The very interesting graph above is from a lengthy quote from Contrary Investor in this post at Mish’s place. The upper part depicts total U. S. credit relative to GDP. To my eye it appears to be a pretty fair illustration of compounding. Here’s the description of the bottom half:
The bottom clip of the chart is one you’ve seen a number of times from us and we believe quite important to what lies ahead. To the point, real final sales to domestic purchasers is GDP stripped of the influence of inventories and exports. What we’re left with is as good look at domestic only GDP and as you can see, the year over year change in terms of growth in the current cycle is the weakest of any initial economic recovery cycle over the time in which official numbers have been kept. Message being? We are seeing very weak aggregate demand, exactly as one would expect in a generational credit cycle reconciliation process.
I think there are two points to be made here. As you can see from the upper graph three years on and we have hardly begun the deleveraging process. That is hardly surprising. The Fed governors, two consecutive administrations, and the Congress have been thrashing around like carp on a gaff trying to avoid the deleveraging process. What will it take to get back to normal? Not more borrowing.
The second graph illustrates just how weak the domestic economy is. Read Mish’s entire post and, especially, the quote from CI. Their claim is that neither monetary nor fiscal policy are of any use in resolving the problems that lie before us.
I think it’s rather clear that the Powers That Be, cf. above, either don’t believe we are in a balance sheet recession and/or they don’t care whether we are or not. If you believe that we are, in fact, experiencing a balance sheet recession and if neither monetary policy nor fiscal policy will help us out, then the only two responsible objectives for any policy are a) to reduce indebtedness or b) to mitigate the misery that the deleveraging process entails and every policy should be considered by those standards.
So far we’re not doing very well.
This put you as diametrically opposed to Krugman et. al. No wonder you have been getting pasted over at OTB. 😉 After all, if consumers are deleveraging but the government is on a borrowing binge….
As Robert Shiller pointed out a week or so ago, reducing the debt, even in the near term, and fiscal stimulus aren’t necessarily in conflict. IMO this isn’t really a partisan or ideological issue. Not when both sides have yet to come to terms with the real scope of the problem.
This morning I received an email (at least it beats frank mail) from my Congressman who described in glowing terms his plan to reduce the deficit by $2 trillion over 10 years. Since in order merely to stabilize our fiscal situation we need to reduce the the deficit by $7 trillion over ten years, I wasn’t particularly impressed. I’ll probably write him to tell him so for what that’s worth.
TPTB don’t care what kind of recession we’re in as long as they get theirs. Thus $6.2 trillion (that we know of) to bail out the banks & related industries while everyone else is expected to get by on food stamps and UEC, if you’re lucky enough to qualify.
Here’s the most relevant quote on the topic, from Mervyn King, Bank of England Governor:
Why move all that debt onto the public sector balance sheets if it was going to sink whole countries?(That’s a rhetorical question, BTW.)
oh, and the $6.2 trillion just refers to what the US has done. I don’t know that nyone has attempted to work out the world-wide numbers.
I’m curious how one can claim we need to deleverage while at the same time borrowing more via the government. It seems to be working at cross purposes.
So what’s the prescription? More deleveraging? By whom – consumers, banks, businesses, government, all of the above? How do we get past this mess?
Andy,
One way to think of it is we had one Hell of a party, now we wake up the next morning with the hang over, and that is the un-fun part.
Of course, since the party was years if not decades long, the hangover could be just as long. There might be policies that could work like aspirin, but my guess is that getting those policies put in place will be near impossible given the current political climate and various special interests (who are still partying hard, they woke up and had a few more shots of Jack and kept right on going).
Steve,
Not that I don’t like your answer, but I’m looking for specific policies, if any exist.
Andy,
Sure, they exist. I found the article by Shiller that mentioned, I think. He discusses a balanced-budget multiplier. Basically the idea is that revenue and spending both go up dollar-for-dollar. So if we have another $500 billion in new spending we need $500 billion in new revenue (i.e. taxes). The multiplier is 1.0 in that case (generally speaking) and since the tax revenues are diffused across all currently employed workers and the spending could, in theory, result in more jobs for the unemployed (i.e. it is much more concentrated) then that could be enough to get things moving again.
