In a Daily Ticker Interview with Henry Blodget, economist Gary Shilling makes the case the US is already in recession.MISH'S Global Economic Trend Analysis
Gary Shilling: US in Recession Now or Within 3 Months, Deleveraging Will Take 5-7 More Years (with video)
Michael (Mish) Shedlock
UPDATE: Edward Harrison — Gary Shilling: We are either in or entering a recession at Credit Writedowns
24 comments:
I was listening on my ar radio to Shilling be interviewed a few days ago. He seems 'out of paraigm' with modern money. For example, he says that monetary and fiscal policy are out of bullets. While that may be mostly true for monetary policy, why does it not occur to wizards like shilling that fiscal policy is far from out of bullets?
Is the problem that he, among most people, do not understand that the budget deficit is not a problem that needs to be solved? It's amazing. Shilling highlights a recession due to lack of consumer spending, but thinks there's no way to improve the situation?
How about lowering federal income taxes? How about the federal government provides states with stimulus?
Hell, how about the the U.S. government just send everyone a check in the mail? The Bush Administration did it, so there's already precedent. Though, those check were a measly $300-$500 for most people. Let's get it done: send everyone a check for $25,000. By sending it to everyone, it's highly progressive stimulus since $25,000 means a lot more to not-wealthy people than it does to wealthy people.
Consequently, those with debt payments will be able to make their payments for the foreseeable future, with some additional disposable income. Those without debt payments can spend spend spend.
What am I missing?
What am I missing?
He's probably taking political gridlock, the public's preference for deficit reduction, and the fiscal cliff into consideration. If the US can avoid the fiscal cliff it will be a minor miracle. Reversal of austerity would take a major miracle. Nobody but nobody thinks there will be more fiscal stimulus in time to avoid the inevitable brick wall. But hopefully, the US will avoid going over the cliff into the abyss.
Shilling's totally out of paradigm, but he's less annoying than Schiff, at least.
Meanwhile, these guys keep forecasting recession. Meanwhile, like Warren has been saying, the deficit has been high enough to support GDP growth at around 2.0%. Where I live the restaurants are full, stores are overflowing with shoppers and tourists are everywhere. Doesn't look like recession to me.
Schiff's latest, and lordy help us if America goes for the otiose advise that a sovereign government can't do anything.
"Ultimately the implosion in the economy is much more dramatic than in 08 because there are no bailouts coming. There’s nobody to bail out the bailer. Once the government fails its game over and so this is the final bubble and I called it in my book, the government bubble."
http://www.wallstreetoasis.com/blog/peter-schiff-interview-the-inevitable-collapse-of-america-part-1
Schiling is a permabear. I would guess that he has forcast twenty of the last five recessions. Someday he will be right, but you may lose a lot of money waiting.
In a balanced economy, households are net savers and firms net borrowers. In a imbalanced economy, households are net borrowers and firms net savers. Presently, firms are increasing savings and buying back equity while households have reduced their saving rate due to stagnant incomes rather than spending, and it seems a good deal of increased borrowing is to meet cash flow. Moreover, debt from student loans is expanding.
US trade balance has improved but exports only increased slightly and imports fell much more, indicating contracting consumer demand. Looks like the global economy is contracting which will affect US exports.
As Warren points out, the federal govt is running a deficit sufficient for sluggish growth but not enough to spark a recovery. As the fiscal cliff looms and austerity is dominant politically, this may change.
The real problems are in cities and states, however. Not much is being written about this, but there are ongoing cuts due to rising population and tax resistance. Some of the that is showing in up poorer services such as larger class size rather than job cuts. But hiring is pretty well frozen in many places.
There are two sleeper stories that are important. First people that are doing well or even OK are carrying the ball, but more and more people are slipping through the cracks and the people that have fallen through the cracks have not be able to climb out. This is not only a disturbing trend, it is a very scary one for the many people that are a paycheck or two from being on the street.
Secondly, and the most important story by far, is that youth are disproportionately affected by unemployment and underemployment. As a result, they are putting off family formation, housing purchases and all that goes with it. Instead, many are pursuing their eduction, which involves the burden of student loans that will take up a significant amount of their affordable monthly nut for years to come. As a result there is not a lot of demand coming from youth and there is no reason to expect that to change anytime soon.
