News Recession: NBER says what all Americans knew

[ar81]

Hmm...think I follow you. Surely though announcing the recession is over would not so much be a case of false news, so much as a self-fulfilling prophecy?

Logic seems to be here that it's a mindset thing - if we all just decided to ignore the recession and start consuming again, thus creating demand and securing jobs this would solve most of the problems? Then cut government waste and use the dividend to pay off the national debt.

As for creating jobs, from what I remember of my history at high school, the catalyst for ending the depression in the 1930s was the start of WW2. Maybe a return to the Cold War and a subsequent re-armament programme wouldn't be such a bad thing right now.

Whilst I have always been mostly skeptical about economists and economics in general, where's a good place to start in understanding the whole trade deficit thing? This is all making me rather curious!

You should think of this model. It is a simplified version of the lineal programming model used by IMF and World Bank, and it adds the missing sector that added bias to numbers that led Argetina to recession after IMF reforms.

Deficit takes place when you spend more than your income.

+Government deficit
+Company deficit
+Bank deficit
+Foreign trade deficit
+Citizen deficit
----------------------
= Excess of demand

In a balanced economy, excess of demand is zero.

Foreign trade deficit leaks currency out and causes liquidity problems, forcing devaluation pressure to balance the economy, which Bush has not done. Lack of deficit was passed to citizen deficit which turned many citizens into subprime people, and bank greed caused that deficit to be passed to banks.

Government has huge deficit that is funded with external debt, which is currently being refinanced, so debt is growing exponentially. Debt was used to pay for war, which is like asking a loan to get drunk. Such spending leaves less money for education, infrastructure, health, etc, inside US.

Banks have huge deficit (losses) and we al know the story.

Citizens have deficit. Unemployment creates a deficitary gap between money needed to survive and current income. Credit card debt also is a deficitary behavior. Lower rates imposed by Bush allows more credit card debt, which in the end refiances consumption, so buy now, pay later, and later deficit will be far worse, as credit card inflationary pressure is temporary, followed by a deflationary pressure when you have to pay.

Companies do not use to have deficit (losses), and in the light of citizen deficit which becomes reduced consumption, companies fire people, and increase citizen deficit, which leads to more job cuts and so on.

So all sectors have deficit, and someone will ahve to pay the deficit, and it is being bounced to the citizen.

Solution?

1.Government needs to generate surplus to pay its debt, to have some liquidity to compensate deficits in other sectors and lead economy to zero excess of demand.

Under ideal conditions, crisis would last for 2 years. But since government cuts will face pressures from certain interests, I would expect it to last 10 years (a realistic term based on experiences of other countries) to 20 years (which is the most likely since those who will be cut will fight to death against the cuts). Among them you have friends of games who might like to spend the money in expensive geopolitical adventures, instead of using the money to attend needs of US citizens, and also you have corporate executives that might like to get some bailouts.

So I expect US to have a 20 year crisis. And of course, the last years will be softer than the initial ones. It could be more, if media keeps using their 9/11 emotional traumas style in the news.

2.Dollar must fall until american and chinese workers are equally expensive. Nowadays 1 american costs the wage of 15 chinese. In that matter, British were smarter than republicans, as pound went down.

3.Jobs need to be created, using root development programs, following the model Francisco Franco used to bring Spain out of its misery. But such program has a high mortality of projects during the first 2 years, so government jobs are needed in the short term (think of it like a natural disaster aid, but in this case you have a republican disaster).

Bailouts? Bailouts have the risk of misuse by corporate executives and it adds overhead costs that reduce efficiency. Instead, government jobs use current government bureaucratic infrastructure, so overhead costs should not grow too much and if they grow they would be in the form of government jobs.

I would expect company bailouts to be as useful to create jobs as funding NGO during a natural disaster... lots of money go everywhere except where money is needed.

Until then the only safe place for your money is under your bed.


-----Post Added-----

War being a global industry, it could be said to be very good for business

In 1982 James Dunningham, US expert in war simulations, said "while peacetime defense is expensive and detrimental to the economy, a war would bankrupt the United States"

In a globalized economy, poverty only makes poor more competitive in the job market. War creates poverty.

If you sell weapons to others, you better have a good way to defend against them, which implies costs for you too, as you need to spend more than them.

