GDP Contracts, Consumer spending rolls off a cliff


The news from the commerce department was not good. Inflation plus a dramatic drop in consumer spending drove a small contraction in the US economy in the third quarter of 2008, and the indicators are that we will get the "two quarters of negative GDP" threshold for everyone to happily call this a recession without looking over their shoulders. In some sense last quarter was made worse by allowing resource inflation to continue longer than was sustainable, but this quarter will face a credit cruch of enormous proportions which will sink numerous people and businesses.

The decline was broad based, and centered around a 1.3% - that's annualized - decline in domestic purchases. Much of the growth was in, you guessed it, defense spending, which rocketed up by 18% on an annualized basis. This looks like an attempt to spend freely while constricting the dollar to bring down oil prices that failed. As importantly, it is clear, even to the feebles who run the fed, that inflation had expanded to the broader economy, ex-food and energy, the GDP deflator grew at an annualized rate of 3.1%.

This is rear view mirror stuff, in the sense that inflation is not going to be the immediate place where the next stages of the crisis are felt. However what was wrong with the economy at the time the snap shot was taken, will be wrong later: it is gripped in a stagflationary situation, where attempting to stimulate the economy boils away as inflation, without producing a rise in wages or purchases.


Stirling Newberry October 30, 2008 - 10:00am
( categories: Miscellany )

after watching Obama's 30 minute infomercial, I really have fears about intellectual stagflation since the anti-war folks are embracing Obama's "college assistance" for "military action" idea; so the well-to-do can opt out while the less fortunate will become slaves to the state and will either have to fight for resources (literally) or do mundane grunt work in a "civil service" role.

so the aristocracy will be preserved.

Moreover, I can't see how Obama can make companies pay off their pension obligations since underlying business models do change.

mrmx October 30, 2008 - 12:48pm

He can't. And I'm surprised corporate America has moved so slowly on this front. After they're completely done busting the unions, then they can lobby for tax-paid health care and squeal that they need their pension obligations covered by the government (us, again) so they can "remain competitive".

Then they'll give their execs multi-million dollar bonuses and assemble their shitty cars outside the U.S.

Pardon my cynicism; I'm a post-war baby and I've seen how big labor worked when the U.S. was the world's dominant manufacturing power, and how management operates since we are no longer. A pox on both houses.



"What we've got here is, failure to communicate"

Rick October 30, 2008 - 1:54pm

from one performance artist to another: "we know musicians (except vanilla ice) can't sell BS a crowd!"

Obama does it and folks eat it up.

if you've seen the infomercial, did you choke up when Biden (if my memory serves me right) claimed that Obama fixed the money corruption problems of congress by reaching across the isle? This was the same Biden that said Obama wasn't fit to lead!

so, for us musicians who are looking for congruence in the tempo, we're left shaking our heads...

mrmx October 30, 2008 - 5:57pm

I was in fact out performing. Much better use of my time.



"What we've got here is, failure to communicate"

Rick October 30, 2008 - 9:16pm

I think the real test for whether or not we're having a recession is two consecutive quarters of GOP rule.

AMC October 30, 2008 - 1:21pm

thanks to the bailout (aka takeover):

Paulson's Swindle Revealed

The swindle of American taxpayers is proceeding more or less in broad daylight, as the unwitting voters are preoccupied with the national election. Treasury Secretary Hank Paulson agreed to invest $125 billion in the nine largest banks, including $10 billion for Goldman Sachs, his old firm. But, if you look more closely at Paulson's transaction, the taxpayers were taken for a ride--a very expensive ride. They paid $125 billion for bank stock that a private investor could purchase for $62.5 billion. That means half of the public's money was a straight-out gift to Wall Street, for which taxpayers got nothing in return.

More at the link

I did inhale.

Don October 31, 2008 - 9:33am

Leo W. Gerard, president of the United Steelworkers, raised these explosive questions in a stinging letter sent to Paulson this week. The union did what any private investor would do. Its finance experts vetted the terms of the bailout investment and calculated the real value of what Treasury bought with the public's money. In the case of Goldman Sachs, the analysis could conveniently rely on a comparable sale twenty days earlier. Billionaire Warren Buffett invested $5 billion in Goldman Sachs and bought the same types of securities--preferred stock and warrants to purchase common stock in the future. Only Buffett's preferred shares pay a 10 percent dividend, while the public gets only 5 percent. Dollar for dollar, Buffett "received at least seven and perhaps up to 14 times more warrants than Treasury did and his warrants have more favorable terms," Gerard pointed out.

"I am sure that someone at Treasury saw the terms of Buffett's investment," the union president wrote. "In fact, my suspicion is that you studied it pretty closely and knew exactly what you were doing. The 50-50 deal--50 percent invested and 50 percent as a gift--is quite consistent with the Republican version of spread-the-wealth-around philosophy."

The Steelworkers' close analysis was done by Ron W. Bloom, director of the union's corporate research and a Wall Street veteran himself who worked at Larzard Freres, the investment house. Bloom applied standard valuation techniques to establish the market price Buffett paid per share compared to Treasury's price. "The analysis is based on the assumption that Warren Buffett is an intelligent third party investor who paid no more for his investment than he had to," Bloom's report explained. "It also assumes that Gold Sachs' job is to protect its existing shareholders so that it extracted from Mr. Buffett the most that it could.... Further, it is assumed that Henry Paulson is likewise an intelligent man and that if he paid any more than Mr. Buffett--if he paid $1 for something for which Mr. Buffett would have paid 50 cents--that the difference is a gift from the taxpayers of the United States to the shareholders of Goldman Sachs."
The Nation

[emphasis added]

The article goes on to ask whether the same 50/50 split is being used in divvying up the rest of the 700 billion "rescue" package.

I'm afraid that 50/50 might turn out to be a good deal for the taxpayers in the end.

tjfxh October 31, 2008 - 12:16pm

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.