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Will Public Austerity Cause Private Sector Paralysis?
As the whole world prepares for years of austerity, now that virtually everyone is aware that sovereign debt levels are unsustainable and the drive to push public sector deficits down has reached a crescendo, one question remains open: what will happen to the private sector deleveraging commenced the world over in the aftermath of the Lehman bankruptcy. Goldman's Jan Hatzius takes a look at this question, and reaches some very unpleasant conclusions. Looking at the closed system of the financial balances of the private sector, the public sector and the rest of the world (i.e., private balance + public balance = current account balance), in which the push for deleveraging in the private sector, the rush to ramp up exports, and the imminent Age of Austerity all signal an upcoming unprecedented "demand shortfall for the economy as a whole", Hatzius concludes gloomily that "given the forces of retrenchment and balance sheet repair, the risks to the growth of aggregate demand?as well as risk-free interest rates?over the medium term are tilted to the downside. Policymakers can provide some relief, but realistically will find it hard to neutralize the headwinds altogether" The economist also looks at what realist fiscal and monetary rabbits are left in the hat of the administration/Fed, and realizes that there is little that can be done to prevent what he dubs a "slowdown" and what everyone else whose bonus isn't tied in with perpetual growth assumptions, a new wave of the Second Great Depression.
First, Jan observes the dynamics of the current economic cycle. In case anyone is still confused about it, here is his summation in a nutshell: "Relative to the start of the recession, the level of employment payrolls is now about 8% lower than in the median cycle of the 1954-1982 period. Scaled to the current level of the labor force, this is a shortfall of roughly 10 million jobs. The size of this gap reflects two unusual features of the current cycle? an unusually deep recession and an unusually weak recovery." We recommend the following refresher course in one of the basic laws of economics, which the Obama administration, try hard as it might, will not be able to get the Supreme Court's repeal vote.
Exhibit 1 illustrates the extent to which the recent recession and its aftermath have diverged from postwar experience by plotting the level of nonfarm payroll employment against prior postwar cycles, starting from the peak of the business cycle (i.e. the start of the recession). Relative to the start of the recession, the level of employment payrolls is now about 8% lower than in the median cycle of the 1954-1982 period. Scaled to the current level of the labor force, this is a shortfall of roughly 10 million jobs.
The size of this gap reflects two unusual features of the current cycle?an unusually deep recession and an unusually weak recovery. This is in stark contrast to the ?what goes down must come up? pattern predicted by many forecasters, at least until recently.
The sheer size of this gap suggests strongly that the cycle is fundamentally different from its postwar predecessors. There are a number of alternative though not mutually exclusive ways of illustrating these differences. But at the most basic level, we view the distinguishing feature of the current cycle as a collective attempt by the different sectors of the economy? households, firms, governments, and the rest of the world?to reduce their debt loads by pushing spending below income. This does not mean that every sector is trying to run a surplus?as is well known, the US federal government is currently running a large deficit and planning to do so for many years. But it means that those sectors that are running deficits are moving less aggressively than those that are running surpluses. This implies a demand shortfall for the economy as a whole.
To illustrate the reasoning, Exhibit 2 shows the financial balances? the differences between income and spending? of the three sectors of the economy, namely the private sector (households and firms), the public sector (federal, state, and local), and the rest of the world. (The rest-of-the-world balance is simply the inverse of the current account balance, representing a capital inflow when the current account is in deficit.) The financial balance is the difference between total income and total spending, and in general equals a sector?'s net lending to other sectors.
Since the three sectors constitute a closed system, one sector?'s borrowing must always be another sector?'s lending. Hence, the three sectoral balances must sum to zero:
(1) private balance + public balance = CA balance.Exhibit 1 shows the current configuration of the three balances. As of the first quarter of 2010, the private sector was running a 7% of GDP surplus, the public sector a 10% of GDP deficit, and the rest of the world a 3% of GDP surplus vis-à-vis the United States.
But while this equation must always hold ex post as a matter of accounting, it need not hold ex ante. In other words, is quite possible for different sectors to pursue spending plans that are mutually inconsistent with one another, and such inconsistencies can keep aggregate demand away from the economy?'s supply potential. In general, if all sectors taken together aim to run a financial deficit?i.e. want to spend more than their expected income and want to finance the difference by borrowing?the economy will tend to overheat. Conversely, if all sectors taken together aim to run a financial surplus, i.e. want to spend less than their expected income and use the difference to pay down debt ?the economy will tend to operate below potential.
We can illustrate this point using some simple assumptions. First, we assume that the current account is fixed at a deficit of 3% of GDP. This is a big simplification, but it does capture the fact that at least some of the factors causing a retrenchment in the United States are also causing a retrenchment in other countries that experienced a credit bubble.
Second, we assume that the public is uncomfortable? or Congress believes that the public is uncomfortable? whenever the general government deficit is above 7% of GDP. While larger deficits are possible for short periods of time, Congress ultimately responds to them by cutting spending and/or raising taxes. The precise number is obviously arbitrary, but we do believe that there is a level of government deficits beyond which the political demands for retrenchment become difficult to resist.
These assumptions imply that the private sector cannot aim to run a financial surplus of more than 4% of GDP without sapping aggregate demand. This is a serious problem because our analysis a few weeks ago concluded that the private sector may target a financial surplus of significantly more than 4% of GDP for the next few years in order to reduce its debt burden at an acceptable pace. This point is illustrated in Exhibit 3. The top panel shows the ratio of private sector debt to GDP, while the bottom panel plots the change in this ratio against the private sector financial balance. The point to note is that large surpluses are likely to be necessary in order to bring the private debt/GDP ratio back to historically more normal levels. In fact, even if we assume? highly optimistically? that the private debt/GDP ratio only needs to return to the upward sloping trend line seen since the 1950s over a five year period, the private sector balance may need to stay near the current 7% of GDP level for the next five years. In fact, we believe it is likely that the private debt/GDP ratio will need to decline to a level well below the prior trendline, although the extent of this decline is difficult to estimate with any degree of confidence.
