Tuesday, February 24, 2009

On Journalistic Integrity

Today's Globe and Mail was dressed with a total abomination of journalism.

Heather Scoffield asks, Will Invoking the Great Depression Bring It On?

To be fair, poor journalism is nothing new. In fact, it is the rule rather than the exception. But this particular article did such a marvelous job of repeating nearly every economic fallacy going around and while doing so attempted to shift the blame from the culpable to the prudent.

OTTAWA — Farms turned to dust, livestock starved to death and migrant workers toiled for pennies a day, sleeping in barns at night and eating mush. Children went without shoes in winter.

“I never took a backward step in my life until that Depression whipped me, took away my wife, my home, a section of good land back in Saskatchewan,” 78-year-old Henry Jacobson told Canadian writer Barry Broadfoot in his chronicle of the Depression in Canada.

“Left me with nothing.”

Scoffield starts out with a classic misrepresentation of the depression. I'm not saying it wasn't bad, but to proclaim that "Children went without shoes in winter," as a statement of absolute fact should strike anyone as sensationalist. Surely, some children went without shoes in winter in the Depression. Surely some went without shoes last year, and the year before.

And the workers "toiling for pennies a day," does not mention that adjusted for inflation those pennies were enough to feed themselves and survive. But again, it is a blanket statement. "Workers." Not some workers. She makes it sound as if it was a condition that plagued all of society. In fact, even at the worst estimates of 25% unemployment, there is the little noticed fact that 3 in 4 people still had their jobs. And while their wages may have been falling, they were not reduced to sleeping in barns.

Scoffield goes to great lengths to sensationalize the worst parts of the Depression. She's not alone. I distinctly remember learning about the Depression in high school (it was one of the classes I didn't skip, evidently). What sticks out in my memory? Pictures like these of course:

What my teachers and Ms. Scoffield failed to point out was that you could traverse across any country at any time (boom or bust) and find people in this condition of poverty. Examples like that of Mr. Jacobson (who lost his farm, home and wife - I'm pretty sure that is the correct order) could be from any period of modern history.

The truth of "the Great Depression affected everyone" has been skewed to make us believe, "the Great Depression had everyone sleeping in barns." This sensationalism is not limited to this article. It is prevalent in every reference to the GD.

Back to the article:

The era was so punishing that it has become ingrained in Canada's psyche as something that must never be repeated. The D word is a painful one, used sparingly and with dramatic effect.

Now, however, as the U.S. economy craters, the global economy falters and Canada is clearly in recession, talk of depression has become commonplace. The 1930s are no longer a distant memory. The decade has become a poignant reference point, with policy makers drawing lessons and making comparisons, and some economists now warning that the world is at the precipice.

Dominique Strauss-Kahn, who heads the International Monetary Fund, has suggested that the world's major economies are “already in depression.” Economist bad-boy Nouriel Roubini warns that the United States is in a “near depression.”

Such seemingly casual use of the D word has many analysts balking, warning of the effect such a mindset can have in an already fragile economy plagued by a lack of consumer and business confidence.

And why do you think "many analysts" are balking at the use of the word? Could it be because its comeuppance would be of no benefit to them? Because their heavily leveraged portfolios are getting margin calls and they need some optimism to sell to a greater fool? Nevermind the conflict of interest. That's a whole other topic.

I want to touch on this issue of "confidence," and whether the lack of it is the cause for our current predicament. Of course, we know the answer is "no." But I always find it amusing that journalists, analysts and most economists never refer to the years of excessive confidence, only pointing it out on the way down. It is always assumed with shocking agreement that rising confidence is rational, yet falling confidence is irrational. You'll often hear guys like Bernanke talking about a "deficiency in aggregate demand." As if by it's very nature, demand is lower than it "should" be. How does he know what it should be? He doesn't, of course.

So can "the news" cause confidence to fall? Think about it. Does one fear losing his job because the newspaper said 120,000 Canadians lost their jobs last month? Or does one fear losing their job because their co-workers or neighbours lost their job last month? What is the reason for the person fearing for their job? Is it job losses or the reporting of job losses? If you guessed the latter, then may I suggest a career with Pravda.

