Roubini:The Deadly Dirty D-Words: “Deflation”, “Debt Deflation” and “Defaults”.

[Winehole23]

http://www.rgemonitor.com/roubini-monitor/254515/the_deadly_dirty_d-words__deflation_debt_deflation_and_defaults__and_ how_central_banks_will_have_to_resort_to_crazy_pol icies_as_we_have_reached_such_bermuda_triangle_of_ a_liquidity_trap

I have been warning since January 2008 that the biggest risk ahead for the US and the global economy is one of a stag-deflation, the deadly combination of an economic stagnation/recession and deflation (http://www.rgemonitor.com/roubini-monitor/254148/the_coming_global_stag-deflation_stagnationrecession_plus_deflation).


Let me discuss the details of this toxic mixture of deflation, liquidity trap, debt deflation and rising household and corporate defaults:



We Are Close to Deflation and Stag-Deflation
First of all, signs of stag-deflation now are clear (http://www.rgemonitor.com/roubini-monitor/254148/the_coming_global_stag-deflation_stagnationrecession_plus_deflation): we are in a severe recession and now the recent readings of both the PPI and the CPI are showing the beginning of deflation. Slack in goods markets with demand falling and supply being excessive (because of years of excessive overinvestment in new capacity in China, Asia and emerging market economies) means lower pricing power of firms and need to cut prices to sell the burgeoning inventory of unsold goods; slack in labor markets with sharp fall in employment and sharp rise in the unemployment rate means lower wage pressures and lower labor cost pressures; and slack in commodity markets – that have already fallen by 30% from their summer peaks and will fall another 20-30% in a global recession – means lower inflation and actual deflationary forces. Given a severe US and global recession deflation will soon be a reality in the US, Japan, Switzerland, UK and, down the line, even in the Eurozone and other economies.


The Risk of a Liquidity Trap
When deflation sets in central banks need to worry about it and worry about a liquidity trap. Take the example of the 2001 recession: that was a mild 8 months recession in the US and over by end of 2001. But by 2002 the US inflation rate had fallen towards 1% (effectively 0% or negative given imperfect measurement of hedonic prices) that the Fed was forced to cut the Fed Funds rate to 1% and Ben Bernanke - then a Fed Governor – was writing speeches titled “Deflation: Making Sure “It” Does Not Happen Here” (http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm) meaning it would not happen in the US as Japan was already in a deflation at that time. So if a mild recession – that was not even global – led to deflation worries how severe deflation could be in a recession that even the IMF is now forecasting to be global in 2009?


When economies get close to deflation central banks aggressively cut policy rate but they are threatened by the liquidity trap that the zero bound on nominal policy rates implies. The Fed is now effectively already in a liquidity trap: the target Fed Funds rate is still 1% but expected to be cut to 0.5% in December and down to 0% by early 2009. Also, while the target rate is still 1% the effective Fed Funds rate has been trading close to 0.3% for several weeks now as the Fed has flooded money markets with massive liquidity injections; so we are effectively already close to the 0% constraint for the nominal policy rate.


Why should we worry about a liquidity trap? When policy rates are close to zero money and interest bearing short term government bonds become effectively perfectly substitutable (what is a zero interest rate bond? It is effectively like cash). Then further open market operations to increase the monetary base cannot reduce further the nominal interest rate and therefore monetary policy becomes ineffective in stimulating consumption, housing investment and capex spending by the corporate sector: you get stuck into a liquidity trap and more unorthodox monetary policy actions (to be discussed below) need to be undertaken.


The Costs and Dangers of Price Deflation
Before we discuss the monetary policy options in a deflation and liquidity trap let us consider the costs and dangers of deflation.


First, if aggregate demand falls sharply below aggregate supply then price deflation sets in (and indeed there is already massive price deflation in the US in the sectors – housing, autos/motor vehicles and consumer durables – where the excess inventory of unsold goods is huge). The fall in prices and the excess inventory of unsold goods forces firms to cut back production and employment; the ensuing fall in incomes leads to further fall in demand and induce another vicious cycle of falling prices and falling production/employment/income and demand.


Second, when there is deflation there is no incentive to consume/spend today as prices will be lower tomorrow: buying goods today is like catching a falling knife and there is an incentive to postpone spending (consumption and investment spending) until the future: why to buy a home or a car today if its price will fall another 15% and purchasing today would imply having one’s equity in a home or a car fully wiped out in a matter of months? Better to postpone spending. But this postponing of spending exacerbates the vicious cycle of falling demand and supply/employment/income and prices.


Third, when there is deflation real interest rate are high and rising in spite of the fact that nominal policy rates are zero. If the policy rate is zero and there is a 2% deflation the real short term policy rate is actually a positive 2% that further depresses consumption and investment; and real long-term market rates are even higher with deflation – as discussed in detail below – as market rates at which firms and households borrow are much higher than short term policy rates.


The Deadly Deeds of Debt Deflation
Fourth, deflation also leads to the nightmare of debt deflation, a situation well analyzed by Fisher during the Great Depression. If debt liabilities are in nominal terms (D) and at a fixed long term interest rate (i) a reduction in the price level (P) increases the real value of such nominal liabilities (D/P goes up); so debtors that are already distressed in a recession and deflation become even more distressed as the real burden of their liabilities (D/P) sharply rises.


Another complementary way to see the perverse effects of debt deflation is to notice that the ex-post – as opposed to the ex-ante –real interest rate faced by borrowers sharply rise. Suppose you are a firm or household that had borrowed – say a 10 year mortgage or a 10 year corporate bond – at an interest rate (i) of 5% at the time when inflation (dP/P) was expected to remain at 3%; then the real ex-ante real cost of borrowing (r= i – dP/P) was only 2% (the difference between 5% and the expected inflation of 3%). Now suppose that, ex-post, the economy falls into a deflation trap and prices are now falling at 2% annual rate and expected to fall as much for a number of years. Now the ex-post real interest rate (r= i – dP/P) on that borrowing rises from 2% ex-ante to an actual ex-post 7% (5% - (-2%)). Thus, ex-post unexpected deflation sharply increases the real interest rate faced by borrowers or, equivalently, sharply increases the real ex-post value of their real liabilities (D/P).


Things are even worse if the debtor had borrowed to finance the leverage purchase of assets whose prices is now falling. Suppose you are a household who borrowed at a 5% mortgage rate to purchase a home whose price is now falling at an annual rate of 15%. Then the effective real interest rate that you are facing on your debt is not 5% but a whopping 20% (the sum of the 5% mortgage rate plus the 15% fall in the price of the underlying asset) that soon leads you into the depth of negative equity into your home. Thus, leveraged purchase of assets whose price is falling is an even more deadly form of debt deflation.


In all of its forms and manifestations debt deflation sharply increases the risk that borrowers will be forced to default on real obligations that they cannot service. Thus, debt deflation is associated with a sharp rise in corporate defaults and household defaults that creates a spiral of deflation, debt deflation and defaults.


High Market Real Interest Rates and Costs of Borrowing in a Deflation/Liquidity Trap
In situations of deflation and liquidity trap traditional monetary policy becomes pathetically ineffective. Consider now why monetary policy is ineffective. The real long-term interest rate faced by borrowers (say a mortgage holders who has a 10 year fixed rate mortgage or a corporate who issues a 10 year nominal rate bond) is given by the following expression:


Real Long Term Market Rate = (Nominal Long Term Market Yield – Inflation Rate) = (Nominal Long Term Market Yield – Long Term Government Bond Yield) + (Long Term Government Bond Yield – Fed Funds Rate) + Fed Funds Rate - Inflation Rate


Similarly the real short-term interest rate faced by borrowers (say a mortgage holder who has a variable rate mortgage or a consumer with credit card debt or a corporate who issues short term commercial paper) is given by the following expression:


Real Short Term Market Rate = (Nominal Short Term Market Yield – Inflation Rate) = (Nominal Short Term Market Yield – 3 month Libor rate) + (3 month Libor rate – Fed Funds Rate) + Fed Funds Rate - Inflation Rate


The first expression above shows clearly that even if the policy rate (the Fed Fund rate) is 0% the long term real interest rate faced by market borrowers can be very high for three reasons:



1. For any given nominal market rate there is deflation that increases real rates
2. The spread between the nominal market rate and the long term nominal yield on safe government bonds (representing the credit spread) can be high and rising
3. The spread between the nominal government bond yield and the policy rate (the yield curve spread) can be high and rising
A similar three-part decomposition holds for the short term real market rate that depends on deflation, on the spread between market rates and the short –term Libor rate and the spread between short term Libor and the policy rate.


Now, in a situation of a liquidity trap all three factors described above keep real long term market rates high and rising in spite of falling policy rates (that end up with the Fed Funds rate down to zero). First, the credit spread has widened for high yield corporates from 250bps in June of last year to a whopping 1600bps in recent days; even the credit spread for high grade corporate has gone from 50bps to 400-500bps. Second the spread between long term government bonds and the Fed Funds rate has sharply increased as the Fed Funds rate has been reduced from 5.25% to 1% (soon 0%) while long bond yields have fallen very little (about 100bps). Third, inflation is sharply falling and deflation is over the horizon.


The same holds for the sharp increase in real short term market rates since the beginning of the liquidity crunch in money markets and short term debt markets: a rise in the spread between market rates (say credit cards or commercial paper) and 3 month Libor; a rise in the spread between 2 month Libor and the policy rate (or variants of the same such as the TED spread or the Libor-OIS spread); a fall in inflation and the onset of deflation.


“Crazy” Monetary Policy to Address the Liquidity Trap and a Severe Liquidity and Credit Crunch
To address the increase in real short term market rates the Fed and other central banks have already undertaken quite unorthodox monetary policy moves. To address the even more severe increase in real long term market rates the Fed and other central banks will have to undertake even more radical and unorthodox policy actions.


The widening of the real short term market rates has been addressed by creating a whole series of new liquidity facilities (the TAF, the TSLF, the PDCF, the swap lines with foreign central banks, the new commercial paper facility). Some of these facilities have been aimed at reducing the sharply rising TED spread, Libor-OIS spread, Libor-Fed Funds spread. While other of these facilities – such as the new commercial paper facility (that has the acronym of ABCPMMMFLF) have had the aim of reducing the sharply rising spread between short-term market rates (such as commercial paper rates) and the policy rate (or the 3 month T-bill rate). Flooding money markets with massive amounts of liquidity and with a massive swap of illiquid assets sitting on the balance sheet of banks and broker dealers (MBS, etc.) for safe Treasuries has finally started – after 12 months of rising spreads – to reduce such Libor versus safe assets spread.


