Wolf Versus Pettis on US Stimulus, Fiscal Deficit (Not for the Fainthearted)

Martin Wolf has a very good comment in the Financial Times, “Why Obama’s plan is still inadequate and incomplete,” which readers might tempted to ignore, since the headline suggests the piece reaches a conventional conclusion: the Obama stimulus plan is too small.

That would be a mistake.

The Wolf article (as others have done) does indeed conform with the conventional view that an US stimulus program needs be bigger to get the economy at least somewhat back on track (we’ll put aside for now the question of whether this is the best way of going about things, or whether less stimulus and more microeconomic reform particularly cleaning up the banking system and improving regulations, might lead to a better trade off of short-term pain for longer term gain).

Wolf reaches two conclusions not widely presented in the US media:

The stimulus would need to be MUCH bigger to reach its goals. Many US commentators suggest that 50% to 100% bigger is closer to the mark.

The US is going to have to run deficits for a long time. A VERY long time.

Wolf’s back of the envelope calculation of the level of stimulus needed:

In last week’s column (“Choices made in 2009 will shape the globe’s destiny”, January 6) I argued that the debt-encumbered US private sector would now be forced to save …. The excess of income over expenditure in the private sector might be, say, 6 per cent of GDP for a lengthy period. If the structural current account deficit remained 4 per cent of GDP, the overall fiscal deficit would need to be 10 per cent of GDP. Moreover, this would be the structural – or full employment – deficit.

The Congressional Budget Office forecasts that US output will be 7 per cent below potential over the next two years, on unchanged policies. If so, the actual deficit should now be much larger than the structural one. It is easy to see, therefore, why the critics argue that the Obama plan for an additional fiscal stimulus of 5 per cent of GDP over two years is too small, even though the CBO forecasts a baseline deficit of 8.3 per cent of GDP this year. It is also easy to understand why many object strongly to tax cuts, since the more likely cuts are to be saved the larger the package must be – and, in addition, taxes will clearly have to rise in the longer term.

So if I have this right, “needed” stimulus is the 10% (full employment” deficit + 7%, or 17% in each of the next two years. What Obama is delivering is 5% over two years, or 2.5% a year, plus a baseline of 8.3%, for a total of 10.7%.

So to get where we need to get (if you buy the logic of this sort of exercise) is an additional 6.3% PER ANNUM deficit as a % of GDP. Remember, Obama’s plan is roughly 2.5% per year. 6.3/2.5= 2.5 times.

Read that again, If you believe the math, Obama’s program would need to be 2.5 times bigger to live up to its billing. And that is before you get into details like “tax cuts are likely to be less effective than other measures”.

But that isn’t what worries Wolf the most:

The bigger point, however, is not that the package needs to be larger, although it does. It is that escaping from huge and prolonged deficits will be very hard. As long as the private sector seeks to reduce its debt and the current account is in structural deficit, the US must run big fiscal deficits if it is to sustain full employment.

That leads to the third point Mr Obama’s advisers must make. This is that running huge fiscal deficits for years is indeed possible. But the US could get away with this only if default were out of the question.

At the end of the Napoleonic wars, the UK had a ratio of public debt to GDP of 270 per cent. This was brought down over a century: growth, the gold standard and the commitment to balanced budgets did the trick (see chart). The question is how much debt the US (or UK) can accumulate now. My guess is that the US could hope to run large deficits for years if these were used to finance the creation of high-quality assets. But the policy could not safely endure throughout a two-term presidency.

Yet, contrary to widespread belief in the US, a swift return to small fiscal deficits, high employment and rapid growth will not occur spontaneously. It is necessary to make structural changes in the US and world economies first. This is the last point Mr Obama’s advisers must make.

What then are these changes?

First, there must be a credible programme for what Americans call “deleveraging”. The US cannot afford years of painful debt reduction in the private sector – a process that has still barely begun. The alternative is forced writedowns of bad assets in the financial sector and either more fiscal recapitalisation or debt-for-equity swaps. It also means the mass bankruptcy of insolvent households and forced writedowns of mortgages.

