Posted on 01/11/2009 4:53:11 PM PST by An Old Man
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This you can take to the bank: If the Fed buys $500 billion in assets of various kinds and if the US government spends an extra trillion dollars and deflation is still a concern, they are going to double down and do it again. And yet again if they think it is necessary. They are not going to stop until the nominal economy is growing and inflation is above at least 1%.
How much will that number finally be? No one really knows. This has never been attempted. Maybe the initial stimulus package and Fed debt purchases will be enough. My bet is that it won't be, but that is just a guess. We are in uncharted waters. But the captains of the boats are all Keynesians. They are going to fight a recession and deflation with old-fashioned stimulus. And that means we had better adjust our portfolios and businesses for that reality.
Just to give you a picture of what economists think about the effect of the stimulus, let's turn to the Levy Economics Institute of Bard College, which is one of my favorite sources for original economic insight (http://www.levy.org/). They are a rather conservative lot. The graph below shows what two different levels of government stimulus will mean to the economy. They graph unemployment at no stimulus (top black line) and at two levels of "shock" or stimulus. Shock 1 is about $380 billion and shock 2 is about $760 billion. The dotted lines are what is known as "output gap," or the measure of the difference between the actual output (actual GDP) of an economy and what it could produce at its most efficient (potential GDP).
"The implication of these projections is that, even with the application of almost unbelievably large fiscal stimuli, output will not increase enough to prevent unemployment from continuing to rise through the next two years.
"It seems to us unlikely that U.S. budget deficits on the order of 8--10 percent through the next two years could be tolerated for purely political reasons, given the strong and widespread belief that the budget should normally be balanced. But looking at the matter more rationally, we are bound to accept that nothing like the configuration of balances and other variables displayed in Figures 3 and 4 could possibly be sustained over any long period of time. The budget deficits imply that the public debt relative to GDP would rise permanently to about 80 percent, while GDP would remain below trend, with unemployment above 6 percent.
"Fiscal policy alone cannot, therefore, resolve the current crisis. A large enough stimulus will help counter the drop in private expenditure, reducing unemployment, but it will bring back a large and growing external imbalance, which will keep world growth on an unsustainable path.
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The article is long, I posted only the section applicable to the chart.
Read the rest! You might be glad you did.
Bloomberg: Nouriel Roubini - worst is still ahead of US
I’m gonna go out on a limb and say that when we’re in a recession caused by inflation, it’s not such a bad idea to have a little deflation. That is, if you want to recover any time soon.
Hard for me to imagine how that’s gonna happen without businesses failing and money being redirected to profitable lines of investment. And that can’t really happen while you’re endlessly pumping more money into markets that haven’t cleared bad investments.
bookmark for later
I hated the Carter administration, but O’Bummer is going to make Jummuh look like an economic genius.
“the measure of the difference between the actual output (actual GDP) of an economy and what it could produce at its most efficient (potential GDP).”
How is it possible to measure “potential GDP”? Do they imagine the economy without government intervention?
“I hated the Carter administration, but O’Bummer is going to make Jummuh look like an economic genius.”
Very well said I might add. LOL
Who is going to finance the $Trillion plus shortfall that the Federal government is going to experience this fiscal year? Isn't this done with Treasury bonds, bills etc? Where is the money going to come from?
>>let’s turn to the Levy Economics Institute of Bard College, which is one of my favorite sources for original economic insight (http://www.levy.org/). They are a rather conservative lot.
Yes, they are the left-wing kind of conservative.
There is nothing gained by greater deflation in the general price level. It is a pure wealth transfer from risk takers and producers to risk avoiders and rentiers. All the necessary adjustments happen just by asset and commodity prices, and interest rates on risky claims, adjusting, and that has already happened. There is zero need to pile on more artificial, money-policy induced pain, to help any real side adjustment.
The price level is falling, with this level of stimulus, and will continue to do so even with further massive stimulus, because demand for risk is falling even faster and further. The monetary authorities are right to be as loose as possible. And fiscally, balancing budgets is the worst possible policy concern. The treasury can borrow at near zero real rates, and it should do so, on a large scale, to fund final demand, repair corporate and household balance sheets, and to recycle capital into riskier holdings where risk-averse private savers won't.
Yes unemployment will rise anyway. Yes we have a recession anyway. These are not reasons not to do it. The recession will be less severe and lost output less serious. We can worry about rebalancing budgets after growth has been restored.
This is all simple economics, and not a partisan matter. It is not open for debate, either. It is going to be done, and it is going to work. Not as fast as anyone would like, but it will. 2-3 years from now, maximum, and probably much sooner, economic growth will resume.
When that happens, everyone predicting endless doom now is going to look quite foolish. The Dems will be perfectly happy to take you up on insistent calls for fiscal discipline and budget balancing at that point - through tax hikes. The right is playing both the economic policy timing, and the politics of this, as badly as can be imagined.
