Is economic boom around the corner?

Submitted by Edward Harrison of Credit Writedowns.

Back in February, I asked you if we were experiencing a recession or depression.  A plurality said it was a depression with a small ’d.’ I agreed and went on to explain why. Since then, things have changed and we seem to be on the verge of what I call a technical recovery (or a fake recovery – take your pick).  We may even be on the verge of a multi-year economic expansion – something bears like David Rosenberg should not rule out. But vigilance is still required. I will explain why.

Since the recovery talk has gathered steam, a lot of well-respected economists and policy makers have begun to construct what I consider a revisionist history of events. It goes something like this:

We have just experienced a major economic downturn. Coupled with a financial panic of major proportions, the global economy suffered a severe shock.  However, we have learnt how to deal with such crises due to our experiences during the Great Depression. The liquidity crisis was overcome through deft monetary policy. And fiscal expansionary policy aided a return to business as usual much sooner than many would have believed.

As a result, it is quite obvious we have been through a severe contraction, but nothing more than a garden-variety recession complicated – of course – by a financial panic. Back in February, a lot of economists made alarmist predictions of woe, foretelling a global Depression. This was wrong-headed and reckless as we see today. GDP has likely turned up in this third quarter and will continue rising for the foreseeable future. With the worst of things behind us, we can normalize monetary and fiscal policy and return to a more robust economic path.

On the surface, this narrative is compelling.  But, I believe it is based on a flawed analysis.  I would like to present a different narrative here for you to dissect.

GDP is a poor measure of growth

As Joseph Stiglitz recently wrote, GDP is a very poor measure of growth and economic health.  And he is right. There are many questions of statistical accuracy in its measurement. But, more than quantity, I have problems with GDP as a measure because of quality. Robust 4% growth that is underpinned by savings and capital investment is not the same as robust 4% growth underpinned by debt and consumption.

The problem I have with the recent history of growth in the United States, the United Kingdom, Spain and Ireland in particular is that the growth was underpinned by high debt accumulation and low savings.  As debt is a mechanism through which we pull demand forward, the debt and consumption has meant we have been growing today at the expense of future growth.

Low quality growth can go on for a long time

This dynamic can continue for a very, very long time. In the United States, by virtue of America’s possession of the world’s reserve currency, an increase in aggregate debt levels has been successfully financed for well over twenty-five years. Mind you, there have been a number of landmines along the way. But, time and again, these pitfalls have been avoided through asymmetric monetary policy and counter-cyclical fiscal expansion.

So, poor quality growth can continue for very long indeed. And it is this fact which allows the narrative of easy money and overconsumption to gain sway.

The boy who cried wolf

A soothsayer who counsels against this type of economic policy, but who warns of impending collapse will surely be seen as the boy who cries wolf. Think back to 2001 or 2002. Did we not witness then the same spectacle whereby the bears and doomsdayers were let out of their holes to warn of impending doom from reckless economic policy? By 2004, unless these individuals changed their tune, they were long forgotten or even laughed at – only to resurface in 2007 and 2008 with their new tales of woe. Knowing this shapes the psychology of economic forecasting and is why missing the turn is disastrous for one’s career. Efforts to avoid missing the turn are also part of a very large pro-cyclical psychological force underpinning a cyclical bull market.

The fact is: low quality growth does not lead to immediate economic calamity. It can continue through many business cycles. Even today, it is wholly conceivable that we could experience a multi-year economic expansion on the back of renewed monetary and fiscal expansion.

Marc Faber: “Don’t underestimate the power of printing money”

You will recall that I wrote a post at the depths of the market implosion highlighting a phrase by Marc Faber, “Don’t underestimate the power of printing money.”  This quote has stuck with me as asset markets have soared in the intervening time.  What Faber was alluding to was the fact that printing money works.  It does goose the economy as intended and it can induce a cyclical recovery.

Nevertheless, the recovery is likely to be of poor quality due to significant malinvestment. Debt levels will rise and capital investment will be directed toward riskier enterprises. Look at what’s happening in China.  Are you telling me stimulus is not working? It most certainly is.

