Let’s have a chat about the economy, starting with a couple articles.
The first is an article from the NY Times noting that small investors have been moving out of the market in droves: 33.12 billion out of mutual funds this year, so far. This is entirely rational, not only is the market currently fixed (major movers do not make a profit every single day of a quarter in a free market), but inflation is low and deflation threatening. When risks are high and inflation is low, the smart thing to do is store your money under a mattress since it will lose little value.
Of course, this is only partially true, since inflation numbers are cooked, and it’s not clear that prices of the things which matter most – food and energy (aka. heating) are actually dropping.
The second article I want to highlight is a column in the Financial Times, by Michael Pettis. Pettis argues that the surge in exports from China and Germany , which has lead to an explosion of the US trade deficit, is dangerous. He notes that the fall of the Euro plus austerity in Europe, and the availability of extremely cheap credit to Chinese manufacturers, has increased surpluses in China and Germany. As European countries that have trade deficits try and lower those, this leaves the US as the designated consumers for the surplus since trade deficit countries in Europe can’t afford to borrow due to the European credit crisis.
This isn’t sustainable, and Pettis fears it will lead to a backlash from America, with actual tariffs and trade quotas.
The larger point is simpler: the countries being punished by “bond vigilantes” are countries running balance of payment deficits. Countries whose finances are in no better shape than, say, Spain, are not getting hit.
But everyone can’t run a surplus. It is impossible. As a simple matter of math, the accounts must balance. The idea pushed by Germany, that everyone should be more like them, and have positive balances of payments, is nonsense. It is literally impossible.
Everyone fears a massive decline in trade, as in the 30s. They should, because we are in a Depression. However, the fact is that if surplus countries refuse to moderate themselves, then the balance will be fixed some other way. It may be through actual protectionism in the US, it may be through a collapse of US demand, but it will happen.
That which cannot go on does not go on.
In terms of the US economy, it’s pretty clear we’re in a second downleg of the Depression, as predicted. The key issues are that States and municipalities are essentially bankrupt, and that corporations aren’t hiring. Corporations aren’t hiring because their profits are fine, and because they don’t see where the sustained growth would come from. States and municipalities are having income issues because the incomes of median taxpayers have not recovered and the number of employed is not increasing (ignore the “unemployment rate”, what matters is how many people are employed and that hasn’t recovered worth a damn.) Since States and municipalities have limited ability to borrow and can’t print money, in both cases, unlike the Feds, this means they must cut or raise taxes and in general States are ideologically opposed to raising taxes and municipalities don’t feel they can. Housing prices remain depressed, which is the main source of money for municipalities.
Since there is no chance of a real stimulus being passed (and if there was, Obama would do it badly, like he did the last one) and since Obama refuses to spend the TARP money on the economy until it’s his reelection on the line rather than Congressional Dems, and since there’s no obvious source of new jobs in the US economy, I see little reason to expect the US economy to recover. Even if the world economy somehow does, it will route around the US, since the US is a high cost domicile and there is no good reason to produce in the US. In the old days you produced in the US because that was where the next big tech boom occured, the skills were there, and you needed in. With the deliberate strangling of innovation in the US due to the oligopolization of the economy, the next tech boom (if there is one) is unlikely to occur in the US.
Overall, there isn’t a lot of reason to be cheerful. If the economy does manage to pick itself up off the floor, that would mean an increase in the price of oil, and inside of two years (and probably inside of one, if it was a good recovery) that increase would spike the recovery in any case.