Buy several clues please, stop pretending any of it is a referendum on your libertarian puritan virtue. The government will spend countercyclically because that is what is does, should do, and what it is politically popular for it to do. The economy will recover because the American economy always does and always will, whatever policy mix is thrown at it, and whatever the short term adjustment costs. And if you don't position the right for both realities, you can easily wind up exiling it to the wilderness for a generation.
Bookmark.
There is no danger whatever of being unable to fund any degree of government spending you please.
The present crisis is defined by the record spreads between the rates on high quality corporate bonds, and treasuries. Even tax free bonds of state governments yield 2-3 times what treasuries can be sold for. The private market itself is clamouring for government to hold all of its capital, and refusing to give a smidgen of it to even the soundest private corporations. Even with the government pushing in the other direction, hard.
Those pretending that merely calling for private solutions to any of it, is the ideologically pure and virtuous thing, are simply utterly unable to face this elementary fact, that *is* the crisis, in the first place. Private capital does not trust private companies any farther than it can throw them, right now.
This may be irrational, it may be unsustainable, but it is the present reality.
Its cause is also not hard to see. It takes a large capital actively arbitraging credit risks to keep them in line with each other. That capital operated with borrowed money, and it blew out over the last 18 months. The function it usually performs is simply *not* being done, by anyone or anything, private or public.
Fundamentally, that is the business of profitable private banking. But banking has been everyone's whipping boy, and anything but profitable. You are simply seeing the consequences of a world in which it does not pay to be a private banker. Either banking is made a legitimate profitable activity again, whatever that takes in public support, or the government will have to allocate capital in the meantime. There are no other options. Private organizations cannot allocate capital to risky ventures and lose tens of trillions, and be expected to just keep doing it.
Obama’s fault! LOL!
The shortfall will be funded by Treasury bills, notes and bonds.
If auction demand starts to push rates too high (whatever the powers that be deem is too high), the Federal Reserve will start buying government paper with money created out of thin air.
While the others are honest and of interest, I want to see more analysis of this.
CA....
They use a "government intervention coefficient" of .18, which is multiplied by Real GDP. If the govt. gets out of the way, the coefficient becomes 1.00.
/s
When I first read this sentence, I thought it said "Kenyans," not "Keynesians," although in our present situation it's both.
As always, I appreciate your insights. Thanks for posting them.
I ask because I've read about it but it seems to me that it ignores two probably pretty fundamental things that will keep the dollar from doing so: one, that demographically, over the long term, we have the only growing population and so will continue to dwarf what maybe in the short term stronger economies like Japan and the EU; and two, that china's economic practices are fundamentally unsound. (That last one made sense a few years ago I guess, but now, some of their policies sound more sound than ours.).I 'd appreciate your thoughts, if you'd care to comment.
“There is no danger whatever of being unable to fund any degree of government spending you please. “
I’m not sure I agree with your statement.
Did you see that China is potentially going to pull back on the level of buying of US paper? They are trying to use their money to stimulate their own economy.
The bond vigilantes slumber. As the greatest sovereign bond bubble of all time rolls into 2009, investors are clinging to an implausible assumption that China and Japan will provide enough capital to keep the happy game going for ever.
Ambrose Evans-Pritchard
Last Updated: 12:41AM GMT 12 Jan 2009
They are betting too that debt deflation will overwhelm the effects of near-zero interest rates across the G10 and nullify a £2,000bn fiscal blast in the US, China, Japan, Britain, and Europe.
Above all, they are betting that the Federal Reserve chief Ben Bernanke will fail to print enough banknotes to inflate the US money supply, despite his avowed intent to do so.
Yields on 10-year US Treasuries have fallen to 2.4pc – a level that was unseen even in the Great Depression. This is "return-free risk", said bond guru Jim Grant.
It is much the same story across the world. Yields are 1.3pc in Japan, 3.02pc in Germany, 3.13pc in Britain, 3.26pc in Chile, 3.47pc in France, and 5.56pc in Brazil.
"Get out of Treasuries. They are very, very expensive," said Mohamed El-Erian, the investment chief at the Pimco, the world's top bond fund, in a Barron's article last week.
It is lazy to think that China, Japan, the petro-powers and the surplus states of emerging Asia will continue to amass foreign reserves, recycling their treasure into the US and European bond markets.
These countries are themselves bleeding as exports collapse. Most face capital flight. The whole process that fed the bond boom from 2003 to 2008 is now going into reverse.
Woe betide any investor who misjudges the consequences of this strategic shift.
[snip]
“Buy several clues please, stop pretending any of it is a referendum on your libertarian puritan virtue. The government will spend countercyclically because that is what is does, should do, and what it is politically popular for it to do. The economy will recover because the American economy always does and always will, whatever policy mix is thrown at it,”
Wow, the American economy is indestructable. No matter what policy mix is thrown at it?
What law of economics dictates that? Civilizations falter and fail. Why do they fail? Could it be possible that America could fail?
Hang on to your seat! The the road to recovery is going to be very long and the ride is going to be very bumpy.
