215 thoughts on “Midweek Message Board

  1. US economy grew by 3.5%.

    Is this sustainable? What has the impact of the fiscal vs monetary stimuli? What impact has the QE been and the TARP? Important questions but I am working so don’t have the time to answer them.

  2. Interestingly, people are pointing to the “cash for clunkers” programme which seems to be one of the best public policies of recent years. This programme has worked both in the US and UK where the car industries and their component suppliers were about to go bust.

    The stimulus package has been described as a winner but it would be unwise to immediately claim victory because there is huge uncertainty. I cannot describe the number of people claiming victory over the recession only to be dragged down two hours later. A lot of market analysts and economists have been very wrong and the uncertainty is shown in the VIX.

    The key questions going forward are whether or not the stimulus package and the QE can be wound back without sending the economy into a tailspin. The next issue is to compare growth in the private-sector economy vs public sector economy. This is important because if there is growth in the public sector but the private sector is still receding, then there are question marks over whether or not withdrawing the stimulus will reduce demand but also whether or not the stimulus can be supported over the medium term.

    Finally, while the stimulus has been applauded this growth should not be too unexpected due to a comment by Larry Summers all the way back in 2007 when he said that it takes two years for a credit crisis to subside and at this moment it has been two years and two months. Does the growth come from the natural cycle or is this government induced?

  3. @Alice

    You have written a lot, much of which is irrelevant and it is a rant of epic proportions.

    Two things.

    One, the electorate is more right-wing than you think. That is why Rudd doesn’t dare increase income taxes, for example.

    Two, Michael Milken has given more to charity and good causes than you ever will. Irrespective of the fact that he was convicted for insider trading, he is a genuinely nice guy who gives millions away to good causes.

    At least he can run an organisation. More than I can say for a lot of people.

  4. @Monkey’s Uncle

    I don’t accept that those who deride ‘trickle down’ assertions assert ‘a watertight compartment’. In most iterations, the claim is that the trickle isn’t the substantial flow that they’ and the advancers of ‘trickle down’ would repsectively desire/imply.

    ‘Multipliers’ are seen (rightly or wrongly) as having this latter property. Whether they do, and under what circumstances is a question of data not theory.

  5. @SeanG
    Nonsense SeanG

    Politicians dont increase income taxes on the wealthy because the politicians themselves have managed to get their own wages and benefits into the top decile of income earners. In short their interests are aligned with the top decile’s and they cant be trusted to implement needed policies. We even have the NRL Premier (as Barry OFarrell quipped “Nathan Rees Loser”) earning in the top 0.5% of taxable income earners. Its pathetic.

    Defending Michael Milken Sean G for a few donations to charity when he has done jail time for his corporate conduct?? So a charitable donation of some piddling (relatively) amount makes that go away does it?

    Defending the indefensible. What more would I expect from you. As for your comment

    “The electorate is more right wing than you think.”

    Thats why they voted for Rudd in a landslide is it?

  6. Rudd was Howard Lite in 2007. Remember the tax cuts? What about being a “fiscal conservative”? How about tacitly approving military intervention in NT. He is more left-wing in power than in Opposition. You don’t know much about politics.

    You also do not know much about decision-making. Politicians want to be reelected and when they use the umbrella of keynesian economics as an excuse to spend money then they will never do so in an efficient manner. Look at the lack of a cost-benefit analysis for billions of taxpayers money spent on “nation building” infrastructure.

    It is the private sector – people pursuing their own interests which drives economic and social development. Freedom in economics and society is linked. You seemingly believe that the huddled masses should just do whatever the government says.

  7. So if I get this correct, if the government spends more money or redistributes more from the more affluent to the less affluent this generates a miraculous ‘multiplier effect’ – i.e. it generates benefits many times greater than the cost. On the other hand, if a wealthy person makes more money this generates no external benefit. The money gets kept in a watertight compartment where not even a trickle flows to anyone else. How anyone can believe in multipliers but then scoff at trickles is a mystery.

