Ok, we’re in crunch time. Bernanke is pulling a strong dollar play and trying to unwind as much of what was done in 08 and 09 as he can. Meanwhile, across the Western world, we have a wave of Hooverism, everyone wants to cut, cut, cut spending. And China isn’t looking as healthy as it once did, which is bad, because basically China is keeping the actual (as opposed to financial) world economy afloat.
However, the good news is the drop in oil prices. High oil prices (and yes, $80 is high) had led to, essentially, only a few half decent months of job growth. Oil had to be gotten under control.
This is, in essence, the same play Bernanke tried to perform in 08. He crashed out oil prices, and took the world financial economy with it.
To understand why you need to understand the contradiction at the heart of the modern neoliberal world economy.
There is a lot of hot money in the world economy, more hot money than there are truly safe investments. The financial bubble and collapse could be summed up as “trying to get AAA security with higher than AAA returns”. The paper was almost all produced in an attempt to get better than Treasury bond returns while claiming to be as secure as Treasury bonds. Obviously, the paper wasn’t, and it all crashed out.
There is still too much hot money which wants AAA security, and better than AAA returns. They demand that governments find a way to give it to them. One way is for the Fed to give them free money, then borrow it back from them (we’ll lend to you at zero, you lend back to us at 3%. Free money!) But there are limits to these sorts of games.
Why? Well, that’s the contradiction. Because the hot money is both scared by the prospects of high deficits (government defaults) and by the economy itself crashing out because, well, there isn’t enough stimulus. If you’re scared of too much stimulus and you’re scared of too high deficits, well, you’re caught between the proverbial rock and a hard place.
Currently the pressure is mostly on the austerity side, with an IMF style crackdown in both Greece and Spain, with a healthcare bill in the US which “saves money” and so on.
The problem is that actual private income in the US, for example, is about 500 billion lower than it was pre-crisis.
The economy breathes fine, as long as we don’t unplug the life support.
And unplug the life support is what everyone except the Chinese seem to want to do.
The US dollar getting higher and commodities getting lower, if it doesn’t crash out the economy when added to global austerity, means that a relatively small amount of money can reorient the economy. This is the Rubin play, and when Rubin did it for Clinton, it worked. The thing is, back then, the internet boom was waiting to happen. I don’t see what Obama and Bernanke will reorient the US economy towards: I don’t see the next big boom (oh, I see some things it could be, but I don’t think they want any of those things.)
The next few months will tell the tale. Will global austerity throw the world into a second downleg of this depression? Or will global austerity and Bernanke’s strong dollar play crush commodity prices without crushing the real economy? And will investors freak out, caught between their twin fears of deficits (don’t want to be in bonds) and lack of stimulus (don’t want to be in stocks), and go on strike again, causing another financial contagion?
Who knows. I’m coming down on the downside right now, mainly because I believe that when you’re given a choice of betting for or against Bernanke, you should generally bet against. (Not directly or in the short run, though, he’s still the player with the biggest stack on the table.)
Curmudgeon
I’m don’t see a likely way out in the foreseeable future given political realities in the US and Europe.
High dollar would be a net negative for the global economy. Resource exporting countries have been among the least damaged by the crash. If Bernanke crushes commodity prices then one of the few remaining supporting pillars in the global economy will fold. American governance is not sufficiently competent to ensure that US demand rises fast enough to offset commodity crash demand destruction in countries ranging from Brazil to Norway.
As you say, there is no politically feasible ‘next big thing’ to kindle the next US boom. The most useful options (e.g. heavy investment in industrial scale biofuel facilities) would not be tolerated by US elites. Restarting the US economy without a bubble isn’t politically feasible, either, as it would involve a concerted–and very unamerican–effort to boost median wages.
At this point there is a very real risk of the western economy falling into something worse then Japan’s lost decades. It won’t take too many more years of an L economy to write off an entire generation of young workers. The result of preventing the next generation from starting their careers will be a permanent loss of technology and skills that will take many decades to get over.
lambert strether
Why we need a Jobs Guarantee. Especially for young people. The numbers are horrific.
Badtux
Pitchforks. That’s the next big economic thing. That, and torches.
Off to look at who makes pitchforks nowdays…
– Badtux the Snarky Penguin
Tom Hickey
Agreed. I rate the probability of a double dip higher than a lost decade of slow growth (Japanification). There are no other viable possibilities. Grim either way and could rather easily turn to desperate as a worst case scenario, e.g., if the EMU implodes and the euro blows up, or the Chinese RE bubble bursts.
anonymous
To understand why you need to understand the contradiction at the heart of the modern neoliberal world economy.
