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Friday, May 15, 2009

 

investment, consumption demand have 'dried up'


via RGE monitor -- a synopsis of a public panel put on by the new york review of books which included nouriel roubini, george soros and paul krugman among others. krugman's comments were notably summarized by submitted to a candid world thusly:

Krugman reiterated the vicious cycle we are currently in: (1) There is a surplus of desired savings globally that should be moved into investments. (2) Investment demand has dried up, fueled in large part by the housing bust. (3) Even businesses that have capital to invest are delaying it because of the drop in consumer demand. And this is happening all over the world, which does tamp the flames of Ferguson’s claim the world is destined to look upon the U.S. government as insolvent.


it does indeed put to bunk a lot of what niall ferguson and many others (tending to but not uniquely on the republican side in the united states) have publicly extolled about the crisis -- but it is confirmation of the reality of the balance sheet recession. to avoid a disastrous collapse in incomes, deposits and GDP we must have massive deficit spending from the only other spoke in the CIGM wheel -- government.

And while Ferguson tried to underscore the contradiction between monetarist and Keynesian strategies, Soros really nailed the contradiction we need to understand: The short-term reaction the crisis requires is almost exactly the opposite of the long-term reaction for economic health.


also interesting and valid from my point of view are the comments of robin wells on the structural origins of the crisis -- particularly the distorting and masking effects of large international capital flows.

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The government is spending... itself in to bankruptcy. Perhaps the whole country could get behind the spending if it wasn't all focused on 1) bailing out Wall St, who should have lost their shirts and good riddance, 2) unproductive portions of the economy (paying people not to work, propping up politically powerful segments like he UAW, and 3) plowing subsidies in to fairy tale "green energy" projects.

You trash the republicans for not wanting to spend, I commend the republicans for not wanting to waste money. As it is, Obama and the dems ARE deficit spending and the only thing it will do is bankrupt the country.

Talk about PRODUCTION. Figure out how the country can produce, or better effect production, and then worry about deficit spending. Maybe you will get more takers.

 
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i wish those were the options, anon. we can get back to a place where they are if we're careful.

the fact is we've ended a long period where consumption was debt-financed with a massive asset collapse.

the resulting facts are that

1) we have too much production. production in the boom was built to satisfy debt-augmented demand. more indebtedness is no longer an option. production MUST contract some, not expand.

2) debt binge + asset collapse = massive equity destruction. households and businesses have found they are much poorer and ill-equipped for the future than they believed. as a result, they MUST save.

3) the combination of 1) and 2) mean that business investment and household consumption are both going into the tank for a good long while. these are two of the three primary components of GDP.

4) those flows will instead be redirected to debt paydown -- creating a paradox of thrift likely to (left unchecked) precipitate a collapse in money supply and outright depression.

5) the only means of avoiding 3) and 4) is for the only other major factor in GDP -- government spending -- to replace demand and maintain cash flows.

this is all straightforward and i don't think anyone denies it. but here's the part that matters:

6) government is capable of financing the kind of deficit spending that consumers and businesses won't be doing by taking the cash flow they are directing to debt repayment and borrowing it out of the banks for fiscal stimulus.that's where the money comes from. that's why the government should not have to worry about where the money will come from -- it's flowing into the banks right now. the result would be a national refinancing -- from private balance sheets to public. when completed, government and the private sector can reverse roles. in the meantime, collapse and depression will be avoided.

it won't mean growth, and it won't be optimal allocation -- but those kind of happy outcomes are simply not possible from this situation. the choices are a fighting stagnation or a deep depression.

we can transfer the massive pile of private debt slowly over to government and make good on our obligations as a society, and in so doing save ourselves from a very bleak future.

but for that to happen, anon, most republican politicians and a good many democratic pols as well will have to have either the courage to save the country or the humility to get the hell out of the way while some smarter people do the lifting.

i'm not trashing the republicans for thrift; thrift is an admirable reflex. (i sincerely wish they'd demonstrated even a single iota of it between 2000 and 2008.)

i am, however, calling them out for not understanding the crisis, how it works and therefore how we can minimize the damage. though admirable for the sum of our society and certainly our long run salvation (as increased productivity is used to retire debts slowly), thrift can be extremely dangerous when business, households AND government all practice it together. this cannot be allowed to happen, or -- mark my words -- men, women and children will starve in the united states. most people don't think that can happen. it can, and it would if we refuse to use the government balance sheet to its useful potential.

 
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that said -- we agree, anon, to the extent that further capital transfers to wall street, insurers, banks and so forth may jeopardize the economy by taking cash flows once directed at investment and consumption and wasting them on bank balance sheets where they won't flow anyplace.

they allocated $700bn for TARP. that's enough. let them now run back to solvency on earnings.

 
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