Taking Stock

My recent bold prediction did not come to pass.  The recent channel I thought looked pretty good got blown away rather quickly.  So, it's time to step back and have another look.  Here in Graph 1 is a view of the Dow industrials index over this century.

Graph 1 - Dow Industrials since 2000

I have highlighted some trend channels.  The light green lines contain the first big rise of the century.  They are projected into the present, which might or might not mean anything.  The heavy purple lines indicate the present trend channel from the recovery after the 2008 recession.  The yellow line was the top channel border until the index burst through in 2017.  This effectively doubled the width of the channel - this happens sometimes - and it is now the center line of the channel.

The red line connects two major bottoms.  Whether that has any significance is yet to be demonstrated.  This is the big picture, covering close to two decades of index movement.

This recovery is now over a decade old, which is quite rare. Further, I find it hard to believe that American industry is worth about 1.75x as much as it did 3 1/2 years ago. The bold move that occurred through 2017 looks a lot like irrational exuberance.  What reasonable explanation is there for most of that 75% rise happening in the first year of the Trump administration?  Since then, with a lot of gyrations, the index has gone essentially nowhere.

Graph 2 is a closer focus on the index during the recovery since 2008. This is just for perspective.  Can it make any kind of sense that the nominal value of the Dow 30 industrials has increased by more than a factor of 4 in the last decade?

Graph 2 - Dow industrials since 2008

Graph 3 is a look at the Dow Industrial Index during this calendar year.  The heavy green line connects the 3 tops since early 2018. The light green lines are the extended trend borders from the pre-2008 upward trend.  The yellow and red lines are as described above.  The orange lines might be the current short term decline trend channel- but it's not pretty, and I've been fooled before.

Graph 3 - Dow industrials, Jan 1 to Sept 24, 2019

My current sense is that we are now post peak.  If the index were to rise above the heavy green line, then this idea would be refuted.  The next resistance would then be at the top purple line that you can see going off the top at the left side of Graph 3.  But I think we're going down from here.  Each of the light green lines might offer some resistance.  You can see this has already been happening at several points during the year.

Should the index continue down, the next major resistance level would be yellow line - the channel center line, since I have no faith in the potential orange channel. If that is breached, the red line might come into play.  After that, it's the bottom purple line shown in Graphs 1 and 2.  This could happen somewhere between 20000 and 22000, depending on the timing and fall rate of the decline.

If that is breached, there might be support near 15500, the double bottom surrounding the beginning of 2016.  A 61.8% decline of the entire gain from the 2008 bottom would put a target low at about 14500.  A 50% decline would put the low around 17000.

This gives a broad range of potential resistance targets that land in the range of index values from CYs 2014 through 2016. For reference, that time period is shown in Graph 4.  Back then, the yellow line was a hard upper barrier, and the purple line was robust support.  When situations reverse, support and resistance lines can exchange their functions. If all of these potential support levels are breached, the entire gain from 2009 could be given back.

Graph 4 - Dow Industrials from 2014 through 2016

Of course, that is [I hope] worst case, and every bit of this is speculative. September is historically a weak months for stocks, but this year it has gained back most of the 2000 or so points lost in August.  On average, Octobers have been net positive, but the most dramatic historical declines [1929, 1988] have been in October, which is right around the corner.

Things don't happen to satisfy my expectations.  But I am quite pessimistic.  This recovery has been over-long for quite a while already, so we're way over-due for a major correction.  Trump's economic and trade policies are based on abysmal ignorance, have already done significant harm, and those buzzards will be coming home to roost some time soon. If you think the national debt level is important, it has ballooned under Trump - contrary to his campaign lies. Unsecured consumer debt is at a historically high level.  Our economy is about 70% dependent on consumer spending.  How can that continue when wages have been static for 40+ years, even when inflation is low?  This is why personal debt is high.  People have leveraged their livelihood, and are badly over-extended.  Where are future profits going to come from?  If things get tough and lay-offs occur, spending and profits will take bigger hits. This is how things spiral out of control.

Maybe there is some reason for optimism that I'm overlooking.  If so, point it out in comments.

The Five Finger Prayer

 

 Saw this on a friend's FB Page

From my perspective as a fallen recovering Catholic, Francis is looking like a pretty damn darned good Pope, so far.

I'm not big on prayer, but the idea of devoting the "tallest" finger to those who have authority is very appealing.