All this would also lead to big one-off increases in public debt. But those increases would probably be much smaller than those generated by a decade of huge fiscal deficits. The aim is to have a slimmer and better-capitalised financial system and a healthier non-financial private-sector balance sheet, sooner rather than later. The troubled asset relief programme should be used for these purposes. It will need to be bigger.

Second and most important, the structural current account deficit has to diminish. The US private sector is no longer in a position to run huge financial deficits as an offset to the demand-draining external deficits. The public sector can do so only for a few years. In the long run, the world economy must be sustainably and healthily rebalanced. This is a huge challenge for international economic diplomacy. It is also an essential element of sound domestic policy.

This is sobering stuff. Comparing what might be in store to the US to the UK after the Napoleonic Wars is a polite way of saying that level of indebtedness is a non-starter (I’ve also noted other commentators suggest the US could run the sort of fiscal deficits we incurred during World War II). . The populace and the rest of the world is somewhat (stress somewhat) more kindly disposed toward borrowings incurred to assure national survival than to go on a national shopping spree.

And what medicine does Wolf suggest? Masssive debt restructuring, And here we get back to the securization mess. It does not mean just writeoffs to banks, but writeoffs to unfortunate holders of asset backed securities of all sorts: credit card, student loan, auto receivables paper, plus MBS. And this is treated as a third rail issue, although the mortgage cramdowns will get us part way there. The US has not been willing to inflict pain on lenders and investors, even though over-their-heads borrowers will go bust and deliver losses. But too many holders of the paper seem to derive false comfort from having the losses show up a tad later than they would anyhow.

Wolf is recommending cleaning out a badly infected wound full of shrapnel before it turns to gangrene. We’d rather take a penicillin shot and hope it clears up. Fat chance.

As grim as that is, China expert Michael Pettis thinks that the US will not be able to run large fiscal deficits for very long (which Wolf indicates is the course of least resistance, and a worse outcome):

What was unsustainable about the current global balance, in my opinion, was not the fact of a US trade deficit (although by 2006 and 2007 it had gotten too high to last very long), but rather the level of household borrowing needed to sustain it. These are not unrelated things, of course, but I would argue that if the US trade deficit had been funded by equity inflows that resulted in an increase in domestic investment, there would not be a trade-sustainability problem. If it was funded by a household borrowing binge, then trade-deficit sustainability is necessarily constrained by the household balance sheets. This is why I have argued that a program of massive fiscal spending to replace household demand is not going to solve the current problem. It simply replaces one kind of unsustainable behavior with another, and still has to be resolved at some point with massive deleveraging.

To get back to China and current issues, the problem with the US trade deficit now is sort of a “Keynesian” problem. US demand has the impact of generating both US production (and employment) as well as foreign production (and employment), and in a world of contracting demand, it is natural that countries that export demand – i.e. trade deficit countries – are going to be a lot less eager to do so. Anything that brings imports closer into balance with exports is likely to have a demand-enhancing impact similar to fiscal expansion, with the benefit that this isn’t achieved by running up fiscal debt. On the other hand it will have a demand-reducing impact for trade surplus countries. That is why trade disputes are likely to be very attractive to trade deficit countries who have – I will continue to insist but it seems recently that this has become a much less “surprising” claim – the upper hand in any dispute with the “virtuous” countries with high savings rates and trade surpluses.

Rather than take any tough measures, the US is opting for expedience, which means only tackling surface aspects of the underlying malaise. We are going down the Japan path when we have much lower savings rates (meaning we cannot handle our problems internally) and less social cohesion.

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47 comments

  1. Born Again Democrat

    I am hardly a pro, but if I follow the argument correctly why isn’t the inevitable answer a lot of inflation, something governments know how to do, and which has the effect of writing down debts and transferring wealth from lenders to borrowers?

  2. Born Again Democrat

    To my above comment I might add that inflation also reduces real wages (a way around downward stickiness as Keynes pointed out) thereby boosting the total volume of employment, which is ultimately a matter of price, ie, supply and demand.