So what happens if the private sector indeed wants to run a 7% of GDP surplus? This means that on an ex ante basis, spending will fall short of (expected) income by 3% of GDP. This demand shortfall saps production, and consequently the income from production. As a result, private sector income is lower than expected, which pushes the private sector balance below 7% of GDP (i.e. to a ?looser? position than desired by the private sector) unless there is a further downward adjustment in private sector spending.
Moreover, lower private sector income implies lower tax revenues, which has a similar impact on the government balance and could trigger further austerity moves by Congress. Ultimately, this adverse feedback loop doesn'?t end until someone accepts a smaller surplus or a larger deficit.
Hatzius then muses on what the possible responses to this imminent economic contraction are, on either the fiscal or the monetary side, and to the chagrin of Keynesianites, finds no feasible options.
The Response of Fiscal Policy…
Let us suppose that we are in the situation outlined at the end of the previous section. What can policymakers do?
In the context of the financial balances framework, the most straightforward response is to boost aggregate demand by targeting a government deficit of at least 10% of GDP?indeed, a bigger target would be better because a period of sharply above-trend growth would be highly desirable to fill in the economy?'s large output gap.
The main objection to such a policy is that higher public deficits raise the risks of a public debt crisis of confidence. Our own view is that these risks have been exaggerated, at least in the case of the United States. Public debt and especially public debt service are still at moderate levels, and the bond market is showing few signs of discomfort with the US fiscal outlook. Moreover, as a practical matter it is in any case difficult to avoid large deficits as long as the private sector is retrenching and the current account is in deficit. As already noted, this saps revenue growth. So it is better to accept the need for these deficits on an ex ante basis since, to a large extent, they will happen ex post anyway.
Nevertheless, we do recognize the difficulty of implementing large-scale fiscal expansion over an extended period of time. Even though we and many others have presented compelling (we think) evidence that last year?s fiscal stimulus package has helped the economy, polling evidence suggests that the public does not buy this; for example, in the most recent Pew Research poll, only about one-third of respondents thought that the stimulus package had ?helped? the economy. Evidently, it is difficult to persuade voters that running large-scale public deficits at a time when many are cutting back in their personal lives is a good idea. If so, the idea that policymakers can offset whatever restraint is coming from private sector retrenchment by ramping up the fiscal stimulus may be sensible economically but unrealistic politically.
One way to make meaningful near-term fiscal easing more acceptable might be to couple it with longer term fiscal tightening. This would argue for a plan to ease the near-term fiscal stance via extensions of unemployment insurance (again), aid to state governments, and the bulk of the 2001/2003 tax cuts (temporarily)?perhaps along with a payroll tax holiday?but couple this with legislation to slow the growth of spending and raise direct and indirect taxes 3-5 years in the future. Another (theoretical?) possibility is to make future tax hikes explicitly conditional on the cyclical position of the economy, perhaps simply measured by the level of the unemployment rate and/or inflation.
…and of Monetary Policy
If these options are out of reach and fiscal policy therefore remains too tight, the alternative is further Fed easing. But even under normal circumstances? that is, if the funds rate has not yet hit the zero bound?its impact in the simple financial balances framework described above is less direct than that of fiscal policy. The main impact of monetary policy on ex ante financial balances is that lower interest rates and/or easier credit in some other form aim to entice the private sector to borrow a little more, or at least to stretch out its retrenchment out over a longer period. But when the channels of credit intermediation are impaired and the private sector has decided to reduce its debt loads, it may be difficult to make as much difference as normal via monetary policy.
These difficulties are magnified in the current environment, where the funds rate is bounded at zero. Fed officials have managed to ease financial conditions by backstopping the financial system and purchasing mortgage-backed securities, and this has probably limited the extent of the private-sector retrenchment to some degree. But our analysis suggests that the total impact has been only equivalent to a 70-basis-point cut in the federal funds rate target. This small a change is unlikely to reverse a fundamental move toward financial restraint and balance sheet repair.
So what else could the Fed do? One option is ?more of the same ??an even more explicit commitment to low rates, a further small cut in the interest rate on excess reserves (IOER), or additional asset purchases. However, while this would undoubtedly ease financial conditions a bit more, it is hard to believe that the impact would be very large unless the asset purchases were very aggressive. One potentially more powerful option is the adoption of a significantly higher inflation target, as suggested by a number of prominent academic macroeconomists. If such an announcement is credible, it could increase inflation expectations and reduce real interest rates. This could lead the private sector to slow down its retrenchment?i.e. cut the ex ante private sector surplus ?and thereby provide a boost to growth.
However, one important reason for why Fed officials have not shown any signs that they are actively considering such a policy is that it risks increasing inflation risk premia as well as inflation expectations. While higher inflation expectations lower real interest rates?defined as nominal rates minus expected inflation?and are generally welcome at a time of significant deflation risks, a higher inflation risk premium would offset that by raising real interest rates and tightening financial conditions. It is therefore not surprising that Fed officials have so far eschewed any discussion of a higher inflation target, although this could change as inflation declines further.
Jan's conclusion is brief and to the point: the days of deluding ourselves things are getting better, are rapidly coming to an end.
The upshot of our discussion: given the forces of retrenchment and balance sheet repair, the risks to the growth of aggregate demand? as well as risk-free interest rates?over the medium term are tilted to the downside. Policymakers can provide some relief, but realistically will find it hard to neutralize the headwinds altogether. Thus, the risks to growth over the medium term are clearly tilted to the downside.
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Two words Durden: Red Rock.
Two other words: "Project Mayhem!"
