This is my Sunday Washington Post column from last week:


Wall Street analysts and economists have this recession recovery wrong

By , Originally Published: July 15 | Updated: Saturday, July 16, 8:26 PM

The recession is well behind us now, and Wall Street seems to think this recovery should be all wrapped up.

Consider this: The federal non-farm jobs report for June was pretty awful. The private sector created 57,000 jobs. Federal, state and local governments cut 39,000 positions (the eighth straight monthly decrease in government employment). We picked up a mere 18,000 net new jobs.

Not a single forecaster in Bloomberg’s monthly survey of 85 Wall Street economists got it anywhere close to right. The most common reaction was “surprise.” That any professional can sincerely claim to be surprised by continued weakness — in employment, GDP or retail sales — was the only revelation.

Let’s put the number into context: In a nation of 307 million people with about 145 million workers, we have to gain about 150,000 new hires a month to maintain steady employment rates. So 18,000 new monthly jobs misses the mark by a wide margin.

Why have analysts and economists on Wall Street gotten this so wrong? In a word: context. Most are looking at the wrong data set, using the post-World War II recession recoveries as their frame of reference.

History suggests the correct frame of reference is not the usual contraction-expansion cycles, but rather credit-crisis collapse and recovery. These are not your run-of-the-mill recessions. They are far rarer, more protracted and much more painful.

Fortunately, a few economists have figured this out and provide some insight into what we should expect. Among the most prescient are professors Carmen M. Reinhart and Kenneth S. Rogoff. Back in January 2008 (!), they published a paper warning that the U.S. subprime mortgage debacle was turning into a full-blown credit crisis. Looking at five previous financial crises — Japan (1992), Finland (1991), Sweden (1991), Norway (1987) and Spain (1977) — the professors warned that we should expect a prolonged slump. These other crises had a number of surprisingly consistent elements:

First, asset market collapses were prolonged and deep. Real housing prices declined an average of 35 percent over six years, while equity prices collapsed an average of 55 percent. Those numbers were stunningly close to what occurred in the U.S. crisis of 2007-09.

Second, they’ve noted that the aftermaths of banking crises “are associated with profound declines in employment.” They found that following a crisis, the average increase in the unemployment rate was 7 percentage points over four years. U.S. unemployment climbed 6 percentage points (from about 4 percent to about 10 percent), while the broadest measure of joblessness gained over 7 percentage points (from about 9 percent to about 16 percent). Again, they were right on the money.

Third, the professors warned that “government debt tends to explode, rising an average of 86 percent.” Surprisingly, the primary cause is not the costs of bailing out the banking system, but the “inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged contractions.” They also warned that “ambitious countercyclical fiscal policies aimed at mitigating the downturn” also tend to be costly.

Hmmm, plummeting tax revenues just as the government tries to stimulate the economy . . . does any of this sound familiar? It should.

Note that the duo published its paper on this in early 2008 — months before Bear Stearns and Lehman collapsed, almost a year before the AIG-Bank of America-Citi-Merrill-Fannie bailouts happened. And at the time, the U.S. stock markets had barely moved off their all-time highs, set in October 2007. After the collapse, they turned their research into a book, “This Time Is Different: Eight Centuries of Financial Folly.”

Credit bubbles are different

Not only are credit crises different from other cycles, they also differ from other bubbles.

As Dan Gross explained in “Pop! Why Bubbles Are Great for the Economy,” the typical investing bubble leaves behind something of value. Whether it was thousands of miles of railroad tracks in the 19th century or thousands of miles of fiber-optic cables in the 1990s, usable infrastructure survives the bubble. Assets get scooped up out of bankruptcy for pennies on the dollar. Eventually, all of this overinvestment in the bubble du jour becomes a productive part of the economy. All that cable laid by Global Crossing and Metromedia Fiber and other bankrupt firms? Today, it is the bandwidth infrastructure that supports Google Maps, Netflix streaming video and Twitter.

