Why We Can't Have Nice Things (Government Regulated Asset Prices)

[Joe Leote]

Sam Harris interview with Noahpinion blogger regarding the US national debt:

We're Borrowing Money to Pay Interest on Our Debt

Regarding capital flight away from the US Global Dollar my position at this time is TINA: There Is No Alternative.

Regarding inflation the best sketch model I've seen was published by Hyman Minsky in Stabilizing an Unstable Economy. In this model, even if there is no government or government debt, then a shift in the workforce from producing Consumption goods to producing Investment goods will cause inflation. This is coherent to some degree with Austrian theory of interest rates. To my knowledge the US is experiencing an industrial build-out in the Midwest and other places partly fueled by Federal spending and federal industrial policy because we feel compelled to race against China, Russia, and other adversaries for next generation military technology and supply chain integrity. Many cheap consumption goods are made in China or offshore, and it helps the US avoid inflation, while an effort to reshore production ought to drive more inflation.

During World War II inflation was kept in check by government policies enforcing rationing and price controls in the dealer networks. People associate that kind of industrial policy with scarce production under socialism but there are many examples of industrial policy interacting with markets where there is an effort to manage inflation and keep it in check while supporting the production economy via government policies.

Warren Mosler is mentioned in the talk, and I note the criticism of Modern Monetary Theory for its lack of a "model" that predicts what causes inflation or deflation. All economists lack such a model! We assign the role of fighting inflation to the Monetary Authority. In theory if the Fed jacks up interest rates very rapidly then the weakest units in the economy, in the nonbank sector and in the financial intermediary sector, will be unable to rollover their short term liabilities at higher interest rates, and this induces a systemic bankruptcy, rising unemployment, and systemic debt default events. In a money market panic the opposite occurs. The market players restrict credit to each other, the spreads get wider, and it threatens to burst the bubble in asset prices. The Monetary Authority provides liquidity to keep the asset prices from collapsing when credit markets have a "run" or "freeze" driven by credit dealer psychology. Returning to tight monetary policy it curbs demand through the credit system and resets the way dealers in markets set their prices. 

Warren Mosler is the only voice I have heard advocating strict regulations on commercial banks concerning the asset side of their balance sheets. That would be a government policy effort to curb asset price inflation. I don't recall if Hyman Minsky had any similar ideas for asset price stability. Real estate developers and speculators should not be running the government public policy because their private business model depends on financial intermediaries extending credit for asset purchases from "thin air" to keep driving up asset prices!

Joe

[Joe Leote]

The graph of Spending, Interest, and Revenue (drawn on this blog page) could be produced in a more useful form:

The Federal Government’s Debt Is Growing Faster Than the Economy. What Does that Mean for You? | U.S. GAO

The top line should be total federal spending, the next line down should be total federal revenue, and the net interest payments should be the lowest line on the graph. Then (I think) it would become clear that revenue still exceeds interest payments so borrowing is not necessarily done just to pay interest. The graph should also extend far back into US history. 

Japan's debt to GDP went north of 200%. Borrowing costs did not rise and Japan did not default via rampant inflation or nominal missed payments. Kalecki argued for a uniform tax on all capital in the national economy sufficient to cover the interest payments on the national debt. He said a uniform tax would not distort market incentives for the decision to invest in capital. It would reduce the profits to capital but then government spending in excess of revenue tends to boost profits in the economy under the Kalecki-Levy profits identity.

Joe

[William Meyer]

Well there is no alternative until there is one.  

We are used to foreigners stacking our IOUs and this regime was entirely justified by the secular decline in interest rates.  This had little to do with monetary sovereignty but produced returns that either rivalled or even exceeded USA stock market returns (if aggressively pursued via continuously swapping into the freshly issued longest duration STRIPS.)

The geopolitical center of the world is shifting to Asia, it would be weird for the global financial center to remain in the USA.  China doesn't want to liberalize in order to become that financial center.  The USA, Britain, Netherlands were all both military and financial hegemons.  China could go the route of Spain which attempted to keep excess financialization out of the country proper and rely on peripheral allies like Genoa and Antwerp for financial services.  Perhaps Singapore could be that strategic ally for China.  

