Why has the worst recession since the 1930′s had such a mild effect on America?

One of the oddities of this recession is the widespread opposition to government actions mitigating its effects.  Doing almost nothing (except tax cuts) has almost become the official policy of the Republican Party, and libertarian sites such as the Instapundit frequently run articles mocking the government’s stimulus programs.

A related conundrum is the stability of spending by US households during a severe recession — despite falling employment (graph and graph), a collapse in hours worked (graph), stagnant wages (now negative YoY for the first time in 50 years; article).  And rising savings (graph)!  How is this possible?  As one economist notes:

In a research note, Carson says job losses in prior downturns have been roughly proportional to the decline in gross domestic product. But in the current recession, the proportion of jobs lost is running about a third greater than the drop in real GDP. (source)

The answer is government aid:  the automatic stabilizers and the stimulus programs.  The government enacted these programs faster than in previous recessions and on a larger scale.  They have buffered the longest and by most measures deepest recession since the 1930’s  (vividly shown by this graph).  Without these measures by now we might have rioting in the streets demanding more government action — instead of “tea parties” protesting high taxes.  (see comment #3 for more about this)

This is sad, people protesting the government actions that mitigate what would otherwise be a horrific downturn.  That does not mean the stimulus was well-designed (it was childishly poorly done), or that the accompanying theft was good (bailing out fat cats in the financial sector).

Looking ahead:  almost anything can happen in the next year.  There are no strong historical precedents for our situation, and we are beyond the limits of conventional economic theory.  We might have a strong recovery, or a dramatic collapse — or anything in between.

Even if we get the expected recovery later this year, unemployment will continue to stagnate through 2010.  If we get only a brief bounce — or don’t even get a bounce — I expect conditions to deteriorate.  Rapidly and severely.  Those tea parties will disappear, as people demand fast, large government action.   Wise or not, that’s what will happen.  Unfortunately, after years of feckless borrowing it will be difficult for the government to meet these expectations.  I’ll discuss that scenario on another day.

(1)  Automatic stabilizers

This graph show the number of people receiving unemployment insurance as a percent of US population.  It’s from Chris Puplava at Financial Sense.


There are several programs paying unemployment claims.  Unemployment insurance pays 26 weeks; now paying 6.0 million people NSA.  During recessions there are other programs enacted, such as the Emergency Unemployment Compensation — now 33 weeks, paying 2.5 million people NSA.   (There are other programs, now paying aprox 400 thousand people but not included in these numbers:  Federal Employees, Newly Discharged Veterans, the Railroad Retirement Board, and Extended Benefits).

The total number now receiving benefits is aprox half again higher than the peak of the horrific 1980-82 recession (3.1% of pop, vs. 1982 peak of 2%). Yet today’s unemployment rate is 14% less (now 9.5% vs. 1982 peak of 11%).

There are many reasons for this, but probably the major one is the longer eligibility for benefits.  Today’s unemployed can receive up to 79 weeks (varying by State and eligibility).  The maximum was 65 weeks in the 1975-78 downturn, and 55 in 1982-1985.  Also supporting household income:  now unemployment benefits automatically qualify families for food stamps.

(2)  The government stimulus

This is well-known, and so needs little explanation.  As an illustration, see this analysis from the government’s most recent Personal Income report (26 June 2009):

Real disposable personal income (DPI) increased 1.6% in May, compared with an increase of 1.2% in April. The May change in DPI was boosted as a result of provisions of the American Recovery and Reinvestment Act of 2009. Provisions of the Act reduced personal current taxes and increased government social benefit payments. Excluding these special factors, which are discussed more fully below, DPI increased $20.6 billion, or 0.2% , in May, following an increase of $101.3 billion, or 0.9%, in April.