Compare that with what gets left behind after a credit bubble bursts: No physical infrastructure, innovations or research breakthroughs; just soul-crushing, economy-sapping debt. And not just regular old balance-sheet obligations, but huge piles of counterproductive consumer and government liabilities.

Credit bubbles produce the exact opposite of productive resources. Deleveragers — those folks formerly known as consumers — spend the next decade paying down these obligations, rather than buying additional goods and services. And heavily indebted state and local governments are similarly thrifty, adding further pressure to the post-crisis economy.

Confusion about this is already taking a toll across the pond. The Irish, British and, soon, Greeks have bought into a misguided belief in austerity — that they can somehow cut their way to growth. In the United States, we have seen states and municipalities slashing head counts of teachers, cops and firemen. The “paradox of thrift” has morphed into a misguided economics of austerity. Hence, even when the private sector manages to create some jobs, its offset by public-sector job cuts.

Painted into a corner

In the not too distant past, the market might have been inclined to rally following a horrific data point such as June’s NFP report. The assumption was that the Fed, or perhaps Congress, would respond to economic distress with its usual largess. But the immediate market reaction — selling off on the “surprisingly” bad number, and then having difficulty all last week — suggests that traders are no longer expecting a cavalry charge to save the day.

Indeed, the Federal Reserve is in no position to do much more without great distress. Markets briefly rallied Wednesday when Fed chief Ben Bernanke suggested that a QE3 was possible. But soon after he finished his congressional testimony, Federal Reserve Bank of Dallas President (and FOMC voting member) Richard Fisher said the Fed had “exhausted our ammunition.” And Thursday, Bernanke scared markets further, saying the central bank wasn’t yet ready to take additional steps to boost the economy.

Markets gave up most of their rally on the recognition that the cavalry might not come this time.

Even with the Fed out of the picture, investors should not expect any relief from Congress: The legislative body in charge of taxing and spending seems incapable of accomplishing much these days. We are more likely to see counterproductive austerity measures than anything else.

Investors, it looks like you are on your own this time.


Ritholtz is chief executive of FusionIQ, a quantitative research firm. He runs a finance blog, the Big Picture.

Category: Apprenticed Investor, Economy, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

54 Responses to “Wall Street analysts and economists have this recession recovery wrong”

  1. MayorQuimby says:

    “counterproductive austerity”???

    As opposed to counter productive debt!!!

    Barry I know you’re not dumb enugh to belong to the free lunch crowd. So what gives?


    BR: Counter-cyclicality: Ideally, smart societies cut government spending and raise taxes during a period of prosperity; During a contraction, you cut taxes and increase spending.

  2. Petey Wheatstraw says:


    What debt? Define the value of a dollar, and then and only then can we talk about debt.

    You seem to be unable to think outside your rut.

    It’s a completely fiat currency. It IS a free lunch. Our problem is that we’ve delivered all of the free food to the gluttons at the top, and they will hold it until it rots sooner than share it with those tasked with producing it.


    The “recession,” by textbook definition, might be over (keeping in mind that the numbers do lie), but the reality is far different. Recession is not confined to investors or the stock market.

    A credit bubble that pops cannot be replaced, immediately, by another credit bubble, as the debt left over from the first bubble must be settled in order to inflate the next one (if continuity of the system is to be maintained). We haven’t begun to clean up the toxic mess left by our recent unchecked foray into fractional reserve/fiat currency/crony capitalism, much less have we dealt with the real and obvious structural problems that led to it.

    We are all chained together in this cattle car — the powerful and the weak together. When the powerful fools start pushing the weaker out the door, in order to make more room for themselves, get ready to taste gravel, because we’re all going to take the fall.

  3. MayorQuimby says:

    Petey I will sy this til were both old and gray.

    Fiat is backed by existing production and the pledge to produce. It therefore has more backing than any metal backed currency because human labor is the real wealth of the world.

    You are the one whose thinking is in a rut.

