The Debt Crisis in a Nutshell

Friday, September 16, AD 2011

Hattip to Bookworm Room.  We are heading to debt repudiation both nationally and internationally, although I am sure that some euphemism will be used.  What this does to the global economy is anyone’s guess, but I think at best we are looking at a prolonged recession\depression lasting at least a decade.  Long range however, I share the fundamental optimism expressed by Milton Friedman in the video below, if we are capable of understanding how we got into this mess and make the necessary changes to radically alter our course.


15 Responses to The Debt Crisis in a Nutshell

  • Here are the policy choices:

    Raise tax receipts.
    Reduce expenditures.
    Accelerate GDP (private sector) growth.
    Inflation – the cruelest tax of all.

    Obama has been unable to achieve any of it based on his one successful government program: killing jobs.

  • Kenneth Rogoff has said that several years of moderate inflation (4-6%) would be therapeutic for our economy. Among the difficulties that the PIIGS economies face at this time are the technical impediments to devaluing their currencies.

  • T. Shaw- it doesn’t seem to be via directly killing off Evil jobs, or even spending mad amounts to help Saintly Jobs, but inflation sure seems to be hitting my family. I know they cheeze the inflation calculations these days by saying that food and energy doesn’t count, but it sure counts in our check book, since that’s most of the non-rent spending….

  • Agreed as to consumer inflation Foxfier. I can see it not only in what my wife has to spend for groceries, but also when looking at the rate of inflation through traditional analysis:

  • I know they cheeze the inflation calculations these days by saying that food and energy doesn’t count,

    No, they do not. They publish a figure commonly called ‘headline’ inflation which includes food and energy prices and ‘core inflation’ which excludes them. Food and energy prices are commonly volatile in both directions, which is what makes the core measure useful to know.

  • AD: A+ on the Euro!

    9/7/2011 Barron’s “Milton Friedman’s Euro Smackdown” by Gene Epstein – he was pessimistic about euro’s prospects. “Suppose things go badly, and Italy is in trouble.” An independent Italian money would address that with a reduction on the lira exchange rate, which would lower Italian prices and wages relative to other’s, and enhance Italian competitiveness.”

    With the Euro Italian prices/wages will need to fall – a more difficult action. “Such asymmetric shocks hitting different countries, said M. Friedman meant the euro had an uncertain future.”

    Case in point is the current sovereign debt crisis. With separate currencies devalued the troubled debt would trade at more (exchange rate changes) favorable prices. With the euro you lilely will see a “disorderly” restructuring of Greek debt by year-end which would trigger a renewed recession.

    Then, what about Spain and Italy? The dollar would seem undervalued, except for Obama . . .

  • Art-
    when the only stat that they talk about is the core inflation, it doesn’t much matter if they offer headline inflation and then say “but it’s not reliable.” (Interesting, though– Investopedia mentions that it’s normal to do a 12 month average of headline inflation to counter that exact point. Shocking how that stat isn’t in standard use, rather than the one that discounts such a huge chunk of actual expenses, isn’t it?)

  • when the only stat that they talk about is the core inflation

    That is not the ‘only stat’ they talk about. This is the most recent release by the Bureau of Labor Statistics. The core inflation numbers are not mentioned until the 3d paragraph. The comprehensive index is discussed in the 1st and 2d paragraph.

  • Art, it most assuredly is the only “inflation” stat you’ll hear about– even news stories that do mention the consumer price index will say ‘inflation’ when they’re talking about the core rate. The information is around to be found, if you know it exists, if you can understand it, and if you care enough to go looking.
    Same way you only hear about the jobs rate on the day it’s released and they don’t mention the adjustments– even the times when most of this month’s growth is from the prior month being adjusted down. (How many times did that happen?)

    There’s a reason that sites like that “shadow stats” place are popular.

  • Foxfier, it is not the fault of either the Bureau of Labor Statistics or the news media that you listen only selectively. (And you are no more correct about news reports than you are about the press releases of the BLS).

    The constituency for “shadow stats” is people who get a charge out of fancying that they are being lied to and are happy to be gulled by the character who runs it. The same sort were buying Birch Society literature four decades ago.

  • Art, your link has the word “inflation” on it once– down at the bottom, leading to a calculator. That you find the information and interpret it just supports my point. Five minutes of looking around would show you that it’s not exactly news that the media keeps using the core stat when they talk about inflation, rather than the 12 month average or the actual monthly stat, even adjusted.

    If you want to have a whizzing contest about how superior you are to the people who just listen to broadcast news, or read the local paper and take them at their word, and how incredibly superior you are to people who will search out sites that offer calculations you disagree with, go for it– you can do it without me. Hope you don’t stub your nose on a doorframe.

  • Five minutes of looking around would show you that it’s not exactly news that the media keeps using the core stat when they talk about inflation, rather than the 12 month average or the actual monthly stat, even adjusted.

    That is just nonsense.

    The precise term the Bureau of Labor Statistics uses is ‘Consumer Price Index’. ‘Inflation’ is a common shorthand.

    For the most part, I read the newspaper and see the same news you do. The media is not putting one over on you. The government sites quoted by the newspaper are just as accessible as this blog and not notably obscure in their presentations.

    Mr. Shadow Stats is an elderly management consultant who contends that he produces better statistics at his desk than the federal agencies who have large staffs to collect, analyze and publish statistics. Implicitly, he contends he produces better statistics than the Conference Board or the Institute of Supply Management. He is not serious.

    I am not interested in a whizzing contest with you or anyone else nor in who is superior to whom. You are propagating falsehoods to your own detriment and that of anyone who listens to you and you should stop doing that.

  • Oh, my!

    Almost everybody I know daily eats and heats (say December to April) their homes. Unadjusted stats 12 months ended 31 August 2011: all energy up 18%; gasoline up 32%; home heating oil up 35%. Food at home is up 8%; all food is up 4.8%. Source: All Urban Consumers (CPI-U): US city average.

    Apparently, the Fed believes that energy inflation magically slows the economy and so it doesn’t need to jump on it with its weapons of mass monetary destitution. This probably is the reason the Fed “hearts” exclusion of energy from analyses of consumer price increases (er, the inflation rate). Concomitantly, there seems to exist a high, inverse correlation between reduced economic inflation and increased mass malnourishment.

  • There are arguments to be made on both sides for including and excluding food and energy prices in determining the rate of inflation. On balance I think they should be included, the wide swings in such prices notwithstanding. As a result I always pay more attention to CPI than to core inflation. A good overview of where CPI stands currently:

  • The practice of using the two methods strikes me as not just reasonable but necessary if one is going to derive any meaningful intelligence about the state of the economy. Things like averaging for a year or adjusting for seasonality are important. It’s not an indication of shenanigans, but one of competency. I would be mocking the reports if those breakdowns didn’t exist.