Yesterday, I said...
Mar. 4th, 2009 03:57 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
solarbirdYesterday, I said:
A lot of people are talking about the Obama stimulus as comparable to that provided by World War II, and meaning that in a good way - that it's a deficit-spending splurge on that sort of scale, with the specific intent to snap the US out of a deflationary recession or depression.
That's all well and good, but I want to point out a few key differences between these two scenarios.
1: Before World War II, there were 11 years of depressed demand - severely and necessarily so. A lot of people spent a lot of time not buying things they wanted. Add World War Two, and you get about 15 years total. And even with that, the US fell into a scary recession after the war.
2: World War II was almost four years of high-wages combined with the above-mentioned suppressed demand. People had money, by comparison to the previous decade, but had relatively few places to spend it. Over US$54B in war bonds were included in that alone - roughly 25% of 1945's GDP, which had doubled since 1940. None of that has happened yet, and, indeed, it seems almost that the point is to avoid having this happen; the savings rate is finally starting to jump up, and economics are worried about it.
So you have years of repressed demand and huge savings, neither of which are true today. Finally:
3: By World War II, the various frauds of the 1920s had been washed out of the system. The wealth destruction process - both constructive (destroying fake wealth) and destructive (destroying real wealth) - had run its cycle.
That hasn't happened yet either. The systemic fraud is largely still in place, and people are still trying to magically turn it into real money, or swap it for tax dollars, or whatever. (See, for example, the black hole of finance known as AIG.) Hence: no confidence in the markets. Hence: people unwilling to go long even overnight (c.f. today's end-of-day selloff).
Nrs. 1 and 2 are real problems with this approach, but nr. 3 will destroy this plan entirely, if unaddressed; all this expenditure will be thrown down a toilet; and frankly, I really worry that the bond market won't put up with it. So when people go on about "this is the World War II stimulus," remember that well, that's as may be - but this isn't World War II and this isn't 1941, or anything too much like it.
And that's your thought for the day. This rally may have legs; technicals predict so, anyway. However, Ford's horrible results have punched their stock in the teeth in the overnights, and reality trumps even True Believers. Good luck.
There's technical argument for being at the bottom of a wave-3-of-5 (or whatever you choose to call it; some people call it 3 of 3, regardless, it's the third and final leg down in a series) and therefore it's time for a retrace up across all markets, but it's tenuous and right now I'm not sure people are paying all that much attention to technical up indicators....well, I guess they are! Paying attention to that, I mean. They certainly didn't care about the terrible Beige Book report, or the awful ADP jobs survey. (Note also: January was revised, again for the worse.) But note the selling into the close.
A lot of people are talking about the Obama stimulus as comparable to that provided by World War II, and meaning that in a good way - that it's a deficit-spending splurge on that sort of scale, with the specific intent to snap the US out of a deflationary recession or depression.
That's all well and good, but I want to point out a few key differences between these two scenarios.
1: Before World War II, there were 11 years of depressed demand - severely and necessarily so. A lot of people spent a lot of time not buying things they wanted. Add World War Two, and you get about 15 years total. And even with that, the US fell into a scary recession after the war.
2: World War II was almost four years of high-wages combined with the above-mentioned suppressed demand. People had money, by comparison to the previous decade, but had relatively few places to spend it. Over US$54B in war bonds were included in that alone - roughly 25% of 1945's GDP, which had doubled since 1940. None of that has happened yet, and, indeed, it seems almost that the point is to avoid having this happen; the savings rate is finally starting to jump up, and economics are worried about it.
So you have years of repressed demand and huge savings, neither of which are true today. Finally:
3: By World War II, the various frauds of the 1920s had been washed out of the system. The wealth destruction process - both constructive (destroying fake wealth) and destructive (destroying real wealth) - had run its cycle.
That hasn't happened yet either. The systemic fraud is largely still in place, and people are still trying to magically turn it into real money, or swap it for tax dollars, or whatever. (See, for example, the black hole of finance known as AIG.) Hence: no confidence in the markets. Hence: people unwilling to go long even overnight (c.f. today's end-of-day selloff).
Nrs. 1 and 2 are real problems with this approach, but nr. 3 will destroy this plan entirely, if unaddressed; all this expenditure will be thrown down a toilet; and frankly, I really worry that the bond market won't put up with it. So when people go on about "this is the World War II stimulus," remember that well, that's as may be - but this isn't World War II and this isn't 1941, or anything too much like it.
