The world’s
rich countries are now conducting a dangerous experiment. They are
repeating an economic policy out of the 1930s — starting to cut
spending and raise taxes before a recovery is assured — and hoping
today’s situation is different enough to assure a different outcome.
In effect, policy makers are betting
that the private sector can make up for the withdrawal of stimulus
over the next couple of years. If they’re right, they will have made a
head start on closing their enormous budget deficits. If they’re
wrong, they may set off a vicious new cycle, in which public spending
cuts weaken the world economy and beget new private spending cuts.
On Tuesday, pessimism seemed the better bet. Stocks fell around the
world, over worries about economic growth.
Longer term,
though, it’s still impossible to know which prediction will turn out
to be right. You can find good evidence to support either one.
The private sector in many rich countries has continued to grow at a
fairly good clip in recent months. In the United States, wages, total
hours worked, industrial production and corporate profits have
all risen significantly. And unlike in the 1930s, developing
countries are now big enough that their growth can lift other
countries’ economies.
On the other hand, the most recent
economic numbers have offered some reason for worry, and the coming
fiscal tightening in this country won’t be much smaller than the 1930s
version. From 1936 to 1938, when the Roosevelt administration
believed that the Great Depression
was largely over, tax increases and spending declines combined to equal
5 percent of gross domestic product.
Back then, however, European governments were raising their
spending in the run-up to World War II. This time, almost the entire
world will be withdrawing its stimulus at once. From 2009 to 2011,
the tightening in the United States will equal 4.6 percent of G.D.P.,
according to the International Monetary Fund.
In Britain, even before taking into account the recently announced
budget cuts, it was set to equal 2.5 percent.
Worldwide, it will equal a
little more than 2 percent of total output.
Today, no wealthy
country is an obvious candidate to be the world’s growth engine, and
the simultaneous moves have the potential to unnerve consumers,
businesses and investors, says Adam Posen, an American expert on
financial crises now working for the Bank of
England. “The world may be making a mistake, and it may turn out
to make things worse rather than better,” Mr. Posen said.
But
he added — after mentioning China, India and the relative health of
the financial system, today versus the 1930s — that, “The chances
we’re going to come out of this O.K. are still larger than the chances
that we aren’t.”
•
The policy mistakes of the 1930s
stemmed mostly from ignorance. John Maynard
Keynes was still a practicing economist in those days, and his
central insight about depressions — that governments need to spend
when the private sector isn’t — was not widely understood. In the
1932 presidential campaign, Franklin D.
Roosevelt vowed to outdo Herbert Hoover
by balancing the budget. Much of Europe was also tightening at the
time.
If anything, the initial stages of our own recent crisis
were more severe than the Great Depression. Global trade, industrial
production and stocks all dropped more in 2008-9 than in 1929-30, as
a study by Barry Eichengreen and Kevin H. O’Rourke found.
In 2008, though, policy makers in most countries knew to act
aggressively. The Federal Reserve and
other central banks flooded the world with cheap money. The United
States, China, Japan and, to a lesser extent, Europe, increased
spending and cut taxes.
It worked. By early last year, within
six months of the collapse of Lehman Brothers,
economies were starting to recover.
The recovery has continued
this year, and it has the potential to create a virtuous cycle. Higher
profits and incomes can lead to more spending — and yet higher
profits and incomes. Government stimulus, in that case, would no longer
be necessary.
An internal memo from White House economists to
other senior aides last week noted that policy makers “necessarily
tend to focus on the impediments to recovery.” But, the memo argued,
the economy’s strengths, like exports and manufacturing, “more than
make up for continued areas of weakness, like housing and commercial
real estate.”
That optimistic take, however, is more debatable
today than it would have been a month or two ago.
As is often the case after a financial crisis, this recovery is turning out to be a
choppy one. Companies kept increasing pay and hours last month, for
example, but did little new hiring. On Tuesday, the Conference Board reported that consumer confidence fell
sharply this month.
And just as households and
businesses are becoming skittish, governments are getting ready to let
stimulus programs expire, the equivalent of cutting spending and
raising taxes. The Senate has so far refused to pass a bill that would
extend unemployment insurance or send aid to ailing state
governments. Goldman Sachs economists this
week described the Senate’s inaction as “an increasingly important
risk to growth.”
