The Mess That Greenspan Made - Part 414

On that Premature Tightening in 1937

I’ve never really gotten that argument about how the Federal Reserve and U.S. government tightened too soon in the late-1930s and, as a result, induced another recession. In his column today, Paul Krugman notes:

“The boom, not the slump, is the right time for austerity at the Treasury.” So declared John Maynard Keynes in 1937, even as F.D.R. was about to prove him right by trying to balance the budget too soon, sending the United States economy — which had been steadily recovering up to that point — into a severe recession. Slashing government spending in a depressed economy depresses the economy further; austerity should wait until a strong recovery is well under way.

Yet, anyone able to look at the data back in 1937 would hardly see the U.S. economy as “depressed”, not after three straight years of real GDP growth averaging 11 percent. While perhaps not a “boom”, a “strong recovery” was certainly underway by then.

To be sure, the 1930-1933 downturn was severe, but, according to the data from the BEA above, the U.S. economy had returned to its 1929 bubble output by 1937 when all the policy mistakes were supposedly made.

Soros: Gold on the Brink of a Bear Market

Bloomberg reports that billionaire investor George Soros, who sold nearly all of his gold holdings in the first quarter and then repurchased some in the third quarter, thinks gold could be about to enter a bear market.

Of course, this just might be another case of “talking your book” since, after Soros exited his gold position, he used a large portion of the proceeds to buy gold stocks. Even after its recent swoon, gold bullion has gained more than 10 percent since the first quarter, while, over that same period, gold stocks have lost more than 10 percent.

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Friday Morning Links

In 2012, something’s gotta give – MarketWatch
Recession ‘to return’ to Europe, say economists – BBC
Euro Set for First Consecutive Annual Drop Since 2001 – Bloomberg
Eurozone crisis: Markets to post hefty losses for 2011 – Guardian
China’s factories falter, pro-growth policies eyed – Reuters
The U.S. Government Bond Bubble (And What To Do About It) – Time
Payroll tax cut raises worries about Social Security – Washington Post
Consumers turn to do-not-track software to maintain privacy – USA Today
Start Saving or Get Ready for U.S. Decline – Kotlikoff, Bloomberg
What exactly is the argument against gold? – Marginal Revolution

Oil inches toward $100 as US economy improves – AP
Gold limps to 2012 with last quarter loss – Reuters
Oil Heads for Third Yearly Gain on Iran Tension, Economy – Bloomberg
Investing: Feeling snakebit? Try a conservative portfolio – USA Today
Bond mutual funds could defy gravity again in 2012 – MarketWatch
Analysis: Dawn of a year of trading dangerously – Reuters
Commodities falter in 2011, hold promise in 2012 – MarketWatch
Gold Bubble Seen by Soros on Brink of Bear Market – Bloomberg
For Metals, Buying Chance Coming, But Still Months Away – CNBC
Sorry Goldbugs, You’re Only Even With the Dow ’11 – WSJ
The End of Year Precious Metal Bullion Bear Raid – Jesse’s Cafe
China gold demand robust amid falling prices – CNTV
Gold ETF is almost a buy – MarketWatch

Keynes Was Right – Krugman, NY Times
The Age Economic survey – Debt Deflation
The Laffer Curve And Austrian School Economics – Daily Capitalist
Hungary passes controversial central bank law – BBC
Spanish Prime Minister Mariano Rajoy to unveil multi-billion euro cuts – Telegraph
Italian Premier Outlines Plan to Stimulate Growth in a Struggling Economy – NY Times
Canada Real estate bubble in 2012? Nah, it’s starting to float back to Earth – Globe & Mail
$306,000 in mortgage equity withdrawal on an $11,150 down payment – OC Housing News
Buyers, sellers continue to butt heads on home prices – Housing Wire
Bank Fees Predicted To Rise In 2012, As Banks Try To Boost Revenue – HuffPost
Former Fed official accuses the bank of bailing out Europe – Examiner


Fear and the Gold Price

The Economist has a set of nine charts that depict what happened in financial markets in 2011 as part of their Daily Chart section today. Below are the last two in the series showing the S&P500 Volatility Index atop selected commodity prices.

Clearly, there’s a pretty good correlation between volatility in U.S. stocks and the gold price, but, as shown above, the former follows the latter – maybe not what you might think at first. Most of the other charts are related to the global economy, credit and currency markets where there are no doubt more relationships to explore, such as the coincident peaks in late-April for the euro and oil (and silver).

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Greek Tax Officials Strike, Will Anyone Notice?

Word comes via this AP report that Greek government workers in the tax collection department have walked off the job in protest after their salaries were cut. In a nation of tax scofflaws, where nearly everyone skirts paying their taxes and an underground, untaxed economy plays a larger role than in most developed nations, will anyone notice?

Greek tax officials walked off the job Thursday at the start of a 48-hour strike to protest salary cuts and other austerity measures, as the government struggles to meet revenue targets demanded by the country’s international creditors.

Tax offices shut down for the last two working days of the year, prompting hundreds of Greeks on Wednesday to rush to settle last-minute issues before the strike. Many handed over their car license plates, preferring to keep their vehicles off the road rather than paying an increased tax.

“As a result of the austerity measures putting some tax officers on reduced pay, we have 5,500 fewer tax office jobs,” said tax officers’ union head Charalambos Nikolakopoulos.

Tax evasion has been rampant in Greece, despite repeated efforts to crack down on the practice.

The strike comes a day after the sudden resignation of two prosecutors heading the judicial task force charged with fighting tax evasion. The two, Grigoris Peponis and Spiros Mouzakitis, claimed they were being sidelined and implied government interference in their work.

There is more on the latest developments in this nation that is about to enter its fourth year of recession in this story at Speigel where government reforms are said to have “ground to a halt”. A best case scenario at this point is that Greece will reduce its debt to 120 percent of GDP in another eight years. Whoopee!

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