The Specter of Excess Capacity 45 comments
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One of the least reported aspects of this recession and in my opinion perhaps one of the most important is the incredible excess capacity that has developed throughout the world. There is just too much of everything. Too many factories to produce things, too many houses for people to buy and too much commercial real estate for lease.
As we move forward into whatever halting recovery the future may have in store, this excess is going to hang over us like a guillotine. Not only is it going to retard business profitability but the demand for workers to staff factories running at reduced rates of production is going to be dampened.
Ambrose Evans-Pritchard touches on this in an article in the Telegraph:
Excess plant will hang over us like an oppressive fog until cleared by liquidation, or incomes slowly catch up, or both. Until this occurs, we risk lurching from one false dawn to another, endlessly disappointed.
Justin Lin, the World Bank’s chief economist, warned last month that half-empty factories risk setting off a “deflationary spiral”. We are moving into a phase where the “real economy crisis” bites deeper – meaning mass lay-offs and drastic falls in investment as firms retrench. “Unless we deal with excess capacity, it will wreak havoc on all countries,” he said.
Mr Lin said capacity use had fallen to 72pc in Germany, 69pc in the US, 65pc in Japan, and near 50pc in some poorer countries. These are post-War lows. Fresh data from the Federal Reserve is actually worse. Capacity use in US manufacturing fell to 65.4pc in July.
The introduction of the deflation word into the conversation is interesting. It seems almost an article of faith that central banks around the world have beat back that monster with all of their monetary prestidigitation. Inflation is what you hear we have to worry about and inflation is presumed by many to be the inevitable outcome for many countries.
Yet, if indeed we are suffering from a serious problem of excess capacity, and I see no reason to suppose that isn’t the case, then deflation certainly can and does remain a danger. The assumption that we slide seamlessly from recession to recovery and need to worry most about when to start mopping up liquidity may be totally false. As producers around the world become increasingly desperate to generate cash, it isn’t at all unreasonable to think that we might well see debilitating price competition. In fact, as Evans-Pritchard notes, CPI figures for many countries are already negative.
Evans-Pritchard introduces another idea that I must say I find intriguing:
Professor James Livingston at Rutgers University says we have been blinded by Milton Friedman, who convinced our economic elites and above all Fed chair Ben Bernanke that the Depression was a “credit event” that could have been avoided by a monetary blast (helicopters/QE). Under that schema, we should be safely clear of trouble before long this time.
Mr Livingston’s “Left-Keynesian” view is that a widening gap between rich and poor in the 1920s incubated the Slump. The profit share of GDP grew: the wage share fell – just as now, in today’s case because globalisation lets business exploit “labour arbitrage” by playing off Western workers against the Asian wages. The rich do not spend (much), they accumulate capital. Hence the investment bubble of the 1920s, even as consumption stagnated.
I reserve judgment on this thesis, which amounts to an indictment of our economic model. But whether we like it or not, Left or Right, we may have to pay more attention to such thinking if Bernanke’s credit fix fails to do the job. Back to socialism anybody?
That’s pretty radical stuff and like Mr. Evans-Pritchard I’m not convinced that the professor is right. At the same time, should the economies enter into prolonged periods of deflation in which unemployment remains painfully high and government efforts prove ineffective at correcting the imbalances then social unrest is a likely outcome. Whether the economic model is broken remains to be seen but if enough people begin to view it as unjust then it becomes academic as to its validity.
Past periods of severe economic distress have reshaped political systems and there is little reason to assume that would not happen this time. The likely outcome is that we recover slowly from this recession and the lid stays on. But that nasty overhang of overcapacity could upset the apple cart mightily.
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Just wait until the new EPA and Cap & Trade hits the middle class home. Ouch.
While the "poor" (ie disabled or non-working & lazy) will be sent vouchers for increased costs.
Your business, you and your customers won't be so lucky.