For more information

  1. Short-Term Responses to the Recession: The Extension of Unemployment Insurance Benefits“, Congressional Budget Office, February 1991
  2. The Economic Recession of 2007-2009: A Comparative Perspective on Its Duration and the Severity of Its Labor Market Impacts“, Andrew Sum, Ishwar Khatiwada, and Joseph McLaughlin (Center for Labor Market Studies, Northeastern U), April 2009
  3. An Update on State Budget Cuts“, Nicholas Johnson, Phil Oliff, and Jeremy Koulish, Center on  Budget and Policy Priorities, 29 June 2009 — “At Least 39 States Have Imposed Cuts That Hurt Vulnerable Residents; Federal Economic Recovery Funds and State Tax Increases Are Reducing the Harm”
  4. Correcting Five Myths About the Stimulus Bill“, James R. Horney, Nicholas Johnson, and Lawrence J. Haas, Center on  Budget and Policy Priorities, 10 July 2009

For more information from the FM site

To read other articles about these things, see the FM reference page on the right side menu bar.  Of esp interest are:

Some of the posts on this site about solutions:

  1. A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
  2. How should we respond to the crisis?, 24 September 2008
  3. A solution to our financial crisis, 25 September 2008
  4. The last opportunity for effective action before disaster strikes, 3 October 2008 — How to stabilize the financial system.
  5. Effective treatment for this crisis will come with “The Master Settlement of 2009″, 5 October 2008
  6. Dr. Bush, stabilize the economy – stat!, 7 October 2008
  7. The new President will need new solutions for the economic crisis, 9 October 2008
  8. The G-7 meeting was the last chance for action before the global recession, 12 October 2008
  9. New recommendations to solve our financial crisis (and I admit that I was wrong), 23 October 2008
  10. A look ahead to the end of this financial crisis, 30 October 2008
  11. Everything you need to know about government stimulus programs (read this – it’s about your money), 30 January 2009
  12. Bush’s bailout plan is now Obama’s. His quiet eloquence guides the sheep into the pen, 30 March 2009


67 thoughts on “Why has the worst recession since the 1930′s had such a mild effect on America?”

  1. The depression didn’t have a huge horrific effect on America immediately either. It was more than a year before some parts of the nation even noticed black Friday; if you weren’t a huge investor or businessman it didn’t touch you for a while. Economies have a lot of momentum, they take time to really take effect. People have savings, businesses have some resources they can dip into, you can still get loans and keep going a while. The depression we know and saw took a year or more to really start to impact peoples’ lives in most areas, it started out awful for some (see Michigan today, for example), but it hit everyone but the most rich and the federal government, eventually.

    Get back to us this time next year and tell us how light the effect on America is.
    Fabius Maximus replies: Nice of you to agree with me (assuming you read the post). If we do not get a recovery in the 2nd half of 2009.

    “Get back to us this time next year and tell us how light the effect on America is”

    OK, I was wrong. You obviously did not read the post.

  2. “Maintaining aggregate demand during a downturn is the key point, not “inspiring investors to invest.” I’m sure Secretary Geithner whispers that in the President’s ear every day. And he will keep whispering it, until unemployment hits 13%.
    Fabius Maximus replies: This makes no sense, either as economics or political criticism.

  3. Ohio Scrivener

    Government spending right now may be cushioning the fall, but we are still falling. Our leaders have no willpower to pay for that spending with higher taxes and offer instead fantasies about how raising the marginal rate on the evil “rich” can somehow bridge the gap. Since we won’t pay for government spending with taxes, we will likely pay for it with inflation. Before this over, the dollar will be devalued, inflation will explode, the private sector will be crowded out by public borrowing, and interest rates will skyrocket.

    The stimulus bill is only going to make things worse. The bill was a pork laden disaster that looked like a 30 year wish-list of political payoffs. Had the “stimulus” bill focused on infrastructure you could at least argue that we would get some long term benefit for the economy (think the interstate highway system under Eisenhower). But not this stimulus bill. Not only did it do little for infrastructure it spread the spending out over several years making it a complete mismatch for its intended purpose. Much of the stimulus spending wont kick in until inflation becomes the real risk, and at that point, the stimulus will be counterproductive.

