With respect to lack of loan demand allow me to paste the following which underscores the complete vacuum for new loans among small businesses:
But the real problem is loan demand, something I’ve confirmed by speaking to bank organizations in half a dozen states over the past year. Loans have to be repaid. But in recent NFIB surveys, record numbers of business owners—as many as 28 percent—have reported weak sales as their top business problem while only 4 percent reported financing as a top problem. Ninety-three percent of business owners reported that all of their credit needs were met in March, including 53 percent who said they were not even interested in a loan. No customers means there’s no need for a loan to finance hiring, inventory purchases or expansion.
3 Reasons Why Markets May Not See QE3 Anytime Soon [View article]
The report card on QE is less than impressive.
Just to some things up, QE did create and unleash bank reserves that they flowed into commodities, international markets and domestic markets. The markets rallied while we financialized certain commodity markets raising prices through speculation only to see them fall when it became apparent there would be no more QE and that global growth is slowing.
We also strained exchange rates in many emerging markets and may have aggravated their respective inflation rates through raising commodity prices, leading many emerging market to raise interest rates beyond what would have been required had there been no QE.
So in addition to not helping domestic markets beyond creating the illusory wealth effect, which was not likely felt today, QE may have exacerbated conditions in emerging markets thereby further constraining international growth.
The fact that the participants did not see deteriorating economic conditions earlier is almost as remarkable as it is disturbing; we are recovering from a balance sheet recession/depression brought about by a bubble in the construction and financing of all types of real estate. No mention of this harsh reality.
And the output gap is probably wildly exaggerated because of structural changes within the economy which have been underway for years but which have accelerated in recent years and together reduce the output gap. Even there were one, the Fed is impotent in the amid deleveraging and facing a liquidity trap
• Tide of Debt: consumers are swimming against a tide of debt with no way to pay it back.
• Demographics: boomers are heading into retirement scared half to death because they did not save enough.
• Jobs: there is no source of jobs and there too many unskilled workers
• Wages: global wage arbitrage
• Attitude Changes: a secular shift in the attitudes of consumers towards housing and risk taking is underway.
• Innovation: slowing as a result declining patent activity
• Education: sinking to the lowest common denominator
• FIRE: growth in finance, insurance and real estate absorbs a disproportionate share of financial resources but does not expand productive capacity
• Local governments: state, county and local governments are as under water as the federal government and many homeowners
• Federal government: debt to GDP and spending to GDP have both reached levels that impose restraints upon economic growth.
As you point out additional QE will do more harm than good amid a balance sheet recession/depression as consumers are delevering and we remain in a liquidity trap.
For the record, QE 2.0 resulted in slightly higher 10 yr rates; hot money rushing into atttractive emerging markets which taxed their respective monetary and exchange rate policies; a decline in the value of the dollar; and higher commodity prices. Oh, and a higher stock prices.
Equally remarkable, they see new sign of deteriorating economic growth....... conditions long ago evident to most writers and commenters on SA save those who spin and schill. The question that must be put to the Fed is if QE 2.0 did not work why think QE 3.0 might work?
Written without prejudice and based upon facts, your article is a breath of fresh air.
The Philly Fed ADS business conditions continues to limp along at below average conditions, much like the Chicago Fed national activity index, while the UCLA pulse of commerce index has now declined in four of the first five months of 2011, and in eight of the past twelve months.
It is clear that the economy is idling and growth remains a struggle which is why many market economists have marked down estimates of second quarter to the 2.0% range, well below the 2.5% required to stabilize the unemployment rate.
Over the next twelve months many economists see the economy accelerating modestly but none identify credible catalysts. Gary Schilling thinks we’re approaching a second recession because of low job growth, falling real incomes and the weight of continuing declines in home prices.
From Marketwatch: A further 20% decline in home prices would raise the percentage of homes worth less than the value of their mortgages to a stunning 40%, from the mid-20% range now. Shilling estimated it would also cut homeowners’ equity to a mere 8% of total home values, from 19% now and 50% in the early 1980s. Consumer spending will collapse.
Longer term, there is little reason to be optimistic about our prospects when we face continuing deleveraging, an aging population, an expanding government footprint, a concentration of personal incomes with an eroding middle class, heightened global competition and unsustainable deficits and debt.
These are macro structural constraints on growth; not just headwinds.