Venezuela has expensive jet planes and no medicines in public hospitals, and it had petrodollars. Costa Rica has one of the most advanced health systems in the world, and it has no army and had no petrodollars but a huge oil bill during the raise of oil.

Venezuela has 27% inflation, blackouts, and 50% of Venezuelans have been attacked by criminals this year. Costa Rica has about 15% inflation, no blackouts and crime rates are significantly lower.


-----Post Added-----


I found this somehow interesting, but I wonder what do you think about it...

Source: http://www.newscientist.com/article/mg20026833.000-forecast-of-economic-collapse-backed-by-data.html

Forecast of economic collapse backed by data

WE ARE on track for serious economic collapse that will dwarf our current troubles. That's the conclusion of the real-world analysis of a controversial prediction made 30 years ago that economic growth cannot be sustained.

In 1972, the book Limits to Growth by a group called the Club of Rome predicted that exponential growth would eventually lead to economic and environmental collapse. The group used models that assessed the interaction of rising populations, pollution, industrial production, resource consumption and food production. Most economists rubbished the book, and governments have ignored its recommendations, but a growing band of experts is once again arguing that we need to reshape our economy to make it more sustainable (New Scientist, 16 October 2008, p 40).

Now Graham Turner at the research organisation CSIRO in Australia has compared Limits to Growth's forecast with data from the intervening years. He says changes in industrial production, food production and pollution are all in line with the Club of Rome's predictions, which foresee decreasing resource availability and an escalating cost of extraction that eventually triggers a slowdown of industry - leading to economic collapse some time after 2020 (Global Environmental Change, vol 10, p 397).

"For the first 30 years of the model, the world has been tracking along an unsustainable trajectory," Turner concludes. Herman Daly of the University of Maryland says these results show that we "must get off the growth path of business as usual, and move to a steady state economy", stopping population growth, resource depletion, and pollution.

Turner is not suggesting that disaster is inevitable, and says his numbers show that a sustainable economy is attainable. "We wouldn't have to go back to the caves," he says.

 

[Urwumpe]

If chicken little tells you that the sky is fallin'
Even if it wasn't would would you still come crawlin'
Back again?
I bet you would my friend
Again & again & again & again

 

[Kurt M. Weber]

ar81, your understanding of economics is apparently nonexistent, so I'll start from the beginning.

Consider the simplest theoretical case: a universe with only one good and one firm, and everyone is employed by this firm in the manufacture of this good. Let's assume there are ten people in this universe.

It takes seven people at all stages of the operation, from management to production, to make one widget a day, and for the sake of simplifying the model let's assume it is impossible to make partial widgets, or to spread the work out among more than seven people.

But there are ten people in this universe, and everyone is employed by this one firm. Now, all ten people are paid based on 1/7th of a widget per day, even though since ten people are employed the average productivity of each employee is actually 1/10th of a widget per day.

Follow so far?

 

[Eagle]

ar81, your understanding of economics is apparently nonexistent, so I'll start from the beginning.

Starting with a personal downer isn't the best way to get somebody to listen.

Good luck, teaching economics is difficult at best. Superseding previous suppositions is even harder.

 

[Urwumpe]

Starting with a personal downer isn't the best way to get somebody to listen.

Especially not to somebody who believes to have reinvented economics.

But from my own army experience, it is sometimes helpful to give somebody a clear downer, so you can start from zero and do away with all wrong knowledge...

 

[ar81]

Oh great... now World Bank is helping to create panic worldwide
http://news.bbc.co.uk/2/hi/business/7774199.stm


-----Post Added-----

ar81, your understanding of economics is apparently nonexistent, so I'll start from the beginning.

You are talking about microeconomics.
I was referring to macroeconomics.
Deficitary behavior in the macroeconomical level in the past is leading to a problem in microeconomics today.

Especially not to somebody who believes to have reinvented economics.

I did not reinvent it.
The model already existed, I just found it had one sector missing, making economy a land without humans, and measures to fight recession end up transferring deficit to citizens to "balance numbers".
When you add that sector, instead of balancing excess of demand, with current measures to "solve crisis" you just make a transfer of deficits between sectors, without affecting the overall excess of demand that brings unstability.
So it means US government have not started to solve the root cause of the problem. So it will go deeper and deeper until it starts to be solved.

