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Click to enlarge.
The next chart uses that data to compare the behavior in the aftermath of the dotcom bust to the behavior in the aftermath of the housing bust (using the low points in both periods as the starting points).
Click to enlarge.
The next chart uses that data to create a scatter chart.
Click to enlarge.
The bulls better hope that the Fed has put a permanent stop to the business cycle. Good luck on that theory!
For what it is worth, I stand by the prediction that I made in 2012 that the next recession will occur on or before October 2014.
This is not investment advice.
See Also:
Bull Market Complacency After the Great Depression
Theory: The Four Phases of Extreme Bull Market Complacency
Source Data:
St. Louis Fed: Custom Chart
14 comments:
http://research.stlouisfed.org/fred2/graph/?g=t75
Blue is S&P 500
Red is YOY consumer borrowing
Green is YOY gov't spending + YOY QE
The 'business cycle' (whatever that is) didn't fail in 2008, US consumers hit the mortgage equity wall, hard, and the fake 'illusion of prosperity' economy of 2002-2007 went away.
We pushed deficits to $2T/yr (!) at one point and followed up with $4T and climbing of QE, essentially eliminating the need for other countries to buy our treasuries to keep our economy going.
Taper the QE, and we'll see the economy taper, sure.
But if Yellen is really running things there, I don't see a taper coming, not when 1999-level 'full employment' is still out around 2020 if current trends continue.
http://research.stlouisfed.org/fred2/graph/?g=t76
what strikes me about that graph is that we need another sustained push like we got 1982-90, and 1992-2000, since the red graph is now up 20M from 2000, but the blue graph is only up ~9M . . . that's 11M underemployment, at 200k/mo job growth, we'll get an intersection again in 2019.
200,000 is an exceedingly weak growth rate, too, even historically when we had a lot smaller working population:
http://research.stlouisfed.org/fred2/graph/?g=t7r
http://research.stlouisfed.org/fred2/graph/?g=t7s
is YOY % job growth.
We're topped out and we're going to need a new socio-economic ordering this decade or next.
The easiest change for the system to make is transition to MMT -- cut taxes, print the difference, and see what happens.
I think this is horrible policy over the long run (mainly because I think rising housing expense will eat renters alive in this regime) but to get where we are now is not indicative that this system can track on good policy for any length of time.
"200,000 is an exceedingly weak growth rate, too, even historically when we had a lot smaller working population"
ah, women not working much explains that growth I guess.
http://research.stlouisfed.org/fred2/series/LRAC64FEUSM156S
still, jobs are jobs.
What this world needs is a good economy simulator. Keen is trying, but his game design skills suck.
Troy,
The 'business cycle' (whatever that is) didn't fail in 2008, US consumers hit the mortgage equity wall, hard, and the fake 'illusion of prosperity' economy of 2002-2007 went away.
My personal definition of the business cycle is that it100% psychological.
It's simply the flow back and forth from pent-up demand and pent-down demand.
When times are bad, people extrapolate that out and hunker down. This builds pent-up demand. Eventually, some start to capitulate and start to buy the things they've been denying themselves.
When times are good, people extrapolate that out and spend beyond their means. This builds pent-down demand. It cannot continue forever. Eventually they, as you put it, hit a wall.
Using my definition, the housing bubble was entirely the business cycle at work (and on a boosted massive scale). People were spending far beyond their means.
During the bust they hunkered again. During the recovery they started spending again. As seen in some of my recent charts, now they are starting to hit the wall again.
The business cycle, to me, is a bit like binge eating ice cream. There comes a point when the pent-up demand (delicious and creamy) turns to pent-down demand (about ready to vomit, lol).
The business cycle won't be dead until the vast majority of the population stops financially bingeing and purging.
You believe QE has worked. I believe it did next to nothing. Excess bank reserves aren't doing much of anything. The Fed is simply piggy backing off the business cycle's natural movements, claiming credit for it, and it will not end well for them (or us).
Of course, in the next bust the Fed will "help" again. Perhaps Yellen will be Time's person of the year like Bernanke was in 2009. Meanwhile, Rome burns over the long-term because structural long-term problems are not being fixed. Sigh.
I believe there are also self-reinforcing subparts to the business cycle.
At the bottom, people might rationalize that since they can't make money off investing, then they might just as well buy that new dining room table instead. The opportunity cost seems so low. Why not? Meanwhile, that purchase boosts the economy and therefore the stock market.
At the top, people might rationalize that since they can make a lot of money off investing that they should not buy that new dining room table. The opportunity cost seems so high. Buy risky investment assets instead! Meanwhile, that lack of dining room table purchase hurts the economy and therefore the stock market.
Put another way, a rapidly rising stock market could easily suck money out of the real economy and into it, which could easily lead to the stock market's next decline. The stock market can't handle the real economy declining. At some point some investors notice and begin to panic.
These are just some of the things I think about when I can't sleep. Insomnia for the win, lol. Sigh.
I didn't just make up that dining room table theory by the way. I lived it.
