2010 October 17 Sunday
7 More Years Of Weak Economic Growth?
Yale housing economist Robert Shiller, famed for the Case-Shiller housing price index, points to economic research that predicts poor economic performance due to the recent financial crisis.
NEW HAVEN – Much of the talk emerging from the August 2010 Jackson Hole Economic Symposium, attended by many of the world’s central bankers and economists, has been about a paper presented there that gave a dire long-run assessment of the future of the world’s economies.
The paper, “After the Fall,” was written by economists Carmen Reinhart and Vincent Reinhart. Their work draws upon a recent book that Carmen Reinhart co-authored with Kenneth Rogoff, entitled This Time Is Different: Eight Centuries of Financial Folly.
According to the Reinharts’ paper, when compared to the decade that precedes financial crises like the one that started three years ago, “GDP growth and housing prices are significantly lower and unemployment higher” in the subsequent “ten-year window.” Thus, one might infer that we face another seven years or so of bad times.
We have more than just that reason to expect poor economic performance in the next decade and beyond. Huge US government deficits, pressures to raise taxes to pay for them, an aging population, Peak Oil and other problems I've pointed to make me expect economic contraction over the next 10 years.
Over at GNXP Thorfinn points to the rising anti-elitist sentiment as economic stagnation continues. I expect this feeling to become more widespread and intense. The feeling seems justified too. If the elites steered things in a direction where stagnation (or worse) will be the result then the elites do not deserve their high perches.
As Benjamin Friedman laid out in The Moral Consequences of Economic Growth; a tolerant, accepting society is predicated on running the growth treadmill. Simply being prosperous is not enough — people need to feel that conditions will steadily improve over time, or else populism, xenophobia, and other measures of intolerance go up.
So as we enter the a “New Normal” phase where the steady economic growth and low unemployment of the Great Moderation can no longer be sustainably maintained, there will be substantial political upheaval as well.
One manifestation of this is the strongly anti-elitist attitude espoused by anti-establishment political candidates, among others. Barack Obama (Columbia, Harvard Law) and Sonia Sotomayor (Princeton, Yale Law), for instance, have been attacked for holding Ivy League credentials.
Competition between factions for resources is going to become a lot ruder and cruder. Old folks, young folks, races, upper and lower classes, doctors, lawyers, CEOs, capitalists, education bureaucracies, welfare recipients: these people can't all be placated. As each group loses the demand will go out for even greater losses by other groups. What I want to know: How's this going to turn out? Who will lose the most? What sacred cows will cease to be sacred first?
I'm expecting means testing of old age benefits, welfare cut-backs, higher education subsidy reductions, education cuts (look at state and local budget cuts that show this is possible), and even a step back from guaranteed full medical treatment all diseases.
The biggest incentive for governments to pressure their central banks to cause hyperinflation in a contracting economy is that it will allow governments to avoid making explicit direct visible cuts from each faction's pie slice. "Oh sorry, you didn't keep up with inflation. We still boosted our expenditures for you. But the inflation we can't control took away even more. Bad inflation. Not our fault. We sympathize." The cuts will come. But they'll be done in a sort of back door way. Plausible deniability. That's a much more economically damaging way to cause the cuts. But many governments have done it and the US government will be sorely tempted.
"...people need to feel that conditions will steadily improve over time, or else populism, xenophobia, and other measures of intolerance go up."
Sounds good to me. Nothing like the truth.
'Great Moderation' - What a crock of shit!!!!
It's funny you only hear professional economists use that phrase #they invented it#, and never the man on the street.
Basically they are talking about the time before the sub-prime shit hit the fan in which China wiped out uS industry, and it's their positive spin after the fact, before the tits started heading south.
By using that phrase they proclaim their 'cleverness' and the fact that dumb-fuck politicoes took their charlantry seriously.
Only now the China-Devil is knocking on the door and demanding his price #the US soul#, and it ain't pretty.
No more material, no more materialism. It seems to me that in addition to xenophobia, etc, our culture may necessarily become more profound.
Ultimately, I think the centre cannot hold. We will have a new political system. But, my hard-bitten life's experience whispers that it's not particularly likely to be better than the one we have. Still, I'm happy. There are a lot of nations in Europe (assuming the hated EU dies), and all will be moving out from under of our shadow of influence, and away from consumerist slumber. Random chance suggests that a few of them will get excellent new political systems that will save them from bio-national oblivion. Not that I want to see cruelty done to the foreigners threatening Europe; instead I want the problem dealt with slowly and with maximum consideration (in the worst case they can even be granted European territory). Then maybe one day, I can be naturalized in an explicitly bio-European nation-state in Innsbruck, Paris, or Copenhagen (or even in some part of North America?), and be a citizen of a real nation that I actually love - which is to say one that can actually perpetuate partly-biological traits and hopes of mine and my family's into future centuries and millennia. That's my "American dream."
"Great moderation" is a name given to the period from the early 80s until 2008, in which economic variables (GDP, payrolls, inflation...) in the US became much less volatile than in any other period. The name is very appropriate, since the period was marked by much more stability than any other, but the reasons Bernanke himself gave for why it happened are now a joke. He named "improved policy-making" and "better understanding of the economic cycle" as the reasons behind the Great Moderation, reasons which were supposed to make the Great Moderation sort of permanent.