Two words: orange shirt
Two words: manly grenade
Quite simply,if everyone is paying debt,who will buy !!!! surely the only sensible thing is to let the whole lot go and start once again with a medium of exchange that has some worth,i.e. Gold and Silver physical.The current situation is to print more money to pay the debt,and then print more to pay more debt creating a never ending circle of debt repayment,resulting in hyperinflation.If this occurs will it not end up with people not selling as the longer goods and resources are held the more they will be worth ? As people knock the Gold price do they not realise that it is continually hovering around $1150 - $1250 an ounce because no one really believes what they are told anymore,there is still more bad news to come out and it is like a patient being told small portions of a diagnosis because the truth would kill him.
buy of a cycle if not of a lifetime. but you never know. remember how hard it is to catch the falling knife to get the bottom. miners participate on both sides of the valley.
"Hatzius concludes gloomily that "given the forces of retrenchment and balance sheet repair, the risks to the growth of aggregate demand as well as risk-free interest rates over the medium term are tilted to the downside."
It's more serious than this by a country mile. The Ponzi has been covering a bigger hole than most realize. Decades of government corruption and systematic looting in every agency, fraud on every level of the Fed, Treasury and Fannie/Freddie. And this doesn't even consider the corporate side of the equation. Who could forget the military/industrial complex jackpot that's never discussed. I seem to remember Rumsfeld discussing a couple of $Trillion missing and unaccounted for in the DOD the day before 9/11.
They aren't trying to "fix" anything. They're trying to loot the carcass before the carrion arrive.
Agree. Missing billions from Afghanistan and Iraq. My lord.
Also, here's why I'm convinced there is a concerted effort to loot the US. Where the hell are the new towers they promised us on ground zero? Looks like Larry pulled a swift insurance job on us and AIG (US taxpayer) actually paid. Shit like this makes me want to revolt through debt default.
PS that's my new war cry my friend.
http://www.cbsnews.com/stories/2002/01/29/eveningnews/main325985.shtml
(CBS) On Sept. 10, Secretary of Defense Donald Rumsfeld declared war. Not on foreign terrorists, "the adversary's closer to home. It's the Pentagon bureaucracy," he said.
He said money wasted by the military poses a serious threat.
"In fact, it could be said it's a matter of life and death," he said.
Rumsfeld promised change but the next day – Sept. 11-- the world changed and in the rush to fund the war on terrorism, the war on waste seems to have been forgotten.
Just last week President Bush announced, "my 2003 budget calls for more than $48 billion in new defense spending."
More money for the Pentagon, CBS News Correspondent Vince Gonzales reports, while its own auditors admit the military cannot account for 25 percent of what it spends.
"According to some estimates we cannot track $2.3 trillion in transactions," Rumsfeld admitted.
$2.3 trillion — that's $8,000 for every man, woman and child in America. To understand how the Pentagon can lose track of trillions, consider the case of one military accountant who tried to find out what happened to a mere $300 million.
All one has to know is his nickname: Rummy. He is such an old hand in the old boys network that he has a key to every executive washroom in the world, a master key if you will. While this article is pointed in a nice direction, the quoting of Rummy removes its creditibility immediately. And that might just have been the point. Speaking in code to those in the know the article says, "Yeah here's an eyewash article on Pentagon waste. We are not going to do anything about it. Another similar article will come out in 36 months to placate the sheep."
ozzi,
Ummmmmm, those are being replaced with NEW Muslim Mosques.
No Shit.(within view of the site)
War monger spending now at 12.8 billion per month for Afghanistan!
IS,
Forget the 12.8, he's spending 5 Billion PER DAY.
3x's+ what Bush was spending.
When the builders of the house of cards began they invested much thought into exactly how to make each house. They placed their destruct charges early on in the very operating structure of the edifice. This is so that when the time comes for sweeping change there is not a lot of effort required to pull the mess over.
In fact, demo and learning from the demo is part of any admininstrator's duties.
In their eyes, its another days at the office.
Why Does Figure 1 regarding non-farm payroll 1953 - 1982 show an asterick stating the 1980 recession as excluded?
Austerity!? Don't make me laugh.
As soon as the Navy mutinies & the jobless riot (Sept 30, 1931). The government will be back to preventing the depreciation of bank assets, including its own.
I don't know what you meant or what your opinion is on austerity vs stimulus but let me tell you this. I am unequivocally opposed to any austerity since it only bolsters the banks position. They already have the fucking money through QE1, why would anyone want the government to restrict the public's access to any fresh money?
Having said that, I also don't trust the government to use stimulus money in any efficient or effective way. I guess you're damned if you do and damned if you don't.
More and more people are creating their own stimulus program as time rolls on, by defaulting on bank loans. Equilibrium of the system for survival demands the banks pass on some of their hoard, whether they like it or not.
Let me see pay the bank or feed the kids?
Austerity is tantamount to the depreciation of bank assets, which is to say governments will pull in their horns & stop inflating the currency.I don't see it happening.
For example;
10 Sept 1931: Police wielding batons break up demonstration by jobless at the Trades Hall in Melbourne.
15 Sept 1931: 12000 ratings ratings on 15 ships in the Atlantic Fleet staged a mutiny in protest at new pay rates, leaving many men with only 25 shillings a week.
30 Sept 1931: Throughout yesterday & last night, police & demonstrators protesting the governments austerity program clashed in London.
14 April 1932: Civil service pay cuts cause New Zealand's worst ever riots; 23 police & hundreds of rioters are hurt etc, etc.
No they'll take the 'easy' way out & make the situation ultimately worse by inflating the currency even more. Or maybe start a war to smash up some shit.
What assets? A large part of MBS's have already been dumped onto the taxpayer. 90% Fannie and Freddie F-ups
The assets that 'balance' the liabilities. Every balance sheet has them.
Austerity == withdraw from artificial stimulation.
So you would like more co-caine?
LeBal,
American public has BEEN on an Austerity program, for one reason, OBAMA...........
There are millions of folks left with lots of discretionary income, chomping at the bit, to buy needed items, and some not so needed.
THEY are not, and will not.....because of the LACK of knowledge of how they will be affected, by the NEW SOCIALIST programs Obama has gotten passed.
Myself, I have put off buying $50k worth of durables, since he took office.Their items that need replacing...........
I (with the current knowledge gleaned, and seen),will not spend a dime more than necessary,to get by.
