Economic Armageddon?

[Beetwasher]

A few interesting stories that are disturbing because of their implications for the economy. The one in the NY Post is surprising because, well, it's in the NY Post, a Murdoch rag. I think things are A LOT worse than we are being lead to believe and the books are being cooked, big time. Read the new Krugman too.

Surge in Rates May Hurt Pillar of the Economy

http://www.nytimes.com/2003/08/05/business/05ECON.html?hp

ASHINGTON, Aug. 4 — If cheap mortgages have kept the economy afloat, the economy may have just sprung a leak.

A little more than a month after the Federal Reserve reduced its overnight lending rate to just 1 percent, mortgage rates have shot up as investors have soured on the bond market — in part because of confusion about the Fed's intentions in managing the economy.

--snip--

http://www.nypost.com/business/2364.htm

INTEREST-RATE MOVES WARN THE ECONOMY MAY BE BROKEN

That's different from saying that the economy is - or isn't - improving. It is like saying it can't improve. And the idea that the nation's business cycle is "broken" is a lot more troubling than what you are hearing economists and politicians arguing about these days.

First, let me say that I hope I'm wrong about this. But the way in which interest rates have behaved over the past month or so should be causing serious concern that the country has gotten itself into a fix that can't be remedied in any conventional way.

--snip--

http://www.nytimes.com/2003/08/05/opinion/05KRUG.html

Everything Is Political
By PAUL KRUGMAN

The agency's analysts find that they are no longer helping to formulate policy; instead, their job is to rationalize decisions that have already been made. And more and more, they find that they are expected to play up evidence, however weak, that seems to support the administration's case, while suppressing evidence that doesn't.

--snip--

[spotbird]

1. Don’t you wish you didn’t know this stuff?

Most folks think the economy sucks but aren’t really worried. At this point I am terrified but just don’t know what to do. Should I bury my 401K in the back yard? Is there even one safe place for money to ride out the storm?

[pbeal]

2. enronomeny

Our economy is being manipulated by showing loss as profit sooner or latter something bad is going to happen.

You cant fuel growth with a shrinking middle class, while at the same time the elite class refuses to perform its civic responsibilities.

[ProfessorGAC]

3. OK. I Read All Of That, &. . .

. . .i will say that there is still no data to support economic armageddon.

As long as there is excess capacity, and cash flow to sustain down to small midsize firms for a year, and there are people without jobs looking to work, there will be no economic collapse.

Even a model with chaos creators in it cannot support a collapse no matter how the variables are tweaked.

I don't disagree with any of the premises or facts in any of the articles. I just disagree with the conclusions.

The economy can't be fixed in a conventional way. Of course not! It never could. People deluded themselves into believing their actions directly affected the economy. (See Reagan, Volcker and Greenspan.) The only true gov't stimulus of the economy since FDR was the raising of marginal rates by 41 and Clinton. This facilitated the consistency of gov't spending and transfer payments with the cash to pay for them outright.

The conventional techniques, while the basis for many economic philosophies, have never been able to be proven as true. No matter what the talking heads say.

So, people are panicking a bit because they don't understand. I would say they never really did understand how the economy works, so the collapse of their precious preconceptions is not any reason for me to worry. They were wrong in the first place. Now they're confused. I'm not. I don't care what these minions think. I don't respect their theories and premises.

When someone publishes a paper that shows a reproducible model that fairly predicts potential for collapse, then i'll worry. In the meantime, this is just so much "chicken little".
The Professor

[Beetwasher]

5. Thanks Prof!

Was hoping you'd chime in. I don't have nearly the acumen you posses on these subjects, but things just look pretty bad to me right now and since it's hard to get any honest or real numbers from "official" sources it's difficult to tell what's really happening, but what I do see isn't pretty...While we might not be headed toward an economic meltdown, it does seem to me we're in for some rough times for quite a while...

In your opinion, what's the best and worse case scenarios?

[ProfessorGAC]

6. I'll GIve It A Shot

Things are bad. The economy is a flat line almost 2.6 sigma below the overall quarterly growth mean over the prior 25 years. In other words, for 9 straight quarters we've had growth or contraction in a region where random variation should only account for only 3 out of every 500 quarters. Now, we've got 9 in a row(!) in a region of low probability. So, the economy has not been this lifeless in at least 25 years.

Low inflation, which will continue as long as there is excess capacity both here and abroad, is all that is preventing this from being much worse for employment and profitability.

Worst Case:
Falling consumer confidence that further exacerbates the oversupply situation. Falling prices will squeeze intermediate (in size and supply chain positioning) for profits. This will cause cutbacks on development, research, new product introductions, and tech enhancements. Cost cutting will require more layoffs at large companies with a consumer orientation or anything above the center of the supply chain. This will cause a huge uptick in unemployment and will put downward pressure on stock prices. It will also minimize capital reinvestment, so growth will be even slower, created a vicious circle that could takes years to get out of.

But, no depression, no massive deflation, and no need to print extra money. But, some pain in various locales and lots of people un- or under-employed.

Best Case:
A good dem candidate convinces people that the data prove that Democrats are better for the economy, better for the working folks, better for the markets, and better for managing the affairs of gov't. Consumer confidence rises in response and demand rises, beginning to absorb excess capacity. The absorption rate is slower than that requiring increased capital spending in the short term. This allows profitabilty to rise without new invested capital. This stimulates rehiring to make use of this capacity, so UE goes down further and there are more "confident" consumers.