With FF rates at close to 0 the only thing the Fed can do is make rates negative and/or resume QE through the direct purchase of bonds, a policy they presumably have curtailed. In the meanwhile with rates as they are, we will continue to see capital misallocated due to its mispricing, tendencies to spend when we should save and a fraudulent and predatory transfer of wealth from savers to financial institutions.
As to the anemic and protracted recovery, history suggests we are obliged to follow this path as others before us have and we, of all countries, should not arrogantly embrace the notion that this time is different. Were we this smart we would have simply averted it but we did not, revealing many foibles.
Historians Reinhart and Rogoff lay out what should be expected in the aftermath of financial crisis: Broadly speaking, financial crises are protracted affairs. More often than not, the aftermath of severe financial crises share three characteristics.
First, asset market collapses are deep and prolonged. Real housing price declines average 35 percent stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years.
Second, the aftermath of banking crises is associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls (from peak to trough) an average of over 9 percent, although the duration of the downturn, averaging roughly two years, is considerably shorter than for unemployment.
Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post–World War II episodes. Interestingly, the main cause of debt explosions is not the widely cited costs of bailing out and recapitalizing the banking system. Admittedly, bailout costs are difficult to measure, and there is considerable divergence among estimates from competing studies. But even upper-bound estimates pale next to actual measured rises in public debt. In fact, the big drivers of debt increases are the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions, as well as often ambitious countercyclical fiscal policies aimed at mitigating the downturn.
Uh Oh, Bernanke Says No 'Double Dip' [View article]
Given his dubious ability to stare at indisputable facts and then remark that the facts are at odds with what he believes them to be suggests we will have a double dip.
Debt and the U.S. Economy: Another Fine Mess [View article]
With respect to public debt, one of the few ways of addressing this growing and baleful problem is to enact term limits to get rid of career politicians who are preoccupied with getting reelected and use the public Treasury to fund their many campaign pledges and other expanding promises offered while in office. It's constituency politics and great mind saw it coming.
Alexis de Tocqueville, 19th century French political thinker and historian:
“The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.”
Alexander Fraser Tytler, 18th century British lawyer and writer:
“A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship.”
Where does this end? Over the weekend a I got my hands on a copy of slide presentation prepared by economics historian Niall Ferguson which he delivered to the Peterson Institute. Ferguson delves into the global debt crises while offering fascinating insights. From his historical studies, Fergusson assures us sovereigns with unmanageable levels of war time levels of debt DO NOT: cut entitlement spending, reduce taxes to stimulate growth, impose consumption taxes as a means of narrowing gaping budget deficits or grow their way out of debt without defaulting or severely depreciating their currency.
“Rather than run a old Wolf column, I for one would find it more helpful if you either identified where I was wrong or mistaken. Address the arguments I make rather than ignore them.”
______________________...
Mark the quote of Wolf was offered more in a context of humor than a rebuttal of anything you said but I will happily oblige you and address your arguments as you ask.
Unless I overlooked something, you are essentially repeating calls that have been made by Krugman, DeLong and countless others for more fiscal spending under the belief it is essential to the economy and it is needed to address pernicious levels of unemployment and the possibility of a double dip. But fiscal spending is never qualified and is treated were it fungible.
I don’t know what the present stimulus plan has accomplished across the broad economy and I think it’s safe to say that no one else does either notwithstanding the statistics you cite. Friday’s jobs report suggest very, very serious problems in the labor markets and the latest revision downward in first quarter GDP reveals domestic final demand is growing at an anemic rate of around 1.4%. On the other hand, there is evidence that cash for clunkers was of some benefit as was the home buyer tax credit, though the most recent data on mortgage purchase application, which have fallen 40% in the last month, suggest we will see a resumption of weakness in housing upon expiration of the tax credit. Put bluntly, it’s unlikely the credit produced a sustainable recovery in housing.
Lack of sustainability and the interrelated issue of spending multipliers strikes at the heart of the weakness of the Recovery Act and the calls for additional fiscal spending; it’s as if we just spend more money the economy will automatically reset. I think it’s more complicated than that and having congress simply write checks in the hopes of generating a sustainable economic recovery is the height of naiveté; fiscal policy should be guided by well defined goals and supported by empirical analyses to extract as much value out of our policy actions as possible. We cannot borrow indefinitely to fulfill promises and correct mistakes.
