demandside

Roubini, Stiglitz, structuring the oil market, and George W., “Idiot of the Week” ……………… Nouriel Roubini’s 20 stresses

a postscript from Joseph Stiglitz on how it has gone global

Our short list of remedies

and regulation may be necessary to prevent excesses and fraud, but we need to restructure markets for other reasons — to make them efficient.  We’ll take a peek at the oil market.

And last but not least, Idiot of the Week.  Somewhere in Texas a village is missing its ….

Now a short form of Nouriel Roubini’s  RGE Monitor:

One can count at least 20 separate or complementary causes that will sharply reduce consumption in the next several years:

· The US consumer is shopped-out …

· The US consumer is saving-less …

· The US consumer is debt burdened with the debt to disposable income having increased from 70% in the early 1990s to … 140% in 2008.

· Not only debt ratios are high and rising but debt servicing ratios are also high and rising …

· The value of housing wealth is now sharply falling …

· Mortgage equity withdrawal (MEW) is collapsing from $700 billion annualized in 2005 to less than $20 in Q2 of this year. …

· The value of the equity wealth of US households has fallen by almost 50%,…

· The credit crunch is becoming more severe … [and] is spreading from sub-prime to near prime to prime mortgages and home equity loans; and from mortgages to credit cards, auto loans and student loans. …

· Consumer confidence is down …

· Real wage growth and real income growth has been stagnant …

· The Fed is reaching the zero-bound on interest rates …

· Employment has been falling for 10 months in a row and the rate of job losses is now accelerating… .

· Tax rebates of over $100 billion failed to stimulate real consumption earlier … another general tax rebate would be as ineffective as the first one in boosting consumption.

· The 1990-91 and 2001 recessions were not global; this time around [it will be different] (see our note from Joseph Stiglitz below)

· The recent rise in inflation – that is only now slowing down – reduced real incomes even further for lower income households …

· The trade weighted fall in the value of the U.S. dollar since 2002 has worsened the terms of trade of the US …

· With consumption being over 71% of GDP a sharp and persistent contraction … implies a more severe recession than otherwise. …

· Monetary easing will not stimulate durable consumption and demand for residential housing ….

· While policy rates are sharply falling the nominal and real rates faced by households are rising rather than falling….

· To bring back the household savings rate to the level of a decade ago (about 6% of GDP) consumption will have to fall – relative to current GDP levels – by almost a trillion dollars. If all of this adjustment were to occur in 12 months GDP would contract directly by 7% and indirectly (including the further collapse of residential and corporate capex spending in a severe recession) by 10%, an exemplification of the Keynesian “paradox of thrift”.

Even in that scenario the cumulative fall of GDP could be of the order of 4-5%, i.e. the worst US recession since WWII. Note that the cumulative fall in GDP in the 2001 recession was only 0.4% and in the 1990-9 recession was only 1.3%. So, the current recession may end up being three times as long and at least three times as deep (in terms of output contraction) as the last two and worse than any other post WWII recession.

Adding another implicit in Roubini’s analysis and from his testimony before the Joint Economic Committee a couple of weeks ago, big new fiscal stimulus is essential immediately (which seems less and less likely to occur).

Absent this stimulus to arrest the collapse of demand, investment and prices, several more pounds of flesh and muscle and bone will be extracted from the economy before January 20.

Joseph Stiglitz writing in Spiegal Online

under the title

Global Crisis — Made in America

A global financial crisis requires a global solution. Uncoordinated macro-economic policies, for instance, have contributed to Europe’s problems. When the European Central Bank refused to lower interest rates earlier this year, focused as it was on the threat of inflation, while America’s did, focused on the impending downturn, it led to a stronger euro. This in turn contributed to Europe’s downturn, though it made America’s GDP numbers look better for a while. Now, Europe’s downturn is ricocheting back on America: Europe’s weaknesses are contributing to America’s.

The same has happened when it comes to regulation. To too great extent, there has been a race to the bottom in accordance with the myth that deregulation breeds innovation. Instead, the innovation was greatest when it came to getting around the regulations designed to ensure good information and a safe and sound financial system.