  3. ndk

    And what medicine does Wolf suggest? Masssive debt restructuring,

    Very nice to see someone with such a public face coming around to this.

    I am hardly a pro, but if I follow the argument correctly why isn’t the inevitable answer a lot of inflation, something governments know how to do, and which has the effect of writing down debts and transferring wealth from lenders to borrowers?

    Unfortunately, we can’t unilaterally create inflation, Born Again.

    Furthermore, increased inflation only represents a small part of the repayment of sovereign debt in normal times. I think we will find it very difficult to use inflation more constructively in the present environment, until a trade war erupts or the pegs are moved.

    The increase in government debt is likely to continue to push up real interest rates, though. Combined with the rise in real interest rates resulting from the intensifying shortfall in the need for vendor financing, we can expect to see any longer-dated assets get whacked and the dollar become increasingly dear.

    This is not a sustainable circle, but it’s a very powerful and persistent one, and I suspect it’s likely to cure itself in an unfortunate way at some point. A trade war would be one way, and so would a limited or larger sovereign default.

  4. Anonymous

    Yves,
    What about Zarlenga’s ideas about eliminating the Federal Reserve? Wouldn’t his plan essentially deliver the giant deleveraging you are discussing?

  5. Frank Gifford

    Perhaps we should take this opportunity to redesign the entire system to match the the Earth’s resources in a steady state. We are very near a global climate tipping point while up against the limits of resource utilization. A system that privatizes profits while socializing costs has no future. The current system is near to or already beyond the end of its ability to function no matter if we redesign or not. There are a limited number of alternative paths to the future that leave a reasonable Earth to upcoming generations. Business as usual is not among those paths. Visit EntropyPawsed for some ideas. It is time for bright minds to work towards the design of a sustainable sytem, for the sake of our children. And lets give the 2nd Law of Thermodynamics its due, and leave behind the technofantasies.

  6. Anonymous

    I can’t access Wolf’s article, but why does the fiscal deficit need to offset exactly the sum of private saving and current account financing? That’s true for the excess of saving over investment. Where’s investment in the equation?

    E.g. what happens if investment is 10 per cent of GDP?

  7. donebenson

    Yves, I’m getting a little tired complementing you on your fantastic posts today. This is ANOTHER excellent one!

    I think anyone reading Naked Capitalism today would immediately understand why the markets are down so much. While the reality that you offer us is at times tough to take, it’s better to be realistic than continuing to live in a naive fantasy world.

    Thanks for all your efforts!

  8. Anonymous

    The potentially improving news is that short term yields are better, which indicates that money is starting to warm up.

    > January 6, 2009: And the yield on the 3-month Treasury bill rallied to 0.15% from 0.09% late Monday. The 3-month Treasury bill is considered a gauge of confidence because investors shuffle funds in and out of the note as they assess the risk of the marketplace.

    Jan 14: Importantly, US 3-month Treasury Bills have started making their way higher to 0.12% after momentarily trading in negative territory in December 2008, as nervous investors were in desperate search of safety.
    http://www.minyanville.com/articles/fnm-libor-treasury-TED-eurozone-markit/index/a/20651

  9. Charles Kiting

    I’ve also noted other commentators suggest the US could run the sort of fiscal deficits we incurred during World War II

    The current US federal per capita spending is already higher than it was during WWII, it surpassed the WWII level a couple years ago.

    In other words, we are essentially already where Wolf thinks we could to go. and we’re already living in what he thinks our future is going to be.

    When you add in state and local government spending, total per capita government spending is already way past sustainable.

  10. dearieme

    “less social cohesion”: when a chap put forward for Treasury Secretary sees no need to pay his taxes, I think you can conclude that social cohesion is lacking. “Taxes are for the little people” is anti-cohesive.

  11. dearieme

    Mind you, he might be well qualified to answer the big question: what is the least damaging way for the USA to renege on its debts?

