American Economy - Boom or Bust?

Great Debates
1

I read today that “the [US] stock market roared as two of the three major indexes hit new record highs. The S&P 500, which measures the value of 500 of the largest companies in the country, and the Dow Jones Industrial Average, which does the same for 30 companies considered to be industry leaders, both rose to all-time highs.”

The BBC tells me that "Home sales in the US sank to the lowest in nearly 30 years, partly due to a sharp rise in interest rates to over 7%. I also read that many pundits on this side of the Atlantic are worried that with about 30% of the S&P 500 in the Magnificent Seven. (Apple, Amazon, Alphabet (Google), Meta (Facebook), Microsoft, Tesla and Nvidia), Tech shares “are ludicrously overpriced and cruising for a bruising”.

So, with an election in the offing - Is the US economy heading for a major restructuring, or is it just business as usual?

2

There’s a lot of room between your “boom” and “bust”.

Rosy or dire predictions sell clicks. “The usual mixed muddle, but generally upwards except when it isn’t” doesn’t sell clicks. And that’s what’s been happening and what will continue to happen IMO.

My own finances are configured for a bullish, not bearish sentiment. I suggest volatility will increase as 2024 wears on, but there’s no particular reason to assume a major net trend under the volatility. Or rather, as always, one can rally a bunch of facts and stats and historical parallels to support either position. Both will be right over a long term. But that tells us zero over the relevant short term.

3

I think the point is that the rise of the FAANGS has masked the fact that without them, the market isn’t doing so well.

The truth is, if you take out the ‘Magnificient 7’ stocks, the other 493 stocks in the S&P 500 were actually down 4% in 2023. With them, it was up 8.5%, significantly lower than the historical 13.7% average.

The FAANGS went up like they did because of the rise of cloud computing, SAAS, and AI. Past performance is no guarantee of future returns, especially in such a top-loaded market.

Also, whatever economic performance there was came at the cost of $2 trillion in borrowed money. That will act as a drag on future growth.

4

The U.S. economy is a gigantic thing. Businesses and consumers often feel differing effects at any given time. That one group is prospering while the other feels pinched as hardly unusual. It might even be called the defining summary of the 21st century.

2023 was an interesting year in that virtually every economic pundit from everywhere around the world predicted continued inflation, high unemployment, and a probable recession for the U.S. The “soft landing” as they call it, with inflation way down, employment way up, and the economy - at least for some sections - booming, was deemed impossible or perhaps wishful thinking.

2024 appears equally confounding. The American economy shouldn’t have any good signs at all. The world is still rebuilding supply chains, which have been seriously disrupted by the loss of the Ukrainian market for both imports and exports. Houthi attacks against Red Sea shipping are pushing containor ships to take an extra ten days to circle Africa. Some of the Republicans in Congress are deliberately trying to destroy the government and the economy to make Biden look bad. Gas is dropping below three dollars a gallon. Thanks, Biden. Wait, we don’t hear that very often, do we?

I’ve been saying that certain tech stocks are insanely overvalued for more than two decades. As a result I’ve moved as much of my portfolio into tech stocks as I can. Two decades of my expecting the market to become rational has taught me a lesson. The market is never rational. Expecting the various insanities to even out is a losing proposition.

Oh, BTW, two things about 2023 are true. One is that it was by a vast amount the hottest year in recorded history and two is the vast number of small steps people around the globe have taken to move toward a green future is working to the extent that no more than a 2C rise in global averages is expected. Nobody predicted that either.

Only one prediction for 2025 is sure. If Trump gets re-elected America will be destroyed. Everything else is uncertain.

5

Famously said another way …

The market can stay irrational longer than you can stay solvent while betting against it.


This too.

6

I thought of quoting Keynes. However, he believed in the eventual sanity of the market. And in the overall sanity of those on the production side. I’m not sure either of those verities hold.

We’re now in the age of Friedman, who preached profits over any other factor. That leads to destruction. Not Schumpeter’s creative destruction, which drove the tech boom, but the destruction of at first small and family businesses and later large cash cows to create high stock prices and huge buyout profits while leaving the resulting firms with killing debt loads leading to their failures under successors.

I know multiple reasons why America could not keep up the post-WWII boom once the rest of the world was put back on its feet. Nevertheless, I don’t think it’s any coincidence that the consequent failure of the middle and working classes to continue their growth while economic inequality zoomed coincided with the Age of Friedman.

I’m not trying to goad Sam by saying this. We just have fundamentally different axioms in our worldviews.

