New Normal

Recommended reading, economic debates, predictions and opinions.

What is the new normal?

The economy will get better
16
33%
The economy is perfectly fine, on balance
10
21%
The economy has yet to bottom
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46%
 
Total votes: 48

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parvus
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New Normal

Post by parvus »

Some pieces I've been reading, but then I've always been of a bearish nature.

A Permanent Slump?
Spend any time around monetary officials and one word you’ll hear a lot is “normalization.” Most though not all such officials accept that now is no time to be tightfisted, that for the time being credit must be easy and interest rates low. Still, the men in dark suits look forward eagerly to the day when they can go back to their usual job, snatching away the punch bowl whenever the party gets going.

But what if the world we’ve been living in for the past five years is the new normal? What if depression-like conditions are on track to persist, not for another year or two, but for decades?

<snip>
Mr. Summers began with a point that should be obvious but is often missed: The financial crisis that started the Great Recession is now far behind us. Indeed, by most measures it ended more than four years ago. Yet our economy remains depressed.

He then made a related point: Before the crisis we had a huge housing and debt bubble. Yet even with this huge bubble boosting spending, the overall economy was only so-so — the job market was O.K. but not great, and the boom was never powerful enough to produce significant inflationary pressure.

Mr. Summers went on to draw a remarkable moral: We have, he suggested, an economy whose normal condition is one of inadequate demand — of at least mild depression — and which only gets anywhere close to full employment when it is being buoyed by bubbles.
Well, that's the neo-Keynesian approach. In today's NYT, Greg Mankiw has a somewhat different take:hysteresis.
The unemployment rate is about three percentage points higher than it was seven years ago, before we got the first whiffs of the economy’s financial problems. The employment-to-population ratio is about five percentage points lower, and it has not recovered much at all since the trough of the recession.

Some of the decline is attributable to an aging population. As more members of the huge generation of baby boomers retire, the employment-to-population ratio naturally declines.

But that is only a small part of the story. A relevant measure is the employment-to-population ratio for those in the prime working age group —25 to 54. This statistic also shows the recession’s lingering effects: the ratio declined to about 75 percent from 80 percent over the course of the recession, and has recovered to only about 76 percent today. So we have recovered only about a fifth of what we lost during the downturn.

<snip>
The most arresting piece of economic data is in the number of weeks the average unemployed person has been looking for work — statistics that have been compiled since 1948. Until recently, the largest such figure was 22 weeks, in the aftermath of the deep recession of 1981-82. In the most recent recession, however, the average reached about 41 weeks, and it still stands at more than 36 weeks. In other words, after more than four years of recovery, the economy still has an unprecedented number of long-term unemployed.

Some economists believe that long-term unemployment leaves permanent scars on the economy — a theory called hysteresis. One possible reason for hysteresis is that the long-term unemployed lose valuable job skills and, over time, become less committed to the labor market. In some ways, perhaps, they should be thought of as effectively out of the labor force. If this theory is right, the labor market today may have less slack than the unemployment rate and the employment-to-population ratio suggest. Policy makers at the Fed may have to accept that lower employment is the new normal.


To bracket this -- lack of (consumer) demand on the one hand, lack of (labour) supply on the other, there's this: When Wealth Disappears.
From the end of World War II to the brief interlude of prosperity after the cold war, politicians could console themselves with the thought that rapid economic growth would eventually rescue them from short-term fiscal transgressions. The miracle of rising living standards encouraged rich countries increasingly to live beyond their means, happy in the belief that healthy returns on their real estate and investment portfolios would let them pay off debts, educate their children and pay for their medical care and retirement. This was, it seemed, the postwar generations’ collective destiny.

But the numbers no longer add up. Even before the Great Recession, rich countries were seeing their tax revenues weaken, social expenditures rise, government debts accumulate and creditors fret thanks to lower economic growth rates.