    Finally, protests are not going to disappear should the economy further collapse. If people are angry at 9.5% unemployment, they are going to livid at 12.5%. Add some inflation to the mix, and government borrowing will stop looking like a free lunch.
    Fabius Maximus replies: First, the data suggests that the economy is stable at this time, broadly speaking — not “still falling.” Second, the point of automatic stabilizers is not to pay for them with higher taxes — which negates their value. Hoover proved that; Japan provided more proof during the 1990’s. Third, your economic forecasts are absurdly overconfident (I doubt you have such a fine record, looking at what you said 5 or 10 years ago). Nobody can reliably make such predictions.

    “protests are not going to disappear should the economy further collapse.”

    Agreed. But I suspect that their character will reverse. Instead of protesting higher taxes on the rich, they’ll demand benefits or protections for the average America — and government action to stabilize the economy.

  4. Isn’t it something of an oversimplification to call this a “recession” (or even a “depression”)? I think we have an unprecedented combination of bad circumstances. I realize that financial speculation (and over-leveraging) led to the stock market collapse of 1929, and this was not unrelated to the depression that followed. However, it seems to me that our “recession” is more a by-product of the bursting of a much larger investment bubble than the stock market alone. The entire network of finances on which our economy—funded as it is by both consumer and corporate credit lines— depends is in danger of collapse.

    The fact that Goldman & Sachs have just reported a huge profit does not reassure me one bit. It just means that our financiers are pretending that nothing has happened, and have not learned a thing—they are still taking in each other’s laundry. The killing blow will come when certain other countries that hold large amounts of U.S. government and private securities decide that holding dollars is a bad idea. I think the only thing that has stopped them is that nobody has thought of an acceptable alternative…yet.
    Fabius Maximus replies: It is not a depression (at least, not yet), by any of the standard definitions (the is no agree-upon def). It is a recession. All labels are oversimplifications; that’s what makes them labels — and useful.

    Yes, lots of folks blow smoke about the “central bankers destroy the world” fantasy. Just as in the 1980’s folks blew smoke about Reagan or the Ruskies blowing the world away for some crazy reason or another. Possible, but unlikely. Central bankers are among the world’s most cautious, reactive, incrementalist creatures. They’ll probably be the last to move, not the first.

  5. First, do you distinguish between the government “bailing out fat cats” and the government acting as liquidity provider of last resort? My impression is that many people, including many in the tea party crowd, do not make the distinction. Nor do they understand that provision of liquidity may not cost taxpayers in the longer run. I have read that the Great Depression could have been reduced to a nasty recession if the government had acted quickly to provide large amounts of liquidity to lenders, which is not the same thing as bailing out fat cats. Second, I question the logic of Keynesian intervention beyond the liquidity issue. The administration has claimed on numerous occasions that we need more government spending to “create jobs” and “grow the economy”. If that actually worked, why not do it all the time? If that worked, doesn’t it logically follow that our unemployment rate would always be zero and our economy would always be growing?
    Fabius Maximus replies: There is a theoretical difference, but not in the manner actually done. The cost of bailing out the banks was large in several dimensions. Providing a free put option, adding to the already massive moral hazard, and the cost. Which, despite your assurance, will be large if there is no recovery in the next few quarters. Nationalization and resale (as with the S&L’s) would have avoided most of these costs.

    I suggest reading a basic economic textbook to answer your questions. In brief, Keynes (and almost everyone since) recommended deficit spending during downturns — paid back during booms. Like so many other simple public policies, this has proved too difficult for our feckless elites to properly execute. But there is no alternative during a downturn.

  6. FM: “Why not put your theory into action? Go to you local unemployment office, put down a soapbox, and preach your theory of “cure through pain” economics! … Government spending is a palliative, mitigating the downturn and reducing the inevitable suffering. Do you refuse painkillers during surgery?

    Don’t oversimplify what I’m saying. Spreading pain out over time can have its place. But delaying the inevitable (trying to reinflate a bubble) isn’t kind-hearted. It is just wimping out of hard choices and making this worse in the long-run.