What we do know, according to Christina Romer, is that the fiscal spending multipliers for reductions in income taxes is three times as potent as it is for fiscal spending, yet only about 35% of the Obama Recovery Act went towards reductions in taxes. The vast majority of it went to assistance for states and to support a host of pet projects; only 20% or so of the spending portion of the Act when towards the hard assets (highways, bridges, green energy, and electrical grids) which Obama referred to during the campaign in soaring rhetoric. And much of the literature suggests that the fiscal multipliers are higher for complicated long lasting infrastructure projects than it is for transfer payments. Given the foregoing, it was a poorly designed Act and would serve as a poor example for future spending. It would only provide a sugar high; a radically new direction is required.
If we are interested in economic growth through employment gains, let focus our attention upon the historical drivers of employment: technology, small businesses and start-ups. Rather than simply spending more money enhancing “aggregate demand”, let’s channel our finite resources to develop an investment led recovery through (1) developing promising technologies promising in such fields nanotechnology, biotechnology, cognitive, artificial intelligence and others (2) making it easier for individuals to invest in start-ups not harder by offering a variety of tax incentives and killing the provision in the Dodd bill which would require “startups raising funding to register with the Securities and Exchange Commission, and then wait 120 days for the SEC to review their filing; a second provision raises the wealth requirements for an "accredited investor" who can invest in startups - if the bill passes, investors would need assets of more than $2.3 million (up from $1 million) or income of more than $450,000 (up from $250,000); the third restriction removes the federal pre-emption allowing angel and venture financing in the United States to follow federal regulations, rather than face different rules between states." and (3) providing a variety of incentives to help individuals start-up businesses through assistance with start-up funding and federally guaranteed loans (4) develop a mechanism through which we can develop a national industrial policy and (5) develop a mechanism through which the federal government can become more active in assisting start-up businesses and existing small businesses.
I could go on further but I hope you get a sense of the direction I would like to see this country take: austerity accompanied by a thoughtful multi-year investment program designed to encourage development and commercializing tomorrow’s technologies to spawn new businesses and start-ups.
This vision is at odds with current polices more concerned with the distribution of wealth as opposed to its creation; low quality fiscal spending rather than tax cuts; potential legislation making it more difficult to be involved with start-ups; burdening small businesses with the cost of healthcare reform; and total indifference to the financial needs of small businesses. To the extent the administration has a policy, it's incoherent.
With respect to our indebtedness, our debt to gdp ratio is close to 140% including the debt of the GSE’s ; spending more under the business as usual model will accomplish nothing, further widen the deficit and deepen our indebtedness which is expected to grow by a $1 trillion per year through 2020 according to the CBO. And this does not account for close to $100 trillion in unfunded liabilities; our grandchildren will not have worry about a debt crisis, we will.
Everybody in the west knows the fable of the grasshopper and the ant. The grasshopper is lazy and sings away the summer, while the ant piles up stores for the winter. When the cold weather comes, the grasshopper begs the ant for food. The ant refuses and the grasshopper starves. The moral of this story? Idleness brings want.
Life is more complex than in Aesop’s fable. Today, the ants are Germans, Chinese and Japanese, while the grasshoppers are American, British, Greek, Irish and Spanish. Ants produce enticing goods grasshoppers want to buy. The latter ask whether the former want something in return. “No,” reply the ants. “You do not have anything we want, except, maybe, a spot by the sea. We will lend you the money. That way, you enjoy our goods and we accumulate stores.”
Time for the Fed to Consider Raising Rates [View article]
To appease those with a sense of history and outrage, members of the Fed will occasionally work up a lather of hawkishness and say things that causes Brad DeLong and those of similar persuasion to be gripped apoplectic sieges. At the end, though, the vehemence is tempered by admission that we are not in a sustainable recovery and continued easing is required to ensure that the escape from the great recession is durable.
In the meantime, low interest rates transfer wealth from those who save to financial institutions who profit from the steep yield curve and park their excesses in reserves or at casino tables. One could easily be tempted to think that slightly higher rates would not significantly impact lending while it would put more money in the pockets of those who save, thereby increasing consumption and rewarding responsible and desirable behavior.
Why Paul Krugman Is Wrong About the U.S. Economy [View article]
With his casual disregard for deficits and debt perhaps Krugman should no longer be viewed as an economist but simply an editorialist with very progressive leanings.
Fiscal stimulus has a different effect depending upon how the market views the behavior of the sovereign borrower. If it assumed the sovereign is going to repay the debt, then one can reasonably expect citizens to expect future tax hikes and contain spending in the face of fiscal profligacy. This would be particularly so in an environment of deleveraging as described by the author.