So at the surface level, things can be looking up but the underbelly of the problem is not so visible, other than in the numbers. Even if we are muddling along, there are problems building beneath the surface that will affect the country for some time.
Finally one of the best indicators of how the economy is doing at the bottom, where changes are most evident. For example, illegal immigrants entering the US from the south. That trend has fallen as many people who are unable to find work are returning to their native countries.
Also the problem with measuring recessions is that the concept is base on the business cycle. This is not a business cycle but a financial cycle, so the behavior is uncharacteristic, confusing many economists as a result. The developed world is still in an extended process of delevering before households feel confident enough to resume using credit for spending in anticipation of rising incomes. Until that happens there will not be a "normal" recovery.
I just updated the post here with Ed Harrison's post on Shilling.
increased borrowing is to meet cash flow…
…which makes the inevitable contraction when people can't afford to continue borrow worse.
Private debt is the biggest elephant in the room by far right now. Nothing short of net government spending can turn it around.
Steve Keen has been beating the right drum.
Paul
I'm still confused by a point that MMT is not clear on..
Does deficit spending actually put more spendable dollars into the economy? Or, does it merely change the composition of some of the already exisiting 'bank' money?
It seems no "new" money is created in deficit spending. Rather, 'inside' money is recycled into 'outside' money, and this process merely improves the balance sheet of the private sector.
Kind like this: the bank loan/credit creation process is constantly burdening the economy with interest payments. Deficit spending seems to keep refreshing to private sector's balance sheet so that the bank lending can go on without collapsing (do to the nature of compounding interest).
So in this current rut, what we need (through deficit spending) is for the private sector's balance sheet to be refreshed. It's happening slowly, but could be happening much more equickly with more expansionary fiscal policy.
What am I missing?
Here's another one for you to think about, JK. Loans create deposits and loans are also funded by chiefly by deposits. (Also stated less precisely as saving funds borrowing.) Which came first, loans (borrowing) or deposits (saving). If loans, how were they funded to begin with, and if deposits where did the funds come from if not loans? There seems to be a chicken and egg problem with bank created money.
Tom,
" loans are also funded by chiefly by deposits."
Is that true? I thought loans create deposits as banks leverage their capital?
Or, are you saying that to have attained capital in the first place, that must have came from earlier deposits, and so on and so forth, back to the currency issuer?
JK, the right and left side have to balance. Equity is less than 10%, so there have to be other liabilities, ie., that the bank borrows either from depositors (savers), boldholders, in the money market, or from the cb. Banks maximize borrowing from depositors, since that is the least expensive form of funding and the most profitable for them. Banks "leverage equity," which means the lower the equity to borrowing, the higher the leverage and the greater the potential profit.
JK,
Deficit spending takes dollars that have become accumulated or hoarded to be saved and converts them into bonds held by the public.
This increases the level of bonds held by the public.
An equal amount of dollars are then spent into the non-government, leaving the level of USD net dollars unchanged.
When the Fed buys the bonds in lieu of the public it increases the level of net dollars in the non-government.
It is my view that since there is currently about $11 Trillion in bonds held by the public (both domestic and foreign) it follows that there exists $5 Trillion in net USD balances in the non-government (hence, the Universe).
Savings (accumulated financial wealth) are converted to spending through the bond-issuing process until the new spending is eventually saved. Rinse and repeat. This makes the economy go, or at least keeps it going.
An aside…
Savings is defined as income not spent. In the NIPA tables and FoF reports savings is estimated (somehow) and apparently represents dollars added to various savings vehicles accounted for by the US government.
Looking at the NIPA/FoF tables one will see that there have been periods when Net Savings reported were positive when the sectoral balances identity indicated that net savings was negative.
This happens because of the credit circuit overlaying the NFA circuit. The circuits are additive but the credit part apparently isn't a part of the governments accounting. This is stock-flow inconsistency in my view.
There is much confusion over this.
This happens for two reasons (again, only my analysis)…
One, NIPA and FoF are approximations while the sectoral balances are an exact virtual representation of the accounting. The S/B are an exact accounting, the tables are an estimate.
Second, the tables don't seem to account for the influence of credit on savings.