Seriously, the insanity has to stop somewhere. If fallacious arguments like this become acceptable logic in our mainstream media, then the entire institution of a free press is in jeopardy. If we are to vilify people such as myself for making correct analysis of the economy, where do we stop? Do we vilify the person who reports the damage of a natural disaster? How about the journalist that uncovers political fraud? Why not just outlaw any news that could be perceived as negative? Do you see where these arguments are rooted? Do you think it is accidental? If so, you are thinking with a dangerous naivety.

But as confidence in the banking system continues to falter, jittery investors drive down stock markets and inflation hovers close to zero, more economists are grappling with the possibility that the deepening recession could turn into something worse and more intractable – a slump that may earn the D-word moniker, even if it doesn't replicate the misery of the 1930s. “It's a worry,” says Angela Redish, an economics historian at the University of British Columbia.


The chances of Canada, or even the U.S., facing a repeat of the 1930s is slim to none, most analysts say, because the North American economy is much different than it was 70 years ago. Employment insurance and social programs are beefier now, especially in Canada, and the population in general is much further away from the poverty line.

There is nothing correct in this last paragraph. Nothing. The North American economy is very similar to 70 years ago. It is lopsided toward consumption. Previously, it was lopsided toward production. Either way, it is lopsided. The insinuation is that we have a more balanced economy now. Nothing could be further from the truth. The services sector accounts for an enormous portion of our economy. And with less consumption to "serve," many of these jobs will become obsolete.

The second assertion is that social programs are "beefier" now. I suppose that would be why more than a dozen US states are already at the bottom of their employment insurance funds? Despite the facts, people continue to praise the social security model as if it is functioning. In reality, pension funds are being decimated, and employment insurance funds are grossly inadequate to cope with anything close to what we face. The jobless elderly are going to find that neither of their promised insurance schemes will be able to pay. And the reason is simple: they were never designed to pay. They were designed as ponzi schemes, where incoming money would be used to pay current obligations. When the incoming money declines, due to economic reasons or demographic, the scheme implodes - just like Madoff's. Citing this as a "strength" is grossly misleading. Rather, the false sense of security our populations have been lulled into is more of a weakness. (I do realize some pension programs are in better shape than others. But if you set the bar low enough...)

The third false assertion is that our general populations are further away from the poverty line than before. In order to make this determination, we need to replace "savings" with "home equity." The former is non-existent, and the latter is dropping like a stone. I can't remember the exact numbers, but something like 80% of Canadians live paycheque to paycheque. I don't care how many flatscreen TVs one has. Without a paycheque, a person without a job, no savings and a house that can't be sold is impoverished.

Below is a chart of consumer and mortgage debt as a percentage of GDP in Canada and the US. If you've fallen for the punchline that Canadians are more responsible with their finances than Americans, you've been fooled. This is not healthy:

More from the article:

For Luc Vallée, former chief economist at the Caisse de dépôt et placement du Québec, the U.S. has already reached that point. The hugely expensive fiscal measures that Washington is throwing at the crisis, accompanied by interest rates near zero and ever-creative moves by the Federal Reserve to fix the financial system, mean that the economic trouble is extraordinary, not just a recession, he argues.

“It looks like maybe the big D has arrived. It may not be the Great Depression, because we have these stabilizers which prevent us from collapsing totally. But it looks like we're stuck in a place where it can't start on its own, because the financial intermediation is not functioning properly, and that's a big part of a market economy.”(emphasis mine)

By Mr. Vallée's logic we can also conclude that: Levitation is a big part of gravity. Killing something is a big part of keeping it alive. Turning out the lights will help us see at night.

Sadly, Mr. Vallée's verbal defecation was only about half-way through this article. We continue boldly:

Deflation is one of the key differentiators between recession and depression, explains economist Robert Fairholm, director of the Toronto-area Centre for Spatial Economics.

If prices are rising, and some sort of inflation persists, it means consumers and investors are still somewhat active, and the economy should be able to start growing again. But if consumers and investors fear widespread falling prices, then a dangerous deflationary spiral – one that drives up the value of debt and prompts consumers to delay purchases – could take hold. And that would drive the economy into a long, deep depression.

