Recovery? or We’re Gonna Need a Bigger Stimulus?
Sometimes, I hate being right. Most of those times are when I take a pessimistic view of data; this has happened a lot recently.
It gets worse when the people who agree with you are none other than The Giant Vampire Squid. As the Wall Street Journal notes:
Zero — First quarter GDP growth, minus the temporary factors of government stimulus and inventories, as estimated by Goldman Sachs.
With the economic recovery already nine months old, it’s easy to forget just how tenuous it remains. Consumers are spending and businesses are investing, but an uncertain amount of that activity depends on temporary lifts, most notably the American Recovery and Reinvestment Act of 2009.
I promise to get enthusiastic about inventory growth when people stop claiming that the drop in sales is based on the Demand side of the equation; that the banks aren’t holding more than $1 Billion in Excess Reserves because they want to, but rather because they can’t find borrowers.
Looking at state budget projections for next year, the reality that inventories cannot grow indefinitely, the unemployment and discouraged-workers levels, and the growth in long-term unemployment, it’s difficult to find engines for growth.
Real GDP recovery is described fairly as, at best, lethargic. And now we know that even the lethargic recovery is stimulus-induced, not real.
But the headline numbers have given an excuse to do nothing, and steroid withdrawal is, I am told, a very painful experience.
And more “stimulus” will only work if the federal reserve is willing to print an equivalent amount of new money; otherwise, there won’t be enough demand globally for the new treasuries that will need to be issued. If not for the $1.6-$1.8 trillion of new money the Fed printed last year, the stimulus plan would have pushed interest rates to prohibitive levels and the recovery would not have happened.
I´ve been looking at the new capacity utilization numbers… it reached 73.7% in April
The attached graph shows historical trend since the 60s… One thing I notice is that the maximums are getting less as time goes on… 89% in early 70s… 87% in 1979… 85% until 1998… 82% recently….
Now the IMF in a new report makes a comment on the future of govt structural deficits… they say …
“The persistence of deficits reflects permanent revenue losses, primarily from a steep decline in potential GDP during the crisis, but also due to the impact of lower asset prices and financial sector profits.“
They basically say that the decline in potential GDP is not recoverable…!!!!
What this tells me is that the capacity utilization maximum will probably go down even further… It´s even possible that cap util will max out at 78% …
This is possible in light of the debt still out there… eventual efforts to regulate business and banks… asset prices staying bubble free … over supply of homes… China cooling down… Europe going into austerity… deflationary pressures in parts of Europe… wages lagging in the US… unemployment years from coming back to normal… savings rate going back down… fiscal stimulus ending… lack of new innovations to grow economy…
Therefore the growth happening now may not be leading to a full recovery, …… It looks to me like cap util will hit a wall around 80% due to decreased potential…
It looks as though the economy has reached diminishing marginal returns…
Ah yes, the long term trend. Doesn’t mean we are at a new normal. May just mean that we are awaiting the long term up trend.
The point is, if the issue is long term trends, then why do we even mess with short term stimulus?
I hear you… but… if we don´t have short term stimulus… the decline in long term potential GDP will be a lot worse…
NY, CA, and ILL especially hope it comes fast. ILL is a mess.
“that the banks aren’t holding more than $1 Billion in Excess Reserves because they want to, but rather because they can’t find borrowers.”
I think you mean trillion, but who’s counting. Certainly not the Fed.
Course the reason it’s there is not because the Fed was trying to increase base money. It’s there as a secondary consequence of the Fed doing QE and buying long term MBS and some Treasuries.
But it doesn’t surprise me at all that we don’t just bounce back to Bubble Level GDP or Bubble Level asset valuations. It surprises me more that some people think we are supposed to.
I don’t see the need for a second stimulus since the funds are not all spent on the first one.
As of 5/7/2010 according to the Recovery.Gov website only about 50 percent of the funds authorized by the Recovery act have been paid out. For the major categories of 1) Tax Benefits; 2) Contracts, Grants, and Loands; and 3) Entitlements the payouts are 162.7, 102B, and 127B respectively out of authorized amounts of 288B, 275B, and 224B (56,37,56 percent)
http://www.recovery.gov/pages/textview.aspx?List=%7BEB595CCA%2DD93F%2D48F4%2DAF96%2D11E2D41DE73D%7D&xsl=Charts/FundingOverviewChartTextView.xsl
The stimulus we need really is to extend the Bush tax cuts and not do anything about global warming, and react but not over react on the oil spill and offshore drilling. On this last point the Obama administration promised they on other issues that they could do more than one thing at a time, so how about both keep awarding offshore drilling permits, preferably in shallow water, and at the same time work with industry to develop procedures and safety standards to try to minimize the risk of what we are seeing today in the Gulf.
CR, you can’t be claiming that we have been stumbling from bubble to bubble? Nah!
Ofcourse, I’m not so sure that isn’t the norm anyway. The other thing that amazes me is the apparent ignorance over impascts of the several large bubbles of the past century, WWI, WWII, and the boomers.
That’s how I do it.
But the type of bubble matters. We are getting a nasty progression.
The tech boom resulted in high corporate debt due to telecom, internet, pc upgrade, and corporate IT modernization booms all happening in syncronism. We also had an associated equity boom, the worst segment being dotcoms.
Then we had the real estate boom and took out the consumer and FIRE.
Now we are “progressing” to sovereign debt bubbles.
The bubble seems to be looking for deeper and deeper pockets.
What’s a bubble? ‘Cause if it is price rise because people are hoping for more price rise – more or less what the textbook says – how is sovereign debt a bubble?
Kinda funny that “the stimulus we really need” is just a bunch of stuff you like anyway, without any demonstration of how that would help the economy get back to capacity.
Ok, I’ll bite and be the first in history to answer these questions.
1)
Q:What’s a bubble?
A: A business cycle that popped.
2)
Q:how is sovereign debt a bubble?
A: When sovereigh bonds pop.
Kharris,
My main point was that the stimulus money has not all been spent yet. Therefore why do we need more of it. I thought I was obvious.
The second point was based on the old chinease proverb:
Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime.
The stimulus was like giving people a fish. Now it seems they want to give another fish (probably the lowly talapia). Low taxes and low regulations set conditions for the economy to produce at its peak (with maybe some ups and downs) for a lifetime.