ECRI's Achuthan Says U.S. Economy Is in Recession

Wish our man Achuthan was off, but he's not - I figured Sept would be recession time based on his prior articles. I love, love, love a good geek. Of course, let's stay on topic here: you know NY RE will never suffer -- prices will continue to go up, up, UP. The next phase of foreigners will be coming from Mars. Of course, they don't require much space and will quickly eat up all those new SRO's, er um, I mean 300 sq ft "micro-studios" that Bloomberg and his cronies are preparing to peddle.

Wow, you guys joined streeteasy around the same time.

http://en.wikipedia.org/wiki/Wow

so we did join at the same time - I never take note of these things. sorry for snarky comments about micro-studios and NY RE. I am just back from Ireland and feeling sick and tired of this city. Want to move the Dublin - things are a bit dire economically at the moment, but there are fewer cops, rules and such. A few more cool days back in the city and I'll be on the up and up.

Bump since I didn't see many responses

I think Blackstone shares this view, because they just put their entire US portfolio up for sale: $22 billion.

They are clearly making a call that this is the top of the market in this cycle. Can only go down from here.

http://professional.wsj.com/article/SB10001424052702303292204577518810593701118.html?mod=googlenews_wsj&mg=reno-wsj

bumping this again since it isn't getting much attention on SE

another bump ..

does anyone on SE cares about the economy ? :) Not many comments from the SE community ?

140 posts since February 2010, 90 of which were posted this week. Maybe it isn't the content, but the messenger.

Maybe the LIBOR thread is more happening. (tee hee) This site is about NY Real Estate and I get the impression that many do not feel that the greater economic picture has much influence on prices in the city. In my opinion, the economy still has not fully recovered from the 2008 Crash. The FED can't print money fast enough, kids are leaving school and college with almost no prospect of meaningful employment and DC has spent a good part of the last week voting on the Affordable Care Act (they have voted on this over 100 times!). The list of disturbing signs and trends is endless. The US is in a difficult phase - not sure where NY RE will end up when the dust settles, but a discussion on the economy is just a downer. Let's hope the downturn is short and minimal. The picture in Europe doesn't help at all, but that is another topic.

str33t:

1. I tnink it could get a lot worse that he is forecasting
2. look at year-to-year ISM new manufacturing orders for June
3. down 6% for exports; 12.3% domestically
4. and Caterpillar's 2011-2012 year-to-year monthly order comparisons
5. in March-May 2011 up over 60%

6. now overeseas sales are barely above zero and in freefall
7. domestic in low 20's but still sharply contracting

8. we seem to be entering a worse phase of the great unwind
9. am also running into people coming to NYC because there are no jobs where they are
10. like Univ Texas law school grad working for a Manhattan solo practitioner
11. who is a close friend of her dad
12. University of Texas is a well-regarded law school and Texas top school
13. and located in Austin, the state capitol, which should be awash in energy jobs
14. and Scranton, whicih Obama and Socialist should love, where they now have wage
equality for all government workers - $7.25/hour
15. or fact that three large California cities have just filed for bankruptcy

16. bottom line: for 50 years Western governmenta have created unsustainable demand
for goods and services by borrowing to give entitlements away

17. the poorer and less liquid those governments get, the more they will be forced
to cut back, which will only increase and accelerate economic implosion until
the economy hits a sustainable statis point, which it eventually will

18. but that point might not be reached until GDP is down from peak 15-30% or more
19. time to start studying survivalist skills ... like cannibalism
20. which also has a positive side effect: larger apartments at lower rents

But of course the US government has never been more liquid: it can borrow unlimited amounts at essential zero interest rates. And we have vast unused capacity in both human and capital markets, which is another way of saying we are rich, not poor, if we decide to use what we have instead of leaving it idle.

So if the government (meaning the Republicans, mainly) chose, we could create sustainable real demand by filling some of the vast need for government services and production, thereby eliminating the recession entirely. It's not like we have all the quality education, effective regulation, sound pensions, affordable healthcare, high speed transportation, environmentally-friendly energy sources, pharmaceutical R&D, high density housing, celebrity drug rehab programs, and other government services that people want.

All it would take is Congress deciding to hire people (or pay states to hire people, or even pay private gazillionaires to hire people, although the last tends to have a lot of leakage) to provide us with things that we want, and we'd have plenty of demand. But that would be "stimulus" and the Republicans are opposed to stimulus.

So the recession is a political production -- not because the politicians created it; the banks did that, taking advantage of deregulation -- but because the politicians could fix it and are not.

Wait for the election. If Romney wins, perhaps he can convince his party to change its policies fast.

And perhaps he can't, or perhaps Obama will win but not by enough to overcome the forces of anti-Americanism in the Congress. In that case we are in for a hard time. It is very hard to create demand by firing people, cutting back government and importing. Tax cuts for the rich aren't going to convince businesses to invest when their customers aren't going to spend, or customers to spend when they are worried about their jobs or their medical insurance or further cuts to their pensions.

NYC RE, however, is still largely bubble fueled: most of the money is people selling one overpriced apartment to buy another one. Or Wall Street fueled: the banks that destroyed the economy are still doing reasonably well, considering the damage they did. And tax cuts for the rich will go straight into RE, because they don't need more stuff and real investments don't make sense when the middle class can't buy. So Manhattan demand is not drying up quickly.

Greece is a great country where they were really good about hiring people to work for the government.

rb345 .. i agree with everything u said until u completely lost me with cannibalism but I get the sarcasm there :) Agree, the great unwind is going over A LOT of people's head. It's the main reason why NYC RE won't survive unlike the optimists so fool-heartedly believe. This is not your typical business cycle or economic cycle "downturn." This is a multi-generational unwinding ... the K-wave Winter!

