Sowing The Seeds Of A New Crisis

[prawn_86]

That's the core of the problem yet some people still don't get it ie the problem(s) not fixed, only delayed?

Non Productive Debt!

Yeh but at what point will it all come crashing down? Thats the big question.

Its all well and good to recognice the macro problems (i think most here on ASF do), but one cant invest solely based on the premise, as it may be generations before everything falls in a hole. Its like those that got out after a yr of the commodities boom (or missed out all together), and then sat just watching everything go up, constantly calling for a fall. They were right eventually, but at what opportunity cost?

I dont know the answer myself. Wish i did....

 

[Uncle Festivus]

Yeh but at what point will it all come crashing down? Thats the big question.

Its all well and good to recognice the macro problems (i think most here on ASF do), but one cant invest solely based on the premise, as it may be generations before everything falls in a hole. Its like those that got out after a yr of the commodities boom (or missed out all together), and then sat just watching everything go up, constantly calling for a fall. They were right eventually, but at what opportunity cost?

I dont know the answer myself. Wish i did....

The beauty of allowing for it is having a plan for it, without precluding from partaking in it?

The point it all comes crashing down, in the USA's case, is when they can't service their debt through foreigners buying their bonds/treasuries. 10yr treasuries is the canary in the debt mine?

 

[gfresh]

Seems there is a lot of what should be happening, and what is morally right and what may happen.. I know I get caught up in that myself often, but unless you are a true revolutionary, the world is not going to change just because you think it should. Things so far are no different to what has been happening for the last 100+ years, greed, bubble, bust, boom, excessive debt, boys with the money and power protecting their mates.

Some get burnt in these sort of major corrections, but most who had the power/money come out if it continuing to build their empires -- yes it's at the expense of others, and yes it's probably not right, but the world goes on, the wheel turns, and the cycles continue, just as they always have. Why would it stop now? The world has been through worse and survived, and it has come through last year and surived.. when is that time it does stop and the world is plunged into the next Dark Ages Who knows.. but on all probability it will continue, just as it has, maybe slightly changed, but the way it has always done in some general sense. Remain adaptive to whichever way things are going in short term increments.

 

[Buckeroo]

I see the stimulation as cushioning the bad effects which obviously had to happen. By this occurring we did not enter a Depression and in Australia we appear to have pretty much missed out on the recession.

I don't see how mass destruction of the economy helps productivity. We need micro economic reform, something that recent governments have been struggling to provide.

In the rest of the world the property correction has occurred. I agree Australia's property is still overpriced but I envisage it will be a slow correction i.e. sub inflation growth in property for the next 7 years.

Well, can you tell me then how our economy is going to now operate without stimulus. What's the extraction plan? More stimulus?

Cheers

P.S. Good topic WayneL - so much to say and so little time to act

 

[beerwm]

Well, can you tell me then how our economy is going to now operate without stimulus.

GFC struck.... people dont spend. fear

so stimulus.. government spends for you.

confidence improves... people spend.

[just filling the gap left by low confidence / who knows whether its worth 300 billion in debt - probably not]

- would of been a better policy to talk up our economy [ increase confidence/spending] - but Rudd's not too bright.

 

[wayneL]

I see the stimulation as cushioning the bad effects which obviously had to happen. By this occurring we did not enter a Depression and in Australia we appear to have pretty much missed out on the recession.

I don't see how mass destruction of the economy helps productivity. We need micro economic reform, something that recent governments have been struggling to provide.

In the rest of the world the property correction has occurred. I agree Australia's property is still overpriced but I envisage it will be a slow correction i.e. sub inflation growth in property for the next 7 years.

It's a bit rich to cast aspersions on the Austrians. They were the ones who foresaw the problems. All the Keynesians and Neo-Monetarists wouldn't accept that there were problems and had the childish temerity to openly scoff the Austrians.

Putting that aside for the moment, Austrian economics is not about mass destruction of the economy, it is about allowing destructive bubbles to deflate and free market based correction of idiotic malinvestment.

The tech bust was a classic example of how it should happen. There was no mass destruction of properly productive elements in the economy.

Unfortunately, this time the underlying bubble happens to involve everyone's most important asset... their house. The malinvestment is not so much the item, rather, the price of the asset and the relative capital resources allocated to it. It's a credit/price bubble that has filtered out into everything else.

