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when do you think the recession will end
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07-01-2009 3:37pm#1
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I don't agree with the point of letting the market find its own bottom in our situation. A recession isn't as simple as people assume it to be, some kind of 'give it time, it will work itself out'. Effective demand will fall--the excess supply does not create its own demand. It's the Fed's mandate to mitigate the business cycle in a case like this, which is done by instigating inflation. I won't spend my money, so I hoard cash, effective demand continues to fall in a cycle pattern. Make it worth my while to spend money because in a years time that money will be worth less (expected inflation has tanked over the last few months). That breaks the cautious cycle. Crude, but effective. Obviously, they should be just as willing to initiate a recession when you have excess. Something which they failed to do between '03 and '07, one could argue. Japanese demographic factors, which contributed to their "growth recession," are eerily like that of the U.S. As a baby boom generation coming to retirement in the next 10-15 years, they have been hammered with direct equity and 401k losses. It's completely understandable that they want to spend nothing. Being over-cautious, however, isn't good for anyone. I'm sceptical of these public works programs being viewed as the end solution, as you appear to be too.silverharp wrote: »what I dont like about the Keynes approach is that the economy can be managed in a way that that is consequence free. Take for example 2001/03 in the US, The FED made it their business to reflate the economy (it is their mandate), my approach would have been to let the market find its own bottom, let people build up their savings and a new business cycle would happen in any case. Had the US been allowed to have a harder recession we would not be in the situation now where the global system is on the verge of collapse. As the system is what it is all I can do is get the popcorn out and watch the car crash unfold.
Otherwise take a spin back a year or two and listen to the assessments of Greenspan and Bernanke , it sounds like nonsense now remember "sub prime is contained". If you want my definition of voodoo economics it is saying that a country can borrow its way to prosperity and when it goes wrong the solution is more borrowing.
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You could fill a book with these wonderful quotes
"The truth is that Fed governors, together with their crack staff of Ph.D economists and market analysts, are as close to an economic dream team as we are ever likely to see."
- Gregory Mankiw, Harvard economist and textbook author,
New York Times, December 23, 2007
Also, we have no way of knowing whether a fatalist stance, of "we need to have a long recession to root out the bad," would solve anything--I follow Krugman on that. Keynes observed the, apparent, ineffectiveness of monetary policy, so, maybe, you and him have something in common, Silverharp :pac:. Sure, didn't Robert Lucas state not long ago that the business cycle was effectively finished... There's lots of blame to go around. In our case just take a pick of irresponsible lending ( 90-100 per cent mortgages and well-known moral hazard problem with this), regulation being non-existent, tax policies that were extended by five years which were there to aid investment in housing, a spatial strategy that was only of use if one required extra-toilet paper, et cetera. The blame doesn't solely lie with central banks, although the denial of the situation was widespread--and certainly condemnable.
Americans were saving money--at least, they thought they were. The graph that one is usually presented with does not include capital gains from property. Analogous to Ireland. The perceived level of saving, gained from on-paper capital gains, unravelled much to the contrary of, people's previous assumption that, housing could not fall in value. People will go back to more conservative means of saving, i.e. buying their government's bonds (to fund their deficits) and deposit accounts (I'm not oblivious to the irony of stating that banks are a safe bet in the current climate
).
Edit: More on topic; The recession will end whenever the Fed (also the BoE, and possibly ECB) can embed the perception of expected inflation. As a small open economy, our hopes are pinned on our trading partners. Also, if the banking situation snowballs into a far worse problem, then recovery will depend on the length of time it takes policy makers to set up a "bad bank," following the Swedish solution.0 -
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Économiste Monétaire wrote: »I don't agree with the point of letting the market find its own bottom in our situation. A recession isn't as simple as people assume it to be, some kind of 'give it time, it will work itself out'. Effective demand will fall--the excess supply does not create its own demand. It's the Fed's mandate to mitigate the business cycle in a case like this, which is done by instigating inflation. I won't spend my money, so I hoard cash, effective demand continues to fall in a cycle pattern. Make it worth my while to spend money because in a years time that money will be worth less (expected inflation has tanked over the last few months). That breaks the cautious cycle. Crude, but effective. Obviously, they should be just as willing to initiate a recession when you have excess. Something which they failed to do between '03 and '07, one could argue.
My opinion is that creating inflation is not a sustainable a way of creating wealth and it is a stealth tax on the lower and working classes. I'd be curious what Keynes would make of it all now, he didnt have to contend with floating exchange rates and I'm sure he hoped that at some point a gov. following his ideas would actually pay the debt back during the following upturn. I think he would go very pale if he was shown the private and public debt % that now exist around the globe. As you've mentioned the business cycle what irks me is that all market participants seemed to have left their brains at the office door, I dont think this was a regulation problem per say but more the “fog of war” caused by a deliberate policy of inflation and apparent back stopping by central banks. This led to mal investment which by definition must have to be written off before progress can be made.Économiste Monétaire wrote: »Japanese demographic factors, which contributed to their "growth recession," are eerily like that of the U.S. As a baby boom generation coming to retirement in the next 10-15 years, they have been hammered with direct equity and 401k losses. It's completely understandable that they want to spend nothing. Being over-cautious, however, isn't good for anyone. I'm sceptical of these public works programs being viewed as the end solution, as you appear to be too.