None of this was necessary, but Obama chose to not just ask for too little money in his stimulus, but spent the money very badly even outside of the hugely useless tax cuts. The money did not give the economy an obvious medium term direction: either a huge telecom build-out or an energy and conservation build-out, and the huge bailouts for financial firms created a more concentrated financial sector full of zombie banks with no intention to lend money. The failure to create a workable cram down on housing prices which also rescued underwater home owners has left housing prices underwater and credit markets still sclerotic. With the House either going Republican in the fall, or if it remains Democratic with the Democratic margin being controlled by hard-core Blue Dogs, even if Obama did buy a clue, there is little chance that a decent restructuring stimulus bill could get through Congress and the actions of regulatory bodies like the FCC, the Justice department, as well as Obama’s implicit recognition of the health oligopoly, make it clear that his administration has no intention of challenging, let alone dismantling, the oligopolies which are draining the life blood of the US polity.
Plus ca change…
An excerpt from January 5th, 2009:
I’ve long observed that the only economic policy that Obama really really believes in is tax cuts. During the election, even when no one really cared, he would keep repeating, over and over and over again, that he was going to cut taxes.
The problem is that giving money to people without pricing power (most middle and working class people) is pointless. People with pricing power, like health care providers, credit card companies (who can and will raise rates) and employers (who will take into account that their workers are now taking home more money and thus don’t need as much from them) will simply take the money away. And at this time workers and ordinary consumers just don’t have pricing power.
Likewise corporations are not going to create real new jobs if there’s no demand. Who wants to invest into this economy? This isn’t an economy where you hire new people, it’s an economy where you take any money you’ve got and you use it to buy up distressed competitors and properties at generational lows. Then you rationalize your new acquisition with your own company by laying people off. We’ve just spent the past few months watching this play out in the banking industry, heavily subsidized by the government, now we’re going to have to watch the government subsidize buyouts of non-financial companies. If at first giving money to corporations (banks) doesn’t work, why not try it with even more companies?
Stimulus at this time should not be tax cuts, it should be spending. Rewire the country’s energy infrastructure, make every building energy efficient, rebuild roads, build high speed train corridors on the west and east costs, then connect them to each other. Give cities money to build the trams or subways they’ve been wanting to build. Push high speed internet out to everyone, and at the same time increase its speed to international standards (i.e. 10x as fast as the crappy “high” speed internet North Americans get). Move to single-payer healthcare and buyout the health insurance companies. Extend UI to 12 months, and create a bunch of programs that folks can work in as was done in the Great Depression.
Spend money and that money will create demand—for all the products needed for all those projects, for the workers to build all the trains, rail lines, roads, power lines, high speed internet, and so on. And you won’t just be giving money away to be spent in all the same ways that got us where we are, you’ll be refitting the economy. The key thing that hasn’t got through the thick skulls of the elites is that the old economy didn’t work for the majority of people. It was broken. Even the “prosperity” which the elites had (and they did, they are richer than they have been in a century) was fake—it was based on profits that didn’t exist. Wall Street’s losses weren’t losses, they were the revelation that every profit they made for the last 10 years was fake and based on fraud.
The economy needs to be restructured, and that means spending on restructuring, not giving money to people to spend in the same patterns as they did before. That doesn’t mean no money shouldn’t be given out, it should. Relief for those who need help should be generous, but the majority of money shouldn’t go to handouts, it should go to creating a new America and creating jobs that Americans can work in to help create that new America.
lambert strether
Aw go on, Ian. Say what you feel.
* * *
Suppose, just for the sake of the argument, you wanted to make the optimist’s case (and by that, I don’t mean mainstream optimism). What would that look like?
Assuming, of course, that this is not the optimist’s case.
Ian Welsh
The optimist’s case would be that the second world, China and Germany are recovering, that trade is picking up and that those folks will want /some/ US goods and services, and that with demand from those areas US corporations can start hiring again. If they do so, you get a virtuous cycle for demand and for taxation, which is good.
gtash
What on earth would China or Germany want to buy from the US? Unless it’s weaponry and late delivery on Boeings…
CEO
I have it, we could sell them Texas.
