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Posts Tagged ‘US Economy

Stagflation and pretty graphs?

For two decades after the end of WWII, economists, bureaucrats and politicians were pretty sure that they’d nailed the problems of controlling a capitalist economy.

The ruling theory was Keynesianism, named after the famous economist John Maynard Keynes, whose key insight in the 1930’s was that in times of economic recession, and especially depression such as The Slump of the 1930’s, governments should not cut back on their spending but increase it.

Prior to that governments had always taken the same attitude towards a shrinking economy that households and businesses did: you cut spending in line with your falling revenues, tax in the case of government. Keynes argued that this was the wrong thing for governments to do; they were different because they controlled the creation of credit so debt was not the same threat to them. They could go into debt, perhaps quite a lot of debt, and keep spending money to keep the economy afloat until the private sector came out of its shell and started investing and spending again. The idea was not so much to inflate the economy as to stop a blackhole effect where the shrinkage fed on itself.

At least in the USA under FDR from 1930 on, and here in New Zealand under the First Labour government, the theory seemed to work although there were a few problems with the argument in that period:

  • The NZ economy was already recovering by the time Labour gained power in 1935 and its Finance Minister Walter Nash, although pushing big increases in spending, never let NZ go into the sort of debt Keynes proposed.
  • The US recovery stalled completely in 1937, with unemployment rising to 17% again. FDR’s own Secretary of the Treasury was appalled at the result after so much money had been blown. In the end it was the industrial powering up for WWII that got the economy growing and flattened unemployment.
  • Australia and Britain simply never took the Keynesian approach, yet there was no evidence that their depressions were any worse, nor their recoveries any slower than those of the US and NZ.
  • In 1946 Keynesian economists were terrified at the prospect of eleven million military men returning home to a nation where the government was already cutting spending in the form of ending huge military contracts for tanks, planes and guns. Their fears grew when a newly installed Republican House and Senate promptly cut spending even further in 1947. And from a GDP approach you could also see their point as it contracted by an incredible 11.6% in 1946 and another 1% in 1947. By contrast it shrank by 12.9% in 1932. But far from a second Great Depression the post-war US economy took off and kept powering away, with only occasional mild recessions for more than twenty years.
  • The so-called “neo-Keynesians” of the Kennedy Administration, figured that if Keynes theory could reduce unemployment down to 5% there was no reason why more Keynesian stimulus couldn’t soak up that last portion. An economy running at 100% all the time. BZZZZZTT: hitting-the-edge-of-the-envelope time again and Hello, late 60’s US inflation.

Still, the Keynesian theory settled in as Western governments coped with those mild recessions by following the formula of increased spending during a recession, as well as Central Banks dropping interest rates. It all seemed to work, even as Western Economies started to get changed by all this government intrusion.

What is neo-liberalism? Who are Reagan and Freidman?

To be fair to Keynes he always made it clear that when the economy started growing again governments should ease up on the increased spending and start paying down their debt in preparation for the next economic downturn. Suffice to say that those aspects have been increasingly ignored.

From the mid 1960’s on, it all began to turn pear-shaped. In the USA inflation began to take off with the impact of all the spending on the Vietnam War and LBJ’s Great Society programs (also Kennedy’s neo-Keynesians mentioned earlier). The Federal Reserve tapped the interest rate brake, government spending under Nixon slowed slightly – and caused a mild recession in 1970. Releasing the brakes on both factors, the economy started growing again, but so did unemployment and inflation, something that was not supposed to be able to happen together. It got worse when recessions hit again and inflation and unemployment kept climbing through the 1970’s, with only occasional and temporary drops.

Thus was born the word “Stagflation”, followed by people paying less attention to Keynes and more to the monetary theories of Milton Friedman, as well as the economic control critiques of Friedrich Hayek from decades earlier, together with the associated politics of Reagan and Thatcher (and here in NZ, Roger Douglas, Australia with Bob Hawke) as they tried to reduce government influence in the economy.

It must be pointed out that despite all the privatisations, de-regulations and fighting over those issues, when it comes to the Big Basics of government spending and debt, it’s as though nothing has changed.

