February 11, 2009

The Economy : Stimulus, Deflation and more

From Ritholtz

Back to the planned US rescue packages, and specifically Bill King’s comments: “The main problem plaguing the US economy is too much debt has been accumulated on gratuitous spending and the papering over of declining US living standards. Solons espouse a monstrous surge in debt to fund even more consumer spending. The toxin is not the cure. Inducements to save and invest in production are the remedy. But the welfare state and its ruling class are trying a last grandiose socialist [Keynesian] binge in the hope of salvaging their realm.”

OK, this guy's over the edge of the cliff with the Keynesian=socialist bullshit. That's not why I put up the quote, though it is fun to poke at the deranged thinking coming out of economists on the right. No, I posted it because he's got something down perfectly... the decline in living standards. What he means to say is the decline in real wages but he'd sound like a real economist then and the nutters would pull his membership card and parking privileges. Part of the reason we've been burying ourselves in debt is that it was the only way we could afford the standard of living to which we'd become accustomed. The trigger that collapsed the credit markets (built on the house of cards that was the CDS 'market' and levered banking) was higher than usual defaults on home loans which were caused by two factors... higher energy prices and interest rate resets on some sub-prime ARMs. When wages aren't increasing but the cost of living is, there is always going to be a breaking point.

The solution? That's going to take some people smarter than me. I think it's a fundamental shift in tax policies that have favored short over long term gains that will do the majority of the heavy lifting. It's also paying more for the lowest levels of jobs. Just like many Americans have enjoyed cheap crap from China, they've also enjoyed paying lower than reasonable prices for real work. That's gotta change because you can't have a stable long term economy that sees people at the top making an unbelievable amount of money while a vast number at the bottom make less in a year than those people make in a day.

And, just for fun, we're already in deflation and the only thing holding us up is the Fed and Treasury.

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All this is as a backdrop to this post over at Greg's Opinion that's spot on. Especially the takedown of new RNC Chair Steele who apparently hasn't seen that more than half the jobs Bush 'created' have disappeared.

There is something else worth noting regarding the comparisons between now and the Depression, especially the notion that government spending didn't do the trick. Those on the right with just enough knowledge to be dangerous are fond of pointing out that in 1940 unemployment was still high. What they don't tell you was that in 38 and 39 the government tried to balance the books by slashing spending and increasing taxes. Which sent the economy back down again. In other words, there wasn't enough stimulus. Click here if you don't believe me.

It should also be noted that even that high level of unemployment in 1940 was still about far better than the absolute worst level in the Depression (about 25% vs 16%) which also kinda deflates the ramblings of the new economic theorists on the right who are just now discovering fiscal responsibility. The problem with them, as usual, is that their timing is awful. Simply put, the government has access to money that is functionally free and the economy needs that money since it's not going into the private market.

Think about it this way... it's analogous to worrying about what started the fire and how much it'll cost to put it out when the house is burning. And you're sitting in the living room.

Oh, and just in case you were wondering, while the press may love the Republicans and their retarded antics, the polls are showing that the majority of Americans are OVER it. Just look.

Posted by mcblogger at February 11, 2009 12:25 AM

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