Indeed, the Fed and other central banks that used to be the “lenders of last resort” have become the “lenders of first and only resort” as banks don’t lend to each other, banks don’t lend to non-bank financial institutions and financial institutions don’t lend to the corporate and household sectors.
However, in spite of the Fed becoming the lender of first and only resort (even the corporate CP market is now being propped by the new Fed facility) there are still major problems that remain seriously unresolved in short term money markets and short term credit markets:



- Such Libor spreads are rising again in recent days; and they are still very high – at the 3 month maturity – compared to what they were before this liquidity crunch;
- banks and other financial institutions are still not lending to each other in spite of lower spreads as they need the liquidity received by the Fed and they worry about the solvency of their counterparties;
- only banks and major broker dealers have access to these facilities and thus most of the shadow banking system does not have access to this Fed liquidity;
- market spreads as still rising and the availability of short term credit is becoming tighter as banks increase interest rates on credit cards, student loans and auto loans and make such loans in scarcer supply;
- only rated investment grade corporate have access to the commercial paper facility leaving millions of speculative grade or non-rated firms in an even bigger liquidity and credit squeeze;
- securitization of credit cards, auto loans, student loans is currently dead.
This is why now a desperate Treasury is starting to think about using the remaining TARP funds to directly unclog the unsecured consumer debt (credit cards, student loans, auto loans) market and the securitization of such debt. Desperate times required desperate and extreme actions.
Even “Crazier” Policy Actions Are Required to Reduce Long Term Market Interest Rates
But even more desperate or “crazier” monetary actions are needed to address the increase in real long term market rates. These actions are needed to prevent deflation from setting in, to reduce the credit spread (the difference between long term market rates and long term government bond yields) and to reduce the yield curve spread (the difference between long term government bond yields and the policy rate).


There are a number of tools that the Fed could use to reduce the yield curve spread when the Fed Funds rate is already done to zero. First, the Fed could commit to maintain the Fed Funds rate down to zero for a long period of time: since long term government bond yields are – based on the expectation hypothesis – equal to a weighted average of current short term government bond yields and current expectations of what those short term bond yields will be for the foreseeable future a commitment to keep the Fed Funds rate down to zero for a long time will affect expectations of future expected short rates and could reduce long term government bond yields. Even this action may not be sufficient to reduce long yields on safe assets as such long yields also depend on liquidity premia and risk premia that will not be affected by expectation of future short rates. Greenspan discovered the “bond market conundrum” when raising the Fed Funds rate from 1% to 5.25% did not change much long rates and Bernanke rediscovered this conundrum when reducing the Fed Funds rate down to 1% failed to significantly reduce long rates. Such long rates depend in part on the global supply of savings relative to the demand for investment; thus they are not likely to be strongly affected by current and future expected policy rates.

Second, the Fed could do what it last did in the 1950s: directly purchase long term government bonds as a way of pushing downward their yield and thus reduce the yield curve spread. But even such action may not be very successful in world where such long rates depend as much as anything else on the global supply of savings relative to investment. Thus, even radical action such as outright Fed purchases of 10 or 30 year US Treasury bonds may not work as much as desired.


Next, the Fed could try to directly affect the credit spread (the spread between long term market rates and long term government bond yields). Radical actions could take the form of: outright purchases of corporate bonds (high yield and high grade); outright purchases of mortgages and private and agency MBS as well as agency debt; forcing Fannie and Freddie to vastly expand their portfolios by buying and/or guaranteeing more mortgages and bundles of mortgages; one could decide to directly subsidize mortgages with fiscal resources; the Fed (or Treasury) could even go as far as directly intervening in the stock market via direct purchases of equities as a way to boost falling equity prices. Some of such policy actions seem extreme but they were in the playbook that Governor Bernanke described in his 2002 speech on how to avoid deflation. They all imply serious risks for the Fed and concerns about market manipulation. Such risks include the losses that the Fed could incur in purchasing long term private securities, especially high yield junk bonds of distressed corporations. In the commercial paper fund the Fed refused to purchase non-investment grade securities. Even high grade corporate bonds are not without risk as their spread have massively widened in recent months from 50bps over Treasuries to levels in the 500bps plus range. Also pushing the insolvent Fannie and Freddie to take even more credit risk may be a reckless policy choice. And having a government trying to manipulate stock prices would create another whole can of worms of conflicts and distortions.


Finally, the Fed could try to follow aggressive policies to attempt to prevent deflation from setting in: massive quantitative easing; flooding markets with unlimited unsterilized liquidity; talking down the value of the dollar; direct and massive intervention in the forex to weaken the dollar; vast increase of the swap lines with foreign central banks (an indirect and disguised form of forex intervention) aimed to prevent a strengthening of the dollar; attempts to target the price level or the inflation rate via aggressive preemptive monetization; or even a money-financed budget deficit (an idea suggested by Bernanke in 2002 that he termed to be the equivalent of an “helicopter drop” of money in the economy (http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm)). The problem with many of these “extreme” policy actions – as well as some of the ones described above to affect the relevant spreads – is that they were tried in Japan in the 1990s and the last few years and they miserably failed: once you are in a liquidity trap and there are fundamental deflationary forces in the economy as the excess aggregate supply of goods is facing a falling aggregate demand it is very hard even with extreme policy actions to prevent deflations from emerging.


Some very aggressive policy actions – such as letting the dollar weaken sharply – may do the job but they may also be beggar-thy-neighbor policies that would export even more deflation to other countries: a much weaker dollar would mean a much stronger value of other currencies that would reduce aggregate demand abroad and exacerbate their deflationary pressures as their import prices would sharply fall.


And indeed with global – rather than U.S. alone – deflationary forces setting in the global economy dealing with global deflation becomes much harder. The world economy has been massively imbalanced for the last decade with the U.S. being the consumer of first and last resort, spending more than its income and running ever larger current account deficits while creating a massive excess productive capacity via overinvestment; while China and other emerging markets have been the producers of first and last resort, spending less than their income and running ever larger current account surpluses. With U.S. spending (consumption, residential investment, capex spending) now faltering and structural rigidities to a rapid growth of domestic consumption demand in China and emerging market economies, a global glut of unsold goods may lead to persistent and perverse deflationary forces that may last for a longer time unless proper policy actions – mostly non-necessarily monetary – are undertaken.


Thus, dealing with this deadly combination of deflation, liquidity traps, debt deflation and defaults that I termed as global stag-deflation may be the biggest challenge that U.S. and global policy makers may have to face in 2009. It will not be easy to prevent this toxic vicious circle unless the process of recapitalizing financial institutions via temporary partial nationalization of them is accelerated and performed in a consistent and credible way; unless such actions are combined with massive fiscal stimulus to prop up aggregate demand while private demand is in free fall; unless the debt burden of insolvent households is sharply reduced via outright large debt reduction (not cosmetic and ineffective “loan modifications”); and unless even more unorthodox and radical monetary policy actions are undertaken to prevent pervasive deflation from setting in.


Thus, while the Fed may pursue radical, “crazy” and “crazier” monetary policy actions the true policy responses to the risk of deflation may lie elsewhere: when monetary policy is in a liquidity trap a properly-targeted fiscal stimulus is more appropriate and effective; cleaning up the financial system and properly recapitalize it is necessary; and debt deflation and debt overhang problems are more directly and properly resolved through debt restructuring and debt reduction than by trying to reduce the real value of such liabilities via higher inflation.

[RandomGuy]

I have been warning since January 2008 that the biggest risk ahead for the US and the global economy is one of a stag-deflation, the deadly combination of an economic stagnation/recession and deflation (http://www.rgemonitor.com/roubini-monitor/254148/the_coming_global_stag-deflation_stagnationrecession_plus_deflation).

.. also known as a "depression".

Don't need a spiffy new term here.

[Twisted_Dawg]

When I see Dr. Roubini on CNBC in the mornings, I always wonder why that mofo cannot tie a tie properly. The fucker looks like he jjust worked an 18 hour shift.

[boutons_]

"a spiffy new term"

stagflation is an OLD term from the 1970s.

[Winehole23]

.. also known as a "depression".

Don't need a spiffy new term here.Agree, but depression has been a rather loaded term since, well, the last one we called a depression.

[boutons_]

I keep reading that pumping so much $$$, $Ts, into the US money supply will typically lead to, when consumption creeps up, to hyper-inflation.

[Winehole23]

While declining costs for everything from gasoline (http://www.bloomberg.com/quote/3AGSREG:IND) to coffee can be good news for consumers, disinflation makes it harder for borrowers to pay off debts and businesses to boost profits. The greater danger comes when disinflation turns into deflation, which leads households to delay purchases in anticipation of even lower prices and companies to postpone investment and hiring as demand for their products dries up.






“There is definitely a whiff of disinflation again taking hold globally,” Robert Sinche, global strategist at Pierpont Securities Holdings LLC in Stamford (http://topics.bloomberg.com/stamford/), Connecticut (http://topics.bloomberg.com/connecticut/), said Nov. 5 on Bloomberg Radio’s “Bloomberg Surveillance (http://topics.bloomberg.com/bloomberg-surveillance/).”



Federal Reserve Chairman Ben S. Bernanke and his central-bank counterparts are trying to avert the deflationary danger by pumping up their economies with lower interest rates and monetary stimulus. They have bet the run-up in stock and home prices they’ve engineered would boost consumer and corporate confidence and spur faster growth and higher inflation. Now they’re having to maintain or intensify their aid -- running the risk those efforts do more harm than good by boosting equity and property prices to unsustainable levels.


“You have a wall of liquidity” that’s “leading to asset inflation and eventually to bubbles,” Nouriel Roubini, chairman of Roubini Global Economics LLC, said Nov. 7 on Bloomberg Television’s “Street Smart.”

http://www.bloomberg.com/news/2013-11-13/central-banks-risk-asset-bubbles-in-battle-with-deflation-danger.html

[Winehole23]

http://www.spurstalk.com/forums/showthread.php?t=201815

[Winehole23]

Worker productivity, a key component of an economy’s health, has risen at an annual clip of 1 percent during the last four years, as the U.S. has struggled to recover from the worst recession since the Great Depression. That’s less than half the 2.2 percent average gain since 1983, according to data from the Labor Department in Washington.


“Slower growth in productivity might have become the norm,” the central bankers noted at their Oct. 29-30 meeting, according to the minutes released last week. That’s a switch from past comments by Bernanke that the deceleration probably was temporary and would end as the expansion continued.


A combination of forces may be at work. Chastened by the deep economic slump, corporate executives have reduced spending plans for factories, equipment, research and development. Startup businesses have been held back as would-be entrepreneurs find it harder to get financing from still-cautious lenders. And out-of-work Americans have seen their skills atrophy the longer they’re without jobs.


“We’re in a slow-growth period of unknown duration,” said Edmund Phelps (http://topics.bloomberg.com/edmund-phelps/), a professor at Columbia University (http://topics.bloomberg.com/columbia-university/) in New York and winner of the 2006 Nobel prize (http://topics.bloomberg.com/nobel-prize/) in economics.

http://www.bloomberg.com/news/2013-11-27/fed-reveals-new-concerns-about-long-term-u-s-slowdown.html

[Winehole23]

http://www.realclear.com/markets/2013/11/17/deflation_fears_spread_beyond_eurozone_4107.html

[boutons_deux]

but but but ...

Repugs said Obama's stimulus (too small by a couple $T), of 4+ years ago, will cause SOOPER DOOPER WHOPPER MEGA HYPER INFLATION!