What a strange and awful state we’re in where we are not discussing possible solutions based on what has been successful before, but instead we’re trying to understand the consequences of neoliberal thinking because that is what has a hold on the Decision makers.
Scott R.
Park Me in the Deflation Camp…,
this is what I posted as a comment on one of Don Henry Ford Jr’s pieces at The Agonist last week:
about a year ago I commented on a piece about the debate over whether we were headed for recession, depression, or inflation, with this tongue in cheek reference to my index indicator.
Well…, when the price of Ole Roy drops from $18.50 to $15.97…, and it did…, it gives me a sense of foreboding. I calculate that as a 13% drop. I get the sense that beer prices are coming down too…, but it is beyond my mathamatical abilities to calculate that. To increase revenue our state has increase “sin taxes”…, but the beer companies are packaging 30 packs as opposed to 24 packs and I am thinking that I am benefiting from a bit of deflation there too.
Add to that an unstoppable oil gusher that results in a 10% drop in crude oil prices…, when it should be the opposite happening? The drop in the price of crude hasn’t translated into a drop at the pump…,at least in my area.
And a 10% market correction that was “magically” corrected by…, we’ll have to have Numerian caluclate the amount of money that took. I am willing to wager that it took more than Big Ben and a squadron of helicopters dropping money…, a more apt metaphor would be a fleet of oil tankers pumping money. Thank you Ben…, you saved my State pension fund? Or the Banksters? Again.
What about wages? I will be getting an extra 10 days off this year. Unpaid of course. That’s only about a 5% wage deflation calculation.
Yeah Don…, I too have a sense of foreboding. I hope Scotjen61 is right and we are on the road to recovery. I am afraid that the stimulus has about run it’s course. But…, it looks like Ben has tankers full of dollars to pump on the problem. Ours and Europe’s.
anonymous
Why we need a Jobs Guarantee. Especially for young people.
Agreed, except that I would say “especially for parents with dependents.”
1. A higher exchange rate for the dollar will mean less exports from the U.S. economy.
2. Gov’t. “austerity” in Europe and elsewhere will mean less spending on all goods, domestic or imported, that is, another decrement to U.S. exports.
3. The sectors that produce goods and services for exports will see falling demand, leading to non-existent hiring or job cuts.
On the “plus” side, if you’re wealthy, then all of your imported goods will be cheaper and travel will be less expensive. So, for B. Bernanke, “mission accomplished.”
Curmudgeon
There’s a word to describe the situation when the solutions you need to adopt to survive a crisis are beyond your Overton window: screwed.
Curmudgeon
Macondo was an exploration well. It never produced any oil for market.
Even if Macondo was a production well, it would only be an infinitesimal drop in the global oil bucket. Macondo would have likely produced 50 thousand barrels per day. In contrast, global oil consumption is about 90 million barrels per day. Losing 50K bpd in a 90M bpd market would be irrelevant to prices even if Macondo was in production when it blew out.
Scott R.
Curmudgeon…, you’re absolutely right on that. I meant to impart that the blowout was such bad news on so many fronts that it should have resulted in a rise in crude prices and not a deflationary reduction in prices. Usually…, any Bad News for Big Oil is met with a rise in crude prices. Aside from the catastrophic environmental impact and cost to BP…, the blowout could be signaling the fact that we have reached the technological limits of deep water off shore drilling. The cost for recoveing that oil can only go higher. The fact that the deflationary trend…, not just in oil…, is over powering logic is fueling my “sense of foreboding”.
Jim
“Crunch time”, for sure. “Jobs guarantee”, a must.
At certain junctures of history, fundamental changes in the economy occur. Take the transition from agricultural to industrial production. As a result you have the French and American Revolutions, the American Civil war, the establishment of parliament in England, etc. We are in such a period of transition and transformation now, from industrial production to electronic production.
In such periods, a new way of organizing society, a new system of power relations is called for. The old system is unable to adjust to the changes brought about by economic progress. The new has yet to be constructed. As the conflict plays out in the legal and political system and in society, these junctures of history are periods of profound instability. All of society is drawn into political struggle, the struggle over which class is going to hold power and organize society in its interests.
The political struggle to determine which class will hold power to organize society is only possible in such times of transition. The struggle develops over how to solve the practical concrete problems of society. Taxation and representation were the focus in the period of the American Revolution. Slavery and all its economic and social consequences tore American society apart during the Civil War period. Today, the basic questions of survival – jobs, food, shelter, health care and education – are being debated across the country and drawing people into struggle.
