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James Fraasch said...

Savings is the only path to recovery.

What is the problem with the economy right now? There is not enough savings. There is not good money to lend. There must be a replenishment of savings in order to reinvest in capital.

In your argument nobody should save anything in a recession because it is bad for the recovery. However, how do you get out of a recession if there are no savings? Who will have money to invest in new companies, new jobs, new capital, new ideas if there is no savings?

Banks use savings to lend. Individuals either borrow from banks or invest their own capital (savings) to start and expand business.

Read some Ludvig Von Mises.

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morganovich said...

the rich do not just save, they also invest. that is precisely what we need in this climate.

over spending is what got us into this mess. we have lived beyond our means and run up a pile of debt the likes of which has not been seen since 1929.

consumer spending is not the way out of that hole.

Keynesian has never, ever worked. it's a bankrupt economic theory rife with claims not borne out by facts that persists because it is so attractive to politicians.

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PeakTrader said...

James Fraasch said...

"Savings is the only path to recovery."

Spending is the path to recovery. Ultimately, you want people to spend, which will increase employment, and cause more spending, etc.

The Paradox of Thrift:

"The paradox states that if everyone tries to save more money during times of recession, then aggregate demand will fall and will in turn lower total savings in the population because of the decrease in consumption and economic growth."

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morganovich said...

peak-

it depends on "recovery from what".

spending is not the way to recover from too much debt, which is our current problem.

you cannot spend your way out of debt, you have to invest your way out. it takes a long time. the massive excess of expenditure over income of the last couple decades needs to equilibrate out somewhere.

decades of deficit must be offset by decades of surplus. the best way to do this is productive investment, not spending.

the only other option is a massive tax on savings through inflation, a policy whose side effects are both unjust and worse than the problem they solve.

it will only leave us in a hole just like the one we are in, only deeper.

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PeakTrader said...

Morganovich, the real problem is too much supply or too little demand. Over the past two years, supply exceeded demand.

We've been destroying the excess supply rather than consuming it.

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morganovich said...

peak-

you are keying on symptoms, not the disease.

the reason we have overcapacity is that we built for a time in which we spent more than we earned.

when that flips because the debt can no longer be added to, the answer is to reduce capacity. that is the correct response to a future drop in buying power.

you are proposing to borrow more and try to keep the game going in order to prevent capacity that is not needed in service.

that's just price supports and subsidy.

more spending beyond our means will not redress the issues caused by spending beyond our means.

you are essentially advocating curing a hangover by getting drunk again. it will just make the pain worse when it comes unless you plan to drink until your liver fails.

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PeakTrader said...

Morganovich, so, it's appropriate to destroy economic growth, cause a high unemployment rate, or create massive idle resources because you believe debt is too high.

U.S. consumers spent beyond their means only because the government spent your money much faster than you earned it, and your money has been squandered at an accelerated rate over the past two years.

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James Fraasch said...

Good comments.

The problem with spending more is that we are already overspent. Assuming the government does not just "print" the money to hand out in stimulus then they must borrow it.

Given that the "multiplier" effect has been more or less proven to be a fallacy, the truth of the matter is that borrowing money in order to spend it is simply an additional burden on the economy. It is a tax on future production.

Now not only do we have to pay down our existing debt, but we are laden with NEW debt to pay off at interest.

When it comes to the TARP and other bailouts (some classified as stimulus) not only do we owe the original debt, but we manufactured new debt out of thin air to protect us from default of the old debt. We effectively owe the same debt TWICE!

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Sigli said...

"In an economy, the income effects from a transfer payment always sum to zero."

But Art "Off His Curve" Laffer knows Ronold Reagan's dirty little secret: Borrowing money and spending it into the economy gives a new tax revenue source, it is highly stimulative, and tends to create a bunch of very happy campaign donors.

Yes, Art LAUGHER, redistributive transfer payments don't do much but ease a little pain of one group. But you know damn well what the Reagan era started.