On Aug 18 08:24 AM bandanna wrote:
> Deflation exists but for discretionary items. There is a lot
> of excess capacity right now for things that have suddenly become
> less necessary, but inflation continues for basics - for instance,
> food. My local restaurant is charging the same price for beef
> but has substituted a lower quality cut. The government stats won't
> pick this up as inflation, but I'm paying the same for lesser quality.
> Ice cream - now brought to you for the same price in much smaller
> packages. Gasoline - back to nearly $3 - 100% price increase from
> 5 years ago. Water - getting scarcer by the day. We can't convert
> those half used chip fabs to oil wells. While things sort themselves
> out, producers of necessities will continue to raise prices, which
> producers of luxuries will need to retool.
Well SAID bandanna
On Aug 18 08:52 AM TeresaE wrote:
> Well sell bandanna
>
> Just wait until the new EPA and Cap & Trade hits the middle class
> home. Ouch.
>
> While the "poor" (ie disabled or non-working & lazy) will be
> sent vouchers for increased costs.
>
> Your business, you and your customers won't be so lucky.
"The Producer Price Index for Finished Goods declined 0.9 percent in July, seasonally adjusted, the Bureau of Labor Statistics of the U.S. Department of Labor reported today. This decrease followed advances of 1.8 percent in June and 0.2 percent in May. At the earlier stages of processing, prices received by manufacturers of intermediate goods moved down 0.2 percent in July after rising 1.9 percent in the prior month, and the crude goods index fell 4.5 percent following a 4.6-percent increase in June. (See table A.)
The downturn in finished goods prices was broad based. The index for energy goods fell 2.4 percent in July after climbing 6.6 percent a month earlier, prices for consumer foods decreased 1.5 percent following a 1.1-percent advance in the previous month, and the index for goods other than foods and energy edged down 0.1 percent compared with a 0.5-percent rise in June."
Admittedly a somewhat volatile number, and not to be taken as the sole guiding number in looking at inflation/deflation, I nevertheless call attention to this sentence: "The downturn in finished goods prices was broad based. "
Jobs.
House values/foreclosures.
Overall consumer confidence and demand.
CRE.
Bank balance sheets.
Capacity Utilization.
Please, tell me where INflation shows up in any of these figures?
Oh and I went to your website. People actually pay money to listen to your crap? I can see that you're having fun with me with your new psychobabble toy.
I recommend that you practice what you preach.
On Aug 17 09:09 PM thotdoc wrote:
> Read up on what is happening in Mobile Alabama and the manufacturing
> that is developing in that area.
>
> Any idea that reflects an either/or or black and white view is inevitably
> wrong.
>
> Reality is much too complex for a thought process (B/W) that begins
> at birth and should be matured out of by 8-10 years old. Yet many
> never mature beyond B/W due to developmental/family patterns.
>
> On Aug 17 04:17 PM John Bowman wrote:
Oh, they must build MORTGAGES in Mobile... with a little help from their Congressmen.
On Aug 18 09:09 AM John Bowman wrote:
> I guess you have been sleeping at the wheel for the last twenty years
> as the textile, furniture, most steelmaking, and a myriad of other
> major industries have vanished from this country. Care to elaborate
> why Mobile is different?
>
> Oh and I went to your website. People actually pay money to listen
> to your crap? I can see that you're having fun with me with your
> new psychobabble toy.
>
> I recommend that you practice what you preach.
On Aug 17 10:09 AM markfl wrote:
> "There is just too much of everything. Too many factories to produce
> things, too many houses for people to buy and too much commercial
> real estate for lease." We agree. Another contributor made a similar
> case earlier this morning, saying that "there is a huge glut of excess
> capacity globally now that we have had a major fall in consumption."
>
> seekingalpha.com/artic...
On Aug 17 06:34 PM Value Added wrote:
> We have surely painted ourselves into a corner, and our
> IOU's won't buy our way out. Until we begin to produce (again, manufacturing,....
Today there is little need to buy a new car, because we already have more than one of the old type. New cars are more of what we already have, so we don't buy them. Most of the developed world has more housing than necessary (especially America) so why buy more? We have most of what we want of what's available - right down to potato chips. Growth depends on innovation that pulls money from saving.