    So maybe the analogy you should use is this: you need to break up with someone b/c you realize you don’t want to get married. Instead of causing a lot of pain in the near-term you delay the inevitable for 10 years. So instead of months of being upset and then getting back into the game, you wasted your significant other’s youth & prime dating years because you didn’t want to hurt her feelings. Does that seem more compassionate to you? It isn’t. Sometimes the hard thing to do is the best thing to do.

    But we also have unemployment & a safety net (actually we have much more than a safety net) to mitigate the effects of the hard things we allow from economic activity. Why? We know over the long-term this allows for greater progress.
    Fabius Maximus replies: I did not oversimplify, but rather showed the implications of what you said. The rest of your post has no relation to what I said in this post. For example, nothing I said remotely advocated “trying to reinflate a bubble.”

  7. Tatterdemalian

    FM: “While I agree with your first sentence, to what Bush policies do you refer? The Obama measures are broadly similar to those of Bush, esp in their focus on bailing out the banks.

    They are quite similar to Bush’s, but like the difference between a President who serves the public and a President served BY the public, the devil is in the details. Both Bush’s and Obama’s bailouts were geared toward banks, but Bush attached a requirement that the banks re-examine their lending policies and make changes to programs that were losing money. No specific changes were recommended, but the banks in general started to reject sub-prime mortgage applications and other high-risk investments, a move the media described as “hoarding the bailout money.” (NY Times)

    The Obama “stimulus” specifically requires that the banks continue the same high-risk lending patterns that led to the crisis, a move backed by Democratic senators like Chris Dodd (D-Conn) but one that led to a brief furor when it turned out the language also protected bonuses paid to AIG executives. Supposedly this would stimulate the economy, rather than flushing more money down the toilet and assuming that the fact that it disappears means that it’s making the plumbing work better, and so will eventually come back.

    I’m no expert, but it doesn’t seem like this will work by any means short of imposing a centrally planned economy backed by military force, not unlike the “progressive” programs implemented by Josef Stalin.
    Fabius Maximus replies: You’re kidding, right? Giving credit to Bush for stopping subprime mtg lending is absurd. You might as well give him credit for Spring. As for your last paragraphs, do you have any evidence for this?

  8. Re: rioting — See what happened to Milosevich in Yugoslavia. As long as about 12 cronies of his, to whom he had delivered the major pieces of the economy, were making money, NATO, EU, USA, couldn’t do anything to remove him, in spite of armed invasion. Once the bombs started trashing their ‘properties’, Milosevich was out in under a month.

    The unemployed are precursor elements of massive upheaval. The riots start when the depreciating assets are mobilized to attack the state. So, essentially, it is a race to the bottom: s) State must preserve ‘fat cats’/ b) fat cats will refrain from opposing the state as long as (see a.)
    Fabius Maximus replies: That forecast seems possible, but unlikely in magnitude and overstated in its certainty.

  9. It’s like we’ve lost number 1 and 2 engines on our twin engine jet. The crew is trying to restart. The pilot is using some of the battery and hydraulic stored energy to power the stabilizers, else bags start leaving the overheads and hitting the passengers.
    The question is, what else should the captain be doing next?

    Not helpful:
    1. Noting that the flame out was not his fault.
    2. Using more precious stored energy than justified to run the stabilizers. (Admittedly a judgment call).

    More productive:
    1. Shutting down non essential piloting tasks; route planning, chatting up the passengers, personal needs, etc.
    2. Inform the crew (and very carefully, passengers) that restarting engines is the absolute top priority.
    3. Begin planning what to do if the engines won’t restart.

    IMO at this juncture, passenger comfort is still on the priority list, but it’s dropping down as the failure to restart engines grows ever more serious.

  10. FM: “Then you must not have read it well. Government action — mostly extended benefits — have mitigated the downturn in consumption (and more broadly, GDP).

