Welcome to the Recovery

Welcome to the Recovery – Q3 GDP grew at a 2 percent annual rate, which would be okay performance for a full employment economy but is totally insufficient to mobilize the huge number of idle workers today. Here’s the shape of the recession and “recovery” in both real and nominal terms:  As you can see, we’re still below the peak level of real output attained in Q4 of 2007. But in the intervening years, some new technologies have been invented, some firms have improved their business processes, and the size of the population has grown. We should be able to produce considerably more at the end of 2010 than we were producing at the end of 2007. That we’re failing to do so represents a massive failure of the American elite.
 

The One-Sided Compromise – Last weekend, the G-20 finance ministers met in South Korea to find areas of agreement in preparation for the main G-20 gathering in November. The Chinese rebuffed renewed American pleas for them to revalue their yuan. They rejected Secretary Geithner’s suggestion of a four percent cap on current account surpluses. However, in return for accepting America’s continued dollar debasement, the Chinese did agree to "look into" a revaluation of the yuan and the management of trade surpluses. They also agreed to an international self-policing regime to curb currency manipulation. This ‘one-sided’ compromise was hailed in the Western media as a triumph for Mr. Geithner. The US stock markets and dollar rallied. All looked good for the election season in November. Unfortunately, compromises are never one-sided; they are only construed as such. Though the reporting failed to emphasize it, Mr. Geithner actually agreed to a massive shift of monetary power in exchange for China’s empty concessions. The shareholdings and board composition of the huge and powerful International Monetary Fund (IMF) have now been shifted.

California Is Broke – 19 Reasons Why It May Be Time For Everyone To Leave The State Of California For Good – Today, millions of Californians are dreaming about leaving the state for good.  The truth is that California is broke.  The economy of the state is in shambles.  The official unemployment rate has been sitting above 12 percent for an extended period of time, and poverty is everywhere.  For many Californians today, there are very few reasons to stay in the state but a whole lot of reasons to leave: falling housing prices, rising crime, budget cuts, rampant illegal immigration, horrific traffic, some of the most brutal tax rates in the nation, increasing gang violence and the ever present threat of wildfires, mudslides and natural disasters.  The truth is that it is easy to understand why there are now more Americans moving out of California each year than there are Americans moving into the state.  California has become a complete and total disaster zone in more ways than one, and an increasing number of Californians are deciding that enough is enough and they are getting out for good. Sadly, the state of California is facing such a wide array of social, economic, and political problems that it is hard to even document them all.  It is really one huge gigantic mess at this point.  Just consider the following facts about what life is like in the state of California today…. 
 
The Moral Equivalent of Stagflation – Stagflation had a huge impact on economic thinking. Why? Mainly because it was predicted: the Friedman-Phelps natural rate hypothesis said that the apparent positive tradeoff between inflation and unemployment would prove only temporary, and that once inflation had gone on for a while, disinflation would involve a period of both high inflation and high unemployment.  So when that condition actually materialized, it gave huge prestige to the whole program of grounding macroeconomic models in microeconomic foundations. So what’s the parallel with the Nipponization of the U.S. economy? Well, like the stagflation of the 1970s, our current predicament was predicted well in advance. Liquidity-trap theorists — yes, with me playing a large and early role — told you what would happen if the economy suffered a sufficiently severe negative shock, one that pushed us up against the zero lower bound. We predicted, specifically, that:

1. Increases in the monetary base would fail to increase broad monetary aggregates, let alone boost the economy
2. Despite large monetary base expansion, the economy would slide toward deflation, not inflation
3. Despite large budget deficits, interest rates would stay low, because short-term rates would stay pinned at zero

 
The Big Lie on Fraudclosure – Yesterday morning, I had The Misinformation Hour on TV as I got dressed for work. One of the comments that was made –  “No one was wrongly thrown out of their home” — was repeated or ignored by hosts and guests alike. This is patently demonstrably false, and yet no one challenged it. The banks have gotten the Big Lie technique down to a science: State a lie so colossal that no one could believe anyone “has the impudence to distort the truth so infamously.” In practice, adding factually accurate, but irrelevant or misleading color, helps push the lie on unsusp0ecting rubes. The banks and their many supplicants have been successful in doing just that in the robosigning issue. Any discussion about property rights, due process, or criminal investigations into perjury are thwarted; instead, the focus is on deadbeat homeowners. And note that I am the guy who in Q1 2010 wrote More Foreclosures, Please . . .) The misdirection is successful, and the average reader/viewer/listener has no idea how badly they are being misinformed.
 
