Understatement of the Year: “Recovery Hampered by Unemployment”
This has to be the understatement of the year: Fed Officials Say Recovery Will Be Hampered by Unemployment.
Here’s the money quote:
“Certainly, there are scenarios in which the unemployment rate might still be at a frustratingly high level and might not have moved much, in which still the overall conditions in the economy would justify beginning to tighten.”
-Dennis Lockhart, Atlanta Fed President.
To put that into some context:
“The U.S. economy will be slow to recover from the deepest recession since the 1930s as rising unemployment curbs consumer spending, Federal Reserve officials said.
San Francisco Fed Bank President Janet Yellen raised the prospect of a “jobless recovery” in a speech in Phoenix, while Dennis Lockhart, who heads the Atlanta Fed, predicted a “relatively subdued pace of growth” this quarter and beyond.
The comments yesterday are among the first on the economic outlook since the Fed signaled last week that a return to growth alone won’t be enough to change its policy of keeping interest rates near zero for “an extended period.” Instead, the central bank said any change would depend on increases in employment and inflation.”
The Fed obviously has no idea what comes next . . .
>
Source:
Fed Officials Say Recovery Will Be Hampered by Unemployment
Steve Matthews and Vivien Lou Chen
Bloomberg, Nov. 11 2009
http://www.bloomberg.com/apps/news?pid=20601087&sid=avesmJ.KupaM&pos=5
Tweet
Facebook
Reddit
Digg this!
November 11th, 2009 at 10:17 am
We don’t need jobs. Everyone should just buy GS stock and let it ride to infinity.
November 11th, 2009 at 10:23 am
Ask three people an open-ended question and you get three different answers.
November 11th, 2009 at 10:33 am
The Fed’s top priority remains protecting the financial system. Inflation helps both financials and a deeply indebted government. The Fed won’t raise rates until inflation becomes a political issue. It’s not about the economy right now, it’s still about fear of financial system failure.
November 11th, 2009 at 10:36 am
It is amazing that they still think that unemployment is the main thing that holds back consumer spending. I guess that is why they always end up surprised. They live in this Washington office world where the future is always just a dead-brained repeat of patterns from the past. When changes occur in the real world that will prevent a repeat of the past – they totally miss it. Don’t they understand that for a lot of consumers, credit is not available, and many of those that can get credit don’t want it. The comparison is more 1932 than 1982 and probably more a mix of the two. Those who survive the royal f•cking by credit card companies (taking place right now) will not easily forget or go back to their old financial lifestyles. And although that will be good for them, it will be bad for the consumer driven economy.
November 11th, 2009 at 10:38 am
Of course they know what’s coming next, and have known for along time they just don’t want to deliver the bad news until it’s already obvious to everyone.
November 11th, 2009 at 10:50 am
“The Fed obviously has no idea what comes next . . .”
the Fed is playing for any inflation- even high inflation-
protect asset values at all costs-
credit deflation will counter that-
10+ years of complete stagnation on the horizon
November 11th, 2009 at 10:51 am
http://finance.yahoo.com/news/World-Bank-warns-unemployment-apf-838983808.html?x=0&sec=topStories&pos=4&asset=&ccode=
November 11th, 2009 at 10:53 am
A good chart of a lagging indicator:
http://img.dailymail.co.uk/i/pix/2008/01_01/shark0201_800x542.jpg
November 11th, 2009 at 10:59 am
A recovery without evidence: Reminds me of dot-com EBITDA/proforma/sticky-eyeballs & biotech Price/Sales metrics.
We need some street sweeps to remove evidence of the jobless, perhaps a 5-year plan is called for?
November 11th, 2009 at 11:01 am
Are unemployment payments indexed to inflation?
November 11th, 2009 at 11:04 am
On a different note:
Looks like the S&P500 is (at least temporarily) having trouble staying above 1100. Is this just a temporary pause or the beginning of something more sinister…
HCF
November 11th, 2009 at 11:10 am
The 1,100 target has been widely espoused for a while now, so I’m not surprised that we bounced off it again. Many are likely calling it a year and converting to cash at this point.