    Maybe so, but at what cost to the future? Much like the out of work couple paying the bills on credit cards, only less wise. With the theft and foolish spending accompanying whatever useful actions are taking place, it’s more like the out-of-work couple paying the bills on a high interest second mortgage (variable rate, too… which the national debt is, if I understand things correctly) while not looking all that hard for work, digging a swimming pool, buying gifts for their friends, and throwing parties every Saturday. The easy living during those hard times will be looked back upon with sorrow once the bills come due.
    Fabius Maximus replies: This is absurd. As I said above, the cost of extended benefits (and food stamps) is pocket change to the government and US economy.

  11. It has. The state run media is not reporting the truth. The state has taken over the banks and autos. Now they are after health care. We are in a world of hurt. What is next. Came you say Fascism.
    Fabius Maximus replies: Always nice to hear from the Gamma Quadrant.

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  13. It’s not mild at all. At least not in the north eastern parts of the US like Ohio and Maine, it’s hitting people hard here.
    Fabius Maximus replies: We’re speaking here of national averages. There are usually areas doing unusually well and unusually poorly in a nation as large and diverse as the US.

  14. Some quick possibilities:

    1. Larger percentage of the population working to begin with. Until the 1980s most women didn’t work outside the home — a huge change that a lot of people forget. Lots of people have lost jobs, but there’s still a lot of their friends and relatives working.

    2. A lot of the first jobs to go were held by illegal immigrants. When laid off, they tend to either go home or keep a low profile.

    3. Basic necessities like food and clothing are relatively much cheaper than they used to be. There’s lots of talk about the obese, but people rarely remark on the contemporary abundance of clothing. Nobody wears hand-me-downs any more, nobody’s cold because they don’t have a coat, everybody can get clothes that are the right size.

    4. It’s summer. Time to vacation, time to kick back and relax. People might not feel the same way come fall.
    Fabius Maximus replies: None of this matches the data. The % job loss renders #1 irrelevant. As for #2, illegals aer not counted in the data either way. #3 and 4 are irrelevant.

  15. sonotimpressed

    Things were much worse during the Depression because life was worse, the western world was between two world wars, Europeans were amid a mass migration, the poor were extremely poor everywhere, and there were few if any public services/safety nets to help people hardest hit by job losses. Today the middle class worries about losing homes, 401k’s, stocks, in the 30’s they worried about their next meal. Today we stand on unemployment lines, in the 30’s it was soup lines. The infrastructure built out of the last depression that so many hate to pay for is what is keeping us from sinking so quickly now. Its true though it wont keep us floating forever.
    Fabius Maximus replies: The G.D. was worse because unemployment was almost 3x current levels (roughly, as the government did not collect job stats back then). The collapse in GDP was many times worse. The downturn was far far longer. And there were few, often no, social safety nets.

  16. It’s only been 8 to 10 months since this recession started. The Bonus March on Washington D.C. didn’t erupt until nearly 3 years into the Great Depression. Wait another 3 years.
    Fabius Maximus replies: The recession started 20 months ago, in December 2007, per the official scorekeepers at the NBER. That detail aside, I agree that we might be in the early stages of this downturn. But a Japan-like period of stagnation is IMO more likely than another great depression.

  17. I think that the stimulus projects need to focus on getting money to the least wealthy people because we all know that if you are living paycheck to paycheck you are very inclined to spend ’em while you got ’em (dollars that is). It would also be wise to focus on things that turn into change quickly. Instead of infastructure (which takes forever to get planned and money spent on) the government should buy some nice F-22’s to replace those aging F-15’s and 16’s. (Defense monies are quickly spent!) Extending unemployment benefits is great, those people are going to spend that money at the grocery, liquor store, or where ever. Yet, I also see the importantance of maintaining the flow of capital to keep the machine moving. Yet, focusing all this stimulus in just a few places sets up industries to anti-trust violations (whether we call them on it or not, remember we need competition to bring down prices) and there should Never be any government direct control over a corporation vis-a-vis GM. Yet, the Republicans do have a point here, raising taxes cuts jobs as does raising the minimum wage. Cap and Trade would also cut much needed jobs now. The big idea is to stay focused and not cut off two of your legs to save one arm.