Looks like not just the folks from ECRI

[Komal Sri-Kumar, chief global strategist at TCW Group Inc., which oversees about $120 billion, says the U.S. economy will fall into recession this year]

http://search1.bloomberg.com/search/?content_type=all&page=1&q=Komal%2BSri-Kumar

> So the recession is a political production -- not because the politicians created it; the banks did that, taking advantage of deregulation -- but because the politicians could fix it and are not.

financedude ... u need help ... if u haven't notice .. both monetary and fiscal policies are hitting the "wall of diminishing return" so politics won't fix this.

* [Komal Sri-Kumar, chief global strategist at TCW Group Inc., which oversees about $120 billion, says the U.S. economy will fall into recession this year]

http://search1.bloomberg.com/search/?content_type=all&page=1&q=Komal%2BSri-Kumar

Finance guy, I think you should stick to finance and skip economics. You make absolutely no sense.

Brooks, you agree with str33teasier about financeguy?

HB: Greece is a country where the rich people refused to pay taxes, leaving the government insolvent. Its government expenditures, like its social services, are below average for Europe. We do have something of a Greece problem, but the problem is corruption and upper class privilege, not excessive social insurance or too much governmental investment.

Str33: Fiscal policy in a demand deficit recession is supposed to mean expanding government spending. We increased Federal spending a little and cut state spending more. The only "wall" fiscal policy has hit is Republican intransigence.

Give the states 5% of GDP in revenue sharing, spend another 5% on infrastructure, institute VA-or-Medicare-For-All with costs similar to the most expensive system in Europe, bring the dollar down relative to China, and go back to collecting taxes from corporations, and all of a sudden we would have full employment, a balanced budget and a functional health care system.

The rich people represent what percentage of the Greek population?

> Str33: Fiscal policy in a demand deficit recession is supposed to mean expanding government spending. We increased Federal spending a little and cut state spending more. The only "wall" fiscal policy has hit is Republican intransigence.

Federal spending increased a "little ?" What about the stimulus ? What about the tax cut ? And where is the economy after all that heavy fiscal lifting ? Hello ?

The economy is where standard theory would expect it to be given the small size of the stimulus relative to the demand lost due to the end of the housing bubble and the cuts in state spending. And that it was mainly in the form of a tax cut, the least effective form of stimulus.

Really, this has all been commonplace -- intro macro -- since about 1945. Eisenhower understood it. Nixon understood it. Reagan understood it. Even Dick Cheney sort of understood it.

When masses of people wake up and discover that their houses are worth half of what they thought, they cut back their spending. That spending is someone else's income. So those people cut back too. Businesses don't invest when they don't see customers. They cut back instead. So that's more people who aren't going to be customers. States don't collect taxes when people don't spend or earn, so they cut back too. Fired teachers and firemen, and retired policemen who just lost their pensions don't run out to buy things from businesses. That's a demand-deficit recession. The housing bubble got us into a big one.

One solution is to export to people abroad who still have jobs, but we've kept the dollar so high that we aren't competitive abroad, and anyway the rest of the world has its own problems.

The other solution is for the Federal government to spend, since unlike businesses, it doesn't need immediate customers. It can borrow at zero percent and invest in many things that will earn the country more than zero percent, like schools and sewers and bridges and trains and research and internet and effective banking regulation and medical information systems. It should give money to the states so they don't have to fire teachers and police but instead can deliver services that people want, but business won't give them, like garbage collection, fire departments, museums and parks and, perhaps, pensions. Or if it can't find anything useful to spend money on, it can buy bombs and planes to blow up stuff abroad. All that spending is someone's income, so they spend more, which means that other people have more income and businesses can expand and the cycle reverses.

That's all that "fiscal stimulus" means.

But we didn't do it. Bush/Obama/Geitner/Bernanke gave a big chunk of money to banks, which gave most of it right back to the US (buying T-bonds) since they had no one to lend it to - businesses don't want to borrow when they have no customers and ordinary people had just realized that they needed to cut back their borrowing, not expand it. Of the rest, the banks turned an obscene amount over to their executives and shareholders. But giving to the rich doesn't do much good in a recession: they aren't going to invest without customers, and they are rich, so they aren't going to spend much more on themselves, except maybe by overpaying for NYC real estate. So while the bank bailouts saved the financial system from complete collapse and kept NYC RE prices high, they were not very effective as stimulus.

(This is also why monetary stimulus hasn't been more effective: even at low interest rates, businesses don't want to borrow or invest now because they don't see who they are going to sell to. Better to just sit on their profits in cash or give them to executives. To get them borrowing and investing would take negative interest rates, i.e., inflation, and the Fed isn't willing to do that.)

Then, President Obama saved the automobile industry from a near death experience that would have crippled vast sectors of the country.

However, in the face of Republican opposition to helping ordinary people, the President chickened out -- he asked for a far-too-small broad stimulus bill and then the Congress cut back even more. So we had a small stimulus and it did about what it could, given how small it was and that too much of it was tax cuts for the rich, who weren't going to spend (or invest, given low demand).

Now we need much more Federal spending. The US can spend; no one else can. So it should. The way to get people back to work is to hire them, so that they have incomes to spend, which will allow businesses to sell to them and start hiring again. And, the way to balance the budget is to get the economy growing so that we can collect taxes again.