Unless by a MIRACLE, we get this crap killed, and some form of sanity takes over D.C.,and some form of monetary changes and deficit reductions are made.
This now, IMHO will never be possible, so I will continue to set my ship right, and stay on the Austerity Ship ........MINE.
+++
DosZap has it exactly right. We are on our own here. On our own personal Austerity Ship (or our own personal Hedge Fund or even fofoa's our own personal Central Bank).
I've cut back good for sometime, and am keeping my money (esp. Gold) to/for myself.
Cutting spending, it's really the right answer for almost everything, at every level.
I just don't understand it. What in hell is he talking about??
How can the Federal government boost aggregate demand? How can the Federal government stimulate through inflation? Interest rates are already low and still the private sector is not biting. The federal government and banks can't force feed debt if the private sector sees no meaningful use for the excess liquidity. Increasing supply with falling demand is a destruction of capital.
What the government needs to understand is that they are part of the problem. It's spending is non productive and actually inhibitive to private sector growth with every damn penny it spends. The US is already snowboarding out of control down the Rahn curve and the only solutions it provides are 1) increase taxes and 2) flush money into non productive ventures with zero ROI. Even extension of UE benefits is not a sustainable solution. This is charity (apologies for sounding unsympathetic to the unemployed but I can bet the they would rather earn their checks with dignity and pride than to receive them out of necessity)
We need jobs that meet new demands that command premiums. Only hi tech can solve that. Where is the ROI from NASA, DoE, DoD etc? Release the technology NOW.
As for the publics perception of the stimulus success, Jan says;
However, from PBS Newshour;
http://www.pbs.org/newshour/bb/politics/july-dec10/shieldsbrooks_07-09.h...
I say it's absurd they actually found a 6% positive response.
I thought about 50% would answer "Yes" since they voted for hope and change.
How can the Federal government boost aggregate demand?
By buying stuff. Ideally, stuff that is worth buying, and where the government can pull in significant economies of scale, so that they can buy more than individuals can independently at the same price. You mentioned R&D -- that's a good example. Yes, our tax dollars will pay for this stuff. But we can actually end up saving money this way, at least in principle. Health care is one of these kinds of services. Public health represents a large pool of risk from which to draw funds. Insurance isn't an industry where competition serves the public good. There isn't a way to lower the cost of carrying a risk, except to have a larger pool from which to draw that risk. For these kinds of industries, "competition" amounts to duplication of effort, as multiple organizational hierarchies must be maintained, despite the fact that for each organization, the marginal cost of maintaining client is minimal.
Would you rather pay a private company 950$ a month, or the government 900$, for the same service? I'm sure plenty of people would say they'd rather pay a premium. Fair enough. But it's economically (though perhaps not politically) irrational.
Thus, the risks to growth over the medium term are clearly tilted to the downside.
Given the wording is bearish, that would ordinarily make me less bearish, given this is GS talking; but maybe the deeper contrarian response is to forget about "growth" at all and expect things to simply get worse, at least on a per capita basis. If the baseline is a downtrend, even referring to "growth" is promoting a mirage.
People gotta eat and they gotta have a roof over their heads. Short of that, the government sends folks to war to be killed.
It's a good thing aggregate demand is a myth, because I might have felt bad for not reading this.
But in january, when lame duck gives his state of the union, we'll hear "hundreds of economists from both sides of the aisle agree, spend spend spend. But spend it on things that directly benefit Americans. And by Americans, I mean people that matter. And by people that matter, I mean people who will likely donate to my re-election campaign."
Companies reliant on government contracts will probably suffer. Many government workers and academics will struggle to find comparable employment.
But the economy will re-align to the deflationary reality. We'll probably see some breakaway republics.
Apostate,
" We'll probably see some breakaway republics."
I am Texan, I am past ready...........( we were a Republic, could have been again before Lincoln screwed it up).
Texas breakoff? Good luck fighting the Mexican drugs cartels on your own...
Dr,
We could take over the entire country............Cartels would be gone in 30days.And the Border would be moved back about 100 miles.
+1
With extreme prejudice.
Don't mess with Texas. The state as a nation would the MEANS and the WILL to STOP illegal immigration and the cartels.
While the rest of the country wallows, at least Arizona is giving it a try.
I lived in Texas for a long time. One riot, one ranger.
If Texas leaves, it will hurt the rest of the USA a lot.
Oh, I think Texas could easily do as well as the feds on that front. Probably much better - they'd actually try.
Apostate,
I don't know why you got junked. You are one of my favorite commentators. People who junk should do a rebuttal.
I suspect someone has a grudge and dislikes debating me.
This is ALL GODDAMNED BULLSHIT.
Look, we were FINE before the fuckin Fed, FINE before the income tax, FINE before there was this abomination called monetary "policy"!!!!!
Gov't, GET THE FUCK OUT OF THE ECONOMY.
we had Depressions and occasional bubbles and crashes without gov't intervention....NEWS FLASH, we've had them WITH and BECAUSE OF gov't intervention as well! The government is NOT making things better. Every credit bubble was as a result of central banks and the type of bankers that Andrew Jackson squashed.
You're right, but you don't really expect the camp guards to think 'outside the gulag' do you?
The gov't could provide (poor choice of words - stop stealing would be more accurate) something of real value to 'balance the books' - namely economic and personal liberty, which are really one and the same because you can't have one without the other.
They won't do that because that would mean dismantling the gulag.
Instead they'll continue to fiddle with their little worthless bits of paper, electrons, and promises to try and make the gulag run just a little bit smoother.
The crap that Krugman and his ilk try to sell - deficits now and don't worry, we'll REALLY deal with that deficit and debt later - is bullshit and we all know it. When my son was 5 and saw a toy he just had to have he'd promise anything to get the toy right NOW. He never followed through - and the PTB do the same thing. My son only got to pull that a couple of times before I caught on. The gov't and fed have been pulling their scam for going on a hundred years. And they wonder why it's 'politically impossible' to keep doing it.