We are reaching end times for Western affluence. Between 2000 and 2007, ahead of the Great Recession, the United States economy grew at a meager average of about 2.4 percent a year — a full percentage point below the 3.4 percent average of the 1980s and 1990s. From 2007 to 2012, annual growth amounted to just 0.8 percent. In Europe, as is well known, the situation is even worse. Both sides of the North Atlantic have already succumbed to a Japan-style “lost decade.”
Arguably, post-1980s prosperity (or at least the appearance of it) was bought through a credit boom, encouraged by the taming of inflation, that boosted consumer confidence in borrowing at the same time as it shifted them to looking at equities -- or worse, real estate -- aided by banks seeking to bolster their bottom line by departing from the previous norm of tight credit. I think this is what people mean by "financialization."

One can take this any number of ways, according to the four schools of financial throught. For the neo-Keynesians, it is a lack of effective demand, whereby credit makes up for the wage increases workers enjoyed under the post-war Fordist system (remembering that Ford paid its workers enough so that they could actually buy the products they made).

For the Chicago theorists of monetarism, there is no problem. There are no inflationary pressures; money is easy. In some sense, the economy is at equilibrium, and the appetite for risk assets has accordingly adjusted itself.

For the Austrians, we still have to work through the long, long cycle of speculation that resulted in overproduction without adequate reward, defying the iron law of the time-preference of money -- in other words, profit. In a way, this too is an equilibrium argument, in the sense that there will be no capital expansion until there are ready profits to be made.

Strangely enough, some Marxists would agree. Other Marxists would fall into the neo-Keynesian underconsumption camp and call for greater wage equality. But these particular Marxists would say that, unable to make an adequate rate of profit, capital frequently destroys value, till it's worthwhile get out of bed again ... not dissimilar from the Austrian argument.

These are highly stylized positions on my part (call them caricatures if you want), but there is something very different from the period 1945 to 1975 (one might see WWII as an episode of deliberate value destruction, however, as opposed to the Depression being a period of passive capital destruction) and the period 1975 to the present. I would characterize the period 1975 to 1995 as a period of stagnation. Something changed briefly during that time, but it ended around 2000 and so more of the same.

For many of us, the late 1970s, the early 1980s, the early 1990s, were pretty miserable. Then there were brief bouts of euphoria. I'm inclined to think the periods of general disenchantment are more the norm, and that, in line with Rogoff and Reinhart, it will take a long time to work off -- though not necessarily for the reasons they specify.
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Re: New Normal

Post by ghariton »

The Economist's forecasts as of November 2013
20131109_int300.png
As you can see, while economic growth is not forecast to be spectacular, it won't be a disaster either.

We are still coming out of a nasty recession, and we have a whole lot of structural adjustments to cope with as well. This takes time. But of course we are an impatient bunch -- understandably so if we are unemployed, less so if we are merely given to fretting -- and we don't have a longer term perspective. Indeed, I suspect a "recency" bias, i.e. undue influence of recent events relative to the historic trend, and "saliency", i.e. dramatic events influence unduly.

Looking back on this in a couple of decades, it will look like a blip, much the way the Great depression looks now when we cast an eye back on historic economic growth.

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Re: New Normal

Post by ig17 »

parvus wrote:A Permanent Slump?
Here's the talk by Larry Summers that prompted Krugman's column:

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Re: New Normal

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ghariton wrote:Looking back on this in a couple of decades, it will look like a blip, much the way the Great depression looks now when we cast an eye back on historic economic growth.
Aye, but don't forget the behavioural influence. You and I are almost a generation apart, you starting off as a war refugee in Paris in 1948 only to see the world blossom from devastation as you matured, me, born 15 years later, to see that blossom slowly fall, with the plant never quite crawling as high up the trellis as it used to.

