Sunday, May 4, 2014

John Hinderaker: Still Economically Clueless

To quote Hawkeye Pierce from MASH, "there's so little that Hinderaker knows about economics, it's difficult to keep up with what he doesn't know."  Really, it's amazing to me that a person who supposedly has an impressive resume can be so wrong on economics on such a regular basis. 

In his latest attempt to prove economic relevance, Hinderaker compares the current expansion to the Reagan's expansion.  As usual, he fails.  Completely.

As people who regularly read this blog know, there is a big fundamental difference that makes this comparison moot.  Reagan's recession was caused by the Federal Reserve increasing interest rates to slow inflation.  As a result, we see the following chart of the effective federal funds rate:

And, we have the following chart of the discount rate:

Because the Fed was the primary cause of the slowdown (fulfilling its job of "taking away the punch bowl") the recovery that started afterward could gain traction quickly.

In contrast, the latest expansion is a "credit default recovery," a vastly different economic event.  Here, the economy experiences a massive asset bubble caused by the expansion of credit.  But as the asset bubble bursts, those who are in debt begin selling assets to cover their loans.  Eventually, the pace of selling leads to two things: a collapsing bubble and a large number of people who owe more than they own.  This means thy greatly slowdown the pace of their purchases, slowing overall economic activity.  We know this to be the current case from looking at monetary velocity numbers:

You can read about this concept in Irving Fisher's essay, The Debt Deflation Theory of Great Depressions.

At this point, I don't expect Hinderaker to actually say anything insightful about economics; he's been consistently wrong on the topic for the better part of 10 years.  But, people actually read his work and (terrifyingly enough) take him seriously.  And that is dangerous, especially when his analysis is so fundamentally flawed.