Posted on 09/25/2009 7:11:06 AM PDT by 1rudeboy
Funny you should say that: isn't that what Laffer did with real estate? (I must confess I didn't watch the video at your link, I just assumed it's the same one I've seen a dozen times--maybe someone should find one of Schiff being wrong--by your standard we should never listen to him again).
Not that I've seen. Where have you seen it? Not here.
And most economists would be wrong. Which is their stock and trade coming into this crisis, BTW. Most economists didn’t see this coming, most economists are still standing around with one thumb up their posterior, another one in their mouth, waiting for every other economist to make exchange their two thumbs so that these other economists know when it is safe to exchange their own thumbs.
Most economists have all the brains of a sheep. They’re herd animals, and completely unsuited for life outside the ivy-covered walls of academia. Which is a nice way of saying that they’re completely unacquainted with the reality of how markets work. Which explains much we’ve seen of economists in the last 10 years, from LTCM onward.
The reason why retaliation against the US happened before way before Smoot-Hawley was passed into law was that a big portion of the US’ exports were ag commodities, and the Fordney-McCumber Act was put into place in 1922 - 10 years prior to Smoot-Hawley. The protectionism was rising already by the time ‘29 came around.
I’m one of the people here on FR who have looked at the records of that period and I don’t think that Smoot-Hawley had that much impact on trade (imports or exports) for the US. We’re already on track for more impact to trade in this downturn and there is nothing like S-H in place - and nothing like Fordney-McCumber either. Fordney-McCumber might have had some real impact on trade issues, but Smoot-Hawley was merely icing on a cake that was rather well baked by that time.
I’m now of a mind that these protectionist wars are a consequence of a debt deflation, not the cause of one. One of the symptoms of a deflationary period is excess capacity (built by virtue of easy and excess debt), and there are only a very few ways to prop up an overcapacity in production: one is by re-inflating the money supply (ie, using monetary policy to take the place of easy debt), the second is to use government programs to buy up or use the excess capacity, the third would be to use trade policy to exclude excess capacity from being imported or dumped into your economy and the last is to use war to both use and destroy excess capacity.
In the 1930’s, we did all of the above.
This time, so far, we’ve done only the first two of those.
That had to jump start our exports?
maybe someone should find one of Schiff being wrong--by your standard we should never listen to him again)
Dunno if you mean Schiff or Laffer. Schiff's "dump dollars" was premature and may turn out to be wrong, but right now I'd pay more attention to him than Laffer. Laffer, IMO, is part of the old establishment, which means he has the wrong take on the situation, as was proven in his arrogant putdown of Schiff. I don't think he's seen the light.
I can't find it on YouTube now, but Schiff had a one-hour talk before a bunch of realtors just prior to the bubble bursting. Basically, he told them they were all gonna die and gave some hilarious (to me) examples of real estate agents pushing overpriced housing on him as examples. He later said they never asked him to talk since then.
Yes and no. Yes, it did help, but not much, because many other nations were devaluing their currency at the same time.
Just as we’re seeing now.
“The reason why retaliation against the US happened before way before Smoot-Hawley was passed into law was that a big portion of the US’ exports were ag commodities, and the Fordney-McCumber Act was put into place in 1922 - 10 years prior to Smoot-Hawley. The protectionism was rising already by the time ‘29 came around.”
SH may have been the icing on a well baked cake...but the main ingredient was protectionism. Every camel’s back has a straw. The wieght of SH resulted in formal diplomatic action by over 40 countries. It mattered.
Diplomatic action might be dramatic, but the economic results were not. Exports fell from about 5%+ of GDP pre-SH to about 3% of GDP, and imports fell from about 4% to 2%. Sure, the combined 4% reduction in GDP hurt, but there was another 8%+ of GDP decline that wasn’t the result of reduction in imports & exports.
Further, while FDR campaigned against S-H, he and the newly elected Democratic majority in Congress didn’t repeal it when he & they had the chance. FDR got a “reciprocal trade agreement” framework in 1934 which turned trade matters over to the POTUS and allowed him to make changes in tariffs, but S-H was still in place for countries which were not “reciprocal trade” countries during the 30’s. Various south American countries were added first, with the UK added as a RTAA country in 1939 (if my memory serves), but trade didn’t start to truly increase until the economy did in 1939 to 1940.