Current actions are like giving an aspirin to a patient with pneumonia who is resting on the snow in the open.

You may try to discredit what I say. I do not care. I know what my sources are.
But if I am not wrong, the ones who will suffer are people in US.
A blind eye towards a problem is like hiding head on the ground, like an ostrich.

 

[Kurt M. Weber]

You are talking about microeconomics.
I was referring to macroeconomics.

Because that's where it all begins.

They are not distinct, independent branches.

The macroeconomic picture is merely an aggregation of all the decisions made by all participants in the economy at the microeconomic level, so any valid macroeconomic model must first begin with a valid microeconomic model.

 

[Urwumpe]

The macroeconomic picture is merely an aggregation of all the decisions made by all participants in the economy at the microeconomic level, so any valid macroeconomic model must first begin with a valid microeconomic model.

Not automatically true - macroeconomics are pretty much similar to quantum physics. The possible macro-behavior is the weighted sum of all possible smaller micro- behaviors.

But just like the quantum-physics, macroeconomics can't contradict the micro-economics, it can just allow a wider range of possible results. The macro-economy can crash and strive at the same time, with just different probabilities.

And in the moment, you measure the probabilities, you interact with the object you measure... And I am sure, something like Heisenbergs uncertainty principle also exists also for the macroeconomy.

Still, in general I can agree with your model.

 

[ar81]

ar81, your understanding of economics is apparently nonexistent, so I'll start from the beginning.

Consider the simplest theoretical case: a universe with only one good and one firm, and everyone is employed by this firm in the manufacture of this good. Let's assume there are ten people in this universe.

It takes seven people at all stages of the operation, from management to production, to make one widget a day, and for the sake of simplifying the model let's assume it is impossible to make partial widgets, or to spread the work out among more than seven people.

But there are ten people in this universe, and everyone is employed by this one firm. Now, all ten people are paid based on 1/7th of a widget per day, even though since ten people are employed the average productivity of each employee is actually 1/10th of a widget per day.

Follow so far?

The advantage of living as a society is that we all work and we all enjoy the benefits of working together. If you have more hands, it means less worload for everyone. If you are alone in a desert island, you will have to take care of everything.

Your model seem to exclude 3 fellow citizens. Or it means you have 3 top executives and 3 people actually working.:lol: Solution, fire the executives, the improductive overhead.:rofl:

Such exclusion of your model is based on the principle that you try to maximize utilization. But what a company needs is to maximize profit, not utilization.

You can increase utilization by having defects and rework, by working slowly. Instead, to maximize profit you need to be creative and work hard.

Amazingly, if you fire one executive that makes $10 million a year, you could hire 100 workers with the salary of an astronaut.

If you fire 100 workers instead of 1 executive, you get less working hous per dollar, so even if utilization of personnel increases if you keep the workers and not the executive, efficient use of dollars actually increase as you have more hands.

What do you do with more hands?
-Move them to make more profit.
-Make them reach everyone, make them think about creative ways to increase sales.
-Make them think about inventions derived from available resources. If the ship is sinking people will have the motivation to save the ship.

If you see Atari in its best times, workers did not have a schedule. They were not tied to utilization, they were being creative. That's bad if you are an addict to data, but humans are not robots. People have potential to do amazing things.

Or you may keep executives if you get to measure their personal performance. Unfortunately there are no reliable metrics for that, so you may think that the could be doing what car maker executives have done for the company...

Your model asumes utilization maximized, and that's exactly why Japanese factories use to be more competitive. They focus on quality, not utilization.

 

[Kurt M. Weber]

Wow. You are:

• Using words without knowing what they mean
• Failing to understand the concept of an "abstraction"
• Denying the necessity of management (which therefore means denying the necessity of thought)

Looks like I've got my work cut out for me in educating you.

 

[ar81]

The necesity of management is the need of leadership.

American model is inherited from old british model during napoleonic wars. Take a person with some education and who loves blood and adventure and appoint him as leader. It was that simple because there nothing more to do than to march in formation. So american model not necessarily produce good leaders.

In Russia, leaders are appointed after they pass tests, so you have the most brilliant minds, but not necessarily leaders.