Were Repugs LYING? LOL

Were Repugs denying economic growth and job creation JUST TO SCREW THE ECONOMY and WORKERS to cause Obama to fail and tatoo him with failure exclusively? LOL

[Winehole23]

How idiotic. The GOP isn't causing global deflationary headwinds.

[boutons_deux]

How idiotic. The GOP isn't causing global deflationary headwinds.

How idiotic.

The Repugs blocking a stimulus of the size necessary to address the Banksters Great Depression would have made the US economy an engine pulling along other economies, like Europe, as it has in the past and even as has Germany.

[Winehole23]

a stimulus that size never got proposed. blame Obama for keeping it too small: he could have proposed on big enough to do what you say could have been done; he didn't.

[boutons_deux]

a stimulus that size never got proposed. blame Obama for keeping it too small: he could have proposed on big enough to do what you say could have been done; he didn't.

the Repugs, tea baggers, VRWC, Fix The Debt (austerity lovers) billionaires, Fox, the entire right wing hate and lie machine was screaming "HYPER INFLATION JUST AROUND THE CORNER DUE TO OUT-OF-CONTROL govt spending and if the a large stimulus was passed. The too-small stimulus barely passed anyway, was all that was politically possible. And the Repug propaganda has since foreclosed on any possibility of another stimulus of any size.

[Winehole23]

the Dems gave up on it; you don't even hear them talking about it.

[boutons_deux]

the Dems gave up on it; you don't even hear them talking about it.

Typical Dems, intimidated by the crazy-ass, spittle-spewing. constipated Repugs.

NOBODY in DC is talking about stimulus or jobs or the upcoming disaster of the next round of sequester cuts, which the Repugs and tea baggers WANT to happen to continue to make the economy as bad a possible for the '14 and '16 elections (didn't work in in the years before '12).

[Winehole23]

http://www.zerohedge.com/contributed/2013-11-28/default-deflation-and-picture-financial-repression

[Winehole23]

An American who won this year's Nobel Prize for economics believes sharp rises in equity and property prices could lead to a dangerous financial bubble and may end badly, he told a German magazine.

Robert Shiller, who won the esteemed award with two other Americans for research into market prices and asset bubbles, pinpointed the U.S. stock market and Brazilian property market as areas of concern.

"I am not yet sounding the alarm. But in many countries stock exchanges are at a high level and prices have risen sharply in some property markets," Shiller told Sunday's Der Spiegel magazine. "That could end badly," he said.

"I am most worried about the boom in the U.S. stock market. Also because our economy is still weak and vulnerable," he said, describing the financial and technology sectors as overvalued.

He had also looked at "drastically" higher house prices in Rio de Janeiro and Sao Paulo in Brazil in the last five years.

"There, I felt a bit like in the United States of 2004," he said, adding he was hearing arguments about investment opportunities and a growing middle class that he had heard in the United States around the year 2000.

The collapse of the U.S. housing market helped trigger the 2008-2009 global financial crisis.

"Bubbles look like this. And the world is still very vulnerable to a bubble," he said.

Bubbles are created when investors do not recognise when rising asset prices get detached from underlying fundamentals.http://www.reuters.com/article/2013/12/01/economy-shiller-idUSL5N0JG0DZ20131201

[boutons_deux]

blowing bubbles is how the financial sector rapes the rest of us.

online advertizing bubble:

http://www.chaosisgood.com/2013/11/the-google-bubble-why-silicon-valleys.html

[Winehole23]

The speed with which Google transitioned from a university research project to a media colossus impels the belief that the complete eclipse of traditional media is unstoppable. In about a dozen years, Google has reordered the media cosmos: It will take in 33 percent of all global digital ad revenue — approximately $38.6 billion (http://mashable.com/2013/08/28/online-ad-revenues/) — this year, six times that of the first runner-up, Facebook, according to eMarketer (http://www.emarketer.com/Article/Facebook-Sees-Big-Gains-Global-Mobile-Ad-Market-Share/1010171). It will also collect more than 50 percent of all mobile advertising. Its annual ad revenues now surpass those of the entire newspaper industry (as well as the entire magazine industry), as Business Insider recently informed (http://www.businessinsider.com/google-is-bigger-than-all-magazines-and-newspapers-combined-2013-11#ixzz2lhIKWjom) us. “The growth of internet advertising revenue has outpaced other media every year since 2005,” Marketing Land (http://marketingland.com/record-breaking-quarte-digital-ad-revenues-cross-10-billion-mark-first-time-40138) reported earlier this year, with the Internet vying with domestic broadcast TV for ad revenue primacy.http://blogs.reuters.com/jackshafer/

[Winehole23]

Margin debt—a measure of how much market participants are borrowing to buy stocks—has soared to $412.5 billion on the New York Stock Exchange. The number represents a 13.2 percent gain from the beginning of 2013 and is fully 50 percent higher than the level in January 2012http://www.cnbc.com/id/101235633

[boutons_deux]

http://www.cnbc.com/id/101235633

and if the stock market declines deeply (say, the next round of sequester cuts hits very hard), the margin calls will destroy the leveraged participants.

[Winehole23]

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/12/02/these-18-countries-may-have-housing-bubbles-if-they-pop-god-help-us-all/?fb_action_ids=10151785645828093&fb_action_types=og.likes

[Winehole23]

I’ll get into the weeds later in the day, but here’s a bit of a shocker: real GDP grew only 0.1% in the first quarter of the year, according to this morning’s report from the Commerce Dept. That’s a huge deceleration from last quarter’s 2.6%, and well below analysts expectations of around 1.2%.


Remember, that 0.1% is an annualized number–the actual, quarterly percent growth of GDP was 0.03%, meaning that the real level of the value of goods and services in the US economy was essentially unchanged in the first three months of the year. That’s unusual and alarming, if it’s correct.

http://jaredbernsteinblog.com/in-downside-surprise-real-gdp-barely-grew-at-all-last-quarter/

[Winehole23]

It is notable that the Fed’s FOMC, already a bit worried about disinflation, is meeting as we speak.same

[boutons_deux]

so what does the Fed do to attack disinflation?

How about "easing" $80B/month directly to the 99% instead of financing the Wall St casino?

[boutons_deux]

A HUGE LIE from right-wingers here, and Repugs, was Obama's "out-of-control-spending" stimulus was sure to bring HYPERINFLATION :lol

WRONG and/or LYING, yet again. :lol

[Winehole23]

how could posters have been lying about predicting the future?

[boutons_deux]

how could posters have been lying about predicting the future?

because they don't GAF about hyperinflation, only about 1) privatizing "bankrupt" SS 2) drowning govt in a bathtub by starving it of tax revenues.

[Winehole23]

sometime you barely make sense at all, boutons.

[boutons_deux]

sometime you barely make sense at all, boutons.

what's nonsensical?

1) privatizing "bankrupt" SS 2) drowning govt in a bathtub by starving it of tax revenues.

... exactly are planks in Repug/Wall St strategy (kill USPS with insane pension funding is another one).

[Winehole23]

GOP was lying about hyperinflation eight years ago because ... the Ryan budget?

still looks like a non-sequitur to me

(shrugs)

[boutons_deux]

GOP was lying about hyperinflation eight years ago because ... the Ryan budget?

still looks like a non-sequitur to me

(shrugs)

They were lying, scare-mongering about hyperinflation to kill/reduce Obama's stimulus as hyperinflationary, when in fact they didn't give a shit about hyper-inflation. All they cared/care about was/still is DENYING Obama and Dems ANY success or PROGRESS, not matter how badly it hurts the country. All politics all the time. Way too small, Obama's stimulus was very successful as far as it went, aka government has the power to move the country forward, counter-cyclical, Keynesian spending works.

[angrydude]

um, no one ever said Obama's stimulus would bring on hyperinflation. That's called fiscal policy.

People did say the FED monetizing all the debt would bring on inflation and eventually hyperinflation. That's called monetary policy.

BTW the stock market hit a new high today. In other news GDP came in at around 0%. Move along folks, nothing to see here.

[Nbadan]

Meanwhile...


ADP NATIONAL EMPLOYMENT REPORT: PRIVATE SECTOR EMPLOYMENT INCREASED BY 220,000 JOBS IN APRIL


ROSELAND, N.J. –April 30, 2014 –Private sector employment increased by 220,000 jobs from March to April according to the April ADP National Employment Report®. Broadly distributed to the public each month, free of charge, the ADP National Employment Report is
produced by ADP®, a leading global provider of Human Capital Management (HCM) solutions, in collaboration with Moody’s Analytics. The report, which is derived from ADP’s actual payroll data, measures the change in total nonfarm private employment each month on a seasonally adjusted basis.

Goods-producing employment rose by 24,000 jobs in April, down from 28,000 jobs gained in March. Most of the gains again came from the construction industry which added 19,000 jobs over the month, compared to 21,000 in March. Manufacturing continued to be sluggish adding 1,000 jobs in April, down from 4,000 in March.

Service-providing employment rose by 197,000 jobs in April, up from the upwardly revised 181,000 in March. The ADP National Employment Report indicates that professional/ business services contributed the most to growth in service-providing industries, adding 77,000 jobs, up from 67,000 in March. Expansion in trade/transportation/utilities grew by 34,000, about equal to the 35,000 jobs added in March. The 8,000 new jobs in financial activities mark the strongest pace of growth in the industry since June 2013.

"The 220,000 U.S. private sector jobs added in April is well above the twelve-month average,” said Carlos Rodriguez, president and chief executive officer of ADP. “Job growth appears to be trending up and hopefully this will continue.” ... Mark Zandi, chief economist of Moody’s Analytics, said, "The job market is gaining strength. After a tough winter employers are expanding payrolls across nearly all industries and company sizes. The recent pickup in job growth at mid-sized companies may signal better business confidence. Job market prospects are steadily improving.”

http://www.adpemploymentreport.com/2014/April/NER/docs/ADP-NATIONAL-EMPLOYMENT-REPORT-April2014-Final-Press-Release.pdf

[boutons_deux]

Meanwhile...


ADP NATIONAL EMPLOYMENT REPORT: PRIVATE SECTOR EMPLOYMENT INCREASED BY 220,000 JOBS IN APRIL



http://www.adpemploymentreport.com/2014/April/NER/docs/ADP-NATIONAL-EMPLOYMENT-REPORT-April2014-Final-Press-Release.pdf


"service providing jobs" = junk food, retail, shitty wages.

good jobs gone and not coming back, shitty jobs for which REPUGS refuse to raise the minimum wage, dominate.

[Winehole23]

beggar thy neighbor is back. six years after the 2008 bust, the globe still faces deflationary headwinds:


The world's oldest central bank has ventured into uncharted territory.



Last week, Sweden's Riksbank slashed its main policy rate into negative territory.

(http://www.telegraph.co.uk/finance/economics/11408950/Sweden-cuts-rates-below-zero-as-global-currency-wars-spread.html)


In doing so, it became the 14th central bank to ease monetary policy so far this year, but the first to actually take its "repo rate" below zero to -0.1pc. This means Sweden is actually charging its banks to lend money. In Britain, the same interest rate currently stands at a historic low of 0.5pc, but could well be cut further if Mark Carney is to be believed.