Which may lead to an argument about relative deprivation and its consequences on investment behaviour.
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Re: New Normal

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Panglossian claptrap.
ghariton wrote:We are still coming out of a nasty recession...
Dream on ducky. Many are coming but few are coming out.
ghariton wrote:...and we have a whole lot of structural adjustments to cope with as well.
Yeah, like for example rearranging the statistical deck-chairs so that 25% unemployment looks like 6% unemployment.
ghariton wrote:But of course we are an impatient bunch -- understandably so if we are unemployed, less so if we are merely given to fretting...
Is that a royal "we". To which group do you belong?
ghariton wrote:...and we don't have a longer term perspective.
I agree, you don't. You appear to want to go backwards.
ghariton wrote:Indeed, I suspect a "recency" bias, i.e. undue influence of recent events relative to the historic trend, and "saliency", i.e. dramatic events influence unduly.
Gobbledygook, but anyway let's see, recently the US president has yet again publicly displayed his overwhelming incompetence vis-à-vis his flagship health-care policy, which is a mess and is quite likely to undo any economic recovery "The Economist" thinks is on the horizon. The Canadian political establishment has become a three ringed circus (Ford/The Senate et al) and gives a lie to the idea that Nero's Lyre is lost. The conspiracy to suppress truth by global moneyed and power elites has become so transparent that Putin is beginning to look like Robin Hood - if you don't believe me ask Edward Snowden.
ghariton wrote:Looking back on this in a couple of decades, it will look like a blip, much the way the Great depression looks now when we cast an eye back on historic economic growth.
When I look back on the period between 1914 to 1945 I see a series of terrible tragedies which effected the livelihoods of millions. The Great Depression was part of this series; it was not a "blip". That's one of the problems with people like George, who think of history is a discipline that can be graphed.

ISTM we are on the cusp of a global societal change the likes of which we haven't seen since Anarchists ran around Europe shooting Hapsburgs. The thought of the likely change horrifies the TPTB (and George) who are pulling out all the stops to prevent it from happening. We are in a war with ourselves and have been for a decade. The casualties of this war are the poor and every day there are more of them - as ever. Almost everything we see and hear now is propaganda fed by one side or another in this central conflict. This is the "New Normal" and it will remain so until all the toxins have been lanced from the wound that is today's reality. My guess is it'll take at least another 100 years.
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Re: New Normal

Post by newguy »

Che is that you?

Just watched a show called Continuum about the future, time travel and evil corporations. Canadian made as well.

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Re: New Normal

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I'm not sure that Che accomplished that much.

But there are important issues, such as the changing nature of statistics (for instance, the counting of the unemployed, as well as hedonic adjustments).

There is also the nature of credit. The Canadian left blames the banks for lending more than they should have. Solution: nationalize the banks. To what end? To lend even more?

Can I be Marxist and Austrian at the same time. (Schumpeter, I think, was.) From an Austrian perspective, there's been too much speculation, thanks to easy money. From a Marxist perspective there's been overproduction, reducing profits with unsaleable inventory.

I'm more inclined to believe the credit story, but I think overproduction plays a role, just from anecdotal experience.

Th economy wouldn't look as great if we had 1950s levels of credit expansion. And our consumption would be far less. Would it be sufficient?

That's a question I have to ask the Keynesians and the monetarists, who tend to look at demand and try to pump up consumption. Are we really in an underconsumption crisis? How much further should credit be expanded? How will it be made good?

I don't have an answer, just a sentiment that the Austrians and Marxists are right, that capital has overexpanded, and there will be value destruction to get things profitably moving again. Or as Schumpeter said, creative destruction.

How, I don't know. In the 1990s, the tech industries were creatively destructive, eliminating such things as typewriters and letter by post. But they were enormously destructive of capital too, with half-baked ideas that never should have left the oven.

Where are we now? Am I underconsuming smartphones? I have no use for them. I still type with 10 fingers on a keyboard. Lots of us do. But I doubt keyboards will lead growth ahead.

Am I underconsuming food? No, I eat what I've always eaten. Am I underconsuming housing? No, I'm comfortable where I am.

So where am I underconsuming?

Oh wait, those businesses won't expand until they can identify things that I don't have that they could sell me but which I don't particularly want.

