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PostAre We Headed for Recession? (Tor Guimaraes, USA, 12/10/18 9:29 am)
I think my favorite intellectual sparring partner, Ric Mauricio (December 8th), is right stating that nothing will work long term when people try to take undue advantage of other people (lack of respect for people) and by not balancing the extremes. The only exception might be searching for the truth on everything, without which we won't know what is going on, how some people are taking advantage of others, and how to balance things. That is basically why I believe in God the Universe.
Ric asks the question, "Are we headed towards a recession?" Here I break my own rules and look at financial markets statistical evidence and heuristics with a large grain of salt. Trends are also very important in some cases, like today's economy and stock market (two very different things). To me the real economy is the people's standard of living, so our economy (the world's for that matter) has been sick and getting worse for a long time.
Since Bill Clinton's administration listened to Greenspan and ripped off the boundary between consumer banking and investment banking, the stock market has been on drugs; and short term the budget deficit was wiped out and the economy felt rosy for a while. After that under the Goldman Sachs administration (Bush/Cheney/Obama) the financial system blew up and the economy has suffered since, even thought the stock market has recovered due to massive doses of free or very cheap money.
The problem has been a much lower standard of living for the majority of the people, coupled with an unsustainably high stock market. The economy was so weak that the Fed did not have to worry too much about inflation so it let things ride. Lately, as the Fed noticed that inflation raised the price of Ric's gym supplies, it had to act and introduced a gradual interest rate increase to fight off inflation. If it slows the rate increase, inflation may accelerate as the economy recovers. If it raises rates too high or abruptly (they know better), we have recession. I guess our capitalist system it is all about money now.
A few days ago I was depressed to find out that China now is producing more research (new knowledge) than we are. That spells long-term problems, because knowledge from research (not organized religion) leads to new technology, new products and processes, jobs and economic growth.
JE comments: Today we have yet another grim day on the stock market. At least no one will accuse it of being unsustainably high. My question, are we headed for recession, or does it just feel like we are? When greed turns to fear...
Is a Recession Looming?
(Istvan Simon, USA
12/11/18 2:46 AM)
Responding to Ric Mauricio's question, I do think that we are headed to a recession.
The American economy has been on a 10-year uninterrupted expansion, the unemployment rate is at 3.7%, and inflation is low. So, Tor Guimaraes' sweeping generalizations and enduring pessimism about the American (and the world) economy seem grossly exaggerated and probably unwarranted.
But, if so, why do I think that we are headed to a recession?
There are several reasons. First, we are due one simply by the cyclical nature of our economy. Ten years of expansion is unusually long, and so something is bound to go wrong, sooner or later, which tends to cause recessions. But there are further reasons for concern. The economic policies of president Trump are in my opinion all wrong. He has done nothing to help the economy along, and has done a lot of things that will tend to stall the economy. The tariffs and his trade war with China are stupid and counterproductive.
The United States has some legitimate complaints about some of China's trade policies and economic behavior. For example, China's tendency to ignore intellectual property. But the way to go about this is not Trump's "elephant in a china shop" (no pun intended) approach. There is no evidence that any of his tariffs have been helpful to the American economy, and plenty of evidence that they have been harmful. As I predicted in these pages, China did not blink, nor changed any of its trade practices, and entirely predictably retaliated.
It is stupid to put tariffs on steel and aluminum. It increases costs, and therefore contributes to inflation, and it makes American manufactured products less competitive, worsening the trade deficit rather than helping it. Since steel is used in mostly everything, it increases the costs of everything where steel is used. The number of jobs lost because of this is vastly superior to the number of jobs saved in the American steel industry. Similar considerations go for aluminum. Furthermore, because China retaliated, it caused the loss of billions of dollars in exports of agricultural products, and loss of market share to American agriculture in world markets. These effects are going to be long term, and persist even after Trump's policies are eventually reversed. The consequences of this Trump-manufactured crisis in the farming sector necessitated a $15 billion bailout to farmers, to try to placate them. It is 15 billion dollars that we do not have, so this just increases the national debt further. Likewise, the increase of over $160 billion in the defense budget was unneeded, and once again increases the national debt. The tax cut for the super-rich as predicted did not result in added growth, as the GOP claimed it would, and therefore once again just exacerbated the deficit. In 2 years the Trump administration grew the national debt by over 2 trillion dollars. Paraphrasing Everett Dirksen, $15 billion here, $160 billion there, and soon it adds up to real money.
It should be said that increasing the deficit during a robust economic expansion is imbecilic. It is Keynes turned on its head. It causes long-term pain with larger and larger burden of interest payments, without much economic benefit. So all these policies of the Trump administration are ill-conceived and causing real harm to the economy. Until recently this was masked by the generally good performance of the economy, which continued on its same upward path inherited from the Obama presidency. But the trade war with China and some of these other factors I mentioned above turned a vigorous bull market into what appears to be a bear market now.
I disagree with Tor Guimaraes that the rise in the stock market was caused by "cheap money." The stock market predicts future profits, and while not always right, generally does that pretty well. That is also what caused the rise in stocks so far, and it has been mostly justified. Profit growth has been healthy, and so stocks rose.
Conversely, the recent reversal of markets seems also sound. Add to this that markets do not not like uncertainty, therefore the constant zig zags of the Trump administration do not help. Neither do the constant lies which are soon contradicted by the actual facts.
JE comments: One silver lining of a possible recession is the unlikelihood it will bring about a collapse in housing as in 2008. Having just procured a mortgage, I can assure you the banks won't cough up a penny unless you're solvent and can prove it with forest-killing reams of documentation.
A recession is formally defined as two successive quarters of negative growth. We haven't had one of those yet--but the fourth quarter of 2018 feels very shaky.
- The "Goldman Sachs Administration" (David Duggan, USA 12/11/18 4:32 AM)
Richard Rubin, chairman of Goldman Sachs, was Clinton's second Secretary of the Treasury, succeeding political hack Lloyd Bentsen in 1995. Of course, Lloyd Bentsen beat George H. W. Bush in the 1970 Senate race in Texas, but was the 1st mate on the Titanic of the Michael Dukakis's presidential campaign of 1988. Maybe there is karma after all.
JE comments: David Duggan writes in response to Tor Guimaraes's reference to the "Goldman Sachs Administration" of "Bush/Cheney/Obama." David reminds us that Bill Clinton was a GS acolyte, too. And what about Europe?
Who can answer this naïve question: why are political leaders so enamored of Goldman Sachs?
"Senator, you're no Jack Kennedy." Hack or not, Lloyd Bentsen left us with one of the most memorable quotes of the decade, perhaps the century.
- The "Goldman Sachs Administration" (David Duggan, USA 12/11/18 4:32 AM)