This is why I bang away on this issue: the clamor against anything that endangers what is popularly claimed to be “free trade” is based on this mythology surrounding Smoot-Hawley. People who point quavering fingers at Smoot-Hawley have quite a bit to explain as to why we have a worse drop in trade today, with nothing remotely like Smoot-Hawley (or Fordney-McCumber) in place, than we saw trade drop in the Great Depression, with heavily protectionist policy in place both in the US and within our trading partners’ governments.
Clearly, if we’re seeing a worse decline in trade now, without S-H, then there’s something else at work here than trade policy, and it is well past time to revisit the popular history of the Depression and get some things cleared up.
And one of those things is just how much S-H contributed to the Depression, and the answer is “not as much as is postulated by such people as Kudlow in hysterical tones...”
The real fault of the collapse in trade in the 1930’s was the collapse of the financial sector, just as now.
It is true that there was a trade war of escalating tariffs and tit-for-tat actions - but the majority of damage to international trade and the retaliations via tariff rates was done in the 1920’s in response to Fordney-McCumber. Some tariff rates were actually higher before S-H was enacted, and in most cases the increase in the absolute percentage tariff under S-H was about 6%. This was made much worse (in percentage terms) by the deflation on prices, however.
The biggest reason why Smoot-Hawley gets so much bad press and historical revisionism is that it is part of the Democratic mythology of how the Republicans were wholly responsible for the Great Depression, since both Smoot and Hawley were Republicans and most Republicans in Congress voted for the act and most Democrats voted against it. The worst thing about S-H was that it was two years in the writing, taking from 1928 to 1930 to get through Congress, gathering all manner of bad press along the way as various industries asked to be added to the list of products & industries to be protected from foreign competition. S-H started as Yet Another Ag Commodity bill, but then snowballed into a catch-all industrial products bill as well after the panic of 1929 and the credit implosion that quickly started following 1929. But mid-1930, industries were seeing orders fall off and demand slack from pre-crash levels, and they saw Smoot-Hawley as an easy fix to prop up their business by raising import tariffs.
People today are almost completely detached from ag production, which isn’t surprising since only about 1% of the US population is even remotely connected with the ag sector. But for those who are, many recall or have been taught that the 20’s were a time of crashing ag prices - even for commodities not produced in the US.
Let me give you an example of an ag commodity not produced in the US at that time (and today only produced in Hawaii): Coffee. In 1924, worldwide coffee production was 1.5 million tonnes, and prices were showing producers a profit. So they expanded production until in 1927, worldwide production was up to 2.1 million tonnes.
That’s a hefty increase. And as a result of this glut, prices started falling — from 24 cents a pound to 14 cents a pound. That hurts.
So producers cut back production and got prices back up to 19 cents/lb in 1928. Well, producers were making a profit at 19 cents, so they expanded again.
In 1929, production was up to 2.4 tonnes, and prices crashed down to 10 cents/lb.
In 1931, coffee was down to 6 cents/lb. The coffee producers were now well and truly screwed.
Another example: Sugar production worldwide increased 40 percent from ‘20 to ‘29. Or silk - something that one wouldn’t think would be easy to increase production of - increased like sugar - about 40% from ‘20 to ‘29. These are ruinous increases in production - far too much, too fast to be absorbed by the worldwide consumer.
Once you consume as much of these products as you need or even want, you’re not going to consume more simply because the price went down another 10%.
There was no way to deal with this vast over-capacity. Trade restrictions started going into place all over the world, not just in the US. Pretty soon, you have people clamoring to their governments to “do something!” And in a democracy, the goofballs in power are elected by the people in their own countries, not foreign trading partners. So they’re going to take the popular, even if ineffective, action of raising a tariff because it provides a “quick fix” for the problem.
The trouble is, the real problem is the over-capacity brought about by easy debt & liquidity, which creates unsustainable demand, just as we’ve seen with housing and autos in this downturn in the US. Houses aren’t imported, but we’re seeing prices on housing come down at a rather quick rate and employment in the construction industry decline rapidly. There is no tariff that could be put in place to respond to this — so Obama & Congress put in place various tax breaks, easy loan policies and “Cash for Clunkers.”
They’re not working either. The only sustainable solution is to deliberately destroy the excess capacity or wait for the market to do it.
“Diplomatic action might be dramatic, but the economic results were not.”
Really? The unemployment rate went from 9% to 16% the year after SH was passed...How much of an economic result is important?
