Krugman's Got It Wrong
Krugman says "we haven't had a recession yet because because of booming exports." He then, on his blog, which was introduced to me by scantron, shows a graph that illustrates how much our exports have increased to save us.
But Krugman - we are importing oil at record cost. That's why our trade deficit was determined to be the highest it has been in 14 months. It increased, not decreased.
All the Fed can do is create another housing boom by easing monetary policy. Oh, and cause major inflation in the process. That could save us from a recession but it won't save us from the next one.
But Krugman - we are importing oil at record cost. That's why our trade deficit was determined to be the highest it has been in 14 months. It increased, not decreased.
All the Fed can do is create another housing boom by easing monetary policy. Oh, and cause major inflation in the process. That could save us from a recession but it won't save us from the next one.
posted by John Liberty at 1:06 PM
5 Comments:
i personally want a recession
European Union also replaced the US as China’s largest export market
The US is at risk of losing its top-notch triple-A credit rating within a decade unless it takes radical action to curb soaring healthcare and social security spending, Moody's, the credit rating agency, said yesterday.
The warning over the future of the triple-A rating - granted to US government debt since it was first assessed in 1917 - reflects growing concerns over the country's ability to retain its financial and economic supremacy.
I saw the Moodys bit on Reuters. Unsurprising, since rationalization and cost-cutting are the mantra of the business class. Of course, healthcare is more expensive than most European welfare states anyway, so it leaves open that option.
Do you have an opinion, Liberty, on Clinton's plan to inject money into the economy to guard against the recession? This is apparently Larry Summers' plan, but Brad DeLong disapproves (see blogs).
Liberty, you have obviously given a lot of thought to the recession issue. I myself have read a lot more economic literature lately (mainly very long-term view type stuff) and it seems to me that, while whatever happens next year will likely be large and damaging, it won't be the potential "big one" necessary to really shake up the Western economic consensus. Economists seem to understand and accept that the financialization of the market since the late 70s has created a much more volatile climate which is more crisis-prone. I suspect that we have a few more years before more important changes in the world market take place, especially the effects of the global "South" and China on American and Western European living standards. Eventually it could happen that the growing sophistication of the South's goods could drive down wages in the North; also the shift of the labor force to there will either drive down wages or encourage protectionism or both. Also much of the Western world is now aging and shrinking in population, thus productivity will go down. But perhaps before all of this happens the finance sector will destroy everything anyway because of all the risky securities and derivatives.
For analysis on this I highly recommend Andrew Glyn, "Capitalism Unleashed" (OUP 2006), for a critical perspective on the direction of the world economy since the "Golden Age" of the 50s and 60s.
Krugman just admitted on his blog that he was wrong about exports(krugman.blogs.nytimes.com). Did one of you tell him?
I am happy to see someone address this very important question regarding competition, wages, and afinancialization. As everything is connected in economics, their relationships are dependent on other macroeconomic factors.
First, you bring up the fact that financialization has created much more extreme volatility in the system. I personally am not familiar with the empirical evidence or metrics that your sources used to come to their conclusions, and perhaps you can share them with me, and so I don't feel comfortable commenting on that. However, I would definitely say that the US economy is becoming more financialized, with trade and commodities themselves being financialized in the form of different types of financial securities. For example, ABS(Asset backed securities)was one of the largest financial markets until recently. ABS are bonds that are linked to corporations assets - their printers, chairs, etc. Corporations use ABS in order to fund their activities. Or how about the financialization of power lines and the energy traveling through them, and the subsequent disaster in California? Their financialization certainly made for a bit of chaos.
I think the real chaos occurs at the most basic level - at the level of chairs and printers. When companies with physical products face increasing world-wide competition they are forced to find new routes to profitability besides the traditional product selling. This trend is frightening to me. Take SEARS for example. SEARS used to be wheelbarrows, refrigerators, televisions and what not. What does
SEARS do now? Same thing but they also have SEARS HOLDING CORP, the financial arm of the company, which lost 99% only last year on the ABS they created to fund their activities. The collateral for the ABS were their products - the tractors, TVs, and refrigerators. When SEARS HOLDING was being set up, the CEO, a very famous businessman whose name I can't remember, cut jobs. He cut jobs and financialized the company. SEARS and SEARS HOLDING has their most profitable years ever.
While I don't like the aesthetic of the financialization, I can understand the turmoil it creates. I recently had an interview at Goldman Sachs within their derivatives department. The department was a mess. There was no standard protocol for trading derivative instruments(as in the very ABS and CDO(collateriazed debt obliations[ie peoples debt]) until 2005 when the Federal Reserve said they were going to shut down the trading of those instruments unless they began keeping paper trails! There weren't even paper trails for these complicated securities that were worth huge amounts of money(think the value of an entire SEARS store bundled into one bond).