The deepening economic crisis is forcing the ruling class to demand that their ability to make maximum profits be protected. The different economic interests of different classes and strata are becoming clearer as those in power act to protect their interests at the expense of the rest. Because capitalism can not provide for a working class it no longer needs, nationalization in the interest of the working class with the government taking over and providing for basic human needs – jobs, schools, housing, health care – is becoming a question of survival for ever larger sectors of society. This is the basic contradiction as I see it.
CMike
Ian writes:
>>>>>>>>>>>>>>>
However, the good news is the drop in oil prices. High oil prices (and yes, $80 is high) had led to, essentially, only a few half decent months of job growth. Oil had to be gotten under control.
This is, in essence, the same play Bernanke tried to perform in 08. He crashed out oil prices, and took the world financial economy with it.
<<<<<<<<<<<<<<<
Bernanke did what in 08?
The Cushing spot price for oil, the $/Euro conversion rate, and the “30-Day AA Financial Commercial Paper Interest Rate” during that period were:
112.60/bbl on May 1, 08
$1.557/1 Euro
2.49%
127.75/bbl on June 2, 08
$1.556/1 Euro
2.30%
141.06/bbl on July 1, 08
$1.578/1 Euro
2.32%
145.16/bbl on July 14, 08
$1.594/1 Euro
2.36%
125.03/bbl on August 1, 08
$1.560/1 Euro
2.34%
109.63/bbl on September 2, 08
$1.464/1 Euro
2.35%
The “average majority prime rate charged by banks on short-term loans to business” was steady at 5% throughout that period as was the Fed discount window primary credit rate at 2.25%.
On September 7, 2008 Fannie and Freddie were placed in conservatorship. On September 14, 2008 Lehman Brothers filed for bankruptcy and AIG sought “an emergency $40 billion dollar loan” from the Federal Reserve.
alyosha
Whichever way we go, after a period of stimulated stability, it sounds like things are about to become unglued (again), and a period of volatiltity (and more) will ensue.
I see two big booms ahead: energy and biotech; biotech is well underway, with amazing discoveries appearing regularly. Sadly, energy is the chokepoint resource, where America has not only lost decades of getting a start on solving this problem, but we’ve made matters worse by wasting enormous resources in trying to bring the last of the Middle Eastern oil reserves under western control. It’s hard to imagine a country acting in a more short sighted and stupid fashion.
By contrast, the Chinese (and others, for example Germany) seem to be much further along in both recognizing and solving the energy problem. I think Obama understands this (in sharp contrast to the previous administration), but has a lot on his plate and is in many degrees hamstrung by those regressives still running the country. Even under the best circumstances, America will be playing catch up to the leads other countries have taken.
A silver lining to the oil disaster in the gulf could be a more sober and serious effort to come to terms with our energy future. In much the way that 9/11 could have brought the world together to do some amazingly positive things, but did not, so could the BP disaster do the same for energy, but sadly may prove to be another crisis that wasn’t fully exploited for the most positive good.
anonymous
I think Obama understands this (in sharp contrast to the previous administration), but has a lot on his plate and is in many degrees hamstrung by those regressives still running the country.
While I agree with much of what you wrote in its general outline, this part about Obama “understanding” what the problems are and what might be done to solve them is not supported by his actions, as opposed to his words. He is not so much “hamstrung by those regressives” as he is “hamstrung” by being one of those.
Ian Welsh
Interest rates are not the only way to measure availability of money. The price of oil dropped almost $40 before Lehman or AIG and kept dropping. For a fact, whatever the interest rates, money got tighter, a lot tighter before September 7th. (In fact, the Fed was tightening before July 08, but people weren’t listening to what the Fed was trying to say.)
Banks advertise their prime rates all the time. Doesn’t mean it’s available to almost anyone. Before September credit was drying up. Bernanke was drying up dollar liquidity.
The Euro is also not the key currency for a strong dollar play. The US does not export squat to Europe and Europe does not sell squat to the US. Here’s the dollar against an index of other currencies, from 2008 (blowing the margins here, but eh).
As you can see, the dollar started to increase in July, and was on a steady rise through August, the crisis merely put that on steroids.
Note that the dollar starts rising mid July, almost exactly at peak oil, and within 2 weeks, the oil prices have dropped $20. Oil was shaking the US economy apart, Bernanke had to do something about it.
