"There Is No Economic Justification for Deficit Reduction" Galbraith to Deficit Commission

Posted by Michael Collins

Your proceedings are clouded by illegitimacy.

The conclusion to be drawn is that Social Security should in any event be off the agenda of your Commission, as it is a transfer program and not a program of public spending in the economic sense. In particular it does not use capital resources and will not drive up interest rates. This is true whether the "Social Security System" is in internal balance or not.
--James K. Galbraith

Why Economic Growth in the United States Cannot Happen

By Joaquin posted by Michael Collins

So, you cut back on your lifestyle; performed a so un-Greek personal austerity reset but your credit card balance is still creeping up; or perhaps you are slowly burning through your savings; or you are at the end of the line; abandon ship. Whatever, you have a lot of company out there. (Image)

Why is it so hard to make ends meet these days? The days of living high on the credit hog are over and we all have to get small but in the end, we still have to make ends meet; we have to pay for food, pay for utilities, buy gas, etc. How to make that work?

We all bought a lot of stuff during those days of easy credit. Debt driven demand drove up the value of lots of things. Homes increased in value so much that they became a kind of income harvested through a home equity line of credit. Autos got big and powerful again making them unaffordable to buy and operate now that we have to live within our means. Cell phones replaced land lines and cost a lot more; especially when everyone in the family has to have one. Maybe you have a home that you cannot sell and you are stuck living 20 miles or more from your workplace and your car is fast reaching the point when you will need a new one just to get to work.

Fed begins monetizing the deficit

By Numerian

The Federal Reserve, in announcing the results of this week's meeting of the Open Market Committee, surprised the market by revealing it will begin purchasing US Treasury notes and bonds with the principal income it receives from its vast holdings of Fannie Mae and Freddie Mac mortgage securities. This practice - wherein the Fed buys up US government securities and injects cash into the public market as payment for these securities - is a form of monetizing the debt.

The last time the Fed did this on a big scale was back in the 1960s when it attempted to mop up the excess Treasury securities that were flooding the market as a result of Lyndon Johnson's efforts to finance the Vietnam War. That Fed program was viewed at the time as a failure, since the cash the Fed put back into the economy in exchange for the securities was a big reason - perhaps the major reason - why price inflation accelerated from the late 1960s until a decade later, when Paul Volcker managed to squelch inflation once and for all with forbiddingly high interest rates.

Fraught with risk

Sunday Morning Comics - edition

Brought to you by Chinese Caulking and Insulation Manufacturing - Americans! Caulk your windows! It will stimulate your economy! (after all it will only cost $23 billion dollars)
Cup O' Joe


Good Morning! Rise and Shine! Get that Cup O' Joe...
break out the O.J....hang out with the pooch...time to check out the Funnies! or Better Know a Made Up District


Jukin' The Stats.

My all time favorite TV series is "The Wire", which ran for 5 years on HBO. Throughout the series, the common thread was the affinity, by the police, the mayor, city politicians and even the drug lords, to "juke the stats". In other words, "tell them what they want to hear", and move on.

In this vein, I've been all over the econoblogosphere today and I'm surprised that this excellent article from Yves Smith hasn't gotten more attention.

Many of us here at EP, and elsewhere, have questioned the veracity of new data eminating from the Census Bureau, the BLS (a.k.a. Bureau of Lying Statistics) and other gov't agencies. In particular, any new reports pertaining to housing, unemployment levels and CPI must be taken with a heavy dose of skepticism.

June housing starts add to evidence of Recovery's Imminence

This morning the Census Bureau reported that Housing Starts increased to 582,000 in June from May's upwardly revised 562,000. Year-over-Year starts are still down (-46.2%).

I'm unable to post graphs at the moment, but Calculated Risk has an excellent one, showing that housing starts are a leading indicator, always borttoming before the end of recessions. Note the recent strong turn-up in our current recession looks like the harbingers of recovery from past recessions.

No Long-term Recovery without real Wage Growth

In my recent series, Economic Indicators during the Roaring Twenties and Great Depression, I concluded that the indicators that were studied from the Deflationary period of 1920-1950 suggested that this recession might bottom out in about Q3 2009. But with anemic wage growth to say the least, such a weakly based recovery might be doomed at birth to be short-lived.

All the deflationary recessions from 1920 - 1950 followed a pattern. The CPI declined from the beginning of the recession and its YoY rate of decline bottomed immediately before the recession's end. M1 money supply followed a similar pattern, sometimes coincidentally, sometimes leading slightly. In all 6 of the deflationary recessions during the period of 1920-50, once M1 and CPI both declined at a decreasing rate, the recession was about to end.

Unemployment and Recovery

The BLS reported this morning that in April the U3 unemployment rate increased to 8.9%. This is a .4% increase from March, and is what I expected.

This is one of those cases where "less awful" actually ought to give rise to some hope. Before Black September, when we had a shallow recession confined to Wall Street and housing-related trades, the worst month for payroll loss was -175,000. By November the loss was -597,000, and from December through March losses were clustered near -700,000 a month!.

April's payroll loss of -539,000 is ~140,000 less than the last 4 months. If this new trend continues for another 3 months, payroll losses will vanish and the economy might actually begin to add jobs by August.

Oil and Recovery

This may be the most important economic graph of the year:

Why? The above graph shows gasoline consumption in the US. The dotted blue line is April 2007-March 2008, the yellow line the remainder of 2008, and the chained red line this year's consumption.

Let us make a not unreasonable assumption that this recession is going to be somewhat "L" shaped or at least a Verizon-logo like elongated "V" with a very slow recovery after hitting bottom. Let's also assume optimistically that we are somewhere near the bottom of the cliff -- the inflection point of the "L" or "V".

How much of a recovery we get -- or worse, if we get a double-dip "W" recession -- is likely to be substantially determined by the price of Oil later this year.

2009: Recession vs. Recovery (Update 5)

Towards the end of last year, I wrote a number of posts about 2 possible scenarios for 2009: recession vs. recovery (although I noted that there could be a recession first, then a recovery). I used at least 4 different indicators to discuss what might happen.

Now that we are through with the first quarter of 2009, let's see what those indicators are showing.