Friday, October 09, 2009

A Structural Change To Our Economy


Bill and I talk on the phone occasionally. He contacted me a few years ago and, although I have not had the chance to meet him personally, have gotten quite comfortable with our conversations. He has had experience dealing with Federal and state governments and has many contacts among those who have insight into the present problems of our nation.

It had been a few months since our last conversation, so I sent him an email which contained this bit:

I've watched with interest as the market floats around 9.5 to 10K and wonder what is keeping it afloat. Lots of talk about a slowing rate of job losses, but cumulatively they have been huge and the consumer segment is pretty quiet... especially up here. Housing remains stagnant except for foreclosures. The auto industry is hanging on by a thread. States are in deep shit. The dollar is dung. Obama wants to punish energy producers, job producers, health care providers, and our military allies.

So when does the market hit 14K again? Are we out of the woods yet?
Shortly thereafter, I received a call from Bill and we talked for nearly three hours... and I never talk anywhere near that long with anyone. We rambled through a myriad of economic issues from trade and taxation to housing and health care. We agonized over U.S. involvement in the Middle East because we both felt there was no real strategy... but we had somewhat different ideas about what should be done. I'm more of a "fight the war and then worry about nation building and using our military as policemen" having never understood why the U.S. would enter a war and then take a self-limiting/self-defeating approach.

Unlike earlier conversations, we didn't end up feeling any sense of resolution. Bill was fairly adamant that the economy was in for a fundamental change because our trade policies over the past two decades has undermined our production sectors and we have tried to fool ourselves into thinking we can be prosperous as a giant service economy. Jobs are gone; jobs are going. We will not have sufficient new jobs to replace those lost plus those needed for a growing population.

Yesterday Bill sent this:


Let's cut to the chase. The consumption share of U.S. GDP no longer will be 71% of GDP and may fall back to levels in the 67% range. The change in U.S. consumption will have major impacts domestically and internationally.

Focusing more specifically on the U.S. economy, it's clear that changes in U.S. consumer consumption patterns will impact a multitude of domestic economic considerations including available taxation revenues from sales of goods and services to employment levels.

We will hear all sorts of ideas and chatter to counteract the reduced spending levels of consumers, but none are likely to have any major impact on returning consumer purchases to previous levels. And we're going to hear all sorts of employment ideas including incentives for creating job growth in businesses. So, we'll spend money pursuing some of those ideas, but very little will change on the consumption front.

This is where we are and where we are headed unless there is a major positive change in the structure of the U.S. economy. Don't expect that to happen any more than we should expect major changes in U.S. trade policy.

What will fill the U.S. GDP loss due to reduced consumption? This is the question which deserves serious attention. It could easily represent a 4% hit.

I can't argue with Bill's reasoning. Below is a graphic I have posted several times and continue to keep in the right hand column of this blog. At the top center is my point to Bill that it all begins with laws/trade agreements and the tax code that incentivize the destruction of our domestic production sectors. Bill's point was we need to start with the trade policy [that is either behind the laws and tax codes or a result of it... I'm not certain which is the chicken and which is the egg].

Click on the image for more on this subject. By the way, I think we are nearing or at the bottom of the chart. And I guess the answers to my questions to Bill are: "not for a long time" and "no." Apparently, there is a difference between Ben Bernanke declaring that the recession is over and, well, the recession being over.


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SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006
Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."

December 11, 2007 Somehow the Fed misses the obvious.
[Image from:]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)