Regarding liquidity traps, stimuluses, liquidationists, etc., let me respond by proposing my theory of the world.
Let us think about the Madoff investors. A year ago, an investor would look at his Madoff statement and see $100k. He would think, wow, I have $100k. Because I have that $100k, I can afford to buy things even if the purchase will stress my ordinary cash flow. I will go to Circuit City and buy a big screen TV on credit because I can always draw down on my Madoff funds if I need too. A year later, investor learns he doesn't have $100k. If he had known his true financial state a year ago, he never would have bought the TV. In addition, there is present consumption he is now going to forego. Maybe he thought that this year he was going to buy a new car on credit, but now he knows his true net worth, he chooses to defer the purchase for the time being. Let us then picture the situation if Bernie Madoff was in charge of every investment fund in America and our typical Madoff investor is multiplied by the millions. We can easily see that the economy will suffer a sudden and huge contraction/recession. On a national scale, we suddenly learn that our assets are significantly less than we thought they were. However, our debt level is the same. Therefore, there is going to be national effort to forego consumption and reduce debt, either through asset sales, bankruptcy. etc. In our Madoff world, I truly have no conception how a Keynesian stimulus would work. The problem is not fear of investment or a flight to safety. The problem is not that people are hoarding wealth and refusing to spend. The problem is not a vicious cycle whereby people lose their job, so they spend less, so people lose their job. The problem is that people are poorer, in actual terms, than they thought they were. The recession/contraction is simply a manifestation of the adjustment from illusion to reality concerning asset levels and net worth. There are simply no underutilized assets in the Madoff world that the government could borrow and then recirculate as spending. I think our credit bubble is no different than the Madoff world. The present crisis/recession/contraction is the realization that our national/global asset levels and net worth are significantly less than we thought they were two years ago. The problem is not underutlization of existing assets, not hoarding, etc. It is simply that we are poorer than we thought we were. No more big screen TVs on credit for now. The stimulus, conceptually, seems nothing more than an attempt to get us to act as if we are not poorer. But we are poorer. Borrowing money and recirculating it is not going to affect our national/global balance sheets. The only thing that is going to affect the balance sheets is deleveraging, and the momentum toward that deleveraging is going to overwhelm anything governments can do unless they choose to hyperinflate, and even that would be very temporary. The tone of Jim and Charles is that this deleveraging in light of reduced asset values and net worth is a choice, that is might be a good idea on paper but the collateral damage is so great it can't be permitted, etc. I don't think it is a choice. I think it is going to happen no matter what anybody does, because you cannot avoid the reality of the asset and net worth levels. All that the "stimulus" is going to do is reallocate wealth to sectors of the economy that built up during the bubble (state governments, housing, financial institutions, etc.). The reallocation will enable those sectors to continue for a period of time based upon their bubble illusion, but that is temporary and and will end soon enough. The stimulus reallocation will delay the sectoral shift in resources that the deleveraging requires, but it will not delay the deleveraging. As I say every day, it is a good time to be a bankruptcy lawyer. David Shemano _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