    Of course Bernanke and Greenspan and everyone else thinks money is something they control but as we’ve seen over the yers, they are incorrect which is why rates are at zero, debts are at records and our economy is grinding to a halt.

    Our debts are therefore denominated in our labor. We owe x amount of labor to the top. And cannot pay. So the top is accepting a lower return via dilution of the currency so instead of the currency backed by pure labor it is now being ‘cut’ the same way drug dealers cut their drugs.

  4. Petey Wheatstraw says:


    I don’t need an explanation of your comment. I only ask that you define the “value” of a dollar, in real terms. Fiat is backed by a pledge to produce what? The word “produce,” in a vacuum, means nothing, and that is precisely what we are on the hook for.

    What is the value of “x”?

    If you must insert an “x” value in order to make your monetary system workable, you don’t have a monetary system, you have a religion.

  5. tawm says:

    BR said: > “In the United States, we have seen states and municipalities slashing head counts of teachers, cops and firemen.”

    This is a function of politicians cutting where it hurts the populace the most, knowing that taxpayers will eventually cry Uncle and give in to renewed spending. It’s a fallacy to conclude that cutting expenses is “misguided economics of austerity.” Let’s distinguish between cutting wasteful, economically-unproductive government spending, and political shenanigans.

  6. MayorQuimby says:


    I’ve gone over this a bunch of times already.

    Dollars are created when a person requests a loan from the bank.

    In order to procure said loan, a person must post collateral which can be repo’d in case of a default on the loan. They must also pledge to produce something by working in the future.

    This is the very core of our entire monetary system.

    So….if I ‘borrow’ $10k for a car, both the car (past labor and tangible asset) AND my pledge to go to work and produce myself for 5 or 6 years back the creation of this new money.

    This keeps the expansion of credit secure and in such a scenario, deflation cannot really occur to any great extent for even if I were to default immediately, the bank would be able to sell the car and maintain it’s solvency!!!

    But if the loan is NOT backed and the credit is created backed by more credit or by the illusion of the ability to pay back the loan the we have a MAJOR problem for should a person default on a loan with no collateral backing it, the only thing the bank can do to maintain solvency is to sell OTHER assets and this is what happened with Lehman.

    So…as long as banks are fully capitalized and maintin very low leverage ratios, the economy is on ROCK SOLID footing. I such an economy, growth is limited to REAL PRODUCTION and asset price swings are mitigated. You don’t get these sugary highs and bubbles but you don’t get crashes either. It is boring in an old fashioned sense of the word in that hard work and savings are rewarded and socialism and central planning are pretty much eliminated until they can worm there way back into the room.

  7. socaljoe says:

    “The recession is well behind us now”… yes, if you believe government statistics. If, however, you were to adjust nominal GDP with the real rate of inflation, I’m not so sure there is any GDP growth… or has been for much of the last decade.

    Whether or not a bursting credit bubble leaves behind anything of value depends on what the debt was used for. If the debt was used to finance welfare, consumption, or fighting wars then there will be nothing left. If, however, the debt was used to finance investment in productive enterprise, then those assets would remain. If China’s credit bubble were to burst, for example, the cities, factories, and transportation infrastructure would still be there.

    Not all debt is bad… it depends on what it is used for… consumption or investment. Unfortunately, our debt bubble was used to finance warfare, welfare, and consumption.

  8. Petey Wheatstraw says:

    But what is the value of a dollar? What, specifically, have you “pledged” to produce?

    Our monetary system is expressly faith based (being “the full faith and credit of the US government”). What is it, in real terms, that we have pledged as collateral? Nothing. We have pledged nothing.

    You ask that I accept your analysis from inside the faith box. I won’t, because it requires intellectual dishonesty as a premise for making the rest of the argument work.

    You seem to think that we owe something to “the top” (your words). I say that we don’t. If anyone has gotten a “free lunch” it’s those at “the top.”

    Also, if debt is counter-productive, why do we allow it?