  18. malaclypse the tertiary

    What is missing from this analysis, methinks, is the mass psychology of technological evolution. We possess and compound more knowledge in the aggregate, at this moment, than we have in all the previous moments combined. This logarithmic expansion of knowledge continues apace. As the trend line approaches the asymptote, transformation on a large scale would seem immanent.

    At some level, I contend that people are aware of this, though for most, this knowledge is not necessarily conscious. Jim Dator (Hawaii Research Center for Futures Studies) describes four basic categories for visions of the future: continuation, collapse, discipline and transformation. The suggestion that the Austrian/Chicago/Instapundit crowd largely champions continuation (“doing nothing” in your parlance) seems spot on. Clearly continuation is impossible (I would expect that you’d agree). The left—inasmuch as I can be forgiven for rhetorically making a monolith of a confederation—would seem to be “hoping” for transformation, but I would aver that they are either expecting a collapse or pursuing discipline (see sustainability). No one is effectively characterizing the possibility of transformation because it is impossible in the empirical sense. You’ve said as much yourself. Dator has his second rule of futures which recapitulates this idea: “Any useful statement about futures will necessarily appear to be absurd.”

    For my part, I’ll take it on because I like to flirt with the absurd and I believe we are living at the boundary of a transformation of human understanding comparable in scope to the agricultural revolution. The enlightenment paradigm is reaching the end of its preeminence. Again, at some level, I think there is a cultural (or collective unconscious) awareness of this transformation. I think this awareness is especially keen in the US because we are very close to the technological antecedents to this transformation. McLuhan said, “we shape our tools and thereafter our tools shape us.” The non-deterministic, holistic, organic nature of increasingly complex computer networks (and their applications) are changing us. People know on some level that things are changing radically even though they don’t necessarily know what it will look like when the change is complete. The kinds of problems that characterize our present situation will be obviated by this change and new problems will be created.

    This, I would argue, is as much responsible for the lack of the kind of despair that would depress spending. The evolution of the human species is on a roll and anywhere that computer networks are present, people have some awareness of this evolution. Indeed, the existence of your blog is a demonstration of this. Were people having massively scaled, massively enfranchising conversations about the great depression as it was occurring?

    Further, I would argue that one of the most important of the foci for this transformation will be the interior of business enterprises. The market, made to look more like the top-down, enlightenment paradigm hierarchies inside of corporations is a move backward. The future is the interior of the corporation made to look more like the market. THAT is what will form the predicate for a systemic compassion for the human condition, not more application of ossified hierarchies pace Obama.

    Please forgive my prolix.

  19. We are in a secular decline. We have been living off the low hanging fruit the microprocessor revolution got us. The easy gains are gone. Until some new technology comes in that significantly lowers costs and increases profits no amount of government stimulus is going to pull us out of this one (i.e. the calls for another stimulus package are a symptom of that). One sign of that is the same as it was in the Great Depression: lots of excess capacity. That is the number I would look at to see how we are doing. Capacity utilization is now at 65%.

    The government should be going nuts with R&D credits and fundamental research. Instead they are bailing out lost causes. That can only add more drag to the economy. Even so, any research done now will not pay off any time soon. Even my favorite, Polywell Fusion (if it works), can’t pull us out for at least another 10 years just because of logistics.

    The Great Depression was in part caused by the end of the big gains from agricultural mechanization and electronics. Things did not start going well again until the R&D from WW2 got applied to the economy in a big way. The recovery started a little early due to the fact that we survived WW2 intact and our enemies did not. Heck even our allies got bashed.

    BTW all this stimulating is causing calls to replace the dollar as a reserve currency. If that happens we will no longer be able to count on the savings of the Chinese and others for our capital needs. Once that happens we are truly screwed.

