Is there anybody out there who can provide even the faintest glimmer of hope that Fed stimulus will help the economy? I keep trying to put together a scenario in which this is helpful and I can’t. Most of my life I’ve been a Reagan Republican - small govt, self-reliance and, of course, big sticks. Then W. was the worst president since Harding, Sarah Palin ran for VP, Eliot Spitzer got caught, and I voted for Obama. Every evening I drive home past this stupid sign on the Merritt Pkwy that says “This road construction paid for by Obama stimulus dollars” while I sit in a big traffic jam. I dunno [mumbles unitelligible nonsense]…
Animal spirits. When the stock market does well, people feel better and buy things. It’s kind of the reflexivity concept that Soros is always talking about.
We have several problems simultaneously. The Fed stimulus can help, but we really need more Fiscal stimulus, which the Fed can help by monetizing. Problem 1: Too much private sector debt, particularly on family balance sheets. For at least a decade, we started lending money to people who didn’t really meet credit standards, partly because some people deluded us (and themselves) that securitization, CDOs, etc, could turn cr@p into gold, or they just didn’t care and wanted origination fees. This was most obvious in the mortgage sector, but also in the credit card sector too. With all that credit flowing, it was easy to buy stuff, and therefore easy to sell stuff, and the economy looked like it was “Rockin’ with W.” We bought a bunch stuff, much of it at inflated prices, and went on vacations, and now someone has to pay that debt. Right now it looks like it’s the consumer, who will take it out of their disposable income, and therefore not consume as much, which of course means that companies won’t sell as much, so they won’t hire as much, and we have this threat of the deflationary spiral. The other way is for the debtholders to absorb some losses by taking a haircut (perhaps even going bald). Somehow being a yield pig and not doing appropriate due diligence is not reason enough to force debtholders to take a haircut, because clearly, people who were told by nice men in labcoats (I mean suits) that they could borrow and refinance were the ones at fault, since they didn’t get any signing bonuses. (I am for shared responsibility between borrower and lender on this one, but there isn’t really much sharing going on). One can ask why debtholders were bailed out in the banking system at the expense of the taxpayers, and the only real reason I can see is that a lot of the debtholders are pension funds, so if they go bust, the taxpayer is on the hook for them anyway. (To some extent, this is a generational contest between retirees who want to assure themselves of pensions and social security, and the young, who are worried about a broke government and higher taxes to repay the national debt. The older generation of Republicans seems to be happy to vote themselves benefits and then wring their hands about “what are the Democrats doing to our children and grandchildren.”) The third way is to deliberately provoke inflation, so that debtholders are repaid, but with inflated dollars. This creates the illusion that everything is going well, because debtors find it easier to pay (provided they are employed) and creditors at least have the sense of orderly repayments. Normally, I’d be against this approach, but I actually think it is the best option of a bad lot here. Fed stimulus can help in a few ways here: 1) try to stimulate inflation so that debts are repaid. 2) try to support asset prices, so that consumers don’t feel quite so precarious and are able spend more, albeit inflated dollars. 3) make fiscal spending more feasible (but not just any fiscal spending; spending needs to address Problem #2). Problem #2) A hollowed-out economy. This is the “what does America produce” problem. If we are going to repair balance sheets without defaulting (which will make it difficult for companies to raise capital going forward) then US consumers will need income with which to repay, but income ultimately needs to come from *productive* activities, which means that we need to create stuff that we ourselves buy, or that we can convince other parts of the world to buy. In the last three decades, we’ve outsourced much of our manufacturing. In the last decade, we offshored much of our service economy. We convinced ourselves that this was not really a problem, because the American worker was fantastically productive. But productive at what? And how were these productivity figures masked by the fact that assets and incomes had become more concentrated than they’d been since the 19th century. The economic growth that we saw in the 2000s was really just paying (some of) ourselves for three things A) paying ourselves a commission for getting goods manufactured in China into the hands of US consumers and profiting from the labor cost differential, and B) paying (some of) ourselves commissions for issuing debt, and C) selling consulting services to teach other countries how to beat us at our own game. Now that gravy train is over (for the small % that actually benefited from it, as opposed to the larger percent that just ended up with zero equity and a ton of debt). Now there are things that we do produce: Higher education (effectively an export), agricultural goods, entertainment. We also have good research and development skills in the tech and biosciences areas, but those advantages are eroding as the rest of the world catches up. We may be able to catch up in the energy arena, but the fact that we haven’t had to deal with this stuff the way the Europeans have or the Chinese have approached