The Standard Deviation of NGDP Growth Since 1950 - Revised

This is a follow up to The Standard Deviation of NGDP Growth During the Great Inflation.  In that post I showed this 100 point scatter graph of the 12 Quarter average Compounded Annual Rate of Return [CARC] of NGDP vs 12 quarter Standard Deviation [Std Dev] of CARC from 1954 to 1978.  It then occurred to me that some of those red dots that have fallen down close to the yellow trend line might be misallocated.  What they represent are 3 quarters in 1957 when Std Dev had a chance to settle down between recessions, and the tumble down of Std Dev in the early 60's as the high Std Dev values of the the 1960 recession fell out of the 12-point data kernel.

This is illustrated in Graph 1.

Graph 1 CARC vs Std Dev 1954-78, With Points Reallocated

The red dots are data points from 1954 through Q1 '62.  The yellow dots are from Q1 '64 on. The blue dots are the three low Std Dev points from 1957, and the pink dots represent the transitions in and out of the 1957 blue-dot data, and the tumble down in Std Dev from Q2 '62 to Q4 ''63.  The original blue trend line is retained for comparison.  Note that removing these three blue and 8 transitional data points from the pre-1964 data set causes the negative correlation of that period to completely evaporate.

This might seem a bit arbitrary; but now we can observe a more tightly packed red data set, and the behavior of the pink data points does seem to be unusual.  The string of high side outliers in the yellow data set occurs in 1971-2, and is associated with the 1970-71 recession.

This piqued my curiosity, so I took a look at the bigger picture - all 253 quarterly data points from Q1 1950 through Q1 2013, shown in Graph 2. 

 Graph 2 - CARC vs Std Dev 1950 to 2012

I see the great majority of these points clustering or stringing out along imaginary upward sloping lines that suggest coherent data subsets, and a relatively small number of points [39, or 15.4% of the total] where the data is in transition between sets.

I parsed it out as shown in graph 3.

Graph 3 - CARC vs Std Dev 1950 to 2012 - Parsed Data

The data points are color coded to correspond with the straight lines that best fit each subset of data, describing 5 distinct realms.  Equations for the lines and R^2 values are also presented in corresponding colors.

The 39 light green dots represent the lowest Std Dev to CARC relationship.  The 72 dark green dots represent a slightly higher relationship. These two subset occur across all decades from the 60's on in times of stable NGDP growth, i.e times outside of recessions.  There are 41 blue points, representing a medium-high relationship.  These occur when the economy is either in or coming out of a recession.   The 53 yellow points represent a high Std Dev to CARC relationship.  This has occurred during especially severe recessions, or when recessions repeat within the 12 quarter data kernel.  The 8 red dots at the top of the graph are ultra-high.  They demonstrate the severe economic instability of the early post WW II years.  Four of these subsets exhibit extremely high R^2 values, above 0.91; and the fifth  [yellow] is quite respectable at 0.74.  The 39 pink dots occur in discrete short periods when Std Dev rises or falls sharply.

This is an unusual way of looking at GDP data, but I feel pretty good about it, because the linear subsets sort themselves out quite reasonably, and to my eye do not look contrived.  Also, the data points of each subset generally follow the trend lines, in either clusters or strings, for several consecutive quarters.  These subsets are trend stationary along the entire time span of the FRED data set, irrespective of inflation or disinflation; high or low levels of NGDP growth; and whether CARC is rising or falling.  This suggests that the relationship between CARC and Std Dev is not random.  Rather, it is deterministic, and also quantized.  I'm reminded of the chart of nested Phillip's curves Noah Smith posted, and the quantization of electron energy levels diagram shown here.

To draw an analogy, recessions provide the activation energy to boost the Std Dev from a low level trend line to a higher level trend line.  When the recession ends, the Std Dev naturally decays down to a lower level.

To bring this back into the real world, Graph 4 shows the 12 period CARC average from 1950 to 2013, with the CARC data points color coded to correspond with graph 2.

Graph 4 - CARC Color Coded to match Graph 2

The color coding is indicative of the economic conditions as described for Graph 3.   Note that each of these data sets is coherent, irrespective of the inflationary environment or the long trend NGDP growth level.  It is the presence or absence of recessions that mainly determines the realm in which the Std Dev of CARC resides. Outside of recessions, the data resides along one of the green lines.  When not following any of these lines, the CARC - Std Dev relationship is transitional, moving into and out of recessions.

What strikes me is that I simply eyeballed straight lines through this scatter of data as an exercise in curiosity, and it wound up making some sort of coherent sense. Each of the realms associated with the best fit lines is trend stationary in a way that is robust across time and varying economic conditions.

But NGDP growth, per se, tells you absolutely nothing about either the rate of inflation nor the Std Dev realm.  So - the big question in my mind is this: how can NGDP targeting be expected to lead to controlled, relatively stable economic growth at any desired level, unless you can also control not only the underlying rate of inflation, but also which Standard Deviation realm you end up in?