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morganovich said...

peak-

that is simply not so. it was not government spending that drove us citizens into debt, it was easy credit. US personal debt reached levels not seen since 1929. that's a personal issue, not governmental one. our governmental debt disaster is a whole separate matter, but it does make the price of running huge federal deficits higher.

look, i'm not saying this is a great situation, but you have to play the ball where it lies. we played, now we must pay. the sooner we get it over with, the better. trying to manipulate the business cycle as you propose will just make the long term worse.

i know that the drop in spending is bitter medicine, but the sooner we take it, the sooner we can recover. driving deficit spending of both the government and the populace higher now is just a band aid on a wound that's festering.

the "spend you way out of everything" philosophy is what got us here. it cannot get us out.

this is not a normal recession but rather a debt crisis. you cannot prime the pump of an economy with this high a debt load. it's never worked anywhere.

yes, i know it has undesirable effects to let capacity shut down, but they are less undesirable than digging a deeper hole by keeping the excess running, and unlike trying to keep the overspending dream alive, it is the road to recovery, not ruin.

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James Fraasch said...

Here is the quote from Hussman regarding doubling down on debt:

n short, instead of directing savings toward investments in real, productive assets that we would observe as physical output, fixed capital, and equipment (and claims on those assets in the form of corporate stocks and bonds), our economy has been forced to choke down a massive issuance of government liabilities in order to bail out bad debt. For every dollar of debt that should have defaulted, we now have two dollars of debt outstanding (the original debt, and a newly issued government security).

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PeakTrader said...

Morganovich, I've explained before how the U.S. created and captured enormous real value in the global economy.

And easy credit didn't cause the recession and financial crisis. The government created them.

Restrictive monetary policy, contractionary fiscal policy, and export-led economies lending their dollars too cheaply, which were ultimately shifted from the private sector to Treasury bonds created the recession and financial crisis.

Without an increase in demand, this "recovery" is toast. Real final sales will need to expand much faster than 1.5% annually.

Living standards will fall anyway, because of massive government inefficiencies placed into system.

Americans will work harder and longer for fewer and smaller assets and goods.

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morganovich said...

peak-

your view is much too simplistic.

we are where we are for a vast confluence of reasons. government certainly played a role, but mostly by encouraging consumers to take on too much debt through loose money, not tight. how can you say that monetary policy in the last decade has been tight? that's ridiculous.

spending needs to be sustainable. no amount of push start is going to get us out of this, it's just prolonging the inevitable and making the crunch worse when it comes.

the increase in demand will only come when debt levels decrease. at this point, incremental debt does more harm than good.

we cannot have a durable recovery without paying down debt. easy credit built up imbalances for which we must now pay.

what is it you think we're supposed to do, flood the market with yet more money and try to inflate a new bubble out of this one? equity bubbles are easy to clean up. debt bubbles take a long time.

the expansion we have enjoyed for the last decade or two was built on an unsustainable foundation. you cannot spend more than you earn indefinitely.

you seem to wish we were in a different situation than we are. i think most of us do. but as the man says, "wish in one hand and crap in the other and see which one fills up first."

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PeakTrader said...

Morganovich, listing the three factors that likely had over 90% explanatory power on the recession and subsequent financial crisis could be viewed as "much too simplistic." However, I've explained the mechanisms and implications before.

Obviously, monetary policy was restrictive at 5 1/4%, which the Fed maintained too long, because it had to catch-up easing the money supply, fiscal policy was obviously contractionary, because the budget deficit shrunk to $162 billion in 2007 (or a little over 1% of GDP), and foreigners were selling goods too cheaply to the private sector, creating up to $800 billion a year trade deficits, and then buying Treasury bonds, which drained money out of the private sector and into the U.S. government.

Economic growth and employment are needed to pay-down debt, and without consumption, there won't be any growth and employment. I explained long ago [in late '08] how to prevent the mess we're in now.

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James Fraasch said...

PeakTrader

Do you have a link to that explanation?

Would like to read it.

Thanks.

James

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PeakTrader said...

James, this is what I wrote on Feb 2nd, 2009 (a $5,000 tax cut per worker, or $750 billion for the 150 million workers at the time, would've been better):

How to prevent an economic contraction in 2009 (currently, roughly a 2% contraction is projected in 2009):

1. Obama should change his stimulus plan to a $2,000 tax cut per worker, along with increasing unemployment benefits by a similar amount. This will help households strengthen their balance sheets, i.e. catch-up on bills, pay-down debt, increase saving, spur consumption of assets and goods, etc. This plan will have an immediate and powerful effect to stimulate the economy. When excess assets and goods clear the market, production will increase.