    Nice straw man there, but unless you believe that the marginal propensity to consume is constant across all income levels then it shouldn’t be a mystery why one is preferred to the other.

  8. So? I like Soros and I think the EMH is rubbish. However, I read in the WSJ a good point which is that EMH is based on a subjective value and does not make an assumption as to whether or not the price is correct. It also has a few other points which are interesting.

    Soros was a student of Karl Popper and I suggest to everyone here to read either Karl Popper or Nassim Taleb. Both are very, very good and question the underlying assumptions we use when we analyse events.

  9. @SeanG
    ha one point of agreement with Sean (I keep count). I like Soros and think the EMH is rubbish as well. Im not 100% sure that Soros’s reflexivity really is likely to explain the herd madness of crowds in financial markets any better than Keynes animal spirits explained market movements but Ill award a mark or two to anyone who can get closer to understanding what is essentially a large casino with a few Packer sized punters at the tables.
    However I think Soros is on the mark when he says that misconsceptions (misperecptions) can and dio alter fundamental values of shares and the market can have protracted periods away from equilibrium. The concept of some sort of equilibrium between demand and supply isnt central to Soros thinking here either – I agree with that as well – demand and supply assumes an indepdendence for each that is as flat as an accounting equation).

    Its just refreshing to have someone deny the fact that we are all perfectly rational and have access to perfect information. Even if we were and did our intelligence isnt perfect enough to process it. How the EMH ever flew is beyond me.

  10. Reflexivity was an interesting concept. In the long-run I disagree with it because it cannot be really applied to commodities and equities. I will give you an example. During the great oil bull run in the first half of 2008 you had reflexivity operating at maximum potential but then the price collapsed once participants recognised that things had gone out of control. Now, over the long term you will get periodic bursts but the trend will be towards equilibrium.

    Don’t forget that Soros is a hedge fund manager – they speculate as opposed to invest in markets and their time horizon is different to those who want to invest in the long-term.

  11. @SeanG
    Go to his lecture on Financial markets Sean – he puts up a graph where it illustrates that this is what tends to happend “reflexivity operating at maximum potential but then the price collapsed once participants recognised that things had gone out of control.” but he acknowledges that and says it then rapidly goes into reverse pulling both the share price and the earnings per share down, with the share price falling ahead of the fall in earnings per share. Given that share prices affect equity levels and changes in that disturb the debt equity ratio then may require adjustments would be made by the frim perhaps resulting in lower profits (sales of assets and less income earning potential as fewer assets) etc then logically earnings per share falls pursuant to the about face in share price.

    He also illustrates these graphs in a number of cases over an 8 or 10 year time frame, so whilst he may have different time frame for hedge fund profit purposes I dont think we can assume that makes any difference to his ideas here.

  12. “Nice straw man there, but unless you believe that the marginal propensity to consume is constant across all income levels then it shouldn’t be a mystery why one is preferred to the other.”

    Well, that’s a nice straw man in itself. The argument that is often put by others here is that trickle-down theory is a myth. Full stop. Doesn’t exist. The argument is not that trickle-down is an inferior or second best option for stimulating economic activity.

    Nothing I said is in any way dependent on believing that the propensity to consume is constant across all income levels. Of course low-income earners are more likely to spend any extra cash they receive, while high-income earners are more likely to save it. But this is only economically beneficial if you assume that a) consumption is better than generating more capital for investment, and that low savings rates and high debt are not a problem, and b) higher taxes on the wealthy don’t impact on economic incentives. While demand-siders may well accept these two assumptions, supply-siders sure don’t so there is no tension in my own position.

    It is true that from a demand-side perspective, it makes sense to use government stimulus and redistribution to stimulate the economy faster than trickle-down. But I wasn’t criticising anyone for claiming some differential. I was criticising those who tend to exaggerate this differential.

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