What U.S. Economic Recovery? Five Destructive Myths

John Creighto

I’m okay, with a small amount of inflation provided the money is distributed so that debt growth is balanced by demand growth. In other words: inflation created by an artificial expansion of credit is bad but if consumers have the buying power to sustain the debts then it is okay. There must be a balance between the two types of injections of new money into the economy. The first type of injection is through the finical sector via loans. The other type of injection is through direct stimulus efforts via government spending. The government spending can either be though a negative income tax or through government services/projects. Negative income taxes are the preferred option because there is a much lower administrative cost.

When there is inflation without any corresponding growth in the buying power of the bottom half of the population then this clearly erodes wages and creates disparity. Consequently this type of inflation is bad and such imbalances are periodically corrected periodically though deflation. When the government injects large quantities of cheap money into the economy though the finical sector it becomes possible for the financial sector to make money on bad business fundamentals. Such wealth misallocation due to bad fundamentals is the reason that prior to the downturn the finical sector made up 40% of the economy.

As an example of how money could be made though bad economic fundamentals, consider that if a bank receives money at an interest rate lower than inflation from the Federal Reserve, then a bank can just stock pile commodities such as gold and earn a profit simply on inflation. For another example consider a large department store with access to cheap money that can simply build up their inventories and wait until the price is right to sell their goods putting small players who don’t have the same access to credit at a large disadvantage.

I cannot say that cheap money is allocated as badly as in my examples but we do know that prior to this last down turn there were plenty of bad loans created which is clearly a sign of a large misallocation of wealth due to the subsidization of credit though monetary policy.

russ_watters

Ok.... Didn't you just argue against your own point? Yes, employers will adjust their pay levels to compensate for inflation and/or deflation.

rhody

I don't believe so Russ, I said I would rather have my smaller buying power buy more with products devalued accordingly, versus having inflation (10 - 20%) to deal with. I have no control over what the Fed, Business, the banks, or foreign governments do in the same regime.

I played straw man to stimulate a logical discussion. and it is working, a good thing IMHO.

Rhody...

WhoWee

I'll again cite this important point from your post:"The bulk of that decline is in real estate, which has lost $4.7 trillion in value, or 22 percent, since 2007."

Now a question - should the Government adjust Section 8 payments downward to compensate for the drop in real estate values?

rhody

Doesn't seem unreasonable, does it to you ? As long as the rents that go with it drop too. The Democrats will scream bloody murder though, that is a given.

Rhody...

WhoWee

I'd like to see the entire program re-evaluated - that's another very long discussion.

My point is focused on the real estate market - it hasn't hit bottom yet and any attempts to support prices from correcting can slow overall recovery.

As discussed up-thread, in some areas of the country banks are donating foreclosed houses to land banks or otherwise demolishing them to eliminate inventory and avoid paying taxes and insurance. In other areas, there is a feeding frenzy among bargain shoppers - many looking for properties to use in participation of Section 8 programs - where they are guaranteed significant long term returns.

Here's an over-simplified summary of the problem. The value of the rent voucher is based on the income of the beneficiaries - not the property market value or actual cost. The rent charged must be reasonable in that it's comparable to similar units or unassisted housing units. If comparable houses are renting for an average $600 per month and you purchase a foreclosure for $10,000 in the area then invest $10,000 (maybe pick up a green credit?) to bring it to standards - you'll realize a $7,200 per year cash flow from a $20,000 investment - assume $2,200 for taxes, insurance, and maintenance - pre-tax (all or part of the $10,000 might be considered a current year maintenance expense) cash flow +$5,000 or 25%.

http://www.bankforeclosuressale.com/...cleveland.html

gravenewworld

Exactly, WHAT economic recovery? This recession isn't like the recessions of past, it is more than just due to down consumer consumption. This recession represents the culmination of years and years of terrible financial policies and a paradigm shift in world history. We are watching the end of American dominance. The US is going the way of England post 1900. The US will never fully recover. As a person in STEM myself, after I graduate from grad school, I'm definitely going to look globally for a job and look to a country where they are heavily investing in research and development. According to the CIA world factbook, the US economy is already a majority service economy. What's the point of staying here then as a future engineer? After the dust settles the only jobs outside of health care will probably be in retail, food preparation/restaurants, or related to tourism. We're toast .

