Nassim Taleb on EconTalk

Smart guy Nassim Taleb talks about the financial crisis and the systemic fragility that led to it in this illuminating interview.

[EconTalk]

Stock Market: Reality (Finally) Sets In

I've been saying the stock market is grossly overpriced for quite some time now, but the market stayed bullish after government bailouts, stimulus, and plain irrational exuberence, despite our economy being in the toilet. But finally, reality has set in, and the Great Correction has begun.

In one month, the Dow has lost 1,190 points, or 10.6% of its value. That is a boatload of money evaporating, and I doubt we have seen the worst of it.

So there's your sunny optimism for the day.

[graph from Marketwatch]

Why Economic Stimulus is Pointless

And how minimum wage laws do more harm than good. Also, why Paul Krugman is an idiot. From 'Underconsumption is not the problem':

The problem in our economy is not that we are “producing too many goods,” or that “people cannot buy back what is produced” because they are not paid enough, or that government has not flooded the economy with enough new money. No, the problem is that much of the structure of production has been geared toward generating projects that cannot be sustained.

The only way that the economy truly can recover is for us to permit these malinvestments either to be liquidated or be directed toward other, sustainable lines of production. Instead, the government tries to throw new money at us and claim that we just are not spending enough.

That’s a prescription for disaster.

Keynesians would have you believe that the problem with our economy is that there are too many goods and not enough buyers, and that with a large enough stimulus we could take up this economic slack, and kickstart the economy back to life.

The problem is that economic slack, or 'underconsumption,' does not cause recessions, but is rather a symptom of a malinvested economy. The problem is not that people are not buying the fruits of production, but rather that production is making things people don't want.

By 'stimulating' the economy, we merely put off necessary shifts in production. We do not allow unproductive firms to fail and be liquidated, and we do not allow successful firms to use that excess capital to rise up.

Economic recessions are a sign of changing times. We can fight against them, but doing so is as useful as trying to stop the tide from coming in. Instead, we must learn to flow with recessions, to allow capital to move from one industry to another, freely and quickly, so that we can reorganize our economy quicker, and get back to business faster.

The Depression That Wasn't

In 1920-21, America's GNP plunged 24%, from $91.5 billion in 1920 to $69.6 billion in 1921, in one of the worst economic downturns in history. In response, President Warren G. Harding cut taxes on business, and held personal income tax rates steady at 8% for top earners.

Harding vetoed spending bills, including one that would give bonuses to veterans. He saved billions.

Harding also cut billions from the existing budget. The Federal budget went from $6.3 billion in 1920 to $5 billion in 1921 to $3.2 billion in 1922. Federal taxes also fell, from $6.6 billion to $5.5 billion to $4 billion, respectively. In this time, Harding paid off a significant portion of America's World War I debts.

By 1922, the GNP had rebounded to $74.1 billion and unemployment dropped to 6.7%. Unemployment continued to decline through the roaring twenties.

Without debt, by simply cutting taxes and slashing government spending, Warren G. Harding prevented a Great Depression and turned an ailing economy around in under 18 months.

Suck it Keynes.

Why You've Never Heard of the Great Depression of 1920

How Warren G. Harding turned a recession around in 1 year.

It's Bubble Time

Here we go again:

In the last eight months, the Dow Jones Industrial Average has risen from its March 6 low of 6470 to over 10290 today, a gain of roughly 59%. The Nasdaq Composite Index and the S&P 500 Index have likewise increased about 71% and 65%, respectively, since early March. Are we looking at the restoration of legitimate values or the emergence of disastrous new asset price bubbles?

The answer would seem to lie in whether the Fed's money machine is fueling an illusory recovery that is only manifested in financial markets as opposed to the general economy. The FOMC's own report acknowledges that economic activity remains weak, household spending is constrained, and businesses are still cutting back on fixed investment and staffing.

The Fed's 0% interest loans to banks are contributing to yet another massive bubble, though instead of real estate, this time its the stock market.

The game is rigged to blow, get out while you can.

[via WSJ]