Bingo! Evidence is contained in the article:
Yesterday's reiteration showing that the fed is pumping money into the banks and having them buy and fund treasury debt proves that this is actually a plea to allow continued looting until the end simply because they have masked the theft so well.
I really don't see what all the fuss is about. For every ten people I meet there is one I would never give a job to. Hence my "natural" rate of unemployment is 10%. And for house prices to drop 40% after a 100% run up is to be expected, not the exception. Lets face it, the US economy involves doing your neighbors laundry (ie. service economy) and charging $50,000 a year to do so. This is not an economy that value adds. The aspects of GDP that actually destroy wealth (the tort system, the health care system, the financial services industry etc.) is stagering. So push on the rope all you want but actions taken to date don't even begin to address the basic structural issues present. Think Germany if you want a role model.
The IMF report nails it. But the typical response is and will be "who are these people to dictate to us". Take your medicine.
For every ten people I meet there is one I would never give a job to.
For every ten people I've worked with, I'd say only 1 out of 10 was truly competent...and I'm being generous and I've never worked for the government.
+1000
+1. my number is about 10% being generous.
Your post NAILS IT--thank you.
mac,
"The IMF report nails it."
WE (U.S.) prop up the IMF with 40% of their finances.........
WE, FEED the lions share of the the U.N.,(as a favor, they screw us at every turn) outside the Gv't, and the Fed, the TWO most corrupt POS on the globe.
Now we have the BIS buying Gold from a CB...........WTF?
Now we know why the $50.00 drop last week and a half......FEAR.
A demand shortage? Where do you guys get this stuff? From my vantage point, severe supply shortages are developing as so many firms are going bankrupt, and so much production is permanently idle due to end-of-life issues (ie: obsolescence, depletion, etc.). Especially in critical sectors that have been chronically investment and credit deprived such as food, oil, energy and manufacturing.
The private sector is shutting down, not only because credit basically isn't available to it on reasonable terms (why should an oil company pay more to borrow than someone borrowing on a house note!), but because investors fear that any profits cashflows they generate will merely be confiscated, either outright, by fiat, or by inflation.
10-4 on that one, good buddy!
I fancy myself an entrepreneur. Had a couple of hits that paid off. But my seed money is firmly in PMs right now, and it's staying there.
I don't claim to be in my right mind, but it's just FUCKING STUPID to start any new venture in this septic tank that passes itself off as an economy.
So I spend a lot of time right here on ZH. Time that in an earlier part of my life would have been spent putting a project together to optimize something and turn it into a piece of money.
I'm sitting very tight until this really shitty movie ends and the second feature starts rolling.
Keep shooting for your outlier that will eventually pay-off. You haven't really stopped being an entrenpreneur- your buying PM. This is not common, and a worthwhile risk that could result in handsome payoffs eventually. I'm betting on it long-term
If you have to borrow money or stop doing something that's already producing an income I'd agree. But there's still some opportunity if you can roll with the punches and are willing to hustle.
My friend and I have bought some cars and trucks with blown motors or transmission problems (the kind of problems that cost a FORTUNE to have fixed at a shop). He's a mechanic so we get a line on good deals that we can fix up and do well on. I've got a garage with all the tools. Turned a hobby into a nice little venture - without borrowing a dime - on evenings and weekends. People still need reliable cars - just aren't willing to part with $40k to get one.
I could live on just this, but then wouldn't be able to afford decent scotch, silver, farm land and ammo.
This may be a good time to hunker down or fly under the radar, but it's against my nature to not be doing something.
"...all the way."
pitz:
Even "big" private sector Obama supporters are fearful:
1. GE is about as convincing as a Portugese bank:
http://money.cnn.com/2010/07/01/news/companies/ge_immelt_comments/index....
2. Aspen get together, Mort Zuckerman and Niall Ferguson
http://www.thedailybeast.com/blogs-and-stories/2010-07-07/aspen-ideas-fe...
3. VZ Chairman Ivan G. Seidenberg:
http://www22.verizon.com/Content/ExecutiveCenter/Ivan_Seidenberg/Economi...
But, since > 2/3 of hiring is by "small" businesses that are getting crushed, both supply and demand are ramping down.
Timmy, Bite-me, and Obama all have thrown in the towel:
http://news.bbc.co.uk/2/hi/business/10406463.stm
http://www.cbsnews.com/8601-503544_162-20008924-32.html?assetTypeId=41&b...
http://www.wsws.org/articles/2010/apr2010/pers-a29.shtml
All part of the plan.
- Ned
excellent points and thanks for the links
Aren't Immelt, Zuckerman and Seidenberg in on the plan? They seem to be priming us for 'change'. Whatever their prescription, I expect it to be worse than the disease.
As an aside, be very wary of anything coming out of Aspen. After working there for years I can say that the air is thin up there and oxygen deprivation has known negative effects on clear thinking.
Old Trooper--I think that they were in on the plan, but are now seeing how it is coming out, not as advertised to them. Of course, GE Capital is bk, so Immelt is going to do what he's told. But, even so, he's off the reservation.
- Ned
(OT, on June 14, 1974, a bunch of us were enjoying the sunny warmth of Ft. Benning. After the obligatory ten of whatever, Black Hat says "recover" and us soon to be jarheads did "ONE for the Army's Birthday!" and ... well, you know the rest. "Pushups until I'm tired")
All the Way!
so when they look back at this fiasco.. it will be called the Great Deleveraging ??? we are in a Great Deleveraging??
In the mean time:
http://www.washingtontimes.com/news/2010/jul/10/struggling-states-seek-m...
"Honest, just one more fix and we'll swear off the 'junk' for keeps!"
If Hatzius’ goal is a further crippling of the private sector and a general lowering of the standard of living for all Americans, he has the formulas—all more-of-the-sames, IMO. His call for policy easing and/or additional deficit-financed fiscal stimulus is just more unworkable Keynesianism.