Tom Hickey
The most pressing problem, as Richard Koo points out, is that this is a “balance sheet recession” (financial cycle recession) and not a business cycle recession. The people in charge are looking at it as if it were a business cycle and ignoring the time bomb of leverage overhang. There is still a mountain of toxic and potentially toxic debt out there, and if debtors are not given space to deleverage and the debt that cannot be paid resolved, that debt is going to come cascading down through default and foreclosure, leading to debt-deflation. (See Hyman Minsky’s financial instability hypothesis and Irving Fisher’s debt deflation theory of depression.)
alyosha
Ian, you have a way of cutting to the chase. I feel as though I could print this out, frame it, tune out, and simply check back every 6 months or so. Or, as another blogger put it, Nothing Has Changed.
What’ll be interesting is what happens when the 2nd leg down begins in earnest, and how things heat up in the next two years before the election in 2012.
Formerly T-Bear
“Catch 22 it is, cannot print their way out, have liquidated their only means to produce their way out, and have mortgaged everything needed to sell their way out; those three curtains are empty, and now the ability to borrow their way out is disappearing as well.”
Does that about sum up the day?
Cujo359
CEO writes:
I think they’d rather buy “late Boeings”.
Fester
Its starting to get tough to live here. “Inflation” may be down, but the costs of food, rent, and energy, which is the stuff I actually pay for, are all up quite a bit and forget about healthcare. Everyone I know is either out of a job or has a frozen salary. If you have money to invest, there is no place to put your money in that is either much too risky, or won’t generate enough returns to keep up with the non-inflationary cost increases.
If you put your money under a mattress, again things that you actually have to be spending on keep going up in price. Anecdotally, crime also seems to be coming back, though again it will be awhile before the statistics catch up.
I think the best idea is Dmitri Orlov’s: people just have to learn how to be poor. I’m starting to do that, but it cuts against forty years of training to think like a middle class person.
Also, the gap between what the press reports and what is happening on the ground is getting big enough that I’m literally starting to rely on the reports of people I meet for information, like I’m living in some sort of medieval village and the only way to find out what is going on is to pick up tavern gossip.
anon2525
The key issues are that States and municipalities are essentially bankrupt, and that corporations aren’t hiring.
It doesn’t change anything, but I thought that you would want to get this right:
Dean Baker clarifies the distinction between jobless claims and hiring.
anon2525
As European countries that have trade deficits try and lower those, this leaves the US as the designated consumers for the surplus since trade deficit countries in Europe can’t afford to borrow due to the European credit crisis.
This isn’t sustainable, and Pettis fears it will lead to a backlash from America, with actual tariffs and trade quotas.
I do not know how long Pettis has had his fears, but Krugman has been calling quite strongly for responses to China’s mercantilism many times since March, at least. Also, this entry from March 17th provides a link to an column by Martin Wolf who was concerned about China and Germany. And Dean Baker has been arguing for a weaker dollar so that exports would increase and domestic hiring would increase for years.
Krugman concludes with:
anon2525
Clarification:
Dean Baker has been arguing for a weaker dollar so that exports would increase and domestic hiring would increase for years.
“for years” should have been written after “has been arguing.”
anon2525
…since there’s no obvious source of new jobs in the US economy…
Not true. There is an obvious source — restart the WPA or CCC or both. What there is not an obvious source of is new jobs started by private capital. But then, that would be capitalism flaw. It is supposed to be able to provide full employment and stable prices in our laissez faire economy. Because it is not working and failed spectacularly* in 2008, we should try something else.
*Technically, it is not laissez faire because while profits were privatized, losses were socialized.
anon2525
Rewire the country’s energy infrastructure, make every building energy efficient, rebuild roads, build high speed train corridors on the west and east costs, then connect them to each other. Give cities money to build the trams or subways they’ve been wanting to build.
Fortunately, we don’t need to fix the stuff that has already been built. It’s not failing. It has been given the passing grade of D by the American Society of Civil Engineers in 2009. That’s the same grade as was given in 2005, but is a slight fall from the D+ given in 2001. So that’s one less thing to worry about. Well, there was that dam that failed a few weeks ago. Levees were given a D-.