November 11th, 2009 at 11:13 am
NYT has interesting article on Fed Battle w/Congress:
——————–
Under Attack, Fed Chief Studies Politics
by Edmund L. Andrews
Mr. Paul’s bill would require the Government Accountability Office, an arm of the Congress, to complete a wide-ranging assessment of the Fed’s financial operations by the end of 2010. The audit would delve into bailouts of individual firms, short-term loans to banks, currency swaps with foreign central banks and the Fed’s effort to prop up mortgage lending by purchasing $1.25 trillion in mortgage-related securities.
Mr. Bernanke initially reacted to the bill in almost apocalyptic terms. The G.A.O. audits, he told a House hearing in late June, could lead to a Congressional “takeover” of monetary policy that would be “highly destructive to the stability of the financial system, the dollar and our national economic situation.”
That did not go over well with many lawmakers, who were competing to describe the Fed in dark and conspiratorial tones.
Senator Jim DeMint, a conservative Republican from South Carolina, denounced the Fed on the Senate floor in July as an “unelected central bank” that enjoyed a “monopoly over the flow of our money” and operated in “almost complete secrecy.”
Senator Bernie Sanders, a left-leaning independent from Vermont who sponsored a Senate version of Mr. Paul’s bill, attacked the Fed for being beholden mainly to Wall Street.
“People are frightened,” Mr. Sanders said. “How do you explain to them that the Fed has spent $2 trillion to help many of the same banks that got us into this crisis in the first place?”
http://finance.yahoo.com/banking-budgeting/article/108133/under-attack-fed-chief-studies-politics?sec=topStories&pos=5&asset=&ccode=
November 11th, 2009 at 11:15 am
The Fed obviously has no idea what comes next . . .
If I did, I would be looking for one of those $15 billion Paulson type investment opportunities, after which I would probably turn into an arrogant prick and bitch about higher taxes.
November 11th, 2009 at 11:17 am
And if you also want to listen to another fool about unemployment please go to CNBC Steve Liesman sunny analysis. Just precious
http://www.cnbc.com/id/33829595
November 11th, 2009 at 11:18 am
http://www.bloomberg.com/apps/news?pid=20601039&sid=aUuHhaDx8Hr8
‘Jobs Created or Saved’ Is White House Fantasy: Caroline Baum
When the government distributes lucre or loot, people spend it. If your interest is national income accounting, spending other people’s money is great. Spending is a back-door way for government statisticians to measure what matters, which is the real output of goods and services.
But the government has no money of its own to spend; only what it borrows or confiscates from us via taxation. Oops.
“Government job creation is an oxymoron,” said Bill Dunkelberg, chief economist at the National Federation of Independent Business. It is only by depriving the private sector of funds that government can hire or subsidize hiring.
That’s why “jobs created or saved” is such pure fiction. It ignores what’s unseen, as our old friend Frederic Bastiat explained so eloquently 160 years ago in an essay.
November 11th, 2009 at 11:21 am
I wish the fed would stop using the term “growth”, financial expansion would be more appropriate.
When I think of growth, I usually picture something positive, like private enterprise-non corporate job creating entities.
OT
To my peeps at the 02/004 and their illustrious predecessors.
http://www.globalsecurity.org/wmd/world/france/luxeuil.htm
http://www.century-of-flight.net/Aviation%20history/airplane%20at%20war/Lafayette%20Escadrille.htm
http://www.youtube.com/watch?v=iadhHK0i5EU
November 11th, 2009 at 11:26 am
@Mannwich:
I agree with your assessment…. For me, I’m trying to think what the catalyst is to really drive the market higher. Perhaps even MORE money printing? Because the “real” economy (economy of common folk minus all the B.S. stimulus) sure as hell isn’t in great shape. For now, I’m happy to be mostly in cash with a hedge investment position. Perhaps, to paraphrase Buffet, the tide goes out again soon and we see a lot fo naked people…
HCF
November 11th, 2009 at 11:30 am
It is quite typical after a crisis for politicians to want to take control of independent bodies such as the Federal Reserve. But seriously think about this. Do you want the Federal Reserve to be controlled by politicians who take their cues from lobbyists and wealthy investment bankers? It would ba an absolute disaster in the Federal Reserve were to lose its independence.
