Here's my thinking.
1. The dotcom bubble shot us way higher.
2. The housing bubble shot us temporarily higher.
3. The commodity bubble will shoot us.
May 7, 2011
Credit Bubble Stocks: Best Krugman Quote Ever
"To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble." - Paul Krugman, August 2002
Here's a link to the original article.
August 2, 2002
Dubya's Double Dip?
The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.
And now for some serious sarcasm.
The basic point is that the recession of 2007 wasn't a typical postwar slump. Ben Bernanke needs to create a commodity bubble to replace the housing bubble.
Source Data:
St. Louis Fed: Custom Chart
Krugman's overall tone in that piece from 2002 was dire negativism, eg ending with:
ReplyDelete"But wishful thinking aside, I just don't understand the grounds for optimism. "
He was talking about what the "Fed needs to do" and "The administration needs a recovery" to provide the economic recovery to justify their 2000-2002 policies.
I also think we got productivity gains in the 1990s from Windows 3 & 95 (and Macs a little : ), the internet, and rising cheap imports from China that gave us more wealth for less bucks.
ReplyDeleteOil staying under $20 facilitated that, too, basically giving us free stuff to stock our big box retailers instead of sending that money to our oil providers.
Troy,
ReplyDeleteKrugman's overall tone in that piece from 2002 was dire negativism...
I agree. What has changed though? He could just as easily write a piece called "Obama's Double Dip?" today and he could keep urging the same things he urged back then. Only the actors and the bubbles have changed.
Clinton -> Bush -> Obama
Dotcom -> Housing -> Commodities
I agree with you on the 1990s. We did seem to get more wealth for less bucks. I was much more optimistic back then (especially as a Windows and Mac programmer). Those days are over though. Sigh.
What has changed though?
ReplyDeleteCR's unemployment chart being 3X worse (-6%) than the tech recession (-2%).
We weren't in the liquidity trap in mid-2002 -- the national debt was $6.2T not the $14T today, CMDEBT was at $8.5T not $13.5T today.
I think Krugman understands the situation we're in -- a consumers-side balance sheet recession.
Krugman's arguing for monetary expansion.
I don't think this will hit oil prices as hard as the 1970s since killing the dollar is kinda an indirect tariff I guess.
I lean toward the idea that it's better to light a candle (inflate) than curse the darkness (deflate), since the latter can involve a significant amount of wealth destruction and real privation here at home.
I don't know where this decade is going tho. Things are certainly crazy.
Mark,
ReplyDeleteIt's the era of the bubble based economy? (Que, "I'm Forever Blowing Bubbles.") This raises the question: Is it possible to assume that all of the growth that occurred during the three recent bubble periods were not real; or overstated? I'm with Troy, light a candle!
Troy (& nanute),
ReplyDelete"I lean toward the idea that it's better to light a candle (inflate) than curse the darkness (deflate), since the latter can involve a significant amount of wealth destruction and real privation here at home."
It is my opinion that there is no free lunch here. The former can also involve a significant amount of wealth destruction and real privation here at home too. I expect it. If nothing else, unstable oil prices due to expansionary monetary policy creates fear and uncertainty.
Picture consumers embracing online shopping at an accelerated rate due to higher gasoline prices (and the effect that would have on employment at malls).
Picture a poor person with two part time jobs who can no longer afford the commute due to higher gasoline prices.
Picture how inflation generally hits the poor hardest since they their purchases are lower on the commodity chain (i.e., Coach handbags vs. Wal-Mart handbags).
If monetary expansion would create as many wage speculators as it creates commodity speculators, then I would embrace monetary expansion as a solution for our debt problems with open arms. Too bad the real world doesn't work that way.
Instead, we get very little wage growth, very little employment growth, inflation in the things we need, deflation in the things we don't, and a decline in our standard of living. How is that helpful?
Picture the consumer who is living paycheck to paycheck due to his massive "balance sheet" problems. We then make him pay more to fill his gas tank, heat his home, and eat. Perhaps inflation will reach his wages someday but it will be far too late to do any good.
ReplyDeleteStag,
ReplyDeleteI'm thinking that the ongoing outsourcing bubble will eventually bring prosperity (to Chindia!).
Here's the sad part. The prosperity is all around us. I'm not a techie, but today's technological advances truly enrich our lives. It's the senseless and counter-productive debt that is hurting the majority.
There was no grand bargain required. The majority could have had all the quality of life enhancing tech gizmos AND affordable housng. College education doesn't need to be so expensive either. Falling CPI prices are not the problem, despite what Bernanke says. Usurious and extractive debt is the problem.
It bugs me to no end that banksters were allowed to loot the system through illegal and immoral means.
As I see it, there is no hope at reforming the system either. The banksters CONtrol a venal CONgress. The knowledge of stewardship has been lost - replaced with free (for all) markets in fraud and moronic and extremist dogma. The perps are still in charge and have more influence than ever.
p.s. Mish is an idiot.
mab,
ReplyDeleteAll was lost when credit somehow became the "lifeblood" of our system. It should be the exception, not the rule.