  12. Anonymous

    This comment by Wolf doesn’t add up: “[private sector debt reduction] would also lead to big one-off increases in public debt. But those increases would probably be much smaller than those generated by a decade of huge fiscal deficits.”

    I would think that any quick private sector debt reduction would a) sink the financial system and certain nonfinancial companies deemed “essential”; b) force a difficult recapitalization of these companies, much of it funded by the US gov’t; c) add very meaningfully to the national public debt. So I think Wolf is being overly optimistic (he would likely agree).

    And I think the global rebalancing Wolf calls for can’t simply be summoned forth with a wand and financial policy. The individual and organizational expertise needed to run successful national industries obviously takes decades to evolve and be refined. Although the US has several world class industries producing tradeable goods still standing (pharma/biotech, IT), a number of other US centerpiece industries are kaput. One with which I have intimate familiarity – the media/entertainment industry – seems to be close to collapse as a meaningful employer due to a broken business model.

    So my interpretation is that Wolf, with Brit subtlety, is saying that there is no way out of this trap. I’m off to have a scotch now.

  13. bb

    all calculations are before taking into account a quite likely cut in military spending for the wars. 99% of war procurement is from US companies and thus recycles at least 2 times into the economy. i dare to say that the wars add about 2% to the GDP number.

  14. wintermute

    The first thing the US should do to slow down the debt growth is to cast Fannie and Freddie adrift.

    Paulson's undertaking to guarantee agency debt is tepid and couched in fedspeak anyway. Geithner could water this down further.

    If a deflationary depression takes hold the US govt liabilites on F&F could top $2tn. In a time where big numbers have become meaningless (RBS loses £2.3bn on Lyondell today and its a yawn)
    – this $2tn is still an amount worth slicing off Wolf's doomsday numbers.

  15. Anonymous

    The stimulus cannot work. The same people who created the financial crisis are involved in a bail out.

    The money will be doled out in cronyistic fashion to the least in need.

    I’m curious why you all think future results should not be indicated by past performance?

    Barney Frank is as corrupt as Paulson. Obama’s Harvard elite are corrupt narcissists. I’m sure they’ll make certain every Harvard grad gets a job.

    Sending out a check in the mail to every taxpayer is the only way to ensure the money will be properly spent.

  16. bena gyerek

    i think wolf was saying the increase should be 2.5x the proposal, so the entire stimulus should be 3.5x. either way, it ain’t gonna happen.

  17. Anonymous

    sigh…. the debt accrued by UK/US during the Napoleonic Era/WWII were expenditures needed to combat a ‘terminal’ threat to each respective nation.

    The debt that the US accumulated and will accumulate during this decade went for tax cuts, prescription drugs and the sidetrack in Iraq. What a waste of the decade… hopefully it won’t become a waste of an entire generation.

    sigh again…

    sincerely, rather be a solvent realist than an insolvent optimist.

  18. S

    An equally important editorial appears in today’s FT by Brezinski which comes on the heels of the one written by Kissenger in yesterday’s IHT. Both are interesting as they were instrumental in opening China. Kissinger espouses a new new world order in which the US embraces China in its harmonious world – of course China gets to ride shotgun. Kissenger positions this as an unrivaled opportunity to remap the world, still US centric, just a bigger circle of friends. Brzezinski sees a similar roadmap where cooperation must trump friction in the form of a G14. This would be in addition to a new G2 relationship seeking to capitalize on “two countries with the most extraordinary potential for shaping our future.” [both are worth reading as the debt regime is as much geopolitical as it is economic]

    If Wolf is correct, then the financing of the deficit to Pettis point is really the central question. And why in the world would the powers in ascendance – like the US post WWII – accede to a continued ceremonial role. Kissenger is makes this point in espousing that a rework of Bretton Woods is much preferable to a full scale protectionist trade war. He appears to be half right. It is needed, but so too is a more rational trade policy akin to thoughts of Dana Rodrik or even dare I say Buffet’s trade certificate program. Nevertheless, perhaps both are two sides of the same coin. Once the incentive to hold the pegs (per NDK) in the form of debt subsidies diminishes the current intangible benefits the US owns in the form of hegemony will be renegotiated.