The next year it went to 25%. Twenty five percent unemployment along with massive reductions in GDP growth.
Protectionism is a tax. SH put an effective 60% tax rate on over 3,000 products.
If you believe protectionism is good then you are for higher taxes and less freedom.
If your belief is that SH was good your ideas fly in the face of facts. If you want to make the case that SH was but one negative factor leading to the Depression, your points have merit.
The unemployment rate went up just as our unemployment rate is going up NOW. Without trade barriers in place.
Debt deflations do that.
BTW — the unemployment numbers from the Depression are plumped up quite a bit. The BLS statistician who created the unemployment stats for the 30’s ex post facto included the following people in the “employable” population:
- Prisoners
- men in the military
- children as young as 14.
He also did not count those employed by temporary government schemes.
My SWAG as to the unemployment rate using today’s methodology is more like 21% or perhaps even lower, and it would be best to compare it to today’s U-6 date, which is now pushing 17%. Again, without any trade barriers in place.
“The unemployment rate went up just as our unemployment rate is going up NOW. Without trade barriers in place.
Debt deflations do that.”
We are in a regular cyclical recession. That in conjunction with systemic transitions where we are losing jobs to cheaper competitors is why unemployment is going up now.
During the Depression you had a rare economic event which was was handled poorly by government...protectionist policies with Smoot Hawley were a large part of that.
Protectionism is poor economic policy which will cause inflation to spike. It is inefficien economics and everybody knows it.
The problem in the US is that our education system has not done an adequate job of preparing our workforce for more technological jobs.
No, we are not in a regular cyclical recession. Anyone who believes that is simply oblivious to the facts.
Regular cyclical recessions don’t take down the financial sector, and they don’t do it world-wide.
Lehman Brothers existed through many a recession. They’re no more. Bear Stearns existed through many recessions. They’re no more.
The entire nation of Iceland defaulted because they could not back the liabilities of their three biggest banks. RBS and HBOS came within hours of collapse in the UK. That doesn’t happen in ordinary recessions.
The US had to use the full faith and credit of the US to back money market funds - which just ended this past Friday. That’s never been done in recessions before.
This is not a “regular cyclical recession.”
It’s possible to have a regular cyclical recession with the banking implosion and a real estate meltdown. The fact that we had the credit crisis doesn’t mean that we didn’t go into a cyclical recession...we were due for a recession...easily.
Now if Obama wants to start a trade war with China, then we will see a double dip recession if not worse.
Whether the stars lined up or not isn’t what differentiates this recession from others. The fact that we’re in a debt deflation and levels of private sector debt rose to levels where even prime, previously rock-solid borrowers are unable to service the debt is what makes this recession different from every other recession since WWII.
The last time we had a financial sector melt down due to debt deflation was the 1930’s. And even then, Lehman Bros and other Wall Street firms survived the crisis, smaller banks went under (in large numbers). This time, the situation is somewhat reversed; the smaller banks have better loan portfolios (on average) than the big banks.
The last time we had a financial sector melt-down that spanned continents was the 1930’s as well. There have been banking melt-downs in individual countries (eg, Japan in the early 90’s, Sweden in the early 90’s, Mexico in the mid-90’s, southeast Asia in the late 90’s), but here, we see Europe, the UK, Japan, the US and some South American countries all in the same boat. Spain is in a for-real depression, with unemployment of 25%, and international trade has declined from/within Asia more severely than in the Great Depression.
This is not a cyclical recession. We simply hit the point at which debt could not be expanded, a Minsky threshold if you will.
I don’t understand your linkage of recession to bad risks taken on by failed corporate investment bankers, such as Lehman etc.
Bear started the highly leverage derivatives that showed great profits...such as many day traders overextend their portfolios 4 fold...Bear monetized their derivative vehicles by 20 plus fold...They lost. They failed. Same for Lehman. But GS survives as do many others.
I don’t see how this was caused by your debt deflation recession theory. In fact we had a financial sector meltdown due to poor risk management of portfolios.
These poor decisions by the financial industry, along with many other factors, including real estate asset bubbles bursting caused this recession. A recession by the way that is above average in length but comparable to at least 5 or 6 others since the 1900s, and of course dwarfed by the Great Depression. The depth of the recession is also comparable to several other recessions as measured by loss of GDP growth.