  9. mathman says:

    Though germane, this may be “moderated” (like so many of my other posts):


  10. willid3 says:

    always here about fiat currency. so i read an article about currency. seems like currency only has value if it is perceived as having value. but that is also true of fiat (currency backed by government) and currency backed by gold. and currency was created because it is and was difficult to trade goods/produce for goods and produce (some thing about problems in weights and measures. seems like one or both parties could and would fudge the measures. and did). todays dollar being backed by full faith and credit of government and fiat money is pledged to allow us to pay our taxes and private debts. , is created only by the government in reality, but you are correct in ways that banks (and wall street too) logically ‘printed’ money by using leverage (that 1 dollar to 40 dollar ratio is a lot of dollar creation isn’t it? and never mind the trillions is ‘dollars’ that wall street created in their ‘assets’). our problem today is the lack of demand (that credit bubble didn’t create much if any thing) but it did satiate demand, for maybe a long time, which leads to less production, and the finacialization of our economy (finance companies are to big for the economy that produces to little) .
    but while finance companies (and banks, etc) can sell the hard assets that secure the loan, without demand, they won’t be made whole as the assets won’t satisfy the note (leading to losses at the banks aka chargeoffs, and deficiencies for borrowers). so the banks aren’t made whole at all. by selling a security, unless the asset increases in value or at least equals the balance owed. in a deflationary time, the later almost never happens

  11. Permabear says:

    Barry absolutely nails it in this one. So many mainstream economists of both left and right are totally clueless about why our current economy remains such a mess. The politicians are also clueless throwing around their blame and shallow prescriptions. It all has to do with the amount of debt that remains in the system, which is a function of the credit bubble and bust we’ve experienced. Our current situation can’t be compared to any post WWII recession and recovery. It has to be compared to other credit busts. I think most notably about the Great Depression in the 30s and Japan in the 90s and beyond.

    Barry has posted this chart before of total credit market debt as a percentage of GDP. Until this number comes back down to historical norms, our economy will remain toast.


  12. Quim..,

    w/this.. “…Fiat is backed by existing production and the pledge to produce…”

    you may care to Wonder..

    that Supposition is Reliant upon a ‘Keystone’–that, of Faith/Trust..

    Fiat Currencies are the Ultimate example of ‘Faith-based Currencies(read: Exchange mechanisms)’.

    you should recall the ol’ Gag, from the Soviet-era, “They pretend to Pay us, We pretend to Work” ..

    also, you may care to Question your Belief in ‘Fractional-Reserve Banking’, in general, or, at the min., Who? should have that Power (?)..


    good Points~

  13. MayorQuimby says:

    Mark- incorrect. No faith is required at all. Because loans are backed by sellable assets there is full protection with each new loan made and therefore all new credit expansions are safe and secure.

  14. willid3 says:

    but while assets/securities can be sold, there is guarantee of any value coming from it, consider todays housing crunch, if the banks actually has done their paperwork correctly (which a lot of them didn’t) they can foreclose on the house. but that house maybe worth 1/10 or maybe 1/2 what they loaned against it. that means they have no protection, they have lost 1/2 or more of the mortgage, and money they loaned. is this happened a lot today? of course it is. the only time they were ‘safe’ was when houses were going up in value, which is not the case today, or in the next few years. or consider a loan for a car/truck. they can repossess the vehicle, but the value of it might not even pay for the repossession.
    just because there is an asset/security for the loan, does not ensure that the loan is protected in any way.
    and while we were thinking of fiat currencies, all currencies, even those backed with gold or silver, or actually backed by faith, as some one has to believe that there is gold or silver, and that some one else values that gold or silver. which has not always been the case. plus there is that measurement problem.

  15. willid3 says:

    there is no guarantee of value

  16. Dima says:

    MayorQuimby you lost me when you said we owe “x” to the top. Who is the top? This appears to be a basic cornerstone of all your thinking. What did the top do that merits that we owe them “x”? Did the top create money by typing debits and credits into a computer system; and now we are all indentured servants to them even though”the top” did not produce the assets being bought and sold?