The parallels to 1937 are not reassuring. From
1933 to 1937, the United States economy expanded more than 40
percent, even surpassing its 1929 high. But the recovery was still not
durable enough to survive Roosevelt’s spending cuts and new Social Security tax. In 1938, the
economy shrank 3.4 percent, and unemployment spiked.
Given
this history, why would policy makers want to put on another fiscal
hair shirt today?
The reasons vary by country. Greece has no
choice. It is out of money, and the markets will not lend to it at a
reasonable rate. Several other countries are worried — not ludicrously
— that financial markets may turn on them, too, if they delay
deficit reduction. Spain falls into this category, and even Britain
may.
Then there are the
countries that still have the cash or borrowing ability to push for
more growth, like the United States, Germany and China, which happen to
be three of the world’s biggest economies. Yet they are also
reluctant.
China, until recently at least, has been
worried about its housing market overheating. Germany has long been
afraid of stimulus, because of inflation’s role in the Nazis’
political rise. In responding to the recent financial crisis, Europe,
led by Germany, was much more timid than the United States, which is
one reason the European economy is in worse shape today.
The reasons for the new American austerity
are subtler, but not shocking. Our economy remains in rough shape, by
any measure. So it’s easy to confuse its condition (bad) with its
direction (better) and to lose sight of how
much worse it could be. The
unyielding criticism from those who opposed stimulus from the get-go —
laissez-faire economists, Congressional Republicans, German leaders —
plays a role, too. They’re able to shout louder than the data.
Finally, the idea that the world’s rich countries need to cut spending
and raise taxes has a lot of truth
to it. The United States, Europe and Japan have all made promises
they cannot afford. Eventually, something needs to change.
In
an ideal world, countries would pair more short-term spending and tax
cuts with long-term spending cuts and tax increases. But not a single
big country has figured out, politically, how to do that.
Instead, we are left to hope that we have absorbed just enough of the
1930s lesson.
The
violence that occurred during the recent G20 summit in Toronto and the
focus on the $1-billion cost of the affair overshadowed what was
surely the most critical element of the meeting of world leaders: how
to prevent, or at least best deal with, the continuing grave economic
problems that beset almost all of the G20 countries save Canada.
Many Canadians, most of whom kept their jobs in the short,
sharp recession that ended one year ago, may understandably be
blissfully unaware of the pressing economic problems many other
countries yet face as they struggle to reemerge from their recessions,
or worse, to avoid a slip back into another recession.
They
should be more aware and governments should also be careful whose
advice they take. This past week, in a piece entitled The Third
Depression, Nobel Prize-winning economist Paul Krugman even wrote of
the possibility of a third Great Depression, noting that while
recessions occur regularly, he feared that much of the world was
entering a Long Depression akin to the one that occurred following the
1873 panic in stock markets, which was followed by years of instability
and deflation.
Krugman's remedy --
governments should spend, spend, spend to prevent deflation -- is not
one with which we agree. Krugman's Nobel Prize is admirable, but other
Nobel economists also exist and they disagree with Krugman. Canada's
Robert Mundell, a Nobel Prize winner himself, recently advised the
American government to lower business tax rates to spur reinvestment and
recapitalize American banks.
U.S. room to move on tax rates, or
much of anything else, is severely limited by how much Washington has
already spent.
The U.S. public and Congress seem to have soured as
of late on any new "stimulus" measures, this perhaps because the last
round of deficit-increasing trillion-dollar stimulus packages, from the
last administration and the new one, did not, as current U.S.
President Barack Obama hoped, lower U.S. unemployment.
Instead,
much of the money spent on bailouts, temporary tax rebates,
cash-for-clunkers for automobile purchases and $8,000 tax credits for
home purchases, merely stole purchases from the future and into the
past 12 to 18 months. The result has been weakened consumer spending as
of late. So the United States is back to where it started with an even
bigger debt.
That, along with similar problems in Europe, is why
the Krugmans of the world are incorrect to urge governments to spend
more. Moreover, just this week, the Genevabased Bank of International
Settlements stated that, "The first and most immediate challenge is to
make a convincing start on reducing budget deficits in the advanced
economies."
Private-sector confidence
has steadily eroded as governments have borrowed more. Governments that
excessively borrow crowd out the private sector and the private sector
knows it, which is why companies are reluctant to spend on capital
investment and new employees.