Certainly one can borrow funds and then not spend them, putting them in savings accounts or savings vehicles, but is that really saving in any meaningful definition of the term?
In addition, one could borrrow money and buy stuff and somewhere down the spending chain those funds are saved (funds are fungible).
This is also registered as saving but note that net savings is zero because someone in the non-government is holding a liability against those funds that must be satisfied.
The act of paying down credit (principal payments) are registered as negative spending, meaning the income used to pay down the balance is not booked as spending because the funds disappear back into the ether. The funds don't consume or invest in anything
Credit is simply a way to bring future earnings into the present as spending.
How far into the future is it possible to go?
It's the reverse of this operation that causes the problems since credit expansion on the micro level is limited by an agent's income and credit cannot expand incomes in the aggregate.
paul Deficit spending takes dollars that have become accumulated or hoarded to be saved and converts them into bonds held by the public. This increases the level of bonds held by the public. An equal amount of dollars are then spent into the non-government, leaving the level of USD net dollars unchanged.
Yes, deposits in not-govt accounts are unchanged and therefore rb corresponding to them in banks' reserve accounts. Govt bonds increase in the amount of the deficit as a deficit offset. The bond drain the rb spent into non-govt by swapping them for tsys. The tsys are represent an increase in non-govt NFA.
This is how state money gets created under the present system.
I looks like the tys are "savings" and therefore sequestered from spending, ie.., "neutralized." But that is not the case, since the liquidity of tsys and their use as collateral just means that the tsy ownership is frequently shifted iaw saving and spending decisions.
But in aggregate, the tys represent non-govt saving of net financial assets denominated in the currency and deficits add to the amount of saving of NFA.
Tom
I looks like the tys are "savings" and therefore sequestered from spending, ie.., "neutralized." But that is not the case,
Tsys are savings in the sense that they are a "store of value" and removed from the spending chain for the most part.
Tsys represent "money on the sideline", but most important, they are unlikely to be used to purchase something having a labor component, and in my view it's that type of spending that means the most re the health of an economy.
Using Tsys to purchase a company just transfers wealth between the wealthy.
If labor isn't involved, what's the point?
Tsys are savings in the sense that they are a "store of value" and removed from the spending chain for the most part.
This is an illusion. Look at the turnover in the tsy market everyday, their use as collateral and in repo. Tsys represent savings in aggregate but say nothing about use of funds. Tys do not sequester spendable funds, in that there is no reason that they affect spending decisions. In addition, PD inventory expands and contracts as a buffer stock based on shifting spending-saving preference.
Tom,
in that there is no reason that they affect spending decisions
I think that's what I said.
Tsys aren't used as a source of funds for spending.
If it isn't spending, it's saving. Tsys can be booked as income, but can't be spent.
Maybe we are talking past each other here.
@ paul,
just stating the mainstream view is that tys as savings neutralize govt spending, whereas in the MMT view that is not the case, because they are money-like and do not affect spending behavior. This is a crucial difference.
In addition, PD inventory expands and contracts as a buffer stock based on shifting spending-saving preference.
Do the PD's have any market-making obligations with regard to the secondary market or does their duty end when the initial auction is over?
JK, I don't know if you are familiar with heteconomist's work, but you may want to check it out. I find his work on MMT-related subjects provide the most clarification. He also uses the word 'keen' regularly enough.
There are a couple of posts I have in mind that I found especially illuminating on NFAs that I can't find at the moment, but you may be interested in this post:
http://heteconomist.com/?p=2871
Perhaps these:
http://heteconomist.com/?p=631
http://heteconomist.com/?p=623
All his posts are broken down by category here:
http://heteconomist.com/?page_id=5366
This is one I was looking for (Peter is not known for his helpful titles and like everything is categorized as 'economics'):
http://heteconomist.com/?p=639
Trixie, thanks for the links. I appreciate it.
Do the PD's have any market-making obligations with regard to the secondary market or does their duty end when the initial auction is over?
They are the market makers. They buy "wholesale" from the Fed and vend "retail" to the market.
Tom
just stating the mainstream view is that tys as savings neutralize govt spending, whereas in the MMT view that is not the case, because they are money-like and do not affect spending behavior. This is a crucial difference.
OK. I see what you're saying. Sorry.
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