    Also, no faith is required as all debt is backed by sellable assets? Really – are unsecured credit cards backed by sellable assets? Are student loans backed by sellable assets? If you consider “labor” to be a sellable asset then you statement would be correct – at which point we begin to move beyond indentured servitude and into slavery.

    I disagree with your basic premises.

  17. gstream says:


    Great article, concise, easy to read. I think the Washington Post is lucky to offer an article like this to its readers.

    In a future article might you offer a couple of your own suggestions to kickstart employment growth?

  18. jadogsl says:

    Article nails it.

    Could we have changed a thing ? No.
    The forces that where in place were similar to the forces in place in the 1920s. Why ? Because they worked…until they didn’t.
    That is .. the Reagan Revolution was effective because the world was opposite then… strong labor, high inflation, young boomers….. George W. went back to that well one last time with opposite results. Why ? Because the world had changed but the economists on the left and right never noticed. For them it is heresy to say that one type of policy could work at one time but not another.
    And the response after the 2008 crisis was the same as the 1930s. Because the choices were the same. Meltdown or Government help. Even Repubs capitulated to this fact. Now that the crisis ‘seems’ to be over the Repubs have moved back to the comfortable right. The coming result. A 1937/1938 type second dip.
    Times change, but human nature does not.

  19. zell says:

    Bernanke scares me!

    His whole professional life is on the line. Helicopter Ben will not miss any opportunity to goose the stock market and devalue currency.

    The investor class gets the payday. The working class gets inflation. The CPI should be based on a Maslovian heirarchy of needs, protecting those most vulnerable to inflation. The working class is suffering from a paradox of austerity – higher commondity prices, weaker job market, destruction of the housing value, an insane free trade policy, and an increasing sense of helplessness.

    As to our trade policies, how can a cell keeps its integrity with its membrane ruptured?

  20. Joe Friday says:

    Charlie Gasparino is drinking the Purple Kool-Aid.

    During his appearance on today’s ‘THIS WEEK‘ program, while Arianna Huffington was making the point that any “deal” in regards to the debt-ceiling will not solve any of our problems: “We will still have massive unemployment, we will still have kids graduating from college who will be unable to get jobs, and we will still have crumbling bridges…

    Gasparino chimed in, “It depends on how much they cut“.

    How the hell will cutting spending result in lower unemployment, college graduates being able to find jobs, and our infrastructure being rebuilt ?


  21. Joe Friday says:


    the Reagan Revolution was effective


    The “Reagan Revolution” was a dismal miserable disaster for the national economy and the American citizenry.

    All it was “effective” at was creating massive federal deficits & debt, increasing unemployment, reducing the Standard of Living of the vast overwhelming majority of working Americans, and increasing the inequality of both wealth and income in America.

  22. NewBob88 says:


    These are powerful words, but are they true: “what gets left behind after a credit bubble bursts: No physical infrastructure, innovations or research breakthroughs; just soul-crushing, economy-sapping debt.”

    During this credit bubble many roads and office building were built. People also bought innovated iPhones and technological products. Research breakthroughs continue to be reported everyday … in all field. New companies have been started and some are thriving. There are a lot more things available today to purchase and use then in 2002.

    We are much better off today with products like NetFlix, iPads, E-Mail, Blogs, Panera Bread, better cars with better gas mileage, improved diesel fuel, solar panels, etc. And now comes full bore … Cloud Computing. Are best days still lie ahead.

  23. MayorQuimby says:


    I said all loans SHOULD be backed by secured assets. That is certainly not the case today!

    As for the “top”…have you ever heard of a thing called capitalism? There are this who do the capitalizing. They are the top,

  24. MayorQuimby says:


    There is never a guarantee that a bank can find a buyer for an asset but if you understand that the asset is the money it will make sense.