In the west, stimulus is also working. It is designed to stop people from hoarding cash and to consume. It is also designed to get people out of savings accounts and into riskier asset classes. it is doing just that. In response to a Spanish-language article on just this topic, I wrote in today’s links:

Europeans are abandoning savings accounts in favour of riskier assets as low interest rates have created a liquidity-seeking-return dynamic. This is true as much in the US as it is in Europe and it proves that a wall of liquidity can induce a cyclical recovery based on asset price inflation aka the fake recovery. The question is what comes next?

Liquidity is seeking return. It is pure speculation whether the upturn that underpins this dynamic has legs. I see an even chance that it does, which is why, despite my recent mild bearishness, I am a lot more upbeat about the economy and markets than a lot of others in the blogosphere.

So where does that leave us?

The outlook is unclear.  The Obama Administration looks ready to run a victory lap judging from recent statements. Officials say they are also withdrawing liquidity in anticipation of an upturn in the economy (though some believe these claims exaggerated). So, that is the one side – which Goldman’s Jim O’Neill takes.

On the other side of the argument is the fact that employment is still weak and incomes are down – the most since the Great Depression. After a decade with no income gains and still weak employment prospects, the ability of households to refuel a debt-induced upturn seems limited – as the recent data on consumer credit demonstrates. This is the side that David Rosenberg takes.

I take neither side. I am just not that clairvoyant. Both scenarios are plausible outcomes. But, I am still very worried about the low quality of any growth we will get in an upturn and the widening gulf of economic fortunes that result. I am equally worried about how even a low quality upturn will sap the will for reform in the financial arena. Mostly, I am worried that the eventual collapse – if it doesn’t happen now – will be much worse when it does happen.


Please listen to the half-hour audio clip with Marc Faber from yesterday.  He does an excellent job of giving voice to some of the ideas I just laid out in his usual semi-apocalyptic style.  The clip comes via Bloomberg’s On the Economy podcast, a show I recommend highly. Click here for the show’s webpage and instructions on how to listen to broadcasts.

(mp3 Audio embedded on original post)

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This entry was posted in Doomsday scenarios, Economic fundamentals, Federal Reserve, Guest Post on by .

About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. bb

    i strongly disagree that central bankers have learnt how to deal with the crisis from the great depression. had fiat currencies been pegged to gold, the crisis would have been catastrophic with mass devaluations and exchange controls.

  2. john c. halasz

    “As debt is a mechanism through which we pull demand forward, the debt and consumption has meant we have been growing today at the expense of future growth.”

    This is way too Austrian. Debt incurred for productive investment, i.e. productive consumption in the present to increase future capacity, is a much different matter than debt incurred for financial speculation or discretionary consumption. Even consumer credit within limits facilitates demand for durables and helps to make those markets, (though I find the consumption smoothing hypothesis one of the implausible abstractions of economists, which depends on a constant availability of credit). The problem nowadays is an utter dearth of plausible opportunities for productive investment, due not simply to “malinvestment”, i.e. inter-sectorally and globally unbalanced investment, but due to general glut, i.e. global productive over-capacity. And that is in turn rooted in long-run market-and-policy based mal-distribution of income, adequate to sustain effective demand, through financial asset inflation.

    “But, time and again, these pitfalls have been avoided through asymmetric monetary policy and counter-cyclical fiscal expansion.”

    Actually, this has been an era of monetarism, with the mainstream assumption that monetary policy is the sole sufficient and legitimate means of assuring stable growth. Fiscal policy has largely been ignored, if not outright tabooed along with industrial policy, and “free trade”, meaning most of all free flowing of financial capital, has been pursued as a panacea at the expense of balanced international trade. This crisis is not some accidental occurance, but rather a man-made disaster, the outcome of a deliberately constructed policy regime.

    1. Edward Harrison Post author

      I would agree with a large part of what you said. Debt accumulation does not mean it is being used to fund unproductive activities. it just means that one is spending money today using anticipated income for the future in order to invest or consume.

      And yes, the over-capacity of which you speak is a problem. I would argue, however, that it is a problem that exists due to prior malinvestment. Irrespective, we agree on the broad strokes.

      And again, I think you’re right that Monetarism has reigned supreme – that is until the neo-Keynesians of the Obama Administration came to town.