Profitability and volume improvements make stable, non-speculative stocks (big industrials, trasnport and financials) more attractive. Money gets directed that way again and stabilizes the market toward expansion of highly stable, "in it for the long haul" firms. This creates further confidence in consumers, and so on. So, this would be a nice upward spiral.

The problem is, that i cannot make any case that this will happen in under 18 months. That's a best case for the rosier scenario.
The Professor

[Beetwasher]

7. Thanks for your cogent analysis!

Much appreciated!

[JNelson6563]

9. I think they have managed to avoid this

So, people are panicking a bit because they don't understand.

For the most part, I am of the opinion that the people have been mislead to believe things are generally much better than the really are, not worse. Maybe a few who have gotten screwed are panicking but I see little coverage of the darker parts of economic news.

Check out CNBC for one. There you will find a great deal of spinning going on. Way downplay bad and mediocre news is often treated as great news--or at least emphasized enough to give that impression.

Just like everything else for the past 2.5 years, it all seems so unreal, untrue to me. Everything is a facade.

I agree with you on the belief that the end is not near but I do think things are going to get a lot worse than Americans are willing to tolerate before they get better.

Just my .02--
Julie

[ProfessorGAC]

12. We Of Similar, But Not Identical, Minds

I think this is about as bad as it will get, but also think it's pretty bad right now. The problem is that gov't actions in fiscal matters have inhibited any expansion or growth in the short term. So, the stated purpose of tax cuts and deficit spending are the opposite of what's actual happening, or is going to happen in the near term.

We're pretty much of the same mind, i would say, except that i don't think things are going to get worse. Nor do i think they have to. A long period of economic stagnation gets the attention of the voter just like a sharp and sudden recessionary period, with high inflation.

Look what happened to Carter. He inherited an incredible mess, couldn't fix it in 4 years, and got trounced by the Amiable Dunce in 1980. People weren't hurting that bad in 1979. Unemployment was less than it is now! But, they were tired of the flat economy and of inflation. So, they voted with their pocketbook against a guy who wasn't at fault.

Look at Hoover. He didn't really do anything from a policy perspective that caused the Depression. He inherited an out of control market system that didn't have any checks and balances and created wealth from thin air (gains in productivity lagging tremendously behind prices). FDR whipped him like a rented mule because of the Depression.

That's 2 examples where the degree of pain was radically different, but the guy in the big chair got dumped in both.

If people get fatigued enough by economic uncertainty, they will blame the guy in office, and no amount of campaign rhetoric and "not my fault" will change that.

At least that's what i'm banking on.
The Professor

[JNelson6563]

13. sensible view

that is for sure. I've never been one to be bearish on the US economy but the last year or so it's different.

Frankly though, in this situation and in spite of the similarities of our views, I would be very happy to be able to say "you were right Prof and I was wrong" in the end.

Here's hopin'--
Julie

[JNelson6563]

4. Harmageddon is upon us!!

Beetwasher there is no doubt these times are dire. We are on a collision course with disaster and Team Bush's usual ploy of bringing forth a bad guy for 2 minute hates ain't gonna fix it this time.

Lots of bonds hitting the block today (short term--3yrs I believe). We need another 60 billion or so so we'll flood an already floundering market........ Shocking to see many on TV openly talking about how rapidly treasuries went up in value and how that may have some negative implications. Whaaaaaaaa? Heads talking actual bad news?? The times they are a changin'!

Many of those who got screwed in stocks moved to Treasuries to be safe and then got it there too. Ugly. Bet they'll all vote this time though. ;-)

Julie

P.S. Sure wish you'd drop by the Stock Watch Thread sometimes Beetwasher, it'd be great to have your input--like in the olden days. :-)

[Doctor_J]

8. Krugman's quote

Everything Is Political
By PAUL KRUGMAN

The agency's analysts find that they are no longer helping to formulate policy; instead, their job is to rationalize decisions that have already been made. And more and more, they find that they are expected to play up evidence, however weak, that seems to support the administration's case, while suppressing evidence that doesn't.

===

His quote is about the economic advisors, but in fact could be about *any* group in Rove's government. I am amazed that none of these people has any shread of integrity - if they did, they would quit and do the cable "news" circuit, exposing this band of incompetent butchers and getting the ball rolling on a landslide loss next year.

[w4rma]

10. Bush* and Mr. Great Depression himself, Hoover both *lost* jobs

[Beetwasher]

11. What a great graphic!

Thanks for posting that, it really drives the point home. The swing is incredible and undeniable...From creating 22 million jobs to losing 2.37 million...

[Beetwasher]

14. How does this fit into the mix?

http://biz.yahoo.com/rb/030805/markets_bonds_5.html

Treasuries Widen Losses, Sale 'Dismal'

NEW YORK (Reuters) - Treasury prices widened already sharp losses on Tuesday after the Treasury's three-year note auction, the first in a three-part refunding, got a cold shoulder from buyers.
The auction of $24 billion in three-year notes drew bids for just 1.32 times the amount on offer, way below the 1.96 bid-to-cover ratio achieved at the last sale in May. The notes went at a high yield of 2.422 percent when they had been changing hands at around 2.36 percent in when-issued trading.

--snip--

Comments? :shrug: