Tag Archives: fiscal policy

Updating the recession watch; & what might the government do to fight a slowdown?

Summary: The economic data continues to darken. Let’s review the situation — updating the recession watch — and guessing what might be the government’s response to a recession. It’s an era of new normals, so we should expect steps that would have been considered incredible or even mad a decade or two ago.  {1st of 2 posts today.}

“Toto, I’ve a feeling we’re not in Kansas any more. We must be over the rainbow!”
— Dorothy in “The Wizard of Oz”.

Economy

Contents

  1. The bad news
  2. Worse news
  3. The weak data
  4. What comes next?
  5. For More Information
  6. Perhaps a better world lies ahead

(1)  The bad news

The graph below gives an ugly forecast. But let’s keep this in context, especially now that the doomsters have discovered it. The value of the Atlanta Fed’s GDPnow forecast is its immediacy. They explain that it’s no more accurate than forecasts by economists or other models. Which is to say it’s a best guess made with limited information. Also, the Fed remains hopeful that Q1 is an aberration, so that 2015 has growth of 2.3% – 2.7%.

20150317 GDPnow forecast

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2015 might bring an end to the great age of experts’ experiments on us

Summary: Beam us down to Earth on 31 December 2015. What will we find? My guess is that the massive experiments now underway by experts will have borne fruit, and we’ll know if they were sweet or poisoned. Interesting times lie ahead, and none can say how they will end.

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Crystal Ball

Contents

  1. The age of experts’ experiments on us
  2. Warnings of Climate Change
  3. Economics: monetary and fiscal magic
  4. For More Information

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Photo from the Star Trek episode “Miri” – The landing party arrives in response to a distress call. Experts on the planet have run a massive experiment to produce a better world. Looks like it didn’t end well.

TOS: "Miri" - Landing Party

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(1)  The age of experts’ experiments on us
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The 21st century has seen some of the largest experiments ever by experts, different from the often-mad amateur experiments that shaped so much of human history (e.g., the French and Russian revolutions, the Fascist social “engineers” in the 1930s, the 1970s Khmer Rouge in Cambodia). Some have run to completion, such as the US military’s expeditions to Iraq and Afghanistan — using the techniques of COIN to defeat local insurgents and build new western-style nations (quite mad given the history of almost total failure since WWII by foreign armies fighting insurgents). Other and larger experiments continue running. Let’s look at two of the biggest.

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Understanding the new world shown us by Larry Summers

Summary: A weakness of my posts is that they don’t adequately convey the wonders of our time, the extraordinary events, the uncertainty of future outcomes.  Today I attempt to show the amazing nature of our new economy, as highlighted in last weeks’ speech by Larry Summers. We have entered a new world, for ill or better.

"Machinery of the Stars" by alexiuss

“Machinery of the Stars” by alexiuss posted at DeviantArt.

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Olivier Blanchard is Director of Research at the IMF and a Professor of Economics at MIT. He goes to the heart of our situation in this title: “Monetary Policy Will Never Be the Same“, 19 November 2013 — “In short,  monetary policy will never be the same after the crisis.  The {IMF Economic Forum} helped us understand how it had moved, and where we have to focus our research and policy efforts in the future.”

We should listen to Blanchard. The response of the major nations to the crisis took us into a new world. Step by step monetary policies have grown bigger and stronger (in several dimensions), beyond anything previously seen in peacetime There are few signs of the world returning to normal soon.

But Blanchard’s statement is true in another way. Larry Summers’ speech opens a new perspective on our situation. The conventional view of the US is an economy in an unusually long but very slow expansion, responding to intense fiscal and monetary stimulus. Summers instead suggests that the US has fallen into the same hole as Japan did in 1989. Perhaps the entire developed world has.

More specifically, we might be in a world of secular stagnation. That the real return on capital might have dropped to zero — or gone negative. As Japan has shown, in this hole even low levels of real interest rates fail to spur investment. Monetary stimulus only blows bubbles. This condition can continue for years, until the real return on capital returns to more normal levels.

The standard Keynesian solution is — as I and so many others have advocated for so long — fiscal stimulus. Borrow at low rates to rebuild our decaying infrastructure, and do other things with a positive return to society. This helps to return the economy more quickly to a good equilibrium. It would channel the excess liquidity created by monetary stimulus into the real world, instead of boosting asset prices.

The obvious solution remains unlikely due to dysfunctional political systems in the US and Europe (it’s being used in Japan, but a corrupt political establishment is in effect burning the money).

Conclusion

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Four graphs showing a nation in decline. An unnecessary and easily fixed decline.

Summary:  We mock China for their over investment in infrastructure. Gleaming new factories, high-speed trains, subways. Foolish ants. Exceptional America does it better. As a third in this series, we look at some pictures of how much America invests in itself.  These are snapshots, not a comprehensive assessment. Still, they tell a chilling story.  We can fix this; it takes only our wisdom and will to do so.  Probably new leaders, too.

“In a field one summer’s day a Grasshopper hopped about, chirping and singing. An Ant passed by, bearing along with great toil an ear of corn he was taking to the nest. …”

Contents

  1. Corporate profitability
  2. Business Investment
  3. Government Investment
  4. Government investment in infrastructure
  5. For More information

These graphs show totals as a per cent of GDP.  All of the investment graphs show declines.
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(1)  Corporate Profits After Tax (without IVA and CC Adjustments)

The growth and level of US corporate profits are exceptional.  What did the CEOs’ cut to produce these profits? Among other things, wages and investment. It’s the sort of short-term thinking that has come to characterize American business. It produces a lavish bloom of profits, but long-term decay for America.

% GDP: Corporate profits

% GDP: Corporate profits

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(2)  Net domestic investment by domestic businesses

This does not include overseas investment by US businesses.

% GDP: Net domestic business investment

% GDP: Net domestic business investment

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(3)  Net domestic investment by Government

A nation works only as well as its public infrastructure.   Let’s hope elves come to fix ours tonight.

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Different answers to your questions about the momentous Fed decision to delay tapering

Summary: We have now had a 24 hour avalanche of analysis about the Fed’s decision not to taper. Most technically accurate, as economic news often is. But myopic, as news coverage usually is. Today’s post gives a wider perspective on this decision, putting it in the content of the Great Recession and the following slow recovery. This gives a different set of answers.

This is a follow-up to yesterday’s post, Government economic stimulus is powerful medicine. Just as heroin was once used as a powerful medicine.

“I have absolutely no doubt that when the time comes for us to reduce the size of the balance sheet that we will find that a whole lot easier than we did when expanding it.”
— Meryvn King (Governor of the Bank of England), press conference on 15 February 2012

Never underestimate the Fed’s dovishness“, Gavyn Davies , Financial Times, 18 September 2013

Fed Taper sign

Contents

  1. Why did they not taper?
  2. When did monetary stimulus become super?
  3. When will they start the taper?
  4. For More Information

(1)  Why did they not taper?

  • Minor Answer #1: Because they feared that today the economy was too weak, and believe that the strength in Q3 and Q4 will allow a slow start to tapering.
  • Minor Answer #2: Because they were afraid that the coming DC budget follies would slow the economy, and wanted to delay the taper’s impact until that act was concluded.

Real Answer #1:  Because America is dysfunctional

Because the GOP opposed using fiscal policy, borrowing at generational-low rates to put unemployed people to work rebuilding America’s decaying infrastructure.Because Obama was too weak and short-sighted to fight for large-scale use of fiscal policy. His acquiescence to the GOP on this destroyed the great potential of his Administration, elected (like FDR) at a potentially pivotal moment in history.

Real answer #2: Because economists (like climate scientists) have become political activists

Since monetary policy was the only game available, they talked it up as the next best thing to Jesus return.  In fact it probably has had little effect on the real world, but appears to have set off an asset price bubble (our third in the past 15 years, a record of incompetence).

Real answer #3:  Because their policies assumed we would have a strong recovery by 2013, not the below-stall speed growth we got

The Fed staff publishes their forecasts, the basis on which the Open Market Committee takes action. The recovery has proven far less vibrant then they planned. By 2013 the economy they expected a boom, with GDP growth the fastest since 2000. Now they expect a strong second half to bring GDP up to 2.0% – 2.3% (slightly above the 2% stall speed). Does this graph build your confidence?

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Government economic stimulus is powerful medicine. Just as heroin was once used as a powerful medicine.

Summary: Today America passed an important fork in the road, an easy exit from the massive monetary stimulus running since the crash. If the economy continues its slow growth (well below the 2% stall speed) today might have been the last opportunity for an easy exit. Today also demonstrated the madness that infects us, as investors cheered the Fed’s bad news about the economy’s slower than expected growth — and bid up asset prices. This post attempts to provide a harsh but accurate perspective on our situation.

See the follow-up post: Different answers to your questions about the momentous Fed decision to delay tapering.

“Damn the torpedoes! Full speed ahead.”

— Paraphrase of Admiral Farragut’s orders at Mobile Bay (1864). A great naval leader; he would have made a terrifyingly bad Central Banker

Money Giveaway

Let’s do it every day!

Contents

  1. How did we get here
  2. It was easy. It’s always easy to get hooked
  3. About government stimulus programs
  4. About the winners
  5. Why end the fun?
  6. Pictures of the US money supply
  7. For More Information

(1) How did we get here?