The biggest incentive for governments to pressure their central banks to cause hyperinflation
I don´t believe hyperinflation is possible in a society that is aging so fast. I doubt even if positive inflation is possible if the aging process is so severe as Japan´s. If it wasn´t for inflation imported from he rest of the world (rising oil prices being the prime example), Japan would have deflated year over year for the last 2 decades.
One effect of the stagnation will be a permanent reduction in the birth rate in the U.S. Fertility has already declined 10% in the past 2 years because of the economy. This decline will increase. We are in for a repeat of the "GenX-slacker" phenomenon we saw in the early 90's. Only this time it will be semi-permanent. Young adults will see little economic opportunity and, as a result, will decide not to get married and have kids. Already married people make up a minority of those aged 25-34 years old. By the end of this 7 year period, the U.S. birth rate will be inline with that of East Asia and Europe (fertility rate of 1.0-1.4).
How that decline is distributed depends on policy. Deporting illegals, uprooting "anchor babies" and diverting their subsidies to natives will change the composition of the generation following.
"Deporting illegals, uprooting "anchor babies" and diverting their subsidies to natives will change the composition of the generation following."
It makes little difference. You are a young person and are having difficulty finding fulfilling employment. You see nothing but stagnation into the foreseeable future. Worse, you see lots of people in their 50's being laid off and experiencing permanent downward mobility and age discrimination. Whats the first thing you do if you want to have a fun, fulfilling life within a zero-sum situation? You avoid the overhead, right? Marriage and kids represents overhead and 20 years of wage slavery. Or you can live a cheap life, put away money while still doing fun things like snow boarding or kite surfing, and retire independently wealthy at age 40? Or you can do a "Fred Reed" and retire in Latin America or South East Asia.
This is such a no-brainer that I shouldn't even have to spell it out for anyone.
Why do you think the Great Moderation happened? I am sincerely curious.
Hyperinflation and an aging population: Good thought. Older people living off of interest payments are opposed to inflation. But the US government has to weigh their interest payments against the government's possible inability to raise enough money in the debt markets. The Japanese were only able to keep going on by running government debt up to over 200% of GDP. They won't be able to sustain that either.
So I see heavy pressures on the US government to inflate.
Most people can't retire independently wealthy by age 40 even if they live very cheaply.
Kids: I want smarter people to have more of them.
Popular opinion on immigration is certainly going to shift further against it once global oil production starts declining. I hope the decline is slow enough it can be managed.
"Most people can't retire independently wealthy by age 40 even if they live very cheaply."
Its a lot cheaper to live in Latin America or South East Asia than the U.S. Pulling a "Fred Reed" is actually not that expensive or difficult.
I didn't say that old people may lobby against inflation, only that I can't how a country can deflate its most basic asset, its population/workforce, and avoid deflating its currency. Think about it, if you deflate your population, all your capital stock, like houses, roads, ports, airports, pools, school buildings, machinery will get increasingly idle with time. In other words, it will be deflated. Japan avoided full deflation because they had the America Colossus exporting inflation to the rest of the world while Japan herself deflated domestically.
wrt the Great Moderation, I don't know. Once my belief in Bernanke's explanation was shattered, nothing else came to substitute it. My point was that it is not true that because the Financial System imploded in 2008 that the Great Moderation did not happen. The fact that it ended does not imply that the Great Moderation did not happen, only that Bernanke's thesis was wrong because according to her the Great Moderation could never end.
How the retirement of the baby boomers plays out is going to be interesting. In countries like Australia where the bombers have high levels of savings and lots of money in real estate values it shouldn't be too much of a problem.
In countries with poor savings rates it could be a big problem. On the one hand new job opportunities may open up for the young, and they should find it easier to buy a house, but the drain on government finances may be a big drag on the economy. I suspect also that most of the new jobs opportunities will be part-time as those bombers unable to retire will continue to work part time for another 5-10 years. Ths could be especially true in the U.S. where house prices have gone down or where not that high to start with.
Whatever else happens I believe low growth is hear to stay in most of the English-speaking West.
Here 's my predictions for best and worst performing English-speaking economies over the next decade, with 1 the best and 6 the worst:
3. New Zealand
6. Great Britain
I rate Britain the lowest because I believe they will be most effected because they will be most hit by peak oil and their failure to invest in nuclear power, even though they have been pretty good at handling their pension system. Australia comes out on top because of high savings levels and mineral reserves. New Zealand and Ireland I'm not too sure about, although NZ will benefit from its connection to Asutralia. The U.S has the biggest debt problems but can always slash military spending if it really needs to, and devaluation/inflation will boost U.S. industry.
Your ratings make sense to me. Canada has tar sands oil going for it. Great Britain, yes, Peak Oil hits there very hard. But same is true for Ireland.
So you are saying deflation in Japan was fed by a plateauing and then shrinkage of their population? Due to immigration the US isn't going to experience that. But we are going to experience a plateau and then decline in average skill level in the workforce. That's baked in by demographic trends.
