Is a Double Dip Recession Likely?

[TraneWreck]

While true, I believe that was a singularly unique situation.

WW3 surely isn't the answer, as I am sure you agree

Money doesn't know what it's being spent on. It cannot distinguish between a bomb and a bridge.

 

[drkitten]

I would support that idea, drkitten, and I'm usually in the thrift camp. The return on that investment would pay back the cost in the not-so-long run. In a time of economic hardship and high debt, we should at least be getting our money's worth.

Well, the Keynesian point -- and history backs him up on this -- is that the spending alone is the investment that will pay back the cost. We could spend an equivalent amount of money hiring the unemployed to dig ditches across Florida and to fill them in again (ever see the film "Cool Hand Luke"?) We could hire the unemployed at minimum wage to paint yellow smiley faces on the bumper of every police car in America, or to count the number of pine needles in Yellowstone National Park. Because at least people would be earning money and spending it. The pine-needle-counters will at least still be paying their mortgage, buying food and clothing, and renting DVDs from Netflix after a hard day out in the Wyoming sun. And as Trane put it, the money doesn't know what it's spent on.

But once we've decided we're committed to spending the money, we might as well spend it on something productive that we want and can use. Basically, it turns into a twofer. (Oddly enough, if space aliens offered to use their nanotech to fix all our roads, bridges, and factories "for free," that wouldn't be nearly as good for the economy as hiring Cool Hand Luke to dig ditches. Because the aliens wouldn't be spending money....)

 

[Emperor_Gestahl]

Unfortunately, most the products weren't deployed productively -- the airplanes weren't used to transport goods and services, but instead were used to shoot down other airplanes and to be wastefully shot down themselves. The steel used to make tank engines wasn't used to improve the nation's rail transport system.

I mentioned before, but using planes to bomb other people's factories, and the enemy bombing yet other people's factories is economically helpful to anyone not getting bombed. Having the sole intact infrastructure in the 1st world certainly allowed us to pick up vast global slack in manufacturing once the demand for tanks etc was gone.

Everyone bought bonds then as well, because they believed in the war as righteous and necessary. Public and global support is not what it was then, hell politics isn't what it was then. do politicians do anything major nowadays with general public/global support? Trying to re-inflate a popped credit bubble born of widespread mortgage fraud and insane lending practices is not exactly a glamorous job that will be easy to sell. The world hasn't forgotten that our govt not only set the problem in motion but exacerbated it regularly up until 2008.

We've already doubled the deficits of the 30s (deficit-to-GDP), and we need to double down again if we want to reach WW2 levels.. How much can the Fed monetize without enraging the rest of the world and extinguishing all organic demand with the artificially suppressed yields?

Again, not a deficit hawk, I think we might as well try this, but we've only got half an economic theory and failure means a currency crisis.

 

[TraneWreck]

We've already doubled the deficits of the 30s (deficit-to-GDP), and we need to double down again if we want to reach WW2 levels.. How much can the Fed monetize without enraging the rest of the world and extinguishing all organic demand with the artificially suppressed yields?

Based on inflation, long-term bond rates, and the general confidence of our creditors, quite a bit.

This thread is literally packed with links to data sources that show the complete lack of any fact indicating that the deficit is currently a problem or will be in the near future.

 

[drkitten]

We've already doubled the deficits of the 30s (deficit-to-GDP), and we need to double down again if we want to reach WW2 levels.. How much can the Fed monetize without enraging the rest of the world and extinguishing all organic demand with the artificially suppressed yields?

Well, given that bond prices and yields are well below historical averages --- I think the Fed can "monetize" considerably more than we currently have.

I don't know how often this can be repeated. The market does not consider increased US debt levels to be a problem. The market is falling over itself to buy US securities, to the point where the market itself has depressed yields well below the historical average. The market considers US debt to be a better investment now than it was at any point during the roaring 1990s bull market.

As Trane put it, "You're screaming 'FIRE' in the middle of Noah's Flood."

Or as one of Trane's citations put it, "The sooner you abandon "orthodox" concern with budget balance and reassuring markets in the hopes of gaining their "confidence," the better."