So you wonder how the banks could lose as much money as they have? It's because they didn't even know how much they had of this complicated stuff(ABS, CDOs, other derivatives). Merrill at one point last year said their write down was going to be 4 billion. Then they came out and said it was around 9 billion. Why? Cause they found more of this shit - shit they were never required to report or catalog, trades made without paperwork. By 2005 it was too late - we're talking five years of this stuff(yes, they exploded under bush - a coincidence or not it's true).
The desire for new routes to profitability spurs the financialization you speak of, a financialization that is necessary in order to confront increased worldwide competition. How does that affect wages for those making the products? The corporations need less manufacturers. Few jobs for many people. Or if your corporation has moved its operation to china - no jobs.
And so we have these ex manufactures running around with their heads cut off listening to Hilary Clinton. Clinton's plan is to slash taxes for middle-income individuals. Larry Summers and other economists, as you note, also suggest that there be temporary tax cuts. Cutting taxes right now is ridiculous.
Slashing taxes for middle income individuals has been suggested by others beside Hillary, but only as a way to assist these individuals from their own indebtedness and for their own comfort. The economic soundness of such a policy is questionable. Millions will suffer while the TV shows us their families on the front lawn with all their furniture and a towel over their shoulder(Cleveland is the hardest hit city by foreclosures). If you notice, Hilary's plan is a straight-up transfer of wealth from the government to individuals to help people pay home heating bills and mortgage payments. Only $40 billion is billed as an economic stimulus with the idea that giving back some money to these lower income individuals will help them spend.
I think what is much more likely is that people are going to use their tax breaks to help pay off their debt rather than outright spend it. So this is really a transfer back to the banks. Secondly, our government does not have the money to issue such temporary tax breaks. This is the bigger issue - you saw my post above concerning the downgrading of U.S. debt. This will make our rating worse. But more importantly, it makes our rating worse because we have to keep borrowing in order to keep the government functioning. The national debt rose from 5 trillion to 9 trillion in the last eight years, and Congress had to raise the debt ceiling. Mind you, all this money the Federal Reserve is pumping into the markets is borrowed money. It's money that we have to pay back at some point. And all these soveriegn wealth funds investing in these banks - they are investing in the sense that they receive huge payments on bonds that the banks issue to them. The banks are taking out permanent loans with foreign governments. Citigroup has to pay 14% a year AND the Abu Dhabi government gets a portion of their revenue stream as determined by the stock price. So you see, these foreign bailouts of american companies are really more debt - and the federal reserve money is really more debt too. Our government doesn't have any money. This is why I think tax cuts are a bad idea in this case even though the money goes to the regular joe. It really will not help reduce the budget deficit, the national debt, and at 40 billion dollars to poor people already in massive debt, how much stimulus can it really give the economy considering the ECB injected 500 billion into their economy and still cant get it going. Besides, we already had the largest tax cut in history in 2001 and 2004 and now we need another? This is bad long-term planning and unlikely to help in the short-term.
This is what really amazes me: our current situation and our current economy does not resemble anything like a normal economic downtown or the economy of years past. This economy is much weaker than is being portrayed. The sales growth we saw this holiday season(a 3.5%), was revised to -1.5%, inflation is so high that the numbers seemed bigger. Furthermore, Hilary's plan is to give 40 billion to middle income people - but its not just middle income being hurt - it's the banks too - and its the rich. It's everyone, everywhere, in every sector. The problem can't be fixed by the Fed - they have no control except to persuade banks like bank of america to buy Countrywide financial(which is what happened, the fed assumed the market risk) and to cut rates in order to inflate another bubble, along with some massive inflation. But this is a problem of TOO much credit, not too little. This is a problem of loans not being repaid by the consumer and by the banks who have investments in these consumer backed bonds. So all the fed can do by cutting rates is to increase the credit out there - meaning we will boost the stock market by there being even more leans, which is already what the fed is doing by putting money in the market, cutting interest rates, and as are these American banks who are taking investment from foreign capital.
Let me tell you this: consumer spending was revealed to be weak today at Tiffanys which is for the rich. It was reported to be weak by AT&T because people werent paying cable TV and phone line bills, banking activity has stalled. exports have stalled. people are in debt. people will be in more debt this year.
prediction: there will be a stock market crash sometime this year, an 1,000 point drop. the dow closed today at the same price it was at in january 2007. people are spooked and one more economic shock will send these markets over the edge in a one or two day crash that will precede a period of economic sluggishness similar to the Great Depression and this will continue for years....
the curative process will take time - lots of time.
Post a Comment
<< Home