One of the most effective leadership models that could be found belong to Germany and Israel. You start at the bottom and you go up only if you are prepared and tested for the next level.

Your abstraction is too company centered. Macroeconomics is more than companies. It has citizens, government, banks and foreign trade. Interactions between them is what determines macroeconomics.

 

[Urwumpe]

In Russia, leaders are appointed after they pass tests, so you have the most brilliant minds, but not necessarily leaders.

Yes. Tests like "Shoot'em before they shoot you" or "How to denounce rivals for tax evasion" or "Use the right fork at the presidents dinner".

And in Germany, it is not different at all to the USA. The only difference is in the small and middle size companies, which are dominated by the German craftsman laws and traditions - you start as "Geselle"(skilled craftsman) and can later get certified as "Meister"(master), which gives you the right in Germany to employ other craftsmen (and craftswomen) and train apprentices ("Auszubildende"). Some sort of traditional quality assurance, but the standards have become pretty low in many businesses.

 

[ar81]

US trade gap gets worse.
Trade deficit reduces liquidity of US economy...
http://news.bbc.co.uk/2/hi/business/7777707.stm

 

[Eagle]

Trade deficit reduces liquidity of US economy...

You keep saying that and it irks me every time.

The trade deficit has nothing to do with the current economic situation. Plus, China is putting a lot of that money right back into the US economy both in stock investments, bonds (corporate and otherwise) and a LOT of US Treasury Bonds. In fact T-notes are up big time because they are viewed as such low risk.

Would a trade surplus be better for the world economy? No. Because the US would be reducing the world's liquidity. Mercantilism used to be, and still is a very popular strategy, but its not the best thing for everyone.

 

[ar81]

Plus, China is putting a lot of that money right back into the US economy both in stock investments, bonds (corporate and otherwise) and a LOT of US Treasury Bonds. In fact T-notes are up big time because they are viewed as such low risk.

Government bonds are debt financing instruments of the U.S. Federal government. A bond is a debt security, in which the authorized issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date. A bond is simply a loan in the form of a security with different terminology: The issuer is equivalent to the borrower, the bond holder to the lender, and the coupon to the interest.

In business and finance, a share (also referred to as equity share) of stock means a share of ownership in a corporation (company). In the plural, stocks is often used as a synonym for shares especially in the United States, but it is less commonly used that way outside of North America. The income received from shares is called a dividend, and a person owning shares is called a shareholder.

Both stocks and bonds are debt.

So China keeps yuan too low to cause US leak of currency in the form of trade deficit. Then China lend that money to US and gets the same money plus interests and dividends, leaking even more money... unless debt is refinanced by paying debt with bonds and stocks... and that makes debt to skyrocket until it becomes unpayable.

Loans are a good source of liquidity, but they have a price called dividends and interests. So if you gain liquidity through loan, and not via trade surplus, you are selling your soul to the devil in the future. With stocks China may control US companies. With bonds, it controls US government. No wonder why US do not solve trade deficit... It would upset China.

US used debt to pay for the war, instead of using taxes. So it is like asking for a loan to get drunk. James Dunningham, US war simulation expert, said in 1982:

while peacetime defense is expensive and detrimental to the economy, a war would bankrupt the United States

Without suspecting what could happen 26 years later, he seems to have become a prophet.

 

[Urwumpe]

Also, if the US trade deficit is to blame - why is the rest of the world also hit, especially the EU countries, which are one reason of the US trade deficit as the money flew in our direction.

We should be the happiest countries in the world, according to this logic.

 

[ar81]

Also, if the US trade deficit is to blame - why is the rest of the world also hit, especially the EU countries, which are one reason of the US trade deficit as the money flew in our direction.

We should be the happiest countries in the world, according to this logic.

Excuse me for the long rant. I know you do not like it.
This will explain the whole situation...
The reply to your comment belongs to the inflation chapter.

INFLATION

Do you remember the inflation that Europe had some time ago?
Excess of currency being spent (instead of being saved) causes excess of liquidity and therefore inflation.

During middle age, having lots of money was to be rich. Nowadays having more money being spent causes inflation. Economy evolved.