2. Shift "toxic" assets into a "bad bank." The government should pay premiums for toxic assets to recapitalize the banking industry and eliminate the systemic problem caused by global imbalances. The Fed has the power to create money out of thin air, to generate nominal growth, boost "animal spirits," and inflate toxic assets.

3. Government expenditures should play a small role in the economic recovery. For example, instead of loans for the auto industry, the government should buy autos and give them away to government employees (e.g. a fringe benefit). So, automakers can continue to produce, instead of shutting down their plants for a month. Auto producers should take advantage of lower costs for raw materials and energy, and generate a multiplier effect in related industries.

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Sigli said...

Peak

How can you argue tight monetary policy was the problem when inflation was hidden in runaway housing prices? Those prices were unsustainable as the underlying cash flows simply were not there. That's result of loose policy, not tight.

We can quote The Paradox of Thrift all we want, but it ignores the reality of debt and debt service, and how money is created in our system. We must have debt growth, and/or velocity through redistribution or free choices. Otherwise the economy becomes starved for cash from interest liabilities, and the default process sets in as the economy looks for a bottom. Default clears out the marginal debt, where redistribution or debt-growth methods reinforce the debt. All this does is maintain the status quo as it protects and helps concentrate wealth in the hands of the few. This leads to serfdom when the masses owe just about everything to the few. Then what? More debt for the masses?

I'd rather see the defaults liberate the poor and close the wealth divide. Then we'd start fresh and powerful.

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morganovich said...

"Obviously, monetary policy was restrictive at 5 1/4%,"

how do you figure that to be obvious? that's a pretty neutral stance historically and much lower than the 1980's. you are just flat out wrong about 5.25 being restrictive. that's right where rates were through the 90's boom. it's a pretty normal rate.

http://www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html

hiking the rate to head of an asset bubble is precisely what the fed ought to do. the problem was that rates were too low for too long post 2000, emptying a stock bubble into a debt bubble.

none of what you are arguing matters if the debt burden is too high. growth is nice, but past a point, debt cannot support it. the relationship flips and the higher costs of debt service swamp the growth.

you are making the precise argument that got us into this mess - drive growth and everything else works. but it's not that simple.

some growth is sustainable, some is not.

you cannot spend your way out of debt. the burden is there now and real. you have slipped into the category of "ponzi borrower" where debt is used to pay off debt.

i understand your arguments about growth, but you are ignoring a constraint that cannot be ignored.

i'd recommend picking up roubini's book "crisis economics" to broaden your understanding of what happened and how complex it was. the desire to oversimplify is always tempting, but you are leaving out too much information and completely misunderstanding the issues around monetary policy.

from 2004 to 2008, m3 growth went from 4% to 17%. measured in dollars, M3 more than doubled in that period, massively exceeding economic growth. that's loose policy, not tight.

debt bubbles do not build in times with overly tight policy, they build in times of loose policy. i presume you will not argue that there was no debt bubble? so where did it come from?

and FWIW, i mostly agree with your prescriptions for recovery, but you left out a key issue which is that governement must also slash spending and balance the budget.

we are getting precariously close to the (05 debt to gdp level that historically heralds a spike in borrowing costs that eats all future growth. time to slash the federal budget and move to a surplus as well as sort out the unfunded liabilities like SS and the medi system.

the hit to GDP will be a great deal less than is commonly feared. government spending crowds out private spending which is almost always more productive.

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PeakTrader said...

Sigli, the short answer is asset prices rise and fall, but there wasn't too much money chasing too few goods.

There was too little money chasing too many goods.

Anyway, the real value of the economy is more important than its nominal value.

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Sigli said...

"Sigli, the short answer is asset prices rise and fall, but there wasn't too much money chasing too few goods.

There was too little money chasing too many goods."

I don't know if you missed the point or are avoiding it, but this is a simplistic answer that answers nothing. Then again, I'm relatively new here and may just be misunderstanding you.

There are obvious holes in your response: Too many goods would have lowered housing prices, not escalated them. Houses are financed. Easy money financed them. Easy money is not equal to "too little money". You don't create bubbles with restrictive money. If your analysis were true then easing monetary policy would pop the bubble. In fact we saw the exact opposite. Your theory doesn't hold up when applied. You're also discounting the cash flows underlying housing assets. And yes, real prices matter. That's why housing cannot outpace wage inflation forever. It did for 50 years until reaching a maximum, from where it fell.