it means that we may not be able to get into this game. So we need industrial policy. We just have to wake up to the fact that the US should be thought of as an Emerging Market. A few people oohed and ahhd on CNBC last week when someone floated the idea that the US is like an emerging market because the US has a lot of debt. But it’s way more than just that. It’s failing infrastructure. It’s massive income and wealth inequalities. It’s child and even maternal mortality rates. It’s the problems of getting people to graduate from even secondary education. It’s a political class that looks at the economy as a chessboard or bargaining chip for accumulating media points and distributing patronage. Successful emerging markets pretty much all have benefitted from engaging in industrial policy. But not all industrial policy leads to successful economic development. People don’t like the idea of governments targeting specific industries and choosing winners and throwing up tariff barriers. And tariff barriers are generally bad. But research support, education support, support for small business formation, all of which need to be conditional on meeting performance standards has worked in South Korea, in Taiwan, in Brazil, even (to some degree) in China. The country that is the most productive is usually the one that wants free trade, because that’s the country that will benefit most from it. For most of the last 60 years, that country was the US. The US is still very productive, but not enough to employ citizens in declining industries like autos and debt issuance. Biotech may be a big winner, but it’s going to be a b*tch getting all those unemployed autoworkers (many with only a high-school education) to become genetic researchers and clean-energy engineers. Industrial policy requires fiscal spending, and the Fed can help by providing monetary support for that. But of course, it looks like we are going to have more fiscal tightening as the Republicans take the Congress, which means more economic contraction, and perhaps a double dip. The top 2% of income earners are likely not to have to pay any more taxes, but it unlikely that much of that savings will actually go back into the US economy. That leaves us back with the Fed trying to generate inflation. The good thing about monetary policy is that when there aren’t structural problems in the economy, it tends to be a subtle way of stimulating and contracting the economy, as it is mediated through banking institutions. The problem is that when there are structural problems, one needs to address them directly, and monetary policy cannot pick industries or projects and act where they need action. Banks can sit on the yield curve and print up money for their balance sheets, which would be great if the bonuses to themselves weren’t so large that they slow down the balance sheet repairing. To use an illness analogy. If you have a cold, you need to rest and drink liquids and let your body heal (analog to monetary policy - let the system take care of itself, with a little bit of general support). When you break a bone, you need a doctor to set it, or it’s going to be bad long after it heals (fiscal policy). Or, to use a circulatory system analogy… the doctors are supplying more blood (money) to the circulatory (financial) system, but we’ve got a ripped aorta, so it’s not getting to the rest of the body (main street economy). So what about Japan? Won’t we be in trouble like Japan in the 1990s? Well, it’s possible. My take on Japan is that BOJ had trouble trying to inflate a leaky baloon. It tried to “print money,” but all that money flowed overseas in the carry trade, and never really made it back into Japanese home production and consumption. The demographic shifts in Japan also caused problems as more people stopped being producers and turned into retirees. In the US, we have a bit of this problem with baby boomers, but we still have plenty of immigrants. The problem is that many these immigrants are illegal, and so that money tends to stay out of the formal economy (not to mention remitted home). Making undocumented workers legal won’t solve the problem, but it could help. So as long as the rest of the world is down for the count, inflating the economy with quantitative easing (aka “printing”) still has a decent chance of working. It also helps that our economy, even when troubled, is still the largest in the world. Even China at #2 is only about 1/3 the size of ours. That means that even if money flows out of the US to the rest of the world in a carry trade, the rest of the world can’t absorb as much, so some of it has to have an effect here. Sorry to talk your ear off, Joey. Good to see you again, though.
JoeyDVivre Wrote: ------------------------------------------------------- > faintest glimmer of hope that Fed stimulus > will help the economy? the purpose is to put a clean placemat out there for the messy economy to start sputtering again. now that the bank bills have been sculpted the banks understand what restructuring will need to take place (luckily, the language is vague so there is a lot of room for the businesses to come back with minimal restructuring.) cheap money is also allowing businesses to refi at low rates which will lower costs for them and increase their liquidity and ability to help small businesses and consumers. hopefully in the next 1-2 years the ‘green-shoots’ bernanke and co. claim to have seen will beging to grow some deeper roots. i didn’t vote for obama, never will. i prefer candidates with valid experience.
bchadwick! I’m a fan! Awesome stuff
beatthecfa Wrote: ------------------------------------------------------- > bchadwick! > > I’m a fan! Awesome stuff Bravo!
