The children’s fairy tale “There’s No Such Thing as a  Dragon” tells the story of a boy who wakes up one morning to find a dragon in his room. The boy’s parents dismiss his attempts to identify the dragon and assure  him that dragons do not exist. Eventually the dragon grows so big that he takes  away their house-it is only then that the parents recognize the dragon - and it  diminishes. In the United States, the political energy has been expended on a manufactured debt  crisis while ignoring the substantive problems in the housing market and household deleveraging that has created a demand shortfall. Those preaching austerity are behaving akin to recommending that a heart attack survivor run 6 miles while he is still in the ICU. They are promoting the right policy at the wrong time. 

From US News & World Report:
"The Fed is running out of options however, as Bernanke himself implicitly acknowledged in his recent Jackson Hole speech. "Most of  the economic policies that  support robust economic growth in the long run are outside the province of the  central bank," he reminded a worldwide audience. 
Bernanke also emphasized that the imperatives of short-term stimulus and  long-term fiscal discipline “are not incompatible.” "

Whether congress will take heed of this inuendo and pass a stimulus package is very much in doubt.
 
What’s more after having watched Japan struggle for more than a decade after their real estate driven financial crisis it is curious that respectable Economists are arguing against government stimulus at this time. 
 
Chicago’s John Cochrane (2009): 
“First,  if money is not going to be printed, it has to come from somewhere. If the government borrows a dollar from you, that is a dollar that you do not spend, or that you do not lend to a company to spend on new investment. Every dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both. This is just accounting, and does not need a complex argument about “crowding out.”

 Really?  Really, with official unemployment above 9.0%? It is fair to argue about the composition and efficacy of stimulus and that not all stimulus is equally expansive; but to say it is not needed after having recently witnessed Japan’s struggle is indefensible.  

Monetary policy cannot solve all problems; we have to rely on the wisdom of Keynes  to get us through this moment. Moreover those that say block grants to states are ineffective because they create no new jobs are missing the point - they preserve existing jobs. To get a terrifying view of the implications of state budget crises watch Bill Gates presentation on TED. Punchline: in order to balance state funding going forward education funding will have to be cut by 50%. Only one state in the union does not have a balanced budget amendment. When Argentina went through difficult financial times one province shut the public school system for a year. Is that where the US is heading? And what does this say about its ability to compete in the future?

Finally, Richard Koo does a great job of highlighting, on slide 36, why Cochrane's crowding out senario would be appropriate if this were a conventional post recession recovery - not one prompted by an asset bubble. In the current situation, monetary policy is ineffective, argues Koo, and fiscal stimulus is appropriate.

 In economics, as in scripture, as in life, dragons exist - the appropriate way to kill them depends on the situation.  

My son with his debating partner won the provincial championships in debating last year. I was one of five judges for the provincial final in the  age class above him. 

Last night we watched the documentary “Resolved”. We were surprised to see that the prominent debating style in the US had morphed into something much different than the way we debate in Canada.  The  US debating style is dominated by participant’s speed talking at about 400 words a minute. A ton of research is conducted to support this epic level of verbal spew. In contrast, the Canadian debating system seems to be built more  on three pillar arguments, rhetoric, and the ability to destroy an opponent’s positions in cross examination. In the Canadian debate system, impromptu debates, where the participants have only 15 minutes to prepare, are held in highest regard and viewed as the more significant demonstration of debating prowess. It demonstrates an ability  to think on your feet and articulate those thoughts. It seems like the US system emphasizes quantity while the Canadian system emphasizes quality.  

Of course, learning to do research is a great skill to acquire and as someone whose career has been as a researcher and analyst I value it.  But it strikes me that the American debting system overemphasizes research while underemphasizing  filtering, critical thinking and persuasiveness. In the end, young people need to be taught to think independently, make decisions under time constraints, under uncertainty and defend their positions. 
 
Even my own profession, Economics, suffers from not enough thinkers and too many analysts who can just run time series regressions. The  credit markets froze up in 2008; the financial system flat lined and required open heart resuscitation.  And yet
it appears that most of the mainstream economists and policy makers are treating 2008 like a run of the mill case of the flu or recession. This over optimism is evidenced by the tsunami of market forecasters cutting their growth forecasts.   

These analysts are adept at research, at using econometric programs, and manipulating data. They are not great at thinking. Thinking requires presence, a quality that is being discouraged with the proliferation of cell phone texting and continous connectivity that is endemic. This past week, I saw two people texting while crossing the crosswalk on the TransCanada, in the heart of Calgary. The average teen sends 3000 text messages a month. That’s our future folks.

Unfortunately, the problems confronting the world are going to require people who can think, and the experts in government and finance have shown us they are not good at that skill. We have outsourced out thinking to experts in society. They have failed us and will continue to do so. We need to assume more responsibility for ourselves and begin to debate the important issues of our day as educated generalists. Otherwise we are doomed. Liz Coleman, in a TED talk, laments this move away from educated generalists to experts. The benefits of specialization, to individuals and nations are a fundamental tenet of economics. From my
perspective, individuals and society need to practice all things in moderation, including moderation. The same goes for specialization.  

As it turns out  for my first post I am going to highlight the writings of Irving Fisher “The Purchasing Power of Money” published in 1911 -  the year my father was born. This one is for you Reinhold.

Robert J Shiller recently published a short paper discussing Fisher’s work titled ‘Irving Fisher, Debt Deflation and Crises’ http://cowles.econ.yale.edu/P/cd/d18a/d1817.pdf  (hat tip:Professor Serletis)

Shiller’s behavioural ideas about contracting in terms of baskets rather that individual currencies are interesting but I am struck by how much the Fisher quotes still ring true today. Consider them in the context of the credit binge, the popping of the housing bubble and where investor psychology is today.

 “The  public psychology of going into debt for gain passes through several more or less distinct phases: (a) the lure of big prospective dividends or gains in income in the remote future; (b) the hope of selling at a profit, and realizing a capital gain in the immediate future; (c) the vogue of reckless promotions, taking advantage of the habituation of the public to great expectations; (d) the development of downright fraud, imposing on a public which had grown credulous and gullible.”

 Fisher also talks about the aftermath of a debt bubble and the problem a society has extracting itself from the consequences that follow. 

“Each dollar of debt still unpaid becomes a bigger dollar, and if the over-indebtedness with which we started was great enough, the liquidation of debts cannot keep up with the fall of prices which it causes. In that case, the liquidation defeats itself. While it diminishes the number of dollars owed, it may not do so as fast, as it increases the value of each dollar owed. Then, the very effort of individuals to lessen their burden of debts increases it, because of the mass effect of the stampede to liquidate in swelling each dollar owed.”