In any event, even if the idea that the best way to increase employment is to hire people is too mysterious, there is the other issue:

Right now, we are swimming in idle capital and idle labor. The US can borrow at zero percent, because the opportunity cost of using idle capital and idle labor is at most zero (probably less, since both labor and capital tend to deteriorate as they sit around unemployed). It has unmet needs that would embarrass any other rich country and plenty of not-so-rich ones. Not to mention nearly infinite investment opportunities in R&D and education and infrastructure that are likely to earn the country more than 0%.

So the Feds ought to be borrowing and investing even if we didn't also have mass unemployment. You don't need a finance degree to understand that borrowing at 0% to invest at anything more than 0% is a good idea. Or that fixing the public schools, or offering to insulate every house in the country, or building a modern transportation system, is highly likely to return more than 0%.

Doesn't this all come down to your financeguy theory: Rich people are to blame for everything everywhere?

Thank you FinanceGuy for stating what should be so plainly obvious to EVERYONE. More than anything though, the fact that this ISN'T so obvious is a failure on the part of Obama and the DNC and the left as a whole.This recession's long winding road has been continued far longer than necessary because we have an incompetent government incapable of actually running the country any other way than into the ground.

And to Huntersburg, I don't think anyone is saying "Rich people are the problem". That's what pisses me off about the Occupy Wall Street movement and the 1 % movement. I'm a 33 year old democrat and I hated it. That energy should have been focused on the politicians not the corporations or Wall St. They should be camped out at the Capital.Politicians and Government are the problem, coupled with a huge number of American voters who vote against their own best interests. Politicians now are beholden to Corporations, Religious voting blocks... the system is broken as a whole and this is the result. The vast majority of voters have never left their state, much less the country. They have NO idea how far we have fallen behind with infrastructure and technology. The fact that we haven't flooded government money into those sectors to bring us up to and ahead of the rest of the world is beyond comprehension. And the fact that Obama and the DNC haven't figured out yet that they should just STOP STOP STOP talking about "Main Street and Wall Street and Tax increases or decreases" and take CONTROL of the discussion and completely change it to show America what Hong Kong and Shanghai and Seoul and myriad other cities have built and are building......... Obama should be on TV once a a week doing Powerpoint presentations (joke) but seriously. This rich vs poor, 1 % vs 99% argument is such a loser. Stop making it America vs America, Dems vs Republicans, Rich vs Not. Start making it, Americans vs the rest of the world and if we just do what we SHOULD have done, STIMULATE IT in SMART ways that put people back to work rebuilding America for the future, we can get out of this mess.

But that will never happen. So we are all screwed.

> When masses of people wake up and discover that their houses are worth half of what they thought, they cut back their spending. That spending is someone else's income. So those people cut back too. Businesses don't invest when they don't see customers. They cut back instead. So that's more people who aren't going to be customers. States don't collect taxes when people don't spend or earn, so they cut back too. Fired teachers and firemen, and retired policemen who just lost their pensions don't run out to buy things from businesses. That's a demand-deficit recession. The housing bubble got us into a big one.

You are delusional financedude. Lay off relying so much on your CFA or MSF and use some common sense. The credit bubble started in the early 80s and culminated in the dot.com bubble. When that bubble burst, we replaced the bursting with the housing bubble around 08. During this great 25+ years of credit expansion, the US economy was "booming" b/c of the wealth effect as Greenspan put it. Take away the bubble, credit contracts and we're where we are. Demand deficit recession ? It's a credit-deficit recession. And credit is, in large part, very hard to get today unless you are a bank charter holder. No wonder we're where we are. You finance guys don't even know the root cause.

> One solution is to export to people abroad who still have jobs, but we've kept the dollar so high that we aren't competitive abroad, and anyway the rest of the world has its own problems

You are delusional once again. Ever heard of competitive devaluation. If that's the road to prosperity, then basically every country cat set an exchange rate of 0! You finance guys are just too funny.

> The other solution is for the Federal government to spend, since unlike businesses, it doesn't need immediate customers. It can borrow at zero percent and invest in many things that will earn the country more than zero percent, like schools and sewers and bridges and trains and research and internet and effective banking regulation and medical information systems. It should give money to the states so they don't have to fire teachers and police but instead can deliver services that people want, but business won't give them, like garbage collection, fire departments, museums and parks and, perhaps, pensions. Or if it can't find anything useful to spend money on, it can buy bombs and planes to blow up stuff abroad. All that spending is someone's income, so they spend more, which means that other people have more income and businesses can expand and the cycle reverses.

> That's all that "fiscal stimulus" means.

This I completely agree and is what Japan have been doing for decades but look at where Japan is today. Mired in a 23-year real estate DEPRESSION. Fiscal spending is NOT ENOUGH and Japan is about to hit its own fiscal wall.

> So the Feds ought to be borrowing and investing even if we didn't also have mass unemployment. You don't need a finance degree to understand that borrowing at 0% to invest at anything more than 0% is a good idea. Or that fixing the public schools, or offering to insulate every house in the country, or building a modern transportation system, is highly likely to return more than 0%.

You forgot one important little detail. Inflation! The moment that 0% borrowing is SPENT, i.e., the liquidity floods into the real economy as oppose to staying in the financial economy as you alluded to and I completely agree, it's game over my friend. I'ts Weimar at an even faster clip. How quickly you forgot how the Arab Spring got started ? On the tail end of QE2 which followed QE1 ? When that 0% borrowing floods into the real economy, it will go global and oil would be at $200.

WAKE UP! The solution isn't THAT EASY!