It should be allowed to pop.

However there are reasons why governments are so interested in propping this one up and it's to do with demographics unfunded welfare/pension obligations in the near future.

Overinflated assets was the gu'mints (collectively) method of trying to deal with the demographics bomb that is due to start its chain reaction very soon.

The UK Labour government even made the asinine prediction that they'd abolished boom and bust. Such stupidity should be a capital offence.

Shame the Keynesian muppets didn't realise what the Austrians have known for since the economic Garden of Eden. That is, you cannot suspend the business cycle forever and you f~~~ with it at your peril.

Knobby, the "stimulus" (i.e. rob from future generations to prop up failing banks and asset speculators) may work for now. But it is to early to tell the ultimate outcome. A bottle of tequila will cure the DTs... temporarily. Ultimately an addiction, whether to alcohol or credit, has to be cured by some serious therapy.

 

[Smurf1976]

The early 90's is still very firmly in my memory since, due to personal circumstances, it was somewhat as life changing event for me.

What we've seen this time is NOTHING in comparisson - it's a bit of a dip which everyone from the office junior to the CEO seems to think will be over in a matter of months.

The fundamental psychology hasn't undergone the transition from boom to bust. Most still seem to think of the boom years as normal with a return almost here. Psychology normally changes drastically at true bottoms in the market or economy...

 

[cuttlefish]

The fundamental psychology hasn't undergone the transition from boom to bust. Most still seem to think of the boom years as normal with a return almost here. Psychology normally changes drastically at true bottoms in the market or economy...

I think this is right - and true innovation and change comes out of this transition. I can respect the arguments that the bust phase is not necessary and that it really is possible to acheive a readjustment into a new phase of growth while providing enough stimulus to cushion the economy from the truly destructive elements of full recession. On the other hand I can't help feeling that the pendulum has to swing back and forth and the longer it swings one way the worse the swing the other way is going to be when it comes.

 

[drsmith]

Below is some discussion on durable goods manufacturing/non-durable goods manufacturing in the USA and how it's response to recessions has changed.

http://wallstreetpit.com/8781-fed-watch-the-debate-over-the-shape-of-the-rebound-continues

 

[Glen48]

Most crash's occur in Sept/ October things are pointing in that direction the Dow could hit 10,000 before we see a massive downturn over the next few months.

 

[Buckeroo]

GFC struck.... people dont spend. fear

so stimulus.. government spends for you.

confidence improves... people spend.

Aha, yes if people could spend. But how are they going to do that when their taxes are increasing due to the deficit & interest rates are rising. Consumers will not have any disposable income to spend on goods & services.

So, we still have the question, how do we get back to having an unsupported economy?

Cheers

 

[cuttlefish]

I don't know if anyone's ever watched Bear Grylls in Man vs Wild .... but the way that the gov't's are injecting cash at the moment feels a lot like when he drinks his own urine to 'hydrate'. That sort of approach really isn't gonna last forever - which means unless you have a broader achievable goal in mind, it might provide some short term relief, but its also pretty pointless.

 

[Knobby22]

Well, can you tell me then how our economy is going to now operate without stimulus. What's the extraction plan? More stimulus?

Cheers

P.S. Good topic WayneL - so much to say and so little time to act

More savings. No more stimulus.

 

[Sean K]

More savings. No more stimulus.

What's the growth rate of this plan?

Can modern humans do it?

 

[trainspotter]

Consumerism is the answer. Give the population $900 three times and all is fixed. No wait ... they tried this already. Did it work? Nope. Bigger debt and no clear business plan to trade their way out of negative territory.

 

[Sean K]

Consumerism is the answer. Give the population $900 three times and all is fixed. No wait ... they tried this already. Did it work? Nope. Bigger debt and no clear business plan to trade their way out of negative territory.

Definately sowing the seeds for a much bigger crisis from all accounts. But, in the mean time ... make hay!

 

[Knobby22]

It's a bit rich to cast aspersions on the Austrians. They were the ones who foresaw the problems. All the Keynesians and Neo-Monetarists wouldn't accept that there were problems and had the childish temerity to openly scoff the Austrians.

Putting that aside for the moment, Austrian economics is not about mass destruction of the economy, it is about allowing destructive bubbles to deflate and free market based correction of idiotic malinvestment.