Also, the “restructuring” list should include “restructuring how kids are educated” so that all of the “ideas” that bush&co put in place are discarded.
Eureka Springs
Thanks, Ian.
I’m sure you tire of repeating yourself, but it helps even those of us who know it to read such clarity.. including and perhaps especially your suggestions of what to do. And we all know how important repetition is if something is ever going to get into the public’s head.
PurpleGirl
When someone’s UI benefits have ended, when they’ve emptied their savings accounts and retirement investments, when they have no more resources to be tapped, how do they pay rent, or mortgage (as if it’s rent, let’s say), buy food, buy medicines they need (they have high blood pressure or type 2 diabetes and the doctor who they can’t afford to see now had kept telling them they could die without the medicine by stroke or heart attack)? Living poor is one thing but how do we live when there is simply no money at all at our disposal?
anon2525
The larger point is simpler: the countries being punished by “bond vigilantes” are countries running balance of payment deficits. Countries whose finances are in no better shape than, say, Spain, are not getting hit.
What about the larger larger point, how the invisible bond vigilantes are providing cover for those in and out of the U.S. gov’t. who don’t want a fiscal response (a WPA jobs program) that would not benefit them?
This theory of bond vigilantes works. Except when it doesn’t.
Ian Welsh
Tell Greece about how bond vigilantes aren’t after them.
anon2525
Let’s have a chat about the economy…
OK, let’s 🙂
…the countries being punished by “bond vigilantes” are countries running balance of payment deficits.
Tell Greece about how bond vigilantes aren’t after them.
And the U.S. isn’t running a balance of payment deficit? And hasn’t been for thirty years?
I’m attempting to make the point that your economic cause-and-effect explanation is incomplete.
Krugman has been waging a battle with Rogoff&Reinhart, who have been arguing that the ratio of public-debt-to-GDP predicts when a country will default. He has been presenting evidence (also here and here) that what they say is not true. Having a high public-debt-to-GDP does not — by itself — predict that a country will default on its debts (and, therefore, is not at risk of “attack” by “bond vigilantes”).
Your description is simple, but it is too simple. The bond vigilantes are not punishing countries that are running balance of payment deficits. The bond vigilantes are punishing countries that happen to be, among other factors, running balance of payment deficits. (As explanations go, it needs improvement.) Couldn’t the bond vigilantes be targeting Greece because Greece has a post-war history of defaulting on public debt? (“Hey, uh, the lights are flashing red on Greece in our economic models. It’s looking like they’ll be defaulting on their debt. Again.”)
(And while we’re at it, what about Spain? 20% unemployment?! “Well, that’s OK. Their economy’s fine, so long as the bond vigilantes like them.”)
As Albert said, “Make things as simple as possible, but not simpler.” (This may seem very similar to Occam’s razor which advocates the simplest solution. However, it is normally taken to be a warning against too much simplicity.)
anon2525
(here and here)
That first “here” had some malformed HTML. Here is the link
anon2525
Here is some OECD data:
Balance of payments from Q2 2008 to Q1 2010. It also includes BoP data for several non-OECD countries.
Over that period, all of the PIIGS have run trade deficits every quarter. Also running trade deficits throughout that period are Australia, France, and the U.K. (Of course, the U.S. has run the largest trade deficit in the world.)
Hungary has been running a trade surplus for the past three quarters.
Belgium, which has been reported to be at risk of default, ran a trade surplus for two of the past three quarters.
Portugal has had a declining trade deficit for the period.
Ian Welsh
So, all the PIIGS had trade deficits. I didn’t say all countries with trade deficits were being punished by bond vigilantes had deficits, I said all of the countries being punished had trade deficits. Belgium has not been attacked. Bond vigilantes have not yet gone after Hungary (their 10 year is at 7.12), though they may (if so, it will be punishment for telling the IMF to fuck itself.)