It is an interesting idea, one I hadn’t heard of before (apparently it was a notion floated by Paul Samuelson in 1947 when there were fears of a return of the depression when WWII ended), but it sounds like it might work….maybe. But will we ever get it to work. Oh fuck no. Republicans will hate it because of tax increases at the very least. Democrats might have problems with it, but lately they’ve been very ineffectual at dealing with Republican intransigence.
Other things we could look at are dealing with the governments huge fiscal obligations as well. The balanced budget multiplier proposal isn’t bad for a short run solution, but it leaves in place our longer run problems (and no, we wont be dead when those problems arise). And Democrats will hate any attempt to fix those.
We are, in a word, fucked.
Here is your set of viable policy options:
Link
I was the designated driver. 😉
A lot of what I’ve been writing about for the last several years here have been prescriptions for dealing with the problems that confront us.
We have a financial sector that’s about three times the size of the one we need and compensated beyond the dreams of avarice. We have subsidized it to the tune of multiple trillions in just the last few years.
We have a $1 trillion healthcare sector for which we’re paying $2 trillion, much of it in the form of government spending.
We have a vastly outsized military and aerospace sector which is, ironically and outrageously, providing a good deal of our exports.
The educational sector is obscene. Costs in higher education have far outstripped anything rational.
The multiple by which the pay of top management in large corporations exceeds ordinary employees’ is beyond absurd and resembles nothing else anywhere in the world.
It’s hard to know where to stop.
The Shiller proposal of increased taxes and spending seems to flounder on this assumption: “The currently employed, who will see their taxes go up, will likely not cut their expenditures as much because they are habituated to their current level of consumption.”
With flat/negative income growth and non-existant levels of savings, increasing taxes would seem to necessitate additional borrowing, additional leverage and perhaps bankruptcy. There appears to be no recognition in this piece of the influence of a balance sheet recession. Its a different diagnosis.
What has the greater multiplier effect, giving each person a thousand dollars, with the freedom to spend or save it. Or taxing each person a thousand dollars, to be paid either by borrowing or cutting spending elsewhere?
Andy, bankruptcy is the solution to insolvency. I was reluctant to recommend it before, because I thought it would drag down more than it saved in the drama of the moment. But we’re years into recovery. The government shouldn’t be pumping money into failing banks, and it should actually (through the FDIC) be forcing banks to foreclose/realize losses and value. If NewYork/ NewJersey want to go a different direction, FDIC should start cutting its losses.
I think this is a difficult political solution, but bankruptcy is really about a fresh start. The country seriously needs one.
“I think this is a difficult political solution, but bankruptcy is really about a fresh start. The country seriously needs one.”
The costs resulting from a bankruptcy far outweigh what we would gain.
Dave-“I think there are two points to be made here. As you can see from the upper graph three years on and we have hardly begun the deleveraging process. That is hardly surprising. The Fed governors, two consecutive administrations, and the Congress have been thrashing around like carp on a gaff trying to avoid the deleveraging process. ”
Does this imply only public debt, or do you still favor some kind of mortgage relief? What is striking here is that both public and private debt hit record levels. In the 30s, we started out with low levels of public debt. We swapped private debt for public debt. We then slowly worked down the debt that generated up until 1980 when we started ignoring our debt. We now start with such levels on both sides of the ledger that both need deleveraging. This is new fo rthe US.
Steve
PD Shaw,
Like Dave and others, I would like to see the big banks broken up. They are probably not solvent currently as it is.
Both. Household debt is dragging down the economy and several generations of profligate federal fiscal policy has narrowed the policy alternatives for coping with it.
“Household debt is dragging down the economy”
How do we get those folks (mostly at the tippy-top, right?) to deleverage? Harsh language?
I’ve already provided an answer for that—essentially a combination of capping the mortgage interest deduction, mark to market, and debt forgiveness at sale.