> This recession's long winding road has been continued far longer than necessary because we have an incompetent government incapable of actually running the country any other way than into the ground.

This isn't a POLITICAL problem. It's a monetary problem! WAKE UP! The problem is credit is CONTRACTING b/c the debt to GDP ratio in this country has surpassed the industrial production curve, i.e., useful productivity. When credit expands beyond production, it's "living beyond ones' means." It's unnecessary credit expansion which brought on the dot.com and housing bubble. Wake up!

> Americans vs the rest of the world

Hahahaha, you, too, are too funny. You willing to earn $8/day living in your fancy NYC apartment ? Have you even been to other parts of the world ?

>And to Huntersburg, I don't think anyone is saying "Rich people are the problem".

financeguy is.

what is your solution?

Unnecessary credit expansion brought on the dot.com bubble? Completely wrong. Compare the federal funds rate from 94-2000 to 2002-2008. Two different episodes with two separate causes.

And I don't think FinanceGuy forgot inflation. Its all certain people have been talking about for the last 5 years. Its coming. Its coming. Wait for it. Its coming...

> Unnecessary credit expansion brought on the dot.com bubble? Completely wrong. Compare the federal funds rate from 94-2000 to 2002-2008. Two different episodes with two separate causes

Please enlighten us!

> And I don't think FinanceGuy forgot inflation. Its all certain people have been talking about for the last 5 years. Its coming. Its coming. Wait for it. Its coming...

That response answers nothing about my comment. Inflation isn't here b/c the 1.5T in excess reserve is SITTING at the FED! You really think there will be NO INFLATION if that 1.5T is allowed to hit the real economy ? Enlighten us PLEASE!

Explain the logic please.

We agree that the private sector went on a bubble-influenced credit binge. We agree that we have massive structural problems including a metastatic rent-seeking finance sector, although I wouldn't characterize the Reaganite economy as "booming" -- growth was far lower than in the pre-Reagan period and, of course, virtually none of it went to the middle class: real median pay is the same as in the late '60s. We agree that by the end, banks were making loans that could only be paid back with bubble profits, in a classic "Minsky Moment," and so the private sector must reduce its borrowing/lending.

But why does it follow that the Federal government should make the problem worse by making it harder for people to pay down their debt?

And on what theory is runaway inflation possible when both labor and capital are sitting idle? How can we be facing both Weimar inflation (without any reparations payments) and Japanese deflation at the same time? If inflation is the future, how come the markets are predicting none? And if they are so dramatically wrong, mistaking Weimar for deflation, why do you want to rely on them alone?

By the way, what is the evidence that Japan is hitting a fiscal wall, whatever that means? The markets obviously disagree with you -- they treat Japanese bonds as free of default risk and inflation risk, as if the main issue in Japan were failure to spend enough to revive demand. Funny, that's what you'd expect from a government that, like ours, is far to beholden to its banks and other incumbent economic powers to press for a little "creative destruction".

1. Google federal funds rate history and enlighten yourself. You probably should have done that in the first place.

2. Re: Inflation, you mean like how when the 800B stimulus hit, it was going to cause massive inflation?

http://online.wsj.com/article/SB123388703203755361.html

"February 6, 2009
Why 'Stimulus' Will Mean Inflation"

Mr. Melloan, is that you?

HB: You are letting your simplistic Lenin/Trotskyism class struggle analysis blind you. Under capitalism, we use markets to create incentives for people to get rich by performing useful services, innovating, and making stuff people need.

I'm not opposed to the rich. Just to anti-capitalist rent-seeking economic incumbents who want subsidies, government monopolies and legal protection to rig markets so they can make money without producing useful goods and services, or force other people to pay for the costs of their businesses, or charge far more than the free-market cost of what they do produce, i.e., marginal cost of production.

As for bubbles, they are an inherent property of asset markets. They've been around as long as the markets. (Google "Credit Mobilier".) And even the simplest computer models of asset markets generate bubbles. (Google "Sugarscape"). The credit expansion comes from private lenders who realize that lending to people who are buying bubble assets is highly profitable and essentially risk free so long as the bubble keeps expanding -- and the lending helps keep it expanding. (Google "Minsky" or "Kindleberger").

Regulators can stop or slow a bubble, if they are not captured by it, and Greenspan certainly is to blame for loudly proclaiming that bubbles don't exist, but bubbles are never caused by regulators (except in the sense that crime is caused by cutting back the police).

Have I ever been to other parts of the world? Yes, I am writing to you from Asia. I split time between NY, LA, Italy, Paris, Tokyo and Hong Kong. I don't need to earn $8 dollars a day because I own business producing things. When everyone I went to College with went to work in Banking, and I mean EVERYONE, I went to work making things and because of that, I'm in a much better situation than most of them.

Laugh all you want at me, people who think like me. I could give two s****.

We are not debating what STARTED this crisis. But if you don't think we have a political crisis, I don't know what to tell you.

> But why does it follow that the Federal government should make the problem worse by making it harder for people to pay down their debt?

How is it harder for people to pay down their debt ? You have the income, you pay down your debt! No income, you are a squatter. The fact that you can't find a job, that's a different story. That has nothing to do with making it hard for folks to pay down their debt.

> And on what theory is runaway inflation possible when both labor and capital are sitting idle?

here we go, the output gap ... How did we get to $140 oil when labor and capital were sitting idle also ?

> How can we be facing both Weimar inflation (without any reparations payments) and Japanese deflation at the same time? I

Then explain to me how come there is a need to have 1.5T in excess reserve ? That's your "reparation payment" right there! You know how much is in Level 3 assets sitting in banks' balance sheet ? U do huh ? Then you certainly know more than the CFOs and the traders and the risk manager at the banks.