mheslep

Which country is it that you suspect spends more on R & D?
http://en.wikipedia.org/wiki/List_of...pment_spending

gravenewworld

Those stats say nothing about the future or changes in R and D spending either. They are only a snapshot of the a static moment in time. National rates of savings are intrinsically linked to investment expenditures over the long run. After Asian economies went under in 1997 and were subsequently bailed out by the IMF, they were forced to adopt strict fiscal measures. After Brazil melted down in the 1990s during its hyperinflation crisis they too adopted strict financial measures. It's the reason why both of those regions have been shielded from much of the current global economic meltdown and also why banks as well as the governments in those regions have hordes of cash and have more conservative investments. Meanwhile, here in the US, our entire economy has melted down after we deregulated huge financial institutions which failed after gambling on mortgage derivatives. It has plunged the US economy into a severe recession that has also led to a huge loss of government tax receipts. It's only a matter of time before the US is forced to adopt severe fiscal contraints which will add another blow to R and D expenditure, not to mention also the national rate of savings in the US has been atrocious for a long time.

Brazil and countries in Asia have vast reserves of cash in savings and are now using it to invest. Sure, the US may remain on top for now, but by the time I get out and need to look for a long term job that can last for more than 5 years, it will very likely be a different story.

mheslep

Well I'd reserve the term "vast" for only the cash reserves of US companies. But ok, what do you imagine is going on with the personal savings rate in the US? Going up or down in the last few years? Furthermore, do you think the best way to avoid another recession (official) is encourage more spending or more saving?

John Creighto

The amount of saving should be matched by the investment in industry. The growth in industrial capacity should match the growth in demand. Otherwise there will be imbalances and these imbalances will need to be corrected.

JonDE

First you need to realize that there is nothing wrong with America being largely a service based economy. This is more due to our technology and investment in it. I'll give you an example.
In 2007 China produced 2.8B tons of coal first in the world, America was 2nd with 1.1B tons, both were net exports and make up over half of all coal mined in the world. China, produced roughly 2.5X as much as the US does, but look deeper at the number. China employs 5,000,000 people in their coal industry, the US, less then 200,000, less then 100k of those are actually miners. So they produce 2.5X as much but employ about 25X as many people, so American coal miners are 10X more efficient then there Chinese counterparts. In America we still produce a ton of stuff, it just requires less and less people to do it ever year.

John Creighto

So if things can be produced so cheaply why is it that goods are so expensive for so many? If so much more value is being created who is enjoying the bounty of all this production?

The graph supporting your claim is striking

http://seekingalpha.com/article/1577...-a-record-high
http://www.freerepublic.com/focus/f-chat/2695456/posts
Is the graph deceiving us? Has the value of what is produced not increased as much as shown for the worker worker. I think I'll give this more thought and address it in another thread.

John Creighto

It's going to take me a while to figure out how the statistics are calculated and what flaws may exist. The following link suggests significant flaws may exist.

http://www.businessweek.com/magazine...5/b4039001.htm

http://www.encyclo.co.uk/define/phantom%20gdp

JonDE

Well its hard to take one mans opinion of an entire market, you can always find two different men who see things in entirely different ways. There is also the possibility that new technology isn't all that expensive, my mind is still blown by a commercial I saw a few weeks ago (I think by AT&T, but could have been google, apple or someone else) where they were showing a system that ran all the forklifts by computer, no dirvers needed. If that system is only a few 100 k that savings would be massive and would still be considered a relatively small investment.

JonDE

Also if you want to get rid of that phantom GDP part, you can look at GNI, which is basically GDP + whatever money is transfered back and forth between the two countries. Although it is not frequnetly used because it looks bad to countries that have high debt. It gives a slightly more clear picture of what is actually going on then GDP.

WhoWee

I'm surprised the solution to the high unemployment rate in the US isn't obvious to the Obama Administration - find a way to decrease productivity and hire more people to replace the machines.