One other point is that your prescription argues for exactly what I'd want to see but an alternative way of achieving it. That is a default on excess debt. Purely printing money and passing it out to citizens is one form of default. The problem with doing that is a lack of rules and leaving the printing machine to the biggest criminals, the politicians. Also, claiming the Federal Reserve simply prints and spends money shows a misunderstanding of our monetary system.

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PeakTrader said...

Sigli, asset prices are only residuals of economic policies, including monetary policy.

U.S. actual output was roughly equal to potential output in the mid-2000s, although the U.S. consumed much more than produced through current account deficits. So, there were too many goods, particularly given there was diminishing U.S. marginal utility (or the opposite of pent-up demand).

It's not important whether the Fed Funds Rate is 10% or 1%, the money supply is high or low, or how many booms and busts take place in asset markets. What's important is maintaining sustainable growth (of goods & services), which is optimal growth. The government was behind the curve providing liquidity to the masses, which caused the recession.

Full Debate:

https://www.blogger.com/comment.g?blogID=28997633&postID=4514775600927515107

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"Recession Frequency Was Much Higher Pre-1990"

morganovich said...
i would actually argue that it was much better.

small frequent corrections keep excesses out of the system. it is precisely that we have done everything in our power to derail the downturns of the business cycle that has left us with the massive debt bubble we currently have.

the price of the "great moderation" has been the inflation of bubble after bubble and a 10 year drop in the dollar as monetary policy has gone to the dogs.

this recession is so brutal and difficult to recover from because we have not had a serious recession since 1982 and have has terribly loose monetary policy for a decade since the .bust. (and bad monetary expansion even preceding that.)

US consumer credit (not including mortgages) tripled from 800 bn to 2.4 tn in 14 years from 1994 -2008. mortgage debt exploded. we exceeded 100% consumer debt to GDP in 2008 for the first time since 1929.

the great moderation is a complete misnomer. what it really was was the great excess. monstrous imbalances were allowed to build up unchecked and actually encouraged by misguided monetary policy. like the sailboat that has all its canvas out because it's been such a moderate day for so long, we get knocked over and dismasted when the squall comes because we were too complacent about the weather.

now, rather than a quick dip and recovery, we face a sharp contraction and a long struggle back.

the illusion that we can control the business cycle is one of the most dangerous idea in politics.

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PeakTrader said...
The charts reflect improvements in U.S. monetary policy.

The U.S. had deep depressions in the 1870s and 1930s. Monetary policy averted a deep depression in the 1970s (although there were four recessions from 1970-82 in a period of inflation).

From 1982-07, monetary policy continued to improve smoothing-out business cycles, resulting in a long-boom, with only two mild recessions, while living standards rose at a steeper rate.

However, in 2007, tight domestic credit caused a recession. The Bush tax cut in early '08 gave the Fed time to catch-up easing the money supply. We were on a path to a mild recession, until Lehman failed in Sep '08, which froze the credit market and tipped the country into a deep recession.

Another "bubble," would've been best for the country (the natural process would've been more of a production than a consumption bubble, similar to 1995-00, rather than more of a consumption than a production bubble, similar to 2002-07).

However, the Obama Administration has stated we cannot afford another bubble, and it subsequently turned out to be correct, because it squandered trillions of dollars. So, the U.S. is in a much weaker position.

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PeakTrader said...
The U.S. had a quick and massive "Creative-Destruction" process mostly from 2000-02 in a mild recession. So, it's unnecessary to have severe recessions to clear out excesses.

Smoothing-out business cycles should be the objective of monetary policy, because economic boom/bust cycles use resources inefficiently both in the boom and bust phases (i.e. creates periods of strain and slack).

Of course, fiscal policy should be expansionary in downturns and contractionary in expansions. It may be best when deficits and surpluses of government budgets average zero over time.