Yes, Greenspan screwed up with his excessively libertarian views on market self-correction, and yes he became too powerful and too influential. In spite of this, there must be ways to better monitor the actions of the Federal Reserve than to place it under the auspices of political animals.
Full and open transparency comes to mind as one of the ways. Had we known about the deals made for Long Term Capital Trust, for Investment Banks off balance sheet products, for AIG bail outs, the public just might ensure the Federal Reserve does not get out of hand.
But if one is a “brilliant” member of the elite class, one knows best what the masses need even if it isn’t what the masses want………..
November 11th, 2009 at 11:31 am
Bad typos day – meant to say -
It would be an absolute disaster if the Federal Reserve were to lose its independence.
November 11th, 2009 at 11:31 am
BTW:
Fed charter is
1) stable interest rates (failed)
2) stable employment (failed)
3) stable currency (failed)
Oh, and the business cycles sure have been smoothed out since the creation of the Fed in 1913. Exhibit A, B: Depressions I, and II. Has any good come of this for US citizens (banks are another story).
Private sector soln. would be Fed fails. Ron Paul is right. Abolish the Fed. No checks and balances. No accountability. No useful purpose served (anti-useful).
November 11th, 2009 at 11:33 am
@sharkbait: You forgot “oversee the banking system” (failed).
November 11th, 2009 at 11:41 am
@Mannwich
Got you in GS @180. Do you want to put a stop on that?
November 11th, 2009 at 11:44 am
@Daffy: Didn’t do it. Can’t bring myself to go there. I’ll be honest though – I have given it some thought, which means we’re getting much closer to a top of some sort.
November 11th, 2009 at 11:45 am
@bsneath:
>Yes, Greenspan screwed up with his excessively libertarian views on market self-correction, and yes he became too powerful and too influential.
I have some issue with calling Greespan’s views “libertarian.” Greenspan’s actions during his tenure as Federal Reserve chief point to him as being a corporatist above all. Libertarians would not flood the market with cheap money and debase the currency. A libertarian would have allowed LTCM to fail, perhaps taking Lehman Brothers down with it 10 years earlier (and saving us all this additional trouble)… A libertarian allows for free markets, does not bail anyone out, allows for failure, has few rules, but VIGOROUSLY ENFORCES those few rules. Greenspan proved himself to be the anti-libertarian…
HCF
November 11th, 2009 at 11:48 am
@bsneath:
I do have to agree with you that Fed independence is important, though here is my order of preference:
BEST: Eliminate Fed completely
Next Best: Fully independent, but transparent Fed
Bad: Current system
Worst: The Fed is Congress’ bitch…
Unfortunately, other than Ron Paul’s movements to audit and eliminate the Fed, all the other proposals (i.e. Dodd’s) seem to be the “Worst” situation listed above…
HCF
November 11th, 2009 at 11:48 am
@HCF: Hence the fact there are no real libertarians in government (outside of maybe Ron Paul, who I don’t think has any “real” power) that have real power. Libertarianism dies once those accumulate real power because it is human nature to want to hang onto and increase that power once you get it, and by any means.
November 11th, 2009 at 11:49 am
“Instead, the central bank said any change would depend on increases in employment and inflation.”
Both are numbers that the USG manipulates then calculates. Unemployment is higher as is inflation. And for those of you crying about how the Fed will lose its independence if it gets audited, give me a break. It lost that a long time ago.
@ Manny
No, unemployment benefits are not indexed to inflation.
November 11th, 2009 at 11:52 am
@Pat G: Why is that not surprising?
November 11th, 2009 at 11:52 am
@Mannwich
Tough market. Good luck.
November 11th, 2009 at 12:05 pm
MW: Yes, and they (Fed) want more control here. Feckless Alan Greenspan called “the “Maestro” ? Translates to “the master”. Good call. I wonder what Ben will be remembered as – other than “B-52 Ben”, of course? Keynesian economics claims that public sector (i.e.: gov’t/ CB’s) intervention in private sector economies is needed. Well, looks like time for a new theory, right along with EMH, and MPT.
November 11th, 2009 at 12:19 pm
“The Fed’s top priority remains protecting the financial system.”
That is only true to a limited degree. The ‘financial system’ does not mean the same thing to the Fed that it means to the average person; Fed governors are quite explicit about this. The financial system is a small club; it includes a very limited number of institutions.