We’ve been here before and we will cycle back to Recovery again. It’s a never ending necessary cycle and part and parcel of the free markets that we have. Albeit imperfect and with regulated inefficiencies.
The US economy is (or rather *was*) predicated for 70% of our GDP on consumers consuming.
The US consumer is highly leveraged and as of 2005, had a negative savings rate, which was the result of ever-greater borrowing by the consumer to consume. A negative savings rate was predicated upon the consumer strip-mining equity out of their housing, and clearly wasn’t sustainable.
As of 2006, the US consumer ran out of ability to service the debt. The manner in which the debt was securitized doesn’t change the fact that the US consumer was unable to service the debt. Whether the debt was packed into CDO’s or straight bonds, the US consumer wasn’t able to service the debt and started to default on the debt.
At this point, suddenly banks re-discovered lending standards and started to withdraw from making new loans. Then lenders started to fail outright as the secondary market noticed the borrower defaults rising and started calling the various mortgage brokers and free-n-easy lenders on their covenants.
At this point, the recession became a fate certain. Without an increasing pool of credit for the US consumer, consumption wasn’t going to increase because the US consumer has had stagnant wages for the last 10 years. There has been no increase in US consumer buying power except for the credit bubble that propped up consumers post-9/11.
The fault of the recession is actually the Fed’s - they faced a deflation in the 2002-2003 recession and they puffed up the available credit, margin and loose lending practices you speak of. The fact that the consumer can’t service the debt, however, is what triggered the recession. If consumer earning power had continued to increase as in the 80’s and 90’s, then the various projections of the sustainability of credit expansion (by the Fed on down) would have been viable. As it was, it isn’t. The can was kicked down the road and the problem was allowed to get even larger.
And today, we’re just kicking the can down the road a tad further. “Too big to fail” has become “Bigger than too big to fail” and we’ve actually increased, not decreased, the risk of even bigger financial collapse.
Just as in the late 20’s and 30’s, the economy expanded based on phantom demand; the easy credit era of Greenspan has created a large overhang in surplus capacity (not only here, but in nations who export goods to the US - in particular, Japan and Germany) that now has to be dealt with. That’s not a normal recession issue. The excess capacity in housing, auto manufacturing, retail, commercial real estate, etc will have to be dealt with (ie, destroyed or allowed to hang over the market until such time as organic demand can soak up the excess). Absent active destruction (eg, the cash-for-clunkers destruction of the trade-in cars) this is going to take quite a bit of time; years.
The “recovery” that people are pimping right now is not sustainable; The TARP banks have decreased, not increased, lending in the last nine months, the mortgage market is almost entirely propped up by the Fed and Federal government agencies, lending standards are tight (and will likely get tighter as prime defaults continue to rise) and today the FDIC is proposing to pre-charge member banks for three years’ deposit insurance to prop up the FDIC insurance fund.
I highly recommend that people read Fisher’s paper on debt deflations from 1935. His checklist of symptoms of a debt deflation are all met. Minsky’s papers on unsustainable “towers of debt” are useful to read as well. We’re at a point in the US where the consumer cannot shoulder any more debt, and the simultaneous drop in equities and home valuation has put a large number of people into the mode of having to save cash for retirement. The stats on new consumer borrowing show that the US consumer is de-leveraging at a rate much faster than expected by economists and various policy wonks, and this means that notions of consumers resuming prior levels of consumption are wishful thinking.
You make good points but I don’t agree with your implied conclusions.
How long do you think the recession will last?
When do you think positive GDP growth will begin?
You seem to have a good idea what you think will happen...I’d be interested to see your forecast for the next year or two.
Positive GDP could happen in Q3 here, but most of it will be artificial. Remember the computation for GDP takes into account government spending (which has ballooned), and imports are *subtracted* from the GDP, and since imports are way down, that helps GDP. There’s going to be a contribution from the cash-for-clunkers program (a temporary little blip in actual consumption) and some homebuying blip. Take away the government trying to goose the economy, however, and I think it will look still negative.
Part of the problem here is that most of our economic statistics are designed and were designed for happy-go-lucky times - ie, most government stats start in 1947 or 1948. Every recession since then was as you describe - cyclical, and expected.
They don’t know what to do with debt deflations, and the fact that you have to dig into the bowels of so many of these reports is why so many people didn’t see this coming. It is the reason why economists keep mumbling like befuddled drunks as to why “Okun’s ‘Law’” isn’t holding true (ie, why is unemployment so much worse than the drop in GDP predicts? Well, for starters, Okun didn’t use data from a debt deflation - only post-WWII data, and second, because there are no “laws” in economics...)
