rejects it as some do. “It depends” doesn’t make much sense at the strategic level of the application of Keynesianism

        • WillyP

          “Was his analysis of every aspect of the process correct? Probably not. On the other hand were the majority of his macroeconomic ideas as they related to the inefficiency of markets; the need for active responses by govt to manage fiscal and monetary policies to stabilize output over business cycles; the paradox of thrift; demand management; etc etc broadly correct? Undoubtedly imho.” HUMBLE opinion?!??!

          Is this the dawning of Otter the Balanced, or Otter the Apostate?

          What a push over! Keynes was the master. Give up so soon when the stimulus and QE2 failed? What kind of a liberal are you? JMK wouldn’t be vaguely praising Hayek; he’d be pushing for more deficit spending. Krugman shows no such equanimity. You think the paradox is thrift is hurting us now – - just wait until those Thriftians start making policy. The multiplier will turn into the divisor, and your 401k will be the paltry dividend.

          I’m disappointed in you. Are you feeling alright?

  • Remember, These Guys Want To Invest YOUR Money | Library Grape

    [...] These Guys Want To Invest YOUR Money by Lev on 31 August 2011 FrumForum passes along a link to a very interesting Financial Times article: John Paulson, the hedge fund [...]

  • LFC

    Steve D said… “Isn’t it interesting how many conservatives will dismiss climate projections as unfounded but quote economic forecasts about how, say, Obamacare will wreck the economy as if they were gospel? But they won’t even take the Gospel as gospel if it conflicts with their agenda (Like Matthew 25:31-46).”

    That has to be the quote of the day.

  • WillyP

    Let’s just be happy that Obama is finally putting an end to that subversive genre of Rock ‘n Roll:

    http://blogs.ajc.com/bob-barr-blog/2011/08/31/gibson-guitar-to-uncle-sam-%E2%80%93-%E2%80%9Cfrom-my-cold-dead-hands%E2%80%9D/

    Gibson Guitar… satanists in disguise!

  • ottovbvs

    If you want a summation of where we are by someone who knows what he’s talking about (including why people buy bonds or gold) you couldn’t do better than this column by Martin Wolf in yesterday’s FT.

    http://www.ft.com/intl/cms/s/0/079ff1c6-d2f0-11e0-9aae-00144feab49a.html#axzz1Wd5Wc9q0

    • D Furlano

      That is a good article.

      • ottovbvs

        Wolf is one of my journalistic economic interpreter gurus. He explains often complex ideas simply and elegantly. The WSJ don’t have anyone to touch him. The nearest here is Steve Pearlstein at the WAPO. The NYT has Krugman of course but he’s a professional economist and just does journalism as a sideline. The New Yorker has Surowiecki (did I spell that correctly?). As a general rule if people can’t explain on paper how they are going do something from putting up a fence to how many of these widgets we’re going sell they are to be disregarded.

  • rockstar

    I live on groupons and its the best choice I ever made, so I don’t need dollars. Does that contribute to the liquidity trap?

    http://www.youtube.com/watch?v=gGw2y5_oDA4