Einhorn: The Real Lesson of 1937-8 → Washingtons Blog
Einhorn: The Real Lesson of 1937-8 - Washingtons Blog

Tuesday, October 20, 2009

Einhorn: The Real Lesson of 1937-8

David Einhorn - President of Greenlight Capital, which manages around $5 billion dollars - says that people claiming that the lesson of 1937-8 is not to withdraw stimulus too soon are wrong:

An alternative lesson from the double dip the economy took in 1938 is that the GDP created by massive fiscal stimulus is artificial. So whenever it is eventually removed, there will be significant economic fall out. Our choice may be either to maintain large annual deficits until our creditors refuse to finance them or tolerate another leg down in our economy by accepting some measure of fiscal discipline.


  1. Oh, really? This is confusing revenue constraints on households and firms (as well as cities and states in the US) with the absence of revenue constraints on a sovereign provisioning a non-convertible fiat currency with flexible exchange rates. Most modern economies are based on a non-convertible fiat currency with a flexible exchange rate, including the US, of course.

    This is also equating (erroneous) neoliberal economics with national policy. Typically, those who confuse neoliberal economics with national policy have a stake in the game for doing so, since this policy favors the accumulation of capital and disadvantages labor (everyone who has to work for a living).

    The US government (Treasury and Fed operating in tandem) is not revenue constrained. Taxes don't "pay" for spending. The monetary authority increases and decreases the amount of high powered money (physical currency and bank reserves, principally reserves) with the stoke of a computer key. Monetary policy is a blunt but swift instrument, where as fiscal policy is slow but targeted (spending increases net financial assets in the non-government sector while taxes decrease). Government "borrowing"or taxing is not necessary for spending. Government uses short-term debt simply for regulating the interest rate.

    The only constraint on government issuance is inflation, which only occurs when the nominal exceeds the real, and this only occurs at full employment (about 2%) where the economy's full productive capacity is reached (the output gap is closed). Prior to reaching this level, the government must run deficits to offset lagging aggregate demand, or else the output gap will result in wasted capacity and both unemployment and underemployment, which is a waste of human resources having profound and often lasting consequences on many people's lives. The output gap is now below 70%, unemployment is in the range of 10% (U6 is approaching 20%), underemployment is rife, and rampant homelessness is a national disgrace.

    Citing circumstances prior to 1971 (and economists writing about these circumstances) is like comparing apples to oranges.

    See, for example, Bill Mitchell-Responsible fiscal practice in his blog Zimbabwe for hyperventilators 101.

  2. This is way too easy.

    The real lesson of 1937-8 is that after the stimulus fails to work, (and we all know it will fail to work) things will get really ugly as war breaks out, -everywhere at first.

    And then a few localized centers of population will get completely hammered back into the Stone Age.

    Everyone then feels astonishingly good (and horny) about having beaten the -bad guys-.

    And the whole thing starts up again, only worse because the population gets bigger and technological innovation has made the human species more efficient cheaters and killers.

    Those who have read enough history will recognize the truth I write here.

    Trust me. Economics has no solutions. Economics is just a running score card.

    Philosophy has the solution.

    And philosophy demands we all recognize just how stupid the whole thing is.

    And then having done that -philosophy demands we start from there -trying to put things back the way they were before the stinking scientists came along proclaiming their genius with every new invention that increasingly debased the world all around us.

    "What genius thought that scientific-wonder was a good idea?"

    You can say that anywhere on the planet today.

    So start saying it, -AND- demanding an answer.

    Has anyone been to Niagara Falls recently?

    Have you seen the Hudson River Valley?

    And what about ... Never mind.

    Just open your eyes.

  3. Mr. Hickey is correct in response to Mr. Einhorn's analysis. Our creditors don't "finance" anything, as the U.S. as sovereign issuer of its own currency does not need to "get" dollars from any external source.

    This simple fact has somewhat counter-intuitive implications, which Mr. Hickey has outlined.


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