7

No, that’s totally fine, and the way it should be. You have different experiences, which lead to different conclusions. Diversity is good, so long as we can be civil and discuss our differences and perhaps learn about them That way at least we don’t have to hate each other for our differences.

8

We ducked a recession, and maybe Biden had something to do with it. The economy right now is pretty damn good, and no signs it will get worse soon.

9

In a way, taking the irrationality of the markets around the world into account, that might be what we should worry about.

A “boom” in the US sucks in spare cash from all over the world. Investors in many countries, like China that are still suffering from post-COVID depression have pushed prices in the US to astronomic heights. Logic (and I know that markets are not logical) dictates that there will be an “adjustment” at some point. When, and how hard, is anyone’s guess.

10

When the US economy & stock market was crashing in 2008 what happened to the US dollar? It appreciated as foreign money poured into the USA even as the USA’s economy was imploding. Why did that seemingly paradoxical thing happen?

Because as much as it sucked in the USA right then, it sucked more elsewhere. Whether the US economy is doing absolutely well or badly doesn’t matter. What matters is how it’s doing relatively vs the other big international economies.

@Exapno_Mapcase has outlined some reasons to believe the era of American economic exceptionalism that came out of WW-II is running out of steam. In general I hold by a similar view.

However until and unless some other country thoroughly takes up the leadership mantle within a still-globalized economy, the US financial markets will continue to outperform not only everyone else’s financial markets but also outperform the US “real” economy.

As @Sam_Stone rightly says, the eventual day of reckoning will be profoundly painful. Where we part company is he seems to believe that’ll happen starting sometime next quarter and always has.

I think it’s still 40-50 years in the future, and may never come at all if the US can shake off the RW populist crazies before too much damage is done, and meanwhile China stumbles politically while declining demographically, Russia storms itself into the gutter, Japan suffers demographic rout, and Europe remains less than enamored of maximizing profits.

We don’t have to be any good. We just have to be better than that rum lot to collect the lion’s share of the benefits.

11

Nobody can predict where the pain will begin. Complsx systems are unpredictable.

An analogy to the debt is dropping pebbles on a pile. The pile starts to grow, but at first it’s stable. As it grows bigger, forces start to build within it. At some point you know that it’s really big, and the occasional pebble rolls of it as it shifts, but the pile holds.

Some people will rake ftom that, “Hey, we’ve been adding pebbles to the pile for years, and nothing bad has happened. So it’s safe to keep adding pebbles.”

Other people will say, “It’s about to go! Don’t add another one!” Then another is added, it doesn’t xollapse, and the people warning about it are mocked for being wrong. And the pebbles keep getting added. But the doomsayers are far more correct than the pebble droppers.

What can’t go on, won’t. But predicting which pebble will collapse the pile is impossible, because of complexity. But we also know that if we keep adding pebbles, it WILL collapse. It could be the very next pebble, or the 100th.

Continuing to add pebbles under that situation is reckless. I don’t know when the reckoning will occur, but I know as a certainty that it will if we stay on the path we are on. And every new pebble increases the risk.

We are currently wrecking economies to fight the risk that climate change will do us harm in the coming decades. But if we have a major financial collapse it will do more economic damage than climate change ever would. And that risk is almost completely ignored.

12

Agree with your logic. And like @Exapno_Mapcase, I wasn’t intending to goad you.

Human business and human government has always been shockingly reckless about big things. You’re certainly right that in our modern highly interconnected world, a major collapse of the pebble pile will have vast consequences for much of humanity and all of the so-called “rich world.” Our comfy set of seemingly impervious realities will be shown to have been a house of cards.

I simply despair of convincing enough people in power to behave cautiously about the economies they’re driving towards a cliff in the dark. It’s too darn profitable to not do it. Whether it’s profit in dollars for the investor / entrepreneur class or profit in votes and power for politicians. Financial growth is the cocaine of economics and we (or our TPTB) are utterly hooked.

13

We are getting worse with every administration. Consider the incredible foolishness, from a Keynesian perspective, of running 2 trillion dollar deficits during a time when the unemployment level is at historical lows and GDP growth is approaching 5%.

Where have all the Keynesians gone? Why aren’t they screaming bloody murder? It’s almost as if Keynes was a useful tool to justify big spending before, but now, since he would be advocating for major cuts and tax increasses solely to pay down the debt, no one wants to talk about Keynes any more.

We have had Monetarist governments and Keynesian governments. They should be at odds with each other on spending, but both types have manaded to run up spending and debt every time. It’s the one constant.