Separately, I was impressed by what Trichet of the ECB said in response to a question bearing upon fiscal austerity. The question was:
Austerity plans are multiplying in Europe but certain economists are warning against an overzealousness that could jeopardise growth. What is your view on this?
He answer was:
When a household systematically spends more than it earns, so that its debt rises exponentially, its situation is clearly untenable. Correcting this situation demonstrates both wise and sound judgment. It is also wise and sound judgment for a country to return to a sustainable fiscal situation in the medium term. There is a semantic issue here. What you call austerity plans I call plans for a progressive return to a sound fiscal situation. In any case these wise policies are favourable to growth since they increase the confidence of households, businesses and investors. Today this confidence is - as I have said – essential for the recovery.
U.S. Economy: Recovering, But Still Unbalanced [View article]
The other point I would add is the farrago of pet pork spending carrying the offical label "stimulus" will peak in the second quarter, and decrease in quantity thereafter. As much as I detest this particular form of spending, I do believe it has oozed though the cogs of the economy and contributed something to growth in GDP; if not, it's a larger waste than what i orignally believed.
To the extent this is true, withdrawal of stimulus will be a "deduct" from growth in the third quarter and further challenge growth in the face of stagnating incomes and inventory builds that eventually must line up and align with final domestic demand, which declined in the first quarter to an annualized rate of 1.6%.
As to exports, the whole world is looking to expand exports so the competition will be keen and a rising dollar........due to a collapse of many risk trades.....is not making this any easier. And no matter how far the dollar falls, unless they remove all of the red duct tape and countless forms required to obtain a license to exports a depreciated currency will not further the cause.
The Reality of First Quarter GDP Growth [View article]
Consumer spending accounted for 2.55 percentage points of reported growth and business investment accounted for 1.67 points of the reported growth of 3.2%; our net export position subtracted from growth as did declines in state and local spending.
Because it is widely speculated startegic defaults are supporting consumer spending through channeling erstwhile mortgage payments into buying toys, one can fairly question the sustainability of this or the cost on the other side of the coin.
(As a note 3.2% growth is good for producing around 2 million jobs annually but bear in mind the labor force is expanding by 1.2 to 1.4 million. This rate of growth will not begin to dent the unemplyment rate of 9.7%)
As to where we go from here, David Schulman an economist at UCLA nailed first quarter growth and I have pasted below his outlook for the rest of the year which more or less takes the shape of the new normal as articulated by Gross, Mauldin, El Erian and others.
In a report titled, "The Bipolar Economy," UCLA Anderson Forecast senior economist David Shulman explores the duality of a national economy, in which GDP is growing while job creation remains scarce — and is expected to remain scarce through 2012.
Shulman suggests that the Washington's economic stimulus packages may have unintentionally caused the economic schizophrenia. Tax cuts and spending programs, coupled with a non-sustainable zero-interest policy do spur growth, but businesses do not make long-term hiring decisions based on temporary government policies, he says.
"Nevertheless, the economy is now on a growth path and employment will soon be increasing, albeit modestly," Shulman writes.
The Forecast's case for recovery is based on strength in business equipment and software, exports, and a revival in home construction from postwar lows. With the exception of housing, these factors are already making positive contributions to the economy.
Growth will be held back by declines in non-residential construction and stagnation and retraction in the state and local government sectors. The Forecast expects the economy to grow at a 3.2 percent rate for the first quarter of this year, and then level off to about 2 percent, leaving 2010's overall growth around 2.3 percent. In 2011 and 2012, GDP is forecasted to be 2.3 percent and 3.2 percent, respectively. However, payroll employment is still forecasted to be 2 million jobs below the 2007 peak at the end of 2012.
In a cautionary note, Shulman says that the real risk to the economy is inflation, arguing that the Federal Reserve's monetary policy has created circumstance ripe for inflation. Shulman believes the Fed understands this risk and will tighten monetary policy, and that inflation will remain under control.
In a report titled, "The Bipolar Economy," UCLA Anderson Forecast senior economist David Shulman explores the duality of a national economy, in which GDP is growing while job creation remains scarce — and is expected to remain scarce through 2012.
Shulman suggests that the Washington's economic stimulus packages may have unintentionally caused the economic schizophrenia. Tax cuts and spending programs, coupled with a non-sustainable zero-interest policy do spur growth, but businesses do not make long-term hiring decisions based on temporary government policies, he says.
"Nevertheless, the economy is now on a growth path and employment will soon be increasing, albeit modestly," Shulman writes.