Unfortunately, as Economist George Selgin pointed out in “Central Banks as Sources of Financial Instability” in The Independent Review (April 2010), theoretical discussions of central banking badly neglect its role in fostering financial instability, in part because they ignore its history and political origins.
Fortunately, though, as the Pew Research poll referenced indicates, the public has shown more innate common sense than Hatzius to “just say no.” The public doesn’t want more Krugman—not bigger government, nor increased taxes, nor more Fed easing, nor negative interest rates, nor additional Fed asset purchases, nor higher inflation, nor increased unserviceable public debt, nor Goldman bailouts… And even if it did, it doesn’t have that kind of money to send trillions vanishing down Bernanke’s big black hole of unfathomable debt. There’s no bottom to it.
The only way the Soviet Union with its failed economic plans survived its system was under an Iron Curtain to imprison its workers and with the help of the United States. But if America falters under current Fed and Obama socialist policies, there won’t be a United States or anyone else to come to her aid.
Hunter Lewis, in his book, Where Keynes Went Wrong…And Why World Governments Keep Creating Inflation, Bubbles, and Busts (2009), writes:
“The basic Keynesian fallacy—the idea that the government can create prosperity by printing money and lending it—was embodied in the very legislation that created the United States’ second central bank, the Federal Reserve, in 1913.
And once again, after at last sucking up all the fruits produced by America’s free enterprise system, the Fed is proving that central planning doesn’t work.
Wrote Solzhenitsyn during Stalin’s reign of terror: “It is American trade that allows the Soviet economy to concentrate its resources on armaments and preparations for war. Remove that trade, and the Soviet economy would be obliged to feed and clothe and house the Russian people, something it has never been able to do. Let the socialists among you allow this socialist economy to prove the superiority that its ideology claims. Stop sending them goods. Let them stand on their own feet, and then see what happens.”
It’s time again. Let the bankers with their damaging monopolies in the provision of money and their congressional enablers stand on their own feet, and then see what happens!!
Paul Krugman in his book "The Return of Depression Economics" explains Keynesian stimulus with a toy example "the Capital Hill Babysitting Coop". In this example the solution to the problem of stagnation was to print more scrip that the coop uses. As far as I could tell, the effect was psychological. People felt less need to hoard scrip and things got rolling again. If this interpretation is correct, the central idea behind Keynesian stimulus is that injecting money into the economy increases confidence which translates into increased demand. However, the important thing is that to have demand, you must have confidence.
In our current economy, printing more money is in fact leading to a loss of confidence and is thereby hurting demand. I wonder if the Keynesians realize that the sequence is Stimulus-->Confidence-->Demand, and that confidence is a prerequisite for demand. That is, Stimulus-->Demand, while seemingly a cause and effect relation, is incomplete. No doubt the idea of creating demand with money injections was Keynes great idea and Krugman is not mis-representing Keynes. But because the money was basically just handed to the banks who then proceeded to hoard it, the public, ie the "economy" does not buy in and the critical component of confidence has been lost.
Again, I feel that a mistake like this is due to physics envy on the part of economists. Words like stimulus and demand do not have the same pedigree as words like force, mass, and acceleration do in physics and to try to create hard and fast cause and effect relations with such terms is courting disaster in the real world.
The focus should be on creating confidence. I don't think lying, lining the pockets of your cronies, corrupt politicians on the take from the banks, not being able to audit the Fed, etc, etc, etc is doing much for confidence.
My view as well.
The Great Malaise II, now all we need is the Misery Index.
It is the "animal spirits". http://cafehayek.com/2010/01/keynes-vs-hayek-rap-video.html (couldn't resist).
and "physics envy", I just spit tea on the keyboard.
- Ned
Thinking about your post today brought to mind Hazlitt’s comment that inflated wages can cause people to believe they are better off, even though their inflated paychecks have less purchasing power. Said Hazlitt:
“Who among us does not feel richer and prouder when he is told that our national income has doubled (in terms of dollars, of course) compared with some preinflationary period? Even the clerk who used to get $75 a week and now gets $120 thinks that he must be in some way better off, though it costs him twice as much to live as it did when he was getting $75. He is of course not blind to the rise in the cost of living. But neither is he as fully aware of his real position as he would have been if his cost living had not changed and if his money salary had been reduced to give him the same reduced purchasing power that he now has, in spite of his salary increase, because of higher prices.
“Inflation is the autosuggestion, the hypnotism, the anesthetic, that has dulled the pain of the operation for him. Inflation is the opium of the people.
“And this is precisely its political function. It is because inflation confuses everything that it is so consistently resorted to by our modern ‘planned economy’ governments.” – Henry Hazlitt, Economics in One Lesson (1978 New Edition)
Rightly, as you say, the important part of the demand equation is confidence, and confidence has been lost. The public has neither faith nor trust in the Fed's banking system, nor is it any longer deceived by policies that reduce real wages through increased prices.
The public has become sophisticated; perhaps it was watching trillions of dollars dropping like confetti from Bernanke’s helicopter, landing on Goldman's lawn, that lit its light.
Excellent post, btw.
JR,
Keynes HIMSELF said his Theory of economics was just THAT.
A theory.
He told FDR, he was all but insane for the spending HE did, causing the 1st Depression to linger on, and on.
FDR, did what he had planned, and Obumma will do the same friggin thing.
HE has an Agenda............a Job, to do on this country.
Only a FOOL would continue on the same PATH, that he has (falsely stated) are role models for what OUR system should be........
The Brits, and the French, are trying to get away from Socialism.....they KNOW it won't work.(look at them).
It's got them so screwed, they do not know whether to PP or go blind....so, that leads us to why our Great leader, would continue on a known path to destruction?. We know why.
The idiot said Yesterday, Now, "It's time to focus on Jobs!!."
Bite ME..............you lying sheiskopf.
It almost appears that small- and medium-sized business is an Obama target because his heavy stimulus ideas for the public sector, allowing the tax increases to come in six months, will heavily affect these businesses already suffering with declining demand for their services and products.