> If inflation is the future, how come the markets are predicting none? And if they are so dramatically wrong, mistaking Weimar for deflation, why do you want to rely on them alone?

I didn't say inflation is HERE! You touted a solution that includes spending the Fed's 0% borrowing. I said that will lead to inflation. I didn't say inflation is HERE. On the contrary, we're facing a deflationary spiral as you have correctly pointed out.

> By the way, what is the evidence that Japan is hitting a fiscal wall, whatever that means?

Hahaha, whatever that means. That's a good one. It means Japan, even though their debt is denominated in Yen, is facing the inevitable reality of destroying Japanese savers who are, by a majority, the buyers of JGB. When that savings is rung out to the last drop, who the "expletive" is going to buy JGB ? Right, the BoJ .. and the FX market will sit iddly watching this little circle J*RK.

on top of everything else, we have a problem across the board (political, business & media) of confusing facts with opinions. we regularly engage in debates about factual material, i.e. global warming and turn opinions into facts through repetition and endless echo chambers.

Re inflation.

So far as I know, everyone agrees that the Fed can always raise interest rates high enough to cause enough unemployment to squelch inflation. So it has the tools to stop inflation if it chooses.

The Fed has repeatedly demonstrated since Volker that it is willing to impose any amount of misery on the country in order to control inflation.

The Fed's governors are elected by banks that have enormous vested interest in low inflation policies. Why do you think that they are suddenly going to reverse course? Do you know something about the politics of the Fed that the rest of us don't?

Modern finance has changed many of the incentives at the big banks. Do you have a story about why they might suddenly begin to pressure the Fed for high inflation or evidence that they are doing so already?

> 1. Google federal funds rate history and enlighten yourself. You probably should have done that in the first place.

OK, I play along Here's the chart to make things simple,

http://en.wikipedia.org/wiki/File:Federal_Funds_Rate_1954_thru_2009_effective.svg

You see that little dip beginning in the early 80s ? Yeah, that's what I mean by "The credit bubble started in the early 80s and culminated in the dot.com bubble."

And your little argument

> Compare the federal funds rate from 94-2000 to 2002-2008. Two different episodes with two separate causes

completely miss the forest for the SINGLE tree. The FFR have been in decline since the early 80s from over 19% to around 3% in mid-90s and you point out to that little "blip" between 2000 and 2001 that saw FFR go from 575bps to 625bps and the 2nd little "blip" between 04-07 that increased the FFR from 100bps to around 550bps ? ARE YOU SERIOUSLY ? ARE YOU JOKING ?

> You probably should have done that in the first place.

Go back to school and learn something useful. Maybe that's how you got so "smart" :) Too funny

> everyone agrees that the Fed can always raise interest rates high enough to cause enough unemployment to squelch inflation. So it has the tools to stop inflation if it chooses.

You are becoming even more funnier than before. Are you sure you're a finance guy ? Still mired in level 1 of the CFA huh ? Are you also joking ? You SERIOUSLY THINK the Fed will raise rates given our current deficit! You know what the interest carry will be to the Fed deficit ? You joking right ? What is the purpose of Op Twist 1 and 2 ?

> The Fed has repeatedly demonstrated since Volker that it is willing to impose any amount of misery on the country in order to control inflation.

Enuff said, you are delusional. You think the Fed can pull a "Volcker ?" Geeshush! What the "expletive" do they teach you in school ?

> The Fed's governors are elected by banks that have enormous vested interest in low inflation policies. Why do you think that they are suddenly going to reverse course? Do you know something about the politics of the Fed that the rest of us don't?

No idea what you are driving at here. You completely loss me.

> Modern finance has changed many of the incentives at the big banks. Do you have a story about why they might suddenly begin to pressure the Fed for high inflation or evidence that they are doing so already?

More mumble jumble that I have no idea what you're driving at ...

so your point is that if inflation were to begin that the fed would sit back and let it happen?

what would that look like?

>on top of everything else, we have a problem across the board (political, business & media) of confusing facts with opinions. we regularly engage in debates about factual material, i.e. global warming and turn opinions into facts through repetition and endless echo chambers.

Such hopelessness, not even worth waking up in the morning.

what's your solution?

Solution to what?

yep.

that says it all.

Str33- you need to be less elliptical. Your story line is hard to follow.

It is hard for unemployed or poorly paid people to pay down their debts; why do you think that these are unrelated? And why aren't the squatters the lenders who made bad loans but expect to be paid back anyway, in defiance of ordinary capitalist norms?

$140 oil could have many reasons, most of which have nothing to do with idle capital or labor (although lack of profitable real investments often sends money into speculation, which might be one cause of $140 oil). Do you think it indicates that capital is finding lots of attractive investments (i.e, interest rates are high) or that unemployment is low? Why?

Your comment about Level III is beyond me. I assume that banks aren't lending because businesses don't have attractive business plans because their customers lost their jobs or are afraid they will or are trying to pay down their debts instead of spending. That's the standard story of a demand-deficit recession. Why do you call that a reparation payment and how does it lead to Weimar-style inflation?

Why do you think Japanese savers are going to stop saving? And if they stop saving, won't they have to invest or spend, which would lead to economic growth, which would lead to higher tax collection and make the government fisc stronger? I don't understand the point you are trying to make.

Exactly, anyone can be a miserable ass and spend all day focused on the negative.

