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PeakTrader said...

Craig says: "...it was the inflation that eventually caused the crash (of the 1982-07 economy).

It was restrictive monetary policy (e.g. the Fed Funds rate at 5 1/4% for too long, after the 2004-06 tightening cycle) and contractionary fiscal policy (the budget deficit shrunk to $162 billion by 2007) that caused the "crash" or recession.

Also, the Bush Administration tried to tighten lending standards in the housing market in 2004, but was blocked by Congress, which eventually caused the financial crisis in 2008 (along with the recession that began in Dec '07).

The 2008 oil shock, the biggest in U.S. history, was unsustainable and the U.S. economy could've absorbed it (PCE inflation rose from a little less than 2% in 2006 to a little more than 4% in 2008).

Whether or not we had a mild or severe recession in 2008, the economy subsequently underperformed by a huge margin, because there remains too many idle resources, e.g. labor (high unemployment) and capital (e.g. corporations holding over $2 trillion in cash).

It has become even more difficult to start or expand businesses, when it should be easier, for entrepreneurs, and invention-innovation.

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VangelV said...

"It was restrictive monetary policy (e.g. the Fed Funds rate at 5 1/4% for too long, after the 2004-06 tightening cycle) and contractionary fiscal policy (the budget deficit shrunk to $162 billion by 2007) that caused the "crash" or recession."

Nonsense. Boom are caused by artificially low interest rates. The artificially low rates send the wrong signals to investors and money flows to companies that should not have been financed in the first place.

When the Fed lowered rates in the 1990s the money went into companies that were selling pet food or groceries on-line and whose metric of success was eyeballs instead of cash flow or profitability. Traditional investors were told that they just did not get IT, whatever IT was supposed to be. Once the liquidity increases slowed a crash followed and the lousy investments were liquidated.

Following the 2000 crash the Fed panicked and lowered rates sharply. The money flew into the financial sector and into housing. But the damage was great and the housing bubble ended in 2005. Actually, in real terms housing hit its peak in 2001 and when measured in gold the decline since then is down by more than 80%.

At this time the Fed is engaged in an attempt to blow up another bubble but that is not working out very well. Rates are close to zero and the Fed has already engaged in a round of debt monetization that has destroyed its balance sheet. Even though the Euro is under massive amounts of pressure as the EU is ready to split up, the USD is still quite weak. With labour participation rates near long time lows, housing down, municipalities and states broke and with GAAP deficits around 30% of national GDP as unfunded liabilities are several times global GDP the only thing that is holding up the dollar is the lousy conditions in Europe.

The contractions are caused by Fed's meddling. But the Fed is running out of ammo and the only way to 'save' the economy is by destroying the USD. While we could see a huge jump in the USD as the EU breaks apart at best such an event would only give us a decent opportunity to buy gold, silver, and energy perhaps for one last time before the blow off phase for commodities begins.

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PeakTrader said...

VangelV, you don't even understand the difference between an asset boom (in the housing market, stock market, commodities market, etc.) and an economic boom (in the production of goods & services).

The U.S. macroeconomy didn't overproduce in the 2000s.

The Fed has done an excellent job working in the future economy (because of lags in the adjustment process) smoothing-out business cycles to achieve sustainable economic growth, which is optimal growth.

In 2007-08, the Fed had to balance a slowing economy with an oil shock more severe than the 1973 oil embargo, using crude tools, since the Fed doesn't micromanage the economy.

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VangelV said...

"VangelV, you don't even understand the difference between an asset boom (in the housing market, stock market, commodities market, etc.) and an economic boom (in the production of goods & services).

The U.S. macroeconomy didn't overproduce in the 2000s."

The US economy produced far too many houses. It produced far too many cars. It produced far too much asset backed paper. It produced far too much debt. And the Fed controlled banking system produced far too much money and credit. Which is why there was a huge crash.

"The Fed has done an excellent job working in the future economy (because of lags in the adjustment process) smoothing-out business cycles to achieve sustainable economic growth, which is optimal growth."

The Fed has managed to do what the USSR could not; destroy the real economy and the financial system of the United States. The real economy has no buttons to be pushed or levers to be pulled. It is each and every one of us acting according to our individual goals. So please spare us the support for central planners and be brave enough to pull back the curtains. The men behind it are no more capable than you or I are.

