So will we experience the promised utopia of all these Democrat policies, with trllions in spending, higher taxes and open borders? Or maybe not?
From the link:
The first transformational trend, El-Erian says, is the shift from insufficient demand to insufficient supply. The second is the end of boundless liquidity from central banks. And the third is the growing fragility of financial markets.
So here’s another opinion:
From the link:
“The situation today I think is more difficult and more challenging than either '08, which was really a protected financial services crisis, or 2000, which was a protected technology crisis,” Leone said, speaking onstage at the Slush startup conference in Helsinki.
“Here, we have a global crisis. We have interest rates around the world increasing, consumers globally are starting to run out of money, we have an energy crisis, and then we have all the issues of geopolitical challenges.”
Whether it’s up or down, it will be more secure. Investments in infrastructure and subsidized domestic production in critical industries will make sure whatever we’ve got isn’t as vulnerable to foreign shenanigans as it is now.
The numbers are all over the place but in strict averages the US has seen
Overall Economy
- a 10-month recession
- a 6-year expansion.
(But this is the center point of spaghetti thrown at the wall.)
Major housing recessions
. . . the only other one in recent times can be described as
- 1-2 years of “everyone sees it coming”
- 3.5 years of decline
- 3 more years before reaching the previous price level
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Stock Market
- On average we would have bottomed in Oct (10-month decline)
- On average that bottom point would be about 10% lower than current stock prices
- Typically, it would take several years t restore that 10-month decline
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My concern is that today’s situation, unlike the past, is that so much of the world’s economy is a mirage in that it’s built on debt and not organic growth. The question becomes how long is that sustainable? I am personally of the opinion that we will be headed for a period of economic stagnation. Maybe we don’t get a severe and or prolonged recession but that those days of exponential growth are long gone.
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True debt, (not government printing press debt) is organic growth.
You save $20, I save $20 and so on.
Because of debt an inventor can take time off from the assembly line and invent stuff and factories can be built etc…
Without debt we would never have an inventor except a person who is self-funded & living off savings, no shop or factory could be built, except out the accumulated savings of a single family.
Therefore, if there is such a problem it is not caused because one actor freely decided to lend money and another freely decided to borrow that money.
If there is such a problem it is because the Fed “paid for” a portion of that lending by creating new dollars and buying the loans. The chart below, comes from the St. Louis Fed and shows the amount of newly minted currency (paper an electronic) that the minted over the years.
Currency created by the Fed cannot be used for anything except to buy
- US Treasury bonds
- Mortgage backed securities
- a limited variety of similar assets
thus the chart below shows the amount of “phoney debt” that was not funded by someone (or some company) working hard, saving his money and lending it to others. It is the amount of purely “funny money” or “phoney debt” in existence.
(To understand the above graph without false alarm, please understand that the vertical section is an accounting change. Read it as a mostly flat line, that suddenly started rising at a 70-degree angle.)
Can’t read the article. I don’t have a subscription. Can you summarize?
Try this link:
The core of the article is the second paragraph which reads
But rather than one more turn of the economic wheel, the world may be experiencing major structural and secular changes that will outlast the current business cycle. Three new trends in particular hint at such a transformation and are likely to play an important role in shaping economic outcomes over the next few years: the shift from insufficient demand to insufficient supply as a major multi-year drag on growth, the end of boundless liquidity from central banks, and the increasing fragility of financial markets.
El-Erian is stating
- we are not (just) entering a garden variety recession
- we are entering something akin in size and scope to the start of the industrial age, the age of International trade etc.
- he implies, though does not state, that because of that large scope, the recession may be worse than normal.
Perhaps more importantly
- central banks have reached a sort of “hard limit” if they rely on their normal tools in normal ways they risk causing a major major meltdown . . . the world economy is “fragile” but not “certainly heading for doomsday.”
Good summary, thank you.
So, what is the solution?
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Thank you!
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Tax cuts for businesses and the high marginal income folks, of course.
Two can play that game! How about Infinite deficit spending, and flooding the country with the world’s poverty and problems!
The general direction is clear and has already started.
High risk loans come with a high interest rates. Credit will tighten and, when available, will be available only at higher interest rates. “Higher interest rates” takes a number of forms, increased unemployment, diminished stock returns, stronger dollar, shrinking home equities etc… Those are already happening.
1.)
On a leadership level, Biden and other world leaders including central bankers are (already) aware of the dangers of speaking too negatively. That could cause the equivalent of a"run on the bank," but right now they are failing to warn, and that failure will likely result in a rug-pull.
Leaders should start channeling their inner Jimmy Carter, Franklin Roosevelt, Winston Churchill etc… That’s an absolute given. Left or right should concur with that. (Because I am a righty I also believe that now is a particularly bad time to “bash the rich” increase wealth transfer etc…)
2.)
In the past, recessions have been “cured” by increasing aggregate demand.
El-Erian points out that cannot be done this time.
In many sectors of the economy, (housing) increasing supply is also not a solution because recent actions have fake-inflated the supply curve to meet the fake-inflated demand curve. One way or another we will realize “We already ate the seed corn. Now we are fat people and we don’t have enough seed corn for next year. In 2023 we are going to grow less corn and eat less corn. There is no avoiding it.”
Here is a really rough analogy that might help.
Note: “The 550 U.S. billionaires together are worth $2.5 trillion. If we confiscated 100% of their wealth, we’d raise enough to run the federal government for less than eight months.”
The analogy:
Imagine an economy is productive enough that its average worker can afford meat and potatoes but cannot afford ice cream. Congress passes a “free ice cream program” and the Fed pays for it by printing money.
- Workers get ice cream and
- an ice creams industry develops.
But this was unsustainable to begin with. It was funded out of printed money and money printing has now hit a ceiling. Increasing demand for ice cream (lefty solution) won’t help and neither will increasing the supply of ice cream (supply-sider solution.) Regardless of what policy we adopt, none will lead to ice cream forever.
Economics is the dismal science.
Looks like he’s not the only one who’s concerned:
From the link:
The central bank’s staff flagged rising pressure on consumer spending, trouble overseas, and higher borrowing costs as near-term headwinds, the minutes from the Fed’s November meeting show.
“Sluggish growth in real private domestic spending, a deteriorating global outlook, and tightening financial conditions were all seen as salient downside risks,” the minutes read, adding that further interest rate rises could make matters worse.
How about we try and figure out what the actual structural problems are instead of reverting to political tropes?
Instead of manipulating the economy for short term ephemeral changes, and scaring/bribing the voters to continue that?
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I believe the Fed is still being overly optimistic. They are still talking about a terminal rate below the inflation rate which
a.) has never ever happened (All economic data is historical data. Thus there is zero economic data their pie-in-the-sky hypothesis has ever happened.)
and
b.) could not happen even in their hypothetical models unless things like oil shocks and supply chain shocks “magically” alleviated themselves before they get to their terminal rate.
“b” is an interesting hypothesis, since energy prices do tend to come down during recessions, it is hypothetically possible, but it has never happened in that order before despite the fact that we have had many energy price spikes (OPEC formation, oil embargo, Iran revolution, Gulf War 1, Gulf War 2) and current G7 policy is to drive energy prices higher, not lower.
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If we are trying to thread a wide needle between “warn too much” (run on banks) and “not too little”) pulling the rug out from beneath the middle/working class) I believe the Fed and other world leaders are currently “warning too little.”