Recessions are like colds, they happen, then they are over. In the mean time they build the immune system against cancer. Spending life in a bubble to avoid colds or recessions is a miserable way to go through life.

when will this recession end?

> $140 oil could have many reasons, most of which have nothing to do with idle capital or labor (although lack of profitable real investments often sends money into speculation, which might be one cause of $140 oil). Do you think it indicates that capital is finding lots of attractive investments (i.e, interest rates are high) or that unemployment is low? Why?

You mentioned that there could be no inflation if you have idle capital and labor, right ? I merely point to energy price inflation despite idle capital and labor in 2010! What's the reason that oil got to 140 is irrelevant b/c QE1 and QE2 flooded the financial economy with liquidity.

> Your comment about Level III is beyond me. I

How is that beyond you ? You point to the lack of a "reparation payment" as the cause of inflation. I merely point to the Level 3 assets sitting in banks' balance sheet as your "reparation payment" for this crisis! Ergo, you have your reparation payment to ignite inflation.

> Why do you think Japanese savers are going to stop saving? And if they stop saving, won't they have to invest or spend, which would lead to economic growth, which would lead to higher tax collection and make the government fisc stronger? I don't understand the point you are trying to make.

Rewind. Sheeeshush, must I lay out everything ? OK, Japan is still an export dependent country, correct ? Therefore, the citizen's wealth is dependent on net export.

* [TOKYO—Japan posted a larger-than-expected merchandise trade deficit last month, due to the country's first-ever trade shortfall with Europe and a surging energy import bill. The deficit was the biggest on record for a May period, the Ministry of Finance said on Wednesday.]

http://online.wsj.com/article/SB10001424052702303836404577477431123812816.html

Export is in decline b/c of the global crisis. Now, income is on the decline and I need you to leap forward or you'll be lost again. Do you think savers will continue to save with a decline in income ? And if not, who's the loser at the margin when savers start saving less ? Don't forget, the demographic for the Japanese is not a pretty picture. Therefore, declining savings rate will paint the BoJ into a corner because its majority buyer is cutting back. Now, again, who will be buying JGB hence the "fiscal wall." Simple enough to follow or you'll say I am making too many leaps obviously.

Bottom line is we are going to have the financial crisis we should have had in 2008 were it not for all the politically motivated spending that had relatively modest economic effect. Now we will go into the "crisis" for real and there isn't a lot that can be done to stop it. Now it will be global. Despite the hardship that will follow if what is uneconomic or unsustainable is cleaned out there will be a recovery. Wish we didn't have to go through it but there are no easy answers this time.

Let's all sit at our dinner tables biting our nails in anticipation of someone else solving all problem.. It's the rich people who should fix it, it's the government, the Democrats, the Republicans, Congress, the President, the unions, the CEOs, Wall Street, the regulators, everyone else, woe is me I'm columbiacounty I have no control, even of my bowl movements.

so your solution is to sit here day in day out endlessly provoking?

why?

> Bottom line is we are going to have the financial crisis we should have had in 2008 were it not for all the politically motivated spending that had relatively modest economic effect. Now we will go into the "crisis" for real and there isn't a lot that can be done to stop it. Now it will be global. Despite the hardship that will follow if what is uneconomic or unsustainable is cleaned out there will be a recovery. Wish we didn't have to go through it but there are no easy answers this time.

Agree a 1000%. There are NO EASY ANSWERS unlike what finance guy believes it is as easy as waving a wane. This isn't your multi-factor model than you can just plug in a few GDP # and UE rate and FFR and wallah ... magico presto ... out comes a solution, neat and tidy. Delusional.

No, solution is not to sit around all day bitching and moaning, blaming. If you have personal problems, get a job, get educated, spend less, do more, focus, etc.

i thought your solution was to sit on this board day and nite and criticize and provoke?

How is your track record on thought?

clearly 100%.

more provoking from you.

Str33, I think I'm beginning to understand your inflation story. Is this what you have in mind?

1. The Fed lowers interest rates. 2. The Republicans in the House approve (and in the Senate do not filibuster) statutes to cause the Federal Government to borrow and spend, because it is good for the country even though it is contrary to their stated electoral position. 3. Federal spending increases demand and reduces unemployment. 4. As unemployment drops, employees are able to demand higher wages. 5. As employment and wages grow, consumers spend more. 6. As consumers spend more, businesses borrow at low interest rates in order to invest to sell to them, thus increasing employment and wages. 7. Tax revenues automatically increase as income and profits go up and the economy grows. 8. Savers become investors, because investment is attractive when people have jobs and the economy is growing. 9. If we are very lucky, demand grows to the point where everyone has a job and all capital is being used for useful investment rather than stuck in safety boxes. If demand continues to increase, all it does is raise prices (including interest rates) without creating more jobs or stuff -- this is a full employment economy at capacity leading to wage-cost inflation as in 1968.

So far, this is the standard account of how monetary and fiscal expansion can pull us out of recessions, except that we haven't gotten close to #9 since the '60s because of a consensus among political and economic elites that #4 is very bad and we should use the full force of the law to prevent ordinary people from winning wage increases.

Now comes the place where you go unconventional:

10. The Fed sees inflation but decides to reduce interest rates because it wants Treasury to be able to borrow at low rates.

So my question is why you think this is how the Fed will react? Why won't it do what it has repeatedly done since Volker: raise interest rates, thus transferring money from debtors to creditors and taxpayers to bondholders, increasing banker profits, reducing private investment, increasing unemployment and making it harder for the middle class to get pay increases thus reducing demand, and creating a fiscal crisis that forces governments to reduce spending on middle class services in order to make bond interest payments to the banks and wealthy?

