Another recession coming?

[Mr.Phips]

The economic recovery that began last summer seems to be running out of steam.  For the first time in almost two years, leading economic indicators dropped last month and the stock market has fallen significantly for the first time in over a year.  Add this to all of the trouble in the UK and rising tax rates next year, we are very likely to see the economy slip into another recession by Spring of 2011.

What does everybody else think?

[Bo]

Unlikely, but not impossible.

[Smid]

I was reading this article yesterday. I don't remember enough macroeconomics to have much to say about it, but I thought I'd post it here and see what your opinion is on it:

http://www.telegraph.co.uk/finance/economics/7769126/US-money-supply-plunges-at-1930s-pace-as-Obama-eyes-fresh-stimulus.html

[Mr.Phips]

I was reading this article yesterday. I don't remember enough macroeconomics to have much to say about it, but I thought I'd post it here and see what your opinion is on it:

http://www.telegraph.co.uk/finance/economics/7769126/US-money-supply-plunges-at-1930s-pace-as-Obama-eyes-fresh-stimulus.html

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

[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.

[Sam Spade]

We're out of recession (or depression or whatever)?

[Sam Spade]

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

Well, first off, the fed funds rate supposedly affects lending.  Lending is still relatively non-existant at the private sector level.  Henceforth, the amount of money (or debt) being created is nowhere near enough to make up for the amount of money (or debt) being destroyed (through default or payoffs). 

Moreover, the debt that is deflating in the private sector so greatly dwarfs any public sector debt creation that neither that is able to make up for this decline in money supply.

The truth is, likely, that we have reached a point where the servicing of the debt in place becomes such a big issue towards the creation of new debt that very little will be created until the debt already in place has been paid off or defaulted.

The big issue is that we have shifted a great amount of private sector debt onto the public sector (through bailouts/MBS purchases) that when the thing eventually blows (i.e. defaults, don't expect it to be paid off unless there is massive devaluation, which would also create big issues, and I don't know how one does that easily in a debt-based currency world), the impact will now occur on the public balance sheet.  The exact impact of that occurrence is still unknown.

[Free Trade is managed by the invisible hand.]

I was reading this article yesterday. I don't remember enough macroeconomics to have much to say about it, but I thought I'd post it here and see what your opinion is on it:

http://www.telegraph.co.uk/finance/economics/7769126/US-money-supply-plunges-at-1930s-pace-as-Obama-eyes-fresh-stimulus.html

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

Just because the monetary base is increasing does not mean the atemporal money supply will.

[Mr.Phips]

We're out of recession (or depression or whatever)?

There has never been job growth during a recession, so yes. 

[Free Trade is managed by the invisible hand.]

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.

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.

[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.

[Torie]

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.

It is when the Left starts using quantitative words that begin with a "t" rather than a "b" that I begin to get a bit nervous. You should watch the hearings being conducted by Obama's budget commission. They are quite excellent actually, and perhaps your world might begin to get a bit more three dimensional. Perhaps. In any event, I assume that you just picked that number out of the air Opebo. Am I right? 

[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).

[Free Trade is managed by the invisible hand.]

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.

It is when the Left starts using quantitative words that begin with a "t" rather than a "b" that I begin to get a bit nervous. You should watch the hearings being conducted by Obama's budget commission. They are quite excellent actually, and perhaps your world might begin to get a bit more three dimensional. Perhaps. In any event, I assume that you just picked that number out of the air Opebo. Am I right? 

The budget commission hearing sometimes bank on the GDP/debt ratio used by carmen rienart? am I right? If so than i would have to disagree with the analysis because it is a conservative estimate that excludes growth. In other words if an economy is growing strong than a high GDP/debt ratio isn't a problem, and the best way to gain growth is a stimulus.

[Torie]

You think real growth will be more than 3% a year, and that heavy deficits will not reduce it? (That is the baseline assumption, that at least tentatively, the commission seems willing to assume.) In my opinion, even without heavy deficits, it will be more like 2% a year, which is more like it has been in the past, and it may well be lower in the future due to the squeeze on energy, poor educational performance, the cheap labor in China and India eroding away (and it is, and at rather rapid speed) etc.  I used to spend a lot of time on this long term horizon thing, when I was trying to structure my portfolio. I had some help from a friend, now quite famous, who is smarter than I on this. We focused on this issue.

I am reasonable confident at this point, that the generation on this forum will in general have a lower standard of living than the one that went before. It is kind of sad, but it is reality, and the way we are going, it may be substantially lower.

Running up deficits to keep public employees employed, including at state and local levels, and maintain their pensions, which is the current Dem plan, is simply nutter. Period.

And it far more your future, than mine. I am kind of done at this game.

[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.)

[Torie]

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.

[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.

[Torie]

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.

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.

[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).

[Torie]

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).

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. Yes, I know, if the government is paying for most things for you, I guess you don't need to worry about the low income years, and won't have any high income years after tax in any event. But putting that little detail aside, just what percentage of income saved is the golden mean for you Opebo? Feel free to use a negative percentage if you wish; don't be shy the way that you sometimes are. 

[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. 

[Torie]

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. 

Well sometimes less business comes in the door, Opebo. Sh*t happens. I just don't get a trust fund check every month. And then there is the little matter of retirement. Having a war chest with which to play with has a certain desirability. One sad thing about getting old, is that there is less available out there for free.

[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.

[Torie]

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.

Splendid. No more economic cycles, and that apparently obtains not only for the economy as a whole, but each and every actor in it. Moving right along, you still have not yet favored me with a golden mean savings percentage. What can I do to help you get out of your shell Opebo?  You know I want to help.