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morganovich said...
peak-

that's simply untrue. we had a shallow GDP recession in 2000-1 because we opened the monetary spigots and used massive amounts of debt to try to dodge the correction. that served to take the imbalances that were present and magnify them until they reached crisis levels.

equity bubbles clean up rather easily. debt bubbles are much, much harder.

the current mess is the direct result of greenspan's absurdly loose monetary policies and bubble denial.

we cured a hangover by getting drunk again, but at some point, you need to sober up and we're worse off for not having handled it.

bubbles and debt imbalances are the natural result of long stable periods. it's a non avoidable part of the business cycle. if you know something will go up 5% a year, you're willing to pay more and more until you have already NPV'd all the future gain and built up debt and risk. it is the very perception of safety that encourages this risk taking. nothing can remove that from a capitalist system.

what we need is a fed that will be more aggressive in taking the punch bowl away before the party really gets out of hand, not one that cheer-leads while we wreck the house and then buys free beer for everyone to try and get the party going again, encouraging and inflaming the moral hazard rather than reducing it as volker knew how to do.

greenspan has done untold damage and then decided to skip town when he could see the gig was up. history will and should judge him very harshly. helicpoter ben is a chip off the old block.

free money is not the answer. the answer is to keep everyone on their toes and prudent, not to fan the fires of speculation until we crash.

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Anonymous said...
You get really big forest fires when you act over time to prevent small forest fires. Small forest fires clear the undergrowth before it accumulates to the point where it threatens to stsrt a major fire.

Are recessions the same? Do the small recessions that clear small problems reduce the chance of large recessions?

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PeakTrader said...
Morganovich, you make many false assumptions. The 2000-02 Creative-Destruction process was a correction and it made U.S. firms stronger. Information-Age industries produced more with less, while older industries shifted into higher quality and more profitable "core" goods.

A deep depression was completely unnecessary. It would've resulted not only in less debt, but even less assets and goods, i.e. a decline in the real economy. You should be praising the Greenspan Fed for smoothing-out business cycles and maximizing U.S. living standards at a sustainable rate.

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PeakTrader said...
Anon, a drought also clears the undergrowth. How often or how long do you want droughts?

Anyway, I think, the last thing people want when there's a forest fire is a drought. So, it was appropriate the Fed eased the money supply in the early 2000s.

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morganovich said...
peak-

you are missing the fundamental irreconcilability of the 2 things you seems to want.

you cannot simultaneously bail out those who made bad decisions before the crisis and foster the kind of schumpterian creative destruction needed to return to sustainable growth.

the two are inevitably at odds. there is no such thing as a schumpterian bail out.

there can be no evolution without natural selection. you seem to think you can have your cake and eat it too. we are now reaping the bitter fruit of the monstrously over aggressive attempts to mitigate the 2001 recession. unlike the 2001 bubble which was mostly equity and therefore resolved itself through a market process, this debt bubble will linger. such bubbles are far more dangerous for precisely that reason.

all we are doing is kicking the can down the road and making the inevitable reckoning worse when it comes, just as we did with the recklessly loose monetary policy of 2001+ in an attempt to smooth the business cycle. anon's forest fire analogy is quite apt - by preventing the fire then, we just built up more fuel for the next one, enough to cause the worst downturn since the 30's. in forest fire terms, we saved the brush in 2001 at the expense of the trees in 2008.

ron-

thanks. use it with my blessing. i'm in favor of anything that helps get that point across. i fear we have truly lost our way from a monetary policy standpoint, mistaking bubbles for growth and bailouts for prosperity. the level of moral hazard supported and encouraged by this system is extremely dangerous.

the US will not be able to pay down debt like it did in the 40's when we were the only remaining industrialized power and world demand was massive as it rebuilt from the war. it's difficult to even imagine the political will to take this country back to budget surplus, particularly on a GAAP basis that accounts for entitlements.

my great fear is that with all the lenders of last resort exhausted, we will turn to the true last resort: the printing press. the effects of monetizing this level of federal debt and deficit upon savings and investment would be catastrophic, and worse, would predominantly punish the prudent to the benefit of those who have borrowed recklessly.

virtually all empires ultimately fall due to fiscal profligacy. absent some very strong near term action, we are on a pace to join them. once external federal debt passes about 90%, terrible debt deficit spirals tend to start. current projections have us there soon. might the US get a bit more leeway as the issuer of the reserve currency, perhaps, but not that much more. the consequences of this would already be showing up in our bonds absent the fed buying 30-40% of the auctions last year and providing unprecedented price supports.