Again, not a deficit hawk, I think we might as well try this, but we've only got half an economic theory and failure means a currency crisis.

Being concerned about this particular "failure" mode is literally irrational. You are standing in Barcelona, in the middle of the hottest June on record, talking about the dangers of not planning for glaciers. You are treading water in the middle of a shark tank and talking about the dangers of being savaged by a camel. You are trapped in an underwater cave with ten minutes left in your SCUBA tank and you're worried of dying of oxygen poisoning.

 

[Tippit]

Well, the Keynesian point -- and history backs him up on this -- is that the spending alone is the investment that will pay back the cost. We could spend an equivalent amount of money hiring the unemployed to dig ditches across Florida and to fill them in again (ever see the film "Cool Hand Luke"?) We could hire the unemployed at minimum wage to paint yellow smiley faces on the bumper of every police car in America, or to count the number of pine needles in Yellowstone National Park.

Who pays for this? The fallacy of Keynes, is that boosting aggregate demand is the only thing the matters. In reality, the money that is spent must first be expropriated from others, which has the unfortunate side effect of preventing them from spending their own money on things they really need, thus not stimulating the producers of things people really need, and not rewarding productivity. What about all of the limited man hours and natural resources wasted on digging useless ditches, and painting cars, or counting pine needles?

Because at least people would be earning money and spending it. The pine-needle-counters will at least still be paying their mortgage, buying food and clothing, and renting DVDs from Netflix after a hard day out in the Wyoming sun. And as Trane put it, the money doesn't know what it's spent on.

This is, to say the least, absurd. Not only are all of the above activities you mentioned completely useless and unproductive, they're also do nothing but make the people who have to perform them miserable, and waste valuable time in their lives. We would be far better off simply cutting people welfare checks, then forcing them do to unproductive things in order to earn some money.

Of course, if bank-sponsored multinational corporatism, unlimited government spending, waste, and fraud due in part to bankrupt economic philosophies like Keynes didn't put us in this position, most of these people wouldn't be so dependent to begin with.

But once we've decided we're committed to spending the money, we might as well spend it on something productive that we want and can use. Basically, it turns into a twofer. (Oddly enough, if space aliens offered to use their nanotech to fix all our roads, bridges, and factories "for free," that wouldn't be nearly as good for the economy as hiring Cool Hand Luke to dig ditches. Because the aliens wouldn't be spending money....)

You're neither smart enough nor honest enough to decide how to spend other people's money. Neither are politicians, nor bankers. The fact that we've delegated so much power to these two groups of parasites in our society is why we are where we are now.

 

[Tippit]

I mentioned before, but using planes to bomb other people's factories, and the enemy bombing yet other people's factories is economically helpful to anyone not getting bombed. Having the sole intact infrastructure in the 1st world certainly allowed us to pick up vast global slack in manufacturing once the demand for tanks etc was gone.

No it isn't. Engineered economic crises like we're experiencing now mostly serve to transfer wealth, not destroy it. But war literally destroys wealth, and should be avoided at all costs. Just because your neighbors house burns down only makes you relatively more wealthy. We are all interdependent. If you bomb a nation's factories, the world suffers.

We've already doubled the deficits of the 30s (deficit-to-GDP), and we need to double down again if we want to reach WW2 levels.. How much can the Fed monetize without enraging the rest of the world and extinguishing all organic demand with the artificially suppressed yields?

The Fed will monetize what it needs to service the exploding debt and roll it over, to the extent that foreign creditors like China stop lending to us.

Again, not a deficit hawk, I think we might as well try this, but we've only got half an economic theory and failure means a currency crisis.

Given that most of our debt is illegitimate, simply IOUs created out of thin-air by congress on behalf of foreign central banks and private banksters all over the world, we should default. We should categorize and identify our creditors, and systematically default on illegitimate public debts assumed by central bankers and greedy politicians in our name. The only other option is "austerity", which will be a disaster for the average person. Of course, since our industrial base has been dismantled over the past few decades, it will result in a recession or depression, but this is unavoidable at this point.

 

[drkitten]

Who pays for this? The fallacy of Keynes,

And here we have even more evidence that no rational person is concerned about the deficit right now.