So far, Canada's inflation numbers are in positive territory, and look poised to stay there – save for a few months of some negatives due to lower energy prices. In the U.S., however, the spectre of deflation is looming large, with officials from the Federal Reserve talking openly about it.

Spacial economics is an accurate description of this person's views. Better would be "outer spacial." Let's get a show of hands among my readers. Who would prefer to pay less for nearly everything they buy? Everyone? Well that's strange. According to the institute of outer space economics, we should want to pay more. We should be afraid of paying less. Running for the hills at the very sight of "price reduced" signs.

This clown, like all the other neoclassical economists, equates inflation with growth. "If prices are rising and some sort of inflation persists, it means consumers and investors are still somewhat active..." This is an absurd statement. How active are consumers and investors in Zimbabwe? How is their economy doing? Rising prices can be due to any number of things. Chiefly, rising prices are a result of consumer time preferences that are effected by social trends, demographics, and monetary policy. It is not a sign of strength or weakness.

Additionally, "economists" like Mr. Fairholm are completely lost to explain the near 30 year period after the civil war in America. Prices were falling an average of 2% every year (compound that), yet America was in the midst of the Second Industrial Revolution. They also cannot explain why recent progress has been centered around sectors where prices have been falling rapidly - namely technology.

Entire schools of economics have been crafted to promote this confiscatory inflationist mantra. Inflationism that we know benefits only those with first access to credit (namely the already rich). So now that we are mired in this rapid deflation, the minions of this inflationist tyranny are sent out to spread their propaganda.

Central banks now have far more flexibility to fend off deflation than in the 1930s, UBC's Ms. Redish stresses. Back then, the gold standard that backed up most currencies constricted central bankers' ability to expand the money supply. Not so now.

“When you have the Fed able to print money and the Bank of Canada able to print money, you're not going to get those deflations,” she said.

I discussed the Fed's ability to "print" money in "It Ain't Gonna Work."

The Fed's "money printing" charade amounts to increasing reserves. This puts the reserve cart before the lending horse. Unless they increase the physical supply of dollar bills by 25x, they cannot start to have an effect on the overall supply of money and credit. But still, that money requires velocity in order to have the same inflationary impact that newly minted credit had back in the boom time. There is no engine for that velocity.

All in all, this article is one of the worst pieces of rubbish I've ever read.

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olives said...

Great post.

mike.montchalin said...


I've been hearing about "beefiness" since the seventh grade, back in the 1960s.

Now, just as it is becoming obvious that things aren't so beefy, Heather Scoffield asserts they are..... and that beefiness will save us!

Ben Bernanke has built his reputation around increasing the money supply to... to whatever it takes.

Imagine that the money supply is increased and reserves continue to increase. And the money supply continues to increase. It seems there could come a point where the increasing money supply is big enough and the rate of growth convincing enough that reserves would be unleashed with panicked abandon.

Does this belief in beefiness and monetary control leave an aftertaste of instability?

By the way, Alan Meltser was on www.econtalk.org with this kind of idea. Well, he thought there would be an eventual unleashing of reserves that would make the seventies look like a picnic on a rainy day.

Somehow, I don't think he is thinking in the order of 25X money growth.

mannfm11 said...

There is more economic nonsense being written than ever Matt. The close of your article covers some of it. The Fed doesn't print money, it swaps liabilities. This if Bank A sells the Fed $50 million of it loans, usually some kind of AAA quality paper, it receives credit with the Fed. It still owes the money to the depositors, but it no longer has an asset. If the depositors don't want the cash, the bank needs to acquire another asset. As long as the purchase are interbank, that is a bank paying back or acquiring an asset from another bank, nothing has happened. Now if the bank buys $50 million in bonds from you or I, it has replaced its asset and the money is now printed in my account, but owed back to the Fed.

The TARP money is one such animal. There wasn't any money. There was an entry in the capital account of the bank. If their capital was insufficient to do business before the TARP and merely made high enough to maintain the status quo, the TARP only replaced what was gone and merely created a swap of liabilities between the bank and the government. They didn't print up anything.