Europe is awash in red ink; the
U.S. is mired in federal and state debt and a massive housing
over-supply four years after prices first began to decline, and China's
overheated property market may also soon burst causing more economic
problems for the world. The situation worldwide calls for governments to
be careful in their spending, not to assume they can finance another
stimulus with questionable results.
Japan has been in what amounts
to a "long recession "since the early 1990s -- and it followed
Krugman's advice. At present, we think it more sensible for other
nations to follow Canada's lead, our own Nobel-winning economist, and
finally allow the private sector ultimately and finally to pull the
world out of its economic malaise.
I’ve
been taking a bit of a trip down memory lane, looking at older blog
posts in aid of a possible future project. And I was struck by
something I sort of knew, but hadn’t focused on: the latest round of
oh-my-God-the-bond-vigilantes-are-attacking-gotta-cut is the third such
round since Obama took office.
First, there was a runup in
interest rates in the spring of 2009 — mainly a reaction to receding
fears of a second Great Depression, but widely interpreted as a sign of
impending fiscal doom. Then rates went back down.
Second, there
was a big scare in the fall of 2009, based on, well, nothing — which
is what led me to write my original post on invisible
bond vigilantes. And fear of this phantom
menace helped scare the Obama administration away from a second
stimulus.
Finally, there was the bond scare of March, in which we
were turning into Greece because of a blip in rates barely visible on
the charts. Since then, rates have plunged.
It kind of makes you
wonder: why do such claims carry any credibility? Bear in mind, too,
that anyone who actually acted on these deficit scares — who, for
example, believed Morgan
Stanley’s prediction of soaring rates in 2010 — has lost a lot of
money.
But I have a sinking feeling that the next time long
rates rise even a bit — say, back to where they were a year ago — we’ll
be told that the bond vigilantes have arrived. Really. And Washington
will believe it.
And rates can rise from these
levels, especially if economic data comes in stronger than expected.
Consider this, Bloomberg reports that Treasury
Two-Year Yield Drops to Record Low on Slowdown Concern:
Treasuries
rallied, pushing the two- year note yield to an all-time low, as U.S.
companies added fewer jobs in June than economists forecast and China’s
manufacturing growth slowed.
The extra yield
investors demand to hold 10-year notes over 2-year debt dropped the
most in six weeks on heightened deflation concern. The U.S. government
will sell $12 billion in 10-year Treasury Inflation Protected
Securities on July 8.
“Whoever is calling for a double dip is
emboldened by this week,” said Suvrat Prakash, an interest-rate
strategist in New York at BNP Paribas SA, one of the 18 primary dealers
obligated to participate in Treasury auctions. “We have to be a little
more cautious about what we expect in the future.”
The yield on the 10-year note dropped this week by
13 basis points, or 0.13 percentage point, to 2.98 percent, according
to BGCantor Market Data. The price of the 3.5 percent security maturing
in May 2020 increased 1 1/8, or $11.25 per $1,000 face amount, to 104
13/32.
The benchmark note’s yield fell the
most since the five days ended May 21, when it dropped 22 basis points.
It touched 2.88 percent on July 1, the lowest level since April 28,
2009. The two-year note yield slid 3 basis points to 0.62 percent after
reaching the all-time low of 0.5856 percent on June 30.
The difference between 10- and 2-year note debt,
known as the yield curve, dropped this week to 2.36 percentage points
after touching 2.28 percentage points on July 1, the lowest level since
Oct. 2.
The narrowed spread indicates
investor preference for longer-term bonds, which tend to rise on
slowing inflation. Two- year rates tend to track the outlook for the
Fed’s target rate for overnight lending.
“Bonds are saying this economy is getting bad,” said Michael Franzese,
managing director and head of Treasury trading at Wunderlich Securities
Inc. in New York. “People are going across the curve. They are buying
for yield and capital preservation.”
My feeling is that the curve flattener trade is getting
overcrowded, and yields can easily snap back from these levels,
especially if economic data comes in stronger than expected.
But maybe the bond market is worried that austerity
measures will effectively kill the fragile economic recovery, pitching
the world into a protracted period of deflation. With 10- and 30-year
yields plummeting
to their lowest level since April 2009, there sure seems to be an
ominous 1930s echo in the air.
Futures overnight looking wonderful Leo. Time to buy buy buy, especially no-earnings POS companies!