For anyone who's curious, Graph 5 shows the CARC - Std Dev scatter, color coded this time by decade.

Graph 5 - CARC vs Std Dev by Decades

Red - 1950-59
Yellow - 1960-69
Light Blue - 1970-79
Purple - 1980-89
Orange - 1990-99
Green - 2000-09
Blue - 2010-13

Note three things. 1) As the data moves across time, when it gets to one of the realms described by Graph 3, it tends to linger there.  These trend stationary realms have real traction.  2) Transitions generally take a short, quick route to the next trend line.  3) Since 1980 there has been a choppy but relentless migration to lower and lower NGDP growth.  We are now stuck in the worst recovery on record, and the lowest growth period ever to occur outside of a recession.  In fact, NDGP growth is now lower than that which has occurred within most recessions.

Whether fiscal policy, monetary policy, trade policy or something else I can't think of  is to blame, this is, to borrow a phrase from my seven-year-old granddaughter Emily, a "total epic fail" of economic policy.  It is grim on a scale unprecedented in the post WW II period.

The Standard Deviation of NGDP Growth During the Great Inflation

This post is a side bar to the Remarkably Stable GDP Growth series.

Part 1
Part2
Part 3

Once again I have to thank Mark Sadowski for goading me into digging deeper, staring longer, and thinking harder about this topic than I otherwise would have.  In comments to Part 3,  Mark informs us that: 

In three year periods ending in 1954 to 1978, which overlaps with the Great Inflation, the 12 quarter standard deviations of the compounded annual rate of change in NGDP are significantly *negatively* correlated with the average rate of change in NGDP. In other words NGDP became *less volatile* as its average rate of change *increased*.

Let's have a look.  Graph 1 is a scattergram of 12 Qtr average NGDP growth from this FRED page, measured as Compounded Annual Rate of Change [CARC] vs Std Dev for the years 1954 through 1978.  A linear trend line is included.

 Graph 1 - 12 Q Avg CARC vs Std Dev

At first glance it appears that Mark is right.  But there is something strange about that data distribution.  Do you see it?

Let's look back to one of my earlier graphs showing the change in Std Dev over time for a moving 13 quarter kernel.  I see a broad sweep up in St Dev from the mid 60's to the early 80's.  Can a 12 Q kernel be very different?  No, it can't, as Graph 2 indicates.

Graph 2 - 12 Q Avg CARC and Std Dev

Twelve Qtr average CARC is in yellow, St Dev in blue.  The basic CARC data is in grey.  What we observe are 5 different realms, with Average CARC and Std Dev moving broadly together: a sharp up and down from '50 to the early 60's; up from '64 to '81; down '82 to 87; flatish '88 (or '90) to '08, and then the Great Recession.   How can we have Std Dev negatively correlated with average CARC when they exhibit similar movement?   That's at the gross level.  The small magnitude undulations, however, are in contrary motion.  This is easiest to see in the wiggles from 1954 to '60, and again in the great recession, but actually occurs throughout.  It happens mainly because recessions bring CARC values down while boosting the Std Dev.  But -- this is not the explanation.

To understand what's going on, consider the big drop in Std Dev from 6.51 in 1960 to 2.47 in  Q1 1964. Remember that 1964 date, it's important.  Now, let's have another look at the CARC data from 1954 to 1978, presented in Graph 3.

Graph 3 CARC and STD Dev, 1954 to 1982

The CARC data from FRED is in dark blue. It moves up over the period, but not in a regular manner.  There are two flatish periods from Q2 '61 to Q3 '70, and from Q2 '72 to Q1 ,78.  Averages for these periods are indicated with yellow horizontal lines.  The data packet spans for the two periods are outlined in red.  Std Dev is in bright blue.  I've included a trend channel in green, just because it amuses me.  Data for the two periods is summarized in the table below.



A higher CARC range leads to a slightly wider data packet, and hence a higher Std Dev.

The 60's were recession free, and in that decade we observe that after Std Dev hits bottom in 1964, it moves in near lock-step with average CARC for the rest of the decade [easiest to see in Graph 2.].  After the 1970 recession, CARC stepped up into a new range.  There was a recession in 1974, yet the data envelope only widened slightly. This is because inflation at the time kept NGDP values high, even in the trough, as this FRED graph illustrates. 

Now, lets have another look at the scattergram of average CARC vs Std Dev, this time with the data properly parsed around that significant 1964 date I mentioned earlier, shown in Graph 4.

Graph 4 - 12 Q Avg CARC vs Std Dev

The values from 1954 to Q4 '63 are in red, and from Q1 '64 on in yellow.  The original trend line is shown in blue, trend lines for the two sub sets are color coded with their respective data points.

