Liu is at it again...

Thanks to Karlof1 for pointing out this article by HCK Liu in the comments of the Ianqui's post below.

As Karlof1 says: "...with this very long article that details the workings of international and domestic monetary issues and can help answer some of the finance related questions. I will caution that without at least econ 101, the article will prove challenging."

That means it's probably worth reading, eh?

(I will do so as soon as I figure out how to get rid of this headache that feels like there's an axe between my eyes. Until then, please feel free to discuss in the comments.)

Also, just in case you were in a hole today...the market dropped a good bit of value when oil went over $60/bbl. Gee, I wonder what'll happen when it hits $70/bbl.

Go to the postings for today

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There were a couple of intersting items at Bill Totten's weblog I posted in a comment earlier cometh.html come.html

From the first link:

If we can believe what we read in the newspapers, the American economy, formerly believed to be as unsinkable as the Titanic, appears to be steaming toward an iceberg. Most of the experts and nearly all of the navigational aids point in the direction of catastrophe - a $666 billion deficit in international transactions last year, a 24 percent increase over the prior year; a federal budget deficit of more than $400 billion; a dollar that has lost more than a third of its value against the euro since 2001. Not too long ago, America was the world's largest creditor; today it is the world's largest debtor, our solvency dependent upon the benevolence of foreign banks. Meanwhile, belowdecks, the cost of maintaining our rapidly rising number of elderly people threatens over the next few decades to overwhelm the federal budget. A respected credit agency recently noted that by 2026, barring a change in our fiscal policy, US Treasury bills - once the world's de facto gold standard - will be classified as junk bonds.


From the second link:

Many Americans are living in a state of delusion, fed by the politicians who keep telling us we're the greatest, the strongest, the freest, the wealthiest, et cetera, et cetera, and so forth. Actually, we are heading toward becoming a Third World country.

The difference between a First World country and a Third World country is this: First World countries manufacture finished goods and import raw materials; Third World countries export raw materials and import manufactured goods.

Why does this account for a difference in standard of living? It's easy to explain. A skilled machinist adds more value to a product than someone who flips a burger with a spatula. Therefore, the machinist can demand a higher salary. Unfortunately, our manufacturing base is rapidly diminishing, and the villains are none other than our own corporate executives, who are moving production to cheap-labor countries.

(Slightly off-topic)
Time to update the "Day" chart, CLN5 has expired, it's time for CLQ5.

Here is a link for CLQ5 for those who need to know

SO THAT's why it changes. Son of a bitch. Thank you.

The discussion about money is most useful. It should help folks understand why Greenspan has increased the money supply so vastly without causing inflation from this action as rising commodity prices absorbed this increased liquidity. Another point is provided by his preview of the coming trade dislocation. Further details are provided in some of his other essays at these links:,,

Just to clarify a point, the reason there has been no inflation has to do with how most economists define inflation - notably, leaving asset prices (such as real estate) out of the definition. We got inflation when the money supply was expanded, it just was expressed in real estate, thereby not affecting the official figures for inflation.

Prof Goose,

You need to update the monthly Sweet Crude Chart as well!! :-)

I did...but after I did that, (and I did only that...) the whole thing went blank on me...are you guys seeing errors in the page like I am?

Seems like there may have been some "/'s" added or subtracted? around the sidebar divisions?

Try to retrace what you did. I am not much good at HTML parsing

yeah, I have no idea...I didn't change anything...then the template did something strange, so I replaced it with a backup, and now it's doing this...this one's beyond me, I hate to say.

What a depressing day on the internet. I didn't buy my prius soon enough to save us all? Will the irrational hordes descend on me and my prius in anger?

That's mostly tongue-in-cheek, but I do see more other-folks in brand new hummers than brand new prius.

Sometimes it all comes back to our nature, and the root of our economic minds. If you've ever read Thaler's "The Winner's Curse" (or seen reference to the concept in oil reserve auctions), or read the economic sections of "The Blank Slate" you might not be surprised by this headline:

"Capuchin Monkeys Show Same Loss Aversion Economic Behavior As Humans"

I guess we get to see how smart we monkeys are with our oil ...

Okay that was a real slog .... Liu does a good job of dissecting the inherent contradictions and myths of modern finance/economic theory, but I am a little vague as to what his actual point is. Can anybody help me with that?