Certainly with the rise to power in the 2000’s of the likes of Bush, Blair and others, plus the shocks of things like the NASDAQ crash of ’99/00, the 9/11 attacks and of course the Great Financial Crisis of 2008, the world of Big Government spending has returned in full force.

The Great Chinese Sinus AIDS pandemic of 2020 just added rocket fuel to it all.

Amidst all this – and I’ve covered much of it already in these posts…

This is not going to get better – Feb 2019

The Great Crash of 2034 – June 2020

$5,630,859,000,000 – August 2020

… the fact was that in each of these situations in the last twenty years inflation did not take off, and while the economy recovered far more slowly than the stimulus spenders of Obama’s time had hoped for, it did at least grow, and unemployment kept going down while inflation was nowhere to be seen. These happy times became even happier under Trump as the economy boomed through 2018/19 before hitting the Covid lockdowns.

With the slow (too slow) unlocking of the economy many people figured that things would get back to normal rapidly. Yes, the Cassandra’s were still harping on about the fantastic increases in government spending, government debt and government credit creation – but we’d heard all that before.

In the case of the GFC it appears that much of that credit creation did not get into the pockets of consumers, being swallowed up by the banks instead – who did actually manage to pay Uncle Sam back for the TARP program, with interest too. Noted Keynesian economist Paul Krugman was angry that the 2008-9 stimulus programs were so small: he argued for programs in the range of $2-3 trillion and for it to go straight into the pockets of consumers.

It took a decade but that’s exactly what the $2.2 trillion CARES Act did in early 2020, followed by smaller ($900 billion) spending programs in late 2020. Then came the $1.9 trillion American Rescue Plan under Biden.

There may be more to come, with the proposed $2.3 trillion American Jobs Plan and the $1.8 trillion American Families Plan.

Krugman must be beyond joy at this moment.

Of course the thing about Cassandra was that she was telling the truth, and so in the Year of Our Lord 2021…

CNBC

Dow Jones estimates had been for 1 million new jobs and an unemployment rate of 5.8%.

New jobs were 266,000 and unemployment rate rose to 6.1%.

NASDAQ news:

The consumer sentiment index unexpectedly crashed to 82.8 in May from 88.3 in April. The decrease surprised economists, who had expected the index to rise to 90.4.

“Unexpectedly”! I always love that. Perhaps if those economists had paid a visit to a US timber yard or looked at the incredible increases in commodity prices across the board they might not have been so surprised about consumer confidence. Massive and rapid increases in prices tend to do that, of which the M2 chart above is merely one indicator. Here’s a better one.

Too much money chasing too few goods: supply vs demand. The oldest rule in the economic theory book. The only question is whether the US is going to add to the demand with those spending programs?

Of course, looking at this history of the last twenty years, it may not actually make any real difference to the path the USA is on, except possibly to act as a trigger point. As always the question is whether we’ll know that the trigger has been pulled. Mixing metaphors, we can be certain that a fuse has been lit.

Written by Tom Hunter

May 17, 2021 at 10:43 am

$5,630,859,000,000

That’s what the US government has spent in the first ten months (October to July) of this fiscal year.

It hardly needs to be said that this is the largest amount of money that the government has ever spent.

The good news is that they collected $2,823,564,000,000 in taxes, also a record.

That’s also the bad news because of course it means that they’ve set a record deficit so far. Those “trillion dollar deficits” of the early Obama years?

HA! This year’s deficit is $2,807,295,000,000: a $2.8 trillion deficit. They’ll likely beat the $3 trillion mark before the fiscal year ends Sep 30.

The big spending components were:

  • $1,005,897,000,000 – Department of Health and Human Services
  • $ 915,775,000,000 – Social Security
  • $ 540,442,000,000 – Department of Defense spent
  • $ 309,415,000,000 – Net Interest

The following graph of inflows and outflows shows that this is an exceptional year, as it is for all nations, with that huge “Income Security” payout to try and compensate workers for their jobs being shut down by order of the fifty state governments – the extent of shut down differing by state. But even taking that element out we’re still talking record deficits and ones that will likely continue for years now.

