2008 Economic Crisis

BBC NEWS | Business | US factory output continues fall

BBC NEWS | Business | US factory output continues fall.

It’s a bit odd to cite a BBC news article for this but the point is the same.  The other day my international economics professor was talking about the advance GDP numbers released this week.  One of the negative but promising items was that construction was down so much.  The point is not that no construction labor is a good thing, but that we’ve probably seen that worn out as a negative factor for the overall GDP.  People likely aren’t still losing jobs in the field, but have already lost them.  There is nowhere else to go but up.  

It may be a similar case for overall factory output as well.  It’s so far down that perhaps it’s going to level off, then eventually climb.  In fact, the article mentions that the drop was not as bad as expected.

Helen Popper: global economics expert, and my professor

Marketplace: Global cooperation is way to recovery

This is an interesting link for two reasons.  First, it is one of many really mind-opening discussions on our economy, the global economy, and how we need to look at so many variables for just about everything.  And everyone has a different perspective.

Second, I am taking a class with Professor Popper this quarter. 

Just heard on CNBC: McCain doesn’t understand economics

I just heard John McCain, in an interview on CNBC, criticize our debt to China by saying we need to get rid of it via a balanced budget.

Our incredible foreign debt – most of which is based in China – is a problem. We owe a LOT, and we are now relying on countries, primarily China, taking even more to fuel our new spending. So I’m fine with the idea that we need to reduce debt.

However, has McCain ever studied history at all? The attempt at balanced budget in 1936 that led to the recession of 1937 (you know, the recession within the Great Depression)? What about the consumption tax increase in Japan in 1997 that killed off gains they made during the Lost Decade?

I learned that stuff over a 10 week macro econ class. You’d think a senator would be at least mildly familiar with that stuff (or that some of his staff would tell him about it.

Tips on keeping your money in cash accounts – Apr. 2, 2009

Tips on keeping your money in cash accounts – Apr. 2, 2009 .

This fits in with my earlier post about a consumption-driven economy.  The savings rate is 3.6% now, which is very high for the US.  However, as one saves, that doesn’t mean that a .1% savings account is the only way to go.  Save wisely.

Right now, I’m spread out over a 2% yield savings account, rotating CD’s, and of course an appropriate amount of money in checking.  My retirement investments (which I’ve actually increased, so I guess that’s like more savings) are spread out over FDIC money market accounts and very conservative funds.  Small yield per year, but it’s not losing.  

(I also have a good chunk in a stock-oriented fund, ready to go as the market goes up…at some point).

Consumerism – not such a bad thing

As I sit here getting ready to take my economics final exam, I am struck by a comment a friend of mine made the other day about our economy and our economic situation.  Essentially, his point was that what we needed to do was save more and spend less.  In other words, that it is our consumer-based economy that inevitably led us to at least some point of weakness.  His words were not that strong but I am distilling a bit here.

However, a consumption-based economy isn’t a bad thing unto  itself.  Yes, a low savings rate must be bolstered by some kind of government-based welfare system (Social Security) which does put a strain on earnings, but consumption can help fight off disinflation (which actually is an okay thing) but also certainly helps fight deflation or the threat thereof.  Even when our rate of consumption is low, we can still fight deflation (now, massive recession on top of low consumption is a different matter).  And high consumption also means payment of taxes, which means money to the government and local municipalities, and a stabilizing effect on the economy (it prevents it from overheating or going into recession for the most part).

The problem is how we fund this consumption.  For each person, it’s about whether we are borrowing in order to consume.  Are we using all credit card debt?  Taking out lines of credit on houses for which we already still have mortgages (and whose value then suddenly drops)?  For the government, the same applies – if we have a huge debt to foreign countries by selling bonds to them to fuel our economy, then we have ourselves in a precarious situation.

Selling bonds is a common way of funding deficit spending.  Because we have a current and potentially more big stimulus packages coming up (and the future ones will be all government spending, I bet, with little to no tax cuts (which is a good thing for stimulus, actually)), that means we are selling a lot of bonds.  When we sell bonds, we go into debt.  The biggest buyer of our bonds right now is China.  China has sent a “shot across our bow” about devaluing the dollar through the Fed “printing money” by selling even more bonds.  This dilutes the market, lowers the price of the bonds, we then have to sell more bonds to get the same amount of money, etc.

So the government is fueling its consumption – which we need – through debt as well.  But it was already deep in debt.  And just like a person who consumes through debt, already being in debt to start with just makes everything worse.  

But…a consumption-based economy isn’t bad unto itself…

Japan reconsidered – Paul Krugman Blog – NYTimes.com

Japan reconsidered – Paul Krugman Blog – NYTimes.com.

Last night, I did a presentation on part of a case I did in my macroeconomics class about the current economic crisis.  My team’s part was comparing the Great Depression and Japan’s “Lost Decade” with the current situation.  A rather big topic.  

Japan’s crisis is remarkably similar on a number of fronts to our current situation.  One notable aspect, touched slightly upon by Krugman in the linked post, is that of sluggish response.  In particular, it took the whole decade before someone said “let’s just admit the banks are in trouble and do a massive recapitalization.  That was a big move.  

Krugman is concerned that our situation might end up a lot worse than a decade that many economists consider “lost.”  That’s a bad thing to be thinking.  Someone in class last night asked me whether I thought, considering all of the new things the Fed is doing (credit easing, etc) under Bernanke and the stimulus package and possible additional efforts, we were going to get out of this.

Honestly?  If we don’t address the bank issue, I am not sure we’ll see the trough of this recession this year.  Yes, this entire year.  At best, I’m thinking mid-year before we see something.  That’s a while from now…

“Bring It” says the Fed

Fed assets total $1.89 trillion in latest week – MarketWatch .

This is kind of cool, because it really reveals some interesting stuff about the economic crisis and how the Fed has been trying to deal with it.  

Traditionally, the Federal Reserve Bank controls money supply in the market.  It does this by “targeting” interest rates and literally putting money in or taking money out of the market by buying or selling bonds.  When it raises interest rates, people save more and spend less, prices drop and inflation goes down.  When it lowers rates, people spend more and inflation goes up.  Throw in some changes in the supply of money and the GDP moves around in desirable ways.  

For…a very long time, what is called the “monetary base” of the Fed – the money which it controls and regulates, which it utilizes to fuel the economy – has been relatively stable.  However, because even a target 0% interest rate (it’s literally set to 0-.25% right now) has had almost no effect on spending (some thoughts on this later…) and therefore GDP won’t budge, the Fed has had to change the way it has gone about business.

First, it started bailing out AIG, Fannie Mae, Freddie Mac, etc.  This meant that they basically started owning these institutions, and now the monetary base went up.  They then started a process of injecting money into other institutions through TARP and other tools and the base got even bigger.

And, as one can see right at the beginning of the article, what was $870 billion in December 2007 is now $1.89 TRILLION.  That’s how much the Fed has in assets.  

Bernanke, the Fed Chairman, has some good stuff…somewhere, about how this dollar amount will shrink naturally as certain items fall off the balance sheet, but the monetary base for the Fed will be higher moving forward.