The conclusion is that the apparent negative correlation between CARC and St Dev over the period of 1954 to 1978 is specious, and wholly due to the high recession-driven Std Dev values of the 50's.  The Std Dev drop of 1960 to '64 occurs when the last of these gyrating data points fall out of the moving 12 quarter kernel.

After that, Std Dev is positively correlated with CARC, as I claimed in the first place

There's a lot more to dig into here, and I'll do that in a follow-up post.

Remarkably Stable GDP Growth - Part 3

Part 1

Part 2

First off, I want to thank Mark Sadowski for contributing, in a gadfly sort of way, to my thinking on this issue with his comments in Parts 1 and 2.  So, this is not the part 3 post I had intended to write.

Mark suggested using a different transformation of the FRED NGDP series I've been looking at.  Instead of taking YoY % change, he suggests using what FRED calls Compounded Annual Rate of Change [henceforth CARC.]  Check the linked graphs and you'll see there's both more fine grain movement and swings to greater extremes in the CARC graph, and, as expected, the Standard Deviation values are higher.  This is a different way of looking at the data.  But is it a better way?  I have no idea.  If you have a convincing argument either way, let's see it in comments.

Graph 1 shows the 13 Qtr Std Dev of CARC.  It's gross features are generally similar to the those of the graph of Std Dev of YoY Change.  There's the steep fall bottoming in 1964, the rise into a broad double peak in 1981-3, followed by a steep drop to a bottom in 1987. Then we see the humps caused by the '91 and '01 recessions, and finally the sharp rise and fall due to the Great Recession. [In the YoY graph some of these extremes are displaced by about a year.]

Graph 1 - 13 Qtr Std Dev of CARC

The major difference between the two graphs occurs after the 1987 bottom.  While the YoY  Std Dev graph continues to slope down, the CARC Std Dev graph moves in a generally horizontal direction between the two red lines drawn from the Q4 '90 high of 2.95 and the Q3 '12 low of 1.17.  Note however, that if the '91 recession had been worse or the '01 recession milder, we would still perceive a downward tendency to the peaks.

The two most recent Std Dev readings are 1.27 and 1.22, so the precipitous fall following the great recession has ended.  Note that similar lows occurred in Q3 '98 and Q3 '99 at 1.29 and 1.25, respectively and Q3 '87 at 1.27. So - yes, we have recently observed the lowest Std Dev reading on record; but, no, it is not the lowest by any kind of great margin.

What accounts for the high Std Dev readings of the 70's and 80's - or, alternatively, what accounts for the low readings now?  To explore this question, let's indulge in a couple counter-factual exercizes.  But first, let's ponder what causes the Std Dev to be high, in general.

The main factors, in no particular order are
- The magnitude of the data values- frex, are they closer to 2 or to 22.
- The data spread envelope - frex, is it closer to +/- 10% or 110%.
- The data irregularity within the envelope - frex, does it gyrate wildly from extreme to extreme, or meander in a more leisurely fashion.

In the context of NGDP growth these factors become
- Average NGDP growth over a period of interest.
- The presence or absence of recessions.
- The growth variablilty in non-recessionary times.

Let's explore the recession factor first.  As it turns out, there are two features that come into play here: the depth of the recession, and the nature of the recovery.  The deeper the recession, the greater the change in growth from the preceding period.  The snappier the recovery, the greater the change in growth from the recessionary trough.  Both of these things turn out to be important factors.  Note in the FRED Graph of CARC that the recessions of the 70's and 80's had sharp, short rebounds in which NGDP growth was unusually high for one or more quarters.  So both the recession and the recovery contributed to high Std Dev values.  Now note the recoveries from the last three recessions.  Very little snap back from '91-92, only a little from '01-02, and none at all from the Great Recession.

Here's where our first counterfactual comes in.  Suppose that the steep double dip recession of 1980-82 had never happened, or that it had occurred, but with only gradual recoveries from the troughs.  These possibilities are illustrated in Graph 2.

 

Graph 2 - CARC with Counterfactuals

The blue line is actual CARC, The green line is a made-up version of CARC without the recessions.  The pink line shows the recessions, but with smoothed recoveries and no snap back.  Graph 3 shows the the 13 Qtr Std Devs for these data sets, with the same color coding.

 Graph 3 - Std Dev of CARC with Counterfactuals

Simply eliminating the snap back recoveries brings the Std Dev down by 2 to 2.5 points.  Eliminating the recessions entirely brings the Std Dev down from just over 6.5 to just over 2.5, a reduction of almost 60%.