I tend to agree that Keynes advocated government saving during good times and government spending (on tax reductions) in the bad times.
I am still trying to figure out how to start a meaningful extension of the debates we have about what's right and wrong to come up with an alternative.
We do need a new philosophy that can be explained in popular and economic terms that migrates us from the toilet to the lounge in as short a time as possible. (20 years?).
Anyway, aside from being a show from a possible Marxist! I found this to be a most excellent precis of the last thirty years that got is into this mess.
http://www.observer.com/2010/wall-street/todays-must-see-animated-capitalist-takedown-rsa-and-david-harvey
Maybe reversing the course of each of the path illustrated in these items is one way to reverse out of the mess, along the lines of how to go back and escape the labyrinth.
I maintain that, given the path we are on is one assured collapse, we simply balance the books by cutting spending by 30% or by increasing taxes by 30% in a single year as the Irish have done (one of the PIIGS) and the UK is about to half do. If this is too hard to contemplate and we think we have credit, we can cushion the blow for three to five years before returning to balance.
One thing though, we have to accuse the OMB of fraudulent accounting via stupid and unrealistic growth assumptions so that we actually know the full extent of the disastrous mess we are currently in.
http://www.whitehouse.gov/omb/budget/Historicals/
click on Table 1.4 in documents on the first page to check out how receipts (after falling during the last crisis) are expected to grow from 2.2 tn to 3.2 tn between 2010 and 2013 whilst spending is expected to grow from 3.7 tn to 3.9 tn over the same years reducing the deficit from 1.5 tn to 0.7 tn. Really?
here's another
http://www.whitehouse.gov/omb/budget/fy2011/assets/budget.pdf
go to page 145, rotate 90 degrees and view the detail.
Now you have to divide the recipts and outlays by the percentage share of GDP, but with this little bit of maths, nominal GDP is projected to grow by 4.5% in fiscal 2011, and 6% in each of fiscal years 2012 and 2013.
Call me a cynic, but I cannot see how nominal GDP is expected to grow by 20% in the next three fiscal years!
Herein lies the accusation of fraudulent accounting. The OMB stands charged with the same creative accounting that Enron, WorldCom and the banks (being told to value at book) indulged in.
Depression or not, citizens of the world are slowing realizing the Keynesian paradox which renders it counter-productive: deficit spending to stimulate an economy is unworkable because no politician will ever reverse the stimulus once economic expansion takes hold for fear of a contraction. Keynesian theory is completely discredited by anyone with an ounce of common sense.
The General Theory.... did not propose endless deficit spending. And Keynes did acknowledge that "in the long run we are all dead" (adopted by Fight Club and ZeroHedge).
So, more correctly, THE PAST 40 YEARS OF ENDLESS DEFICIT SPENDING AND INCREASING DEBT IS DISCREDITED.
John Maynard Keynes did NOT espouse endless deficit spending in his name. His name is thrown about for authority by those that lack credibility and authority.
Keynes advocated governments obtain surpluses in times of flush tax revenues to allow deficit spending when the business cycle turns downward..
Sounds like good common sense to me...
Keynes was a genius, and ironically he didn't live long enough to get a Nobel Prize in economics (not that he needed one). I put him way above modern day economists, including so-called neo-Keynesians. Two most influential economists ever: Keynes and Friedman (distant second).
Maybe, Maybe not ... Read 'This Time is Different' ... but, if we can borrow our way out of this one, I believe that Keynes should be granted a Nobel Prize posthumously.
If they’re right, they will have made a head start on closing their enormous budget deficits. If they’re wrong, they may set off a vicious new cycle, in which public spending cuts weaken the world economy and beget new private spending cuts.
I reject this false trade off between reducing government expenditures risking a deflation death-spiral vs spending ourselves into debt oblivion. These people are just evil, their presentation of the options is biased by their world view that government is the only answer.
First, the debt as it stands is unpayable. It makes no sense to add to the debt.
Second, the argument is by reducing government expenditures we "hurt" the economy. Yet these economists themselves say that the marginal value of debt is less than 1 given our present circumstance. Borrow a dollar, get 90 cents in return.
Maybe we could consider a different path. Maybe we could dramatically reduce the size of government, give a bunch of this saved $$ back to the private sector, work to encourage economic growth and wealth creation and see what happens?
The medicine must be taken, the pain endured, at least we could emerge on the other side with something to show for it? The approach the Krugman's of the world espouse gives us nothing but more debt and few years of stagnation.