The closest the Fed can get to printing is to sell $50 million in government bonds, lets say. government spend $50 million and the fed turn around and buy back $50 million in bonds. If the Fed didn't do the first transaction, it would clearly be that the Fed owed the bank $50 million.

My point in all of this is the socalled printing that goes on is more complex than most think. For it to really go on, the act of futility has to occur where the bank buys an asset outside the bank to replace what it sold to the Fed or it has to create a new loan, by which it now has a new liability to a new customer and still no asset other than an equivalent of a loan from the fed on a financial asset. The idea the Fed prints money for nothing is pure nonsense and the minute they issued uncollateralized paper, they would be out of business. This is because the Fed is a bank and has to have a capital reserve like any other bank. This seems to be lost on people.

The real problem is to find people that aren't broke to borrow money for the purpose of spending it. I talked to a successful friend tonight. He was telling me about the credit line he got and how he had some of it drawn merely to show the bank he was using it. He wasn't really using it, but wanted it available if he needed it. If he didn't draw on it, the bank might just take it away. My guess is there are maybe a trillion in loans that are doing nothing more than sitting in an account, just in case the company needs the money. A bank don't need to go to the Fed to make this kind of loan, they merely need to create the credit in the account. In fact, this money never really exists until the customer writes a check.

Namke von Federlein said...

I've been waiting for a word for some time - productivity. It would seem that this 'radical concept' has been beamed into 'outer spacial'. And I think that productivity is the root of the point that you are trying to make about inflation vs. deflation : Basically, nobody cares what the nominal price of an item is as long as the purchasing power of a salary continues to increase.

In passing, I think you have hit the main reason why this, um, financial adjustment phase is going to be very, very painful. I think that we are at the point of 'tech convergence'.

In other words, think about the factories, people and raw materials needed to make : a phone, a music player, a camera, a flash-light, books, magazines, compact disks, boxed software, remote controls for your TV and the built-in controls for your microwave. Add your keys, your cash and all the receipts that cash registers produce. Not to mention video store rentals, computer games,the key pad on your home security system and the remote control for your garage.

Now think of a device which is like the iPhone plus the Kindle ('no subscription' downloading of files). We are almost at the point where just about everything can be 'virtualized' into one little (and inexpensive) portable device. Got a new TV? Just use the wireless connection to download the remote control software into your device. No design, construction, shipping or disposal of remote controls necessary.

The point is that this technology is so cheap that it will allow developing nations to leap-frog an entire generation of 'capital and labour intensive' economic development.

Not to mention how business can leverage computer tech. For instance, imagine a store at the mall where the staff would 1. find you the best price on the Internet from their screened and certified suppliers of merchandise 2. take your payment (so you don't have to put your credit card on the Internet) and 3. take delivery for you (so you can pick up your stuff after work).

Anyway, I am really enjoying your blog. There is a great deal of frustration and anger in the blog space. You are not alone! In fact, I got so angry with the TARP 1 declaration of World War that I had to stop blogging.

Thanks for your straightforward style and excellent blog content.

Namke von Federlein said...


Just a little update to my last comment where I mention the impact and imminence of "tech convergence'.

Not surprisingly, at news DOT cnet DOT com there are two articles today that you might find interesting.

One is called "Kindle books, meet iPhone readers" where Kindle e-books are now being made available for the iPhone.

The second article explains how 3rd party software for the iPhone is now turning it into things like a medical diagnostic tool, game console, etc. The article is "Apple developers mark a year of iPhone apps"

The economic implications of this rate of "tech convergence" is just incredible - especially at a time when people are looking for ways to increase their productivity at the lowest cost possible.

Anyway, thanks again for your blog. Just thought I'd pass the articles on since I think that "tech convergence" will be a significant factor affecting investment opportunities over the next few years.

Productivity : have you noticed that there has been no mention of it at all in the econo-blogsphere? Weird. All of the things that are happening will ultimately work themselves out as huge boosts of productivity (and I don't mean the 'unpaid overtime' variety of productivity).

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