I think it is a list of reasons we're toast ... but I guess the point of my post was that even if his facts and logic are flawless, we can't be sure how the markets and economies (monkeys) will react. I certainly accept it as a valid cautionary tail ... er, tale.

I agree with odograph -- it is indeed a list of reasons why we are toast. Wealth inequality, weakening dollar, huge trade deficiits, huge federal deficit, no manufacturing base, high energy prices, et. al. but especially

"Global trade has become a vehicle for exploitation of the weak to strengthen the strong both domestically and internationally." You betcha. And this can not go on, which I think is Liu's main point. See the section called "1929 revisited and more" at the end of his article.

What disturbs me even more is the Fallows article in The Atlantic (which I have not seen yet) about a crash in 2009. The Atlantic is highbrow MSM and this is the first time I've seen any kind of acknowledgement there that we're in trouble. It's one think for Jim Kunstler to write about the Hooverization of Bush but quite another for Jim Fallows to do so.

I had always thought that PO would drive the next depression but there are so many other economic pressures in play here that I'm not sure what to think....

I read this today in Thomas Cahill's book "How the Irish Saved Civilization" regarding the themes dominating the last days of the Roman Empire:

The changing character of the native population, brought about through unremarked pressures on porous borders; the creation of an increasingly unwieldy and rigid bureaucracy, whose own survival becomes its overriding goal; the despising of the military and the avoidance of its service by established families, while its offices present unprecedented opportunity for marginal men to whom its ranks had once been closed; the lip service paid to values long dead; the pretense that we still are what we once were; the increasing concentrations of the populace into richer and poorer by way of a corrupt tax system, and the desperation that inevitably follows; the aggrandizement of executive power at the expense of the legislature; ineffectual legislation promulgated with great show; the moral vocation of the man at the top to maintain order at all costs, while growing blind to the cruel dilemmas of ordinary life -- these are all themes with which our world is familiar, nor are they the God-given property of any party or political point of view, even though we often act as if they were. At least, the emperor could not heap his economic burdens on posterity by creating long-term public debt, for floating capital had not yet been conceptualized. The only kinds of wealth worth speaking of were the fruits of the earth.

Though it is easy for us to perceive the wild instability of the Roman Imperium in its final days, it was not easy for the Romans. [pp. 29-30]

The parallels between this situation and our own struck me. I think the real lesson here is that great civilizations can and do collapse, and we are not exempt from history.

those who do not learn...yadda yadda yadda...

How about a depression intentionally started to forestall the worst effects of Peak Oil?

A recession is easy to start - allow consumers to be "trapped" by debt beyond their means; allow inflation to rise faster than normal; jack up rates, trapped consumers in a world of hurt stop spending, et voila, recession.

A depression requires a little extra help - say, a bunch of unwitting senators on a protectionist bent, a la the lead up to 1929...

How about something funny in the food supply making the whole nation mad? (reading the political bloggers today, and their "irrational exuberence" for things partisan)

" How about a depression intentionally started to forestall the worst effects of Peak Oil?"

I've seen this concept expressed in quite a few (conspiratorially oriented) places, like Rigorous Intuition (who used the memorable "Global Year Zero" phrase) and Jeff Vail's "A Theory Of Power".

I don't think PO needs protectionism to turn recession into depression - all protectionism does is kill international trade, and rising transportation prices should be effective enough at that on their own.

Two words for everyone to keep in mind "energy efficiency" - its the only way out of the trap...

From this forum: "those who do not learn...yadda yadda yadda...
hmmph." The Oil Drum (profgoose)

The article in the Asia Times covers a lot of historical ground. Economic competition between nations has caused much indiscipline, and now promises global ruin.

"US policymakers in the 1920s believed that business was the purpose of society, just as policymakers today believe that free trade is the purpose of civilization. Thus the government took no action against unconstructive speculation, believing that the market knew best and would be self-correcting." The Depression was one result.

"For Britain and the United States, a quick war was exactly what was needed to bring their own economies out of depression. No one anticipated that World War II would be so destructive."

At least we have the G8 next month to sort things out.

Not surprisingly, a background in Humanities makes Liu's article a challenge, as do several rather demanding children forcing me to read it in two-minute segments.

