The Economist On Economics
By Pejman Yousefzadeh Posted in Economy | State Of The Economy — Comments (5) / Email this page » / Leave a comment »
Two valuable points are made on the Free Exchange blog:
- The fact that we are still wondering whether a recession has begun and that the consensus viewpoint is that any recession will be short and mild is absolutely astonishing and notable.
- If this recession--like others in recent times--is mild and short, it will likely be because financial modeling is a highly valuable tool, its critics notwithstanding.
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The Economist On Economics 5 Comments (0 topical, 5 editorial, 0 hidden) Post a comment »
We're in the middle of a deep financial crisis. I can tell you that from first-hand knowledge.
I can also tell you that its impact on the real economy has been muted so far.
Are we in a "recession"? As can easily be seen, the answer depends on what you mean by the word. In his Senate Banking Committee testimony, Ben Bernanke carefully avoided using the word (thus also avoiding the definitional morass) while making the substantive point that growth in economic output is stagnant and may contract a little bit.
But in the Depression, output contracted by 50%, and unemployment went as high as 25%. That kind of real-world pain is just impossible for me to imagine today. Even though the stresses in the financial system are nearly as bad now as they were in the summer of 1930, when banks were failing all over the US.
There are many reasons for the difference. That's worth a dissertation all by itself.
I believe that the economy of the United States is far too integrated into the world economy for another huge recession/depression. Unlike in 1930, most of the world's nations have small or decreasing trade barriers, and capital can now flow to where it is needed literally with the speed of light.
If the entire world economy takes a turn for the worse, then that is another story. But I doubt that would happen barring some global catastrophe.
"Nothing works like freedom, Nothing succeeds like liberty"
Kyle
I'm not sure what "negative" means in this context.
I was pointing out that, although the financial world is suffering a disruption of historic proportions, rivaling the early Thirties in some respects, the real economy is not likely to.
You mention trade flows. I'd say the real picture in comparison with the pre-FDR Depression is rather more complex. For one thing, the US economy then was manufacturing-based rather than service-based. For another, fully one-half of the world's manufacturing was done in the US. Today, we do a tiny sliver, and China does more than half.
Up until March 1933, the most critical export from the US was monetary gold. Today, the world's money is very largely under our control.
Many mitigating factors.
China runs an essentially dollarized economy. They're suffering raging inflation now, as a consequence of importing our monetary policy, and they're going to face some massive problems this year. Real-world problems.
... may be the exposure of the US economy as a virtual house of cards. Sooner or later, the bond holders in Asia and the middle east will begin to question whether or not their leverage on US foreign policy is worth the risk and ask for a better return on their investment in our debt. We can hardly rely on Boeing and Caterpiller to bolster our exports in the face of the dollar's downward spiral. Capital can flow at the speed of light indeed, but when there is a confidence crisis as now, that capital may well just remain hoarded.
The way "The Fed" operates, altering "available money" by changing intrest rates is designed to minimize recession and put a limit on the inflation rate.
Its a false system... that only works because people have been led to believe in it.
When its improperly run (as it was in the Carter administration) it can do more harm than good. (Remember 20% interest rates on mortgages and the cartoons about Mafia loan sharks "going legit"? I do...)
All it takes is someone who thinks too highly of their economic ideas, playing games with the system... and its pretty sure to backfire.
The games that lenders have been playing with encouraging excessive borrowing have come back to haunt a lot of companies and a lot of individuals.
Failure of our "public education" (more like liberal indoctrination at times...) system to teach basic money management (since parents no longer seem to have a clue about it due to MANY years of "Buy now Pay Later" mentality...) is causing huge problems that won't easilly or painlessly dissapear...
The government spends more than it takes in...
So the government schools don't dare teach kids that its STUPID to spend more money than you have.
Just after the depression... people SAVED... and the economy boomed. The federal government overspending wasn't as huge a problem... because of the rapidly growing economy.
The growth to support the overspending is impossible to sustain...
And... low-income/no-income families have foudn that they can vote themselves "free money" (which is simply STOLEN from people who actually WORK for a living... then redistributed...)
This was predicted... Politicians buying votes by making more and more "free money" programs... free health care is next... and soon there will be no way to support the federal budget without STEALING 50% or more of every WORKING person's income...
No... we may not be going into a deep recession... this time. I give us about 10 years until the BAD recession. (7 if Clinton wins)
But when THIS bubble really bursts... the great depression will look like a boom economy.