(http://www.telegraph.co.uk/finance/bank-of-england/11409986/Mark-Carney-enjoy-low-prices-while-you-can.html)


Switzerland and Denmark have already sent their deposit rates to -0.75pc to prevent currency appreciation and defeat deflation.



The map above shows how this extraordinary central bank action has become the new normal in the developed world.


Faced with the twins threats of deflation and economic stagnation, monetary policymakers are reaching for their interest rate levers and digital money-printing tools in a bid to stave off recessions and debt deflationary dynamics.

http://www.telegraph.co.uk/finance/economics/11378193/How-central-banks-have-lost-control-of-the-world.html

[Winehole23]

so much for hyperinflation

[boutons_deux]

so much for hyperinflation

hyperinflation was just another REPUG lie to kill any possibility of any more of Obama's successful stimulus

[CosmicCowboy]

Historically these swings have come in waves and the pendulum tends to over swing in both directions.

[Winehole23]

when was the last time we had hyperinflation in the US?

[CosmicCowboy]

define hyper.

http://l.yimg.com/bt/api/res/1.2/lCJdHiTpyhvNZ_Iy4xrtPQ--/YXBwaWQ9eW5ld3M7cT04NQ--/http://media.zenfs.com/en-US/blogs/talking-numbers/Louise-Yamadas-chart-of-222-years-of-interest-rates.jpg

I certainly remember the prime rate being 21.5% in my adult lifetime.

[boutons_deux]

Historically these swings have come in waves and the pendulum tends to over swing in both directions.

... when there was dampening, resistance in the system to slow down the rates and amplitudes of the swings, ie, regulations on the financial sector and aggressive income tax rates, two conditions which haven't existed at least since 1980.

[Slutter McGee]

hyperinflation was just another REPUG lie to kill any possibility of any more of Obama's successful stimulus

Sure, hyperinflation is extremely unlikely, but very high inflation could be problematic in the future. Depends on how the FED handles it. M2 has literally skyrocketed. The money supply has grown at an incredible rate these last few years. But there is a reason why it hasn't caused a rise in prices. The FED decided to start paying interest on bank reserves. So this increase in the money supply is being held as excess reserves by banks at historical levels. When the FED bumps up interest rates, banks are going to have to have an incentive to loan out those reserves unless there is a corresponding rise in the Interest rate being paid on those reserves. That causes its own problems. Of course the FED can try and sell assets to counter the effect this will have.

Times should get interesting. Question is if the FED will be able to pull it off.

Slutter McGee

[Slutter McGee]

Also, no one fucking knows if the stimulus was successful, looking at the data at least. One thing is becoming clear in academia though. Cutting unemployment benefit extensions is what has improved the labor market.

[ElNono]

so much for hyperinflation

:lol I still remember the chain emails from some investment crooks about how everything was about to blow up...

What's more intriguing to me is the cause of such prolonged deflation. Is it China's growth into a manufacturing superpower, a country that manipulates it's currency to stay competitive?

Is it companies hoarding cash due to, among other things, tax avoidance? IIRC, there's almost $5 trillion stashed overseas (1/3 of our annual GDP) waiting for some tax holiday.

Any other reasons? I suspect it's a mix of all of them.

[boutons_deux]

Also, no one fucking knows if the stimulus was successful, looking at the data at least.

The data said the OBAMA stimulus saved and/or created some x M jobs.

OTOH, the Repugs at state level have laid off 100Ks of state employees, which was a serious drag on the economy regaining speed, while pushing those people onto public assistance, which the Repugs also cut. Repugs fuck everybody they can, it's their ideology.

eg, Texas already has one of the meanest, stingiest Medicaid systems, restrained only by Federal rules, from which they will probably be seeking wavers so Repugs can fuck kids, old, poor, disabled even more, while give about $20B/year in corporate expenditures (subsidies, tax breaks, etc)

[Nbadan]

The global bankers are robbing Americas wealth like they robbed Great Britains....There is no hyper-inflation because of wage stagflation for a majority of American workers...to make problems worse the GOP and its goon of party racists want to close the border and rob us of future tax payers and producers...

[Winehole23]

I certainly remember the prime rate being 21.5% in my adult lifetime.that's what killed inflation, dummy

[Winehole23]

define hyper.you define it. that's been your standing prediction for six years now.

[Winehole23]

a stopped watch is right twice a day. you're not even close to that level of accuracy.

[Winehole23]

CC just throws shit on the wall and expects people to bow to it. why is anyone's guess.

[Winehole23]

:lol I still remember the chain emails from some investment crooks about how everything was about to blow up...

What's more intriguing to me is the cause of such prolonged deflation. Is it China's growth into a manufacturing superpower, a country that manipulates it's currency to stay competitive?

Is it companies hoarding cash due to, among other things, tax avoidance? IIRC, there's almost $5 trillion stashed overseas (1/3 of our annual GDP) waiting for some tax holiday.

Any other reasons? I suspect it's a mix of all of them.
lot of bad paper still out there. nearly busted our system of payment in 2008. debt deflation is still real.

one bubble rolls into another. the financialization of the economy plus the global bust put capitalism on the defensive. money seeks to preserve itself, and extracts revenue from nations rather than investing it productively. neo-feudalism, if you like.

[Winehole23]

exigency can become the custom. like the war on terror. when is it over?

[ElNono]

lot of bad paper still out there. nearly busted our system of payment in 2008. debt deflation is still real.

one bubble rolls into another. the financialization of the economy plus the global bust put capitalism on the defensive. money seeks to preserve itself, and extracts revenue from nations rather than investing it productively. neo-feudalism, if you like.

Yeah, I have no doubt we're currently on a rentier-to-the-max system. Extraction is the name of the game right now. I was just reading the just-published OOC USTR list (here (https://ustr.gov/sites/default/files/2014%20Notorious%20Markets%20List%20-%20Published_0.pdf)), and I had to remind myself this was a government document, not a laundry list from the IP cartel. Although, odds are the cartel wrote it. Sigh.

[Slutter McGee]

The data said the OBAMA stimulus saved and/or created some x M jobs.

Bullshit, the unemployment rate with the stimulus went higher than the projected rate without the stimulus. You can make an argument that it would have gone even higher, but the fact is nobody knows.

But one thing is for sure. Cutting unemployment benefits did help unemployment. New econometric studies have proven it. Can't blame Obama for taking credit for something he had absolutely nothing to do with.

[Winehole23]

But one thing is for sure. Cutting unemployment benefits did help unemployment. New econometric studies have proven it.cite?

[boutons_deux]

[QUOTE=Slutter McGee;7859071Cutting unemployment benefits did help unemployment.[/QUOTE]

not in NC, where the nasty Repugs cut payments and length of time but unemployment barely moved, even as the economy crept upward.

Nobody can say cutting unemployment benefits/duration CAUSES people to get jobs when at the same time the economy upshifts and more jobs become available.

I can say definitively that REPUGS cause people to stay on unemployment because the unemployed see low-wage jobs paying same as or less than unemployment.

Repugs cause this situation by REFUSING to raise the Federal minimum wage well above unemployment checks.

Federal minimum wage should be $20/hour, increased over 5 years, and indexed to CPI.

$20/hour:

1. elevates 10Ms out of poverty.

2. entice the unemployed to look aggressively for work

3. Forces companies to pay people's total paycheck instead of outsourcing/offloading some the paychecks to taxpayers financing public assistance. iow, taxpayers are picking up the "external" costs of employers paying shit wages.

4. Stimulates the economy by put $100Bs into poor people's pockets instead into BigCorp and BigBanks' pockets.

5. Pushes ALL wages up from the bottom to compensate for the 35 years of VRWC/Repug union busting, war on employess, and wage suppression/theft.

[CosmicCowboy]

that's what killed inflation, dummy

Pretty much a massive oversimplification.

Not sure why you have such a hard on for me in this thread...

I don't see how it's possible to continue to expand the money supply and debt faster than the growth rate forever without consequences. That doesn't make me a "sky is falling" hyperinflation alarmist either. Just a return to normalized interest rates at say 7% will present problems of their own with US debt service on trillions of dollars of debt. Lets say when the debt is 20 trillion the debt service will require 1.4 trillion a year. Considering total tax revenue now is a little over 3 trillion you could see how this could be a problem.

[boutons_deux]

"I don't see how it's possible to continue to expand the money supply and debt faster than the growth rate forever without consequences"

QE money went into the financial sector, where it mostly stopped, to be gambled in the world wide financial casino, including piling into the stock market because T-bonds have been paying shit.

QE didn't go to the 99% to increase spending and demand pull on inflation. Consumer demand is quite flat, eg, 4th qtr 2014 Christmas season.

who said "forever" besides you?

"Americans made more progress in repairing their post recession finances and have increased their overall borrowing, yet they are also showing an aversion to credit cards and new mortgages that could hinder the economic recovery.Household debt—including mortgages, credit cards, auto loans and student loans—rose $129 billion between January and March to $11.65 trillion, new figures from the Federal Reserve Bank of New York showed Tuesday. That was the third consecutive quarterly increase.

Behind the uptick: Mortgage balances—which make up the bulk of U.S. household debt—rose $116 billion to $8.2 trillion, thanks in part to fewer people going into foreclosure, which drags down mortgage debt. Auto-loan balances grew $12 billion to $875 billion. Student-loan balances increased $31 billion to $1.1 trillion, maintaining its place as the fastest-growing debt category.

Despite all their progress digging out of the downturn, however, U.S. consumers are displaying a heightened wariness about using credit cards or taking out new mortgages."

http://www.wsj.com/articles/SB10001424052702304081804579559813544267206

"aversion to new mortgages" is mostly the difficulty for the 99% to obtain them. The rental business is booming, as are rental prices.

[CosmicCowboy]

Who says "forever" besides me?

:lol

The US will NEVER again match expenditures to revenue. It simply can't happen. We will ALWAYS spend more than we bring in for revenue.

Boo if you think they can or will you are even more batshit crazy than I though.

[boutons_deux]

Who says "forever" besides me?

:lol

The US will NEVER again match expenditures to revenue. It simply can't happen. We will ALWAYS spend more than we bring in for revenue.

Boo if you think they can or will you are even more batshit crazy than I though.

When did the USA have NO national debt?

[Slutter McGee]

Nobody can say cutting unemployment benefits/duration CAUSES people to get jobs when at the same time the economy upshifts and more jobs become available.

Kurt Mitman; Look him up. There is a new working paper where they use the data from bordering counties on state lines to study the effect. In essence they take advantage of this discontinuity of policy in different states to study the effects of unemployment. The data disagree with you.


I can say definitively that REPUGS cause people to stay on unemployment because the unemployed see low-wage jobs paying same as or less than unemployment.

The rest of this I can handle myself. You just admitted that unemployment extensions cause people not to want to work.


Repugs cause this situation by REFUSING to raise the Federal minimum wage well above unemployment checks.