    The point is that for every dollar there is a corresponding unit of a thing backing it so the money supply is constrained, the dollar is kept valuable and people are encouraged to work for these valuable dollars.

  25. GerhardWMagnus says:


    “the Reagan Revolution was effective”

    The Civil Rights Movement, the ascendency of 60s youth culture, and the Vietnam War left the Silent Majority — the American bourgeoisie — confused and uncertain; perhaps even questioning their own moral superiority. Imagine that! Ronald Reagan encouraged Nice White People feel good about themselves again. No wonder conservatives still cling to him so desperately.

  26. jadogsl says:

    like I said

    it is heresy to say that one type of policy could work at one time but not another.

  27. Joseph Martinez says:

    asset market collapses.
    declines in employment.
    government debt explodes.
    tax revenues decrease.
    business & consumers hold liquidity.
    government debt becomes unsustainable.
    austerity measures follow
    second recession occurs

  28. Joe Friday says:

    But it didn’t “work” then either.

  29. Petey Wheatstraw says:


    Posted an answer 3 times, but it doesn’t show up. If this one does, I’m stumped.

  30. Petey Wheatstraw says:

    Let’s see if i can weed out teh offending word/paragraph.

    One at a time. Here goes:

    But what is the value of a dollar? What, specifically, have you “pledged” to produce?

  31. Petey Wheatstraw says:

    Our monetary system is expressly faith based (being “the full faith and credit of the US government”). What is it, in real terms, that we have pledged as collateral? Nothing. We have pledged nothing.

  32. Petey Wheatstraw says:

    You ask that I accept your analysis from inside the faith box. I won’t, because it requires intellectual dishonesty as a premise for making the rest of the argument work.

  33. Petey Wheatstraw says:

    That wealth is created by bankers lending, or that every undefined/undefinable monetary unit holds anything beyond its inherent value (paper and ink), requires intellectual dishonesty as a premise for making the rest of the argument work.

  34. Petey Wheatstraw says:

    You seem to think that we owe something to “the top” (your words), or that they are somehow fountains of endless wealth that they came by naturally, or by some supernatural virtue. I say that we don’t, and they aren’t/haven’t. If anyone has gotten a “free lunch” it’s those at “the top.”

    Also, if debt is counter-productive, why do we allow it?

  35. paulie46 says:

    MayorQuimby said…

    “Dollars are created when a person requests a loan from the bank.”…

    This is wrong.

    When a person gets a loan from a bank he gets cash plus an equal offsetting liability – his net worth has not changed.

    The ONLY way to add NFA’s (Net Financial Assets) to the private economy is through DEFICIT spending (total government spending minus taxes).

  36. miamiocean says:

    MayorQuimby says: “It is boring in an old fashioned sense of the word in that hard work and savings are rewarded and socialism and central planning are pretty much eliminated until they can worm there way back into the room.”

    You mean like slavery is rewarded ? Assuming an exchange of equal worth between labor and cash is a very big assumption.

  37. Rick Caird says:


    I don’t think you are right. Because we have a fractional reserve banking system, when a bank makes a loan, the majority of that loan is newly created money. While the borrower, at least temporarily, has an equal debit and credit, the bank has an asset (the loan) for which it has only pledged a small portion of its liability (the reserve).

  38. skier5150 says:

    Re “Reaganomics was effective’: It was more than taxes, three big things were happening:
    1. The tax cuts were all borrowed, very Keyensian, but the big spending increase was mostly military, less productive than if put into the civilian economy,
    2. Oil peaked in 1980-81, it dropped in half over the next five years, due to high prices and efficiency rules passed by the Democrats under Carter,
    3 . Interest rates had also been raised to 21% prime rate, to break the inflation, and kept up after the inflation was broken, and not dropped until Mexico(?) was about to default. It dropped from 20% in July 1981 to 10.5% in July 1983. Sounds very high now but after years of 20%, hello Real Estate!