"In 2007-08, the Fed had to balance a slowing economy with an oil shock more severe than the 1973 oil embargo, using crude tools, since the Fed doesn't micromanage the economy."

The Fed could not solve a problem that it created by using the same methods that it used to create the problem in the first place. If you want to save the US economy get rid of the Fed.

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PeakTrader said...

VangelV, you continue to confuse asset markets with the macroeconomy.

U.S. actual output roughly equaled potential output in 2003-07, i.e. about 3% real growth. Actual output was below potential output in 2001-02 and 2008-11.

You also continue to confuse the Fed with Congress, which sets laws the Fed must obey.

Moreover, the Fed has less power over the banking system than you believe. For example, it can make lending cheaper, but can't force banks to lend.

Nonetheless, the Fed has been most successful in helping to direct the economy towards optimal growth.

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morganovich said...

peak-

on what basis can you possibly make such a claim about the business cycle?

since the fed became heavily interventionist in 2000, we have had 11 years of growth way under trend.

if you use the old gdp deflator and inflation measures to make the data series comparable (whatever your inflation belief, you canto change the delfator calculation and graft the 2 series together as has been done) then we were in recession for about half that time.

so, i'm terribly curious: where is the evidence of this wonderful business cycle management? looks to me like it's been a catastrophe.

also: you cannot separate asset markets and GDP as you try to do. the two have strong links, and asset bubbles and busts (which you may have noticed have become much more frequent lately) have profound effects on the macroeconomy by misallocating resources (home building) on the way up, then demolishing purchasing power and leaving piles of debt behind on the way down.

if that's your idea of "successful" i'd hate to see failure.

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PeakTrader said...

Morganovich, I don't know where you've been the last 25 or 30 years, but I guess you didn't notice the strong disinflationary growth from 1982-07 (with only a moderate recession in 1990-91 and a mild recession in 2001).

The Fed has no control over the economic policies of others, particularly the policies of the past few years that either failed to prevent a severe recession, or failed to achieve a V-shaped recovery. The Fed can only attempt to offset poor economic policies.

Also, I may add, saying there's a difference between asset bubbles and a macroeconomy is not the same as assuming I'm trying to de-link them.

Moreover, I may add, if you're going to continue overstating inflation, using inferior methods, why don't you also overstate nominal income growth too?

The 1995-00 and 2002-07 asset bubbles raised U.S. net wealth:

US household net wealth rises
But remains below the record level set in Q3 2007.
15 June 2010

At the end of Q1 2010, the value of US household assets amounted to $68.53 trillion.

At the end of Q1 2010, the level of US total household debt was $13.97 trillion.

US net wealth now represents a very respectable 491% of household disposable income. The current ratio is actually exactly in-line with the long-term ratio, which dates back to 1952, although there have been times when the ratio has risen over 600%.

Overall the US consumer remains extremely wealthy by historical and international standards; despite the high level of debt.

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morganovich said...

peak-

"don't know where you've been the last 25 or 30 years, but I guess you didn't notice the strong disinflationary growth from 1982-07 (with only a moderate recession in 1990-91 and a mild recession in 2001)."

you're joking, right?

remember the massive bubble in 1999-2000 that loose money inflate4d? that was the last growth of any note we saw. since 2000, it's been dreadful.

further, the fed took an easy bubble to clean up (equity funded in productive assets) and turned it into the hardest bubble to clean up (debt funded non productive assets).

so we have a decade of sub par growth and the swapping of a very manageable bubble for a far more intractable and durable one while the dollar loses half it's buying power in forex terms and asset markets are a disaster.

even if we accept the laughably manipulated CPI, you are down 40% in 12 year in real terms on the S+P.

half the gdp growth (cumulative) from 2000-7 was funded by debt, which soared to stunning levels due to negative real interest rates. that's going to be with us for decades.

no, this same fed is playing the most dangerous game of all and monetizing government debt by the trillion.

nothing has been successfully managed.

this has been hideous misrule and astounding stupidity.

we have just had the worst decade for growth and asset markets since the 30's.

if we used the GDP deflator from the 80's, we were in recession for 6 of the last 12 years.

it's only by fudging the number that this even looks like growth in real terms.

in reality, it's been all inflation and debt accumulation.

you net wealth figures are meaningless.

they cannot tell inflation from real gains.

in real terms, households are MUCH worse off than in 2000.