But handing out free money gets politicians elected ....
sschu
I see it like this:
The world developed countries enjoy approximately two units of productive GDP for each Barrel of Oil. (plus or minus for technology and place) With oil supply constraints and the possibility of oil supply in decline, each barrel of oil not produced restricts GDP by two units. Now, keep measuring GDP in dollars or euros and print a whole ton of each and watch the GDP grow. Add to that the efforts to clean up the messes that our Oligarchs have made and we have a recovery in a world beset with disasters.
I am in the camp where Peak Oil is a reality and our real GDP will not grow beyond the ceiling of oil production capacity. I see declines in GDP from 2 to 10 percent yearly for the next decade. Is anyone other than the folks at the Oil Drum even contemplating that?
The American oil cartel and the Middle East oil cartel love that Scarce Oil theory.
The only capacity that is being constrained is the capacity to Think.
We've gone from wood, to coal, to oil.
If the U.S. government subsidized alternative energy to the extent of the oil payments trade deficit (including the cost of Middle East wars and the standing army/navy) with Americas enemies, then alternative domestic created energy would be available right now.
There are too many vested interests in the oil companies, Wall Street and the Middle East that keep us sucking the oil teat.
Although the Fed makes it seem complex - it really isn't. The government should have minimal role in free market economics. Businesses should be allowed to fail - no matter how big. There should be no bailouts. People and corporations that make bad decisions - have to pay the consequences. There is no free lunch. Keynes theory makes sense only when governments actually save money to spend in difficult times. Spending money that is actually saved makes sense as labor and construction costs are much cheaper to afford. However, you don't spend money you don't have buying labour and construction materials at inflated prices! I don't think Keynes had "borrowing trillions" in mind when he created this theory - he would likely be rather ticked off that his name has been marred. It's either we pay the consequences for our stupid government policies now - or we pay for it in the next few years. Choose wisely.... These policies will end badly. Anyone who thinks otherwise is a clown.
Proper logic is very simple.
Today's people in positions of policy making seem to have no clue as to how to enable the private sector to muster economic strength.
All in all there is a very simple equation that all policy mandates must respect.
Private side business valuation....
Valuation = Income + Debt
All government policies to date have clearly reduced Valuation....by either increasing debt or increasing costs of production....
As a result ...sales will go downward ...thus snuffing out any chance of the economy improving.
...........................................
The only policy tool left that will permanently add to private side Valuation is tax structure change....
This means the removal of both corporate and individual income taxes...to be replaced by a maximum 15% consumption tax....whose revenues will be split between state and fed....
.....................................
Monetary dilution ....more legal largesse....additional taxation will only decrease private side valuation...
..................................
Another possible area of improvement will be making the proper accounting industry changes....Today's economic debacle largely has occurred because of improper accounting standards....
Confidence and policy that adds to private side valuation is the only way to go....
.............................
The current direction is a certain move towards a Japan/Euro fate....many decades of economic malaise along with increases in the socialistic welfare state....
...........................
In addition the least understood point is that a 15% consumption tax revenue base will provide a much higher government revenue base that the current system that is in place today....
Furthermore the economic security of the country depends on it....
This is economic war....lots of status quo people in office are the problem and must be removed and replaced by those who know what to do....
agreed + another quadrillion,
except,
shouldn't it be Valuation = PV of future income (variable profit) at a risk adjusted interest rate? And isn't all income subject to diminishing returns from obsolescence?
as long as our debt can be rolled over, and oil is priced in dollars, everything will be fine.
And bond holders are OK with return of capital (nominal) and not return on capital. And a real crisis never occurs.
If, is a mighty big word.
"This recovery". Ha, ha. Good one, Grey Lady. Good one. On a less delusional note, one wonders about the extent to which the arithmetically unpayable debt forced on current and future generations as a result of Wall Street's takeover of the Treasury will give rise to the same kind of long-term political effects that flowed from the Treaty of Versailles. Assuming, of course, that Skittle®-pooping, math-transcending unicorns do not descend from the sky to spend us out of certain national bankruptcy first.
Economists talk as though they are psychologists. The bond market is not a person, imbued with the capacity to worry! We should get away from such hokum.
Most economists have not yet realised that economics is all about human desire and motivations, not a set of physical laws constructed from perfect information and free choice bollocks.