Note also the sharp jump in Std Dev at Q2 '78, and the following plateau.  This is entirely due to a single quarter of ridiculously high NGDP growth during the moribund Carter administration, and illustrates how a single anomalous data point can distort the Std Dev calculation for an extended period. The plateau ends at Q3 '81 when this point falls out of the 13 Q data kernel.

In comments to Part 1, Mark Sadowski asked if lower volatility isn't a good thing.  My answer is -- only maybe.  If it's caused by avoiding recessions, then yes.  But if it's caused by lopping off the potential tops of recoveries, such as what we have experience these last three years, then no - not at all.

Here's another counterfactual to ponder.    What would the Std Dev of CARC have been in the period we just looked at if NGDP growth were at the current level, but the relative volatility had remained the same?  From Q2 '78 through Q3 '84, CARC averaged 9.93%.  Suppose a counterfactual of 4.01% average CARC, which is what we have experience from Q3 '09 through Q1 '13, the recovery from the great recession.  This is illustrated in Graph 4.

Graph 4 - Early 80's Counterfactual

The dark blue line is the actual CARC data.  The horizontal blue line is the period average of 9.93.  The brown line is the counterfactual CARC data, constructed by having each point be above or below the average of 4.01 [brown horizontal line] by the same percentage as the corresponding real data point. The light blue and red lines show the 13 Q Std Dev values for the two data sets, respectively.  The Std Dev value for the entire real data set is 5.92.  The Std Dev for the counterfactual data set is 2.39.  This is again a reduction of just about 60%. 

So, if you take the early 80's data and eliminate the recessions, Std Dev for the flatish period from Q3 '81 to Q1 '84 drops by 58% from 6.34 to 2.65.

Also, if you consider the volatility level of Q2 '78 to Q4 '84 along with the CARC level following the Great Recession, the Std Dev drops by 59.7% from 5.92 to 2.39.  So this gives me another answer to Mark's question:  If the low Std Dev is an artifact of low NGDP growth, then no, it's not a good thing at all.

These examples suggest that both the occurrence of recessions and the high level of NGDP growth just before the start of the alleged great moderation were about equally as important in contributing to the high Std Dev of that era.

So I have to modify my idea about the relative importance of these two factors in making Std Dev high or low.  A low NGDP growth rate is only AS important, not MORE important than avoiding recessions

Remember, the point of this exercise is to show that the low volatility of current NGDP growth is neither remarkable, nor necessarily a particularly good thing.   I think I'm getting there.

Next, In Part 4, I'll look at what I originally intended to look at in Part 3.  Stay tuned.

Make it here, buy it here

Visit msnbc.com for breaking news, world news, and news about the economy

The Mill's website

H/T to the LW

Spending vs Income

I'm not a Freakonomics fan, and don't follow the web site.  (Thinking like an economist about economics is bad enough. Thinking like an economist about other stuff leads to ideas like combating global warming by shielding the atmosphere with clouds of sulfur dioxide.)  But this post, circuitously via Krugman, via Thoma, by Justin Wolfers is interesting.   And it is about economics.

It illustrates the differences between spending based GDP (the usual measure) and income based GDP.  In a perfect world, they are equal.  Oh, well.  The graphs tell the story.  Go read the post.

Here are the conclusions.

1.      The slump began in late 2006. And indeed, we were hardly enjoying good times through early 2006.
2.      It’s a big slump, and GDP per capita fell by over 7 percent.
3.      We remain a long way below the previous peak.
4.      It’s going to take a long while to return to where we were back in 2006. Most forecasters are expecting GDP to grow by around 3 percent, implying per-capita growth closer to two percent. At those rates, average incomes in 2013 will (finally!) be back around the levels of 2006.


Finally, it’s worth emphasizing another key statistical finding from Nalewaik’s research: Over the next few years the Bureau of Economic Analysis will continue to revise their estimates of what has happened, and if history is any guide, their revised estimates of the blue line will look a lot more like the red line.

Not only are we poorer than we have to be.  We're poorer than we realize.
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Worse Than the Great Depression?

Washington's Blog has a long post on the current economic downturn, cross-posted at Naked Capitalism.  You often hear that it's the worst since the great depression.  It may well be the worst ever.

I'm not going get into extensive quotes.  You can go to the source, and you should for all the information, quotes, links  and eye popping charts.  I see Suzan has picked up the whole post, as well..

But I do want to embed the two videos.  The first shows a lot of non-agreement among CNBC financial talking-head types, from this morning's live action on the market floor.  BTW, the DJI finished the day at 12,290.14 down 279.65.





