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Economic Developments

Posted: Mon May 19, 2008 7:50 am
by djolds1
Analysis by a friend of mine.

12:38:53 pm, Categories: 2008, 551 words English (US)
the half trillion dollar misunderstanding ... refer=home

Forget the happy pabulum the daily media feed us. Welcome to reality. Our financial sector has pulled in half a trillion between the Feds and outside capital. No one can find a bottom. At the same time they are refusing to lend to each other or to consumers/small business. They are readjusting their balance sheets. This is all necessary. It is also quite painful and shows no sign of ending. The ripples from the credit crunch are working their way through the economy with no end in sight. To them must be added the inflationary pressures from the commodity explosion. Now none of this is per se inflationary. To build an inflationary cycle the higher prices must lead to higher wages as more money is used to maintain consumption. We are not doing that beyond some silly symbolic USG checks. So what will happen is obvious. If people must spend more for gas, heating oil and the groceries they will spend less for everything else. That everything else will include debt. Faced with feeding the family or letting the credit card default and the answer is obvious. They will also walk away from homes with negative equity. These are the ripples to fear, not inflation. We will go through a period of reduced expenditure, massive debt default/mortgage default and a nasty populace that will figure out that a small segment of the population in the big cities creamed up all the gains on the upside of the last two bubbles and then handed off the debts to be nationalized on the downside. The deregulation/lower taxes/markets uber alles orthodoxy as about run its course. By refusing in the name of ideological purity and naked greed to discipline the financial industry they will trigger a new round of statist populism. Now the normal response to this would be to argue for good Republican administrators who at least can run a welfare state prudently. After W selling governance as a Republican virtue is a joke. What does this mean?
1. The next four years will be worse than Carter's four regardless of who wins in November
2. They will be worse in different ways depending on whether McCain or Obama wins. If McCain the stalemate will be over the blame. If Obama wins [the more probable outcome] expect an explosion when fiscal and financial realities show that the unmet spending wishes of the traditional liberals collide with the economic mess W leaves behind. The economic mess is worse than Iraq. We can run away from Iraq. There are huge costs in doing so but we can. We cannot run away from the US. The trigger to all this is going to be health care. Obama and the national Dems are mostly running an empty slogan campaign of just saying they will change everything W did. Should work. However one of the few firm markers they have put down is on healthcare. The fantasy is that they can cover the cost by a mix of repealing the Bush tax cuts and ending the Iraq war. When that money proves to be needed just to stem the collapsing Federal deficit the war within the Democratic caucus should be nuclear.


Edited the link to make it clickable. My apologies. Simon

Posted: Mon May 19, 2008 9:03 am
by MSimon

We are pulling away from the so called meltdown. At least if you believe the unemployment numbers and the stock market. The loss of a half a trillion or a trillion in capital is a bump in the road with an economy throwing off $13 trn a year in profits and whose underlying capital is $100 trn.

Can't find a bottom? Found and we are on the rise again.

The Economy is a lot Stronger than People Think ... y_is_.html
These intangibles partly explain why the trade deficit and low savings rate have not managed to drag the US economy into recession all even after these years, and why knowledge creation is valued so highly by the stock market. The combined revenue of Google, eBay, and Yahoo! is only $16 Billion, yet their combined market cap is $220 Billion, even in these cautious post-bubble times.

People who suffer from Bush Derangement Syndrome are utterly convinced that the economy is in terrible shape, insisting that unemployment is underreported, that twin deficits will sink us, that only low-paying jobs are being created, while only the rich get richer. However, while even the traditional data shows the current economy to be one that is moderately strong, this new paradigm portrays the current economy on even stronger footing than previously recorded. Irrationally pessimistic people are subconsciously preventing their own success in this economy, by failing to take risks or pursue the opportunities that surround them.

The last comment to the above post was by my friend triticale who died last year.

===== ... rowth.html

In the modern age, we take for granted that the US will grow at 3.5% a year, and that the world economy grows at 4% to 4.5% a year. However, these are numbers that were unheard of in the 19th century, during which World GDP grew under 2% a year. Prior to the 19th century, annual World GDP growth was so little that changes from one generation to the next were virtually zero. Brad Delong has some data on World GDP from prehistoric times until 2000 AD.

If I put historical per-capita GDP through 2000 in a logarithmic timescale, we see the following :
you will have to click the link to see the chart. It is inverse log which makes it a little hard to interpret. It makes it look like growth is flattening when in fact the rate of growth is accelerating.


The pessimist have an unbroken record in relation to their predictions. Wrong. Wrong. Wrong. And wrong again.

However, I will grant that if the Ds take the Presidency there will be big trouble: a much bigger war in the Middle East.

As to medical costs: we will contain them the way we contained food costs in the US: technology advances.


American industry is booming, at least according to the trade journals I read.

Where will this lead: reduced cost of production over and above the advantage the cheap dollar gives us. Due to increased investment in production.

Posted: Mon May 19, 2008 9:21 am
by MSimon
BTW I expect a sharp reversal in fortune when the American crops come on market in the June/Sept time frame.

Posted: Mon May 19, 2008 10:46 am
by tonybarry
MSimon wrote:The pessimist have an unbroken record in relation to their predictions. Wrong. Wrong. Wrong. And wrong again.
A pessimist is always happiest in gloom. If he can't be right about disaster, then a good second is to be wrong about prosperity.

Tony Barry