The proponents of Modern Monetary Theory don’t see a problem with this of course, and it makes arguments about it almost a moot point, since the USA is effectively practising it right now. But they can only do this because, unlike a little nation like New Zealand, their currency is basically the world’s currency.

I don’t see how this can go on. But then I’ve been saying that for years now and somehow it does. Perhaps the figures just don’t mean anything to ordinary people any longer? Perhaps they don’t think it will affect them: that when the day of payment comes they’ll simply refuse and allow the institutions of federal government in far-off Washington D.C. to collapse?

See also:

The Great Crash of 2034

This is not going to get better.

Written by Tom Hunter

August 16, 2020 at 9:21 am

The Great Crash of 2034

One of the first things I wrote about here at NoMinister was an article on the disastrous debt situation in the USA, This is not going to get better.

Amidst the charts of tax revenue vs rates and the vast, unfunded liabilities that lay in America’s future, courtesy of Social Security, Medicare and Medicaid – “these three giant machines running on automatic” – I wrote the following:

The good news is that government revenue is increasing, likely hitting 16.5 percent of GDP this year, increasing to 17.4 percent in 2025, and 18.3 percent of GDP in 2029. Of course this is all built on economic models and we know how those go with assumptions of economic growth rates and so forth. For all the talk about econometric models the reality is that they’re often little different to the spreadsheets ordinary people put together. So they’ll contain smooth changes from month-to-month or quarter-to-quarter. But did anybody throw in even a bog-standard recession, something just on the order of the 1990-91 deal, with a couple of % GDP foregone?

And here we are. And we’re not looking at a 2% GDP drop but probably something much worse courtesy of government reactions to the Wuhan Flu.

You can look at that old article to see the histories of US income tax revenue vs the highest income tax rate or corporate tax revenue vs corporate tax rates, but here I want to focus on US spending and then debt, starting with this chart published just last year in 2019.

Note the sidebar of assumptions underpinning this already frightening scenario: “no more wars, no recessions”, and so forth. Note also that the biggest increase in spending comes from non-discretionary spending, courtesy of the Big Three Machines mentioned earlier.

At the same time there was an article published that looked into a future much closer than 2049, The National Debt Death Spiral:

According to the U.S. Treasury Department’s Office of Debt Management, the U.S. government is just five years away from the point of no return.  With the national debt spiraling quickly out of control, there are only a few years left before every single dollar the government borrows will go toward funding interest payments on the national debt.

Interest payments only: not for paying the debt down. This is Ponzi Scheme territory. More specifically it’s the tipping point for when the scam starts to collapse. It’s also why you can look forward to a temporary future of near-zero, zero or even negative interest rates: “temporary“.

And that’s just the Federal situation. There are a number of territories and smaller cities that have already plunged through this event horizon :

In bankrupt San Bernardino, a third of the city’s 210,000 people live below the poverty line, making it the poorest city of its size in California. But a police lieutenant can retire in his 50s and take home $230,000 in one-time payouts on his last day, before settling in with a guaranteed $128,000-a-year pension. Forty-six retired city employees receive over $100,000 a year in pensions.

Almost 75 percent of the city’s general fund is now spent solely on the police and fire departments, according to a Reuters analysis of city bankruptcy documents – most of that on wages and pension costs.

Larger cities like Chicago are rapidly approaching the same point, with their debt now rated at Junk Bond levels, and the state of Illinois unable to help because they’re in the same shape.

And then there’s the wider economic problem that derives from the government spending priorities:

A couple of years ago there was somewhat of a kerfuffle in the more sober precincts of the MSM when a story circulated that after his economic advisors presented these post-2024 debt tipping point arguments and data to President Trump his response was (paraphrased): “I won’t be President by then so what does it matter?“.

Naturally the articles lambasted Trump for this selfish and cavalier attitude to spending and debt, but that outrage only lasted a day because everybody knew the terrible truth.