Federal minimum wage should be $20/hour, increased over 5 years, and indexed to CPI.

And here is where your argument falls apart. Most Republican’s are incorrect when they say that raising the minimum wage is going to destroy so many jobs that it makes the economy fall apart. But raising it by the amount you suggest certainly would.

Hopefully, god…I hope, you are aware of the perfectly competitive model of supply and demand. And artificial price floor (a minimum wage) creates a surplus of supply, in this case since we are looking at a labor market, it causes unemployment.

So now, in or analysis, lets look at the problems with this. Even if you don’t understand what I am saying, you will probably agree with my first conclusion.

1.Elasticity of labor demand. That is the percent change in employment for every percent change in the wage rate. The perfectly competitive model for an individual firm assumes that wage is perfectly elastic. Firms are wage takers. But looking at most data actual aggregate elasticity is around -.25. That means it is relatively inelastic. For every 10% increase in the minimum wage we are looking at a drop of employment of 2.5%. That isn’t good, but it is no where as bad as republicans suggest.

But lets now look at what your wage would do in this model. You are suggesting a 175.86% increase in the minimum wage….so you are looking at a corresponding drop of 43.965% in employment. That is obviously overstated as I am still using a competitive model, but is still catastrophic. It helps prove my point.

Now that I have shown how Republican arguments are overstated, and demonstrated that a 20 dollar minimum wage would be disastrous, lets admit that raising the minimum wage could lead to increased aggregate employment and take a look at how or why that might be affective.



It could happen in a monopsony situation where all labor demanded in one market goes to one firm. This is theoretical and you all most never see it in real life. It has to do with lowering marginal expense. I can go into more detail if you want.




Let us now look at ways you can define employment. Et = E(t-1) +Ht – St. Let Et be current employment, E(t-1) be employment from a previous period, Ht is the hiring rate, and St is the separation rate. Basically this means that employment is affected by flows. An increase in the minimum wage would lower Ht but also lower St. People are going to higher less, but less people are going to quit their jobs. So yes, employment may stay constant. Employment can even go up in the aggregate because of the marginal expense of hiring new workers is decreased. That is why a low separation rate can lead to these results. The firms make more and hire more.


But here is the key. This can only happen with an just binding wage. Or a small increase in the minimum wage. A strictly binding wage, or a large increase would be totally different. I can show you some differential calculus as proof if you want.

And here is another thing you don’t seem to get. Large firms; those mega corporations that you hate so much….They can absorb a wage increase that small businesses can’t and the benefits on retention and lowering marginal expense are help? Why do you think Walmart raised their wage? They are counting on the savings from retention.

This increased wage that you want so bad creates barriers to entry. What new firm is going to start up if the cost of labor is so high? Few, unless they can substitute to capital or outsource. This means that an increase in the minimum wage has antitrust issues. Artifical barriers to entry have been constructed by your silly idea, and now only those mega corporations exist.

Lets hear all for Boutons; The New Champion for Corporate Power.


1. elevates 10Ms out of poverty.

It does, if they can keep their jobs. And if the wage increase doesn’t have inflationary influence.


2. entice the unemployed to look aggressively for work

They won’t be able to find work because the separation rate will drop


3. Forces companies to pay people's total paycheck instead of outsourcing/offloading some the paychecks to taxpayers financing public assistance. iow, taxpayers are picking up the "external" costs of employers paying shit wages.

No, I just proved to you that it is going to force companies to outsource more.


4. Stimulates the economy by put $100Bs into poor people's pockets instead into BigCorp and BigBanks' pockets.


I’ve already proven you are a big supporter of Big Corporations.


5. Pushes ALL wages up from the bottom to compensate for the 35 years of VRWC/Repug union busting, war on employess, and wage suppression/theft.

Real wage has gone up slightly in the last 20 years.

Once last thing; CPI is overstated because it doesn’t take into account substitution bias or quality bias.

Basically, with this giant wall of text. TLDR etc….I hope I made one point. You have no idea what the fuck you are talking about.

Slutter McGee

[ElNono]

Who says "forever" besides me?

:lol

The US will NEVER again match expenditures to revenue. It simply can't happen. We will ALWAYS spend more than we bring in for revenue.

Boo if you think they can or will you are even more batshit crazy than I though.

That's a fairly bold claim. Didn't we match and even exceed revenue a little over 20 years ago?

[FuzzyLumpkins]

That's a fairly bold claim. Didn't we match and even exceed revenue a little over 20 years ago?

We did but blustering on bullshit like unprovable arguments is exactly what the old man does.

[CosmicCowboy]

When did the USA have NO national debt?

You are intentionally missing the point Boo. There is a difference between reasonable debt to GDP but when it climbs over 100% headed for 200% it's not reasonable anymore.

Debt service eventually eats the budget for all discretionary spending.

Personally, I see no fix for the problem from either party and I don't claim to have the answer either. From my standpoint personally the trend is favorable for my lifetime...I am able to borrow money cheaply and expand my net worth during my working years and build a nice nest egg for retirement. Then when interest rates and inflation do go up and I retire my two big expenses (housing, paid for) (medical expenses paid by medicare) I can then drop that multimillion dollar nest egg into bonds and clip coupons at 10% and live fat and happy.

Not so much fun for you younger guys that will have to figure out a way to pay for all that. lets call 2030 debt 50 trillion...I would consider that a reasonable expectation. Debt service just eats the shit out of revenues and you can kiss any spending beyond SS, Medicare, Medicaid, and the military goodbye.

[CosmicCowboy]

The Congressional Budget Office’s long-term budget forecasts on the national fiscal health are highly educated guesswork, but guesswork just the same. The 2030s are pretty far off, and the degree of forecasting uncertainty is higher than it once was. As CBO explains “the current degree of economic dislocation exceeds that of any previous period in the past half-century, so the uncertainty inherent in current forecasts probably exceeds the historical average.” But let’s imagine that the 2030s have arrived, and that CBO’s budget projections have come true. What would America look like?

For starters, Social Security would be flat broke. All U.S. Treasury’s IOUs to Social Security will have been cashed in. Since the Social Security trust funds will be completely depleted and, because Social Security is barred by law from borrowing from the federal government, the program will be unable to meet its obligations. Thus, by the end of the 2030s, payable benefits would have to be cut by 20 percent. Is it possible to imagine that the government will suddenly cut 20 percent of the benefits it hands out? That seems unlikely — the law would be changed and borrowing would resume.

In fact, Social Security’s problems would start much earlier. In 2016, according to CBO, its outlays would begin to regularly exceed its revenues, and consequently Social Security would first start to regularly call in its IOUs. Thus, the Treasury Department would need to borrow billions of dollars each year to pay back what it borrowed from Social Security’s trust funds.

If Social Security is expected to be in bad shape by the 2030s, the big public health care programs, Medicare and Medicaid, would be doing even worse. The culprits being an aging population and expanding health care costs, which are scheduled to grow faster than the U.S. economy. By the 2030s the number of people over the age of 65 — the beneficiaries – will have increased by 90 percent while those between 20 and 65 — the contributors — will have grown by a meager 10 percent.

In the 2030s, federal spending on mandatory health care programs accounts for 11 percent of GDP, about twice the level in 2010. Add in Social Security, and the big three entitlements cost about 16 percent of GDP. Keep in mind that primary spending for the 40 year period before 2010 averaged 18.5 percent of GDP. This means that in 2030, the U.S. government will either be unable to direct resources to other priorities (like education,) or will have to increase a tax rate by roughly double that of 2010.

Finally, America in the 2030s will groan under mind-boggling public debt, assuming the country’s fiscal fortunes are calculated by the CBO under what’s called a “current policy” scenario. In this case, the CBO assumes that no major public policy innovations will occur throughout the lifetime of its projection. This scenario reflects the political reality we face today. For example, congress is currently debating whether to extend the Bush tax cuts and “patch” the Alternative Minimum Tax. If political inaction prevails, debt-to-GDP ratio would exceed 200 percent by the 2030s, even with an economic recovery.

It is true that the U.S. holds a privileged position by virtue of the dollar’s role as the world’s reserve currency. But we have no idea how a debt of this magnitude would affect our ability to invest in future growth, and to keep borrowing from abroad. Moreover, in the 2030s, interest payments on the national debt are nine percent of GDP, from just one percent of GDP in 2010. If we continue borrowing at the projected rates beyond 2030, interest spending would exceed total federal revenues 15 years thereafter.

Finally, this grim fiscal portrait of America in the 2030s rests on optimistic assumptions. CBO projections assume that revenue will average around 19 percent of GDP and that long-term interest rates remain low. They also assume away the strong likelihood that America will face another economic crisis or armed conflict between 2010 and 2030.

[Slutter McGee]

When did the USA have NO national debt?

Deficit vs debt....how does it work? I learned the difference when i was 12.

Slutter McGee

[ElNono]

The 2030 deadline used to be the 2010 deadline, which used to be the 2000 deadline, which was the reason to balance the budget in 1990...

[CosmicCowboy]

The 2030 deadline used to be the 2010 deadline, which used to be the 2000 deadline, which was the reason to balance the budget in 1990...

Well, since there is no political will to increase taxes or reduce benefits I guess we will find out in 2030. You are a pretty bright guy with a math/science background as best I remember. Seems you would be able to look at it and realize that at some point the math doesn't work anymore.

[CosmicCowboy]

Short term on a global scale we will definitely see deflation as property markets in China and the rest of the Pacific Rim countries implode. Also when you see condos in New York and London breaking "most expensive" records every month it pretty much tells you there are some bubbles out there that are bound to pop eventually.

[Winehole23]

The Congressional Budget Office’s long-term budget forecasts on the national fiscal health are highly educated guesswork, but guesswork just the same. The 2030s are pretty far off, and the degree of forecasting uncertainty is higher than it once was. As CBO explains “the current degree of economic dislocation exceeds that of any previous period in the past half-century, so the uncertainty inherent in current forecasts probably exceeds the historical average.” But let’s imagine that the 2030s have arrived, and that CBO’s budget projections have come true. What would America look like?

For starters, Social Security would be flat broke. All U.S. Treasury’s IOUs to Social Security will have been cashed in. Since the Social Security trust funds will be completely depleted and, because Social Security is barred by law from borrowing from the federal government, the program will be unable to meet its obligations. Thus, by the end of the 2030s, payable benefits would have to be cut by 20 percent. Is it possible to imagine that the government will suddenly cut 20 percent of the benefits it hands out? That seems unlikely — the law would be changed and borrowing would resume.

In fact, Social Security’s problems would start much earlier. In 2016, according to CBO, its outlays would begin to regularly exceed its revenues, and consequently Social Security would first start to regularly call in its IOUs. Thus, the Treasury Department would need to borrow billions of dollars each year to pay back what it borrowed from Social Security’s trust funds.

If Social Security is expected to be in bad shape by the 2030s, the big public health care programs, Medicare and Medicaid, would be doing even worse. The culprits being an aging population and expanding health care costs, which are scheduled to grow faster than the U.S. economy. By the 2030s the number of people over the age of 65 — the beneficiaries – will have increased by 90 percent while those between 20 and 65 — the contributors — will have grown by a meager 10 percent.