  3. DownSouth

    To me it all sounds hauntingly reminiscent of this:

    The Reign of Terror, we should remember, followed upon the period when all political developments had fallen under the influence of Louis XVI’s ill-fated cabals and intrigues. The violence of terror, at least to a certain extent, was the reaction to a series of broken oaths and unkept promises that were the perfect political equivalent of the customary intrigues of Court society… Promises and oaths were nothing but a rather awkwardly construed frontage with which to cover up, and win time for, an even more inept intrigue contrived towards the breaking of all promises and all oaths… The widespread opinion that the most successful modes of political action are intrigue, falsehood, and machination, if they are not outright violence, goes back to these experiences… Whenever (genteel) society was permitted to invade, to overgrow, and eventually to absorb the political realm, it imposed its own mores and ‘moral’ standards, the intrigues and perfidies of high society, to which the lower strata responded by violence and brutality.
    –Hannah Arendt, On Revolution

  4. Mista B

    If a man makes $50k per year, has no assets, and has $100k of credit card debt, are you doing him a favor by lending him $30k? Sure he suddenly has more money to spend and his immediate liquidity crisis is solved. His solvency issue, on the other hand, has gotten worse.

    There are two main reasons why no recovery is happening. First, banks are still tightening lending. Only an idiot would run up his credit card given today’s rates. MEWs are history. They’re responsible for almost all of the positive GDP growth this decade, and they’re now negative. Second, the number of people in the 45-54 year-old age group is at a peak. It’s going to head down from here. This group spends the most, and it’d been on the rise since 1982. That’s why we could always rely on consumer expenditures rising. That is no more. So now we’re entering a period where there will be (1) far tighter credit and (2) fewer consumers, yet we’re to expect growth? The 50-year-olds of tomorrow would have to spend even MORE than did the 50-year-olds of the last seven years. How can they, given that incomes and credit are dropping? It’s preposterous, but there it is. People are extremely short-sighted. We’re now in the greatest liquidity driven bear market rally of all time. On main street, make no mistake: we’re still in the heart of a recession. Not a single business contact I know says otherwise. The thing with psychology, it changes fast. People are bearish about the economy but uber-bullish about the stock market. Not a good mix.

    1. Jim in MN

      >>>>>>>>>>>>kewpie doll<<<<<<<<<<<<<<

      Nail, meet hammer.

      Note also that real household income has declined over the past decade. It is likely to decline further.

      It is quite easy to argue that middle class Americans were at their economic peak in about 1970, right when the complaints were bitterest (All In The Family, Good Times, One Day At A Time etc.).

      We’re seeing the glittering castles of globalized capital, built on Wall Street as the most defensible place to store wealth. It doesn’t help most people. It does, however, serve as the flame to the millions of tiny moths known as 401(k)s. There has been a disturbance in the Force, and the castles went askew. Guess where the cash is coming from to prop them back up?

      Main Street is not getting any better. The damage will deepen, even if someone out East finally panics enough to bother reading the history of the Reconstruction Finance Corporation in the 1930s–start with the Chicago and Detroit banking collapses–and gets public agents behind bank lending desks to erase the word “NO” and instead write the word “YES” on small business financing memos.

      It took about three years to get there in the Olde Great Depression. (looks at watch)….hmm….

      1. Jack Lacton

        Quoting household income figures tends to be the tactic of fraudsters trying to point out how bad things are. Fewer people per household, which has been the experience of the last 20-30 years, lowers household figures. The better thing to analyse is real purchasing power, which is up significantly in that same period.

  5. fresno dan

    The recent Census data tells us that there has been no growth in income for the last decade. Calculated Risk tells us that a good portion of consumption was due to MEW (mortage equity withdrawal).
    When I read Plato when I was young, I had not lived long enough to appreciate it. We see things not only as shadows, but as preconceptions. Is that the shadow of a rabbit head, or a human fist with two fingers sticking up?
    I agree that printing money can cover a multitude of sins – for decades. We fool ourselves, and others who have dollars, but at some point the value of what you produce and what you consume has to converge. Borrowing is not income, and debt is not wealth.

  6. joe costello

    This is well put and gets to the heart of the bet. I’m skeptical what’s been done will get anything more than long term stagnation, that doesn’t mean a quarter here and there of strong growth. But, certainly stranger things have happened.

    However the longer term trends are firmly entrenched. Stagnation of wages is now 3 decades going, literally papered over by increased debt. The step down by many in the past year, will not be met with a future step up, part of the “new normal.”