The Fed balance sheet has grown from $800 billion before the crash to $3.6 trillion today, now under QE3 increasing at $85 billion per month. While necessary during the recession, this has a side effect, one found in a few other powerful medicines. We have become addicted. I (and many others) warned about this (the original brief version of this post was Dec 2009). Now we’re hooked. Unless we act soon (later this year?) probably much pain lies ahead.

See this excerpt from “Financial Heroin”, Don Coxe, Coxe Advisors, 16 December 2009:

… my father was a doctor in the Canadian Army in WWII, and served in the Italian campaign. He became greatly respected for his anaesthesia and pain management under battlefield surgery and rehabilitation conditions. He was cited after war’s end for perhaps having performed more anaesthetics under such conditions than any other Canadian doctor.

In discussing his experiences, he told me that he swiftly learned that the best — and frequently the only — reliable drug for the critically wounded was heroin. Soldiers who writhed in agony under other medications almost always responded to heroin. The problem wasn’t deciding whether to administer it: if morphine didn’t work fast, you didn’t waste time, you injected heroin.

The problem for the doctor came when the patient had begun to recover from surgery, and was receiving heroin. How quickly could the dosage be reduced and when would it be terminated? Although few soldiers were freed of heroin without experiencing pain and distress, it was necessary to take the drug away as rapidly as possible. Otherwise they would become addicts and their lives would be ruined — for soldiering and everything else.

… Zero interest rates are Financial Heroin.

This goes to the vital points, mostly misunderstood, about the massive fiscal and monetary stimulus governments have applied in response to this global recession. Government stimulus has several characteristics similar to heroin.

  1. It mitigates the downturn, minimizing the suffering,
  2. but it does nothing to fix the underlying problems,
  3. and it creates imbalances which must be removed when the economy recovers.

It’s medicine. Powerful when used correctly. But like all sharp tools it cuts both ways. Confusing first aid (emergency medicine) with long-term treatment can produce serious errors.

(2) It was easy. It’s always easy to get hooked

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The US economy is slowing. Things might get exciting if this continues.

Summary: In an this time of almost unprecedented economic intervention by governments — experiments on a scale never before attempted during peacetime — determining the state of the economy is difficult. Determining the near future of the economic is almost impossible. Determining the distant future requires psychic powers. Today we continue our series of looking at the data and guessing about the future.

“It’s hard to make predictions, especially about the future.”
— Aphorism, origin unknown

Economics

Contents

  1. Accurate economic forecasting is difficult.
  2. The recovery takes a nap
  3. What happens if the US slides into a recession?
  4. Look at the big four indicators
  5. What is a recession?
  6. Other posts in this series
  7. For More Information

(1) Accurate economic forecasting is difficult

“The worst is behind us. … And what did the worst do to us? Slowed growth to 0.5% in one quarter. Boo frickin hoo.”
— M Simon of the Classical Values website, mocking my warnings about the economy. Said on 27 August 2008, just as the economy was about to go off a cliff

The US economy is large, complex, and rapidly changing. Economic theory is immature. Our economic data collection agencies are grossly underfunded. The combination makes accurate forecasts almost impossible, especially detecting inflection points. Even economists find it difficult, proven by the record shown by surveys of economists. The best known are the Blue Chip Financial Forecasts and the Wall Street Journal’s Economic Forecasting Survey (available to non-subscribers here). Neither has ever forecast a recession.

(2) The recovery takes a nap

The US economy has been growing at 2% – 2.5% since 2010, with slow periods met by government action (fiscal or monetary stimulus). The last two quarters were slow growth: real GDP grew 0.4% in Q4 and 1.8% in Q1. Q2 looks to be another slow quarter. The consensus was +2% before the June data started to come in; now estimates are dropping fast (updated July 19):

We use the finest forecasting tools

  • Credit Suisse: +1.1%
  • JP Morgan: +1.0%
  • Bank of America -Merrill: 0.9%
  • Goldman: +0.8%
  • Macroeconomic Advisers: 0.6%
  • Barclays and Royal Bank Scotland: +0.5%
  • Morgan Stanley: 0.3%

We are in trouble if the theory about a “stall speed” is correct — that slowing below roughly 2% increases the odds of a recession. On the other hand, forecasts for second half and 2014 GDP are not being cut, so the gap between first half and second half GDP is widening fast — reflecting confidence about the transient effects of higher taxes, the sequester, higher oil prices, and higher interest rates. Also confidence that consumer spending and business investment will accelerate in the second half of 2013. And, above all, confidence about the wealth effects supposedly created by QE3 (more on this on another day).

In May there were many forecasts for 4% GDP growth in 2015. Now the consensus forecast is 3.0%. Hopes for a boom have dimmed, or been pushed into the future.

(3) What happens if the US slides into a recession?

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