  • It’s a bi-partisan attitude in D.C;
  • almost every politician there (bar Rand Paul and a few House members) is in on it;
  • all of them are too terrified of the fallout that would happen from trying to fix it.

Trump’s 2020 budget produced earlier this year went on to prove the point, as this article demonstrated with comparisons of the MSM coverage of Trump’s budget and the actual forecast numbers. First the MSM headlines:

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Holy shit! Trump was proposing huge spending cuts in domestic programs? That’s great news!

If only it was true.

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This would be the same under any President and any Congress, courtesy of those screaming headlines. Nobody dares to cut spending; even the “cut” of $4.4 trillion noted above was merely a plan to spend less than the baseline spending increases assumed at the start of the budget process.

And remember that all of the above was before the latest economic crisis hit the USA, which has produced the following astounding graph from the US Central Bank, the Federal Reserve:

As you can see the Fed had only just started to finally rid its balance sheet of the debt piled up from the GFC before the Chinese Lung Rot hit the fan. As this article pointed out:

The federal debt had topped $24 trillion for the first time on April 7, 2020.

It then climbed another trillion dollars in just 28 days, topping $25 trillion for the first time on May 5.

Only 35 days had elapsed from when the debt topped that $25-trillion threshold on May 5 to yesterday, when it topped $26 trillion for the first time.

It took about two hundred years for the USA to pile up $2 trillion in Federal debt, hitting that figure in 1983.

Now it has taken just 63 days.

The following chart shows how the debt load is not only increasing but even the rate of acceleration, as is the case with Ponzi schemes. No private business would see this as anything than the stuff of sleepless nights between daytime nightmares.

I’ll finish with this quote from John Stossell, which I especially like because it takes my original article title of “This is not going to get better” and sharpens it:

“We have piled deficit upon deficit, mortgaging our future and our children’s future,” warned Ronald Reagan. “We must act today to preserve tomorrow.”

Bill Clinton said, “We’ve got to deal with this big long term debt problem.”

Barack Obama called driving up the national debt “irresponsible” and then proceeded to do exactly that.

Donald Trump complained that Obama “doubled” the nation’s debt. But now, under Trump’s presidency and the new CARES Act, our debt will grow even faster.

This will not end well.

Even a so-called V-shaped economic recovery would not change this very much.

For all the talk of pandemics and now riots it is this story about the USA that should truly scare you. It is not Antifa or BLM or any other bunch of fanatics and idiots that will destroy the USA but the age-old problem of debt. Take your pick as to the crunch date, mine is 2034!

One of Adam Smith’s famous economic observations was made to a pupil concerned that the massive growth of debt in Britain during the Napoleonic Wars would ruin the nation. That debt would eventually reach 200% of GDP but Smith assured the student that “there is a great deal of ruin in a nation.“, and that proved to be the case, but not without a lot of pain being inflicted in the following two decades.

Same here via Rand Paul’s “Pennies Plan” alternative Budget, although I can’t help feeling that the USA is pushing the outside of the envelope awfully hard on Smith’s maxim.

Written by Tom Hunter

June 14, 2020 at 7:00 pm

Tucker Carlson strikes the right note

Last week I made the following point about dealing with the coronavirus, COVID-19:

With regard to a recession, there will be negative life impacts resulting from an economic slowdown forced by overly-zealous containment procedures. People who lose their jobs, watch their savings evaporate, and struggle to keep their homes will suffer from anxiety and depression, and not in spikes but over time. Unemployment carries especially harsh consequences for such things, even aside from the external impacts, and the longer a person is unemployed the worse it gets. Suicide rates rise as unemployment rises and drug abuse is twice as likely as for someone with a job. Add divorce to all this as each factor feeds on the other.

So I was pleased to see Fox News’s Tucker Carlson making a similar point. Your can also read the transcript here.

Carlson’s viewpoint is well argued and well-balanced:

Our first obligation, everyone agrees, is to keep our people safe. If we can prevent Americans from getting the coronavirus, we should do that. At the same time, though, we need to protect our economy, and that is not just something that Wall Street cares about, to be totally clear.