  7. Hugh

    This post seemed all over the place. We are on the verge of a multi-year expansion, a recovery, a technical recovery, possibly a depression, I don’t know, I’m agnostic, etc.

    We are told that GDP is a poor measure of recovery and then told that the bailouts have “goosed” the economy (although it would be more accurate to say they have goosed the stock market, an even worse indicator of recovery).

    The outlook isn’t unclear. The fundamentals suck and are getting worse. This is the housing bubble all over again. We can’t say exactly when things are going to go splat but it is obvious that they will. My own view is 2011 but it could really happen at any time.

  8. PascalB

    Indeed, When debt increases due to productive investments, it is not at all alarming because the increased debt is “backed” by future growth. In fact, increasing debt “backed” by real collateral that is increasing in value is OK, too.

    The issue here is that debt increased in the past 10 years on the back of out-of-reality increases in real and financial collateral fueled by easy money, structurally decreasing interest rates since the 80s which allowed debt rolling over on a macro scale, and outright speculation.

    At the minimum, the past decade of growth and credit expansion was NOT sustainable on any rigorous economic basis. Which means the recovery is also not sustainable and the weakness which we have burried under the surface with mega bailouts and monetary expansion will resurface at the first occasion… and authorities will have MUCH less ammunition to fight back when the second bomb hits. My bet is 2012.

  9. Snoop-Diggity-DANG-Dawg

    “Don’t underestimate the power of printing money.” This quote has stuck with me as asset markets have soared in the intervening time. What Faber was alluding to was the fact that printing money works. It does goose the economy as intended and it can induce a cyclical recovery.

    Absolutely. It’s called ‘bubble-blowing’ and it’s precisely what got us unto this mess. Blowing more bubbles isn’t the answer; it’s the problem.

    Sadly, we’re apparently genetically predisposed against learning ANYTHING.

  10. Roberspiere

    “The Obama Administration looks ready to run a victory lap judging from recent statements.”

    By landing on an aircraft carrier and declaring victory ?

  11. Michele S

    I believe schools of thought should be rethought.
    From the ground here’s the report:
    Probably 20% unemployment.
    Huge redistribution of wealth and malinvestment of capital.
    Food stamps.
    Manufacturing sent overseas for “our own good” as we are a service economy.
    Aging population. Overcapacity.
    A crummy elementary education system.
    No investment in energy in our country so we are dependent on overseas. Same with minerals (rare earth etc.)
    An administration that believes it has fixed the problem and now wants to fix health care ie increase costs, and the same people who made the problem will fix it. So things stay the same obviously.
    Banks that are screwing the consumer in more ways than I can count.
    I could go on but why bother. Just add money, shake and rock and roll.

  12. ndk

    In the west, stimulus is also working. It is designed to stop people from hoarding cash and to consume. It is also designed to get people out of savings accounts and into riskier asset classes. it is doing just that.

    This is strikes me as incorrect, Ed. I would really, really urge you to keep monetization and quantitative easing separate from fiscal stimulus.

    Keynesian stimulus is designed to increase aggregate demand, partially by adding to demand directly, and partially by follow-on multiplier effects.

    And even if you did believe that stimulus had the effects you enumerated as intended consequences, the size of the spending in the U.S. was far too small to have any effect.

    Finally, I do and will continue to disrespect the power of printing money. There are few transmission mechanisms to get that printed money into the real economy. It’s clearly got traction in asset markets, but now what? How does that turn into wages or meaningful economic recovery? Wealth effects and financial accelerator effects are plausible, but they can only carry us so far.

    With low and probably negative equilibrium real interest rates, I just don’t see inflation or economic growth.

    1. Edward Harrison Post author

      we agree that fiscal stimulus is being used to support aggregate demand – when I say consumption – that is what I mean. Of course, in the absence of measures to underpin wages, you have a problem.

      And I also agree that the Obama stimulus was too small by half (as I said before the bill was formally presented).

      As for printing money, the transmission mechanism is asset prices.

      1. ndk

        Thanks for taking the time to clarify, Ed. :D

        Regarding your last statement, asset prices aren’t a very good transmission mechanism at the zero bound. Quoting the Krugman article I referenced:

        Purchases of long-term bonds would work similarly. In this case the central bank would in effect be competing with private investors as a source of investment finance (this would be true even if the intervention itself were in government bonds). Again, there would be an offset – with lower yields, private investors would divert some of their savings from bonds into short term assets or, what is equivalent under liquidity trap conditions, cash….

