The Sequester

[astralis]

JAD,

have you seen this piece by ezra klein?

This is why Obama can’t make a deal with Republicans

i'd like to know your thoughts. inaccuracies, good points?

[JAD_333]

Ugh. I understand that position, and personally support it - i.e. I think Obama is particularly derelict in his duty as CINC. But I thought that before the economic fight too, so that won't carry much weight with anyone. :)

But honestly I think the "look look, Obama's a shitbag!" argument is over. The argument was made last year, and I think quite well.

Most people disagreed or just didn't care.

I was convinced that they would, but I was wrong. So lurching from political attack to political attack seems useless and wasteful to me these days. He's still the Prez, that ain't gonna change, so those of us that don't like that just have to suck on it for a few more years and spend our efforts highlighting and blocking his policies, not the man behind them.

-dale

I tend to agree with you. However, the picture could change if a critical mass of readiness issues develop. We already have a carrier held back from scheduled deployment and if talk of cutting back on flight training and other readiness training materializes to any great extent, the hand of opposition groups would be strengthened. If the GOP House passes a supplemental appropriation to, in effect, cancel the defense portion of the sequester, the ball will be clearly in the president's court. I don't see the Senate refusing to act on it unless the president signals he won't sign it.

As things stand now, Congress looks more like the bad guy than the president. But keep in mind that the White House is the one issuing warnings of cut backs in essential services, some of which have turned out to be wrong and some of which don't seem to make sense. Take the announcement that air travelers will experience delays because of cutbacks in overtime for security screening. People will have a hard time accepting that the FAA can't cut back elsewhere or that we can afford to give $80 million in aid to the Syrian freedom fighters but can't keep airport security ops up to snuff. The correlation may be silly, but, hey, that's how our 'politically astute' public thinks.

[dalem]

It is true, but was said in a different context. Nevertheless, your point is half right. Congress can lead, but so can the president, inasmuch as he holds the veto. With respect to defense, he is the executive in charge. In a perfect world he determines what he needs to maintain a force adequate to meet current and anticipated threats and asks Congress for the funds to do so.

But I wasn't expressing a personal opinion as to whether Obama is culpable for risking military readiness by refusing to back down on the sequester. What I was getting at is that a political group determined to attack his position on the sequester could try to sell the public that he not living up to his oath of office. That's the way the game is played.

Ugh. I understand that position, and personally support it - i.e. I think Obama is particularly derelict in his duty as CINC. But I thought that before the economic fight too, so that won't carry much weight with anyone. :)

But honestly I think the "look look, Obama's a shitbag!" argument is over. The argument was made last year, and I think quite well.

Most people disagreed or just didn't care.

I was convinced that they would, but I was wrong. So lurching from political attack to political attack seems useless and wasteful to me these days. He's still the Prez, that ain't gonna change, so those of us that don't like that just have to suck on it for a few more years and spend our efforts highlighting and blocking his policies, not the man behind them.

-dale

[JAD_333]

Jad,

This is what you said

Quote Originally Posted by JAD_333
Inasmuch as the real power to spend and tax rests with Congress, the message seems clear.

If this is true, then the leadership should be asked from Congress, not Obama. Congress holds the purse strings and gives the money. Obama gets to spend it as per laws laid down.

It is true, but was said in a different context. Nevertheless, your point is half right. Congress can lead, but so can the president, inasmuch as he holds the veto. With respect to defense, he is the executive in charge. In a perfect world he determines what he needs to maintain a force adequate to meet current and anticipated threats and asks Congress for the funds to do so.

But I wasn't expressing a personal opinion as to whether Obama is culpable for risking military readiness by refusing to back down on the sequester. What I was getting at is that a political group determined to attack his position on the sequester could try to sell the public that he not living up to his oath of office. That's the way the game is played.

[astralis]

dale,

Speaking from a position of relative ignorance, don't we WANT interest rates to go up at least a little?

what would be ideal would be if the Fed continued to push bond purchases aimed at lowering interest rates...but interest rates go up anyway. that would indicate the economy is picking up steam.

[dalem]

Speaking from a position of relative ignorance, don't we WANT interest rates to go up at least a little?

-dale

[astralis]

snapper,

i'll keep my responses to you short, primarily because most of your responses are more soap-boxing than a real attempt to debate.