In the 2030s, federal spending on mandatory health care programs accounts for 11 percent of GDP, about twice the level in 2010. Add in Social Security, and the big three entitlements cost about 16 percent of GDP. Keep in mind that primary spending for the 40 year period before 2010 averaged 18.5 percent of GDP. This means that in 2030, the U.S. government will either be unable to direct resources to other priorities (like education,) or will have to increase a tax rate by roughly double that of 2010.

Finally, America in the 2030s will groan under mind-boggling public debt, assuming the country’s fiscal fortunes are calculated by the CBO under what’s called a “current policy” scenario. In this case, the CBO assumes that no major public policy innovations will occur throughout the lifetime of its projection. This scenario reflects the political reality we face today. For example, congress is currently debating whether to extend the Bush tax cuts and “patch” the Alternative Minimum Tax. If political inaction prevails, debt-to-GDP ratio would exceed 200 percent by the 2030s, even with an economic recovery.

It is true that the U.S. holds a privileged position by virtue of the dollar’s role as the world’s reserve currency. But we have no idea how a debt of this magnitude would affect our ability to invest in future growth, and to keep borrowing from abroad. Moreover, in the 2030s, interest payments on the national debt are nine percent of GDP, from just one percent of GDP in 2010. If we continue borrowing at the projected rates beyond 2030, interest spending would exceed total federal revenues 15 years thereafter.

Finally, this grim fiscal portrait of America in the 2030s rests on optimistic assumptions. CBO projections assume that revenue will average around 19 percent of GDP and that long-term interest rates remain low. They also assume away the strong likelihood that America will face another economic crisis or armed conflict between 2010 and 2030.http://www.progressivepolicy.org/issues/economy/america-in-2030-a-fiscal-portrait/

[Winehole23]

it's either PFA or ripped off without attribution with you, isn't?

[CosmicCowboy]

I didn't write it. Sorry about the bibliography error. Is is not a credible source? It was mostly just an economic analysis and extension based on CBO's numbers.

Not a spittle stained blog from the far right or left.

[CosmicCowboy]

Debt service of 50 Trillion could conservatively be 2.5 trillion a year. You youngsters better get fucking busy. I'm going to be expecting my damn SS check to cash every month...:lol

[ElNono]

I didn't write it. Sorry about the bibliography error. Is is not a credible source? It was mostly just an economic analysis and extension based on CBO's numbers.

Not a spittle stained blog from the far right or left.

Why did you cut off the last paragraph?

The key for policy-makers, of course, is to envision a different fiscal future for America – and to act on it just as soon as the economy recovers.

That actually is what's expected to happen. It's easier to cut back when you have a growing, active economy. Even if we don't have an active economy by then, there will be tweaks to kick it forward.

You should know this by now.

[CosmicCowboy]

Why did you cut off the last paragraph?

The key for policy-makers, of course, is to envision a different fiscal future for America – and to act on it just as soon as the economy recovers.

That actually is what's expected to happen. It's easier to cut back when you have a growing, active economy. Even if we don't have an active economy by then, there will be tweaks to kick it forward.

You should know this by now.

I think my disdain for policy makers and their ability to do the right thing as opposed to the politically expedient has been expressed multiple times. If you think they will act before there is a crisis I cynically think you are delusional.

[ElNono]

Well, since there is no political will to increase taxes or reduce benefits I guess we will find out in 2030. You are a pretty bright guy with a math/science background as best I remember. Seems you would be able to look at it and realize that at some point the math doesn't work anymore.

I think having a balanced budget is a noble goal. But in the real world we're trying hard to stave off deflation right now.

I've always said I blame government for not cutting back enough when the good times roll. That's a legit concern, when we get there. We're not there yet.

IMO, look at what currency the rich guys keep their money on. If it's the US Dollar, it's gonna be stable...

[ElNono]

I think my disdain for policy makers and their ability to do the right thing as opposed to the politically expedient has been expressed multiple times. If you think they will act before there is a crisis I cynically think you are delusional.

I don't see it as politicians doing the right thing. I see it as their masters protecting their money. If you start seeing a massive migration away from US Dollars to something else, then sound the alarms.

[CosmicCowboy]

I don't see it as politicians doing the right thing. I see it as their masters protecting their money. If you start seeing a massive migration away from US Dollars to something else, then sound the alarms.

Chicken/egg

Nothing will fundamentally change until it is a crisis.

As for migration from the dollar, it has already started. The Euro was a big first step for inter european transactions. Now the#1 economy in the world is moving towards treaties with its trading partners for direct currency to currency transactions that don't involve the dollar. The Russians are doing the same.

[ElNono]

Chicken/egg

Nothing will fundamentally change until it is a crisis.

As for migration from the dollar, it has already started. The Euro was a big first step for inter european transactions. Now the#1 economy in the world is moving towards treaties with its trading partners for direct currency to currency transactions that don't involve the dollar. The Russians are doing the same.

Except it really isn't happening. It's more of a wish/veiled threat than anything real, and glosses over the fact that no country really wants to take on currency that's not the US Dollar, simply due to stability issues. Even China is loaning to other countries in US Dollars, not Yuan.

Demand for US Treasuries are as high as they ever been. China isn't stupid, we're the #1 consumer of the shit they make, it's in their best interest we have the money to pay.

[Nbadan]

Demand for US Treasuries are as high as they ever been. China isn't stupid, we're the #1 consumer of the shit they make, it's in their best interest we have the money to pay.

Exactly, the 'new world order' currency has been right in front of us all all along....backed by national security and collateralize by resources from every continent, including oil from Iraq and Libya, , in the world...no need for the Amero....we have the U.S. Dollar..

[CosmicCowboy]

:lol

So you are saying no matter what the 300 million people in The US do with dilluting their currency the other 7.7 billion people will just have to suck it up because they don't and wont ever have any other option?

Our innate superiority as the US precludes anyone else from looking out for their own best interest? Interesting attitude more commonly expressed by uneducated white rednecks. A little surprising from the liberals in here.

[ElNono]

No, what I'm saying is that 7.7 billion people have historically seen their currencies get manipulated and diluted much, much more than the 300 million people in the US, sometimes even more than 1000x, which is why they have historically taken refuge on the US dollar. The US has never hit a 20% annual inflation rate in the past 100 years, a double digit annual inflation rate in the past 30, which is ridiculously stable compared to any other currency in the same periods.

The Euro might be on track, but it's not even 20 years old, IIRC.

In other words, you have no idea how good you had/have it when it comes to currency.

[CosmicCowboy]

Of course I do. That's why we should be cautious about shitting on it.

[SnakeBoy]

I think having a balanced budget is a noble goal. But in the real world we're trying hard to keep the bubble inflated right now.


fify

[ElNono]

fify

Well, is it? I was asking earlier what are the reasons for such a prolonged deflation. Unfortunately, didn't get many answers. What's your theory?

[ElNono]

Of course I do. That's why we should be cautious about shitting on it.

I think the usual mistake in this kinda of analysis is trying to compare the US dollar vs itself on a historical setting. I see that all the time: "you used to be able to buy a ranch for $200"...

But it's the wrong analysis, the actual value of the dollar on a free floating exchange market is dictated vis a vis the value of the other currencies.

Both China and Russia, the grandiloquents of dollar replacement, have undergone hyperinflation within the past 50 years or so. China currently heavily manipulates the yuan, and Russia just posted a 15% inflation rate for January alone.

Everybody can talk, but if you want people to flock to your currency, you gotta walk the walk.

[SnakeBoy]

Well, is it? I was asking earlier what are the reasons for such a prolonged deflation. Unfortunately, didn't get many answers. What's your theory?

We threw everything at not just preventing the housing bubble from fully deflating but trying to re-inflate it and have been somewhat successful...it still wants to deflate though. I think it's inevitable that housing prices return to historical means but only time will tell. At least we are better off than most of Asia, which is where we were at in '08. Perhaps Asia will be the trigger that gets the global depression back on track.

[ElNono]

We threw everything at not just preventing the housing bubble from fully deflating but trying to re-inflate it and have been somewhat successful...it still wants to deflate though. I think it's inevitable that housing prices return to historical means but only time will tell. At least we are better off than most of Asia, which is where we were at in '08. Perhaps Asia will be the trigger that gets the global depression back on track.

:tu

Yeah, I personally think despite the "economic indicators" talking about recovery, as long as we need to keep pumping bills to starve off the economy from shrinking, we're not in a real path to recovery. But I don't see a whole lot of alternatives, unfortunately.

[boutons_deux]

"I don't see a whole lot of alternatives"

wages haven't moved significantly.

Increase FEDERAL "median" minimum wage to $20/hour, over 5 years, indexed to inflation and pro-rated by a region's COL.

[SnakeBoy]

"I don't see a whole lot of alternatives"

wages haven't moved significantly.

Increase FEDERAL "median" minimum wage to $20/hour, over 5 years, indexed to inflation and pro-rated by a region's COL.

Somehow I don't think raising burger flipping to the median income will solve all of our economic challenges. My opinion is that anyone who thinks a single sentence can provide the fix for the most complex economy to have ever existed is a complete moron.

[ElNono]

Somehow I don't think raising burger flipping to the median income will solve all of our economic challenges. My opinion is that anyone who thinks a single sentence can provide the fix for the most complex economy to have ever existed is a complete moron.

yup.

[boutons_deux]

Somehow I don't think raising burger flipping to the median income will solve all of our economic challenges. My opinion is that anyone who thinks a single sentence can provide the fix for the most complex economy to have ever existed is a complete moron.

I didn't say "solve all".

But it's a huge start, putting "spend-ready" (as contrasted with shovel-ready) $100Bs directly into the hands of low end spenders, which in turn will cause the people above them to expect more, pushing up wages up the payscale line. Reduces inequality, increase sales, SS/Medicare revenues, IRS revenue.

There's lots of other stuff, but Repugs will block increasing the Fed minimum wage, and everything else that would help the 99%, ANYTHING proposed by the Dems.

With Repugs controlling Congress and dozens of states at all levels, we are assured that America is and will be inescapably fucked and unfuckable. Fucking America is the VRWC/Repug strategy.

Thanks, Repug voters! All y'all sonsofbitches are fucking America.

Elections have consequences, and y'all electing extremist Repugs CONSEQUENTLY keeps America fucked and unfuckable.

[SnakeBoy]

lol "lot's of other stuff"

[Winehole23]

What's more intriguing to me is the cause of such prolonged deflation. Is it China's growth into a manufacturing superpower, a country that manipulates it's currency to stay competitive?AEP has an article about this in the Torygraph



China has abandoned a solemn pledge to keep its exchange rate stable and is carrying out a systematic devaluation of the yuan, sending a powerful deflationary impulse through a global economy already caught in a 1930s trap.