Because of Obama’s puppet performance for the investment bankers, their clients, the large corporations, are taking advantage of smaller businesses. Crippling regulations can be designed by a government working in partnership with large corporations to monopolize industries and squeeze smaller competitors out of the picture.
And, then, they blame Keynes for what they do.
Aye... While the government has many impediments to firing workers and hoarding cash, the private sector and individually households have no such limits on how savagely they can cut their costs. Once the polish comes off this recovery turd, Americans will all but boycott the stores.
i find it intruiging that Lehman is still on the map.
is it because they were so forefront in manipulation of the market and didn't get out fast enough or is their mention simply because their dirty laundry won't go away?
I agree - there is more to this than meets the eye..
The issue is money. Do we depend on private banks to issue their own, as before the Federal Reserve? Do we continue to have this system of government backed money run through a private banking system? Or, if we are going to have a public currency, have a public banking system, where the profits are returned to those guaranteeing the value of the currency? A free market requires a medium of exchange. Those controlling that medium effectively tax every transaction in that medium. Should this be a private function, or a public function? Would we like to have the roads, courts and police to be private functions again, as they were under monarchy? There has to be some balance between the public and the private. It can't be all one or the other.
The Constitution already provides the solution:
The Congress shall have the power...
To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;
To provide for the Punishment of counterfeiting the Securities and current Coin of the United States;
Art 1 Sec 8
Nooooooooooooooooooo!!!!
We want the Fed to lord over us !!!!!!!!!!!!!!!
It’s ironic to me that Hatzius, an economist, ignores the stabilizing effects of a system run automatically on supply and demand. Instead, as Die Grand Central Planer, he shakes his head over his stalled economy and laments, “What can policy makers do?” And, as Tyler adds, “finds no feasible options.”
G. Edward Griffin warned in 1994 that ‘the Federal Reserve can now inflate our money supply by using literally any debt in the world…and unless we zero in on the Fed itself, we will just be playing political games with no chance of winning.”
But he warned that elimination of the Fed must be a programmed plan, else the monetary supply would be wiped out overnight and the globalists would use the resulting chaos to move the people into a rescue by a global entity such as an IMF/World Bank.
And he warned us not to turn the Fed’s totalitarian powers over to the government for more of the same ‘cures’ that made us ill. “The same people would run it, and they would continue to create money for political purposes…”
In his step-by-step plan to abolish the Fed, the first step (as “Carl Marks” suggests) is for the Congress to convert the present fiat money into real money, with other steps eventually leading to an ordered system of free banking.
Economist George Selgin of the University of Georgia in an article in The Independent Review shows how pressure on central banks from governments to expand credit excessively, combined with their monopoly of the money supply, creates the perfect storm for financial instability.
Quoting a paraphrase of his article: “The situation was starkly different prior to central banking, when private banks were free to issue notes that circulated as money, explains Selgin. Banks that issued too many notes would lose reserves, as customers and other banks redeemed them. That prospect gave note-issuing banks strong incentives to not over-issue.
“Unfortunately, most economists fail to understand that market mechanism, which Selgin calls the ‘principle of adverse clearings.’ As a result, they overlook the benefits of free banking and accept central banks and their damaging monopolies in the provision of money.”
There was a degree of stability, in that banks tended to be unstable and collapse regularly.
I think a big part of the problem with government spending is that there is no actually budgeting mechanism. The current system is designed to overspend by buying enough votes to pass enormous bills that can only be vetoed in whole by the president. This serves to create debt in order to store capital, as government debt is the primary investment vehicle. In the spirit of actual budgeting, a possible solution would be to break the spending bills down to their constituent items and have every legislator assign a percentage value to each item and then re-assemble them in order of preference. The president would draw the line at what would be funded. This would divide responsibility, allowing the legislature to prioritize, while giving the president final authority over total spending. Since making the cut would be graded on a curve, there would be much less incentive to trade favors and the percentage system would allow legislators to fine tune their granting of favors to other legislators and lobbyists. There would be a natural brake to overspending, as the specific range of projects in question would have a far more limited constituency than those funding them. Since this would likely reduce funding for local projects, a system of local public banks would fill this need.
We break government into local, state and national, so to would a public banking system be equally divided. There would be strong incentive for communities and states to maintain their own budgets and not have it channeled through higher levels of government. On the other hand, having a broadly acceptable currency, or several of varying levels of quality, would be more economically useful than just local, unstable currencies.
brodix –
Really good ideas—this would help. Obviously, the best thing to do is get them out of the government. But, in the meantime, if congressmen had a budgeting system whereby they had individual projects that had to be voted on or dealt with one at a time, then you could identify the particular congressman for that particular project and his reasons for what he’s doing; and, then, the President would be faced with having to say yes or no to each of those items. It seems to me it would greatly reduce waste.
You start out with the perfect observation. The politicians just love the present system and the President isn’t blamed for anything. I recall clips of Reagan with that big budget stacked to the floor saying, if they send me another item, I won’t sign it; and then he signed it. The question is what are all the hidden creatures inside that budget that we the people are buying. (Sorry I missed your post yesterday.)
I dont pretend to be smart and know anything that TF or any of the other sharp ZH guys know but could QE/easy money be a way for banks NOT to loan money domestically to small biz. Instead of seeking domestic capital it is so much easier to take 0% fed money and drop it on a cary trade + the SP, or any other staple trade, why not do that instead of actually having to be a "thinking banker" and know your clients and determine risk. Banking used to be knowing a good investment and making it, now its being the shark in the tank. No?
The answer to growth has always been to create things of value that others want to barter for or buy. After WWII the U.S. swung the big stck since we not only had a functioning infrastructure, we also had the reserve currency. Now all of that is being challenged, Europe and Japan rebuilt and China found a way to leverage it's huge, hungry population and create a manufacturing mecca.
Our sole assets now are 12 Trident missile subs, enviable natural resources, and having the world's reserve currency. The other side of the ledger is not pretty either. It's hard not to see war in our future, especially if the rest of the world creates an alternative to the USD. Cage match time, USA vs. China.