November 11th, 2009 at 12:24 pm
HCF Says: I have some issue with calling Greespan’s views “libertarian.”
Understood.
Greenspan was sort of a “social engineering” libertarian. Libertarian in the sense that he believed in small and unobtrusive government, but a social engineer from the standpoint that I think he took great pride in 1) engineering the end of the “business cycle”, 2) bringing unemployment down to a level that many economists thought was not possible and 3) encouraging bank lending to increase home ownership. (I also believe he is responsible for the changes at BLS resulting in understated inflation. His agenda being to help “fix” the social security program deficit by slowly reducing real dollar payouts.)
I think today he may have a better understanding of the pit falls when tinkering with the free market.
November 11th, 2009 at 12:44 pm
@bsneath:
Great points! I am convinced that Greenspan became too enamored with his own “brilliance” and tinkering.
@Mannwich:
Good points about real libertarianism and power… The best hope we have is to elect people who could disassemble much of the Federal government quickly, before they are seduced by the power. Unfortunately, I doubt that will happen, since there aren’t enough honest people out there who are interested in politics. Plus, no one would vote for them anyways… “What? No free stuff from government? I’ll vote for the other guy…”
HCF
November 11th, 2009 at 12:47 pm
@HCF: It also seems antithetical for a true “libertarian” to want to be IN government, does it not? Remember, once human beings get a taste of power (and wealth), they almost always want more, not less, or at least to retain that power (and wealth) at all costs.
November 11th, 2009 at 12:50 pm
You mean we’ve painted ourselves into a corner with no good options? Hmmm, who woulda thunk it?
You mean we aren’t going to get out of this era of gross irresponsibility and greed without a huge dose of pain, one way or another? Hey, that’s not what they told us! I’m going to get Krugman’s opinion, I bet he tells me we can keep spending til the cows come home or else we’re toast. He’ll keep my easy money coming. Yeah, that’s it.
November 11th, 2009 at 1:07 pm
Between Greenspan becoming entranced by the power he had to tinker with the economy (think of the Sorcerer’s Apprentice here) and the banking industry manipulating his socially inept self (think of the in crowd, athletic club cadre using the geek for their ends by flattering him), it was a recipe for disaster for the economy at large, but a bonanza for the financial sector.
More to it of course. American exceptionalism, post WWII era dominance that we came to think of as entitlement, heaping helpings of denial and greed, etc.
November 11th, 2009 at 1:15 pm
@Mannwich:
That’s why Ron Paul surprises me so much. A seemingly ethical, rational person, with a real profession who wanted to be a congressman in order to defend the Constitution. It’s too bad there aren’t more people like him. Power is indeed an opiate that many people can’t handle once they get a taste…
HCF
November 11th, 2009 at 1:25 pm
“Keynesian economics claims that public sector (i.e.: gov’t/ CB’s) intervention in private sector economies is needed. Well, looks like time for a new theory”
Why? It actually worked. We were facing another great depression and the public sector intervention turned that into a softer landing with only a great ressesion. That is a heck of a lot more success a “doing what you are predicting” than any other economic theories have ever had. The issue is not that the theory doesn’t work but that no theory can get you painlessly out of the kind of hole we got into from decaded of trickle down stupidity. Keynesian approaches may have cut the pain in half, but its only the spoiled brad American spirit that will say buh-huh that’s not enough I want a free lunch. There is no way out of this without a lot of pain, the issue is who is going to take that pain and when.
November 11th, 2009 at 1:28 pm
HCF
Indeed, Ron Paul is a very uncommon man. I don’t know how he does it, really. Imagine being up on The Hill among all those other unscrupulous, disingenuous clowns and thieves. It would drive most people of his ilk crazy, and most would lose it. But he just keeps on going, telling it like he sees it, taking all the sneering, dismissive, sometimes patronizing crap in stride. He is to be admired, IMO.
November 11th, 2009 at 1:29 pm
@DeDude: Define “works”. Sure, maybe it’s delayed the inevitable for a bit, we can’t say for sure that it “works”. What do you mean by that?