As I suggested above, perhaps this is a crisis of overproduction rather than underconsumption. Capitals get ahead of themselves to secure a rate of profit -- condo building -- and sometimes the state, as the "executive committee of the bourgeoisie," facilitates their progress, through low interest rates. Which capitals should the executive committee now favour? Any or all? (After all, it's capital that creates jobs.) :wink:
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Re: New Normal

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mudLark wrote:Almost everything we see and hear now is propaganda fed by one side or another in this central conflict.
There's a conspiracy theory thread kicking around here somewhere. I'll bump it up for you if you like.

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Re: New Normal

Post by Shakespeare »

Y'know, despite the worry about wealth concentration in the Western economies, even the relatively poor now (excluding those unfortunates on the streets) live far better thanks to technology improvements than we did in the middle class even in the 1960's.
Sic transit gloria mundi. Tuesday is usually worse. - Robert A. Heinlein, Starman Jones
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Re: New Normal

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Gazing into my ol' crystal ball I don't see any speculation by 'the thinkers' about what's to do when the gummint of China pulls the trigger and buys us out - perhaps not in my time (the Chinese are noted for plots and plans that stretch for generations) but they already own a goodly chunk of the US economy in thrall and could probably easily bring "us" do our knees by simply calling the notes they already hold. Could it be one of those 'don't mention it and perhaps it will go away' thingamabobs ? - and eventually our New Normal ?
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Re: New Normal

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Shakespeare wrote:Y'know, despite the worry about wealth concentration in the Western economies, even the relatively poor now (excluding those unfortunates on the streets) live far better thanks to technology improvements than we did in the middle class even in the 1960's.
Yep, but this may be the best it gets.
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Re: New Normal

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parvus wrote:...hedonic adjustments...
Which soon, using the deliberately confusing label "chained CPI", will further impoverish the impoverished.
parvus wrote:Would it be sufficient?
No! Without obscenely high returns and growth rates the giant vampire squids will all shrivel up and die.
parvus wrote:Are we really in an underconsumption crisis?
Yes, just ask a giant vampire squid.
parvus wrote:How will it be made good?
Perhaps it won't be. Maintaining a constant state of crisis and tension is great for the media, a wonderful excuse of eroding personal freedoms and is a good way of keeping the nouveau plebeians out of mischief.
parvus wrote:After all, it's capital that creates jobs.
Capital is also essential to the destruction of jobs. :wink:
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Re: New Normal

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ghariton wrote:
mudLark wrote:Almost everything we see and hear now is propaganda fed by one side or another in this central conflict.
There's a conspiracy theory thread kicking around here somewhere. I'll bump it up for you if you like.

George
No thanks. I'll risk being labeled a conspiracy theorist, rather than smug and naïve.
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Re: New Normal

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mudLark wrote:George
No thanks. I'll risk being labeled a conspiracy theorist, rather than smug and naïve.[/quote]
Given that this is a financial forum, I wonder if you would spell out the investment implications of your world view, especially for DIY investors.

Gold bullion?

Private security forces?

Rifles and ammunition?

Ownership of an isolated island?

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Re: New Normal

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More products of the conspiracy to hide how bad things really are.

[url=
http://www.ft.com/intl/cms/s/0/072486ac ... z2moEJbTsC]Financial Times[/url]:
Ministers from around the world sealed the first global trade deal in a generation on Saturday in a move hailed as a tonic for both the global economy and the battered credibility of the World Trade Organisation.

<snip>

Business groups immediately praised the trade facilitation deal as a needed stimulus for the global economy. The International Chamber of Commerce estimates it will lower the cost of doing trade by as much as 10-15 per cent and add $1tn to global output.
Meanwhile, back in the U.S.: New York Times:
After years of frustrating fits and starts in the wake of the financial crisis and the Great Recession, the United States economy finally appears to be generating jobs at a healthier, more sustainable pace that many analysts now think will continue into 2014. The official unemployment rate fell in November to its lowest level since 2008.
[url=
http://www.forbes.com/sites/kitconews/2 ... -analysts/]How about the rest of the world?[/url]
In its report, the OECD said that global growth is expected to grow by 3.6% in 2014, up from 2013’s estimated growth of 2.7%. Although the global economy is poised to move beyond the post-crisis lethargic growth, the organization adds that growing risks in large emerging market economies (EMEs) and underlying fragility will continue to weigh on growth in the new year.