The Forecast's case for recovery is based on strength in business equipment and software, exports, and a revival in home construction from postwar lows. With the exception of housing, these factors are already making positive contributions to the economy.
Growth will be held back by declines in non-residential construction and stagnation and retraction in the state and local government sectors. The Forecast expects the economy to grow at a 3.2 percent rate for the first quarter of this year, and then level off to about 2 percent, leaving 2010's overall growth around 2.3 percent. In 2011 and 2012, GDP is forecasted to be 2.3 percent and 3.2 percent, respectively. However, payroll employment is still forecasted to be 2 million jobs below the 2007 peak at the end of 2012.
In a cautionary note, Shulman says that the real risk to the economy is inflation, arguing that the Federal Reserve's monetary policy has created circumstance ripe for inflation. Shulman believes the Fed understands this risk and will tighten monetary policy, and that inflation will remain under control.
Fed Will Leave Rates at Zero Until Inflation Shows Up [View article]
For sake of argument, let's say some of the surplus capacity is actually capacity that is obsolete and has fallen out of use; to the extent this is true, there may not be as much slack as professed. . Secondly, these guys, again, are focusing upon a lagging indicator (unemployment) which is certain to give rise to inflation. Thirdly, the current Fed would happily risk inflation rather than risk withdrawing accomodating policies pramaturely and repeating what some believe to be the mistake of the Depression. And lastly, there is an election right around the corner. The bottom line: we'll be knee deep in money as far as the eye can see.
Why Banks Aren't Lending [View article]
But the real problem is loan demand, something I’ve confirmed by speaking to bank organizations in half a dozen states over the past year. Loans have to be repaid. But in recent NFIB surveys, record numbers of business owners—as many as 28 percent—have reported weak sales as their top business problem while only 4 percent reported financing as a top problem. Ninety-three percent of business owners reported that all of their credit needs were met in March, including 53 percent who said they were not even interested in a loan. No customers means there’s no need for a loan to finance hiring, inventory purchases or expansion.
3 Reasons Why Markets May Not See QE3 Anytime Soon [View article]
Just to some things up, QE did create and unleash bank reserves that they flowed into commodities, international markets and domestic markets. The markets rallied while we financialized certain commodity markets raising prices through speculation only to see them fall when it became apparent there would be no more QE and that global growth is slowing.
We also strained exchange rates in many emerging markets and may have aggravated their respective inflation rates through raising commodity prices, leading many emerging market to raise interest rates beyond what would have been required had there been no QE.
So in addition to not helping domestic markets beyond creating the illusory wealth effect, which was not likely felt today, QE may have exacerbated conditions in emerging markets thereby further constraining international growth.
Not impressive.
Parsing Bernanke [View article]
And the output gap is probably wildly exaggerated because of structural changes within the economy which have been underway for years but which have accelerated in recent years and together reduce the output gap. Even there were one, the Fed is impotent in the amid deleveraging and facing a liquidity trap
• Tide of Debt: consumers are swimming against a tide of debt with no way to pay it back.
• Demographics: boomers are heading into retirement scared half to death because they did not save enough.
• Jobs: there is no source of jobs and there too many unskilled workers
• Wages: global wage arbitrage
• Attitude Changes: a secular shift in the attitudes of consumers towards housing and risk taking is underway.
• Innovation: slowing as a result declining patent activity
• Education: sinking to the lowest common denominator
• FIRE: growth in finance, insurance and real estate absorbs a disproportionate share of financial resources but does not expand productive capacity
• Local governments: state, county and local governments are as under water as the federal government and many homeowners
• Federal government: debt to GDP and spending to GDP have both reached levels that impose restraints upon economic growth.
FOMC Minutes: Q3 Still an Option [View article]
For the record, QE 2.0 resulted in slightly higher 10 yr rates; hot money rushing into atttractive emerging markets which taxed their respective monetary and exchange rate policies; a decline in the value of the dollar; and higher commodity prices. Oh, and a higher stock prices.
Equally remarkable, they see new sign of deteriorating economic growth....... conditions long ago evident to most writers and commenters on SA save those who spin and schill. The question that must be put to the Fed is if QE 2.0 did not work why think QE 3.0 might work?
Economy in Danger of Full Stall [View article]
The Philly Fed ADS business conditions continues to limp along at below average conditions, much like the Chicago Fed national activity index, while the UCLA pulse of commerce index has now declined in four of the first five months of 2011, and in eight of the past twelve months.