    There was a story yesterday that Bush signed a dual use technology transfer bill with China that allows for easier exports. This is akin to the article some weeks or months back where China demanded that the US should be sharing high technology/green technologies.

    Then there is the progress in the gulf toward the currency union.

    All this adds up to Bernanke missing this week’s testimony in the House Finance Committee to be in Switzerland for a meeting at the BIS with other central bank heads. I suspect the emerging story with all this printing will be how the Anglo block looks to maneuver to try and protect its hegemony. Any new trilateral or committee of four ($, Yuan, euro, Yen) regime will be a death struggle as the US seeks to use the morality argument to protect its incumbent first seat. It would be a mistake to underestimate the lengths to which the US will go to protect what is ultimately its single greatest competitive advantage next to the military.

    This is why the narrative that has the US is the best of the worst is just opportunistism personified. it may or may not be true. Whatever the verdict on relative depredation, it has zero correlation to what the relative positioning will be when the next great moderation (harmony) arrives.

  19. Anonymous

    Has not Kissinger’s co. been a lobbyist for China for some years now?

    Albright, and more all worked lobbying for foreign cos. and govts.

    Gee, how many trips did Paulson make to China as head of Goldman Sachs

    Far too many former senior Wash. officials lobby for foreign govs. and cos. Washington is a corrupted cess pool. Most of our tax dollars and governance should be regionally based by now. Same for regional banks vs. these insane
    bailouts.

    independent

  20. Hank Paulson's Mom

    “I am hardly a pro, but if I follow the argument correctly why isn’t the inevitable answer a lot of inflation, something governments know how to do, and which has the effect of writing down debts and transferring wealth from lenders to borrowers?”

    If by “answer”, you mean “solution to the problem”, then you have hit upon what Bernanke is ultimately aiming for. Bernanke and the powers-that-be need consumers to spend (never mind that they have already spent themselves into oblivion, that is besides the point in their minds). With inflation, there is incentive to spend now, as your money will be worth less in the future. With the current deflation, there is incentive to SAVE, as consumers will be able to buy more (house for example) in the future as prices fall.

    The PTB are morbidly afraid of deflation, as there tends to be a feedback loop – more savings at the expense of spending causes more deflation, etc.

    However, with an understandable reluctance to lend and borrow money by all parties due to insolvencies, coupled with global wage arbitrage keeping wages low in developed countries, there is little hope that inflation can be re-ignited…at least until the world economy gets rid of the insolvencies (painful), and world wide wage imbalances are tamed.

    Another way to look at it…stimulus aimed at saving jobs and temporarily increasing demand for concrete and steel only delays the eventual outcome, as consumers are already (for the most part) either tapped out or insolvent. Keeping some people in their jobs will NOT comfort them into spending like there was no tomorrow…which many of them had literally been doing before the crisis.

  21. Hank Paulson's Mom

    “I am hardly a pro, but if I follow the argument correctly why isn’t the inevitable answer a lot of inflation, something governments know how to do, and which has the effect of writing down debts and transferring wealth from lenders to borrowers?”

    If by “answer”, you mean “solution to the problem”, then you have hit upon what Bernanke is ultimately aiming for. Bernanke and the powers-that-be need consumers to spend (never mind that they have already spent themselves into oblivion, that is besides the point in their minds). With inflation, there is incentive to spend now, as your money will be worth less in the future. With the current deflation, there is incentive to SAVE, as consumers will be able to buy more (house for example) in the future as prices fall.

    The PTB are morbidly afraid of deflation, as there tends to be a feedback loop – more savings at the expense of spending causes more deflation, etc.

    However, with an understandable reluctance to lend and borrow money by all parties due to insolvencies, coupled with global wage arbitrage keeping wages low in developed countries, there is little hope that inflation can be re-ignited…at least until the world economy gets rid of the insolvencies (painful), and world wide wage imbalances are tamed.