    The deal is: you can’t do just one thing – it is all connected.
    Fabius Maximus replies: That’s tought-provoking! Thank you for posting.

  20. malaclypse the tertiary

    M. Simon: “One sign of that is the same as it was in the Great Depression: lots of excess capacity. That is the number I would look at to see how we are doing. Capacity utilization is now at 65%.”

    Spoken like an engineer. (Which, please don’t take offence; I love engineers.)

    I submit that capacity utilization is an outmoded metric. There is an incommensurability problem between the metrics, modes and metaphors that typify the outgoing paradigm and those of the new. The new paradigm is non-deterministic. A bromide I’ve seen a lot lately is, “If the 20th century belonged to physics, the 21st century will belong to biology.” The facile read of this notion is that functional genomics, etc are ascending. A deeper read, IMHO, is that the kinds of epistemic models employed by conventional physics will give way to those models which better describe living things. Biological systems are not top-down hierarchies; they are non-local and non-deterministic. Biological systems are also highly redundant and not only tolerate but encourage massive amounts of failure. Capacity utilization only makes sense as an important metric in models in which failure and redundancy are things to be eliminated.

    An example: Coca-Cola spent many millions of dollars in R&D to develop the 12-pack fridge box that is now commonplace. It was a top-down approach they employed; focus group, design, test, focus group, redesign, test, ad nausiam. The result was a valuable innovation. Old paradigm stuff (which worked of course, although in a manner inconsistent with the way the living things go about organic innovation). Interestingly, after rolling out this innovation, they discovered that a bottler in Australia had invented the same packaging well before the corporation undertook the R&D process. This organic innovation was invisible to the top-down hierarchical model that describes their corporate structure.

  21. The point of the stimulus is to keep economic activity at a certain level to mitigate the downturn. If the previous level was unsustainable, it is trying to reinflate a bubble.
    Fabius Maximus replies: The definition of mitigate is “To reduce, lessen, or decrease.” Not to maintain at the same level.

  22. MTT, Capacity utilization (CU) underlies profits. Low CU means unsupportable debt. CU is a measure of the efficiency of capital utilization.

    And thanks for the props re: engineering. Word must be getting around about what I have done for a living. Right now I’m retired. Or as I prefer – between assignments.

    I think the model you posit is coming (rip rap machines etc.) we are not at a place yet where it is a significant part of the economy.
    Fabuis Maximus replies: Well said! I agree on all points!

  23. Fabius, you’re probably right about the conservatism of central bankers, and I wasn’t really thinking that they would deliberately destroy a system that gives them power (and, presumably, good annual bonuses). I was thinking more of the implications of our government’s apparently unlimited willingness to borrow—presumably from the world’s banks to finance its efforts to reinflate the credit-spending bubble, while continuing to finance world-wide wars and increasingly expansive and expensive social problems. Will this not have an effect on the value of the dollar vs. other national currencies? It seems to me that such policies must cause the value of the dollar to fall. It seems to me that if the dollar falls far enough, it will no longer be credible to buy up U.S. government and private securities. The dollar will become a toxic asset.

    Money has been a useful abstraction for a very long time, and the fact that it is abstract is not a bad thing. Quite the opposite—abstraction is the whole point of money. However, “abstract” does not mean the same as “imaginary”, nor does it imply “arbitrary”, and it seems to me that the people in charge have quite forgotten this—or choose to ignore it because ignoring the implicit rules of the system has made them rich.

    As I’ve said before, I find the subjects of economics and finance very difficult to understand, so I’d be grateful if you’d take the time to explain to me why I’m wrong (or if someone would!).
    Fabius Maximus replies: This grossly underestimates the range of possible outcomes. As I said, a Japan-like outcome — long, slow deflation — would likely keep the dollar either stable or even strengthen it. Growth in America is associated with inflation, a rising trade deficit, and a weaker dollar.