November 11th, 2009 at 1:38 pm
It works as in the nosedive has been stopped and stabilized. As in when you take a number like U3 or GDP and look at where they would be today if the nosedive had followed the same pattern as in the great depression then things are a lot better than if we had let everything follow their “natural” course.
November 11th, 2009 at 1:41 pm
@DeDude: Like I said it’s temporarily “stabilized” things and trying to get us back to the status quo or worse with all of the debt still out there (and more on the public side, socializing the losses), but that’s all it’s done. Nobody knows if this is/was a solid long term solution. My guess is that it’s creating a bigger problem down the road. Kicking the can.
November 11th, 2009 at 1:51 pm
@DeDude:
Remember the formula for GDP:
GDP = private consumption + gross investment + government spending + (exports − imports)
Right now, GDP = government spending, since everything else is negative or close to zero… Where does the government get this? From you and me in the form of taxes, and from China/Japan/Russia/Middle East, etc. in the form of borrowing. Things have “stabilized” for now, but at the expense of borrowing from the future. Did your parents ever teach you the concept that “money doesn’t grow on trees” or “there is no free lunch”?
I absolutely agree that U3 and GDP appear better now than they “would have” without massive intervention or stimulus. However, I argue that that is not the right way to look at it. If U3 spiked to 15% and quickly receded (or GDP goes very negative and bounces back), it’s a much better situation than 10% U3 for a long time or perennially low growth. If you’re a math geek, think about unemployment or GDP in terms of integration of a function over time. With all the stimulus, we are trading deep, but likely short situation, for a shallower hell that is dragged out for a long time.
Once you are drunk or high as a kite, coming off it is painful, but necessary. The only short cut is to get drunk/high again. That’s what we are trying to do, as opposed to really solving the problem…
HCF
November 11th, 2009 at 1:57 pm
To add to Mannwich’s point:
Only 3 things can happen with debt:
1) Paid off
2) Defaulted on
3) Written down
During this whole crisis, rather than force risk-taking companies (such as PIMCO) to take write-downs (scenario 3) on private debt (Fannie/Freddie, etc.), we’ve moved the debt to taxpayer backed, Uncle Sam debt. Scenario 1 (pay off) for debt sure as hell isn’t going to happen, so that leave #2 as the likely scenario. The question is, HOW do we default on the debt? I believe the “easiest” one to do is the one we see right now: debase the currency. It’s the financial equivalent of slowly boiling a frog in a pot of cold water. Unfortunately, we are the frog…
HCF
November 11th, 2009 at 1:57 pm
bsneath Says:
November 11th, 2009 at 11:30 am
It is quite typical after a crisis for politicians to want to take control of independent bodies such as the Federal Reserve. But seriously think about this. Do you want the Federal Reserve to be controlled by politicians who take their cues from lobbyists and wealthy investment bankers? It would be an absolute disaster if the Federal Reserve were to lose its independence.
@bsneath: I think you missed a point. The Fed is a private company owned by the banks. It is controlled by wealthy investment bankers and is not independent.
November 11th, 2009 at 2:06 pm
The notion that the Fed is somehow “independent” might be the biggest farce (of many) going right now.
November 11th, 2009 at 2:14 pm
To me when Barry says “the FED has no idea what comes next…” seems to imply Barry does. Well its fairly blimmen obvious. By a process of elimination we can see that no jobs recovery leads to no growth which leads to a stock market correction which feeds back into a weaker economy which leads to further decline.
Why will jobs not recover? because of balance sheet repair. Spare money pays down debt. What happens to the money used to pay down Debt? Banks lend it to the government. Will interest rates rise? Maybe not if the American people buy government bonds with their savings and the government keeps spending money so that they can.
November 11th, 2009 at 2:32 pm
Mannwich; Some of this is kicking the can down the road and yes the debt has to be payed back at some point in time. That is why we have to get past this idiotic idea that somehow taxes cannot be raised on the rich. With all the bubbles being blown in gold and commodities and stocks it is clear that the rich have more money than what can be productively used in the economy (instead it is being destructively used in speculation). Lets eventually do what should have been done in 2002 to prevent this problem in the first place: tax the rich and solve two problems at once, reduce the public debt and the destructive speculative bubbles.