The argument can be made that the crisis was already ongoing by August, of course, but then the argument can be made it was already ongoing (and it was) by late 2007.
The dollar play is something Stirling and I were discussing as it happened, at the time, though I don’t recall if we discussed it publicly. Note that there are other factors other than what the Fed does, contrary to what people think most monetary supply isn’t created by the Fed, it is created by banks and shadow banks.
Ian Welsh
Monetary authority lending
Q1 2007: 26.9
Q2: 32.9
Q3: -43.7
Q4: -169.4
Q1 2008: -416.7
Q2: -379.9
Bernanke had been putting in the screws for some time, the economy wasn’t getting the message, so he tightened even further.
CMike
Ian,
Thanks for the response. I’ll take a closer look.
Ian Welsh
Eh, I could be wrong. Honestly, this is one of those places where I defer to Stirling’s greater knowledge.
anonymous
The US does not export squat to Europe and Europe does not sell squat to the US.
Here are some trade balance numbers from the U.S. Census Bureau for
2009. The figures given are in millions of dollars.
‘Export’ is the amount exported by the U.S.
‘Import’ is the amount imported by the U.S.
Regions: Export Import Balance
———————————————————
Europe 258,761.7 330,725.2 -71,963.5
EU 220,776.5 281,319.5 -60,543.0
OPEC 49,782.5 111,631.3 -61,848.9
Pacific Rim 254,790.8 533,154.8 -278,363.9
C.&S.America 109,847.2 108,126.7 1,720.6
N. America 333,697.0 401,447.8 -67,750.8
Here are some selected countries (2009):
Canada 204,699.0 224,910.7 -20,211.7
Mexico 128,997.7 176,537.0 -47,539.4
China 69,576.0 296,402.1 -226,826.1
India 16,462.4 21,176.2 -4,713.7
Japan 51,179.6 95,949.0 -44,769.4
S. Korea 28,640.0 39,235.1 -10,595.1
Netherlands 32,347.0 16,102.8 16,244.2
United Kingdom 45,713.7 47,485.9 -1,772.2
France 26,522.3 34,034.2 -7,511.9
Germany 43,298.6 71,253.1 -27,954.5
Australia 19,597.5 8,014.9 11,582.6
Brazil 26,175.3 20,073.9 6,101.4
Belgium 21,629.7 13,780.6 7,849.1
Portugal 1,085.3 1,569.0 -483.7
Ireland 7,516.4 28,066.0 -20,549.5
Italy 12,232.6 26,416.2 -14,183.6
Greece 2,475.7 840.6 1,635.1
Spain 8,750.8 7,865.0 885.8
Source: http://www.census.gov/foreign-trade/balance/
anonymous
P.S., Apologies for the formatting of the table columns. (If only there were a description somewhere of which HTML codes can be used here.)
Ian Welsh
LOL. I stand corrected. Thanks Anon. (HTML here is whatever is standard for WordPress, as far as I know). I was thinking of imbalances, not overall trade, but my bad.
Here’s the thing, what matters for the dollar is commodity prices. When commodity prices go too high, the US economy cracks up. As a matter of experience, around 5/gallon or 120 to 130 seems to be the limit.
A strong dollar play, when it works, reduces effective prices of commodities. This is less the case than it used to be, because of the Euro, but still true enough, since the main driver of new commodity demand is Asia, and in Asia, China, and China is pegged to the dollar.
The problem with high dollar, of course, is that it increases imports.
The importance of commodities, especially oil, is counterintuitive in one sense, because imports of such commodities make up a small part of all imports. (Which is why many economists kept insisting it didn’t matter /that/ much. However, they (and specifically oil) is the uber import. The US economy cannot run without it, nor can any other economy, and (cheap) oil is in increasingly short supply.
The fundamental fact of the US economy is that it is, and has been driven, by suburbanization. Every new suburb or exurb implies more oil, more gas. The jobs are not in the suburbs, nothing is in the suburbs, so anyone who lives in one must drive, and that requires oil. Suburbs are not properly served by rail or ocean transport, so everything must be trucked in: that means oil.
The value of the US economy is predicated on real estate prices, but real estate prices are underpinned by jobs, and the jobs aren’t in the suburbs, which means oil. (They are also underpinned by schools, in the sense that since schools are supported by property taxes, high priced burbs have well funded, and usually good, schools, which is how the upper middle and lower upper class tries to pass on its class advantage).