All the econ data I am seeing on USA buildout is almost entirely data center driven - not clear it will end well for either jobs or roi when second order effects of loss in professional services high paying jobs is taken into consideration.

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[Joe Leote]

After I posted the theory of goods flowing into NYC from outside via accelerated deal-making in the high population density city, motivating goods to flow in from the surrounding countryside, then I noticed a bunch of videos on my Youtube feed describing NYC deep water geography, New York State navigation water routes, etc. One video, I lost the reference, describes the shortage of flat bed trucks in the Midwest for moving goods under contract. This is attributed to Ohio being within a 1,000 mile drive of major US industry hubs and a build-out of factories in the region under US industrial policy to rebuild domestic supply chains. This type of investment impulse would contribute to inflation under Hyman Minsky's theory where society shifts the workforce and materials to the production of investment goods and away from the production of consumption goods on the abstract curve known as the production possibilities frontier. I suspect if one digs deep into the data there are investment projects beyond the grid and data centers for building modern factories, plant, property, and equipment.

Joe

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[Joe Leote]

I found the video arguing that the flatbed bed truck shortage is a bullish economic signal:

Americans Are About to Get a Lot Richer

This video claims half of the US (population) lives within 500 miles of Columbus OH:

Why Ohio Is the Center of Everything

It makes sense to me that the Midwest (rust belt) would attract a good portion of new investment spending under an effort to reshore industry led by the US federal government.

Joe

[William Meyer]

Flatbed is often construction related.  I don't doubt there is a boom in data center.  Some portion may be a rush to break ground before local political resistance begins to materialize.  Some portion of these may stall at partial completion once title and zoning have been established (possession 9/10 of the law).  Imagine acres of half finished data centers mothballed in a potential AI bust - not good.  

Manufacturing employment from bls payrolls hasnt picked up.  This is mostly an announcements story so far (think pledges during a telethon).  They often are lies and never happen.

Of particular interest is all the chip fabs announced on television with trump standing adjacent.  These are political stunts to get tariff free chip imports.  If any portion of this is fake then this whole story is nothing but a mirage.

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[Joe Leote]

I think AI is driving investment into a bubble. But do a keyword search on factories being built in the USA. There is factory construction boom according to the responses. I don't follow the official data necessary to track the projects being pursued under the economic classification of "investment". But there does seem to be an investment boom driven largely by Biden era industrial policy legislation.

Joe

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[Joe Leote]

This video makes the case for a new round of factory investment in the Midwest:

Why Factories Are Moving Back to the Midwest

Joe

[William Meyer]

Used to work in a manufacturing environment where only other things were farming and strip clubs.  Had a hard time keeping people employed from retail competition in nearest big town, mostly hardware stores.  

Before it makes sense to build new capacity, firms fully utilize existing capacity ie 3rd line shifts or 2nd customs shifts etc.  Employment is where the rubber meets the road.  If real, that number should pick up fast but already should have.

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[Joe Leote]

In theory excess spare capacity keeps inflation down and curbs demand for investment in new factories. But industrial policy drives investment demand from the public policy shift. The investment boom under G.W. Bush, prior to the Iraq War, seemed to be driven by tax policies favoring investment even though there were reports of spare capacity at that time. I don't claim to be an economist with bullet-proof models for political-economic storytelling. The shift in labor from consumption to investment goods might not be a macro constraint depending on the pre-existing levels of employment. Typically investment industries pay more than consumer goods. Maybe we are buying robots from Japan to install in new factories so labor is not a big domestic constraint in the boom. I would love to resurrect the defunct economist, Hyman Minsky, and query his sharp mind on such matters! I may do some research into how to track factory construction and why it might be more efficient to use less labor to construct factories or make factory goods then it did in the past. Either way the use of capital to build factories tends to generate inflation as I understand the various economic arguments.

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