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Headwinds to a recovery. 2 comments
There are some tensions that I see that weren't present in the Great Depression that will make our recovery difficult. The US is in massive debt, as a debtor nation, with a need to sell treasury bonds. The tension between wanting to stimulate to recovery and the need to sell treasury bonds is a tension surely weighing on the Federal Reserve. I am not sure that they can pull both agendas off at the same time.
The Fed has another tension that did not seem to be an issue in the Great Depression. That tension is between stimulating the economy and creating asset inflation. Natural resources were plentiful, and according to people I have spoken with, while money was very tight in the Great Depression, prices were very low. We are facing tight money and high prices. That seems to be much worse than what was taking place in the Great Depression.
The government has a tension that must be maddening to the likes of Larry Summers and Obama and Geithner. I must admit that to watch him, Larry Summers looks like a man without a worry in the world. He is convinced that decreased searches on the internet for "economic depression" means that we have no big issues too big to overcome. I want what he is smoking.
The government tension does not go away because Larry Summers is a pollyanna! That tension is that unemployment benefits are running out. The modern day equivalent of the soup line is unemployment benefits. But how much money does the government need to borrow to supply these folks with a good meal and a roof over their heads. It seems that we have spent too much already on the banks who contribute nothing to the success of these folks. This is an aweful tension within the government.
While America is not the worst of the debtor nations, and certainly the international bankers believe we can take on more debt to their advantage, we still are falling dangerously into debt. As this recession drags on and on, with years of high unemployment facing us, the costs will skyrocket. Either consumer spending will contract a little (as long as folks get benefits) or consumer spending will contract a lot as the haves help their family members who have exhausted their unemployment benefits, food stamps, etc.
You Seeking Alpha readers are welcome to cheer me up, but I don't see a pleasant outcome based on these tensions and the possible permanency in the loss of jobs that we now see.
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This post has 2 comments:
If I had to make a prediction I would say that we will have numerous ups and downs in the economy but mainly stagnate with high unemployment and wild swings in the market.
"The big question is: why the Japanese economy remains so weak so many years after the bubble burst? Economists are still debating this.
(1) One explanation is purely cyclical. Since the bubble period created large overcapacity, it will take time to reduce capital stock and inventory. But if so, stock adjustment is taking a bit too long.
(2) Another explanation blames the banks' non-performing loans. Since banks failed to get rid of bad debt (and the government did not encourage this effectively), financial intermediation was impaired, which in turn hurt the real economy. This vicious circle will continue until a bold measure to clean up the banks' balance sheets is taken (the government is claiming that it is being done, but maybe it is not enough...)
(3) Another popular explanation is that Japan's economic system has become obsolete. Japan's relational systems (lifetime employment, seniority system, keiretsu groups, subcontracting, and so on) may have worked well during the 1950s and 60s, but they are no longer efficient in the age of globalization. Some argue that Japan is facing the third major transformation (the first was in Meiji, the second was post-WW2 reforms). But others caution that Japan should not adopt the American system uncritically since some Japanese systems are still useful. Recall the argument about the origin of the Japanese system in lecture 9.
(4) Still another explanation points to the long-term changes of the Japanese society. Japan has a rapidly aging population and snowballing government debt. The Japanese people are uncertain about their future, especially concerning the rising tax burden, availability of jobs, medical care, and the sustainability of pension schemes. This pessimism slows down consumer spending and business investment.
(5) More recently, the lost competitiveness and the "hollowing-out" phenomenon (as firms invest abroad, jobs will disappear at home) of the Japanese manufacturing base are cited as a great threat. The recent rise of China as the factory of the world is raising concern [but China's growth may slow down; China itself has many economic, social and political problems in the age of WTO].
It seems that the lack of political leadership at the top to squarely recognize and solve these problems is the ultimate cause of uncertainty and declining confidence in the Japanese society. People just do not believe that the current government can manage these problems."
So, Nathaniel you can see that there are some scary similarities between the BIS treatment of Japan and what is coming for our banks. Yet we have more reflation and more debt. Without increase in wages I see a real problem.
On Nov 07 11:43 PM Nathaniel C wrote:
> Gary I agree with your idea that we cannot have a real recovery,
> but this does not seem to matter to the stock market. Before this
> 60% rally in the market I was convinced that we would encounter debt
> deflation and that the best we could hope for would be Japan 1989-current.
> However the FED this time responded a lot different than the bank
> of Japan by literally printing trillions of dollars. This seems to
> have temporarily reinflated asset prices. I really think we are in
> no mans land right now. There is no precedent in history that we
> can compare to. Many people try the great depression but the FED
> has responded much different than they did back in 1929-1930.
>
> If I had to make a prediction I would say that we will have numerous
> ups and downs in the economy but mainly stagnate with high unemployment
> and wild swings in the market.
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