This Is What Accounting Identities Look Like – I have been periodically raging against the ignorance of those who would slash fiscal deficits without regard to fundamental accounting identities. Such “serious” people somehow think that public and private debt levels can be lowered simultaneously, without a substitution of foreign assets in domestic portfolios (a current account surplus). It does not occur to them that one person’s debt is another’s asset—too confusing, I guess. What this means is that, if the private sector is collectively paying down its debts, and the government tries to pare its deficits at the same time, either there is an increase in net exports to finance all of this, or it just doesn’t happen. That’s how it is with identities. Unlike other kinds of rules, they are not made to be broken. Which brings us to this morning’s news about public finances in Europe: despite the earnest efforts of the austerians, fiscal deficits are not declining. Rather, tax receipts are going down, so that the ex post identities remain in force. As long as the private sector continues to deleverage, further efforts to produce “responsible” fiscal deficits will just lead to lower tax revenues and further spending cuts, in a downward spiral of pointless misery.
 
Accounting Identities -The background to the world economic crisis is that we went through an extended period of rising debt. Now, one person’s liability is another person’s asset, so rising debt made the world as a whole neither richer nor poorer. It did, however, leave the borrowers increasingly leveraged. And then came the Minsky moment; suddenly, investors were no longer willing to roll over, let alone increase, the debts of highly leveraged players. So these players are being forced to pay down debt. The process of paying down debt, however, must obey two rules: 1. Those who pay down debt must do so by spending less than their income. 2. For the world as a whole, spending equals income. It follows that 3. Those who are not being forced to pay down debt must spend more than their income. But here’s the problem: there’s no good mechanism in place to induce those who can spend more to do so. Low interest rates do encourage spending; but given the size of the debt shock, even zero rates are nowhere near low enough. So since the world economy can’t raise the bridge, it is lowering the water: without sufficient spending from those who can, the only way to make the accounting identities hold is for incomes to decline — specifically, the incomes of those not constrained by debt must decline so as to create a sufficiently large gap between their (unchanged) spending and their incomes to offset the forced saving of debtors. Of course, the mechanism here is an overall global slump, so the debtors are squeezed as well, forced into even more painful cuts.
 
Shadow Inventory Avalanche, Coming Soon – Much has been written about the so-called “shadow inventory” since the term was first coined a few years ago.  Some analysts and commentators have argued about whether it even exists.  Let’s take an in-depth look at this shadow inventory and see whether it really is a threat to housing markets around the country. Rather than joining the dispute about what the term actually means, I will simply define it in this way:  The “Shadow Inventory” is comprised of all those distressed residential properties (other than MLS listings) which we know will almost certainly be coming onto the market in the not-to-distant future. The starting point in discussing the shadow inventory has to be homes actually on MLS listings around the country.  With the plunge in home sales starting in July, the number of listings has risen substantially since the spring.  For example, California listings are up 25% since April.
 
Energy: Turning up the Power The world’s thirst for oil (and our sluggish investment in alternative energy) means we will be caught short when global crude production reaches its limits — and some experts say it has already happened. That’s the forecast of the Peak Oil scenario, which posits that the sharp decline in oil supplies will trigger a sudden economic collapse. "The era of happy motoring is over," says social critic James Howard Kunstler; his 2005 book, The Long Emergency, describes a grim post-oil world. Bottom line: Buy sturdy shoes, because you’ll be walking a lot. "Life in the U.S.A. will become deeply local and austere," Kunstler says. Ominously, he adds, "The younger generation will punish the boomers for destroying their future."
 
The Peak Oil Crisis: The Midterms – It has been obvious to anyone who cared to look at the issue that for the last six or seven years something has been seriously wrong with the global supply of oil. Prices have moved to up from their traditional $10-20 a barrel range to roughly four times higher. Looking behind this number, it does not take long to learn that world oil production has been static for the last five years and that demand for oil in China, India, the oil-exporters, and a few other developing countries is moving up rapidly. Indeed, a few knowledgeable observers are beginning to say that it was the rapid increase in oil prices and the concomitant inflation and higher interest rates between 2002 and 2006 that started the ball rolling towards our current global recession. The great oil price spike to $147 a barrel in the summer of 2008 was the icing on the cake. The great financial/credit bubble that had been growing in the U.S. and Europe for several decades began to deflate.
 
Plastics: There And Back Again – Plastics were once regarded as wonder-materials. They are still ubiquitous, but find less favour than they used to because of the very stability and persistence that won them plaudits in the first place. Persistence is not a quality to be desired in something that gets thrown away, and so much plastic is used in packaging, and in articles that are disposable, that many people now see conventional petrochemical plastics as a nuisance and a threat. The search is on, then, for biodegradable alternatives. One possibility has recently been explored by David Schiraldi of Case Western Reserve University, in Ohio, and his colleagues. They propose to reach back into history and revive the use of a feedstock that was used to make some of the first plastics invented: milk.
 
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