    Another way to look at it…stimulus aimed at saving jobs and temporarily increasing demand for concrete and steel only delays the eventual outcome, as consumers are already (for the most part) either tapped out or insolvent. Keeping some people in their jobs will NOT comfort them into spending like there was no tomorrow…which many of them had literally been doing before the crisis.

  22. Anonymous

    Hank Paulson’s Mom said…

    …”However, with an understandable reluctance to lend and borrow money by all parties due to insolvencies, coupled with global wage arbitrage keeping wages low in developed countries, there is little hope that inflation can be re-ignited…at least until the world economy gets rid of the insolvencies (painful), and world wide wage imbalances are tamed.”

    Yeah, but in that case the U.S. is screwed. (Well, more screwed.)

    As long as we’re importing 60+ percent of our energy needs, we cannot default on big government debt like treasuries, (or no more oil foreign oil) and if we inflate too much or too quickly we lose reserve currency status (meaning we won’t be able to afford the oil to import).

    Screwed, screwed, screwed.

    Here’s my bailout plan:

    1. Quit dicking around and just nationalize the banks.

    2. Jubilee or 30-yr, no interest suspension of all current fed-backed student loans.

    3. Dump as much money into solar, wind and rebuilding the domestic grid as possible without causing a dollar panic.

  23. Anonymous

    The assumptions are way off:

    -is economic growth intrinsically good, and is a goal of growth appropriate?

  24. S

    The assumptions behind a gap make the entire analysis off: how can you base a gap calculation off current or trailing bubble inflated GDP. The potential Krugman uses (OMB etc) are imagination pure and simple. Cant have a housing bubble mutually agreed and a short term gap. Not possible

  25. john bougearel

    “But too many holders of the paper seem to derive false comfort from having the losses show up a tad later than they would anyhow.”

    The same thing happened in the early 1930’s. Homer Hoyt wrote that real estate speculators/investors did not feel compelled to take a loss on their securities because they were backed by real assets – a home per se. But the taxes and interests on thoses loans/securities, went on without interruption.

    “Slowly but inexorably, the speculator in real estate is ground down. With him moreover suffers his bank. In 1933 Chicago, 163 out of 200 banks suspended payment. Real-estate loans, not failed stockbrokers accounts, were the largest single element in the failure of 4800 banks between 1930 to 1933.”

  26. john bougearel

    It is not just the “treasury undertaking to guarantee agency debt” but also the willingness of the Fed (Bernanke) to buy agency debt to allow the GSE’s to drive mortgage rates down and to expand their lending programs, not to shrink them. ~Egads, the thought of shrinking their lending programs or anything that would cause their lending programs is scaring the shit out of Bernanke right now!

  27. Anonymous

    I wonder if the commentariat here can help me think through one key issue in these discussions: why would import tariffs (or Buffett’s import certificates) be detrimental (in the long term) to the US?

    Since the Yuan is (for all intents and purposes) hard-pegged to the USD (and the Yen is also, albeit to a lesser degree), and since there is general agreement that a) the US imports too much and b) the US cannot continue to borrow and consume indefinitely, wouldn’t an import tariff(s) simply act as a forced revaluation of the Yuan?

    I can understand why a net exporter (as the US was 1920 -1933) imposing import tariffs was detrimental, but I don’t understand why it would be for a net importer (as the US is today, particularly for low to middle manufactured goods). What might happen in retaliation — China would stop lending us money to purchase Chinese manufactured goods? . If they stopped lending us money, we’d stop buying Chinese goods – who is more harmed? How does that, long term, hurt the US (more than it would hurt China)? Would China “dump” dollars – if they did wouldn’t this result in a revaluation of the USD / Yuan (which we’ve asked for and most people believe is necessary but doesn’t seem to happen)? Most of the stimulus package discussed by Obama seems to be focused on “getting money into the hands of the consumer” so they, exactly, can do what? Buy Chinese manufactured goods? What’s up with that? And if “world trade” declines, who is most harmed? The US?

    So, please, (and this is a serious question), help me out. How does the US lose out by imposing substantial import tariffs?