  24. Re M Simon #59: “The winds of change driven by the micro computing revolution are not played out so much as in a lull, waiting for the next hurricane force howling to begin. One possibility is that while we wait like the audience in a theater for the “Next Big Thing” to bestride the stage, we find out this time the Next big Thing has been sitting next to us in the audience the whole time. That’s right,The Next Big Thing is us. Who Knew?”

    This is the notion behind “An Army Of Davids“, by Glenn Reynolds.

    FM also, through this site, provides the lever (Knowledge, through links and posts) and a fulcrum (by encouraging moral discourse). His challenge to us is, “You alone have the place to stand. Do you have the courage to move the world?”

    I hope and believe we will soon hear an encouraging answer. I know this internet thingy is definitely not played out. Not by a long shot.

  25. FM note: This is a valid criticism. The various dollar dynamics discussed occur over different time scales, but this is not clear to the casual reader. Thanks for raising this issue, which I will discuss in today’s post.

    Fabius, you are something of an enigma to me. Sometimes I will make a comment, you reply with what seems like disagreement. Then I will notice a remark of yours that seems to pretty much take the same position I did. Here’s a recent example:

    I said: “The killing blow will come when certain other countries that hold large amounts of U.S. government and private securities decide that holding dollars is a bad idea. I think the only thing that has stopped them is that nobody has thought of an acceptable alternative…yet.

    You replied: [FM]“Yes, lots of folks blow smoke about the “central bankers destroy the world” fantasy. Just as in the 1980’s folks blew smoke about Reagan or the Ruskies blowing the world away for some crazy reason or another. Possible, but unlikely. Central bankers are among the world’s most cautious, reactive, incrementalist creatures. They’ll probably be the last to move, not the first”.

    Now, that sounded like disagreement to me, so I followed up with one of my usual “Gee I’m puzzled…” comments, basically clarifying that I didn’t think the bankers would do any such thing deliberately. But you seemingly disagreed with that also, implying (I thought) that you thought “…a Japan-like outcome — long, slow deflation… was more likely, and “…would likely keep the dollar either stable or even strengthen it..

    Then today I read these words by Fabius:“Our government’s solvency depends on the tolerance of foreign powers — Asia (esp Japan and China) and OPEC. They are the underwriters of our military, which illustrates the foolishness of our grand strategy. As the US debt (from past spending) grows, the day of reckoning draws near. Our navy will not help when it arrives.“. It seemed to me that you were stating the very point I had been trying to make: our financial wholeness is the product of foreign sufferance[1], and those foreign nations are not likely to suffer us forever.

    Sometimes, there seems to be a certain disconnectedness about the dialogue on your site, Fabius. I am sure that I have gained this impression due to my failure to understand your often hurried remarks, and perhaps that is unavoidable—you are a very busy man, and I do not have the time I would like to spend on reading your pages. And to be honest, my comments are seldom as concise and clear as I would like to think. Yet, you make many stimulating remarks, and I surely would like to know if I’ve understood them correctly, or not.

    1. See for example: China has intervened actively in foreign exchange markets to prevent the yuan from appreciating faster by selling yuan and buying other major currencies (mostly dollars). As a result of this policy, its foreign exchange reserves grew from $403 billion at the end of 2003 to $1.9 trillion at the end of 2008.

  26. More research about the trend in long-term unemployment, from the National Employment Law Project.

    (1) “The Severe Crisis of Job Loss and the Accompanying Surge in Long Term Unemployment“, Sylvia Allegretto and Andrew Stettner, 6 May 2009

    (2) Updated analysis: Over Half a Million to Exhaust Benefits by End of September; 1.5 Million by End of ‘09 — Federal Stimulus Provided Critical Help to Unemployed – But More Needed Soon, 24 July 2009

  27. How on earth would less than 5% of the stimulus money being spent stop the economic damage that would have been caused without it, sir? This is an idiotic pile of undefended tripe. You assert something you cannot demonstrate (because there is no data showing the stimulus has helped at all) then insult people for disagreeing? Unbelievable.

    Few things are more despicable than a lying closet socialist.

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