    Hard to say how much of which gunned the economy, but it certainly wasn’t just the tax cuts. Oil prices and interest rates were strangling us, and once relieved, normal growth resumed. Cutting gas in half and a 10% change in interest rates would do us wonders. Hmm, not really sure how to do the second…

  39. Petey Wheatstraw says:


    Interesting comment.

    Doesn’t the person taking the loan also discount his future wealth by paying interest (assuming inflation is nil, and incomes are flat)? Isn’t the liability greater than the loan simply because there is interest being paid?

    Also, the bank is fractionally capitalized in the first place. New debt, itself, creates a vacuum in the money supply that can either be filled by new, devalued units (supply/demand), or is lent with the expectation of default by the borrower (something the banks now know they can get away with, so what’s stopping them?).

    We could print and distribute (distribution being where we already F’d up and gave the treasury away), dollar-for-dollar our entire debt, both public and private, and settle all accounts tomorrow. It would upset TPTB, and the global apple cart, but that will happen anyway. There is no way we can settle our debt with anything less than severely devalued dollars.

  40. paulie46 says:

    @ Rick Caird…

    It’s all newly-created money, (that’s another discussion) but it is simply loaned to the private sector and no net change in financial assets is created. It only increases the private sector available credit.

    The bank technically has a liability to the Fed but in practice reserves are never decreased as far as I know.

    Reserves do not add NFA’s to the private sector. Reserves increase the amount of available credit but all loans made from the reserves are offset by by a liability equal to the loan.

  41. paulie46 says:

    @ Petey Wheatstraw…

    “Doesn’t the person taking the loan also discount his future wealth by paying interest…?”

    The interest paid must come from the existing stock of money in the economy. Money that was created previously by the Fed.

    That’s the bargain the borrower made with the bank. The use of their cash to have now something the borrower must pay for with future earnings.

    The question is, where does the money come from that allows the private sector’s balance sheet to grow (profit), i.e. an increase in net worth.

    The economy as a whole is a closed system. It cannot grow from within. It requires an endogenous source of money to grow.

    Increasing bank reserves increases the available (potential) flow of money but the money stock is unchanged.

  42. Greg0658 says:

    I’m going to side with Rick Caird on money supply growth due to the old 1:10 reserve system .. and that 9/10ths growth is future labor .. minus the inflation baked into the system

    Petey posts “person taking the loan also discount his future wealth by paying interest” .. we’ve seen inflation reduce that in periods past …. but/and the increase of money supply should flow around and float more boats .. I said should .. but if the money traps in milking schemes (interest rates of 600% as in check into cash) .. sure the money goes into someones pocket somewhere – but thats your bubble blowing up

    paulie “closed system. It cannot grow from within” .. think about that 1:10 rule again

  43. RW says:

    miamiocean pins Quimby’s “old fashioned” logic correctly. It is the viciously circular logic of Puritan and slave master alike: You are where where you are and I am where I am because each of us earned it and this is self evident because we would not be where we are if this were not so.

  44. paulie46 says:


    “think about that 1:10 rule again”

    That other 90% of the loan (all of it actually) comes from outside the economy – the Fed is endogenous to the economy – it creates money out of thin air by marking up private bank accounts.

    Just saying – where does the money that ends up in private bank accounts come from?

    Plus reserves only increase credit – any money created in a private bank account through reserve banking comes with an offsetting liability. ∆NFA=0.

    How do you propose to increase money in private bank accounts? Not cash, I’m talking about net worth.

    It is a simple accounting transaction.

  45. jadogsl says:

    Re: Reagonomics

    The reason Reagonomics worked for Reagan and not W. Bush is that it was Supply Side economics.

    When there are too many $s chasing too few goods ( inflation ) to ‘supply’ more production is a plus.
    When there are too many goods chasing too few $s ( disinflation,deflation ) Supply side doesn’t work…..we do not ‘need’ to supply more production.

    and vice versa for the Keynesians….

    If economists and politicians can ever wrap there brains around this… the secular behavior of markets can be less desctructive.