The country’s currency basket has been sliding at an annual pace of 12pc since the start of the year. This has picked up sharply since the Brexit vote, suggesting that the People’s Bank (PBOC) may be taking advantage of the distraction to push through a sharper devaluation.;


“This makes a mockery of the PBOC’s suggestion that its policy is to keep the currency’s value stable,” said Mark Williams, chief China economist at Capital Economics. “Markets will not take PBOC policy statements at face value in the future.”

http://www.telegraph.co.uk/business/2016/07/07/world-faces-deflation-shock-as-china-devalues-at-accelerating-pa/

[Winehole23]

Factory gate prices within China are falling at a rate of 2.9pc, further amplifying the deflationary impact. Analysts fear that Beijing is engaged is an undeclared policy of beggar-thy-neighbour mercantilism, trying to avert an industrial crisis at home by exporting its overcapacity in steel, shipbuilding, chemicals, plastics, paper, glass, and even solar panels, to the rest for the world.


“When you have a relatively closed capital account like China, it means that any currency move like this is a policy decision,” said Hans Redeker, currency chief at Morgan Stanley.



“They seem to be overriding their own model and letting the remnimbi (yuan) fall to improve competitiveness. They are in the same sort of deflationary syndrome as Japan in the 1990 but on a much bigger scale. The global economy is in no position to absorb this.”


Import prices in Japan have collapsed by 20pc over the last year, 5.5pc in Germany, and 5pc in the US, despite the recovery oil prices.

[Winehole23]

Yet a fragile world economy cannot cope with a falling yuan. China’s fixed asset investment has been running at $5 trillion a year, as much as in North America and Europe combined. The country is hostage to an investment-led growth model that was not reformed in time, and relies too heavily on exports.



The steel saga of the last year offers a vivid illustration of how this model distorts the global economy. China’s share of world steel output has risen from 10pc to 50pc over the last decade. It has built up 400m tonnes of excess capacity, twice the size of the entire EU steel industry.
http://www.telegraph.co.uk/content/dam/business/2016/07/07/china_stell-xlarge_trans++19_NzbQs9d-EII1Khqe4yprk8W1ZuXhLejEYx_ttM3w.PNG China now produces half the world's steel, an example of why it matters if the yuan keeps falling Credit: World Steel Association


The surplus has flooded Europe, encouraged by export subsidies, tax breaks, and cheap state credit. Even where the volumes admitted have been modest, the marginal effect has upset the market and led to a price slide. Episodes like this help to explain why global deflation is becoming systemic.

[ElNono]

The good news is that eventually they'll top out. I say good news because while in the short term it will look like a heavy financial crisis, in the long run, it should make other countries more competitive, including the US. At that point we should see real economic improvement.

[SnakeBoy]

Don't worry folks, he's got this shit

http://assets.nydailynews.com/polopoly_fs/1.2259881.1434477143!/img/httpImage/trump-china-0616.gif

[Winehole23]

The debt overhang and zombie companies were propped up starting 13 years ago after the last depression Roubini predicted, first with the TARP, then with a decade plus of QE and zero bound interest rates.

Propping up creditors isn't working, unpayable debts need to be restructured or forgiven, and imprudent creditors bankrupted.


Recession indicators (https://markets.businessinsider.com/news/bonds/recession-outlook-treasury-yields-invert-curve-financial-crisis-2007-economy-2022-7?utm_medium=ingest&utm_source=markets) are ringing and key commodities (https://markets.businessinsider.com/news/commodities/copper-bear-market-recessions-inflation-interest-rates-economy-2022-6?utm_medium=ingest&utm_source=markets) have plunged into a bear market, signaling a downturn may be on the horizon. And Nouriel Roubini dismissed hopes that an incoming recession will be shallow.

The famed economist, who called the 2008 financial crash, told Bloomberg (https://www.bloomberg.com/news/articles/2022-07-25/shallow-recession-calls-are-totally-delusional-roubini-warns) that the economy is headed for a severe recession as well as a severe debt and financial crisis.

Roubini, also known as "Dr. Doom," said debt ratios are historically high at 420% for advanced economies and climbing, while bailouts during the pandemic have resulted in "zombie corporations" that put the economy at risk.

In contrast, the stagflation seen during the 1970s was accompanied by low debt ratios, and the debt crisis during the 2008 financial crash saw falling inflation.
https://markets.businessinsider.com/news/stocks/us-recession-odds-nouriel-roubini-mild-severe-financial-crisis-predictions-2022-7

[Winehole23]

Because so much of credit and trade is dollar-denominated, US interest rate hikes have dramatic implications for debtor nations and emerging economies, with corresponding deflationary headwinds for the US.


As Sri Lanka struggles to service the $45 billion in long-term debt it owes, of which over $7 billion is due this year, it could join countries that have defaulted during the pandemic, including Argentina and Lebanon, which is heavily dependent on wheat imports (https://twitter.com/alexjmssmith/status/1506679722872168449).

The pattern illustrates the procyclical dynamics of developing-world finance: Under looser monetary conditions, capital moves in fueling debt run-ups, like the ones that financed the former president’s white elephant projects. It flees just as quickly.

THE REPORT’S TITLE refers (https://unctad.org/webflyer/tapering-time-conflict) to the period in 2013 when the Federal Reserve and the European Central Bank (ECB), having pulled out of the 2008 financial crisis, dialed back their bond-buying. In a so-called “taper tantrum (https://www.ft.com/content/c795963e-066a-11e3-ba04-00144feab7de),” investors pulled out of emerging markets like Brazil and Turkey in favor of advanced economies, where bond yields had started to look more attractive.

Now, as the Federal Reserve hikes interest rates, it could once again suck capital back from developing countries to the Global North, causing currency depreciation with dangerous knock-on effects. Meanwhile, contractionary monetary policy in rich countries can dampen domestic economic activity and lower demand.

UNCTAD stops short of forecasting the outcome of interest rate hikes by the Fed and European Central Bank. Another taper tantrum is hard to predict, the report argues, since it would be set off by herd behavior in markets, not just fundamentals. But even absent quick capital withdrawal, developing countries are being urged to readopt austerity budgets that could send them into recession.

The upshot, the report explains, is that the developing world will undergo a painful adjustment one way or the other, whether “by volatile liquidity-driven cross-border financial flows, or by the slower grind of diminished policy space, fiscal and monetary tightening and squeezed incomes.”
https://prospect.org/world/developing-countries-strained-rich-world-monetary-tightening/

[Winehole23]

James Galbreath once quipped that "the only function of economic forecasting is to make astrology look respectable," but Roubini did get it right in 2008.

This time around he's predicting a severe, stagflationary recession. In that scenario, the political temptation to fight fire with gasoline will be hard to resist.


Unlike in the 2008 financial crisis and the early months of COVID-19, simply bailing out private and public agents with loose macro policies would pour more gasoline on the inflationary fire. That means there will be a hard landing – a deep, protracted recession – on top of a severe financial crisis. As asset bubbles burst, debt-servicing ratios spike, and inflation-adjusted incomes fall across households, corporations, and governments, the economic crisis and the financial crash will feed on each other.

To be sure, advanced economies that borrow in their own currency can use a bout of unexpected inflation to reduce the real value of some nominal long-term fixed-rate debt. With governments unwilling to raise taxes or cut spending to reduce their deficits, central-bank deficit monetization will once again be seen as the path of least resistance


https://www.project-syndicate.org/commentary/stagflationary-economic-financial-and-debt-crisis-by-nouriel-roubini-2022-12

[Winehole23]

BlackRock's 2023 outlook cites similar themes: recession plus persistent inflation.


The Great Moderation, the four-decade period of largely stable activityand inflation, is behind us. The new regime of greater macro and marketvolatility is playing out. A recession is foretold; central banks are oncourse to overtighten policy as they seek to tame inflation. This keeps ustactically underweight developed market (DM) equities. We expect toturn more positive on risk assets at some point in 2023 – but we are notthere yet. And when we get there, we don’t see the sustained bull marketsof the past. That’s why a new investment playbook is needed.

We laid out in our 2022 midyear outlookwhy we had entered a new regime – and areseeing it play out in persistent inflation andoutput volatility, central banks pushingpolicy rates up to levels that damageeconomic activity, rising bond yields andongoing pressure on risk assets.Central bankers won’t ride to the rescuewhen growth slows in this new regime,contrary to what investors have come toexpect. They are deliberately causingrecessions by overtightening policy to try torein in inflation. That makes recessionforetold. We see central banks eventuallybacking off from rate hikes as the economicdamage becomes reality. We expectinflation to cool but stay persistently higherthan central bank targets of 2%.What matters most, we think, is how muchof the economic damage is already reflectedin market pricing. This is why pricing thedamage is our first 2023 investment theme.Case in point: Equity valuations don’t yetreflect the damage ahead, in our view. Wewill turn positive on equities when we thinkthe damage is priced or our view of marketrisk sentiment changes. Yet we won’t seethis as a prelude to another decade-longbull market in stocks and bonds.This new regime calls for rethinking bonds,our second theme. Higher yields are a gift toinvestors who have long been starved forincome.

And investors don’t have to go far upthe risk spectrum to receive it. We like shortterm government bonds and mortgagesecurities for that reason. We favor highgrade credit as we see it compensating forrecession risks. On the other hand, we thinklong-term government bonds won’t play theirtraditional role as portfolio diversifiers due topersistent inflation. And we see investorsdemanding higher compensation for holdingthem as central banks tighten monetarypolicy at a time of record debt levels.Our third theme is living with inflation. Wesee long-term drivers of the new regime suchas aging workforces keeping inflation abovepre-pandemic levels. We stay overweightinflation-linked bonds on both a tactical andstrategic horizon as a result.Our bottom line: The new regime requires anew investment playbook. It involves morefrequent portfolio changes by balancingviews on risk appetite with estimates of howmarkets are pricing in economic damage. Italso calls for taking more granular views byfocusing on sectors, regions and sub-assetclasses, rather than on broad exposurehttps://www.blackrock.com/institutions/en-zz/literature/whitepaper/bii-global-outlook-2023.pdf

[Winehole23]

Jamie Galbreath throws cold water on Phillips Curve, NAIRU, potential output, and money-supply growth hypotheses for inflation. He think the Fed may do more harm than good by treating the symptom than the cause, which in his opinion is cost driven.




6. US household behavior in slump and stimulus

The United States had a poor and badly disorganized public health response to the onset of the Covid-19 pandemic, with a rapid spread of the virus and a chilling death toll, albeit heavily weighted toward the elderly, immunocompromised, and otherwise at-risk parts of the population. However, the economic response was rapid and administratively efficient, providing a cash transfer through the tax system and a very substantial extended unemployment benefit, which, at $600 per week initially, represented a raise for a large segment of the working population. For this reason, despite a spectacular collapse in employment and working incomes, there was little-to-no increase in poverty and certain indicators of well-being, such as food insecurity, actually declined (Schanzenbach 2022 (https://econofact.org/the-pandemic-drop-in-food-insecurity-among-households-with-children)).