However, the current economic problem is not too much debt but to fast a debt destruction. The total private+corporate+public debt is being reduced, from what I have seen. The transfer of debt from the private to the public sector is a political problem, the economy dosn’t care what bucket the debt is in only the total. Personally I don’t care if government has to take private debt from the TBTF to prevent a finaincial meltdown, as long as they make sure we own those losers 100% and that the incompetent management is fired.
November 11th, 2009 at 2:58 pm
HCF; Lets be a little more serious. Private consumption is still by far the greatest part of the GDP (near 70%). Furthermore, a similar overwhelming part of our nations debt is provided from within our own country. And those are not opinions, but facts.
Because the overwhelming factor in GDP is consumption, the economy is always about the consumer class and their health. What the government is doing right now is to support the consumer class by providing them with survival money (unemployment benefits) and jobs (part of the stimulus package). So yes the government part of the GDP has increased a little, but mostly to go straight back into support of the consumption part of the economy. Some people think it is terrible when a bigger chunk of the economy is government spending. But for me there is no problem with letting a slightly smaller part of the economy be spending on big, ugly, polluting, terrorist supporting, SUV’s and instead spend a little more on safe highways and bridges, or making sure sick people can get a decent humane treatment.
“If U3 spiked to 15% and quickly receded (or GDP goes very negative and bounces back), it’s a much better situation than 10% U3 for a long time or perennially low growth”
This is where you are completely separating from any reality that has ever been observed in the real world. It doesn’t work this way that the faster you go down the faster you get right back up to where you were. Look at the length of the great depression and the length of the last serious ressesion (and the small ones), the deeper the hole you fall into the longer it takes to get back out. Unemployed people do not start spending when U3 gets to 15% in a way they did not when U3 was just 10%. It’s exactly opposite. It’s actually a negative spiral where the higher the unemployment the less private consumption (and investment in new factories, etc.), the more factories close and the more unemployment etc. etc. Without any intervention it can sink all the way back to a primitive agraian economy where all people do is building their own houses and growing their own food. And last time we where there it took us about 200 years to grow up to where we are now. Why would it take less than 100 if we tried to repeat?
November 11th, 2009 at 3:14 pm
Patiently waiting. If SPX can manage through 1100 by 3:30, It’ll run quickly. Doesn’t seem to want to get there though. If not, I’ll initiate a new position in SDS. Finger on the trigger, patiently waiting.
November 11th, 2009 at 3:42 pm
The current total US debt of about 350% of GDP is as uncomfortable for the country as a total debt of 350K would be for a household making 100K/year. Uncomfortable, but far from a disaster. The strongest argument for paying it down is not that it will throw us into the abyss, but that it is immoral to pass your expenses to the next generation.
The biggest threat to the recovery and our economy is not stimulus, but politicians doing the right thing at the wrong time and pace. It may happen exactly as in the 30‘ies. We get scared of the debt and pull government spending back to fast and to early. We may mess up like Volker did with the 1980-83 ressesion doing the right thing to fast, and create a nasty and even longer second dip. If the republicans get one more senate seat next year it is almost guaranteed to happen. Even if they were smart enough to understand what they were doing, it would still be in their best self interest to kill the economic recovery so they could beat Obama in 2012.
November 11th, 2009 at 3:45 pm
@DeDude:
When an economic downturn happens, companies cut back, often TOO MUCH. When they realize this, they begin to ramp up production again. Similarly, consumers pull back spending, also often by TOO MUCH. Eventually, though, people need to buy stuff, if for no other reason, to replace old stuff: cars, houses, etc.
Government intervention into this process almost always results in a misallocation of resources, which leads to a longer recovery time. If you doubt this, then exhibit A is Japan, a nation that was by far the most Keynesian in its response to an economic crisis.
The problem with using the Great Depression as an example of “why we need Keynesianism” is that government intervention helped blow the bubble of the 20′s and to exacerbate the depression of the 30′s. For Keynesianism to truly work, you’d have to have actual counter-cyclical policies to STIMULATE during weak times, and SUPPRESS during bad times. There is no political will to possibly ever implement this… It is easier to remove Federal governments from this part of the economy and have it only as a referee, to enforce rules and crack down on fraud.