mar350 Wrote: ------------------------------------------------------- >i prefer candidates with valid experience. That is a rarity nowadays, for sure. BTW, anybody see those ads talking about some candidate pushing senior citizens out of Medicare and into a goverment run health care plan? If this kind of stuff works (you know, completely nonsensical statements like the above) then voters are even less willing to think than ever.
good stuff bchadwick!
bchadwick Wrote: ------------------------------------------------------- > Problem #2) A hollowed-out economy. > We just have to wake up to the fact that the US should be thought > of as an Emerging Market. i think this is a fair comparison to make when talking about the general status of the economy, but our infrastructure, healthcare, educational and political system are light-years beyond 99% of the world (granted no one really likes their political system). like an emerging market economy, the US is saddled with a massive amount of debt. its like a bad leveraged swap; we’re all hoping and praying it doesn’t get called soon because we really don’t have enough in the boat to have the pirates spare our lives. however, emerging markets are small and are more volatile with shorter business cycles and have serious currency/valuation concerns. the US has the benefit of a globally recognized currency and a central bank that is both smart and savy enough to enact corrective policies to navigate its economy through various financial tides. the US also has a strong and developed legal system that has allowed the recovery process to proceed at a pretty good clip (cash for clunkers, the home foreclosure process, unemployment payments.) without the ownership and personal property systems we have the speed of these transactions would have been in jeopardy. > The country that is the most productive is usually > the one that wants free trade true, because the best producer will have the best comparative advantage and have the most to gain. the US has long had the comparative disadvantage and has paid for it, resulting in the incredible trade deficit we are currently sitting in. i think we need to enact some protectionist ‘fair trade’ policies, otherwise we will need to cut costs (ie. workers) which will further the income/wealth gap. > Industrial policy requires fiscal spending, and > the Fed can help by providing monetary support for that. how can the answer be more debt - do we really want to dump money into a hole without filling it first? i think the answer lies more protectionist (or ‘fair’) trade rules since the US no longer has a comparative advantage in industry (ie. cost of labor/materials/energy/infrastructure/social conciousness). > But of course, it looks like we are going to have > more fiscal tightening as the Republicans take the > Congress, which means more economic contraction, > and perhaps a double dip. The top 2% of income > earners are likely not to have to pay any more > taxes, but it unlikely that much of that savings > will actually go back into the US economy. i believe that we need to practice what we preach here. we preach low debt ratios to our children, our investments, and our trading partners. i don’t see how dollars in the hands of politicians can be more efffectively spent than in the hands of actual business persons, either. why wouldn’t the savings go back? the savings will be in investment accounts to spur future investment growth. when the US market stabilizes and investment opportunities arise there will be more capital available to businesses and the market. again, i don’t trust politicians with dollars, i trust the people who made them in the first place.
mar350 Wrote: ------------------------------------------------------- > JoeyDVivre Wrote: > -------------------------------------------------- > ----- > > faintest glimmer of hope that Fed stimulus > > will help the economy? > > the purpose is to put a clean placemat out there > for the messy economy to start sputtering again. > now that the bank bills have been sculpted the > banks understand what restructuring will need to > take place (luckily, the language is vague so > there is a lot of room for the businesses to come > back with minimal restructuring.) cheap money is > also allowing businesses to refi at low rates > which will lower costs for them and increase their > liquidity and ability to help small businesses and > consumers. > > hopefully in the next 1-2 years the ‘green-shoots’ > bernanke and co. claim to have seen will beging to > grow some deeper roots. > > i didn’t vote for obama, never will. i prefer > candidates with valid experience. Of course, you will vote for people like Bush who have extensive experience running companies into the ground and the country. Or Sarah Palin who didn’t even finish her term as Governor.
marcus phoenix Wrote: ------------------------------------------------------- > Of course, you will vote for people like Bush who > have extensive experience running companies into > the ground and the country. Or Sarah Palin who > didn’t even finish her term as Governor. hey great to have to you back. i actually voted for gore, kerry, and mccain. thanks for playing!
bchadwick, Thanks!
mar350 Wrote: ------------------------------------------------------- > i didn’t vote for obama, never will. i prefer > candidates with valid experience. So who will you vote for if Palin runs against him???
monger187 Wrote: ------------------------------------------------------- > So who will you vote for if Palin runs against him??? palin is truly in a league of her own. i might have to abstain.
I will vote for Palin. She can see Russia from her house, that’s enough for me.