Mark,
ReplyDeleteI share your concerns regarding the effects of inflation on those that can least afford it. Market forces have been distorted to the point where some sort of "intervention" will be required to right the ship. Regulatory capture, and gaming of the legal system have made it virtually impossible to make those that created current conditions pay for the damage. In fact, the current system has rewarded looting and near financial collapse. I agree that the banking/financial markets needed intervention to stabilize and avoid systemic collapse. The problem is that no meaningful penalties were included in the "fix." There will be another crisis, sooner or later. The lack of penalties for bad behaivor guarantees it will occur. No regulation of the derivatives markets and programmed trading will be the catalyst for the next big shock to the system. The public will be in no mood for another round of bailouts, and then we will see the real effects of wealth destruction. As Jazzbumpa is fond of saying: WASF.
(Oh, and Happy Mothers Day.)
Great comments Mark re inflation/deflation.
ReplyDeletePicture consumers embracing online shopping at an accelerated rate due to higher gasoline prices (and the effect that would have on employment at malls).
ReplyDeleteI detest make-work jobs, and like I said above, killing the dollar is a back-door import tariff.
Granted, China is willing and able to step up to take our demand, but that's all good really.
With wages flat, higher energy prices will come out of rents eventually. Everybody's rent is still higher than their energy bills.
The ROW pays $10/gallon gas and their systems have adjusted.
Of all the options on the table, dollar dilution has the most positives and the fewest negatives (and some of those negatives are positives in the long run).
I just think we need a post-employment economy : )
Here's the various job levels by sector:
Mfg: back to 1960
Cons: back to 1995
Retail: back to 1997
Trans: back to 2005
Info: back to 1995
Leisure is doing relatively well, halfway-recovered, job-wise.
Education & health are the true heroes, but of course this is all debt-funded so precarious job growth.
Government is topped out and heading down.
Bottom line is our trade balance is well out of whack compared to the system's needs for USD as reserve currency. Fixes for this are 1) tariffs 2) weaker dollar 3) deflationary draw-down.
check your spam filter. too many links in my latest I guess . . .
ReplyDeletenanute,
ReplyDeleteThe public will be in no mood for another round of bailouts, and then we will see the real effects of wealth destruction.
I think you are right on that one.
I am not arguing that deflation won't hurt those with debt by the way. It will. I am simply arguing that inflation isn't the free lunch that many seem to think it is. There are unintended consequences and they may be just as painful if not more.
Troy,
"With wages flat, higher energy prices will come out of rents eventually. Everybody's rent is still higher than their energy bills."
If rents come down due to higher energy prices then how would that help prop up housing prices? Isn't the ultimate goal to mitigate the massive deflationary damage of falling housing prices for those with underwater loans?
"I detest make-work jobs..."
"I just think we need a post-employment economy : )"
I absolutely agree. We should be working through how to handle a Jetsons world. Why make people work building bridges to nowhere when they could simply be enjoying more free time due to advancements in technology? I am totally with you on this.
"...and like I said above, killing the dollar is a back-door import tariff."
That is a better argument to me. Something needs to solve our trade imbalances. It is hollowing us out. I wish we would actually do a front-door import tariff though as Warren Buffett spelled out here.
The risk of doing a back-door import tariff, at least to me, is that the Chinese can do one too (by destroying their currency too).
Of course, even speaking of tariffs makes people cringe in horror. Rightly so. It is too painful to contemplate. However, I think the horror of doing nothing is even worse long-term though.
We've put ourselves in a lose-lose situation and we keep looking for the miracle that isn't coming. Sigh.
Thanks for telling me to check the SPAM filter. It was trapped there of course! One seems to get trapped there about once a week.
ReplyDeleteIf rents come down due to higher energy prices then how would that help prop up housing prices? Isn't the ultimate goal to mitigate the massive deflationary damage of falling housing prices for those with underwater loans?
ReplyDeleteyeah, absent wage inflation falling home prices are a given . . .
This is a complicated question of course, given the trillions of dollars of debt overhang.
A 1970s-style wage-price spiral would be less radical, but not necessarily preferable to some sort of home-owner bailout.
Excellent helicopter opportunity, at least.
Troy,
ReplyDeleteExcellent helicopter opportunity, at least.
The helicopters arrived but new higher priority targets appeared for them.
Bernanke's Famous Deflation Speech
First, as you know, Japan's economy faces some significant barriers to growth besides deflation, including massive financial problems in the banking and corporate sectors and a large overhang of government debt. Plausibly, private-sector financial problems have muted the effects of the monetary policies that have been tried in Japan, even as the heavy overhang of government debt has made Japanese policymakers more reluctant to use aggressive fiscal policies (for evidence see, for example, Posen, 1998). Fortunately, the U.S. economy does not share these problems, at least not to anything like the same degree, suggesting that anti-deflationary monetary and fiscal policies would be more potent here than they have been in Japan.
Oops.