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“The Stupidest Article Ever Published”

I got a good chuckle from this comment over at Mark Thoma’s website:

Via email, I was asked if this is the “stupidest article ever published?”:

The Inflation-Debt Scam

If not, it’s certainly in the running.

The articles promotes the Shadow Stats views and the idea that the USA is on the verge of catastrophe.  In essence, they argue that inflation has been massively understated, the US government is on the verge of financial insolvency and that GDP is actually lower than it was in 2002.

I’ve touched on the Shadow Stats and hyperinflation views enough in the last 5 years that I don’t think I need to repeat myself.  Besides, Mark Thoma’s comment pretty much covered all the necessary bases there.  People who still buy into the views of the hyperinflationists and Shadow Stats are working from what has been a seriously discredited framework….

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14 comments
  1. Avatar
    tealeaves

    Something I can’t understand in general, by why does debt (total credit TCMDO) by GDP continuosly increase. In 1980, $1.5 of debt produced $1 of GDP but today $3.5 of debt is required to produce $1 of output.

    Is this increase in debt to production a natural progress as all economies become less efficient at production (until at least a significant innovation occurs). Or is there an over reliance on borrowing from the future for growth today? Does it matter? I suppose, the debt/assets for the private sector is high but not seemingly in a runaway condition.

  2. Avatar
    jswede

    the rub lies in what the debt proceeds are used for. Service on debt used for non-productive purposes (ie consumption) will drag on the economy as the payments must be derived from returns elsewhere. Debt proceeds spent on true productive ventures should, by definition, “pay for themselves”.

  3. Avatar
    LoLattheUS

    If The Fed Consumer Survey is accurate, no one will have to worry because they’re all screwed, minus the top 3% (according to survey).

    The data, both words and math can be designed to be custom fit, but the survey, once again if accurate, is stating what is actually happening to the populace. It really doesn’t matter what GDP, inflation, costs, etc. is doing if the math and words made up by some Ph. D is wrong to begin with. What the survey said is structural, but since everyone wants their free lunch today, no one is really looking forward based on what is happening to them now (or the past).

  4. Avatar
    Jeff Jeffries

    A while ago I asked you Cullen what your thoughts on the sustainability of the American economy were. You said growth would slow and better opportunity lied outside of our country. It seems that although you don’t agree with the road the author took, but you do agree to some degree where it will lead. Still to this day after trying to get you opinion on two other occasions I haven’t gotten a response from you on your thoughts on the current changes in the petro dollar system. I know that until now your thoughts on the lack of inflation from QE have been proven correct. Sure seems like if something were to spawn inflation it would be lack of demand for US dollars caused by a failing petro dollar. Maybe you don’t think the petro dollar system is worth discussion but Kissinger sure thought it was a necessary implementation after leaving the gold standard.

  5. Avatar
    Cullen Roche

    Debt is just one side of the ledger. You always have to think about the other side. And assets have also grown much faster than GDP. Household net worth relative to GDP has also risen steadily. Maybe it has more to do with the way we don’t always accurately calculate GDP as opposed to something purely negative?

  6. Avatar
    Cullen Roche

    Hi Jeff,

    Demand for dollars is about much more than the petro dollar system. I also think this idea vastly overstates the importance of Saudi oil in the USA. In fact, the USA doesn’t rely on Saudi oil nearly as much as people think. We’re much more dependent on Canada and our domestic production now. Dependence on Saudi oil is falling. And my guess is it will fall faster and faster as we make more progress in the alt energy space. My guess is we’ll see oil prices totally collapse in my lifetime and it will spark a massive consumption boom as all those dollars are reallocated into other parts of the economy….The peak oil theories are totally wrong in my opinion. Trough oil is the more likely scenario….The petro system is an antiquated system and it’s only a matter of time before innovation crushes the dependence on it. Won’t happen over night, but I think I’ll die knowing that our dependence on the petro system is no longer….

  7. Avatar
    Jeff Jeffries

    I’m psyched you replied so quick thank you Cullen, however as much as I agree with your resolve I am quite skeptical on where these “dollars” are really located in the system. I was under the impression that our petro dollar system (though old and becoming obsolete) was the number one thing causing international demand for US dollars. You and I both believe that our world is headed towards a global economy. If this happens then it just seems obvious to me that the petro dollar system will completely fall apart, but other economies (nonamerican) will also be benefitting from this “new system” which in essence seems like the beginning of the decline of the dollar into that inflation we don’t think possible at this point. I agree that QE doesn’t cause inflation, but what are the effects of QE when the petro dollar fails. Do you think there is just no correlation at all? I have no idea myself but the two seem more interconnected to me than most.

  8. Avatar
    jswede

    see I’d say that exactly points to the problem imo, and the difference in our views, Cullen…. you’re looking at the ledger of Aggregate US Household Net Worth — problem is that when you break it down into subgroups – and certainly individuals – generally speaking, those with the assets have no debt, and those with the debt have little assets. Stocks have single-handedly inflated the asset side to record heights – but how much of the consuming public have benefited?

  9. Avatar
    Geoff

    It is very difficult to get a loan unless you have assets for collateral. But your point is well taken. With the 10yr Treasury having corrected to 2.60%, is it time to back up the truck??

  10. Avatar
    Jeff Jeffries

    And just one more thing. I agree that US dependence on Saudi oil is at a lowering pace. Is that really isn’t the economic issue at hand? It would seem to me that foreign demand of Saudi oil would be the more determining factor on how that affects the US dollar, wouldn’t it? If Europe and Russia and China and the mideast all deal in oil devoid of US intervention that has to have dire consequences on US currency demand. I guess what I’m asking, is what do you see as the other driving factors raising foreign demand in US dollars?

  11. Avatar
    John Daschbach

    This is a classic and mostly wrong view. Consumption and production are within a tiny amount always balanced. Everything that is consumed requires production. Our ability to store production is small relative to the rate of production, and all stores of production have entropic losses of varying magnitudes. Remember that in pure macro economics money doesn’t appear, it’s only the production and consumption terms (which includes the entropic losses).

  12. Avatar
    John Daschbach

    There is a body of recent Chemical Engineering literature that puts the cost of domestically producing all US liquid fuel needs, primarily using coal and natural gas as feed sources, but also able to use, at higher cost, biomass feed sources, at ca. $100/barrel amortized over ca. 50 years. If you add in probable changes in distribution costs, it’s more realistically ca. $110/b to $140/b. The costs are hugely front loaded. I’m obviously not a financial person, but the US private market system is unlikely to ever undertake such up front investment given current and near term market expectations. However, it seems like a perfect storm for China (because the up front costs are employment for construction) and I would not be surprised if a century from now history looks back and questions why the US adherence to “free markets” and “private enterprise” and “short term profit seeking” wasn’t understood as the same recipe for failure as many other unbalanced views throughout history.

    I would not expect any miracles in the alt energy space given our drastic reduction in basic research in this area. This is a very hard problem and the pace of breakthroughs is minuscule. The analysis referred to above uses only slight modifications of chemistry developed in Germany ca. 100 years ago. Don’t fool yourself reading the publicity, read the real chemical literature. Outside of gen 4 nuclear reactors (which we irrationally abandoned decades ago) there is no known technology that can provide our energy needs at “near market” prices for probably the few decades.

  13. Avatar
    jswede

    as in my point above, in aggregate you are correct. however the aggregate view hides the problem.

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