It is clear that the economy is idling and growth remains a struggle which is why many market economists have marked down estimates of second quarter to the 2.0% range, well below the 2.5% required to stabilize the unemployment rate.
Over the next twelve months many economists see the economy accelerating modestly but none identify credible catalysts. Gary Schilling thinks we’re approaching a second recession because of low job growth, falling real incomes and the weight of continuing declines in home prices.
From Marketwatch: A further 20% decline in home prices would raise the percentage of homes worth less than the value of their mortgages to a stunning 40%, from the mid-20% range now. Shilling estimated it would also cut homeowners’ equity to a mere 8% of total home values, from 19% now and 50% in the early 1980s. Consumer spending will collapse.
Longer term, there is little reason to be optimistic about our prospects when we face continuing deleveraging, an aging population, an expanding government footprint, a concentration of personal incomes with an eroding middle class, heightened global competition and unsustainable deficits and debt.
These are macro structural constraints on growth; not just headwinds.
The Fed: 'Pushing on a String' [View article]
As to the anemic and protracted recovery, history suggests we are obliged to follow this path as others before us have and we, of all countries, should not arrogantly embrace the notion that this time is different. Were we this smart we would have simply averted it but we did not, revealing many foibles.
Historians Reinhart and Rogoff lay out what should be expected in the aftermath of financial crisis: Broadly speaking, financial crises are protracted affairs. More often than not, the aftermath of severe financial crises share three characteristics.
First, asset market collapses are deep and prolonged. Real housing price declines average 35 percent
stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years.
Second, the aftermath of banking crises is associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls (from peak to trough) an average of over 9 percent, although the duration of the downturn, averaging roughly two years, is considerably shorter than for unemployment.
Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post–World War II episodes. Interestingly, the main cause of debt explosions is not the widely cited costs of bailing out and recapitalizing the banking system. Admittedly, bailout costs are difficult to measure, and there is considerable divergence among estimates from competing studies.
But even upper-bound estimates pale next to actual measured rises in public debt. In fact, the big drivers of debt increases are the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions, as well as often ambitious countercyclical fiscal policies aimed at mitigating the downturn.
Uh Oh, Bernanke Says No 'Double Dip' [View article]
Debt and the U.S. Economy: Another Fine Mess [View article]
Alexis de Tocqueville, 19th century French political thinker and historian:
“The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.”
Alexander Fraser Tytler, 18th century British lawyer and writer:
“A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship.”
Where does this end? Over the weekend a I got my hands on a copy of slide presentation prepared by economics historian Niall Ferguson which he delivered to the Peterson Institute. Ferguson delves into the global debt crises while offering fascinating insights. From his historical studies, Fergusson assures us sovereigns with unmanageable levels of war time levels of debt DO NOT: cut entitlement spending, reduce taxes to stimulate growth, impose consumption taxes as a means of narrowing gaping budget deficits or grow their way out of debt without defaulting or severely depreciating their currency.
G20: Gas Now, Brake Later [View article]
______________________...
Mark the quote of Wolf was offered more in a context of humor than a rebuttal of anything you said but I will happily oblige you and address your arguments as you ask.
Unless I overlooked something, you are essentially repeating calls that have been made by Krugman, DeLong and countless others for more fiscal spending under the belief it is essential to the economy and it is needed to address pernicious levels of unemployment and the possibility of a double dip. But fiscal spending is never qualified and is treated were it fungible.
I don’t know what the present stimulus plan has accomplished across the broad economy and I think it’s safe to say that no one else does either notwithstanding the statistics you cite. Friday’s jobs report suggest very, very serious problems in the labor markets and the latest revision downward in first quarter GDP reveals domestic final demand is growing at an anemic rate of around 1.4%. On the other hand, there is evidence that cash for clunkers was of some benefit as was the home buyer tax credit, though the most recent data on mortgage purchase application, which have fallen 40% in the last month, suggest we will see a resumption of weakness in housing upon expiration of the tax credit. Put bluntly, it’s unlikely the credit produced a sustainable recovery in housing.
Lack of sustainability and the interrelated issue of spending multipliers strikes at the heart of the weakness of the Recovery Act and the calls for additional fiscal spending; it’s as if we just spend more money the economy will automatically reset. I think it’s more complicated than that and having congress simply write checks in the hopes of generating a sustainable economic recovery is the height of naiveté; fiscal policy should be guided by well defined goals and supported by empirical analyses to extract as much value out of our policy actions as possible. We cannot borrow indefinitely to fulfill promises and correct mistakes.