Economic decline is dangerous for everyone, especially at the bottom of the economy. It’s a legitimate human concern. It’s not just financial, it’s about families.

People keep focusing on Wall Street, but that place is often not fully linked to the “real” economy, as was shown by the 1987 Wall Street crash, which had many people hyperventilating about the recession that would inevitably follow in 1988.

Some went further, looking at how closely Black Monday – with a 22.6% one-day drop – matched the 1929 Crash and predicting a full-blown Great Depression II.

It never happened, thanks largely to the lessons learned from 1929 as to how to keep things moving and not fall into a spiral: don’t cut government spending, don’t raise taxes, use Central Bank credit creation to allow for a temporary flood of liquidity.

By early 1988 there was no sign that the event had had much of a negative impact on the economy at all. That was not the cae in 2008 because that crash was directly linked to the problems with trading of mortgage bonds and more exotic financial instruments all directly linked to an everyday economic item: the family home.

But locking down the everyday actions of an economy is something very different to both of those events.

Here’s the problem. We’ve got two imperatives and they often conflict. So if you ask an epidemiologist what we ought to do next, the answer is simple: Shut it down. Close every public space until the virus passes. Hospitals would get a pass, of course, but restaurants, bars, hotels, movie theaters, airlines — everything.

From a public health standpoint, that makes sense. But what would be the consequences of doing that? Millions and millions of people would lose their jobs, some of them for good. We’d enter a severe recession with mass unemployment, and it could get worse from there.

You would see an awful lot of people in poverty in Middle America and that poses its own kind of public health risk. Poor countries are never healthy countries. If you want great health care, you’ve got to pay for it, and you have to have money to do so.

Thankfully most Western governments seem to understand this and have either announced or about to announce various financial support mechanisms, and although most central banks are still not back where they should be in terms of interest rates, with rates so low it’s hard to see them going lower, they will act in their classic manner of lender-of-last-resort as they did in 1987 and 2008/9.

Carlson discusses the various ideas of directly helping people:

Some of the professional class have suggested a guaranteed basic income as a response to this threat. Mitt Romney has suggested sending every American a monthly check for $1,000. That’s likely a well-meaning idea. A lot of smart people are behind it. But it’s also decadent and foolish.

Name a place that’s become happier and more prosperous under a scheme like that? Indian reservations? The inner city? Rural areas where half the male population gets monthly disability checks? Or for that matter, if we’re being honest, how many happily idle, inherited money people do you know? Rich people? None. They’re all drunk. Of course they are.

But he suggests one idea from Germany that he thinks has merit:

The German government runs a program called Kurzarbeit. It means “short time.” Employees are encouraged not to lay off their workers but instead place them on reduced hours. The government then steps in to compensate some of those missing wages to help the companies with payroll.

Now, it may cost taxpayers more than Romney’s grand a month program, but critically, it keeps people in their jobs. It’s also straightforward, unlike so many of the double-secret backward tax rebate programs the geniuses in Congress are always coming up with and telling you, you should love and be happy with. But you don’t ever understand them, and neither do they. 

And that model has some solid and recent history of success:

During the 2008 financial crisis, Germany’s economy shrank by a higher proportion than ours did in America. Yet, at the same time, Germany’s unemployment rate actually fell. Labor force participation rose.

That’s pretty damned impressive. We should try that here in New Zealand as well, crisis or no crisis.

Written by Tom Hunter

March 18, 2020 at 1:04 am

Die MSM, Die – Reporting the US Economy

Heh!

Written by Tom Hunter

March 13, 2020 at 4:22 am

Reason Number Eleventyleven…………

……….why President Trump will be re-elected in a 2020 landslide;

Here’s the money quote.

In fact, the eight months following President Trump’s inauguration are the only months since February 2009 in which 60 percent or more of Americans were employed and it’s been above 60 percent for every month of the Trump presidency. In September, the percentage of Americans who were employed reached 60.4 percent. The last time it was this high was January 2009, the month President Obama took office.