The second is an excerpt from a recent 60 minutes episode that shows that things are so much worse than you might realize.





There's lots more at the link.  Read it and weep.

I will quote the wrap up at the end.

Two fundamental causes of the Great Depression, and of our current economic problems, are fraud and inequality:

• Fraud was one of the main causes of the Depression, but nothing has been done to rein in fraud today

• Inequality was another major cause of downturns - including the Depression - but inequality is currently worse than during the Depression

There are, of course, other reasons the economy is still stuck in a ditch for most Americans, such as encouraging too much leverage, bailing out the big speculators, failing to break up the mammoth banks, and failing to spend wisely, where it will do some good. See this and this. But fraud and inequality were core causes of the Depression, and our failure to address them will only prolong our misery.

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The Great Recession

Brad Delong dicusses a proper understanding of the Great Recession, it's causes and  cures, as well seven types of incorrect zombie analysis.

Read it all here.  It's 9500 words, and well worth your while.
  
Major theme:  It's Milton Friedman's fault for allowing people to believe that complex problems have simple solutions.

His social libertarianism prevented him from acknowledging that attempting to keep money growth constant was a (valid) example of government intervention.   "He sold the Chicago school an interventionist, technocratic managerial optimal monetary policy under the pretense that it was something -- laissez faire -- that it was not."  In doing so, he denied the Keynesian approach of more complicated interventions.   Since about 1980, his approach has failed, and in 2008 even extraordinary money growth could not prevent extraordinary levels of unemployment.  This left many economists with no foundation for understanding, and they simply started to either make stuff up on the fly or fall back on ideas that were discredited 80 years ago.

Wrong Models and Stuff They Made Up  (See Delong at the link for details and refutations)


Low Marginal Product Workers - We have 10.5 million unskilled workers who cannot be hired because their value is below minimum wage.   (Niall Ferguson, Tyler Cowan)

Structural Unemployment -  We have 12 million workers with the wrong skill sets (or locations) who need to be retrained (or relocated.)   (Narayana Kotcherlakota)

Overaccumulation of Capital - The problem is not a shortfall in aggregate demand, but a surplus of aggregate supply.  Thus, the economy needs to "liquidate" via unemployment, bankruptcy and obsolescence.  (Marx, Hayek, Mellon, Hoover)  BTW This is the Marxian argument of capitalism consuming itself and collapsing - thus, the logical solution, via Marx and rejected by the others is socialism.  The others took the collapse to be temporary, and when the dust cleared the whole cycle could start all over again.  So, take your lumps and shut the hell up.

Uncertainty - The election of Commie-socialist-Muslim-anti-imperialist-foreign-born dictator B. Hussein Obama and the specter of deficits and burdensome regulations he is oh-so-likely-to-impose has scared the wrinkled green shit out of capitalism; and so it is paralyzed like a deer in the headlights. (Alan Greenspan, Rethug Politicians, Rethug Sycophants, Idiots)

The Need to Control Inflation and Avoid Crowding Out - Further stimulative policies will cause a burst of inflation, raise interest rates, crowd out private investment and stifle economic growth long term. (John Cochran)   The inflation premium today on  10 Yr TIPS is 2.283%, on 30 Yr TIPS it's 2.355% (difference from non-indexed bond.)  Draw your own conclusions about inflation expectations.
 
Banking and Fiscal Policy Unnecessary -  Per Friedman, Fed open market operations are sufficient.  We can certainly see how well that is working.  (Nobel Prize winner Robert Lucas, who in his own words admits, "I really don't get it.")  Lovely.  Say and Mill got it back in 1829.

Banking and Fiscal Policy are Ineffective - This is a crowding out/future tax increase argument that simply bears no relationship to the real wold.  (Eugene Fama, Nobel Prize winner Myron Scholes)

As I've stated before, thinking like an economist means that zombie ideas eat your brain.

So - are we screwed, or what?
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Six Word Saturday

Unemployment is still a big problem.

A jobless recovery is NO recovery.

Why isn't the President a Democrat?

Seriously. U6 has been above 16% for the greatest part of two full years, and what we get from Obama is TAX BREAKS. Defects the largest ever, and what we get from Obama is TAX BREAKS.

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What the Hell?!? Friday -- Where's My Prosperity? Edition

Over at AB, spencer presents the employment data.  Read it and weep.

Notable quote:

This is the third consecutive jobless recovery and the payroll gains have been very weak in all three.

To Jerry's point in comments to my previous post, this is a partial explanation of stagnating real disposable income per capita.  The growth rate of the pie is anemic, while the slices for you and me grow even more slowly.

Update:  More from CR.  The graphs tell a very dismal story

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The U.S. Economy is Dying - Pt 2.