  46. jadogsl says:

    It also means that the if the Tea Party guys get what they want ( more Supply Side ) it’s disaster.

  47. Joe Friday says:


    1. The tax cuts were all borrowed, very Keyensian


    Tax cuts have never been stimulative and not Keynesian.

    Hard to say how much of which gunned the economy, but it certainly wasn’t just the tax cuts.

    The economy was NOT “gunned”. GDP declined for nine quarters AFTER the tax cuts for the Rich & Corporate were enacted.

  48. Joe Friday says:


    The reason Reagonomics worked for Reagan

    It didn’t.

    Failed supply-side economics has NEVER “worked”.

  49. Petey Wheatstraw says:

    Joe Friday is on the case, tonight.

    “The story you are about to witness is true . . .”

    I remember super high interest rates under Reagan. Very tight money. Volker had been running the Fed for a while (after Nixon’s wage/price freezes, and Ford’s WIN! (Whip Inflation Now!), campaign. Maybe I misremember.

  50. paulie46 says:


    Exogenous not Endogenous.

  51. FrViper says:

    So what’s wrong with deleveraging? Short term the credit driven jobs will be reduced. Demand will slow, therefore, product prices will go down, meaning less inflation and more ability to buy what is truly required. Personal responsibility should grow as ‘wealth’ are assets that are owned not borrowed. The economy would reflect true productivity, not ‘bubbles’.

    Now as to ‘jobs’, will true necessity drive initiative to generate income or will our 47% be like the East Germans who still don’t understand employment without the State? It should be up to our schools and employers’ training programs (remember apprenticeships?). The younger generations cry of ‘I want it all and I want it now” needs to change to saving, garage sales, and enjoying what you have been able to generate. The younger generation needs to become the ‘learning’ generation, not the ‘I know it all”. We’ve made mistakes, but that’s life’s process of growing up.

    OK, so I’m older and learned/saved a few things, but I’m concerned about our Nation and where it’s people are headed. Greece is not an option! I intend our grandchildren are well educated both in academics and life. God bless our Nation and it’s people! Roy Sjoberg

  52. willid3 says:

    FrViper, deleveraging will lead to deflation, which will not lead to much more than less activity. and lots fewer jobs. when a credit bubble bursts, like now, we get nothing. and it wasn’t personal irresponsibility that got us here. its was corporate and their lackeys in government (who after will hire a lobbyist for finance companies to regulate them???????).
    jobs are coming back, as demand isn’t (partly because folks are worried about their jobs, and have come to the realization that their incomes without credit aren’t enough to do more than subsist).
    todays generation makes less than people did back in the 80s, and in a lot of cases back to the 70s.
    but prople today have no patience, that much is true, so if the economy collapses, what makes any one think they will want capitalism again? didn’t it just fail, big time. and back after the great depression, there was good chance back then that it wasn’t going to come back. people were really angry . take away the social support that we had added over the objections of some and expect that they will be just really happy to put a fork into capitalism and declare it dead. since they got no benefit from it, why should they support it any more?
    and we haven’t had much truly new inventions in a while, since just about every thing we depend on today, is really nothing more than out growth of some thing from the 1940s, 1960s, or before that even.\
    the biggest threat we have (other than stupidity from politicians) is that income inequity will lead to unrest, as the bottom 90% get really angry, as they see less and less benefit from the economy, they will wonder why they want to keep it

  53. Greg0658 says:

    FrViper I’m not sure the kids in this open information system world we created, wish to serve capital anymore .. maybe we need a new carrot and stick .. na – give it time – the human animal will come thru for ya .. after all is said & done – if you believe, all will be forgiven – and if not – its instinct isn’t it … whatever

  54. victor says:

    BR: Great article, I forwarded it to my friends. I always wondered why voices such as yours are not resonating in Washington, this is a superb analysis but who’s listening in DC? How do you get to the policy makers? I know, it’s politics and my question is naive. Oh, well.