<snip>


Breaking down the OECD’s forecast: the U.S. is expected to grow by 2.9%, up from this year’s GDP forecast of 1.7%; the euro area GDP is expected to hit positive growth of 1.0%, up from expected negative growth of 0.4% in 2013 – this will be the second year of negative growth for the European economy; Japan’s economy is expected to grow 1.5% in 2014, slightly down from this year’s expected growth of 1.8%; China’s economy is expected to grow 8.2% next year, up from this year’s expected growth of 7.7%.

The OECD’s outlooks are relatively in-line with forecasts from other banks. BMO Capital Markets is expecting the U.S. economy to grow 2.7% from this year’s estimated growth of 1.6%. BMO expects global growth to hit 3.6% in 2014, from this year’s forecast of 3.0%.

<snip>

RBC economics expects the global economy to grow by 3.5% in 2014, up from estimated growth of 3.0% this year. Looking at the U.S. RCB expects GPD to grow by 2.6% next year, up from this year’s expected growth of 1.6%. Europe’s GDP is expected to grow by 1.0% in 2014 after expected negative growth of 0.4% this year.
Liars, all of them!!!!

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Re: New Normal

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As you know, there are lies, damned lies and economic models. :wink:

In any case, 3% growth is treading water -- better than drowning, but ...
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Re: New Normal

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parvus wrote:In any case, 3% growth is treading water -- better than drowning, but ...
Latest U.N. projections to 2050 imply a world population growth rate of 0.3% per annum. If we really manage to achieve 3.6% growth per annum in GDP growth, that's an increase of 3.3% per capita per year. That's pretty good, especially if you look at the long term historical record.

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Re: New Normal

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From OECD:
Over the next half century, the unweighted average of GDP per capita (in 2005 PPP terms), is predicted to grow by roughly 3% annually in the non-OECD area, as against 1.7% in the OECD area. As a result, GDP per capita in the poorest economies will (in 2011) more than quadruple (in 2005 PPP terms), whereas it will only double in the richest economies.

<snip>
Despite this fast growth among “catching-up” countries, the rankings of GDP per capita in 2011 and 2060 are projected to remain very similar. Even though differences in productivity and skills are reduced, remaining differences in these factors still explain a significant share of gaps in living standards in 2060.

Additionally, in a few European OECD countries and some emerging economies differences in labour input will also continue to explain a sizeable share of the remaining income gaps. Indeed, for some European countries, where ageing is more pronounced and/or older-age participation rates are low, these factors are enough to cause a widening in the income gap with the United States, despite continued convergence in productivity and skills levels.

Once the legacy of the global financial crisis has been overcome, global GDP could grow at around 3% per year over the next 50 years. Growth will be enabled by continued fiscal and structural reforms and sustained by the rising share of relatively fast-growing emerging countries in global output.
Growth of the non-OECD will continue to outpace the OECD, but the difference will narrow over coming decades.
The next 50 years will see major changes in the relative size of world economies. Fast growth in China and India will make their combined GDP measured at 2005 Purchasing Power Parities (PPPs), soon surpassing that of the G7 economies and exceeding that of the entire current OECD membership by 2060.
Notwithstanding fast growth in low-income and emerging countries, large cross-country differences in living standards will persist in 2060.
In the absence of more ambitious policy changes, imbalances will emerge which could undermine growth.
So what does this leave us with? Anemic OECD growth. Higher deficits/programme cuts for unfunded health/pension liabilities. A need to import immigrants to maintain taxpayer/taxtaker ratios (in health care and pensions). Continuing displacement of "discouraged workers" thanks to "sticky wage" expectations, leading to higher social service bills, early takeup of social security/medicaid benefits, et al.