Back in October I posted Part 1, based on a look at GDP since WW II.  Here are some other dismal facts to ponder.  Consider first, Capacity Utilization.  Data from the Federal Reserve.

It's easy to pick out the recessions on this graph.  The line droops like an icicle as business slows, then climbs up again as we come out of recession.  The disturbing thing is the trend line, shown in green on the chart - relentlesly down, down, down for over 40 years, as each recovery is more anemic than the last.

Just for kicks, the capacity utilization line is sketched out in Red and Blue segments, indicating the spans of Republican and Democratic administrations. I've also added a horizontal line for each admin, indicating the average of utilization over its time span.  Note that the moribund Carter admin. was at a higher level than ANY of the Republicans.  Actually, at 83.45%, Carter even inches out Clinton at 82.84%.   It's just an amazing coincidence that all of the icicle tips - except for the last one, that B. Hoover Obama inherited from his idiot predecessor - are Red.  One might also note in passing that the onset of a Republican administration is always - and I mean ALWAYS indicated by a steep drop in capacity utilization (e.g. RECESSION).  This must be one of the ways in which Republicans are good for business.

Right now, in the midst of an a scintillating recovery - we've been stalled at 75% for three months - we're still nowhere near the descending tend line that connects the tops.  Note also that 75% is in the mid-range for previous bottoms.

Here's industrial production since 1967, from Calculated Risk.

There was a time when this was a growth curve - then G. W. Bush happened.  Now it looks like we're stalling out at a level that was once a peak - a mere 10 years ago.

Remember that small business are the real growth engine of our economy.  Here are their near term hiring plans, also from CR.

The ZERO level used to occur at bottoms.  Now, we've had to improve to get to that level.  (Take that, Lump of Labor Fallaciators.)  Plus it looks like we might be stalling there as well.

On the other hand, though, big business are doing their part by hiring lots of people.   That would perhaps be more helpful if it were happening on this continent.  (Take that, Lump of Labor Fallaciators.) (H/T to the L/W.)

And if you're wondering why all this is happening, let's ask all the small business owners what their biggest problem is.

Poor sales?!? Could that be an aggregate demand shortfall?

Those small business owners sound like a bunch of Keynesian idiots!

No wonder we're in so much trouble.
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Quote of the Day - Krugman on the Tax Deal

Krugman usually editorializes in the NY Times on Monday and Friday.  Here is an excerpt from today's entry. 

The root of our current troubles lies in the debt American families ran up during the Bush-era housing bubble. Twenty years ago, the average American household’s debt was 83 percent of its income; by a decade ago, that had crept up to 92 percent; but by late 2007, debts were 130 percent of income. 

All this borrowing took place both because banks had abandoned any notion of sound lending and because everyone assumed that house prices would never fall. And then the bubble burst.

What we’ve been dealing with ever since is a painful process of “deleveraging”: highly indebted Americans not only can’t spend the way they used to, they’re having to pay down the debts they ran up in the bubble years. This would be fine if someone else were taking up the slack. But what’s actually happening is that some people are spending much less while nobody is spending more — and this translates into a depressed economy and high unemployment.

What the government should be doing in this situation is spending more while the private sector is spending less, supporting employment while those debts are paid down. And this government spending needs to be sustained: we’re not talking about a brief burst of aid; we’re talking about spending that lasts long enough for households to get their debts back under control. The original Obama stimulus wasn’t just too small; it was also much too short-lived, with much of the positive effect already gone. 

 He goes on to note that deleveraging is working - household debt is down to 118% of income. 

H/T to Thoma, who has an overlapping, but more extensive quote, which includes PK's final paragraph, and that is the really crux of this bad deal - it will all have to be played out again in 2012, with the backdrop of an election year.

I continue to become more pessimistic.
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QE II and interest Rates

There seems to be broad-based confusion on the effects of QE II, as indicated by the movement in long bond rates.  David Beckworth takes a stab at explaining it, using a chart of this year's changes in 10-year Treasury yields.

I'm not convinced.  Markets move to their own rhythms, and attributing this rise or that drop to some exogenous event is often playing a game of post hoc.  I want QE II to work as much as anybody, but I don't expect it to do a lot, with the M1 multiplier below 1, and the money disappearing into bank vaults.

Look at a longer time frame on the yield chart for 10-yr treasuries.  Chart is from Yahoo finance.  I've added parallel trend lines to highlight the 30-year long trading channel.

The recent activity looks like just another tooth in the saw blade.  In fact, current yield is about in the middle of the trend channel. It's hard for me to get excited until something dramatic happens, and this is a long way from it.
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Republicans, All Wrong, All the Time, Pt 21 - Dude -Where's My Recovery?