        And, you have indeed seen some improvement in asset prices, you have certainly also seen lower yields, a shortening of debt term structures, but we also have large cash surpluses remaining in the financial system. Indeed, the excess is increasing, to $823 Billion in the last H.3, although there is some support for your view in the form of increased required reserves.

        Krugman continues:

        The prospect of having a quasi-governmental institution owning a trillion dollars of overseas assets, or most of the Japanese government’s debt, is a bit daunting. Of course this would not happen if a relatively brief period of unconventional monetary policy led to a self-sustaining recovery. But to believe in this prospect you must, as in the case of fiscal policy, believe that the economy is currently in a low-level equilibrium and can be jolted back to prosperity with temporary actions – a fairly exotic, though not necessarily wrong, view on which to base policy.

        So if we assume that asset prices can be sufficient transmission mechanism — and I’m still not really comfortable saying they are — the real question becomes whether this is just an abnormal blip down resulting from a shock.

        I don’t think so. The U.S. Economy, and Chinese economy, have been fighting deflation for nearly a decade now. Global bond yields are dropping everywhere even today. There are discussions upthread about overcapacity, and capacity utilization rates could not be lower. Employment is extremely slack, and it has been for years, even through the “jobless recovery.”

        We might get more bubbles here, or even a recovery in GDP, but I believe something is fundamentally badly mis-aligned. So put me with Rosenberg here.

  13. In Debt We Trust

    All that has happened is the circulation of money from the left hand of the government to the right hand. Is that truly growth?

    All I see instead is a potential increase in the velocity of money. But is that enough to offset the decline in consumer credit and macro business lending? I think not – even as the markets experience an uptick.

  14. wally

    The cost of the pull-forward and the subsequent lagging growth is very, very hard to measure because it is slow to unfold. But the cost may equal or exceed the benefits gained from the pull. The Fed and Bernanke do not even attempt to quantify this when they enact policy or when they analyze their actions.

    I’ll just say, from experience: when I was a kid growing up in the 50s and 60s in a large family in a small town in Iowa, my parents bought a better life with less money than I can afford today. There was less Chinese junk, but food was cheap, cars were cheap and available, medical care was available easily and cheaply and education cost far, far, less than it does today. The cheap junk of today does not outweigh the far higher costs of basics like education and health care. There has, therefore, not been any fundamental economic improvement or growth in those 50 years… but rather, a decline.

  15. pebird

    Faber makes his usual great points.

    Rather than the Great Recession, this is the Great Restructuring. Whatever type of “recovery” we experience, it will be a jobless and income growth-less recovery.

    The current increase in debt is not going to consumers – they are deleveraging as fast as they can – but into certain asset markets (stock, commodity). as long as there isn’t any productive use for that debt, it will probably circulate between these markets chasing incremental returns – as Faber points out so clearly, if interest rates are essentially zero, you have to put your money someplace else – the liquidity-seeking-return “cyclical” recovery.

    So the increase in velocity and supply is staying in the exchanges and not getting into circulation. This should keep incomes down and consumer prices deflated – but we should expect inflation in certain asset classes.

    The global glut of over-capacity is going to remain for a very long time. We see that any inventory-led demand is easily met with increased productivity, not hiring or investment. As long as there is over-capacity we will see low interest rates as there is little need for capital investment, so you have to coax the money out somehow.

    What we have is a charade of capital market growth along with a fake “cyclical” recovery. The markets aren’t fooled – they know where the increase is coming from. The public and many economists are fooled – this stimulus is about as far from Keynesian as possible.

    As Faber points out, as the stimulus runs its course, velocity will slow and the markets will make noise for another round of government funding. With no broad base of liquidity (the general population being on the sidelines), we should expect significant market volatility and most likely the public will be held hostage for another devaluing of their wealth via “stimulus phase 2”.

    The US (and Europe) per capita wealth must be driven down to a global benchmark – that is what globalization means. Which is easier – bringing 800 million Chinese plus 500 million Indian workers up to Western standards or 400 million Western workers down to global standards?

    From a purely abstract perspective, you have to admit this is a brilliant plan that Bernanke is executing.