But one model is as good as another, especially if both are made by the OECD. :wink:
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Re: New Normal

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ghariton wrote:I wonder if you would spell out the investment implications of your world view, especially for DIY investors.
This past weekend I heard an interview (Fareed Zakaria GPS) with Alan Greenspan. I was surprised to hear that his view is now much the same as mine, especially when he stated that: "The level of uncertainty in the long-term future [of the markets and the economy] has never been higher." He stuck with this pessimistic outlook throughout the interview, despite the usual indignant protestations of the interviewer, as he explained why corporations are profitable but the economy is stagnating. He was also quite candid in his opinion that the US Federal Reserve Bank is now trapped; that if it tapers or removes ZIRP in the foreseeable future then a market response will be "...outside the limits...", which I took to mean will have unacceptably negative consequences on the markets, the economy and possibly [in my view] world peace. This interview was further evidence of the Greenspan volte-face, which began when he admitted before congress that his brand of smug naivete had led to him not taking timely and appropriate actions that might have mitigated some of the effects of the 2008 financial crisis.

Like Alan Greenspan it is my "world view" that for the foreseeable future "investing" (the art of using capital to increase capital and ultimately to create an income) successfully will become increasingly difficult if not impossible for the average individual. Not only because "The level of uncertainty in the long-term future [of the markets and the economy] has never been higher."; but also because neither has the competition for carry - ever - and because just about everything to do with making money is now so "rigged" by insiders. The number of insider parasites stealing a piece of your action is growing like a cancer as the relative amount they steal multiplies weak returns by minus one; the amount of carry available to the average investor, regardless of the investment or risk, just keeps on contracting because the system is so rigged to pay an increasing amount to the insiders first. This reflects a very different paradigm to the one experienced by many so-called "DIY investors" during the thirty-five (or so) year period that began to end in 2007/08. During this earlier period anyone with a pulse could call themselves an "investor" because using capital to increase capital and ultimately to create an income was extremely easy. IMO this is no longer the case, and I don't believe will be for my remaining lifetime or that of most boomers.

Beyond the obvious limits to growth, the basic reasons I believe this period of global economic contraction/stagnation is going to continue for a very long while is simple: 1) because the technological and economic conditions needed for a higher level of organic economic growth to take root cannot occur until we have fully integrated into our thinking (and our doing) all the technological and economic facts and techniques we have acquired during the amazing expansion of past 50 years; 2) because I believe far too much future capital/income has been expended in the past 15 years trying to bail us out from the excesses of this expansion (IOW we, especially in the developed world, are collectively far too indebted); and 3) because of growing income inequality - as most of the planet's wealthier countries continue to experience an ongoing stagnation of median household incomes, choking off demand for consumer goods and services.

There are lots of fanciful tricks that central bankers can use (and are using) to try to stimulate the economy, and/or fake growth, but at the end of the day we probably all know that these tricks will mostly only result in more financial bubbles. ISTM the serial-bubble approach to running the economy, that has increasingly been our reality for the past half century, is failing most and only benefits the very few. If we hope to make people responsible for investing and funding their own retirements in the future we need to find a more stable way of running the global economy and the markets.

Unfortunately though, for the foreseeable future it appears we are going to be forced to continue to accept that the proponents of a particularly inefficient and cumbersome set of economic/capitalistic ideologies are managing the markets and the global economy. The ideas they represent are a witches brew of ideas from Ayn Rand, Bretton Woods and Keynesianism which were individually fine ideas for their times, but which methinks have been corrupted beyond recognition by the many powerful vested interests standing in the way of any meaningful change.
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Re: New Normal

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Thank you for setting out your views coherently and in detail. I find this very useful, and will reflect upon what you wrote.