And that's your thought for the day. This rally may have legs; technicals predict so, anyway. However, Ford's horrible results have punched their stock in the teeth in the overnights, and reality trumps even True Believers. Good luck.
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no subject
Date: 2009-03-05 12:18 am (UTC)Might be wrong, which would be a good thing.
no subject
Date: 2009-03-05 12:47 am (UTC)no subject
Date: 2009-03-05 08:03 am (UTC)no subject
Date: 2009-03-05 05:04 am (UTC)no subject
Date: 2009-03-05 08:04 am (UTC)no subject
Date: 2009-03-05 03:10 pm (UTC)About all I've found is that the credit market is loosening a little (still looks stuck to what I can see, but the news says it's looser), and housing sales are up on my area, though they're all short sales and foreclosures.
I really haven't been able to find any other good news. :-/
no subject
Date: 2009-03-05 01:54 am (UTC)0: It's NOT on the same scale, and I think that's a big part of what's wrong with it. It's too small, so far.
1: Before WWII there were 12 years of depressed demand, but the economy grew in 7 of those years, and 7 of the 8 prior to the outbreak of the war. The only down year was the year when government spending was reduced in an attempt to balance the budget. That is, the New Deal stimulus worked to lower unemployment and produce growth, but not enough to make up the output gap. Real GDP did exceed 1929's GDP by 1937, but the output trendline wasn't crossed until 1941. Krugman has the relevant chart (http://krugman.blogs.nytimes.com/2008/11/08/new-deal-economics/) on an old blog post. But the bottom line is this: output was only below trend for 12 years (1929-1941), all but one of the down years happened under Hoover, and every other FDR year prior to the war saw strong economic growth (and incidentally, strong decreases in unemployment.) It's true the US fell into a bad recession after the war, but nothing comparable to the Depression--and the key reason for the drop was a reduction in spending and employment because the war was ending. This argues in favor of more spending in our current situation, not less.
2. Savings rates are going up right now, from around zero to about 5% last I heard. I think this is structurally good for the economy in the long run but bad for the short-term economy. This is why we need government spending to make up the shortfall. Eventually consumers will pay off enough debt and accumulate enough savings, and businesses will get rid of excess capacity, and people will start buying stuff again. But if the government refrains from spending then we're likely to have increasing debt for everyone, a greater pullback from spending, more unemployment: in short, a deflationary spiral that will be very hard to get out of. Every argument about how taking on huge amounts of debt will endanger our national credit rating and eventually sink the currency will apply several times over if we delay spending until deflation has really set in. Our debt to GDP ratio is about 40% of what it was at the peak of WWII. We've got room to act, but not if we aren't willing to accumulate some debt to finance much greater government spending and avoid much greater debt in the long run. Oh, and we do have repressed demand right now, at least as measured by actual vs. potential GDP: the output gap (http://www.cbo.gov/ftpdocs/99xx/doc9967/01-27-StateofEconomy_Testimony.pdf) (PDF) for the next two years is estimated to be 6.8% per year, and the gap is estimated to last through 2013. Our current era is very much like the Great Depression on this point.
3. The wealth destruction process hit its nadir in 1933, and the important stage of the process was FDR's bank holiday. I agree that the Obama administration has not reached that stage yet, unfortunately. On the other hand, we're much earlier in this crisis. I do think we need to root out fraud and that we'll have that happen once nationalization occurs. I think it's inevitable, the question is how much looting will happen before it does. But the fact that bankers are still looting really has little bearing on whether we need fiscal stimulus. We need the stimulus whether the looting is stopped or not, and we're NOT talking about the same dollars. When you spend money on stimulus people have jobs and make lasting things, even if the financial and credit markets are still screwed because of the banks. And really, the banks won't be able to keep up their current scams for much longer. Populist pressure won't allow it. Nationalization will win out over the very real possibility of a violent breakdown in society.
Summarizing, in every important respect this is enough like the 1930s that we are well-advised to follow a policy of massive government spending. Unfortunately we seem hell-bent to make some of their same mistakes all over again.
no subject
Date: 2009-03-05 05:03 am (UTC)no subject
Date: 2009-03-05 06:53 am (UTC)no subject
Date: 2009-03-05 08:05 am (UTC)