Just Tippit.

 

[drkitten]

No it isn't. Engineered economic crises like we're experiencing now mostly serve to transfer wealth, not destroy it. But war literally destroys wealth, and should be avoided at all costs. Just because your neighbors house burns down only makes you relatively more wealthy. We are all interdependent. If you bomb a nation's factories, the world suffers.

So we add the law of supply and demand to the ever-growing list of economic concepts that Tippit doesn't understand.

No, bombing your neighbor's factory [for the same goods] makes you wealthier in absolute terms. It destroys a competitor, which reduces the amount of supply for the goods you produce, which in turn means that every widget you sell sells at a higher price (making you more wealthy in absolute as well as relative terms).

 

[Emperor_Gestahl]

The market considers US debt to be a better investment now[/URL] than it was at any point during the roaring 1990s bull market.[/i]

High yields in the late 90s was likely a result of that roaring bull market, not in spite of it. Yields are low now due to Fed QE and the fact that we've failed to juice the money supply. If we continue to fail in this the worry will become de facto default.

My concern is about that current failure. The monetary base is contracting despite our spending. The longer we stay here piling on debt without the intended result the deeper we sink.. The problem I think is that we're trying to revive credit and demand that never really existed in the first place. Fraudulent, unpayable loans turned our monetary base (and RE market) into an inflationary mirage, lauded by our blind government.

With no legitimate "peak" to "recover" back up to, we are faced with the task of blowing an entirely new "bubble" from scratch. Consumers were tricked into leveraging up the first time around, so it's no surprise they're not playing ball now that they know the economy is bad. unless something changes in a big way, a "lost decade" will be one of the rosier scenarios.

 

[drkitten]

High yields in the late 90s was likely a result of that roaring bull market, not in spite of it. Yields are low now due to Fed QE and the fact that we've failed to juice the money supply. If we continue to fail in this the worry will become de facto default.

Well, that's basically Krugman's argument (and before that, was Keynes') about the lost decade. If you can't make money from investment, why invest?

My concern is about that current failure. The monetary base is contracting despite our spending. The longer we stay here piling on debt without the intended result the deeper we sink.. The problem I think is that we're trying to revive credit and demand that never really existed in the first place.

Not really. Demand has always existed and more or less will always exist; the point of spending is not to re-inflate the housing bubble, but to keep basic demand (and credit) for ordinary goods going. Again, Cash-for-Clunkers provides a good example; by providing incentive for people to buy cars, it kept factories turning, salesmen selling, and salaries being paid.... which in turn meant that people could and would still afford to buy things like beer, toilet paper, video games, bookcases, and trips to Niagara Falls.

With no legitimate "peak" to "recover" back up to, we are faced with the task of blowing an entirely new "bubble" from scratch. Consumers were tricked into leveraging up the first time around, so it's no surprise they're not playing ball now that they know the economy is bad.

Why do we need a "bubble"? The whole point is to stop the deflationary spiral, not to create new hyperinflation. There's a reason that the Fed traditionally aims at 2-3% inflation per year; that's a good, stable, predictable growth (and money supply) target, enough to encourage investment but not enough to destabilize things. When people are afraid to invest their money --- because they get significant positive return just putting it in a cookie jar --- you have problems. But investment doesn't have to mean excessive leverage, and the whole point of the recent banking reforms is to encourage investment while discouraging excessive leverage.

 

[soylent]

I sure hope so; I don't think the US could withstand kicking the can and defering the recession once more.

I see businesses and business models that needs to go away being propped up. I see hamfisted attempts to keep housing prices levitating. I see the legalization of accounting fraud(the suspension of mark-to-market). I see demand being pulled forward by borrowing to boost GDP today at the expense of GDP tomorrow.

What I don't see is a recovery.

 

[Emperor_Gestahl]

But investment doesn't have to mean excessive leverage, and the whole point of the recent banking reforms is to encourage investment while discouraging excessive leverage.

On the individual level though, we've still got most of the old leverage. People stuck with the oversized mortgages, not having a printing press or bailout sugar daddies, have no choice but to pay down debt or default. Deflationary either way, and government attempts to encourage more borrowing won't change a thing for such consumers.