  28. S

    “So, please, (and this is a serious question), help me out. How does the US lose out by imposing substantial import tariffs?”

    Timing of tranisiton seems to me to be big hurdle…Bernanke seems to be in a spread defense, but that by definition can’t last indefinitly.

  29. Eric L. Prentis

    Hurray for Robert Scheer’s analysis of the government’s criminal response to the financial crisis, Geithner/Summers/Bernanke must step down. http://www.truthdig.com/report/item/20090113_wall_street_robber_barons_ride_again/
    $350 billion dollars of Treasury TARP funds and the massive $2.5 trillion dollar intrusion into the economy by the Federal Reserve has done no good, the plutocracy is just legally stealing the US taxpayer’s money. When times were good, the financial ruling class, in league with the politicians, made unconscionable amounts of money by selling dodgy derivatives to trusting customers and now when times are bad the plutocracy is looting the treasury to save themselves. The WaPo’s Steven Pearlstein, the banker’s stooge, today says, “I don’t see how it’s possible to rescue the banking system without rescuing banks.” http://www.washingtonpost.com/wp-dyn/content/article/2009/01/13/AR2009011303111.html BULL!! Why throw $350 billon more TARP funds at the managers who bankrupted their banks, instead, let’s use the tested and true Swedish model to reorganize failed banks so that the crooks are held accountable and the US economy can bounce back quickly.

  30. Anonymous

    As I see it the only way to navigate our way out of this mess is to commit ourselves to having another Baby Boom. Without new workers to absorb all the debt the burden will be too great. Maybe the government can better spend its money enticing us all to have more children.

    As I see it, it was the Baby Boom that brought us outsized profits and the boom times for the last several years. I am not being critical of baby boomers either, it is just that you have more people to spread the debt amoung and the ability to keep increasing consumption. I do not see how this is possible with a declining population. Demand has to decrease and prices have to decrease to adjust for the decrease in population.

  31. Anonymous

    If not bankruptcy of the banks now and admission of their excesses then there will be bankruptcy of America soon enough.

  32. SDB

    So, please, (and this is a serious question), help me out. How does the US lose out by imposing substantial import tariffs?”

    Actually, the Chinese (and other asian countries) are at least partially responsible for this mess. Thirty years of their aggressive mercantilism –coupled to our national religion (“the market is all powerful and all knowing, trade barriers are bad”) — caused us to de-industrialize. (Actually put our own industries out of business.) Shorn of an economy which produces real wealth — and real incomes for the vast majority of Americans — we turned to borrowing and credit Ponzi schemes to prop up our standard of living.

    That bubble has now burst. Prepare to live a Peruvian standard of living.

    But to get back to your question: The problem with tariffs is that they are a beggar-thy-neighbor tool. If China can’t export its crap to us by undercutting our own industries, then they end up with massive unemployment and their own social problems. China will then experience massive popular resentment, which will be easily channeled towards whomever the desperate government wants to target. They may decide it’s time to raise the ante with Taiwan by taking it militarily. Or they might decide to let North Korea off its leash to do some nasty mischief somewhere. Or they may just decide to confront us directly somewhere. Maybe in the Gulf Oil region?

    And remember, some of these actors have nukes.

    To summarize: The (relative) political stability of the post-WWII period ends. Pax Americana dies, and is replaced by a multi-polar world without order. China — as well as other countries — sensing America’s weakness, might decide to launch their own adventures.

    So as much as I agree that China is our unsympathetic partner is making this mess, simply screwing screwing with tariffs (or tariff-like restrictions) in a crude way can backfire in ways which are bad for everybody.

    Cheers,

    SDB

  33. Patrick Griffiths

    “Bernanke is ultimately aiming for. Bernanke and the powers-that-be need consumers to spend”

    BB has pulled out all the stops. The inflation machine and printing presses are running at full speed, and it is STILL not enough to fill the hole.

    Nouriel Roubini has long argued that debt relief and a swift and brutal triage of the financial sector is what’s needed (e.g. Emergency Bank Act of 1933). This reinforces my opinion that he’s correct.