This is a real problem, a generation of Americans have lived on the basis that they could trade down and cash in on property and 401K gains, they must cut back on credit and make decisions based on their new reality. The peak earner category(44-55 year olds) goes into decline from about 2010. The US consumer appears to have to roll over and take a nap. Longer term this is very bearish for equity markets , it would seem difficult to maintain high prices when generationally there would appear to be more sellers then buyers for years to come.Économiste Monétaire wrote: »Also, we have no way of knowing whether a fatalist stance, of "we need to have a long recession to root out the bad," would solve anything--I follow Krugman on that. Keynes observed the, apparent, ineffectiveness of monetary policy,
What you call fatalist is also an opportunity for business to reorganise , take for instance the US auto makers , you would agree that an efficient doestic Auto sector would be better for US inc. Assuming that you agree that they had lost their way compared to their competitors as they seemed to depend on “creative” financing, then the free market approach would have broken up these doggies years ago, the surviving entities would be profitbale and would be able to invest in an efficient manner. On a personal level “tricking” the population into taking on more debt is not a sustainable solution, it reaks of short termism where the cure maybe worse then the desease.
The other problem with intervention in the markets is that the longer term consquences are not knowable or controllable , to me this is hubris on the part of state planners, and until proven otherwise I will continue to be cycnical of their proposalsÉconomiste Monétaire wrote: »Americans were saving money--at least, they thought they were. The graph that one is usually presented with does not include capital gains from property. Analogous to Ireland. The perceived level of saving, gained from on-paper capital gains, unravelled much to the contrary of, people's previous assumption that, housing could not fall in value. People will go back to more conservative means of saving, i.e. buying their government's bonds (to fund their deficits) and deposit accounts (I'm not oblivious to the irony of stating that banks are a safe bet in the current climate).
Edit: More on topic; The recession will end whenever the Fed (also the BoE, and possibly ECB) can embed the perception of expected inflation. As a small open economy, our hopes are pinned on our trading partners. Also, if the banking situation snowballs into a far worse problem, then recovery will depend on the length of time it takes policy makers to set up a "bad bank," following the Swedish solution.
I agree the gains were an illusion and when you stand back it seems idiotic to think that people buying and selling property to each other at increasing prices could ever be deemed to be called saving. I would class this as part of the “fog of war” point I made above in that inflation policies “confuse” the market.
I cant agree with your last paragraph, it is also possible to have an inflationary recession. It seems like too much has happened for this to be turned around on the basis that they scare savings back into the markets or into the shops. From a market perspective I would call a bottom when P/E ratios get down to about 10 or 12 or when yields on property go up to high single digits, which is simply another way of sayig that affordability has to come back to the market.A belief in gender identity involves a level of faith as there is nothing tangible to prove its existence which, as something divorced from the physical body, is similar to the idea of a soul. - Colette Colfer
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Well, it's like the early 1930s, half of all American banks went under. Not just those who entered into shady lending to inflate the stock market, but conservative banks too. The only ones left were those with (near) cash only assets. Most businesses will have debt, it's odd to expect otherwise. However, it's the knock on effect of businesses not being able to get short-term financing but who may still be solvent. There's no need for more businesses to go under than what one would expect from a supply contraction, due to falling effective demand, adding to our problems with a fire sale of assets. It's just one benefit of a little inflation--one which a debt-ridden country could see the benefit ofsilverharp wrote: »you get into the issue of what is a good and bad company. Taking a simple example of someone that say set up say a new restaurant in Dublin in 05. he maybe good at what he does but assuming hes loaded up on debt based on 05 lease prices, do you class such a company as good or bad? It would seem that a good company in this environment will be the one with the least amount of debt. More generally it looks like we are in a secular period of deleveraging, I can almost guanantee that you will never see the existing home lending standards and institutional leverage for decades to come. As this unwinding has only just begun, from a market perspective there is at least 2 or 3 years left of unwinding for he market to chew through.
How effective will any stimulous package be under these conditions? apart from arguing that that it would be worse if nothing was done, maybe but I still see asset prices falling in a similar fashion to Japan , the only question is how long will the process takes, and what effect throwing the kitchen sink at this will do to the bond market. At the moment the gov's can borrow at under 5%, what if this becomes 10-12% or higher?
With your example the person was already heavily loaded under debt. I'm talking about those with reasonable debt levels, whatever yardstick you wish to use for 'reasonable', whose real debt will increase during deflation. The deleveraging is already occurring heavily in the U.S. (the recent sale of stakes in Chinese banks and such), the Fed is throwing the kitchen sink to slow down the process, but people except it needs to happen. The deflation will be a positive for government's trying to borrow, with capital markets awash with sovereign debt (and when conservative investors come to view equity as a better option again). U.S. debt is getting a bit outrageous at this stage. The tax reductions in the Obama plan probably won't do anything for consumer expenditure if asset prices are still falling. People will simply save the money, which is probably the most prudent thing to do.0
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