Regarding the Freidman/monetarist support for recent Fed policy I do not dispute that he advocated such a policy for Japan but I cannot see how this support is consistent with his advocacy of the abolition of the Fed.

Friedman advocated the abolishment of the Fed and a creation of a new organization that would simply increase the money supply at a steady rate, regardless of the economic situation.

however, he fully realized that such an abolishment was not going to happen, and thus suggested policies he deemed most economically efficient given the existence of a Fed. his monetarist theories derive from this.

So let me address some of the points I am grateful to you for having made as they address what I call the 'real issue'. You suggest that dotcom bubble was caused by Chinese investment and "this fed low interest rates"... Well from Wiki the dotcom burst in March 2000 so I examined the Fed's interest rates Jan 1996 to March 2000. Here is what you get; PAGE NOT FOUND The trend is in black and the mean dotted, they differ very little but the average is around 5.3% in the four years leading up to the dotcom burst. The only exception is the sharp drop at the end of 1998 to spring 1999 when rates dropped below 4.8%. I

my mistake here, actually; chinese investment played a minor role up until 2004-2005, where it fed the housing bubble.

the relatively low inflation and the growth of the market in the pre-dotcom bubble years were the years of the monetarist/new keynesian triumph, where folks believed that they had solved the issue of depressions once and for all.

To be quite honest I have never seen a better argument for the abolition of a central bank than a brief analysis of these statistics... How can you set an artificial rate claiming to 'target inflation' while fuelling the burst of a bubble that costs people the roofs over their heads?

the housing bubble itself was not caused by the Fed but by a huge inflow of chinese money, as i wrote before.

I wonder how the US survived and prospered before the Fed? Didn't do too bad it seems to me.

read any economic history of the gilded age. huge growth because of the second industrial revolution, yet it was hit with the panic of 1873 (lasted 3 years), panic of 1884, panic of 1890, the panic of 1893, 1896, 1901, 1907, 1910-1911.

this led to recessions in 1873–1879, 1882–85, 1893–1896, 1907–08.

the time before the fed involved crashes that were greater (because the swings in the market were greater), and longer/more recessions.

The mean 10 year bond yield was 4.9%. Taking into account inflation of the same period of mean 2.8% the 'real' interest on US Government 10 year bonds 2000 -2006 was around 2.1%. If this was so for 10 year bond we can assume other bonds followed the same general trend so I won't go into them. Well today real interest on US 10 year bonds is 0.1%... Perhaps we should examine GDP growth? Well in the 2000 - 2006 period US GDP was growing... mean growth 2.2%. Between 2010 and now the trend is falling and the mean is 2%. How then do you account for the divergencies in bond yields between the two if not by QE?

this is because the US is viewed as an international safe haven. bond traders are willing to take paltry, even NEGATIVE, gains because they want the safety that the US bond represents. if QE and fed monetary policy cause inflation, we haven't seen this yet.

Fine, you can create ALL the jobs you want - have full employment but it doesn't solve the problem. I can employ people to twiddle their thumbs but they aren't creating wealth, they spend more because I am employing them and they get wages and so the illusion appears real untill I go broke because I can't sell the product of thumb twiddling as there is no

this is true when the economy is close to the natural rate of employment, but definitely not true in a liquidity trap.

encouraging employment in a liquidity trap is useful because the point is to get money flowing in the market, as it is otherwise locked in unproductive arenas.

finally,

Do I accept this? Not really - I think a year is a little to short as I cannot tell how long the Fed will continue to artificially keep the bond bubble afloat or what might happen in the eurozone that may cause investors to regard the US as safer,

good lord, at least have the courage of your own convictions. your own little theory has predictable outcomes, not least of which is that any Fed involvement will backfire quickly, because by its mere existence it is distorting the market.

i've heard these same predictions since 2008, and you'd think after 5 years of being proven wrong each and every time folks like yourself would be willing to consider that they may indeed be wrong.

hey, i'm even willing to wait until 2015 or so, when most folks predict that the fed will begin rate hikes. let's see if there's utter disaster then, shall we?