What we do know, according to Christina Romer, is that the fiscal spending multipliers for reductions in income taxes is three times as potent as it is for fiscal spending, yet only about 35% of the Obama Recovery Act went towards reductions in taxes. The vast majority of it went to assistance for states and to support a host of pet projects; only 20% or so of the spending portion of the Act when towards the hard assets (highways, bridges, green energy, and electrical grids) which Obama referred to during the campaign in soaring rhetoric. And much of the literature suggests that the fiscal multipliers are higher for complicated long lasting infrastructure projects than it is for transfer payments. Given the foregoing, it was a poorly designed Act and would serve as a poor example for future spending. It would only provide a sugar high; a radically new direction is required.
If we are interested in economic growth through employment gains, let focus our attention upon the historical drivers of employment: technology, small businesses and start-ups. Rather than simply spending more money enhancing “aggregate demand”, let’s channel our finite resources to develop an investment led recovery through (1) developing promising technologies promising in such fields nanotechnology, biotechnology, cognitive, artificial intelligence and others (2) making it easier for individuals to invest in start-ups not harder by offering a variety of tax incentives and killing the provision in the Dodd bill which would require “startups raising funding to register with the Securities and Exchange Commission, and then wait 120 days for the SEC to review their filing; a second provision raises the wealth requirements for an "accredited investor" who can invest in startups - if the bill passes, investors would need assets of more than $2.3 million (up from $1 million) or income of more than $450,000 (up from $250,000); the third restriction removes the federal pre-emption allowing angel and venture financing in the United States to follow federal regulations, rather than face different rules between states." and (3) providing a variety of incentives to help individuals start-up businesses through assistance with start-up funding and federally guaranteed loans (4) develop a mechanism through which we can develop a national industrial policy and (5) develop a mechanism through which the federal government can become more active in assisting start-up businesses and existing small businesses.
I could go on further but I hope you get a sense of the direction I would like to see this country take: austerity accompanied by a thoughtful multi-year investment program designed to encourage development and commercializing tomorrow’s technologies to spawn new businesses and start-ups.
This vision is at odds with current polices more concerned with the distribution of wealth as opposed to its creation; low quality fiscal spending rather than tax cuts; potential legislation making it more difficult to be involved with start-ups; burdening small businesses with the cost of healthcare reform; and total indifference to the financial needs of small businesses. To the extent the administration has a policy, it's incoherent.
With respect to our indebtedness, our debt to gdp ratio is close to 140% including the debt of the GSE’s ; spending more under the business as usual model will accomplish nothing, further widen the deficit and deepen our indebtedness which is expected to grow by a $1 trillion per year through 2020 according to the CBO. And this does not account for close to $100 trillion in unfunded liabilities; our grandchildren will not have worry about a debt crisis, we will.
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Everybody in the west knows the fable of the grasshopper and the ant. The grasshopper is lazy and sings away the summer, while the ant piles up stores for the winter. When the cold weather comes, the grasshopper begs the ant for food. The ant refuses and the grasshopper starves. The moral of this story? Idleness brings want.
Life is more complex than in Aesop’s fable. Today, the ants are Germans, Chinese and Japanese, while the grasshoppers are American, British, Greek, Irish and Spanish. Ants produce enticing goods grasshoppers want to buy. The latter ask whether the former want something in return. “No,” reply the ants. “You do not have anything we want, except, maybe, a spot by the sea. We will lend you the money. That way, you enjoy our goods and we accumulate stores.”
Time for the Fed to Consider Raising Rates [View article]
In the meantime, low interest rates transfer wealth from those who save to financial institutions who profit from the steep yield curve and park their excesses in reserves or at casino tables. One could easily be tempted to think that slightly higher rates would not significantly impact lending while it would put more money in the pockets of those who save, thereby increasing consumption and rewarding responsible and desirable behavior.
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Fiscal stimulus has a different effect depending upon how the market views the behavior of the sovereign borrower. If it assumed the sovereign is going to repay the debt, then one can reasonably expect citizens to expect future tax hikes and contain spending in the face of fiscal profligacy. This would be particularly so in an environment of deleveraging as described by the author.
Separately, I was impressed by what Trichet of the ECB said in response to a question bearing upon fiscal austerity. The question was:
Austerity plans are multiplying in Europe but certain economists are warning against an overzealousness that could jeopardise growth. What is your view on this?