The stimulus will do nothing. If you look at a chart of money supply vs. velocity you’ll notice they’re mirror images of each other. Throwing money into a system that doesn’t need it/won’t circulate it won’t do a damn bit of good. Of course, people will tell you it’ll keep mortgage rate lower, which it very well might. But that doesn’t help the people that are underwater, or really address the five years of housing inventory we have. Continued low rates will force more pain on people that live off fixed income, and pension/endowment funds that require way too high a rate of return (days of counting on 8% are over folks). Housing is the problem. No one wants to say it, but there’s really nothing that can be done. Any move by the government, be it artificially lowering rates or offering tax credits to home buyers, doesn’t solve the problem; actually hurts us in the long run. We have to let things run their (very painful) course.
monger187 Wrote: ------------------------------------------------------- > mar350 Wrote: > -------------------------------------------------- > ----- > > i didn’t vote for obama, never will. i prefer > > candidates with valid experience. > > > So who will you vote for if Palin runs against > him??? Palin makes for good TV but does not have a realistic chance of winning the nomination. She is supported by a handful right-wing wackos and liberal factions of the media who like to paint her as being representative of the majority of republicans, which she is not. She’s the Howard Dean of the republican party, absent actual intelligence.
Country A: low income tax rates (both personal and corporate), sound fiscal position, growing population, growing incomes & middle class, (relatively) low labor costs Country B: high and likely increasing tax rates, massive government deficits, tapped out consumers, shrinking population and middle class, high labor costs and onerous regulations. If you were CEO of a company, where would you be? No brainer, right, Country A. Now think about US prospects for the next few decades. Neither Fed nor bunch of politicians in Washington can change that
Eliot Spitzer was a Democrat.
- Fiscal spending - Since when has the gov’t been good at spending money? This is that stupid Obama Road Works sign I see on the way home. The gov’t is paying the rent on some construction equipment and paying people to widen the shoulder of the Merritt Pkwy. In the short term, this is stupid because the cumulative delay time of the traffic jams exceeds the amount of working time the construction workers are getting. It’s damn expensive fiscal stimulus, but the costs are indirect. In the long term it’s really stupid because the Merritt pkwy can’t be widened without tearing down the historic bridges that cross it every two miles. All the reasons I can think of for widening the shoulders (parking trucks, prelude to road widening, make cops safer, etc) just don’t work. I was at a restaurant awhile ago and a candidate for state senator came and sat down with me (his son was a boy scout and I was telling the son my boy scout stories). I told him that I thought that the role of govt needs to be to eliminate dead-weight loss and facilitate productive activity. After 15 minutes, it was clear he had no idea what I was talking about. And this guy will be responsible for fiscal stimulus? Sarah Palin might be good for a little fisical stimulus, but, uh… 2) Inflation, cheap money, and Mar "i think the answer lies more protectionist (or ‘fair’) trade rules since the US no longer has a comparative advantage in industry (ie. cost of labor/materials/energy/infrastructure/social conciousness). " It’s sounding a lot like Beggar-thy-Neighbor out there. This doesn’t work in the best of cases, and I’m just not playing Beggar with China because the Chinese can endure better than anyone and way, way better than me. 3) America’s productive capacity Is throttled by cherished notions that we can’t afford anymore. I’m actually on board with the Republicans who want to repeal health care reform, because the reform did nothing to relieve any of the problems that make Americans spend tons on healthcare but not be particularly healthy. Where was tort reform, cost/benefit analysis of very expensive exotic treatments, disincentives for unhealthy living, or diagnosis-based limits on insurance spending? My own lesson - Earlier this year I tried to help my wife open a clinic for people addicted to video games. There are a few of these in the world and they have big waiting lists. Much of America’s future productive capacity is being drained by youngsters who spend way too much time on Halo and GTA. These people are generally well-functioning in most ways and they essentially need to be ripped from their consoles and put some place safe. However, in CT to operate such a clinic you need a license and to get that license you need an unbelievable amount of crap including a building that is virtually fire-proof. I wanted to house functional 20-40 yr olds and I needed sprinkler systems, audible alarms, fire escapes, … I would have employed a few people and increased lots of other people’s productive abilities, but I was squashed by stupid govt rules that said that I needed to pay for fire protection to run this business (doesn’t the Mafia sell fire protection?). In China, they don’t need to do that. The role of govt in this needs to be to let me spend money and get out of my way. There is tons of money already out there; it’s just that it can’t be spent productively. Putting more out there won’t help anyone.