David Beckworth very politely deconstructs a vapid, though very civil critique of his NR article by Mark Calabria, of the Cato Institute.  It comes as no surprise to learn that a Cato scholar either has very poor reading comprehension, or is blinded by ideology.  Read it and chuckle.

But that is not my point here.  In the deconstruction post, Beckworth presents three graphs showing Domestic Demand per Capita (now at a mid-2007 level); Core inflation (leaning hard towards 0.00 and beyond); and money velocity (bouncing like a dead cat.)   Follow the link to see the not very pretty pictures.

Then Thoma comes up with this FRED graph.

And, of course, Rethugs refused to extend unemployment benefits for the 5% of the population who fell off that cliff at the right side of the graph.

Recovery - Hell!  It seems to me that there is no bright spot anywhere.
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QE 2

No, not a big luxury liner - a potential second round of Quantitative Easing.

James Hamilton - who you can follow at econbrowser fills us in on it's specifics and potentials for good and ill.

And in case you didn't already know this, Larry Kudlow is an obnoxious asshat.

Well, I can't get the embed code to work, so here is a link.

Good Debt, Bad Debt

Reminding us that all debt is not created equal, Krugman offers:

Whenever the issue of fiscal stimulus comes up, you can count on someone chiming in to say, “Only a moron could believe that the answer to a problem created by too much debt is to create even more debt.” It sounds plausible — but it misses the key point: there’s a fallacy of composition here. When everyone tries to pay off debt at the same time, the result is contraction and deflation, which ends up making the debt problem worse even if nominal debt falls. On the other hand, a strong fiscal stimulus, by expanding the economy and creating moderate inflation, can actually help resolve debt problems.

Delong adds:

There is nothing wrong with what Paul says. But I think it is incomplete, and that there is a better way of getting to the right conclusion.

The problem was created by too much risky debt and not enough safe debt. The result is that right now there is an excess demand for safe assets--like U.S. government securities. 

. . .

If our big problem were too much debt we would not be here, in depression. Too much debt generates inflation. The things that generate depression are shortages of financial assets, and excess demand for some class of financial assets then produces  .  .  .

Both posts are worth reading.  And what all of this casts into bold relief is the grotesque fiscal irresponsibility of the previous president, and the difficulty of cleaning up after his messes - further complicated by the fact that there are so many of them, in so many places.  Also, the gutting of regulations since Reagan has allowed capitalism to morph into the robber-baronism and economic disparity that ultimately brought on the other Great Depression.  Which is more or less why capitalism fails.

Alas, Obama lacks whatever it takes to get the country back on the right footing in the face of idiotic Repugnicant obstructionism.   And the public seems to be in the grip of right-wing populism - possibly the single most destructive political force known to man.

We are so screwed.

Welcome to the Lost Decade . . .

. . . or more.

This is what the unemployment picture looks like, from CEPR, via HuffPo.

(And check out the other graphs at the CEPR link.  You might want to have a strong drink handy.)   That leveling you see above through '09 and improvement (for a while) this year - such as it was - were due to the stimulus package.  Which is about done.

If I can invertly paraphrase what minority leader and Rethug asshat John Boehner said in a different, but related context, this is elephant hunting with a sling shot.  Fact is, it was just enough to give lying Repugnicants, glibertarians and ideologically-blinded Austrian fellow-travelers an excuse to claim it didn't work.

Well, it did work.

A little.

For a while.

In spite of being largely wasted on totally non-productive tax cuts.

Our journey to the lost decade comes to you courtesy of Prez B. Hoover Obama, Yellow Dog DINOS, obstructionist Repugs, and the richest 1% of Americans, whom all of the above suck on like toads.

Update: The problem with things like the stimulus package is, of course, that debt and debt servicing costs are increased.  Or so the story goes from them who be agin' it.  Krugman gives us some historical perspective.
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Republicans - All Wrong All the Time, Pt 10 - The Futility of Stimulus

Red alert for job losses under Bush.  Still having the Blues under Obama - but doesn't it look like we might be moving in the right direction?

Disturbingly symmetric, isn't it.  Do you think policy might matter?

Find the original (as far as I know) graph here.

What the Hell?!? Friday

Yes, it is Christmas.  But, it is also Friday.

So - what the hell - it might also be  C’thrishm’sh!
 
Which could mean a visit from  Sog-Nug-hotep 
 
It's possible, isn't it?  Just, maybe, with enough love and craft, that, "On this odd day squid may abide with you?"

May you be blessed with a ten-tentacular day of cheer, love, joy and mollusks.