The Capital Commerce Debate


Over at US News & World Report, I am engaged in a debate on the state of the Economy with none other than Don Luskin. It will run this entire week, with fresh posts and rebuttals each evening.

Round 1 is here: The Bullish versus Bearish Economic View

Round 2 can be found here: Don’t Worry–Be Happy vs Worry a Lot–Housing Will Hurt the Economy

In the second round, the links to the charts were having problems — you can see the two I used below.


MEW, Net Extraction
and Percentage of Disposable Personal Income

(1991 to present)

Graphs courtesy
of Calculated Risk


GDP Growth (MEW, w/o MEW):


Graphs courtesy
of Calculated Risk

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What's been said:

Discussions found on the web:
  1. Josh commented on Apr 11

    “Capital spending HAS slowed” Yeah, I’m sure it WILL pick up. This is the third year election cycle and based on esimated future earnings using past data, stocks are cheap…

    That MEW extraction and % of spending is a tremendous argument. Nice work Barry.

  2. Mike M commented on Apr 11

    The Austrians are right. The last five years have been nothing more than a false boom created by gianormous debt growth. None of the debt expansion has been put to productive use. MEW is essentially burning the furniture to stay warm.

  3. David commented on Apr 11

    While I think MEW has contributed to GDP over the past five or more years, I’ve not been able to duplicate the numbers that Calculated Risk has produced in the graphs posted. And I’ve read his explanation of how he derived this numbers and came away even more confused.

    Looking at the nominal SAAR numbers from the Greenspan-Kennedy tables for 2005, we get roughly $740 billion in MEW. If we estimate half goes to personal consumption, then that would be $370 bil. That equals almost 3% of nominal GDP in ’05.

    But to compare how GDP would have faired w/out MEW, you have to go back and back MEW out from each year, then look at the growth rates for GDP with MEW and GDP w/out, on a YoY basis. I did this quickly just now for ’05 and found that GDP grew 6.3% with MEW & 6.1% w/out it. Not that dramatic a difference.

    I didn’t deflate the numbers as Calculated Risk did, but that won’t account for the large gap between my estimates and his.

    If someone thinks I’ve done something wrong here, please let me know.

  4. Ross commented on Apr 11

    FEW Fire equity withdrawl coming to a street near you.

    Manny meets friend Joe.
    “So,Joe, how you been?”
    “Not so good. We had a fire and collected two million from insurance. Hows about you,Manny?”
    “Our business had a flood and we collected 12 million!”
    Joe to Manny “Manny, how do you have a flood???”

  5. Tyler commented on Apr 11

    Shouldn’t the second graph go back to 1990 so we can compare apples-to-apples in terms of the business cycle? It would make more sense to compare the early 1990s to the early 2000s. The early part of the cycle is more likely to be driven by monetary stimulus, while the late cycle is not. I bet the MEW and GDP growth are much closer in the 1990-1995 period. Since cyclically 2007 is in line with 1995 (mid-cycle slowdown after monetary tightening), you could see 2008 much more driven by real growth like 1996. It is bad (or perhaps partisan) economics to compare the late 1990s to the early 2000s.


    BR: MEW was such an insignificant portion of GDP pre-1996, it would have been purposeless.

    In 1996, MEW was still between 1-2% of Disposable Personal Income — The key was the move from ’96 on, where it moved up to 10%

  6. Eclectic commented on Apr 11

    The upside-down component of your debate with Luskin is the entire reason for the asset appreciation that may yet prove to be a bit of a phantom… and that phantom was entirely the creation of the Fed.

    It was so either directly or indirectly, by pursuing an expansive monetary policy that, because of reasons I have carefully and theoretically described on this blog, could not succeed without in turn c-r-e-a-t-i-n-g the macroeconomic imbalances that now threaten our economy.

  7. me commented on Apr 11

    Look, two things that have not been widely reported and are having an huge impact.

    1. With the new strict mortgage guidelines, all the low interest teaser rates are not going to be able to refi to fixed and a reasonable rate. Most likely these people we not qualified for a mortgage in the first place and now will not get one so they will be stuck with escalating interest rate.

    2. State sales tax revenues are declining due to housing. No furniture, no building materials, so down go the revenues.

    But hey, be happy, don’t worry. If you re in the top one percent you have it made.