I’ve been quite sloppy here. I’ll try and get together the energy and time to do a major theoretical post in the next couple weeks.
nihil obstet
Actually, a lot of jobs are in the suburbs. The cities have been abandoned, although that trend may be reversing. It’s just that your job probably isn’t in your suburb; it’s in another section of the greenbelt. That’s what makes transit so difficult, in that both origination and destination areas are sprawled out.
anonymous
On matters macroeconomic, I’m will always pause if Dean Baker disagrees with my thinking. A few months ago, he had this to say about the “strong” dollar and its effect on trade deficit:
Post Uses Xenophobia to Advance Its Budget Agenda
My earlier comment was just to follow his point with the consequence that lower exports leads at a minimum to less hiring and at worse layoffs and bankruptcies in the exporting businesses. So, a “stronger” should, whatever else it might do, prevent “robust” hiring to occur over the next six months.
I agree that fossil fuel prices are critical. The collapse in 2007/2008 had several factors:
Low interest rates (thanks, “Maestro” and “subprime is contained” Bernanke!)
Deregulation in finance leading to increased leveraging, “securitization”, exponential growth in derivatives, and fraud. (Never forget the acronym used by people in finance: ‘IBGBT’ — I’ll be gone by then — they knew that what they were doing would blow up).
The previous two made it possible to create the housing bubble.
The housing bubble lead to HELOCs and lots of other credit that was used to overheat the world economy.
The overheated economy combined with the end of cheap oil lead to speculation that made it possible to push oil prices to $145/bbl.
$4/gallon gasoline broke the household budgets of people who were already in trouble with their oversized house payments.
I don’t have all of the data to back up this list. It is my observation from what I saw at the time and based on what I have learned since Sept. 2008. I would like to see some team of economists come up with a documented cause-and-effect explanation.
But all of this is immaterial, no? We’re stuck with figuring out neoliberal thinking and its consequences.
anonymous
Corrections:
“and at worse layoffs” -> “and at worst to layoffs”
“a “stronger” should” -> “a “stronger” dollar should”
“prevent “robust” hiring to occur” -> “prevent “robust” hiring from occurring”
And the list of factors was supposed to be bulleted, but the ‘li’ HTML tag did not work as I expected.
Ian Welsh
Unfortunately for Dean the correlation between trade balances improving and a lower dollar just isn’t there. If you look at the overall Bush era, the dollar collapsed, and, well trade balances got worse. I like Dean, because he’s bloody hard core, and hard core is good, but I don’t think he’s got this one right.
The problem is that the US is really in a catch 22. Is a high dollar bad? Yes. Is a low dollar bad? Yes.
This is why many of us have been screaming to reduce oil dependency. It’s not just a peak oil, it’s about the US’s particular dependence on oil. (I live in Canada. Oil prices going up have helped a good chunk of Canada (though I’d rather we didn’t have such high reserves if we’re going to mishandle them so badly, but that’s a whole other conversation…))
In terms of factors, there are longer term set up factors (low interest rates and low underwriting standards and outright fraud leading to housing bubble), and shorter term precipitating events. (ie. we all knew it was going to go bad, we did not know when or exactly how. This is an argument I had with Stirling. He thought it’d not really go to hell till 2009 because he figured they’d keep it together till then, I bet that they /couldn’t/ keep it together till then, because they were (and are) incompetent boobs.)
anonymous
Yeah, that’s what I think, too, except for the part about him not getting it right. When I think he’s not right, I doubt my thinking. He’s smart, he’s sensible, and he spends a lot of time working on this. So, I suspend my decision and continue studying until either I understand why he’s right (most of the time) or what he appears to have overlooked (rarely).
anonymous
It’s not just peak oil. It’s also that burning all of the oil is destroying the biosphere.
It’s arguable that we could be in that same situation now. There’s good reason to think that after the election, what with the cat-food commission, unemployement extensions not being extended further, votes already counted, etc., they’ll just let the macroeconomy go to hell — “they need a little austerity — it’ll make them appreciate what they haven’t got”. But then they might not hold it together before November. The PIIGS situation may spin out of control. And don’t forget last winter’s large snow storms. They could be portents of hurricanes to come.
anonymous
And I’d rather that no one had “tar sands.” Production of oil from these is one of the most environmentally destructive, polluting industrial processes ever devised. (That’s no judgment against Canadians. I live in a country that literally chops up hundreds of whole mountains and ships them away and strips the ocean floors clean of life: http://www.ted.com/talks/jeremy_jackson.html)