  34. Anonymous

    there’s plenty of “stuff” around, and plenty of money, too.

    there needs to be a redistribution away from those with an excess to those in need

  35. joebhed

    Here we are again pondering the unponderable.
    Cataclysmic insolvency.
    One commentor already has asked about Stephen Zarlenga’s proposals.
    Abolish the FED is the mantra of the Paulistas and the Austros.
    Zarlenga’s proposal is much more than abolishing the FED, for his work has been to prepare for the collapse of the debt-money system, which is what this “systemic insolvency” is really all about.
    Consider the options, folks.
    I repeat myself, but Minsky correctly noted that the debt-money nature of the debacle is what brings the true cause to the fore.
    Having used the fractional reserve banking system for a hundred years does absolutely nothing to provide any credibility to it as a sustainable means of providing for economic exchange.
    The debt-money system is the problem.
    The sooner we wake up to that fact, the sooner we can begin to take the steps necessary to unwind the noose that the private federal reserve bankers have placed around the necks of the unsuspecting American people.
    We are the sovereign American people, and the problem is our adopted money system.
    Debt-free money.
    Social credit.
    Let’s get on with it.

  36. Anonymous

    Why is expansion the favorite word in the human, how to fix things book. Many of our so called great historical societys, which are revered for it gosh the (pyramids are big or the meso-American temples, Greek and Roman buildings) where are these societies now (they expanded into oblivion, contraction was inevitable).

    It seems to me expansion got us into this mess in the first place bigger, harder, faster and this is the only way we can prop up our system when it start to topple, by the very action that got us here in the first place.

    We need a re-think of what our needs are and create a system which does not function just for expansion sake whether for wealth, prestige, power, leverage in human activity’s. How many bubble will we blow and with increasing efficacy/technology, BIGGER till we blow the mother of all BUBBLES and it POPS. Maybe not in my life time but its not to far away. Funny how we think we can always fix thing in the future tense.

    Sippy

  37. S

    Yves, you wondered why the rush for tarp II – CNBC BAC back to gov’t for more money…situation resolved

  38. S

    Streetevents: This is shocking stuff – BAC blackmailed the gov’t. This is looting

    “Any potential deal could protect Bank of America from additional losses on Merrill’s bad assets, with a cap on the amount BAC would have to take and the government absorbing the remainder, according to a source close to the situation. It is not known exactly how much Merrill lost during Q4. The talks between BAC and the government were driven by Treasury Secretary Paulson, who was concerned that without help the deal wouldn’t have been completed, and the deal did close on 1-Jan with the understanding that the bank and Treasury would complete a deal. The terms of the deal are still being finalized and details are expected to be provided when BAC reports Q4 on 20-Jan.”

  39. Mark A. Sadowski

    Before I dwell on the doom and gloom let me just say I favor a large stimulus simply because I don’t think we have any alternative.

    Part of the problem with the incoming administration’s stimulus proposal is the baseline scenario, or, in other words, the path of unemployment without a stimulus. It assumes that unemployment peaks three quarters after the trough in GDP and that unemployment drops by about 0.4% per quarter for two years after the peak in unemployment.

    Based on the last two recessions this is optimistic. Unemployment peaked 5 and 7 quarters after the trough in GDP in the last two recessions. In the recovery following each recession unemployment fell at about 0.2% a quarter for two years following the peak in unemployment.

    All of this implies to me that the stimulus is going to have to be much larger and longer lasting than the current proposal.

  40. Edwardo

    Anon wrote:

    The assumptions are way off:

    -is economic growth intrinsically good, and is a goal of growth appropriate?

    Bravo, those are precisely the questions that need to be answered as the despoiling of the commons reaches critical mass.

  41. Jon Claerbout

    stimulus plan too small?

    If the plan were to loan money to taxpayers, the plan could be scaled very large. Few will complain about a plan where the group being subsidized is the group paying for the subsidy.

    I propose interest free loans to taxpayers in amount of last 3 years of tax paid, to be repaid 10%/year.

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