HCF
November 11th, 2009 at 3:46 pm
typo: I meant to say “SUPPRESS during good times” in the above post…
HCF
November 11th, 2009 at 3:49 pm
Run Harry run. You and a zillion other people are waiting for that magic break of the 1100 before you bail. In the mean time the big boyz are bailing at 1095 selling as much as they can to those euphoric sheeple and getting out before you ;-)
November 11th, 2009 at 4:13 pm
HCF; The time that companies are realizing that they have cut back to much is when the consumer comes back into money, not when unemployment is 10% heading for 15% heading for?. The production cuts are always to late and that is why initially inventories build as the economy falls. The companies then draw a straight line and predict continuosly falling at the current pace. So when the consumers start stabilizing (as in when government has given stimulus to stabilize the consumer class), those straight line predictions start to undershoot realities – and suddenly the companies run out of inventory. People do not begin bying stuff when they have no job and get kicked out of their houses and the old car breaks down. Because they have no money to buy it with and they cannot get any sane person or bank to loan them the money. And that is a fact. In a consumer driven economy, there is not natural stops to the downward spiral until you are way down and have lost decades of economic growth – that is why government has to intervene when the market forces fail and begin to unwind the economy. Anything else is a huge and unnessesary waste of wealth (and potential wealth).
No Japan was not very Keynesian in its response. They used huge amounts of money to save banks, not to build infrastructure. Furthermore, they had an economy where the export part of the equation was huge and all the money they pumped into the banking sector was used for carry-trade not for business loan to build exporting factories. Their basic situation, problems, and approach were considerably different from ours, and their response was far from Keynesian (massive government stimulus). But we can learn from them that you should not just hand over free money to the banks without conditions on how they are allowed to use that money.
November 11th, 2009 at 4:27 pm
@DeDude:
> They used huge amounts of money to save banks, not to build infrastructure.
The Japanese didn’t spend a lot on infrastructure? Clearly, your news sources are different from mine:
http://www.nytimes.com/2009/02/06/world/asia/06japan.html
Some salient quotes:
“During those nearly two decades, Japan accumulated the largest public debt in the developed world — totaling 180 percent of its $5.5 trillion economy — while failing to generate a convincing recovery.”
“In total, Japan spent $6.3 trillion on construction-related public investment between 1991 and September of last year, according to the Cabinet Office. The spending peaked in 1995 and remained high until the early 2000s, when it was cut amid growing concerns about ballooning budget deficits.”
HCF
November 11th, 2009 at 5:09 pm
If they were going to fix problems in their export driven economy by replacing their export growth with domestic consumption they would have to put a lot more money into a Keynesian approach than that. But their problems were not really a collapse of consumption in a consumer driven economy. So Keynesian approaches were not that effective to begin with. They had taken the unsustainable approach of growing their economy by export and just like our growth by consumer credit in the past decade, that can only work for a limited period before it kills itself. Their other major problem was demographic with an aging population. That problem again is not solvable by Keynesian approaches. However, what the Keynesian approach did, was to keep the level of suffering for the population at a much lower level. The people that are crying about the lost decades in Japan are the investor class. Regular people are doing just fine.
November 11th, 2009 at 5:25 pm
Japans problem was that they listened to those idiots in Chicago. If they had taxed the rich to pay for the government spending they would have been fine. Their problem is that they do not have a consumer culture, they have a huge population of older people with a saver culture. They cannot really get growth in private consumption to surplant the lack of growth in exports, until all those old folks are dead. So they have to grow on increased government consumption for some time. The economy does not care if the consumption is private endulgence on getting bigger houses and luxury cars etc. or it is better infrastructure, education, energy distribution systems etc. It all creates GDP growth equally well. It is only the selfindulgent American for whom it is a catastrophe if economic growth is used on fighting pollution, helping poor people or creating a nice park – instead of on giving him another stupid useless toy to parade in front of his brother in law.
November 11th, 2009 at 9:18 pm
@DeDude Says:
November 11th, 2009 at 5:25 pm
Japans problem was that they listened to those idiots in Chicago. If they had taxed the rich to pay for the government spending they would have been fine. Their problem is that they do not have a consumer culture, they have a huge population of older people with a saver culture.
—————
Interesting comment about Japan. Thanks… because your view is interesting compared to what others ae saying out there about Japan’s “Big Problem.’