He answer was:
When a household systematically spends more than it earns, so that its debt rises exponentially, its situation is clearly untenable. Correcting this situation demonstrates both wise and sound judgment. It is also wise and sound judgment for a country to return to a sustainable fiscal situation in the medium term. There is a semantic issue here. What you call austerity plans I call plans for a progressive return to a sound fiscal situation. In any case these wise policies are favourable to growth since they increase the confidence of households, businesses and investors. Today this confidence is - as I have said – essential for the recovery.
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To the extent this is true, withdrawal of stimulus will be a "deduct" from growth in the third quarter and further challenge growth in the face of stagnating incomes and inventory builds that eventually must line up and align with final domestic demand, which declined in the first quarter to an annualized rate of 1.6%.
As to exports, the whole world is looking to expand exports so the competition will be keen and a rising dollar........due to a collapse of many risk trades.....is not making this any easier. And no matter how far the dollar falls, unless they remove all of the red duct tape and countless forms required to obtain a license to exports a depreciated currency will not further the cause.
The Reality of First Quarter GDP Growth [View article]
Because it is widely speculated startegic defaults are supporting consumer spending through channeling erstwhile mortgage payments into buying toys, one can fairly question the sustainability of this or the cost on the other side of the coin.
(As a note 3.2% growth is good for producing around 2 million jobs annually but bear in mind the labor force is expanding by 1.2 to 1.4 million. This rate of growth will not begin to dent the unemplyment rate of 9.7%)
As to where we go from here, David Schulman an economist at UCLA nailed first quarter growth and I have pasted below his outlook for the rest of the year which more or less takes the shape of the new normal as articulated by Gross, Mauldin, El Erian and others.
In a report titled, "The Bipolar Economy," UCLA Anderson Forecast senior economist David Shulman explores the duality of a national economy, in which GDP is growing while job creation remains scarce — and is expected to remain scarce through 2012.
Shulman suggests that the Washington's economic stimulus packages may have unintentionally caused the economic schizophrenia. Tax cuts and spending programs, coupled with a non-sustainable zero-interest policy do spur growth, but businesses do not make long-term hiring decisions based on temporary government policies, he says.
"Nevertheless, the economy is now on a growth path and employment will soon be increasing, albeit modestly," Shulman writes.
The Forecast's case for recovery is based on strength in business equipment and software, exports, and a revival in home construction from postwar lows. With the exception of housing, these factors are already making positive contributions to the economy.
Growth will be held back by declines in non-residential construction and stagnation and retraction in the state and local government sectors. The Forecast expects the economy to grow at a 3.2 percent rate for the first quarter of this year, and then level off to about 2 percent, leaving 2010's overall growth around 2.3 percent. In 2011 and 2012, GDP is forecasted to be 2.3 percent and 3.2 percent, respectively. However, payroll employment is still forecasted to be 2 million jobs below the 2007 peak at the end of 2012.
In a cautionary note, Shulman says that the real risk to the economy is inflation, arguing that the Federal Reserve's monetary policy has created circumstance ripe for inflation. Shulman believes the Fed understands this risk and will tighten monetary policy, and that inflation will remain under control.
In a report titled, "The Bipolar Economy," UCLA Anderson Forecast senior economist David Shulman explores the duality of a national economy, in which GDP is growing while job creation remains scarce — and is expected to remain scarce through 2012.
Shulman suggests that the Washington's economic stimulus packages may have unintentionally caused the economic schizophrenia. Tax cuts and spending programs, coupled with a non-sustainable zero-interest policy do spur growth, but businesses do not make long-term hiring decisions based on temporary government policies, he says.
"Nevertheless, the economy is now on a growth path and employment will soon be increasing, albeit modestly," Shulman writes.
The Forecast's case for recovery is based on strength in business equipment and software, exports, and a revival in home construction from postwar lows. With the exception of housing, these factors are already making positive contributions to the economy.
Growth will be held back by declines in non-residential construction and stagnation and retraction in the state and local government sectors. The Forecast expects the economy to grow at a 3.2 percent rate for the first quarter of this year, and then level off to about 2 percent, leaving 2010's overall growth around 2.3 percent. In 2011 and 2012, GDP is forecasted to be 2.3 percent and 3.2 percent, respectively. However, payroll employment is still forecasted to be 2 million jobs below the 2007 peak at the end of 2012.
In a cautionary note, Shulman says that the real risk to the economy is inflation, arguing that the Federal Reserve's monetary policy has created circumstance ripe for inflation. Shulman believes the Fed understands this risk and will tighten monetary policy, and that inflation will remain under control.
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