    1. Mista B

      Great post. It’s what I literally see happening. For all of the printed money, I could go on and on about people I know of all walks of life all over the U.S. who are having tremendous difficult borrowing. Many of these people are absolutely great credit risks. So while the money is going somewhere, it sure isn’t finding its way to consumers OR businesses. It’s going straight into asset prices. That will not help the “real” economy, the real economy being individuals making buying decisions with regards to themselves or their companies. Both individuals and businesses have seen their incomes drop. Is it really feasible that just because the Fed printed a bunch of money that these people will spend the cash that they do earn? I can personally attest to seeing precisely the opposite. People and businesses are cutting back expenses and putting off capital expenditures. Prices for virtually everything have dropped–houses, furniture, appliances, cars, computers, electronics, boats, commercial real estate, etc. People keep talking about inflation, but when I ask them what the actually see happening, it’s clear what’s occurring. Unfortunately, deflation is far, far worse than inflation. Given the glut of capacity we now have, it’s going to linger for many years.

  16. Vinny G.

    Very good podcast, covering a multitude of issues. Certainly, worth listening to.

    I travel often between the US and Eastern Europe, and just like Marc Faber mentioned, I too notice the differences between the so-called “developed” and the “developing” worlds to be leveling off fairly quickly. In another 5 years the differences will largely vanish.

    If anybody here only has one citizenship, now’s a good time to try to get a second one. I’d hate to see you, “true blue” proud and patriotic Americans here, apply for immigration or work visa to Poland, Croatia, or Romania in 5 years.

    Vinny G. — the indisputable think tank of one…

    1. Jonathan

      This is the real cause of the pain that we are facing. It is going to be impossible to save home values as Obama is trying to do. Saving the big banks is a pure waste of resources. Ultimately people have to pay for the mortgages. If they are competing globally with a laborer from China or a technical worker from India, they will not be able to earn the money necessary to cover their costs if they include a mortgage based upon yesterday’s earnings.

      One possible solution which we may be witnessing is a massive expansion of the supply of dollars and ultimately a dramatic drop in the value of the dollar. In this manner, the cost of imported products would rise dramatically compared to the cost of home. Thus, a person would then be able to afford their home, but no big screen TV or imported furniture.

  17. Swedish Lex


    A timely and relevant post.

    The architects of economic policy sought to solve the problems by sweeping them under the rug made of newly printed money. If it works, there will be no momentum left for sensible reform and people will soon be entering the casino en masse again to make sure they profit from this artificial boom.

    A not too unlikely scenario: When the bubble 2.0 bursts, central banks will not be able to double or triple their balance sheets, again, and governments not able to increase national debt by another 50% of GDP or so. At that point, trust in the economy may snap.

  18. ComparedToWhat?

    Fine with me if yuns wanna bet with Faber that Western legal systems are fail compared to East Asian authoritarianism. Many such bets were made on Latin American regimes during the Cold War. Show me the money.

    “I travel often between the US and Eastern Europe, and just like Marc Faber mentioned, I too notice the differences between the so-called “developed” and the “developing” worlds to be leveling off fairly quickly. In another 5 years the differences will largely vanish.” — Vinnie G

    Vinnie, tell me more about how fabulous things are in the former DDR, I’m all ears. Loads of people are voting with their feet and moving there, right? They’re having lots of babies too, because the future’s so damn bright. Land of milk and honey? Gimme a fucking break.

  19. Swedish Lex

    On Stiglitz (& Sen, etc.)

    I commented on Sarkozy’s initiative to reform the GDP concept on NC a couple of days ago. I will be monitoring to see whether the French committee with its top notch members actually will be able to deliver a final paper. Thus far, my impression is that work has been delayed and progress slow.

    Anyhow, Sarkozy’s objective is clearly to be able to project any new ideas up to the EU level. He might choose to roll out these proposals in time for his re-election bid.

  20. Bruce Krasting

    You are right that a lot of folks (including myself) thought we were in for the big one earlier this year. In March it looked there was no bottom in the markets or the economy. But March was the month that the QE policy kicked in in earnest. The POMO buys have been non stop ever since.

    I never assumed that this effort would be so successful. I did not give it the proper respect. I don’t think anyone could have assumed how quickly the economy would respond to a few trillion in free money. That includes Bernanke and Co.