  8. Greg0658 commented on Apr 11

    When I was a kid I remember a stat that the dollar revolves 14 times.

    I always thought that meant this:
    1>The US Government buys a tank.
    2>The tank factory takes those dollars and buys raw materials, hires men to mold the materials and truck it.
    3>Those raw material suppliers buy things to mine their stuff, hires men to dig and truck.
    4>Those workers in the factory and the supplier take their dollars and go shopping.
    5>Those shopping centers take the dollars and circulate them much the same way.
    6>Tax time brings the money back to the Government so it all starts again. **

    Thats 5 to 14 circulations. Or #?

    All these circulation transactions are taxable, and creates a Capitalist Economy.

    Is this number a figment of my memory or just a goofy fact someone wrote/spoke a story around? Is this the stuff you learn in Economics 101?

    ** Except in a global market.?

  9. James Bednar commented on Apr 11

    When I was a kid I remember a stat that the dollar revolves 14 times

    Velocity of money baby!

  10. donna commented on Apr 11

    Citigroup laid off 10,000 today.

    But I’m sure it’s nothing to worry about….

  11. Estragon commented on Apr 11

    “When I was a kid I remember a stat that the dollar revolves 14 times”

    As I recall, the number reflected the fractional reserve requirement in the banking system. The tank factory deposits the payment for tanks. The bank can lend the deposit back out, minus the statutory reserve. The borrower buys goods and services, payment for which the supplier then deposits, and so on. The reserve requirement takes a slice out of the process with each iteration, and the higher the reserve %, the lower the total loans made against a newly minted $.

    This gives us the quantity of money. The velocity is the speed at which the process iterates.

    It’s been a while, but that’s what I remember from econ101

  12. Estragon commented on Apr 11

    Cramer, among others, has been advancing the notion that the FOMC will bail out fugly mortgage lending. BB’s speech today on financial regulation, market discipline, and moral hazard suggests otherwise.

    In a message likely to be largely ignored, he essentially said that he’s not only prepared to see failures, he sees it as absolutely necessary that investors “be persuaded that they will experience significant losses in the event of a failure”. Interestingly, he specifically mentions that having equity investors wiped out isn’t enough, because they have an incentive to take wild risks (nothing more to lose). In order to be effective, debt holders have to be convinced they’re at risk too, so they’ll intervene to stop equity investors from doubling down.

    BB doesn’t mention subprime or mortgages specifically, but the message is pretty clear. Seeing a few of the bad originators go under isn’t enough. The debt holders have to go to the woodshed too.

  13. Tom Riedel commented on Apr 11

    I’m not into TA but that double top in the first MEW graph is screaming at me.

  14. Eclectic commented on Apr 11

    My opinion is that Barringo won round two as well as round one, and today’s reorganized Fed statement and market action are the two votes that say Barringo – 2: Luskin “zip.”

    But, Barringo, if you think Dr. Benber N. Anke is really that worried about inflation over the short-intermediate term, you need to lay off the allergy medicine completely.

    Today’s scary Fed couldn’t even run Bondie over the shock level from last Good Friday’s somewhat ordinary BLS report.

    You need to see Dr. Harry Goode. I understand he’s really good with alergies. Tell ya what… make yourself an appointment with Goode, Friday. He’ll be off and playin’ golf with Dr. Nelson Friday, Thursday… but back in the office Friday.

    BTW, I’ve managed to just about get Bondie settled down again, so pass along to Dr. Anke my appreciation for the important half of the Fed statement that she’ll certainly appreciate.

  15. MiniMarkets commented on Apr 11

    Don “watch me lose million in real time” Luskin…Laughable, just like politics the most discredited, the ones who should cower from the glow of the spotlight and take a residence in a cave somewhere never to be heard from again, somehow manage to hang around.

  16. Troy commented on Apr 11

    I too find the velocity of money angle interesting when looking at MEW.

    With MEW being 5-10% of consumer spending, and itself essentially a lump-sum withdrawal of the borrower’s future earnings (over the remainder of his life essentially) that has been injected into the today’s economy, I believe MEW + the velocity of money has been responsible for an immense chunk of GDP this decade. . . *GDP*, not GDP growth.