[snapper]

snapper,

no, he said this in 2000 about 2000-era japan, and the policies he advocated were -exactly- the same as what bernanke executed later, in eerily close economic conditions.

and seeing as how the father of monetarism, whom also feared inflation (overly much) didn't think it would cause a bond bubble, this is something for you to take into advisement.


now, to address what you call the main point.



whence did the low interest rates before the dotcom bubble come from? not primarily the fed, but by the huge outgrowth from china. chinese policymakers invested huge amounts in the US because their own market was saturated and the US is a safer harbor than europe. this fed low interest rates, not the fed.

this is different from the actions taken by the fed with the recession, and in a different time. inflationary pressures in an inflationary environment causes bubbles, and this is where we were from approximately 2000-2006. understand that with the recession came a deflationary environment and a liquidity trap, which by definition counters the inflationary effects of QE as well as the lowering of bond prices.

what you've in effect taken is an austrian position, where any intervention in the market causes economic distortion.

i encourage you to read the following:

Bernanke And The Shibboleths - NYTimes.com



this is why i've asked you to read up on the monetarist school and friedman.

conservatives used to believe in monetarism and central bank action as the alternative to direct government intervention in the economy. once you understand this basis of thought you'll better understand the role of Fed policy.



ah, it's easy to thrown around quotes-- here's mine: christine lagarde, managing director of IMF: "We think that talk of currency wars is overblown." - Feb 16 2013.

the effects of a currency war is obvious; a general decline in international trade. so let's see.



1. no, there is no bond bubble. 2. yes, QE is fully justifiable. 3. a leading statement, because there will no bubble to 'escape from'.

all of these statements have predictive power. as i said, if you are right, then we should see hyperinflation, a collapse in the bond market, and a general global recession if not depression. there will be competitive currency devaluation.

in short, all the predictions that the austrian school made in 2008.

i'm willing to give it another year. i'll admit i was wrong and my economics need re-assessment should this happen-- are you willing to do the same?

Well I am grateful to you for answering the points I raised and also the less patronising tone of your reply. I admit I am not an 'economist' and I do not claim to know all the details of historical debates in the field. I am an amateur trying to understand it all!

Regarding the Freidman/monetarist support for recent Fed policy I do not dispute that he advocated such a policy for Japan but I cannot see how this support is consistent with his advocacy of the abolition of the Fed. To me the two seem inconsistent... Perhaps you do not see an inconsistency here?

So let me address some of the points I am grateful to you for having made as they address what I call the 'real issue'. You suggest that dotcom bubble was caused by Chinese investment and "this fed low interest rates"... Well from Wiki the dotcom burst in March 2000 so I examined the Fed's interest rates Jan 1996 to March 2000. Here is what you get; http://www.tradingeconomics.com/char...nd=1&mean=true The trend is in black and the mean dotted, they differ very little but the average is around 5.3% in the four years leading up to the dotcom burst. The only exception is the sharp drop at the end of 1998 to spring 1999 when rates dropped below 4.8%. If you go back further to 1994 you find that the interest rate rose that year from 3% to 6%. I will not dispute your suggestion that Chinese investment helped fuel the dotcom bubble and certainly the Fed acted to burst the bubble by increasing rates six times between 1999 and early 2000, however apart from the momentary dip I don't quite understand how the Chinese investment fed low interest rates. Personally, though I would dispute the 'benefits' of having a central bank at all, I regard the Fed's policy at this time as largely responsible. It is what it has done since then that is leading to disaster.

this is different from the actions taken by the fed with the recession, and in a different time. inflationary pressures in an inflationary environment causes bubbles, and this is where we were from approximately 2000-2006. understand that with the recession came a deflationary environment and a liquidity trap, which by definition counters the inflationary effects of QE as well as the lowering of bond prices.

I take it that your references to inflationary pressures are pre dotcom burst in 2000 when mean interest rates were 5.3% and mean inflation around 2.2%? Here's the US inflation graph for the same period Jan 1996 to March 2000; http://www.tradingeconomics.com/char...0331&mean=true If you mean the inflationary pressure between 2000 - 2006 lets do the charts for this period:

US Interest rates Jan 2000 - Jan 2006: http://www.tradingeconomics.com/char...0131&mean=true
US Inflation Jan 2000 - Jan 2006: http://www.tradingeconomics.com/char...0131&mean=true

