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Genius of the day: Krugman



September 05, 2010 – Comments (1)

Yes, our village fool has inadvertently hit it on the head this time. The proposed debt Ponzi scheme keeps running as long as the people haven't caught up to what's happening and try to behave as if we had a normal economy. Once everybody realizes it, everybody takes as much debt as he can, asset prices get bid up to the point where getting a return on your investment becomes all but impossible, and then the sweet dream comes to an end, and enrichment through debt no longer works. "Hey, how do I pay off that $100,000 margin debt to my brokerage?" - "You don't pay it off. You outgrow it by borrowing another $120,000 and investing it and growing your equity faster than the debt. What did you say? You're asking, "but, uncle, how can I be sure my equity will grow when the PE ratio of the index is already above 40?" Oh, well...a good question...And I don't know the answer to that one...I guess, our little game is up. Damn financial literacy...If every Joe and their cousin did not try to copycat our margin trading strategy, we could stay in this game forever..." 



"Whenever the issue of fiscal stimulus comes up, you can count on someone chiming in to say, “Only a moron could believe that the answer to a problem created by too much debt is to create even more debt.” It sounds plausible — but it misses the key point: there’s a fallacy of composition here. When everyone tries to pay off debt at the same time, the result is contraction and deflation, which ends up making the debt problem worse even if nominal debt falls. On the other hand, a strong fiscal stimulus, by expanding the economy and creating moderate inflation, can actually help resolve debt problems.


From 1929 to 1933, everyone was trying to pay down debt — and the debt/GDP ratio skyrocketed thanks to contraction and deflation. During and immediately after WWII, there was massive borrowing — but GDP grew faster than debt, and the debt burden ended up falling.

Yes, it seems paradoxical — but that’s the kind of world we’re living in. And the refusal of so many people to face up to the fact that we’re in a world where conventional rules don’t apply makes it likely that we’ll stay in that world for a long time come.


1 Comments – Post Your Own

#1) On September 05, 2010 at 3:19 PM, fmahnke (67.51) wrote:

I can understand the case morefor  debt / stimulus.  I don't agree with it, but it is at least logical at some level.

Howver, the Krugman/Obama view of the form  that stimulus should take is much harder to get my arms around.  Hire federal employees, keep the structural imbalances at the state level aloat and keep your union buddies happy (even to the extent of excluding non-union contractors from working on stimulus projects) ????

The  result of the economic policy  (which I would argue is more a political, and social enginering effort) is an unprecented debt, (which many Americans and Economists believe is the biggest threat to the American dream) uncertaincy and fear among business leaders and citizens aa well as higher levels of unemployment,

So I think you should ask yourself what is the real result of these policies.  It looks to me,like  they will result in a republican controlled House, the defunding of Obamacare and a series of investigations (including one that I beleive will result in the Justice Department failing to uphold the civil rights of most Americans).

Of course only time will tell if conservatives take control of the political agenda, but if they do, the economic policies of this administration will pretty clearly be the reason, If conservatives prevail, the Krugram economic adgenda could derail his own (and Obama's) political agenda for years to come


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