Recessions, until the last 20 years, tended to huddle together for warmth. The last recession was rewritten to be shorter by the NBER, but had many of the characteristics of being a double dip recession, or one very long recession. The odds of a recession this year are approaching unity, because George W. Bush does not want to deliver fiscal stimulus to Democratic constituencies. That’s really when expansions end, when one of the players would rather not take the consequences of continuing the expansion. In 2000 that was Alan Greenspan, this time around, it is George W. Bush.
It will be a shallow recession, because of the vast monetary stimulus being used to prop up US housing, and the global desire to keep the resources boom, the flip side of a resources bubble, in place. This means that inflation will not be broken, and very shortly after the end of the present recession, which will be made worse by the ending of Iraq based stimulus in the short term, we will be back in an devaluationary crisis similar to this one. There is not enough investment supply: that is a stream of businesses which will pay the natural cost of money. There is too much investment demand chasing too little supply, which means real returns must fall, except in those limited areas where there are resource benefits. Lack of Investment Supply. Put it on your wall and frame it.
Recently even people in the financial industry have started to openly state that further fed rate cuts are not going to help, and that monetary policy will not be a cure global imbalances. Global imbalance is a code word for China not being willing to suffer an inflationary rampage that would destablize the government so that huge fistfuls of foreigners can make a killing selling Yuan denominated assets.
The Yuan is not the source of the world’s imbalances, but it is the source of the present financial crisis. The way the developed world’s economy has stayed ahead has been development arbitrage: buying up assets cheaply from countries with cash flow problems, selling these at large markups in order to pay their resource bills. When they were relatively restrained about spending in the 1990’s their currencies appreciated against resources, and it was very profitable. It also lead to the meltdown of a number of economies, and the absolutely crushing and dismal conditions in Russia, as well as Japan’s long Bright Depression.
With the coming of monetary policy change in Q4 1997, the developed world took a different course: allowing devaluation of the dollar in order to build out the US asset base. The next step in this policy was the invasion of Iraq, to secure some of the appreciating oil assets. We are now facing the dismal failure of the deflationary policy regime pursued by Greenspan, Bush, Bernanke and aided by the Bank of Japan. The United States has not seen a significant appreciation in its stock market, its currency is now far weaker, meaning that the absolute value of assets in the United States is lower. Viewed from the perspective of the Euro, the global economy has shrunk, not grown, and this explains a variety of seemingly unrelated effects such as the increase in the price of oil far above the demand for it, the waves of immigration from countries where people who are not connected to resource streams are being displaced and the disruption of trading patterns.
The present coming recession is not going to cure any of the imbalances, nor is China likely to do anything other than buy up key US assets.
This means that with the massive monetary stimulus, inflationary expectations on the part of those say, selling oil, are going to continue, and it is not to their disadvantage to allow a major stock slide, when oil remains expensive. They can buy up assets with cheap dollars paid for with expensive oil, and then allow the price of oil to ebb. The corruption in the Arab financial system prevented this play the last time around, with events like BCCI being merely one example of many.
What this will mean is that as the US emerges from the coming recession, there will be intense pressure to raise the value of the dollar, and liquidate assets predicated on a deflationary housing boom. This will require massive monetary constriction, and lead to a second recession very close to the first, probably one which will be deeper and broader, and quite probably longer.
The alternative will be a period of increasing inflation, deterioration of the US position in terms of controlling the world financial apparatus, and ultimately a permanent downward adjustment in US standards of living.
Are there solutions? Not really, we have bought and paid for this recession, and a worse one to follow it. Already. However, while recessions are painful, they are not necessarily entirely evil. A recession shifts the decision making over the future of the economy from those who have possession of assets, to those who have possession of credit. This can mean that the “deep rich” gain control, as they did in this decade, but it can also mean that the social sector and the public sector use this as an opportunity to unify around a long term vision for the society.
This is why the shift in thinking from monetary to fiscal policy is important. Monetary policy gives an economy more of whatever it is already doing. Fiscal policy can change directions. When an economy is essentially in the right direction, monetary stimulus can be used effectively to grow or contract the economy around a trendline. When an economy is fundamentally providing poor incentives, fiscal policy looks better and better. Provided of course one has people running the fiscal policy who are not moral cripples suffering from rectal cranial inversion. Unfortunately for the US, it has replaced a personally corrupt evil stupid congress run by Republicans, with merely a corrupt cowardly evil stupid congress.run by Republicans with Bush Dogs as cosigners. It is that they aren’t personally corrupt. The catastrophic failure of Democratic leadership will be masked by the good conditions of 2008 for Democrats, but unless dramatically changed, will lead to their losing Congress right back in 2010, especially if there is a Democratic President being hammered for the recession.
This means that instead of Americans taking paper losses on the houses and retirements, they are goint to wake up and find a bi-partisan consensus, meaning Republicans plus Bush Dogs, to shave more off their entitlements. The Republican way to do this may well be double taxation: a national sales tax means that people who paid income taxes earning money, will then have to pay sales taxes spending it. The Democratic way will be nibbling away at benefits and technocratic shell games, as “hedonic adjustments’ were used to nibble away at Social Security.
Neither party is stating the obvious, that the various sticky fingers of the financial system, which have deprived Americans of the benefits of lower costs, now add up to over 10% of GDP. Plus the prison-security-military-industrial complex, this comes closer to 20 cents of every dollar boiling away into projects that do not improve the fundamentals of the American economy, but shift money directly from those who work, to those whose job it is to delay the day of reckoning.
Few people remember that Hoover oversaw a dramatic expansion of the Washington Bureaucracy, and that FDR slashed many of the expansions that Hoover made. He did this because he wanted every cent possible for broad experimentation and direct stimulus to the economy. The Hundred Days featured not only spending, but ending ”“ ending of bad decisions made earlier.
In our present, Iraq is the obvious target. It amounts to some 200 billion dollars a year of costs plus interests, for relatively little net return. To give you an idea of how much this is, it is half of the total domestic discretionary spending. To pay for Iraq, we would have to fire half of everyone who works for the government, and stop half of every road, bridge, and hospital that the government has a hand in building. That includes half of all aid to states.
This means that there is no place for fiscal stimulus to come but from the US military budget, which is not a very efficient way to deliver such stimulus.
Given the immense entrenched interests involved, it will only be when the rest of the country forms a coalition against this that it will be changed. This will not be in time to deliver fiscal stimulus when we are leaving the coming recession, which almost assures that the most likely scenarios are that this recession will either have a very long convalescing period, or turn directly into a second down turn when monetary contraction is implied to finally fight inflation.
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