If interest rates don’t come down this year, the government’s debt service costs next year will be over $1 trillion, about the same as the budget of the Department of Defense, and 10 times the size of the Department of Education. And there will be a raft of foreclosures and a collapse in commercial real estate and probably a collapse of regional banks. But if interest rates DO come down, it could reignite inflation. That’s exactly what happened in the 70’s.

Here’s another analogy you night appreciate: The coffin corner. That’s where we are financially. Our leaders flew us there, and are struggling to find a soft landing.

14

I just finished reading Craig Nelson’s V Is for Victory*, detailing how the U.S. emerged from the Depression into WWII, completely retooled the nation’s industry within 18 months, and by the end of the war essentially outproduced the rest of the world combined. We spent $2B on the atomic bomb and $3B on the bomber program, unprecedented and unbelievable numbers for the time.

After the war, America was amazingly, incomprehensibly rich. It has remained so for the past 75 years.** Today’s equivalent of that WWII spending is 1000 times greater. We could spend $2T on a critical program. We could and should spend $2T on climate abatement. All that would require is the will to do so.

The deficit for 2025 is a big number. Yet chart D.03f shows that as a percentage of GDP it is not out of line historically, and a minor blip compared to what the government ran in WWII.

I’m not suggesting a return to a war footing, just that the American economy is not in danger of collapse, that in fact it has as much headroom as I do walking through the average doorway. We do have a decades-long problem with tax policy, of course, almost criminal malpractice. That’s fixable, especially in a crisis. Or an even moderately sensible Congress could make great strides in FY2025.

Will 2024 therefore be a great year for the average America? Probably not. A good year? Likely. A terrible year? Only if another series of crises hit, surely a possibility.

The economy as a whole and its effects on segments of society are separate subjects.

* Fun book to read, with millions of fun statistics. Cons: it’s a hagiography of FDR, it ignores labor entirely, and all negatives of a war economy are passed over.

|** Part of that is due to America’s domination of major tech. Referring to FAANG companies (Facebook, Amazon, Apple, Netflix and Google) is outdated. Today’s trillion dollar market cap companies are Microsoft, Apple, Alphabet, Amazon, and NVIDIA, with Meta just a smidgen under. Six firms, over $10T in market cap. We own the world. If we suffer it’s from our arrogance.

15

MANAMA? Not a whole lot of variety here. TAN MAMA if we include Tesla.

16

How do you think the Dems could reduce the debt? By reasonable tax reform and increases on the ultra wealthy. But the GOP not only has blocked those, they cut taxes on the wealthy. And the GOP doesnt really want to reduce the debt- they have proven very bad at it.

17

That won’t do it. The rich don’t have anywhere near the kind of money needed, and most of their wealth is tied up in businesses. How are you going to extract it without ruining those businesses?

The truth is, the debt will only be mitigated through growth or inflation. Inflation would be the most painful way, but most likely. Growing out of the debt requires maintaining GDP growth higher than the the growth of the debt. That is getting harder and harder to do both because our institutions were not what they once were, and because the debt overhand impedes growth.

Or, the U.S. will simply enter an era of low growth and lower standards of living, like Europe and Canada.

18

Taxing the rich would pay incredible dividends in ending poverty and injustice. Calculations from Oxfam found that a progressive wealth tax on US multi-millionaires and billionaires could generate $664 billion dollars every year to help lift people out of poverty.

19

I’m confused by who is “we” in this sentence. I thought you identified as a Canadian.

20

Canada is doing the same thing, in just about the same proportions. Call it a ‘western’ problem if you want.

BTW, the bank of Canada announced today that no one should expect interest rate decreases in the next statement on Wednesday. There is just too much inflationary pressure being held back by the higher rates.

Also, our inflation rate just ticked up again, from 3.1 to 3.4. I think it did in the US as well.

A while ago Larry Summers posted this chart:

That chart overlays the inflation changes in the 1970’s with today’s. They are eerily similar.

Still, you can draw too many conclusions from this, because it’s just a correlation. The chart doesn’t mean that inflation is about to spike upwards again. This is not the 1970’s. However, it means that it has done so before, so the fact that inflation has come down recently is not necessarily a ‘victory’, and I’m sure the central banks are very aware of what happened in the 70’s when they declared an early victory on inflation and began to lower interest rates early.

The markets are currently behaving as they are on the expectation of 150 basis points of interest rate deductions this year. If that does not happen, the markets could drop substantially.