Seems to me that the phrase 'the bond markets are worried' really means that the author is worried - which given, his frequent denial of the real state of the global economy, he should be.
guaranteed as always to promote a response with an outrageous bias, well done Leo, again.
We know that the additional trillions have been bought by the Fed, so that we are now living in an envirnoment of regulated interest rates across the curve (reprise 1950's) in order to appease Chinese, Japanese and OPEC holdings (the latter via London).
We know that the Fed has bought the bond marker and has sterilised the massive deficit spending programs of successive failed US governments on pork barrel politics and wars.
We know that the Fed will continue to buy the unaffordable promises for the future well being of health and welfare by succesive US Governments.
We know that the Fed has bailed out the sycophantic oligarchy that is the relationship between the Government, the banks and the military.
Don't think we don't know this, because we do.
It is not "austerity" to reign in spending when you can't afford it.
It is disingenous of you to not even consider a program to pay for past sins by repaying the debt that has resulted from broken promises and historical Government largesse.
It is not "austerity" to run surpluses to repay debts.
It is HONESTY and GOOD BUSINESS sense.
Tariffs, capital controls, reintroduction of specie backed money. Its all coming to an increasingly right wing government near you over the next few years. I am wondering how the children of today, overfed and overspoilt as they are, will cope with the concept of not getting what they want all the time...
Where are the statesmen of yesteryear ? Answer: they weren't considered statesmen at the time, history has conferred that accolade on many (not you Winston, of course. you were great).
Duck and cover, or stand up and be counted. Just don't whine and bleat about erosion of freedoms while doing nothing about it.
Times of economic stress are often characterised by musical innovation. Punk was born out of the last truly bad economic decade (the early 80's doesn't count, was only half a decade, and we got New Romantics rather than real music as a result). House and hip hop came out of inner city decay and poverty. Where's the new music ?
Dis
If we stay on this path of more debt solves the problem of too much debt, the music will be a beating drum.
There is a vacuum of political legitimacy, a growing frustration in the land and a cloud of uncertainty that the next rising megalomaniac could step into.
The first thing the Remocrats and the Depublicans did was save the crooks that sunk the ship while throwing the women and children overboard.
Things have only returned to "normal" for the Wall Street criminals and Government check recipients.
Times of stress? Try CAR today, Rwanda in 1994, Europe in 1947, China in 1969, Russia in 1942 ... As Americans we know nothing of real stress. Those times for us may lay ahead ... and a return to classical music would ease that stress (it has been shown that peaceful classical music lowers blood pressure and heart rate).
Am with you there. Which composer fits best for the coming 'stress' though. Wagner from our friends the Germans, perhaps. On balance though, I guess the Russians will provide an appropriate soundtrack.
Come on, Leo. Tell us we should be doing the Charleston instead.
i would say that spending the next 100 years of taxes (assuming 2% real GDP growth!!!) is pretty stressful for future generations. Of course our politicians and fed could care less about those..its all abouth THEM and NOW!
oops, them = politicians and the Fed
Interesting, but we are not venturing into the great unkown.
Leo there is no need to speculate on the US sovereign bond market. US debt management is being played out at the state level. Call it mini-sovereign default, or perhaps a crisis of intellegence.
It is interesting to witness the struggle of balancing a state budget. The state's administration of limited resources is well, pathetic to watch. The astonishing obligations made and the lack of simple arithmatic is beyond description.
So sit back and watch. The same pathetic surprise will be played out at the federal level.
----------
To own any US sovereign debt in light of the impossibility to pay or even have congress express problems in a realistic way should not attract any buyers.
An example is the latest CBO SS report. The CBO clearly describe the mechanism of a trust fund while at the same time stating how any deficit in outlays will have to be paid from new revenue redirected towards SS. However, what is amazing is the pretense that surplus squandered in the past is still somehow a benefit. It is this attitude, this arrogance, which should convince any potential investor that the US political system is broken.
----------
If you look at the magnitude of debt the US must sell, both new and rollover, while the world is de-leveraging, you will see that the interest rate needed to attract buyers, will redirect resources for growth towards paying interest. It is just a matter of time.
This effect has nothing to do with the 1930s. Our current situation has no historical basis.
Our problems are simple, we have exceeded our ability to pay.