So from this I can see how you might argue that the Fed followed a monetarist policy - it is shadowing inflation and almost oblivious to anything else. In you extend the interest rate graph further another two years to property bubble burst, which I would suggest has been fed by the lowering of rates after the dotcom burst, you see the Fed again lowered rates at the end of 2007 after inflation started nosediving due to bubble bursting. To be quite honest I have never seen a better argument for the abolition of a central bank than a brief analysis of these statistics... How can you set an artificial rate claiming to 'target inflation' while fuelling the burst of a bubble that costs people the roofs over their heads? Why can't the market find it's own rate? But to answer the monetarist argument I would say that it views the world only through 'one pair of glasses' while ignoring everything else. Inflation is certainly theft but the answer is not more control - it is less. I wonder how the US survived and prospered before the Fed? Didn't do too bad it seems to me.

Regarding your other expressed view on what I call the 'real' issues;

1. no, there is no bond bubble. 2. yes, QE is fully justifiable. 3. a leading statement, because there will no bubble to 'escape from'.

Ok so there is no bond bubble? Let's examine this argument by comparing the 2000 -2006 statistics, since they are here already, and today: Above I have shown the data for interest rates and inflation for the period... what were the bond yields? You can see that here: http://www.tradingeconomics.com/char...0131&mean=true The mean 10 year bond yield was 4.9%. Taking into account inflation of the same period of mean 2.8% the 'real' interest on US Government 10 year bonds 2000 -2006 was around 2.1%. If this was so for 10 year bond we can assume other bonds followed the same general trend so I won't go into them. Well today real interest on US 10 year bonds is 0.1%... Perhaps we should examine GDP growth? Well in the 2000 - 2006 period US GDP was growing... mean growth 2.2%. Between 2010 and now the trend is falling and the mean is 2%. How then do you account for the divergencies in bond yields between the two if not by QE? The market is very clearly rigged. You don't have to be advocating the theories of any particular 'school' to point this out - anyone that trades the markets will admit it. You say that a bond bubble doesn't exist but yet yields are at all time lows... have a look at this graph from the Economist; http://media.economist.com/sites/def...630_FBC506.png Are you suggesting that QE doesn't devalue the bond yield at all? In that case why is the Fed doing it? To any neutral observer - as I am having no money invested in the US - the bubble is clear.

So the Nobel Prize winner Krugman who advocates negative real interest rates.... Well you're there! That is what you have. The Fed's interest is 0.2% and inflation is 1.6% (by manipulation in my view). He says "2. Alternatively, governments can step in and spend while the private sector won’t. Obama has... The Fed has also bought long term debt as he suggests. I have to admit Krugman really takes the buscuit... If I was any good at baking buscuits I would send them to him. When he says "The answer, mainly, is that over-borrowing in the past has left large parts of the world credit-constrained, forced to deleverage by cutting spending" he is referring to when? If this time is relatively recent then how can he say; "The simple fact is that we have a global excess supply of savings". Krugman, Nobel prize winner though he may be (though that is an overtly political award recently), is talking about ways to solve US unemployment... he even says so. The aim of most WW2 Government was full employment and while this is a fine sounding social ideal to have as a policy and will doubtless win you many votes it is a social policy for which Krugman wishes to use articifial rates and borrowing in a rigged market to solve. Fine, you can create ALL the jobs you want - have full employment but it doesn't solve the problem. I can employ people to twiddle their thumbs but they aren't creating wealth, they spend more because I am employing them and they get wages and so the illusion appears real untill I go broke because I can't sell the product of thumb twiddling as there is none. A Government that wishes to indulge in such a thumb twiddling enterprise is guilty of financial incompetance. This is not economics nor 'liberal' in my book - it is nothing less than state social engineering by economic manipulation.

I agree that a currency war can quickly turn nasty and lead to 'a general decline in international trade' and that is why I asked what "other mechanisms" China might have in mind. I assume this an oblique hint at some protectionist measures but to my mind China would not benefit from outright trade war. Ms Legardes comments of course we should, in my opinion, view as normal for someone in her position; to admit it adds fuel to it. Admitting the truth in public is forbidden in economics it seems. Though I can see why I still find this odd. Isn't it your job to speak the truth, why is truth reserved for some ears? Who's paying her salary? Can I opt out? I object to the IMF who's calculations have proved to be consistently wrong about a country (Greece) where I have many friends suffering because of them and others.

