It’s The Technicals

I found a very nice explanation of our current economic maladies in a comment at Zero Hedge. In response to a commenter who calls himself Krugman.

Pareto Fri, 03/15/2013 – 20:23

Your Keynesian model assumes static inter-temporal preferences – that people don’t change their preferences given a change in the system’s rules and price signals. Re-read Lucas(1976). [Thus] dy/dg merely amounts to a redistribution of wealth and increasing debt because the government has to take resources from either a current productive area of the economy, or, issue bonds and take it from future productivity. either way dy/dg <0. Moreover, if you understand the Lucas critique you actually have the opposite of your Keynesian desired outcome when it comes to encouraging real aggregate demand. As government spends money (that it doesn't have), there is a tacit recognition that it has to be paid back, presumably through higher taxes. Forward looking, given the life cycle theory, people will actually SAVE, not spend, and they will save increasingly more (see Hugh Hendry – Buttonwood), get by with increasingly less in anticipation. Moreover, as the non-wealth generating component of the economy (primary dealers) spend increased reserves, they bid up asset prices. In addition, firms recognize that the price pressures down the labor and capital chains are not a result of increased volume (real demand), rather they are a result of too much money chasing too few goods. Its why firms are producing the same, but doing so with less input costs, hence their margins are widening despite declining gross revenues (sales).

So, you have pressure on labor with an associated and unintended incentive response of not actually increasing cap. ex., since there is no need. Utilization rates are nowhere near capacity. There is no real demand. The stock market is an excellent proxy for similar behaviour – prices rising on decreasing volume.

The bottom line. The FED has grossly encouraged the mis-pricing of risk EVERYWHERE. Capital markets are in complete disarray, since it cannot correctly assay risk based on demonstrated preferences. there is no real commitment ANYWHERE in the market place.

Tell me how you think thsi is going to end up? Were 5 years in, and it aint working. How much further down the rabbit hole do you need to go before you figure it out?

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Re: the dy/dg question. I look at that in a recent piece I wrote for ECN where I show that for at least one sector of the US economy dy/dg is less than zero. There was a time when I called Obama President ∅. Perhaps he should now be called President <∅. For those of you still at a loss about dy/dg here is a definition of terms: C + I + G = Y C=consumption I=private investment G=government spending Y=GDP Some people add the following X=exports M= imports. Giving: C + I + G + X - M = Y