    Combined with the mad deficit spending since 2001, there’s this economy has undergone one heck of a shock treatment to keep it moving.

  17. Billy commented on Apr 12

    I’m with alexzander, minimarkets and DeLong on this one. Luskin is not only the stupidest man alive, he’s also in the top 3 of the most mendacious. Kudlow is also on that list. Why do you bother appearing on his show all the time?

  18. Eclectic commented on Apr 12

    Per BR:

    “BR: MEW was such an insignificant portion of GDP pre-1996, it would have been purposeless.” end.

    American macroeconomic life is a marginal thing… and your statement is true because the generation of homeowners that had matured prior to, say, 1990 or so (in other words, those who had been born from approximately 1925-1935, who’d purchased houses in the general period from 1955-1965, and paid them off by approximately 1990) would’ve found the whole concept of MEW as being a rather dangerous and irresponsible use of a form of personal liquidity reserved only for dire emergencies. They would’ve seen MEW as possibly being a phantom source of liquidity, and at best a personal balance sheet asset with an off-setting liability.

    Yes, of course this attitude would’ve derived from a much closer understanding of the Great Depression era they’d have had, both from their own parents and from their experiences as children growing up during the Great Depression.

    The generation that came behind them, generally the Boomers, grew up and raised their own children in an environment of privileged entitlement.

    Too, the great supply-side revolution, with its attending pro-forma EBITDA accountancy, arose in almost exactly the middle period of the Boomers’ maturity cycle.

    The Boomers have been generally too removed from an understanding of the Great Depression, partly because of the passage of time since that era, and partly because their own parents w-e-r-e that generation that gave them the privileged society they grew up in.

    The transition of all of these marginal, socio-economic and psychological factors spiralled upwardly in effect beginning approximately just after the period from 1995-2000, and up until the present, for two very good reasons: 1)-The Boomers’ own children were maturing and seeking to purchase homes, so now you have a second generation of home buyers that is even more removed from an understanding of irresponsible borrowing than the first, and, 2)- the Monetarist Fed and a mortgage industry practicing hocus-pocus accountancy have accommodated the use of irresponsible MEW by home owners.

    These two factors lead borrowers to the erroneous conclusion that MEW is essentially a riskless transaction. Even Alan Greenspan effectively all but recommended a higher use of MEW when he was the Fed Chairman, by exhorting borrowers to consider using variable rate semi-permanent mortgage loans, albeit he certainly intended them being used responsibly.

    The problem is that the mortgage industry saw that as a green light from the Fed to actually increase the use of teaser variable rate loans, not for the responsible use of true temporary financing bridged later to affordable permanent financing, but rather to effectively subvert the requirement for providing a buffer equity downpayment, or by essentially making it less expensive for the borrower to finance his own downpayment.

    Here I’m not speaking of mortgage companies that are dishonest shams, but rather otherwise responsible mortgage companies that have simply miscalculated the risks. They would’ve thought at the time of making the teaser rate mortgages: Either we should protect ourselves with a strong equity downpayment, or by a rigorous observance of creditworthiness standards for the borrower, but not n-e-c-e-s-s-a-r-i-l-y both, since we can generally depend on equity appreciation as the ultimate fail-safe.

    Unfortunately, it’s somewhat easier to move from thinking “not necessarily both requirements” to thinking instead “not necessarily either requirement” when real estate is rapidly appreciating.

    In other words, the industry decided to accommodate a sort of initial MEW… even before there was any ME to W. and relied on appreciation to bail them out if necessary, and now the great testing phase may have begun on a wider macroeconomic scale than just subprime as to whether the miscalculations were grand enough to weaken the overall economy.

    It’s one form of irresponsibility for an individual borrower to make use of MEW that would threaten the borrower’s own financial solvency. However, the accommodation of this practice that is provided by the lender, particularly when the mortgage company is simply the originator of a mortgage to be distributed to a third-party pooling lender, is irresponsibility of a much higher order of magnitude.

  19. S commented on Apr 12

    Just read Round 3 of the Smackdown.

    I was stunned to see Luskin try to relate MEW with the wealth effect. He lost alot of street cred with that argument.

  20. Troy commented on Apr 13

    Luskin actually has any “street cred” left? Maybe on Loon Street.