There remains the question of whether QE and current Fed policy is justifiable and this I suppose depends on whether they get away with - whether it works or not - and you propose a years trial. Do I accept this? Not really - I think a year is a little to short as I cannot tell how long the Fed will continue to artificially keep the bond bubble afloat or what might happen in the eurozone that may cause investors to regard the US as safer, though should the eurozone go under I would expect the relief for the US to be temporary; money will run there at first but after the realisation that a main trading partner is no longer operating the 'contagion' would hit. Let me instead of stipulating a time test ask you, since we are speaking specifically of Fed policy, under what conditions the Fed could sell it's 'assets' and when you expect this to happen? Suppose the Fed sold their $3 trillion worth of 'assets' (which I regard as liabilities) now? Do you suppose that bond yields might rise? I shall assume that you accept this so when can it sell? Why's Bernanke waiting? He'll lose money if the yields rise... Suppose the US economy DOES pick up... inflation grows to 2 then 3% still stick and not sell his 'assets' and raise rates? Show me the Fed's 'extraction' policy and you will have answered for me if a collapse is coming.

Historians of the future will deride the bank bailouts as lunacy and say they should have taken the hard medicine then. All that has happened since that gross abuse of any form of capitalist theory has been State intervention for social purposes and to buy votes. Economics or any form of logic went out of the window some time ago. "Personal income decreased by $505.5 billion in January, or 3.6%, compared to December (on a seasonally adjusted and annualized basis). That's the most dramatic decline since January 1993, according to the Commerce Department." (Americans see biggest one-month decline in income in 20 years - Mar. 1, 2013) Bravo Krugman, Obama, Bernanke et al!! And the answer they will suggest? More of the same medicine. QE 1 was followed by QE 2 and now we have an open ended QE 3 of $85bn per month... This is conforming to the definition of insanity by repeating the mistake and compounding it. I suppose Nietzsche was right when he said; "Madness is rare in individuals - but in groups, parties, nations, and ages it is the rule."

[dalem]

If President Obama started throwing his weight around the way Johnson, Nixon and others did, the paleocons would be complaining about the Imperial Presidency.

I believe they already are.

-dale

[DOR]

Jad,

This is what you said



If this is true, then the leadership should be asked from Congress, not Obama. Congress holds the purse strings and gives the money. Obama gets to spend it as per laws laid down.

Obama would be pushing hard the message that he has limited options at defense through his Sec Def. and build public opinion that he is spending wisely as much he is being allowed.

If President Obama started throwing his weight around the way Johnson, Nixon and others did, the paleocons would be complaining about the Imperial Presidency.

The tactic of asking Congress to put forth bills they can actually pass -- healthcare, budget, etc -- is closer to respecting the concept of checks and balances than we've been in a long time.

[dalem]

Why, of course. :) Did you read it with a straight face?

Nahh. Not that gullible. :)

-dale

[antimony]

This will shed a little light on Obama's reluctance to compromise.

Stymied by a GOP House, Obama looks ahead to 2014 to cement his legacy - The Washington Post

In terms of perception, however Obama views the damage that will be done to our military preparedness by the sequester, he is vulnerable to the charge that he is not living up to his oath of office "to protect and defend" the US. That charge may be leveled at both sides, but he being one and Congress being many makes him an easier target.

Jad,

This is what you said

Inasmuch as the real power to spend and tax rests with Congress, the message seems clear.

If this is true, then the leadership should be asked from Congress, not Obama. Congress holds the purse strings and gives the money. Obama gets to spend it as per laws laid down.

Obama would be pushing hard the message that he has limited options at defense through his Sec Def. and build public opinion that he is spending wisely as much he is being allowed.

[JAD_333]

This will shed a little light on Obama's reluctance to compromise.

Stymied by a GOP House, Obama looks ahead to 2014 to cement his legacy - The Washington Post

In terms of perception, however Obama views the damage that will be done to our military preparedness by the sequester, he is vulnerable to the charge that he is not living up to his oath of office "to protect and defend" the US. That charge may be leveled at both sides, but he being one and Congress being many makes him an easier target.

[JAD_333]

Did you type that with a straight face?

-dale

Why, of course. :) Did you read it with a straight face?

[dalem]

At least he can appreciate where the GOP is coming from, even if he no longer comes from the same place.

Did you type that with a straight face?

-dale