Finally, the jobs are better. Since January, the number of people working full time has increased by two million while the number working part time increased by only 245,000. In September alone, the number of people working full time increased by 935,000. This helps explains why average hourly wages have grown by 2.9 percent over the past 12 months, the highest level of annual wage growth in more than eight years.

Bottom line, thanks in great part to President Trump’s deregulation efforts, businesses across the country are hiring and more Americans are working better jobs for higher pay. 

You need to read that twice for the real message to sink in.  The dates are significant.

Obama deliberately tanked the American economy.  So much for ‘fundamental transformation.’

Written by adolffinkensen

October 11, 2017 at 11:32 pm

Posted in New Zealand

Tagged with

What The ‘Media’ Don’t Tell You

Did you know the American economy is awash with good news?   GDP growth up; job numbers up; unemployment down; stock markets booming?

If you read the New York Times, Washington Post, Sydney Morning Herald or NZ Herald and watch TVNZ, ABC, CNN, MSNBC or CBS you won’t hear or see much about it.

With the Dow at 22,000, solid job gains, confidence high and and growth jumping to 2.6 percent in the last quarter under President Trump, the economy clearly has a new bounce in its step.The gains to investors and pension funds (for tens of millions of middle class families) is on the magnitude of $4 trillion.If the economy and jobs had done this well under President Obama he and the media would have been doing cartwheels down Pennsylvania Avenue.”

and this is the bit I like…..

My favorite moment in the post-election analysis was the morning after the election when Nobel Prize- winning economist Paul Krugman, who also twice writes a column for The New York Times, was asked when the stock market would recover, and he famously groused: “Never!”And then over the next eight hours the stock market soared by some 700 points. And now it has shot up more than 3,000 points since that day. Yet Paul Krugman is the guru who the left unfailingly turns to for this kind of sage wisdom.

Meanwhile the beanpole who wrecked the American economy is off to Kenya where he is campaigning for a genocidally racist candidate for president.

Written by adolffinkensen

August 8, 2017 at 1:30 am

Posted in New Zealand

Tagged with

BUT TWAS ONLY A SMALL SUBSIDY

President-Elect Trump has thumbed his nose at the conservative wing of the Republican Party with his announced the $8m subsidy bribe to Carrier to stop them moving 1,000 jobs from Indiana to Mexico … plus a gentle leaning on reminding the company just how many defence industry contracts they currently hold … wot God givith, God can taketh away.

A certain irony in that for years the Republicans have blasted the Democrats over subsidies given to promote wind-farming and solar energy production … presumably those industries didn’t create jobs. 

I am against subsidies simply because they promote inefficiency and stifle innovation … short term gain for long term pain.  New Zealand is a far better place from having moved on from the ‘glory’ days where the State picked winners (and losers) using taxpayer money to keep players that should have long gone to wall afloat.     Having said that I accept there will always be exceptions to the rule in order to retain a strategic industry like Tiwai Point or the Marsden Fund established to facilitate fundamental research on a contestable basis.   

But there is a limit as to how far government (any government) can go in subsidising failure.    At some point the ‘House of Cards’ will come tumbling down as it did in New Zealand in 1984.    I see America under Trump as much more insular and inward looking … sure, the US economy has huge resilience but, for it be able to compete with the world, it has to be efficient and if it isn’t the world will go looking elsewhere … that is the danger of institutionalised subsidies … there is less an  imperative for innovation and efficiency and, at some point, the government funding will run out.

You couple that with the US National debt and their inability to balance the budget and Trump’s short term gain may be very short indeed.

Written by The Veteran

December 4, 2016 at 12:47 am

And He Hasn’t Been Sworn In Yet

Already two major US employers have cancelled plans to export American jobs offshore.

Obviously thy have more brains than the Democrats and know how to read an election result.

Ford and Carrier have announced that plans to shift production to Mexico have been shelved.  So already Trump has saved over 5,000 jobs for his constituents in the rust belt.  Trump has done more for working Americans in three weeks than the fool Obama did in eight years.

And they said this fellow was unpresidential?

Written by adolffinkensen

November 30, 2016 at 5:30 am