Roger,
" Europe and Japan rebuilt "
Yeah, and we PAID for it................
Loans due us from WWII, are still outstanding, they were in the millions............then.
Imagine what they would be now, adjusted for Inflation........
Dupe.Grrrrrrr
party of the little guy - fighting for you
http://www.nypost.com/p/news/local/bedford_hill_bill_BrCbhHcYNSeSdBQPGQEWcL
As demonstrated by most of the comments, the American people have little stomach for more stimulus and bailouts. Yet, the monetary system is dependent upon such spending. When domestic spending is hampered by political constraints, the only option is war. 9/11 proved the public's blind adherence to patriotism in the face of terror threats. The next threat will billed as existential. Invest accordingly.
The other option is complete collapse. Then you can't really go to war because the military lower end desert to save their families.
Cammy,
As sad,and horrific as that would be, in my heart of hearts, I believe that's the FINAL OPTION for Americans, to regain their country, and start over.................sans all the fruitcakes.
Would be public/trials & hangings 24-7, for at least a year.
Updated DOW charts:
http://stockmarket618.wordpress.com
http://www.zerohedge.com/forum/latest-market-outlook-1
It is tough to see where the exit is for the US, save taking hard choices now. That means facing reality, namely that the era of being #1 superpower is over, a demise in status brought about by the country's own mistakes at all levels of government and citizenry. And then, having acknowledged the fact, 'readjusting' wealth distribution and kickstarting the economy by taxing TPTB in particular to try to fix matters before its too late. Good luck with that.
Capital controls, erosions of freedom and a great levelling are coming. Never mind the conspiracy Zionist nut job theories, good old fashioned fear will do what the government at the time needs it to do. I for one will be glad not to visit the country again...
Austerity for the people, quadrillions for the bankers.
Japan has done everything including throwing the kitchen sink at deflation and its been the same results, bupkis.
Look the real source of deflation is in medium family income. The whole asset pyramid rest on it. Who'd of thought pitting American workers against workers earning a bowl of rice and a fish head would cause deflation?
Two reasons I don't buy his conclusion.
1. prior level consumption is even remotely realistic: ever hear of "living beyond your means?"
2. the choice of retrenchment is an option - for many I believe it is not.
We end up then trying to achieve an expansion target that was achieved in the past but is not a true rate of consumption, in other words the past was artificial.
Growth forever is like unobtainium.
Great piece, TD.
I think this point about sums up where we are right now.
Moreover, lower private sector income implies lower tax revenues, which has a similar impact on the government balance and could trigger further austerity moves by Congress. Ultimately, this adverse feedback loop doesn'?t end until someone accepts a smaller surplus or a larger deficit.
We gotta go big enough to reach some sort of escape velocity. The alternative of sitting on our ass is not going to acomplish anything, even if it appears to be the noble thing to do.
I guess we have to say it for as long as the gamers keeping pretending there is an answer.
"Austerity", "negative growth", "recession" and "depression" are not words that are relevant to describe an economy whose activity is predicated on lying, false hopes and promises.
There is a stable, fair and soundly based economy that probably operates around 2/3 of the current level of GDP activity. It is not based on cheap imports from slave labour countries or pentagon spending or transfers from tax payers direct to bankers or from the fed straight to bankers.
In this economy, banks provide a sound economic utility that does not involve reducing an investors capital by 2 per cent per annum, then the borrowers ability to make a profit by another 2 per cent per annum.
In this economy we do not have regulated interest rates and debt.
Obama is not the man who can shift the economy to the correct level of activity. He does not have the ability. Who does?
hooligan,
"Obama is not the man who can shift the economy to the correct level of activity. He does not have the ability. Who does?"
I totally disagree, HE is the reason we're where we are, and HE is (along with a willing Congress,able to reverse the shit he passed).And the American voters are going to start fixing that in November(if we get there).
Give major tax incentives,get off the GREEN shit as a primary focus, open up drilling, and development of our Natural resources, (which we have mountains of) get the Banks back to Banking, and out of the Mkts, and have them PAY back the funds borrowed still not re-paid...............it would be slow, but at least not DEAD in the water.........
Do that, so the American people can SEE a light, and plan for the future, SPENDING starts again...........I guarantee it.
When that happened, you would see business start hiring tommorrow............people forget before this started, there were(and still are)more millionaires in the USA than ever before........people like you and I.
Give someone with capital a reason, and some hope to invest, make a decent profit, and they will.
But, SINCE that's never been HIS agenda, forget it.
Back in the early 90s, when I was working in a bookstore, one of the big Tom Clancy novels (Debt of Honor, IIRC) ended with a jumbo jet being purposely crashed into the Capitol Building in DC while the President is addressing Congress. Absurd, huh? Nowadays, the part that is most absurd is that the attack is the result of economic conflict between the US and Japan. So, so much of the top electoral office holders are killed in that attack the America effectively gets a massive CTRL-ALT-DEL to the system, allowing Clancy to indulge in a dream of clearing out bad policies and program.
Back then, I was a lot less conservative and that book struck me as an indication of lunacy by certain types of people who made an even bigger seller than it would have automatically have been just for having Clancy as author in that era.
Now, it just makes me a bit wistful to think of the extreme circumstances that would be needed to drain some of the stupid juice out of the DC swamp.
Having written the above, I felt an urge to reaquaint myself with the order of succession. We've never really put it to use but there is a provision to go beyond the VP and Speaker. I'm a bit surprised to find the Sec. Treasury comes before Sec. Defense. It seems to me that any event that takes out that much of the leadership is going to have us in a war or at least martial law to deal with a disaster other than an attack. Which in turn makes me regard the Sec. Defense as a better option to take the helm than Timmah.
You MUST be kidding. Obama caused all this and he can fix it? His "agenda" is even relevant?
I'd like some o' what you're smoking.
And the economy will recover if the populace can gain confidence and start spending again? Now that is some really good shit. I'll take half a kilo.
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