Not really a lot of economic theory needed to describe the Treasury negative cash flow after the exit of debt buyers. To pay our bills the FED will monetize the debt, which will only drive more buyers away or spike rates.
----------
Krugman advocates more stimulus, but for example, ARRA is only about 50% complete. We are entering the ARRA sweet spot.
What additional misallocation of funds will truly lead to sustainable growth? Economic theory depends on proper and efficient execution towards understanding solutions, and not an elite politcal attitude that more money guaranetees results.
Could it be that the politicians do not understand that to solve a problem you must apply the correct solution. If so, why don't we see a fundemental shift in ARRA outlays? Why can't the politicians adjust the ARRA to produce results?
Why should I trust investment to the US, when politicians are incapable of applying solutions.
----------
From a pragmatic standpoint, it is almost like the politicians are trying to drive away buyers of US sovereign debt.
I often ask myself what greater lengths of government lunacy are possible?
The US "performance" should not attract one cent of sovereign debt investment.
Mark Beck
+1 quadrillion (thats a thousand, thousand, billion right?)
Updated DOW chart:
http://stockmarket618.wordpress.com
http://www.zerohedge.com/forum/latest-market-outlook-1
Maybe soon enough we'll come to realise, as a society, that we could never have bought the things we wanted to buy, anyway. ..this has grown as a fiscal crisis, balancing budgets, into a monetary crisis, the value of money. It only spent three weeks as apolitical crisis - governments borrow so much, that their word is synonymous with their spending power. Our society is premised on that one fundamental.
The solution is all about how much can we spend, where should we spend, who can we borrow from. ..we're looking at this like ants.. these problems are here because we are on the verge of a fantastic increase in output. We have more than we know what to do with and the value on returns on investment collapsed as a result. All the money-base for the investments which aren't going anywhere got called- that's your MBS bubble.
There's no market for industries of scale, efficiency and technology have thrown that out. It's happened with Steel, it's happening with Printed circuits, soon enough we'll be able to mix our own paints with stuff from a shop, or grown in a garden. Biotechnology, Graphene, Genetics coupled to computers is itself the best thing to happen to medicine in thousands of years, these things are Huge. .. We really ought to get land reform working, now before cities degenerate into war zones, and everyone should get to go to free classes, government-sponsored if you like, to study how the new production works. This is an emergency, we should dive into it.
We could organize a centralised goods clearing system. Everyone has a quota fro producing some component part, in a massively-distributed supply chain, that keeps money rolling. Sure it's like Socialism, but in socialism the individual puts the bulk of his service under the command of the state, in this it is typically less than 20% of the time spent in productive employ, spent whilst also creating his own lifestyle. We should really try a model town on it.
quality not quantity. anyone can measure an amount with an agree metric. not everyone can create the quality of spending. the negative return on government spending is a sign that it should be minimised in an economy NOT increased to lunatic proportions.
Leo, what do you think is the fair value on the S&P?
I have not used the Fed Model in a long time. If you believe Goldman, S&P fair value is 1300.
I take this stuff with a grain of salt. Still think overall market will go higher this summer, but it's really all about being in the right stocks and sectors.
Bonds rally? because they have trillions of bonds need to sell. If no body wants, they will play Euro show, still no body wants, they will attack stock market, now everybody finally realize what is 'safe heaven'. After they sell most of bodns, dollar will fall like a rock.
i think the solution is real simple....
end the invasions of iraq, afghanistan
bring the troops back from okinawa, the southern half of the korean peninsula, germany, qatar, diego garcia[and who knows how many other bases around the world].
the end of u.s. imperialism has arrived. it can no longer be afforded.
so, let us repudiate the empire now. not to do that is to endure the death of 10,000cuts over the coming century.
You could eliminate the DoD budget in its entirity and still it's not enough...you will need more.
So you need to answer Denninger's question (I know how some of the folks here do not appreciate Karl, but he's is on the right side in this), where do you cut from the big pie chart:
http://7ax.de/1gsq
The solution is simple, it is just not easy.
agreed, albert. we are also paying client countries, protection money to hold other more vicious babrbarians from our gates via FDI, which essentially impoverishes americans from jobs.
the heart of this problem is that any investment is good investment since it builds capacity. Krugman has no concept of quality, just quantity and assumes that an education system that churns out large quantities of graduates who contribute nothing to the economy by becoming bankers, lawyers and accountants (gaming the rules) is a good thing.