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Re: New Normal

Post by Shakespeare »

There's an aphorism that states "something that can not go on, will end". If the Fed can not end bubble blowing by itself, the implication is that an external trigger - say, a failed treasury auction or possibly a war - will do so catastrophically. Since such externalities are unpredictable, it is difficult to see what measures could be taken to protect oneself (other than owning a house, a rifle, and lots of ammo. ;-) )
Sic transit gloria mundi. Tuesday is usually worse. - Robert A. Heinlein, Starman Jones
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Re: New Normal

Post by ghariton »

Shakespeare wrote:If the Fed can not end bubble blowing by itself, the implication is that an external trigger - say, a failed treasury auction or possibly a war - will do so catastrophically.
Or the balloon/bubble can develop a leak and deflate with a whimper, not a bang. I personally still think that the most likely solvent will be inflation, quietly eroding our debts, but also our assets, and for the retired, our lifestyles..

But I agree that the uncertainty is huge. While we can build plausible scenarios, the implications vary so wildly that it is difficult to design "robust" strategies that will do well across different scenarios. At the end of the day, I pick out the two or three risks that I find most worrisome, and try to protect against those.

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Re: New Normal

Post by Shakespeare »

I don't think a general financial panic is an implausible scenario - possibly leading to another Great Depression - but don't see how to protect against it other than with GoC bonds. GICs may also be all right.
Sic transit gloria mundi. Tuesday is usually worse. - Robert A. Heinlein, Starman Jones
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Re: New Normal

Post by parvus »

Shakespeare wrote:There's an aphorism that states "something that can not go on, will end".
That was Ben Stein's father, Herb, a Nixon advisor.
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Re: New Normal

Post by parvus »

Shakespeare wrote:I don't think a general financial panic is an implausible scenario - possibly leading to another Great Depression - but don't see how to protect against it other than with GoC bonds. GICs may also be all right.
A general financial panic -- money under the mattresses -- would certainly accelerate the trend towards deflation (unlike George, I think the balance of probabilities tips towards deflation rather than inflation; a fund manager I recently heard notes that the real Fed funds rate is -0.2%) which would make fixed income the investment of choice.

We can talk about asset bubbles, but the one that concerns me is credit bubbles. George, rightly, has pointed to the potential impact of Basel III, with higher capital reserves. The financial crisis was primarily a liquidity crisis rather than a solvency crisis -- what with corporations not able to roll over their short-term borrowing. And George has mentioned possible perturbations in the corporate bond market and I believe repos.

So liquidity or solvency? If it's simply liquidity, tapering could mean a soft landing. If it's solvency, well that depends on Basel III. Financial institutions probably (fingers crossed) won't fail. But credit will contract, which is bad news for homeowners, car lessess, students on loan and some small businesses.

Not quite a Great Depression, since large-caps are still sitting on plenty of cash, but a reprise of the Great Recession and a compression of low-wage and some medium-wage jobs, since these were the jobs that grew with the "green shoots" of the recovery.

That puts housing prices on the firing line, since they are leveraged, autos, since they are leveraged, and education, since it is leveraged.

With small business, it depends on the source of capital: leverage or extended family savings.

Some initial thoughts. I agree with many of mudLark's assessments, though for perhaps different reasons.

The post-war boom was a fluke. It could easily have turned the other way, as after WWI, which, except in the United States and perhaps Canada, saw both the victors and the vanquished mired in economic situations below their pre-war peaks, albeit with different trajectories: Inflation in Germany, deflation in Britain and France.

In the post-war period, the Marshall plan proved to be of great Keynesian utility, and North America benefited from the economic colonization of stricken Europe as well as the stimulus of Cold War spending. Cheap oil certainly helped as well as pent-up consumer demand (diverted both through rationing and "patriotic" savings -- nothing to buy, might as well buy a war bond.)

What was the trigger? It wasn't just OPEC. It was that during the Vietnam War, the U.S. was living beyond its means. The chickens came home to roost with Bretton Woods. The taxes that weren't paid during the 1960s were exacted in the income stagnation that has persisted since then, masked by risky credit expansion.

(Hmm, there's a research project here.)
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