I get the big picture of a handbasket and the gates of Hell, but I'm struggling to evaluate the monetary theory Liu is presenting. As far as I can tell, it looks admirably common sense in not abstracting away the entire physical universe. Some of his historical interpretations seem a bit stretched, however (a field I feel more confident to offer opinions on)--which makes me wonder about the rest of the argument.

So: Liu argues that dollar hegemony and free market fundamentalism join to allow the United States to export the bad effects of its spendthrift policies, while simultaneously making it more economically beneficial to export labor as well. This means that the current system is designed to benefit the financial sector at a cost to labor, both domestic and international. This market orthodoxy has so overtaken the governing classes that major social upheaval is seen as the only thing that will cause the United States to change policies, since all exit strategies will be ugly.

In place of market orthodoxy, Liu wants something similar to the Social Credit ideas of the 1920s and 1930s, where government manipulation of the money supply was seen as a vehicle for economic growth focused on employment. I was told (by a traditional economist) that that theory was rejected as inflationary, but it seems that Liu's position is that a little inflation is a small price to pay for full employment (rather than current orthodoxy holding that unemployment is a small price to pay for low inflation, a policy which helps creditors). Is that close to a correct understanding?

Further thoughts: what steps might I take with my rather small nest egg in the face of these possibilities? It seems that trade collapse might happen for financial reasons, and that a recovery will be complicated by the reduction of trade resulting from steadily increasing transportation costs. On the up side, it also might create another opening for progressive politics in this country, based on labor and local production, provided there is enough capital left to make the transition and the intellectual framework in place to make it politically possible.

Henry Liu studied achitecture and the Asia Times is a third rate publication with no print edition. I sort of live in Asia and have read Asia Time regularly for a long time. But if you are looking for intelligent commentary on global economics, there are better places to go. From the left, Brad DeLong and Krugman are far better.

Thanks for the heads up about the qualityof the Asia Times. I ran some stuff by an economist I know, and his summation was: incoherent economics, but fascinating from a political standpoint as an attempt to encourage the Chinese to engage in protectionist policies. This dovetails with the threat of politically - motivated oil policy and the Unocal deal. He also thought that (ideologically) putting forth a kind of human-centered economics to stand against monetarism could be intriguing.

Liu's background and the inconsistent nature of the prose suggest a broad cribbing of other sources without attribution. That is common enough in Asia, but it doesn't help the quality of the argument.

Liu was a professor of Archtecture and Planning at UCLA and Harvard before starting an investment firm in New York, where he is currently. He was involved in the early evolution of interdisciplinary research in Urban Planning and Architecture at UCLA in the early 1970's which set the framework from which he approaches things.

Liu's economics are a bit incoherent, and I can't make heads or tails of how he feels about the gold standard, but on the trade-off between interest rates and full employment he is fairly accurate.

Current orthodoxy is that inflation must be avoided at all costs, and that some level of unemployment is an acceptable result. The public is sold on this idea by pointing out the short-term pain of inflation (rising consumer prices). However, the real beneficiaries of low inflation are bondholders and holders of financial instruments in general. The losers are owners of hard assets, such as real estate.

If the goal is full employment and we accept that the cost is some level of inflation, the following things result:
1) Value of hard assets, such as houses, rises steadily (in a non-bubble-like fashion, unlike our current situation)
2) Incomes rise, in aggregate at about the same rate as inflation, thus eliminating any real impact to the average worker over the long term. The problem with this is that this is not a smooth process, so between pay raises, workers feel burdened by rising prices.
3) Debts (in particular mortgages) become easier to pay as income rises (see #2)
4) The value of financial assets steadily deteriorates. This impacts mainly the very wealthy, since most workers hold far more in hard assets (such as houses) than they do in financial assets.

Of course, Number 4 is why nearly all financial industry types judge the credibility of central bankers exclusively on their ability to fight inflation (and are more than a little suspicious of anybody that views full employment as a proper economic goal). If more of the public understood the real impacts of inflation vs. lack of inflation, I think things would work a little bit differently in this country.

For an extremely long and detailed explanation of all this as well as insight into how the Federal Reserve works, read "Secrets of the Temple: How the Federal Reserve Runs the Country" by William Greider.

But of course, actual inflation is much higher than shown in the CPI figures. So we now have high inflation and high unemployment. Because the methodology of calculating both these figures under went a change (at least in the US) that biases them towards producing artificially low numbers.