I've long thought that the only real way to generate inflation in this environment is a public bailout.. Bernanke's "helicopter" so to speak.. If Obama is going to be accused of socialism no matter what he does, why not some trickle-up economics? Cut regular checks to everyone under a certain income level.. If not for "social justice"'s sake then just because the rich are much more likely to "park" their money in bonds, commodities, and equities which does little good due to the very low velocity of that money.

Hell I'll do one better, why not just bail out teenagers? Hand out $20s in high school. It feels like work to them anyway, and it sure can't hurt attendance. The hawks say we're "shouldering the burden" on the children, if so why not just give children the money? No one can spend like a 16 year old, that ****'s not getting saved or stuck in a 401k I promise. Besides kids can't threaten to vote you out when it comes time to withdraw stimulus.

Read a bit more Krugman yesterday, and I understand why he/you feels we can spend more or less to our heart's content without worrying about yields, but.. If that's true, what's stopping us? We're still in deflation, what's taking the next stimulus so long? Why doesn't Obama just come out and say that deficits are no problem and we can spend as we please? Is pretending to listen to deficit hawks a critical part of the plan?

Spending is an area where the democrats might as well just plow forward, Obama's enemies have effectively painted themselves into a corner philosophically where there's nothing negative left to say or think about him. Fox, after all, couldn't manage an ounce more outrage if Obama waged war on Alabama or declared national puppy-kicking day.

So why all the pussyfooting if our borrowing situation is so robust as it appears to be? Also, why has apparently all of Europe taken an opposite stance to Krugman's? I'm willing to presume that Krugman is correct, but the ECB president has to have some reasoning beyond "pain for pain's sake" as Krugman puts it. Any thoughts on what their actual angle might be?

 

[drkitten]

On the individual level though, we've still got most of the old leverage. People stuck with the oversized mortgages, not having a printing press or bailout sugar daddies, have no choice but to pay down debt or default.

... or getting better jobs. In many cases, that would be "any job at all."

A lot of the "oversized mortgages" are nothing of the sort, but with unemployment at 10% and underemployment at something like 25% (I forget the exact number offhand), a lot of people who took out reasonable mortgages against reasonable expectations and then found themselves un(der)employed.

I've long thought that the only real way to generate inflation in this environment is a public bailout..

Public bailouts only work up to a point; although a better public bailout would certainly help. The problem is that we need to restore business production and sales.

But the real problem :

Read a bit more Krugman yesterday, and I understand why he/you feels we can spend more or less to our heart's content without worrying about yields, but.. If that's true, what's stopping us?

... is that forty Senate Republicans and a handful of Blue Dog Democrats. egged on by Rush, Glenn, and the Tea Baggers, are able to stall any sort of useful program. Obama isn't Emperor of America and needs the support of a majority on the House and a supermajority in the Senate to do anything. He's actually doing astonishingly well by historical standards -- health care and banking reform have been elements of the progressive agenda for decades and Obama's finally managed to pull them off.

So why all the pussyfooting if our borrowing situation is so robust as it appears to be? Also, why has apparently all of Europe taken an opposite stance to Krugman's? I'm willing to presume that Krugman is correct, but the ECB president has to have some reasoning beyond "pain for pain's sake" as Krugman puts it. Any thoughts on what their actual angle might be?

The cult of Reaganism, which has basically taken over government economists, since it plays so well to the banking community.

 

[drkitten]

I sure hope so; I don't think the US could withstand kicking the can and defering the recession once more.

Actually, "kicking the can and deferring the recession" is exactly what Keynesianism is all about. There's no way to prevent recessions; command economies don't work. The best we can reasonably hope to do is to mitigate them. In this case, "mitigation" would involve softening and extending the money supply, but demand will still be low for a while no matter what can be done.

The problem is that tightening the money supply will kick the can closer to us; it will lower demand and pull a second recession down on top of the first one.

What I don't see is a recovery.

What, you think the world is going to be permanently depressed? Of course there will be a recovery. And there will be another recession on the other side of the recovery.