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PeakTrader said...
Morganovich says:

"You cannot simultaneously bail out those who made bad decisions before the crisis and foster the kind of schumpterian creative destruction needed to return to sustainable growth."

Do you really believe all the major banks in the U.S. made "bad decisions." It was more likely the government created economic conditions, or a systemic problem, that caused failure.

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PeakTrader said...
Morganovich, the U.S. economy in the 2000s produced more with less, and U.S. corporations had a record 20 consecutive quarters of double-digit earnings growth, which raised living standards.

It was unnecessary to turn the 2000s into the 1930s, just like it's unnecessary to create a Lost Decade in the 2010s by preventing another bubble.

Bargains induce demand. Why take that away from the American people to reduce their spending? It's better to increase employment and income than force them to save through fewer bargains.

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morganovich said...
peak-

the truth is very complicated. to say "it was the government" or "it was the banks" is just too much of a simplification. it was a confluence of factors fueled by massive monetary looseness and a willingness to gamble driven by the well established "greenspan put".

did CRA cause huge problems? absolutely. but the banks bear much blame as well, as do borrowers, the rating agencies, and perhaps most of all the fed.

your argument about "why take away from the american people to curb their spending" is a specious framing of the issue. you are assuming the right to cheap money and that such constant access has no ill effects, that somehow the "natural" level for interest rates is a very low one.

it was not the fed hiking rates that caused the debt bubble. you can;t cause a debt bubble with high rates. the bubble came from low rates and from consumer borrowing that was both unsustainable and, in the event, unsupportable by cash flow.

we had a party, and now we are in debt from it. you are mistaking a bubble for prosperity. bubbles burst. if you let them get big enough (as the fed did) they do a lot of damage when they do. now we have taken huge amounts of the debt onto the federal balance sheet.

is there some point at which you think deficit spending at both the personal and governmental level has to stop? you seem to just want to spend more and more as though deficits and debt are a panacea.

you speak of all the growth and earnings, but look at the foundation upon which it was built. the proportion of S+P 500 EPS from financial companies was about 40%? that's where the growth was. that was driven by low rates, and it led us to overshoot and crash.

rather than learning from the mistake, you are advocating doing it again.

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PeakTrader said...
Morganovich, I've explained above how the government drained dollars from the private sector. Your solution to a lack of liquidity is less liquidity.

Also, you believe the efficiencies and innovations that created and captured enormous real assets, goods, and capital for the U.S. masses in the global economy were too great and a depression was needed to clear the "excesses."

However, that's completely unnecessary. This is what I wrote over a year ago:

Global Imbalances

It was inevitable global imbalances would correct. The question was would they correct slowly or suddenly. The U.S. had a virtuous cycle of consumption and investment. Export-led economies sold their goods too cheaply and lent their dollars too cheaply. Consequently, the U.S. overconsumed and underproduced, while export-led economies overproduced and underconsumed.

The U.S. housing boom (and related goods) helped raise U.S. actual output towards potential output, which caused export-dependent economies to overproduce even more. The U.S. consumption-investment cycle turned into a boom, which was unsustainable.

Global imbalances began to correct slowly in 2007, until Lehman failed in September 2008, which froze the credit market, and caused the correction to accelerate. Nonetheless, the correction was inevitable.

There was diminishing U.S. marginal utility, since Americans bought too many goods, and would buy more goods only if prices fell further. Export-led economies had production strains, while lending their dollars to the U.S. more cheaply. Export-led countries exchanged their goods for U.S. dollars instead of U.S. goods, and received increasingly smaller gains-of-trade through inflation (e.g. postponing or never buying U.S. goods), negative real interest rates (e.g. low long-term and short-term bond yields), and in the foreign exchange market (receiving fewer units of their currencies per dollar).

Restrictive monetary policy and contractionary fiscal policy slowed U.S. economic growth. U.S. consumers paid export-led economies dollars for their goods, and then those dollars were exchanged for mostly U.S. Treasury bonds. Ultimately, dollars flowed from U.S. consumers to the U.S. government. However, the "excess" capital flowed to borrowers who weren't creditworthy, through U.S. financial firms, to clear the market.

So, the U.S. government needed to refund U.S. consumers and financial firms. The Bernanke Fed kept a restrictive monetary stance for too long (i.e. the Fed Funds Rate at 5 1/4% from June 2006 to September 2007), and fell behind the curve easing the money supply. The Bush tax cut in early 2008 gave the Fed time to catch-up. The Fed eased the money supply, although commodity prices reached new highs till mid-2008.