What did households do with the money? For the vast majority, laid-off from low-to-moderate-wage service jobs, the best answer (Peterson Foundation 2021 (https://www.pgpf.org/blog/2021/05/how-did-americans-spend-their-stimuluschecks-and-how-did-it-affect-the-economy)) appears to be that they kept up with their ordinary, fixed, and customary expenses: rent, utilities, groceries, gasoline, education. They did not splurge, but for these households, there was only a modest increase in savings. For households in the upper tiers of the distribution, the picture is different. They had previously spent heavily on the services that employed the large majority of American workers; they were less likely to become unemployed and the assistance was a less-important share of their incomes. But they were cut off from the ordinary use of their earnings. So they saved what they could not spend, and aggregate savings rose temporarily to about one-third of aggregate income. These savings then found their way into asset markets: real estate, corporate equities, collectibles, and the like, with purchases abetted by extremely low long-term interest rates. Asset prices, accordingly, recovered quickly and rose sharply as the pandemic wore on.

None of this supports the notion of an inflationary spending spree fed by a reckless “stimulus” policy. There was, to a degree, a shift of purchasing power, blocked from services, into household appliances, vehicles, home renovations, and new construction. But (as institutionalist theory would predict) the result of this shift toward newly-produced goods was (mainly) backlogs and queues and shortages rather than price increases, and in many cases the backlogs were of imports, leading to epic congestion in the container ports of the US West Coast (USDOT 2022 (https://www.transportation.gov/briefing-room/usdot-supply-chain-tracker-shows-historic-levels-goods-coming-us-continued-challenges)). Price effects were (again, as theory would expect) stronger in asset markets. As stated above, these are not markets for produced goods and therefore not normally considered to be elements of inflation, even if they do appear in some components of the Consumer Price Index. On the contrary, the usual word for a general increase in asset prices is “boom.” And booms, as history shows, are deeply vulnerable to increased interest rates.

In brief summary: The price increases of 2021-2022 were cost-driven, accompanied by an asset price boom incident to the disruption of the service economy. They were not driven by macroeconomic excess, neither fiscal nor monetary. But they did hand the Federal Reserve a political problem, which it proceeded to solve, in what may prove to be the worst way.

7. The Fed waves its wand

According to President Biden (Irwin 2022 (https://www.axios.com/2022/01/19/biden-fighting-inflation-feds-job)) and to the large consensus of mainstream economists and the voices of the financial sector, the “inflation” problem of 2021-2022 fell within the responsibility of the Federal Reserve. This was convenient for each player in the drama. For the President, it meant that political responsibility for price increases and (worse) for the consequences of dealing with it could be shuffled off onto an impregnable institution outside his control. For the banks, vested through quantitative easing with vast excess reserves, it would mean earnings without risk or effort, since the Federal Reserve pays interest on reserves at the official rate. For the economists and central bankers, it would mean vindication of their long-held beliefs and a boost to their perceived influence. The costs would fall elsewhere – on other countries and their banks, on speculative markets, on homebuilders and homeowners, on the indebted, and, eventually although not necessarily soon, on businesses and the presently employed.

The Federal Reserve therefore acted. Interest rates rose in large tranches from early 2022 through the late fall. Higher interest rates quickly quelled the housing market, while supporting the dollar and therefore keeping a lid on the price of imports. Stocks, especially in the technology sector, and cryptocurrencies fell in value. By raising interest rates aggressively, the Federal Reserve also received credit for an end to price increases in core commodities that would have stopped rising in any event, especially after the administration started selling petroleum from the Strategic Reserve and oil prices were brought back down. The fact that absolutely no prior theory or evidence supports the notion that tight monetary policies can end inflation within just a few months was, in the main, conveniently overlooked (Galbraith 2022b (https://www.project-syndicate.org/commentary/fed-interest-rate-policy-will-cut-into-wages-by-james-k-galbraith-2022-01)). The Federal Reserve is a very lucky institution.

However, there is a fly in the soup. It is the relationship between the short-term interest rate, which the Federal Reserve controls, and the longer-term rates, on Treasury bonds and in the private sector, over which the central bank exercises very little immediate influence. Long-term rates, for a safe asset like Treasury bonds, are a compound of current short-term rates and the expected future course of short-term rates over the lifetime of the bond. This second element has been conditioned (very reasonably) for years to expect very low short-term rates, and thus to view a rise in rates as a temporary aberration, likely to be reversed once the economy falls into a deep enough slump. The result is that the yield curve, normally upward-sloping, is now inverted. There is therefore no reason for any investor to buy or hold a long-term security – the short-term assets are not only safer, but also a better deal.

This is why an inverted yield curve is almost always followed by a slump in business investment, home construction, housing prices (and therefore the viability of mortgages), and of course in stocks and bond markets (Galbraith, Giovannoni and Russo 2007 (http://utip.lbj.utexas.edu/papers/utip_42.pdf)). At present writing, many observers can see the coming storm. But the Federal Reserve is stuck. If it relaxes policy, it will appear over-sensitive to economic risks, inconstant, and non-credible. If it continues down the present path, it is steering economic activity toward a cliff. Again, not necessarily soon. But in due course, and inevitably – opening the door to another financial crisis and yet another round of crisis interventions.

In this climate, at present writing, the Federal Reserve’s leadership has shown its colors and commitments (Galbraith 2022a (https://www.project-syndicate.org/commentary/fed-rate-hike-provides-cover-for-inflation-hawks-by-james-k-galbraith-2022-05)). The interests of the dollar and the US banking sector in world competition are paramount. So far as the domestic political economy is concerned, the priority is primarily toward ensuring that wages never catch up to the price increases that have already occurred. In recent speeches (Cohan 2022 (https://www.forbes.com/sites/petercohan/2022/12/13/5-wage-growth-means-fed-will-yield-to-inflation-hawks)), Chairman Powell has made this commitment abundantly clear – and even the fact that wage growth has slowed in recent months seems to be making little impression on the course of policy. Unemployment must rise, labor markets must soften, capital must gain, and workers must lose. That is where matters presently stand.

8. The prospect for prices

The most likely course of events is therefore a renewed slump and a further shock to employment and wages. Apart from construction, however, this may not happen soon; contrary to commonly expressed liberal worries (Olander, 2022 (https://www.politico.com/news/2022/08/28/warren-elizabeth-recession-federal-reserve-00054010)), the next big one may not yet be in sight. Businesses and households have a way of trying to survive, when conditions begin to get worse, by taking on new debts even on unfavorable terms. Lenders usually find such deals attractive; they bring good returns and the assets, such as they are, can often be securitized and fobbed off on the unwary. This can continue until it stops.

And so, it also remains possible that the crisis of prices, such as it was, may not have run its course. There are three reasons to fear additional problems on the cost front in the period ahead.

First, there is a problem of gross markups. In normal times, with general price stability, these are stabilized by convention and habit, by the economic equivalent of good manners. Businesses are cautious about antagonizing their customers; they do not like to acquire the reputation of a price gouger. (This is why, for instance, hardware stores do not generally jack up the price of plywood when a hurricane is on the way). But in a general melee, with prices going up all around, a different mentality sets in, an impulse to grab what one can, and not be the sucker left behind. An inflation driven by profits (Bivens 2022 (https://www.epi.org/blog/corporate-profits-have-contributed-disproportionately-to-inflation-how-should-policymakers-respond/)), not wages, can therefore reverberate for some time. Unlike a wage spiral, a profit spiral gets little media attention and policy response – for obvious reasons.

Second, there is a risk of more shocks to core commodities, especially in the energy sector. Oil prices came down in 2022 thanks to sales from a finite strategic reserve. Now with the mid-term election past, the administration plans to buy oil from the market to replenish the stock (White House 2022 (https://www.whitehouse.gov/briefing-room/statements-releases/2022/10/18/fact-sheet-president-biden-to-announce-new-actions-to-strengthen-u-s-energy-security-encourage-production-and-bring-down-costs/)). Will production suffice to cover both regular demand and storage? So far as known, no one really knows; both the geology and the strategy of the producing firms and refiners are uncertain. But energy markets are financialized, and there is in them the capacity for speculative manipulation – what I have called the choke-chain effect (Galbraith 2014). We shall see whether we are in for another round of that.


Third, there is the effect of higher interest rates on business costs. Interest, after all, must be paid. Sooner or later, the higher short-term rates will bleed into the accounts of business borrowers, and some of the effect will be passed along, so far as conditions permit, to their customers. To that degree, a tight monetary policy is inflationary before it is disinflationary.https://www.ineteconomics.org/perspectives/blog/the-quasi-inflation-of-2021-2022-a-case-of-bad-analysis-and-worse-response

[Winehole23]

Does raising interest rates curb inflation? Some economists think not. Data collected by Blair Fix suggests the opposite may be true.

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[Winehole23]

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[Winehole23]

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[Winehole23]

Fed agrees that accelerated markups were a major factor in the growth of inflation in 2021, but puts it down to expectations of future inflation.


Inflation reached a 40-year high in 2021 and continued to climb in 2022. Record corporate profits received significant public attention as a potential explanation for high inflation. Although corporate profits and inflation do not have a direct accounting relationship, inflation is directly affected by growth in the markup, or the ratio between the price a firm charges and the firm’s current marginal cost of production. Thus, the sum of the growth in the marginal cost of production and the growth in the markup is the inflation in a firm’s price. Markups can change over time for many reasons, including firms’ expectations for their marginal costs in the future.


Andrew Glover, José Mustre-del-Río, and Alice von Ende-Becker present evidence that markup growth was a major contributor to inflation in 2021. Specifically, markups grew by 3.4 percent over the year, whereas inflation, as measured by the price index for Personal Consumption Expenditures, was 5.8 percent, suggesting that markups could account for more than half of 2021 inflation. However, the timing and cross-industry patterns of markup growth are more consistent with firms raising prices in anticipation of future cost increases, rather than an increase in monopoly power or higher demand.
https://www.kansascityfed.org/research/economic-review/how-much-have-record-corporate-profits-contributed-to-recent-inflation/

[Winehole23]

Far leftists at WSJ agree.


Big Companies Thrive During Periods of Inflation (https://www.wsj.com/video/big-companies-thrive-during-periods-of-inflation/757EB92E-3705-4A63-B971-E878E704EAC3.html)

Some think rising inflation means companies are forced to raise their prices. But as WSJ’s Dion Rabouin explains, it actually works the other way around: Corporations actually drive inflation, and data show that they have been and will continue to push prices up for some time.

[Winehole23]

the ultra low cost of credit distorted economics for ten years

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[Winehole23]

Hope the Fed doesn't overshoot with rate hikes -- if it hasn't already.

Historically, negative money supply correlates strongly with recession.


https://pbs.twimg.com/media/FqksPQKacAAN8b4?format=jpg&name=medium

[Winehole23]

1658098708209098753

[Winehole23]

Bankers gripping (https://twitter.com/JackFarley96/status/1711832851593781714) over their exposure to historically normal interest rates. AFAIK, Congress isn't considering anything like this yet, it's just an op-Ed in American Banker.

https://www.statista.com/graphic/1/187616/effective-rate-of-us-federal-funds-monthly.jpg

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