    So Marc Faber was spot on. We underestimated the power of printed money.

    But as you point out consumption fueled by debt is just consumption brought forward from a future period. The problem will come when the debt machine has been turned off and all of that consumption that has been created by cheap money and subsidies.

    We can probably sustain this recovery if we continue to print money as we have been. But I think everyone can agree that what has been going on for the last 6 months is simply not sustainable.

    Without free money and subsidies we will quickly fall back to negative growth. The markets will respond to that reality. Does anyone think that car sales and home sales are real numbers? They are not. This is clunkers and first time home buyer rebates. This is going to end.

    The collapse that we thought was upon us last spring has not been avoided. Only delayed. It will be back on the stage three months after the insane level of market intervention comes to an end.

    We spent $2 trillion. At best it will buy us 9 months. The best/worse is yet to come.

  21. danm

    never assumed that this effort would be so successful. I did not give it the proper respect. I don’t think anyone could have assumed how quickly the economy would respond to a few trillion in free money. That includes Bernanke and Co.
    That’s key. I don’t think anyone ever thought the government would inject 3 trillion and more!

    Governement could throw in 10 more trillion and no one would bat an eye.

  22. Blissex

    «But as you point out consumption fueled by debt is just consumption brought forward from a future period.»

    That is PHYSICALLY IMPOSSIBLE, at least in the aggregate.

  23. Siggy

    Krasting . . . Nice summary!

    The Bernanke/Geithner Obama Bamboozel has more or less worked and left us with a very dire future. What will 2010 and 2011 bring? At some point we will have to paydown or repudiate all the stimulating debt.

    The cynical choice would be to repudiate it. China played mercantilist with cheap labor, would we dare to leave them with an empty bag?

    As all the ‘monoply’ money chases yield, we face a sequential recurrence of bubbles and a rapid erosion of purchasing power.

    It may be that most boomers will never be able to retire.

  24. Edwardo

    Saving the big banks has proven to be a completely indefensible act for the simple reason that, as credit intermediaries, they continue not to lend (except to Uncle Sam) even after receiving unprecedented monies on superb terms. Banks are hideous creatures generally, and what we have here in Freedom’s Land with respect to far too many banking institutions are legions of zombie grotesques with out sized influence.

    Someone wrote the following:

    “Rather than the Great Recession, this is the Great Restructuring. Whatever type of “recovery” we experience, it will be a jobless and income growth-less recovery.”

    The absurd locution “jobless recovery” has been in the argot for a long time, and at this point, entrenched as it is, it is simply emblematic of the times we live in. The term, simply put, is a massive contradiction in terms, a canard, a deception. Job creation, and not just any jobs, but jobs with specific profiles with respect to atability and wage growth is the essence of an economic recovery. Why job creation defines what a recovery is IF one is living in a civilized society where safeguarding the well being of the citizenry is the paramount task of government.

    And I strongly disagree with the idea that asset appreciation is a satisfactory “transmission mechanism.” And I’m surprised that the author even puts forth such a notion.

  25. Vinny G.

    @ ComparedToWhat

    As I said, I travel back and forth between the US, Western Europe, and Eastern Europe. Of the three, I see by far the greatest amount of advancement occuring in Easter Europe. In another 5 years the differences will be minimal.

    As far as DDR goes, that’s all part of Germany now, isn’t it? Aand that’s the problem why the East Germans are having difficulty. Namely, the lazy, fat, and quite ignorant West Germans have been fighting tooth and nail against their Eastern brethren, have been discriminating them, and have oposed any significant investment in the East. They can do that because DDR made the stupid mistake to merge with a had-been country like West Germany making expensive cars that nobody seems interested to buy anymore, and demanding kingly health care aloing with a 32 hour work week.

    However, what is occuring in the former DDR does not apply to the rest of Eastern Europe. The aforementioned fat, lazy, and ignorant West Germans can bitch and moan as long as they want about the deindustrialization of their nation, but BMW is still moving to Hungary, Nokia is still moving to Romania, and the list goes on and on.

    In a nutshell, you missing my point. Until the West rediscovers the concept of work ethics, and until the mentality of entitlement vanishes, the decline is likely to continue.

    Vinny G. — shrink extraordinaire and unstoppable think tank of one…

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