This is the first severe recession, since 1981-82. However, not all recessions are the same. In the 1981-82 recession, there was too much money chasing too few assets and goods. In the current recession, there's too little money chasing too many assets and goods.

Rather than clear the market of excess (private) assets and goods, Obama has chosen to destroy (rather than consume) those excesses, while creating public assets and goods (through massive government spending rather than a large tax cut). There was a strong expansion after the 1981-82 recession. However, Obama may prevent a strong expansion, because of capital and output destruction, while creating inefficiencies in production.

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morganovich said...
peak-

i continue to think you are misdiagnosing the problem. the problem is debt, not tight money. interest rates literally cannot be lower. the fed funds rate is essentially zero, yet borrowing has not recovered.

why do you think that is?

it's because we have debt that needs to be paid down. money that consumers get is going to debt reduction. they only spent around 30% of stimulus dollars when they got tax rebates.

i know you hate the idea, but facts are facts: debt has to be paid (or losses taken). no amount of "damn the torpedoes, full spend ahead" is going to work right now. we have some big overhead to work off, and the ineffectual government spending that is racking up such massive deficits is not and will not drive growth. worse, it to is running up a huge bill that will depress future growth.

in the next 2 years, global banks have $5tn in short term debt to roll over. that's enough to crowd out a great deal of both private and governmental borrowing and will show you the effects of debt on lending and growth.

i don't think you understand the 81-2 recession. it was brought on by a massive interest rate hike as volker broke the back of the inflationary spiral. you describe the recession as having too much money chasing too few goods, but money supply growth then was well below that of the late 90's or 2006-9. the fed funds rate hit 18% in 81-2. there was too much inflation prior, but that recession was all about wiping it out.

i don't know how to convince you that you cannot spend your way out of debt. it simply does not work. the keynsians were bailed out of the impending FDR disaster by the second world war. we will have no such exogenous aid this time.

it is precisely the "drive spending and all will be well" short term thinking you champion that got us here. the depth and duration of this recession is the direct result of the greenspan put fanning the flames of numerous other economic imbalances and perverse incentives until they were so great we could not deal with them any more.

this is not a "normal" recession. it's a debt bust like 1929. it's not a short term disruption in the "animal spirits" of the economy, but rather the exhaustion of economic ammunition as we have already spent years of future earnings and have run out of ability, not desire, to live beyond our means.

if spending > income, then debt builds up. to pay it spending < income is required. you seem to think we can live in the first state in perpetuity and that it is somehow desirable or even our duty to facilitate such a thing. that assertion is as dangerous as it is untrue.

you cannot manage downturns out of the business cycle. it's not possible. for creative destruction to occur, there must be destruction. bailing everyone out by "clearing the market of excess goods" is the antithesis of creative destruction. you are missing the contradiction in what you propose and expecting to have your cake and eat it too.

there is no such thing as a schumpterian bailout. the course you propose prevents creative destruction and just piles more fuel on the pile for the next blow up as yet more imbalances are created.

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PeakTrader said...
Morganovich says "we have debt that needs to be paid down. money that consumers get is going to debt reduction. they only spent around 30% of stimulus dollars when they got tax rebates."

Yes, consumers aren't getting enough money.

What would've 150 million workers done with a $5,000 tax cut over a year ago? Yes, they'd pay down debt, e.g. the highest interest rate debt first, and then would have more disposible monthly income to consume. So, the oversupply of houses, autos, imports, etc. would clear the market more quickly, and production would increase.

The 1981-82 recession was in many ways the opposite of the most recent recession. Not all recessions are the same.

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PeakTrader said...
And you know what happens when production increases. Employment increases and consumption increases.

A virtuous cycle of consumption-employment takes place, where consumption creates employment and employment creates consumption, etc.

Before the cycle turns into a boom, the Fed will tighten the money supply in an attempt to sustain growth at an optimal rate (though price stability of goods & services).

Foreigners may absorb more dollars again (perhaps up to 6% of GDP). However, the Fed will compensate with a higher money supply.

To pay-down debt, Americans need to work longer and harder, which will add to future economic growth.