Also, I still don't see where the Arab Spring fits into this. Were the Bush wars started by the Fed?

"completely miss the forest for the SINGLE tree. The FFR have been in decline since the early 80s from over 19% to around 3% in mid-90s and you point out to that little "blip" between 2000 and 2001 that saw FFR go from 575bps to 625bps and the 2nd little "blip" between 04-07 that increased the FFR from 100bps to around 550bps ? ARE YOU SERIOUSLY ? ARE YOU JOKING ?"

Yes I am seriously, whatever that means. Listen, you are the joke, slipping and sliding to bring up new arguments so you don't have to defend the ones you've already made. Now your argument is that 19% was normal? Do some reading about what happened when rates were that high. I never argued that the rates were not kept artificially low last decade. You argued that that is what caused the internet bubble in the 90s. You are wrong. That is my point.

"Therefore, declining savings rate will paint the BoJ into a corner because its majority buyer is cutting back. Now, again, who will be buying JGB hence the "fiscal wall." Simple enough to follow or you'll say I am making too many leaps obviously."

When do you suppose this will happen? I mean, the Japanese household saving rate has been declining for 38 years. Wait for it, wait for it...

> I never argued that the rates were not kept artificially low last decade. You argued that that is what caused the internet bubble in the 90s. You are wrong. That is my point.

So if rates were kept artificially low for the last decade, actually last 2.5 decades but what's another decade of low rates to ferment speculation but I am bring up another argument or slipping and sliding according to Mr Malthus here even though it's the same darn argument.

OK, so if rates were kept artificially low for the last decade, how is that not contributing to the creation of the internet bubble ? What does low rates allow a speculator to do ? Borrow at nearly 0 cost. What do you do when you can borrow at 0 cost ? You speculate! You do carry trades. You do IR swaps and forwards and countless other degenerate gambling ways to speculate. How is that NOT contribute to the Internet bubble ? If it wasn't speculation that created the Internet bubble, why do they call it a BUBBLE ? Shheeeshuush. What are they teaching you in school these days ?

> hen do you suppose this will happen? I mean, the Japanese household saving rate has been declining for 38 years. Wait for it, wait for it...

Says who it has been in decline for 38 years. They were running a trade surplus UNTIL RECENTLY. Sheeshush ..

> 1. The Fed lowers interest rates. 2. The Republicans in the House approve (and in the Senate do not filibuster) statutes to cause the Federal Government to borrow and spend, because it is good for the country even though it is contrary to their stated electoral position. 3. Federal spending increases demand and reduces unemployment. 4. As unemployment drops, employees are able to demand higher wages. 5. As employment and wages grow, consumers spend more. 6. As consumers spend more, businesses borrow at low interest rates in order to invest to sell to them, thus increasing employment and wages. 7. Tax revenues automatically increase as income and profits go up and the economy grows. 8. Savers become investors, because investment is attractive when people have jobs and the economy is growing. 9. If we are very lucky, demand grows to the point where everyone has a job and all capital is being used for useful investment rather than stuck in safety boxes. If demand continues to increase, all it does is raise prices (including interest rates) without creating more jobs or stuff -- this is a full employment economy at capacity leading to wage-cost inflation as in 1968.

All good points except for ONE ... 3. Federal spending increases demand and reduces unemployment.

It wasn't Fed spending that increased demand and reduced unemployment. It was the combination of home equity withdrawal coupled with the emergence of Walmart-nation, i.e., China producing low cost goods. So, home equity withdrawal was possible due to the housing bubble and Walmart-nation prolonged this spending bubble with low cost goods from China.

As for 4. As unemployment drops, employees are able to demand higher wages.

If you recall, we've had wage stagnation for over a decade, since the dot.com bubble burst so no, employees haven't been able to demand higher wages. So where did the increase in consumer spending come from ? From the little detail that you forgot to mentioned which was home equity withdrawal. Therefore, back to my original point, it was credit creation that provided the juice for the boom. It is now credit contraction time. What is so hard to grasp ?

> So my question is why you think this is how the Fed will react? Why won't it do what it has repeatedly done since Volker: raise interest rates,

Refer to my previous response. You really are delusional if you think the Fed will raise rate.

> thus transferring money from debtors to creditors and taxpayers to bondholders,

And how does this help Treasury to sell more debt if it can already borrow at 0% ? Get a clue .. and I thought u are a finance guy.

> increasing banker profits,

Banker profit is already increased. The 1.5T in excess reserve is EARNING INTEREST. The yield curve is positive! Banks are getting a positive carry! HELLO ? FINANCE GUY ?

> reducing private investment, increasing unemployment and making it harder for the middle class to get pay increases thus reducing demand, and creating a fiscal crisis that forces governments to reduce spending on middle class services in order to make bond interest payments to the banks and wealthy?

I have no answer for that. I'm not the Fed. However, my original thesis stands. It was a generational credit bubble that created the Internet boom and housing boom and now that generational credit bubble is contracting, BIG TIME.

> Also, I still don't see where the Arab Spring fits into this.

the arab spring was borne out of food and necessities price inflation and deteriorating living standards, i.e., food shortage and scarcity .. u don't recall the man setting himself on fire in Tunisia do u ?

http://en.wikipedia.org/wiki/Arab_Spring

AND
http://articles.businessinsider.com/2010-11-16/markets/30045282_1_world-food-crisis-price-inflation-india

And you are a FINANCE GUY ? Do you even know what's going on in reality ?

but what does that have to do with fiscal policy in the US?