The tech bust was a classic example of how it should happen. There was no mass destruction of properly productive elements in the economy.

Unfortunately, this time the underlying bubble happens to involve everyone's most important asset... their house. The malinvestment is not so much the item, rather, the price of the asset and the relative capital resources allocated to it. It's a credit/price bubble that has filtered out into everything else.

It should be allowed to pop.

However there are reasons why governments are so interested in propping this one up and it's to do with demographics unfunded welfare/pension obligations in the near future.

Overinflated assets was the gu'mints (collectively) method of trying to deal with the demographics bomb that is due to start its chain reaction very soon.

The UK Labour government even made the asinine prediction that they'd abolished boom and bust. Such stupidity should be a capital offence.

Shame the Keynesian muppets didn't realise what the Austrians have known for since the economic Garden of Eden. That is, you cannot suspend the business cycle forever and you f~~~ with it at your peril.

Knobby, the "stimulus" (i.e. rob from future generations to prop up failing banks and asset speculators) may work for now. But it is to early to tell the ultimate outcome. A bottle of tequila will cure the DTs... temporarily. Ultimately an addiction, whether to alcohol or credit, has to be cured by some serious therapy.

The Austrians always say doom is coming. If there predictions varied a bit I might have more respect. Follow this blog for others that have made the prediction.

http://www.debtdeflation.com/blogs/

Keynesians also agree with free market theory especially creative destruction. The difference is that Austrians believe that if no one touched anything, economies would enter an amazing nirvana of steady state of growth and everything is self correcting. Sort of a heaven on earth. This is despite history showing that it's rubbish.

Of course we need creative destruction, we just don't need a 15 year depression.

Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and therefore advocates active policy responses by the public sector, including monetary policy actions by the central bank and fiscal policy actions by the government to stabilize output over the business cycle.

In Keynes's theory, some micro-level actions of individuals and firms can lead to aggregate macroeconomic outcomes in which the economy operates below its potential output and growth. Austrian's believe in Say's Law, that supply creates its own demand, so that a "general glut" would therefore be impossible. Keynes contended that aggregate demand for goods might be insufficient during economic downturns, leading to unnecessarily high unemployment and losses of potential output. Keynes argued that government policies could be used to increase aggregate demand, thus increasing economic activity and reducing unemployment and deflation.

Keynesians are more realistic.
Because prices are sticky in the New Keynesian model, an increase in the money supply (or equivalently, a decrease in the interest rate) does increase output and lower unemployment in the short run.

Keynesian economists advocate using monetary policy for stabilization.

When the economy is hit by some unexpected external shock, it may be a good idea to offset the macroeconomic effects of the shock with monetary policy. This is especially true if the unexpected shock is one (like a fall in consumer confidence) which tends to lower both output and inflation; in that case, expanding the money supply (lowering interest rates) helps by increasing output while stabilizing inflation and inflationary expectations.

Keynsians also believe you should adjust the nominal interest rate in response to changes in inflation and output.

In my words Keynsians treat an economy is more like a transistor. Without positive and negative fedbacks it will not operate in the "zone" and you will get distortian or even worse runaway.

House prices should be allowed to drop but massive wealth destruction that causes house prices to drop 95%, unemployment at 30% and govenrments to topple with fascists and communists taking control with misery all around has been tried already. The imprtant thing is that governments do not continue the stimulus too long and pay back the debt asap. This may involve raising taxes to the wealthy in the short term. That is the reason Keynsians are hated by people such as Murdoch.

 

[trainspotter]

Current climate suggests hay crop has turned to chaff with the Govt assisting.

 

[Knobby22]

Consumerism is the answer. Give the population $900 three times and all is fixed. No wait ... they tried this already. Did it work? Nope. Bigger debt and no clear business plan to trade their way out of negative territory.

It did work! Now since we haven't got mass unemployment we can pay the debt off easily and not waste millions on unempolyment benefits and prisons and other problems caused by social unrest.

 

[trainspotter]

WHy would we have massive unemployment? Are you advising me that the $2700 was spent in shops to save the career paths of the minions who will be paying of the 315 billion debt/deficit we currently have? Admittedly it was only 43 billion in the cash splash. Last time I looked there were no marauding hordes causing social unrest? Pay it off easily??? Excuse me ???