AlbertC - the military sector may be the only one even more powerful than Wall Street in their influence over the political class. It is also the greatest employment program in the world. Although your comments reflect the truth (100%), it's normal in times of great economic turmoil to find a "straw man" to wage war against.
Who are you? 10,000 cuts? Are you from Yemen?
Nice try. That won't happen. What's Plan B?
The policy mistakes of the 1930s stemmed mostly from ignorance. John Maynard Keynes was still a practicing economist in those days, and his central insight about depressions — that governments need to spend when the private sector isn’t — was not widely understood.
The problem is that Keynes didn't advise that government run outrageous deficits all the time, in good economies and bad and then REALLY step up the spending when a recession/depression came along.
He thought they should be fiscally prudent at most times thereby allowing them to spend in emergencies.
All the Krugman types advocating more spending now even when the U.S.'s debt of all types is unsustainable aren't doing what Keynes suggested. They're advocating half of what Keynes suggested. Of course they never much care about the fiscal prudence in most times.
I personally am convinced that the Keynes theories are suspect at the core. However, you do make a good point in that Keynes was not the complete idiot that would agree with the Krugman arguments that deficit spending in all circumstances is good for the nation or the economy.
If Krugman believes that deficit spending and money printing was so darned wonderful and such a great thing, Krugman should explain the collapse of the Weimar Republic. The population consisted of essentially the same hard working and thrifty Germans throughout the period. Is there a great difference between Germans sending money to France in war reperations and receiving nothing or the US taxpayer sending money to the Detroit city government?
Keynes' theories cores are unsuitable to our times.
You can save during good times and spend what you save during bad times (Keynes for dummies)
You can save during good times and save during bad times
You can spend during good times and save during bad times.
You can spend during good times and spend during bad times.
The last one is the one popularized by the US. The best way to win a consumption game. Hallmark of expansionists.
The second to last is very wished by expansionists as it ensures the participation of people to any expansionist scheme. The US will go this way.
A government that robs Peter to pay Paul can always count on the support of Paul.
Look at the percentage of the population that is supported by the government - start with 30 million direct employees in the greater public sector, all the Social Security recipients - food stamps (40 million), unemployment benefits - there are so many in the "Paul" sector of the economy. They all support Krugman -
Very true. Keynes was smart enough to know that politician are all sociopaths and probably would probably have had some funny comments about how “his theory” was applied by the likes of the Krugmans.
Economic theory only works in the presence of theoreticians. Add real people and it stops being economics and becomes psychology.
Knowing that politicians are all sociopaths is different from writing and teaching same.
If you have people hanging on your every word ( yes you candidate Obama) perhaps someone could try honesty for once.
Correct. By proposing a two-part solution where he knows only one-half is politically viable makes Keynes only half of a social scientist. The other half qualifies as a scoundrel.
"The right to search for the truth implies also a duty; one must not conceal any part of what one has recognized to be the truth" - Albert Einstein
Yeah Hungry nicely put but maybe a non sequitur by using as a paragon of virtue that wild haired prick of fucking 'fudge factor' fame ?
No problem here. At least AE openly declared his use of a fudge factor. Krugman hides behind his obfuscacity.
I hereby declare the end to the Great Recession and herald in the Minor Depression
Our two weapons are fear and surprise...and ruthless efficiency...
That's three.
Did you know that fully 50% of statistics are just made up?
did you miss the reference to monty python's "spanish inquisition" ..oh unless its a triple entendre..ack
"Our economy remains in rough shape, by any measure. So it’s easy to confuse its condition (bad) with its direction (better) and to lose sight of how much worse it could be. The unyielding criticism from those who opposed stimulus from the get-go — laissez-faire economists, Congressional Republicans, German leaders — plays a role, too. They’re able to shout louder than the data."
This is actually a great point. Someone lying in an intensive care unit on a ventilator may be in much better condition than they were two hours before, when they were in bypass surgery on a heart-lung machine. The lesson to take away: the guys who are talking about how you should get long this thing, how powerful the recovery is, and how we're on the threshold of the next bull run ("just wait til those unbelieveable employment numbers come in NEXT TIME") can see that the patient isn't on a CBP pump anymore - but they're ignoring the fact that the patient is still in critical condition and on a ventilator with an overlevered balance sheet that is likely to tip him into the grave.