They can't simultaneously sell us more exports than we buy from them, and not accept dollar financial claims from us as payment. If they want to eliminate their trade surplus and raise our savings rate, they are free to do so. Meanwhile, every treasury auction remains oversubscribed 2-4 fold at record low rates.
Capital goes where it is most welcome. Nobody can coercively direct it. If US companies offer double digits, then Brazilians or Indians go without, not us.
Capital is going to go where it is most welcome, among nations. At present, risk appetites are non-existent. Anyone think, say, Russia is a lower risk bet than say a GNMA, government guaranteed mortgage, or a state general obligation bond? The move toward safety and to wider and wider spreads tends to concentrate capital in the core of the developed world, and starve the periphery. It isn't going to starve the hardest currencies on the planet, or the safest asset classes.
Medium term, some of last years epic spread widening will reverse. But a lot slower than the doomster-commodity bettor types believe. If you want to track men who see clearly what is happening, listed to the likes of Zulaf or Gross. We will experience deflation for some time, and the economy will remain in recession for months, perhaps a year or more. It will then recover as usual, but financial markets may take longer to do so.
Men do not forget the level of losses experienced last year in a day. They will not wildly chase leveraged commodity bets like the oil bubble, again. Low short rates will not make them do so. Also, short rates are not low for nearly all actors, right now. Spreads are so wide that only the treasuries of the core industrial world, or assets they directly guarantee and underwrite, are low. (That includes consumer deposits etc, and therefore some financing of banks, to be sure).
Savings rates will rise. Desired levels of risk will fall and remain permanently lower for a decade or more. Spreads will stay wide for some time, though perhaps not last fall wide, as credit losses remain elevated for the period of the real economy contraction, or nearly so.
In that environment, it is foolish to expect huge gains in asset prices, let alone huge gains in average consumer prices or wages, and thus the broad price level. Much stimulus or narrow money creation will wind up simply repairing damaged balance sheets, retiring old debts, and padding savings rates to desired, sustainable levels. Wide spreads will meanwhile earn significant real returns to higher credit lenders, and will go on doing so, until all the losses on past loans are recovered, and risk appetites increase as a result. Right now, lenders think most loans are fraud by the borrower, or heads he wins and tails the lender loses, speculations on asset price changes that cannot be expected to pan out - not an opportunity for profit on their own end.
In that enviroment, lending to sound credits will be profitable - much more profitable in the long run and in real terms, than loans made at narrow spreads to the last deadbeat gaming the bubble, a few years ago.
The men instead predicting to you, endlessly, that the dollar must collapse and all of their favorite real asset classes must go to infinity against it, are simply the same speculators that lost their shirts in the last 18 months, singing the same tune, and hoping it eventually comes out right through sheer stubborness and repetition. But it won't. The diagnosis was wrong, it had an ideological not an empirical basis, and it has already been shown to be false, in spades, by events. They refuse to admit the error, that's all.
“Freedom on one, not us, and no, it won’t. And if you don’t get that, you aren’t a conservative or a patriot. And you are also hopelessly wrong about America, and America will never listen to you.”
Whoa, whoa, whoa, at ease Tex. Put down the artillery.
I love America, its heritage, its founders, the Constitution, freedom, those that have fought and died for my freedons, the Pacific coast, Atlantic coast, Rocky Mountains, Hoover Dam, Boy Scouts, Religion, little league baseball, Apple Pie, Conservatives, Thomas Sowell, rock and roll, God, family, the Great Plains, Alaska, Sarah Palin, some movies, Ronald Reagan, puppies, kitties, my job, relaxing around the fireplace on a cold Sabbath, hot chocolate, the interstate freeway system, factories, cars, guns, being out of debt, the deseret where no one is within 30 miles of you, low taxes etc, etc, etc.
I could go on and on if need be.
I try to raise my children so that they will love all the above. I want my great-grandchildren to be even more free than I am.
I do not particularly care for Europe, liberals, taxes, mass transit, bonks on the head, or sharp sticks in the eye, etc, etc, etc.
Now you know a little more about me and you still think I am not a conservative or a patriot so be it. My point is this: However blessed Amerca is doesn’t mean that it won’t or can’t fail ‘no matter what’.
I believe that America can fail if we as citizens:
1. Continue to live beyond our means,
2. Choose to be unfaithful to our spouses and families,
3. Willing to accept leaders that are not honest,
4. Expect the government to bail American companies,
5. Tear each other down for minor difference in opinion,
6. Cease to believe and serve God,
7. Send our children to 16 years of liberal education to be indoctrinated to become socialists without teaching them ourselves about the meaning and significance of freedom,
8. Never get out of debt, just keep refinancing so remove any equity we have built up in our homes.
9. Allow unlimited immigration to such as extend that the unique American culture based of the belief of freedom and liberty is undermined by a welfare society.
10, etc, etc, etc, etc.
JasonC: Each of these things are happening to one extend or another. If we as Americans continue to choose wrongly American will fail. It is not inevitable but it is possible. I think it is important to understand that so that we can work to maintain our freedoms.
Take it easy.
The post above was for you JasonC.
Take it easy.
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