For now the US is fine, I agree with Krugman on that. The risk point will be when/if China transitions to an internal economy.
anon2525
OK. I’m concerned about people positing false economic mechanisms. Here is the parallel:
– Claim 1: “The gov’t-debt-to-GDP ratio predicts when a country will default on its debt. Bond traders look at this ratio to decide whether to bid at gov’t. auctions of gov’t. bonds. This causes the yield on the bonds (the interest rate the gov’t. needs to pay for loans) to rise as traders assess the debt to be more risky.” (The right-wing then uses this claim to assert that because of this relationship, we should cut spending on social programs.)
– Claim 2: “The trade balance (to GDP?) predicts when a country will default on its debt. Bond traders look at the trade deficit (imports greater than exports) to decide whether to bid at gov’t. auctions of gov’t. bonds. This causes the yield on the bonds to rise as traders assess the debt to be more risky.” (The right-wing then uses this claim to assert that because of this relationship, we should cut spending on social programs.)
Krugman has been providing evidence that Claim 1 is false. The Debt-to-GDP ratio alone is not sufficient to determine that a gov’t. is going to default, and the bond traders agree that Claim 1 is false.
It appeared to me that initially Ian Welsh was making Claim 2 (without the recommended right-wing policy response):
Ian Welsh: The larger point is simpler: the countries being punished by “bond vigilantes” are countries running balance of payment deficits. Countries whose finances are in no better shape than, say, Spain, are not getting hit.
Some countries that are running trade deficits are being judged by bond traders to be at risk of default on their gov’t. debt, and some that are running trade deficits are not. So, trade deficits alone, like debt-to-GDP ratio, does not predict whether gov’ts. will default, and therefore does not predict whether bond traders will require higher rates of interest before loaning those gov’ts. money.
I think that we need to be aware of possible false economic reasoning because people are using it as a justification for cutting social programs. Certainly, this is what Krugman is pointing out in his campaign against the flawed reasoning of Rogoff&Reinhart.
chicago dyke
Also, the gap between what the press reports and what is happening on the ground is getting big enough that I’m literally starting to rely on the reports of people I meet for information, like I’m living in some sort of medieval village and the only way to find out what is going on is to pick up tavern gossip.
i feel this way too, esp at the local level. the local papers here are beyond worthless. so much is happening that is never seen in most of them. i drive around my hood and think, “it’s pretty hard not to notice (some sort of change, usually negative). i tend to read blogs for individual comments and not for the political coverage, as i also feel a strong disconnect between the practice of day to day politics and my own reality. what i learn from individual comments about economic conditions may be anecdotal, but given the worthlessness of the press, i find on the ground reports from fellow blog people very useful, in the aggregate.
anon2525
…given the worthlessness of the press, i find on the ground reports from fellow blog people very useful…
I reached the breaking point in 2003, when I learned about the existence of internet journals being written by Iraqis in Iraq leading up to and after the invasion. The corporate media had devolved into propaganda organs for bush&cheney&rumsfeld&co. And this was after their lewinski/”impeachment, bush v. gore, and election 2002 failures.
We’re all at the point where, in addition to our job, we have to be our own news editor. The ones paid by the corporate media outlets have shown themselves to be hopelessly corrupted or incompetent. Now we have to find experts that we can trust in economics, politics, history, foreign policy, science, etc. Corporations are counting on the vast majority of people not bothering to do that, not doing it well, or not having time to do it.
donna
I’m selling stocks right now to pay for my kids’ education; college is outrageously expensive. We need an education and jobs programs STAT.
I’m better off than others who are selling stocks to live on. I have one friend who has been unemployed for three years now and is living off his 401K.
Cpmpanies have to stop sitting on cash and HIRE people. If people don’t have jobs, they can’t buy what companies make. I don’t know why they can’t get this. You can’t keep making your millions as a CEO if you don’t hire and PAY people.
Get a clue, corporate America.