Teaching a nobel economist a few things

Am I so cocky as to think I can teach a Nobel laureate economist a few things about economics?

Yes, when that Nobel laureate distorts his economics with the pleadings of his own self-interest.

Joseph Stiglitz is a brilliant guy and I met him recently at a conference here in New York, however, his economic views are often skewed by his own political views, which knock his economic views out of paradigm.

Here is an example below.

May 13 (Bloomberg) -- China may emerge as “a winner” from the global financial crisis because of its high savings rate and strong policy response, Nobel Prize-winning economist Joseph Stiglitz said.

Fiscal response is not constrained by savings. That is a gold-standard concept. He ought to know this. And he ought to know a very basic accounting identity, which is:

I = S

Which means that for any level of savings there is that same level of investment. It doesn't say that investment flows from savings. In fact, Keynes postulated that it flows the other way around. It was the "animal spirits" of entrepreneurs that drove investment and that is what supplied savings.

“China’s government has taken very rapid action to address the crisis,” Stiglitz said at a forum in Beijing today. High savings rates may help Asian economies “weather the financial crisis,” he said.

Again, investment by a government whose monetary system is not based upon a gold standard is not constrained by savings. Anyway, who is the net supplier of savings to the Chinese? It is the U.S. and more precisely, the Federal Gov't, whose deficit spending supplies most of the world's net savings.

The Shanghai Composite Index has climbed 46 percent this year on optimism that surging lending and a 4 trillion yuan ($586 billion) stimulus package will drive a rebound in the world’s third-biggest economy. Weaker industrial-output growth in April, reported today, highlighted the central bank’s view that the recovery is not yet solid.

Yes, what China did is enact stimluus far more aggressively than the U.S. That is why I said, "buy China," back in March.

“The fiscal strength of the Chinese government means it can deploy resources quickly,” said Jing Ulrich, Hong Kong- based chairwoman of China equities at JPMorgan Chase & Co. “This year, China has a pretty good chance to achieve its economic goals.”

Again, any country that is not on a gold standard or fixed exchange rate can deploy resources quickly in any amount that it wants. The only "constraint" is a potential weakening of the foreign exchange value of its currency. The amount it spends or invests has nothing to do with national savings. Furthermore, the faster and more aggressively it deploys resources, the faster private savings increase. Look at the U.S., where personal savings went from virtually nothing last year to $470 billion today, all because of government deficit spending. It is imposssible for the private sector to save in the aggregate. Personal saving by an individual equates to a loss of savings for the vendors and firms that rely on that individual's consumption. The net change in saving is zero. This is Keynes' classic, "Paradox of Thrift." Only gov't can supply net savings by deficit spending, just as government is the only entity that can supply the currency with which to buy bonds or pay taxes.

China is battling a global recession that dragged economic growth to 6.1 percent in the first quarter, the slowest pace in almost a decade. The world economy may “bottom soon” after declining at a slower rate, Stiglitz said.

It already has.

Federal Reserve Chairman Ben S. Bernanke and European Central Bank President Jean-Claude Trichet are among policy makers who have signaled the recession may be easing. Former Federal Reserve Chairman Alan Greenspan said this week that the decline in the U.S. housing market may be bottoming and it’s “very easy to see” financial markets continuing to improve. “We are at the end of the beginning, rather than the beginning of the end,” Stiglitz said. “The global economy may be declining at a slower rate and we may see a bottom soon, but it doesn’t mean a full recovery.”

We are at the beginning of the beginning!

The moral of this post is that no matter how smart people are, once they let the facts get distorted by their own personal belief systems or self-interest, ANYONE is capbable of teaching them a thing or two. So, don't ever be afraid to speak up and correct someone--no matter how smart or important--when you hear them replacing dogma for fact.