I keep telling people (on FR and elsewhere) to dig into these reams of stats — the harbingers of the banking disaster were there for all to see — but ONLY if you read past the “rah-rah” headlines and down into the guts of the stats.
The GDP-going-positive uptick I’m halfway expecting this quarter won’t be the result of organic economic growth, nor is it the result of sustainable private sector growth. At best, I think we’ll be able to say there’s been some inventory restocking and “things sucked less” for the housing market in August. However, consumer credit contracted over $21B in August:
http://www.federalreserve.gov/releases/g19/Current/
Consumers can buy because either their household income is going up (which it isn’t) or they’re taking on more credit (which they’re not). The oh-so-terribly-smart economists and analysts projected consumer credit to contract about $4B in August (off by a factor of 5, but hey, what’s a little rounding error in economics, right?).... but the consumer had other ideas, as you see from the Fed report above.
No increase in wages + no increase in credit issuance + big jump in savings rate = systemically reduced consumer demand, which is a drop in the thing that drives 70% of the GDP organically.
The government has been trying to prop up consumer consumption, with cash-for-clunkers, the $8K first-time homeowners’ tax credit, blah, blah, blah. IMO, They won’t result in a sustainable growth in GDP.
Look at cash for clunkers as a great, FDR-lite model of government program: (CFC is the AAA re-hashed - there’s little new under the sun, really)
We (the taxpayers) paid over $3B for people to buy a bunch of cars that they likely would have done so in the fullness of time. I fully expect that while the auto industry was doing cartwheels over the August 14.4 million SAAR, that in September we’ll see the rate back down to about 10 million units, SAAR, perhaps even less. All we’ve done, IMO, is pull demand forward. Once the program is done, the activity disappears into the larger background trend - people aren’t going to buy as many cars as in 2006 (16+ million units) and one of the reasons they won’t is that in some states (eg, CA), over 30% of auto purchases were financed with HELOC’s. You can’t hardly keep your existing HELOC now, much less get a new one, so that method of financing consumption is flat-out gone. Even now, I’m reading of buyer’s remorse as people are realizing that the $4500 for their clapped-out old car was great, but they really didn’t think about having a car payment *every month* for the next five years...
I’m going to be most interested in future reports of delinquency and default on the CFC auto loans.
OK, so what do I see coming? Best thing to do is look at major economic trends. Let’s look at another government scheme, Fannie Mae. Uncle Sugar is now backing most all mortgages written in the US, and the Fed is deliberately keeping mortgage rates low with the QE purchases of RMBS and agency paper (over a TRILLION dollars worth of the paper, BTW):
http://www.fanniemae.com/ir/pdf/monthly/2009/083109.pdf
Please see “Table 9.” Lower right hand of second page. See the delinquency rates? They continue to go up. The augmented mortgage rates are over 10% (ie, borrowers with PMI, etc).
Remember, Fannie doesn’t “do” crap paper. These are supposed to be prime borrowers. Also remember that the mortgage rates for the kind of mortgages backed by Fannie are being artificially depressed by the Fed buying their paper... and that the Fed’s QE program is set to stop in January to February sometime annnnd the $8K homebuyers’ tax credit is up at the end of the year annnnd there’s a huge shadow inventory of REO property that has to come on the market at some point.
Net:net: I see more delinquencies and defaults as unemployment continues to go up and people exhaust UI benefits.
As I’ve said before, this ain’t a normal cyclical recession. This was a rampant over-expansion of various sectors of the economy (and not just our economy) based on cheap, easy debt. For another example, look at the economics of, oh, Spain. Huge housing bubble. Easy, easy, debt. They now have 25% unemployment, a crashing housing market and their government is spending like no drunken sailor ever has - but because they’re part of the EU, they can’t run deficits like ours, so they have to increase taxes in the midst of their economic depression to keep their deficits within Maastrict guidelines.
On the Fed’s consumer credit report, that’s for July 2009, not August. Sorry, my bad. Too many things happening on my desk at once right now...
Inflation: Why pay off debt? (Vanity)
Posted on 09/11/2009 10:32:44 AM PDT by servantoftheservant
http://www.freerepublic.com/focus/chat/2337397/posts
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