"Says who it has been in decline for 38 years. They were running a trade surplus UNTIL RECENTLY. Sheeshush .."

Again, I would like to point you toward this search engine called Google. You can find all sorts of facts, although sometimes they absolutely destroy your assumptions:

http://streetcapitalist.com/2010/07/09/edward-chancellor-reflections-on-the-sovereign-debt-crisis/

OK, Str33, now we are getting somewhere. Your prophecy of inflation is based on the premise that in the face of inflation, the Fed will see helping Treasury sell bonds as its primary goal.

That premise seems unlikely to me. It requires believing that the Fed will decide to violate the law, the professional commitments of investment bankers and the interests of its electors. So I'm happy to ignore the conclusions you derive from it.

Str33, on your other main point, that "artificially" low interest rates caused a credit boom that caused bubbles.

I don't see how the Fed can "create" a credit boom, let alone a bubble. No matter how low it sets interest rates, it can't force lenders to make loans or borrowers to take them in order to buy assets for more than fundamental value.

I think you've reversed the causality. In an asset bubble, rising prices cause demand to increase and thus prices to rise still more (as opposed to the standard market account where rising prices cause increased supply and lower demand, thus bringing prices down).

In a bubble, borrowers have a foolproof investment strategy -- buy and sell into the bubble. Accordingly, they are willing to borrow as much as they can. The more you borrow, the more you can buy, and the more you buy, the more you'll make when prices go up.

And lenders have safe borrowers -- even if they can't pay out of income, they can always sell for a profit, so why not lend to them.

So the bubble causes the credit boom, not the other way around. That doesn't make the bubble or the credit a good thing, but it does help to understand the policy issues.

Bubbles don't need low interest rates, just like they don't need low prices. Even at high prices and high rates, borrowers and lenders will still expect to make money so long as they expect prices to go even higher.

The Fed can stop bubbles, however, if it decides to: it can ban banks and other regulated entities from making loans that could not be paid back from income, or to require them to prove that they'll be solvent even if prices drop. Greenspan however believed that markets are always right, or that bankers should be allowed to profit at the expense of the taxpayers, so he went the other direction, loosening regulation and letting the bubble-financiers gamble in the assurance that he would clean up if they made a mess.

By the way, what makes interest rates "artificial"? Does the Fed sometimes add chemicals when it sets them? Don't you mean "mistaken, according to my analysis"?

> OK, Str33, now we are getting somewhere. Your prophecy of inflation is based on the premise that in the face of inflation, the Fed will see helping Treasury sell bonds as its primary goal.

That premise seems unlikely to me. It requires believing that the Fed will decide to violate the law, the professional commitments of investment bankers and the interests of its electors. So I'm happy to ignore the conclusions you derive from it.

You are indeed delusional!!! What's the purpose of Op Twist 1 and 2 if not for "the Fed will see helping Treasury sell bonds as its primary goal."

I'm happy to conclude that you are either not thinking straight or too many late night CFA session has gotten you "smarter ?" You know there is a sarcastic remark in there somewhere right ?

All joking aside, tell me what is the purpose of Op Twist 1 and 2 ?

> The situation going forward looks rather different. As the population ages, Japan’s household savings rate is in steep decline. Pension funds have become sellers, rather than buyers, of JGBs. The capacity of both the Bank of Japan and domestic commercial banks to acquire yet more government bonds is limited. Japan’s political system has failed to address the chronic crisis in public finances. Huge deficits have become entrenched at a time when the cost of financing the national debt has consistently exceeded the country’s growth rate. In short, Japan is stuck in a debt trap.

> Furthermore, Japanese debt is relatively short term. The face value of bonds that have to be rolled over this year is equivalent to nearly half of Japan’s GDP.29 Unless Japan changes direction, its public credit will come under threat.

Made my point pretty darn nicely that Japan is facing a "fiscal wall!"

I stand corrected on the savings rate. It has been in decline!

> Str33, on your other main point, that "artificially" low interest rates caused a credit boom that caused bubbles.

I don't see how the Fed can "create" a credit boom, let alone a bubble. No matter how low it sets interest rates, it can't force lenders to make loans or borrowers to take them in order to buy assets for more than fundamental value.

We're DONE UNfinance guy. You OBVIOUSLY ARE NOT INVOLVED IN FINANCE.

> I don't see how the Fed can "create" a credit boom, let alone a bubble.

This statement alone makes you sound like a complete idiot, especially with your financeguy moniker

So let me ask you UNfinanceguy, what caused the housing bubble and the subprime mortgage ? Where did the banks managed to "find" trillions of dollars to lend out to wannaba house buyers ?

which part of selling securitized loans do you not understand?

> columbia,which part of selling securitized loans do you not understand?

Stop making a fool of yourself. Your posts are automatically "hidden" if you don't notice. But I will play along.

You asked "which part of securitized loan I don't understand ?" It's so funny. Let me ask you "Which part of securitized loan DO NOT INVOLVE a loan ?" And which part of a "loan" don't involve a bank having the MONEY to make the loan ? therefore, my original question to UNfinanceguy stands "Where did the banks managed to "find" trillions of dollars to lend out to wannaba house buyers ?"

You are just as idiotic as UNfinanceguy ..

columbia, you are IGNORED going forward.

so...who do you think bought the securitized loans?

let me help you a little.

a....the federal reserve
b....the us government
c....investors

i think it has been established that FG is a communist, Socialist at best

agree brooks2 .. thx for the head's up.

from the trotsky tradition or straight marxist/leninist?

Which form of government is preferred by the Columbia County legislature?