 

[Emperor_Gestahl]

A lot of the "oversized mortgages" are nothing of the sort, but with unemployment at 10% and underemployment at something like 25% (I forget the exact number offhand), a lot of people who took out reasonable mortgages against reasonable expectations and then found themselves un(der)employed.

I say "oversized" because fraudulent demand was a major price driver in the housing market, even the people who could have paid those steep housing prices shouldn't have had to pay them in an organic market. Those honest, reasonable types were indirect victims of fraud and speculation.

[QUOTE... is that forty Senate Republicans and a handful of Blue Dog Democrats. egged on by Rush, Glenn, and the Tea Baggers, are able to stall any sort of useful program. Obama isn't Emperor of America and needs the support of a majority on the House and a supermajority in the Senate to do anything. He's actually doing astonishingly well by historical standards -- health care and banking reform have been elements of the progressive agenda for decades and Obama's finally managed to pull them off. [/QUOTE]

Well it's not "universal health care" like we were promised, I give Obama a C- on that whole debacle.. Not to mention he spent a LOT of time doing that while deflation is a much more pressing issue IMO. Bank regulation.. Yes, it's good but we'd not need it if we could stop the banks always tearing up laws they don't like (like glass-steagal).

I think Obama should get out there and start selling the notion of bigger deficits, drag Krugman along with him and try to explain the basic economics of the situation to the public. Don't just talk goals and projections and job creation, dig into economic theory and the reasoning itself.

After all the EU is going for austerity, I doubt the American public is really any better informed than the European masses.. Need the hearts and the minds for this one. Politicians always seem to content with the former.

I still think a state bailout that preserves the $100k garbageman situation is a terrible idea compared to simply dropping money on the general public. I'm serious that children would be the best recipients of direct cash distribution, working people given money may well pay down debt and shrink the money supply even more. Adults not in debt may just invest/speculate with any money they're given, while not deflationary that activity isn't terribly inflationary either.. parking it looking for a return does not conjure images of "velocity" which is critical. Kids are 99% guaranteed to spend spend spend.

Like I said before, just pay them to go to school, hell pay them for good grades or for credits earned or whatever.. Guaranteed spenders and it could help the graduation/attendance rates quite a bit.

 

[stilicho]

At least in theory, that's fairly easy. I can think of at least three ways (off the top of my head). Of course they'd need some fleshing out before they could be made into policy, but not that much.

a) Drop the corporate income tax rate by 10% in all brackets less than $500,000/year.

b) Create a 1% tax deduction/credit for all businesses employing fewer than 500 people.

c) Use the existing definition of "small business" as applied by the Federal government elsewhere (i.e. use the SBA's existing definitions).

I'd also add a higher exemption level for Sarbanes-Oxley compliance and a single centralised audit structure to avoid duplication (or endless replication) of its reporting requirements. It would also help to have a single department collect the data and documentation at a single point in time and distribute it to the auditors instead of picking intervals almost at random.

Harmonised taxation schemes might also help. There are too many jurisdictions each requiring slightly different information (netting or not netting bad debt is one example) and that costs businesses money to supply and support.

Incentives for implementing automated reconciliation solutions would also help. The company I work for did this on our own but the results are astonishing as we compare the closing intervals between those business units using it and those that don't.

There are a lot of "little" things that don't require outright tax cuts or increased spending that may assist companies trying to work their way through a persistent economic downturn.

Higher individual education incentives may also pay off in the long run. They tend to get people off the streets, off the unemployment rolls, and into programmes that ought to prepare them better for the changing nature of industry and commerce.

 

[stilicho]

Kids are 99% guaranteed to spend spend spend.

Children don't buy durable goods. Their spending habits also sometimes cause manufacturers to write down considerable inventories. Yesterday's Tickle-Me-Elmos and pet rocks are today's museum pieces.

 

[Emperor_Gestahl]

Children don't buy durable goods. Their spending habits also sometimes cause manufacturers to write down considerable inventories. Yesterday's Tickle-Me-Elmos and pet rocks are today's museum pieces.

Kids young enough to want fad toys aren't buying that stuff for themselves, I'm not suggesting we give the parents money. Teenage spending habits are likely less chaotic, and like I say there's almost no chance the money could be used in a deflationary or low velocity way as with adults.