In the 1990s we saw the demand for computing technology explode as people realized they could do more with these PCs and networks. That created real demand. We saw demand for mobile phones explode as people realized it improved productivity versus land-lines. It's that kind of innovation that increases demand, and raises capacity utilization.
What's needed today is more investment in R&D and new product development. Not "stimulus" money. If you create unique new solutions, it pulls the money. Over the last 25 years we've systematically reduced incentives in R&D and new products, and we'll see demand stagnate until more focused in this area.
Is anybody else getting this crap?
Could it be part of his games?
And is SA EVER going to do anything about this nonsense?
Getting ready to resign from this site.. just not worth the aggravation.
> You all worry too much. The FED will print enough money to keep
> us in the zone between inflation and deflation (stagflation).
And You Are "Too Trusting With Your Livelihood".
Better Take A Look At The Fall Of Rome; Very Similar "Policies" In The Final Days.
Just Because There Is No Adverse Effect For You Now Does Not Mean It Will Remain So.
To Assume Benevolence Is Foolish.
> OFF Topic - its bad enough we have to put up with that little turd
> cetin. Recently I've been getting virus and spyware warning messages
> that appear randomly when I access different articles on this site.
> They've been happening off and on for a week or two, no rhyme or
> reason to when they occur.
>
> Is anybody else getting this crap?
>
> Could it be part of his games?
>
> And is SA EVER going to do anything about this nonsense?
>
> Getting ready to resign from this site.. just not worth the aggravation.
The Internet Is Like The Wild - Very Hard To Control.
Aggravation Stems From Expectation. Consider The World "Imperfect" And Your "Stress Level" Will Drop; Better Able To Deal With What Comes.
When You Find A Good "Pool Of Information" There Will Always Be Predators "Stalking The Watering Hole".
Look Into AVG as a Cyber Security Software Provider - They Do A Great Job. (A Bit Heavy On The Settings - Much Greater Control Of What Gets Through)
Hope Your Day Improves.
On Aug 18 01:17 PM PainfullyAware wrote:
> On Aug 18 10:45 AM ain't no fortunate son wrote:
On Aug 17 11:12 AM Jiffy wrote:
> excess capacity is the 800 lb gorilla in the room that few talk about.
>
> Maybe because it has less ideological baggage and few can find a
> way to vent about their ideology. Answers will begin to appear to
> those few who are willing and able to suspend their own biases and
> observe the facts. In the meantime most will run in circles yelling
> their biases at those with opposite biases and most readers will
> only read those that share their own bias. Not a perscription for
> finding solutions to our common problems.
>
> Human emotions are just as important as excess capactiy and funds
> flow and interest rates. The lemmings will run together, the question
> is go with the flow or stand aside as they run off the cliff.
>
> I doubt there is a leader with the correct prescription who will
> be able to influence the lemmings. Like a global pandemic, it may
> just have to run its course. Once everyone is worn out maybe calm
> minds can cooperatively discuss productive activity.
>
> I am afraid it will last much longer than anyone is willing to admit
> today. If you admit it has a long way to run, it is much harder to
> push the panic button to pass some new/old policy thru. Politicians
> are not prone to patience. Consequently many of their policies are
> created before they even know the true nature of any problem.
>
> Save, don't spend.
> tend you garden.
> tend your family
> tend you friends.
> strengthen your local community
> Be patient.
On Aug 18 08:50 AM TeresaE wrote:
> No it doesn't.
>
> It shows if the government throws "free" money, idiots show up.<br/>
>
> Wonder how many idiots will have a repo on their credit within a
> year or two? (With job losses and defaults on the rise, not too
> mention if more private pension plans fall to the public option),
> this is yet another gift to the Wall St Banksters.
>
> DEBT of the government is not free. And this is yet one more program
> digging our collective grave.
>
> Not any kind of a success in my book.
I'll take faster development.