If europeans had anticipated that the leak of money would not last forever, and made their citizens to save money, inflation could have been contained as liquidity would have been reduced during that period. And when currency leak stopped, european citizens would have had money saved to spend and counteract the recessive situation.

From the analysis of the fixed IMF/World bank model, inflation can be contained in 2 ways:
-Poverty
-Saving money

ANTICIPATING CRISIS

Indeed, before the present crisis I sent an email to a minister of my country who is economist (I met him personally some months ago), and also to a european ambassador here, warning about the two stages: currency leak with inflation and then recession. Probably in Europe politicians or economists would not listen a John Doe like me.

European export markets were severely tied to US. That is exactly the reason why, as exports to US get affected by US recession, Europe countries sink into recession too.

Oscar Arias, nobel prize and economist too, who is president of Costa Rica reacted to it, and started to establish contacts with China, EU, Petrocaribe and South American countries. Percentage of dependency of economy on US exports was significantly reduced, reducing the percentage of jobs that depend on exports.

US embassy here was amazed that Costa Rica would have broken relations with Taiwan and suddenly established relations with China, and also trying to make US to be secondary in our economy. Now they should know why.

WHEN CRISIS TOOK PLACE

Reduction of exports causes loss of jobs.

Fear caused by yellow journalism is making recession to be far worst, as it causes unnecesary less spending (salaries paid by companies and consumption of citizens) and makes investments less attractive (stock markets falling, interbank rates skyrocketing).

Costa Rica had nationalized banks since long ago. Interbank rates were not affected because nationalized banks do not fear each other.

FUTURE THREATS TO ECONOMY

In more recent emails I have warned about the threat to developed countries caused by world poverty and highest competitivneness of poor countries in globalized job markets. I hope they listen to this John Doe this time.

 

[Eagle]

With stocks China may control US companies. With bonds, it controls US government.

Debt is a double-edged sword. Consider the many nations that ran up billions of dollars in debt to the Soviet Union. Russia wants money but many countries aren't inclined to pay so quickly. So what do they do? Threaten to purchase hardware from the US so Russia makes a counteroffer for their equipment at a reduced price, the payment of which goes toward paying off their debt.

If you owe me $100 I can twist your arm until you write me a check. But how am I going to get my money back if you owe me $100,000? There's no way you can pay me in one go.

What if I muscle $1,000 out of you and decide I'm going to do that every so often. Well, for whatever reason, you may not feel so obliged to pay so much at a time, so you find a friend to menace over me the next time I come over. I can't get my money the hard way anymore, so now I'm going to have to deal and make it beneficial for you to pay back.

 

[Urwumpe]

Do you remember the inflation that Europe had some time ago?

Which inflation? :rofl:

Honestly - no joke, which inflation do you mean?

• Mid 1999: 1%
• Mid 2000: 2%
• Mid 2001: 2.8%
• Mid 2002: 1.9%
• Mid 2003: 1.9%
• May 2004: 2.5%
• May 2005: 2.0%
• May 2006: 2.5%
• May 2007: 1.9%
• May 2008: 3.7%

The inflation rates in the Eurozone are among the lowest in the world, with the 3.7% spike being caused by the run away oil-price last spring and the 2.8% rise being caused by the introduction of the Euro in many countries.

 

[ar81]

Which inflation? :rofl:

Honestly - no joke, which inflation do you mean?

• Mid 1999: 1%
• Mid 2000: 2%
• Mid 2001: 2.8%
• Mid 2002: 1.9%
• Mid 2003: 1.9%
• May 2004: 2.5%
• May 2005: 2.0%
• May 2006: 2.5%
• May 2007: 1.9%
• May 2008: 3.7%

The inflation rates in the Eurozone are among the lowest in the world, with the 3.7% spike being caused by the run away oil-price last spring and the 2.8% rise being caused by the introduction of the Euro in many countries.

Inflation hit Europe in a minor degree.

Oil companies and oil countries absorbed/sucked lots of liquidity, made from US currency leak, since as more goods are produced, more oil is consumed. And our economies rely on oil.

China suffered overheated economy and inflation. Venezuela had a projection of 27% anual inflation, for example. Tracking inflation could give an idea of where the money is going.

The problem comes with exports to US, where you have lots of jobs depending on US market.