"Moreover, I may add, if you're going to continue overstating inflation, using inferior methods, why don't you also overstate nominal income growth too?"

and this does not even make sense and demonstrates that you do not understand the math here.

inflation is already built into nominal. it has to be. you sell a car for 10000 one year ans 10100 the next. that's nominal. inflation is already there.

where you get into trouble is reporting it as real. for that, you need to know inflation. i'm not even trying to have the inflation argument with you.

i'm pointing out statistics 101 stuff and you do not seem to be able to grasp it.

you cannot graft 2 series of unlike data together and get a continuous picture. this is a FACT and not arguable in any way.

if i took a chart of celsius temperature before 1992 and Fahrenheit afterward and put the together and said "wow it's much warmer now" you see the problem instantly.

the EXACT same thing was done with CPI (and GDP deflator).

let's leave aside which measure is better (old or new inflation) for a minute. it's irrelevant to this discussion.

what we know to be true is this: new CPI reads lower than the old one would. so does GDP deflator.

whichever is correct, you still have 2 unlike series grafted together. in 1992, there is a break point. either you need to take recent growth and match it to the old series, in which case we just had 6 years of recession in 12, of you can deflate the old series the new way, and get real growth 2-4% higher than previously reported.

in either case, normalizing the series to either standard makes it incredibly obvious that we just had the longest period of sub par growth in the post war US, and that it's been dire since the fed got really active in 2000.

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PeakTrader said...

Morganovich, nothing you say fits in any sound mathematical or empirical model.

According to you, all the "bad" things, e.g. inflation and debt, go up, while all the "good" things, e.g. nominal income (or wages) and assets don't go up (how many workers do you know got a 10% raise from your high inflation rate?).

Also, we had the longest economic expansion in U.S. history from 1991-01, had a recession so mild in 2001 that it wasn't a recession based on annual real per capita GDP (which didn't fall in 2001), and then had another expansion until Dec '07.

The expansion in the 2000s raised living standards at a steeper rate, not only because of the massive "creative-destruction" process, mostly in 2000-02, which made the economy more efficient, and the unemployment rate subsequently fell below 5%, but also because we had up to $800 billion annual trade deficits, i.e. the U.S. consumed up to $800 billion a year more than it produced.

Perhaps, you believe the Information Revolution was just an illusion, and all those goods Americans bought, because of low prices and low interest rates, were not real.

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PeakTrader said...

Many people don't realize the U.S. economy is in a weak position.

Further U.S. monetary stimulus is constrained by inflation.

Further U.S. fiscal stimulus is constrained by budget deficits.

Obama, rather than moving to the center, like Clinton after the 1994 defeat, not only continues to defend his failed economic policies, he wants more of the same, while stepping-up attacks on the most productive Americans, for "not paying their fair share."

An economic shock, e.g. an E.U. recession, particularly if it turns into a vicious cycle, making the recession much worse, will cause a double-dip U.S. recession, and there won't be much the U.S. can do about it.

Except, hope the GOP wins big in 2012 and does what needs to be done, e.g. deregulating, cutting spending, and cutting taxes, on a large enough scale to jolt the economy into a virtuous cycle of consumption-employment.

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PeakTrader said...

The inverted yield curve before the 2007 recession supports the fact that U.S. monetary policy was restrictive (the Fed believed the global savings glut contributed to the inverted yield curve and kept the money supply too tight).

Currently, if short-term rates are too low, e.g. zero Fed Funds rate or quantitative easing (because of accelerating inflation), the 10-year yield of only 2% (the lowest since the 1950s) may forecast recession.

Riding the yield curve
December 27, 2005

"The biggest risk in 2006 is that the Fed will be seduced by worries about inflation into raising rates too high," said Hugh Johnson, chairman of Johnson Illington Advisors. "A lot depends on what the 10-year does and while I would hope that they would take notice that it's going down in yield, the question is whether they will take it seriously or dismiss it."

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