Financial markets are supposed to be a means to an end — a more prosperous and stable economy as a result of good allocation of resources and better management of risk. But instead, financial markets didn’t manage risk, they created it. They didn’t enable America’s families to manage the risk of volatile interest rates, and now millions are losing their homes. Furthermore, they misallocated hundreds of billions of dollar.

…. Joseph Stiglitz

***

On November 7, the Center for American Progress opined in its thought for the day.

The full set of policies we need can be divided into four categories: stabilization, stimulus, recovery, and growth—an agenda that will deliver the prosperous economy we all desire. ***

Which leads to our list, familiar to listeners:

Stabilize  home values through the many means already suggested.

Two:

Reduce debt burdens of homeowners, credit card holders, and other consumer debt holders.

Three:

Prevent further damage to States and Municipalities by filling the holes in their budgets with federal grants and loans.

Four:

Help the stressed through extending unemployment benefits and increasing food stamps.

Five:

Large, new infrastructure projects, with ongoing funding

Six:

Enact universal health insurance

Seven:

Fully fund alternative energy R&D

Eight:

Follow through on the volunteer corps idea for supporting college education

***

There is a lot of concern and there should be that spending cannot ignore the federal budget.  In particular, it would not be a good idea to undertake the ongoing infrastructure projects without identifying the funding.  We’ll leave aside the necessity for huge new infrastructure to combat global warming.  Economically, infrastructure spending would have immensely greater impact as stimulus and recovery if it were clearly seen as being long-term, not flash-in-the-pan.  It would leverage private investment by companies tooling up and positioning themselves to contract for the infrastructure.  It would create stable, community-building jobs and job bases.

At the same time the energy market needs to be structured.  We’ll get into this need to structure markets in a more general way soon.  But in particular, with regard to infrastructure financing, the auto bailout and global warming, let’s consider energy.

The oil price is too low.

In full view of the collapse of the environment, coal and oil are priced at the cost of extracting, distributing and collecting profits.  Not one cent of the price reflects the cost of killing the planet.  Absent the price signal, the First Law of Economics dictates that consumers will overuse fossil fuels and under-use alternatives.

The American auto fleet needs to be turned over into fuel efficient cars.  Absent a clear price/cost need, in a down economy, people will cling to their SUVs and simply drive them less if the price of oil goes up.

The economics of alternative energy investment needs to be strong.  It is weak in a cheap gasoline market.

When the price signal is broken, the market is broken.  The market itself occurs in the moment of purchase and sale, which includes the price and the participants.  A stable market structure creates standardized products and transparent terms for this transaction.  A fully functional market includes all costs, but they need to be included in this moment, or the market is not fully functional and a non-market mitigation mechanism has to come into being.

There is compelling reason to introduce the costs of burning fossil fuels into the price that is charged for gasoline.  We can do that by instituting a stiff tax on a per-gallon basis.  We should encourage states that do not already do so to extend their retail sales taxes to gasoline.

In 2007 the blue ribbon commission on surface transportation reported to the Congress that a gas tax of ultimately 83 cents per gallon, phased it, would provide $250 billion dollars per year for 50 years.

In funding infrastructure this way, we are essentially trading imported oil for domestic jobs and creating an efficient, sensible, sane base to our economy.  It would structure a useful market which included all costs and was not run for the benefit of well-connected corporations.  But even if the gas tax money were returned to the taxpayer in the form of rebates on other taxes, it would structure an energy market that worked.

****

Now, speaking of the corporate connections, idiot of the week

Unfortunately for George W, there are no WMDs and there is no free market.  Were we to substitute something like corporate dominated market or corporate oligarchy for free market, it would come much closer to reflecting reality and also Bush’s believes.

But whatever you call it, it has failed.  It is appropriate only for nostalgia, a newsreel, to broadcast such a speech.  Highly inappropriate for the lead-in to the G-20 meeting where the victims of the current scheme were gathered to assess survival possibilities.

Whatever you call it, it has failed.  The Bush hands off the market has failed.  Tax cuts as a route to prosperity has failed.  Bush has been the front man for the most inept, corrupt and intellectually vapid administration in modern history.  He has led the nation and the world into blind alleys on the environment and the economy.  He has not only disembowelled American prosperity, but its integrity and its standing in the world as well.  He leaves with the economy in flames, and his last act is to obstruct the fire department from reaching the scene.

George W. Bush.  Idiot of the week.

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