I expect most working age people will work about 5 years or more longer than they have planned. I'm thinking I'll have to work into my early 70s because the US government is going to increase its taxes on me while cutting back old age benefits.
You are wrong.The key economic metric is 'productivity' ie the cash valued output per worker employed.Teeming millions of Bangladeshis have low productivity and a stagnant econmy, whilst a few million Swiss see their incomes rise year-on-year due to them exporting better and better machines year after year.
Have you noticed that increases in productivity are deflationary almost by definition? Also, deflation is not bad by itself. The US economy went through some of her best times ever from 1880 to 1910, with prices falling continuously. Deflation is bad if there is a large stock of debt in the economy.
Just for you to know, "deflation" refers to a monetary phenomenon, while output/productivity refer to the "Real Side" of the economy. Keep in mind when you are talking about nominal variables or real ones. Nothing says that prices and output should move together, or not.
I am a subscriber of the "Mish school of inflation", from Mish Shedlock. the true money supply includes not only the monetary base (i.e, Central Bank money), but also most of the credit available in the economy. Since the second element dwarves the first, you can see why most people got it so wrong when the FED put interest rates at zero. ANd it is easy to see how an aging population impacts inflation, because the total stock of credit needed will necessarily decrease. If you count credit as part of money supply, then old people are hugely deflationary.
People should keep Japan´s example in mind when talking about inflation. Japan tried everything imaginable to increase inflation, and yet the only price rises they got were due to the commodity boom from 2002 until 2008. I.e, imported inflation.
You don't know what you are talking about.An increase in productivity means just that - more wealth is produced per worker ie the GDP per capita goes up.This means the money stock has also increased - how the Hell is that deflationary?
gig did have a point about increased productivity being deflationary. Think of two nations A and B.if A increased productivity relative to B, all things being equal, you will see the currency of A rise relative to B. An all things being equal, increase in the currency value is deflationary.
It is even more simple. If productivity of coffee plantations doubled today, price of coffe would hit the ground. Second round effects (i.e producers leaving the market, etc) matter, but I can´t see a scenario in which prices of coffe would go up if productivity doubled overnight
All the "Hedonic Pricing" theory says that. It feels that prices of computers are stable, but since their "productivity" is increasing dramatically, the effective price of computers today is a fraction of even a few years ago.
"7 More Years Of Weak Economic Growth?"
Sounds too biblical and prophetical for my taste... I've never understood this obsession with the number 7 lingering nowadays.
The amount of useful compute utility goes up way slower than the rate of processor speed. So price per amount of utility isn't dropping anywhere near as fast.
Mish and inflation: Well, so far the Fed's policies haven't driven up prices much for things I buy. I suspect velocity has dropped as fast as money supply has expanded. The money supply expansion hasn't brought demand back to what it was a few years ago. That's clear from looking at data on freight shipments and lots of other industrial measures.
In my view the prophesiers of hyperinflation due to Fed QE activities have got some explaining to do.
The Fed usually uses rising productivity's effects on lowering costs to enable it to expand the money supply so that prices do not fall overall. Sure, prices fall in some areas. But other prices rise.
What I see as the problems:
- The big financial bubble caused massive misinvestment. Lots of capital was misallocated. So lots of wealth was effectively wasted. This depresses living standards.
- Oil costs are up and so the use of more energy as a way to boost human productivity isn't practical. Therefore more of other factors must be used to boost productivity. That effectively raises the cost of productivity increases and therefore slows productivity growth.
I expect productivity growth to go negative as Peak Oil bites even harder. We'll have fewer machines serving us. My question: Will Peak Oil be deflationary or inflationary? So far I am surprised by the deflationary conditions we are experiencing. Maybe Stoneleigh and Ilargi are correct. But I still expect the pressure on the Fed to inflate to become extremely intense.
I've always taken the word 'deflation' to mean the old-fashioned definition ie a nation's money stock is actually reduced causing a general stagnation in economic activity, mass unemployment and falling prices.Perhaps the definition of this economic term has changed in recent times.
Anyhow, an increase in productivity implies an increase in aggregate wealth.An increase in wealth means an increase in the money stock.An increase in the money stock implies rising wages and prices.
So much for classical theory.
As a rule of the thumb, positive aggregate supply shocks lead to "good deflation". Railways, the internet, falling oil prices are all examples of that. The last half of the Golden Age of railways in the US was just that: economic growth, lots of high IQ immigrants from countries with beautiful girls, self-confidence and falling prices.
"Bad deflation" is associated with aggregate demand shocks. A country with highly indebted citizens, firms and government is an example of it, being led into deflation by falling demand, which leads to overcapacity. If excess capacity is not eliminated by growth, it starts to depreciate, being then another deflationary force.
Japan is not Latin America, in which policy-makers are scared like hell from embarrasing their PhD teachers in the US. Japan tried everything under the sun to get to a 2% y/y inflation rate consistently, and failed. ANyway, while the Age profile of Japan is much worse than the USA´s, the demographic profile of America is much worse and worsening fast. I do not know which one will prevail.