Another recession coming?

[opebo]

I dont understand how the money supply can decrease with monetary policy so loose.  I mean, the fed funds red is still at 0%. 

Low interest rates don't mean people will borrow (or be allowed to borrow, even if they wanted to).  Interest rates were virtually nil during the Great Depression and no one could get money out the door.  It is the classic pushing-on-a-string problem.

The only way to get us out of deflation is - massive new spending.  As in several trillion per year.

[opebo]

are you sure it would be several trillion per year? I am thinking that if we simply passed a mini-stimulus now it would be very effective because the unemployment rate has largely bottomed out.

Maybe, but what's missing is trillions in private lending (if what the above posters say is true), and thus demand/consumption.  So, I think we could get away with a few trillion of quantitative easing with no inflationary pressure - in other words, just to eliminate deflation.

[opebo]

In any event, I assume that you just picked that number out of the air Opebo. Am I right? 

Sure.  We know that trillions have been lost in value in various 'markets', such as real estate, stocks, etc.  What impact that has had on consumption, as well as the impact of reduction of lending, can be roughly determined no doubt.   We can replace these losses by printing money, starting new government programs, and lending lots of money as direct government loans.  We can figure out how much is needed, whether it is trillions or just one trillion, I don't know.  But it the only way to beat deflation.

I for one could use a big loan - I'd spend it right away!  (they shouldn't try to hard to get paid back, in my opinion, as the whole point is demand stimulus - the being paid back is of absolutely no importance).

[opebo]

Deficits increase growth, Torie.  They don't reduce it.

But certainly I agree that each subsequent generation will have a lower standard of living then the previous one - as has been evidenced already with every generation since yours.  (we don't need to wait for the future to see this trend.)

[opebo]

Deficits increase growth, Torie.  They don't reduce it.

But certainly I agree that each subsequent generation will have a lower standard of living then the previous one - as has been evidenced already with every generation since yours.  (we don't need to wait for the future to see this trend.)

Just about everyone on the deficit commission thinks to the contrary (at least as to the longer term; a few thing it is needed short term to get over the financial institution implosion), except for a couple of the usual suspects, as did all the witnesses so far that I have heard.

No, deficits take money that would be 'saved', and spend it in the present, creating demand/consumption.  If the government didn't take that money and spend it, it would simply lie idle in the mattress. 

Really I would prefer that the money be 'taken' by means of printing currency or by taxation, but it isn't too important how it is accessed - we need to reduce 'saving' and increase spending in order to reflate the economy.  Otherwise we face the endless spiral towards less and less capacity utilization and less and less employment which is unreformed capitalism.

[opebo]

I take it you think Opebo that stamping out private saving is job one. Well don't worry Opebo, Americans have never saved that much - they love to consume (well except me, back when, before I decided to join in the fun).  Japan is the place with the savings "problem."  That is why it can function with such high debt levels in fact.

Inadequate demand = excessive saving. 

As you rightly point out, the US is the least bad on this front, and we're still glaringly, dangerously biased in favor of 'saving' (mainly due to our viciously heirarchical, regressive society).

[opebo]

At what level does saving become excessive Opebo? Do you have a number in mind?  And I assume that you do know one function of saving is to sock away money in high income years, to spend in low income years.

But why should there be 'low income years', Torie?  There's no need for these fluctuations. 

[opebo]

The point is, with proper Keynesian balancing, demand support, and government stabilization of the economy, as well as a generous welfare state, we can minimize the need for savings, and maximize production.  Keep everything running full-tilt all the time.

[opebo]

I see no reason to guess at an appropriate savings rate.  Who knows?  We can be certain that demand is inadequate due to the huge under-utilization of capacity, but does this mean we can then estimate a 'correct savings rate' with any precision?  No, I think not.

I do however suspect that all the chitter-chatter about 'inadequate savings' is more a product of america's foolish work-ethic moralizing than it is about any real economic issue. 

If there is any validity to the idea of a 'debt-fueled' economy, it is that working class incomes are not being set high enough to support the consumption we expect of them, and thus debt levels are unsustainable for this class.  Do we want to answer this problem by reducing their consumption even further, and thus totally eviscerating demand?  Or do we wish to simply set their incomes higher by state-action and thus increase demand and fight deflation? 

I opt for the latter, and Torie and co. opt for the former.  Alas, their way leads to and endless downward spiral of deflation and lower and lower living standards (as we've seen the last few generations).

[opebo]

People are self-centered and use their own microeconomic situation and extrapolate it to the macroeconomy.

Another way of putting this is there is no reason for the ordinary person to care about the macroeconomy.

[opebo]

I am beginning to reassess what I had previously wrote here as I look at the huge positive yield curve(3%).  A negative yield curve usually indicates that a recession is coming, an even yield curve usually indicates sluggish growth, and a positive yield curve usually indicates strong growth.  The yield curve has been over 3% since Spring last year and reached 3.5% early this year and is now at 3%.  This could be distorted because the fact that the fed has had the fed funds rate at 0% for almost two years and that rates cant go any lower. 

Actually given the massive deflation and capacity slack in the economy, interest rates are extremely high right now.  In order to have a net 0% interest rate, we would need quantitative easing and fiscal stimulus in the trillions per year - thus stabilizing prices and capacity usage, or perhaps even creating a little inflation.

[opebo]

There has been a large amount of quantitative easing.  The amount of fiscal stimulus that you suggest is impossible to pass. 

In the current environment.  Once people are starving, and there are massive riots and civil dislocations due to dire want, the solution could conceivably be implemented.  Like Germany in the 30s.

[opebo]

You bet and there won't be as much revenue coming into our nation's capital and we'll be at risk of another terrorist attack because we couldn't spend enough money on defense and intelligence.

Bring it on!

[opebo]

There has been a large amount of quantitative easing.  The amount of fiscal stimulus that you suggest is impossible to pass. 

In the current environment.  Once people are starving, and there are massive riots and civil dislocations due to dire want, the solution could conceivably be implemented.  Like Germany in the 30s.

Something tells me you are missing the analogy.

Perhaps so.  Why don't you explain?