I bought my house in 1997. I did not buy a dining room table until 2004. I no longer felt future investment returns would be all that great (due to my belief that the housing bubble would pop).
My dining room table purchase did temporarily boost the economy though. Go figure.
You'll laugh at our naivety, but when we started our recent search for a new car (new = new to us) we were astonished to find that the prices of the cars were scarcely mentioned; it was the monthly cost of buying that figured large. In other words, people are treating the cars as if they were leasing them rather than buying them, and expecting to do it with borrowed money. At up to 7% p.a., apparently. When our bank base rate is 0.5% p.a. Are people mad?
dearieme,
Are people mad?
When I bought my first "cheap" new car in 1988 (Hyundai Excel), the salesman only wanted to talk about monthly payments. I only wanted to talk about price.
I paraphrase the following story from memory. It's been a long time. My memory's not what it once was but it went something like this.
Towards the end of the negotiation (with the sales manager), we were within $200 of each other. He asked if it was worth spending the rest of the day haggling over $4 per month (or thereabouts).
I pointed out that I was right out of college, was moving to the Seattle area to start a career, and did not have my next job lined up yet. I'd be more than willing to negotiate for 20 more hours at $10 per hour. I was dead serious too, and he knew it (because it was true).
He instantly came down to meet my price (knocked $200 off). My dad was with me at the time (cosigning my loan). Oh how my dad laughed as we left the dealership over that one. It was a good day.
So yes, people are mad to let dealerships convince them that price does not matter!
" People were spending far beyond their means.
"During the bust they hunkered again"
I see it as the housing boom/bubble doing more than mere psychology -- it was spraying $100B/month at the middle-quintile economy.
The "bust" took their ice cream away.
Nobody (in the media) understands this dynamic at all. Krugman never mentions it, neither does DeLong. Other commentators I read like Denninger don't bang this drum either, though they're probably more receptive to it.
But it's so godamn obvious. I feel like I'm in a Twilight Episode here, people refusing to accept some basic element of reality, that consumers borrowing (and spending!) $6T 2002-2008 got us out of the 2001 recession.
That and a massive rise in government spending, too.
http://research.stlouisfed.org/fred2/graph/?g=t7Q
I call the red line (YOY consumer debt increase) "Mt Häagen Dazs")
what I don't understand about everyone's model of the economy is how "multipliers" can be so low.
$1.2T of monetary injection / $100,000 per job is 12M jobs.
But the total recovery only saw us gain 10M jobs:
http://research.stlouisfed.org/fred2/graph/?g=t7R
there's a hole in our economy somewhere, where money is draining out and not giving us any velocity.
Keen or somebody needs to simulate the entire economy to find it. Now that RAM's so cheap, shouldn't be too hard.
Troy,
I see it as the housing boom/bubble doing more than mere psychology -- it was spraying $100B/month at the middle-quintile economy.
You say people were being sprayed. Lenders were definitely willing to spray. That's absolutely true.
I say it was people perfectly willing to be sprayed (psychology). It's not like banks were pushing on a string to get people to borrow more. That's absolutely true too.
The spraying can't happen unless both the lenders *and* the borrowers are willing.
We're really saying the same thing here, just from a slightly different perspective.
Troy,
there's a hole in our economy somewhere
There's a hole lotta economy gettin' exploited, lol. Sigh.
Gallows humor. :(
yeah, markets certainly have a psychology of their own. But housing never goes down!
http://bigpicture.typepad.com/comments/2005/06/uhoh_time_magaz.html
But it took a perfect storm of forces lining up to give us 2005-2007 . . .
Greenspan's Fed lowering rates in 2002-2004, the 2001-2003 tax cuts liberating more disposable income to bid up housing, a sharp but shallow recession that didn't take out too many people, greatly expanding government spending after a decade of split-government quasi-austerity, and iterally the same crew that gave us the S&L crisis in charge of (not) overseeing the FIRE industry again, allowing all sorts of new and exciting suicide lending products to be tried out on an unsuspecting public, especially 2005-2007 as prices topped out.
Once the home appreciation trend got rolling in 2002-2003, its money vortex created its own momentum in the wider economy, as the intangible wealth effect of skyrocketing home values made people more comfortable spending money, while also putting trillions ($6T to be exact) of borrowed money back in the middle-quintile paycheck economy.
The cash/credit tsunami was beautiful while it lasted, but alas, I wasn't clued in to this stuff as it was happening in real-time, I only started reading economics blogs (mainly CR) in 2005.
Have no idea how the system is going to gin up things to top all that. What's left is Japanese-style mitigation efforts.
But we're not Japan, alas. We've got a lot more workers now than just 15 years ago.
It'd be great if the GOP pivoted to be pro-labor in this country, but that's not something they've been in living memory.
Troy,
Have no idea how the system is going to gin up things to top all that. What's left is Japanese-style mitigation efforts.
Yeah, that's what I think too.
It'd be great if the GOP pivoted to be pro-labor in this country, but that's not something they've been in living memory.
Can't we all just agree that we should outsource as many jobs is as humanly possible and automate the rest?
Sigh.
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