First of all, few people see bubbles forming until they’re about ready to pop. I lived through the S&L crisis, the tech bubble, the mark-to-market tricks, the derivatives of the 2000s – people don’t see bubbles coming until some company unexpectedly reports billion dollar losses or simply goes bankrupt.
I can’t speak to over-valued assets, but what I can say is that more and more of the economy is increasingly dependent on fewer and fewer players. More of the country’s deposit accounts are in the hands of fewer banks. More of this country’s aggregate spending power is concentrated in the hands of fewer people. And nearly a handful of big tech companies comprise 1/5 of the S&P’s overall value.
To think of it another way, a bubble isn’t just a sector that’s over-valued; it’s also an economy that is over-reliant on a handful of individuals and companies to make decisions that benefit the rest of us. We’d be naive to assume that the plutocrats are going to carry the rest of us, as evidenced by that tax bill, which was not only “inefficient” but only intensifies the concentration of wealth.
In what sense are we in a “fake” economy? Real people are employed, often producing real goods and services that people want.
One way the economy is inefficient (or “fake”) is if production is siphoned off to activities that do not really contribute to people’s needs or wants. For example the financial sector is a very big piece of the U.S. economy, and includes activities which do not benefit the general population.
A hike in interest rates would plunge the country into recession.
True, higher interest rates would be a sign of a healthy economy and would provide regulators with leverage. But the cart can’t push the horse. I’m not sure why interest rates are low — is it a result of QE? — nor if/when “normalcy” will return. But whether the present financial situation is an aberration or is the new norm, we’re stuck with it for now.
As survinga says …
Yes. The FedRes doesn’t seem to be responding to political pressure: it’s just pursuing its mandate to maximize employment while keeping inflation at about 2%. (Trump tries to pressure his Fed Chief to lower interest rates further but by now most ignore this President’s prattling.)
Some analysts speak of a “risk-free asset bubble”! The concept seems silly. But analysts are worried that a slight slowdown will be amplified by the very high levels of corporate debt. A setback that would normally cause a company just to cut dividends may cause an over-leveraged company to default on its bonds.
Should Lockheed Martin produce F-35s for free? Should the Interstate highways be turned into toll roads?? What does “sweet spot” even mean??? I just paid $2.15 for a can of tuna; would $2.10 be “sweeter”? (And if the tuna were completely free it would give me more freedom to simply keep more of my money.)
I already explained it above. Yes, people are being employed and real goods are being produced, but this growth has been, and continues to be, fueled by cheap credit. Relative to 10 years ago, the banks are far less leveraged than they were - many are taking in record profits. However, the US household is gradually borrowing more because they have a job now, have a little more spending power than they used to, and like they typically do, forget that it doesn’t always last forever – and most American households, particularly the middle class households that really drive the economic data we want to see, are gradually taking on more debt and they don’t have the savings to deal with even a moderate slowdown in the economy, as you yourself appear to acknowledge when you suggested that a simple rate hike might lead to a recession.
But if you’re not sold on the above, consider the leveraging of businesses. Small cap stocks are as leveraged as ever relative to large and mid cap stocks. And larger cap stocks are playing a game of stock buybacks, in which they increase their stock value not by showing investors real revenues and profits, but by creating more “value” by simply decreasing the number of shares that are available to buyers. Keep in mind that as these companies could be paying their employees instead of buying stocks, but they don’t because the CEOs and other executives have every incentive not to do that – and enrich themselves in the process. Any pay increases that the average frontline worker or middle manager gets will only occur in very small increments, either because they are just keeping up with the demand for labor or because someone like Bernie Sanders comes along and shames them into doing so, or because local municipal governments make them do it outright. And oh by the way - a majority of the buybacks are financed…by debt. In short, American capitalism in 2020 has found another magic pill, another “new economy,” another mark-to-market accounting trick, another credit default swap.
A periodic upward rate adjustment shouldn’t plunge the country into a recession. If the markets push rates up by 50 basis points and consequently plunges the economy into a recession, I’ve got news for you: it was already hurtling toward a recession. I don’t agree that a periodic quarter or half percent rise in interest rates necessarily leads to a contraction, but if it does, that’s because consumers are already underemployed and over-leveraged, and businesses themselves are also over-leveraged. Moreover, that’s indicative of an economy that favors “growth” over stable production and circulating the economic rewards of economic production back to the laborer. If you believe that an interest rate hike would cause a recession, then you already agree with me that for the average household, this economic “growth” is fake because while the numbers look good, the average household is increasingly struggling to stay in the middle class.
@ **asahi **- as you can see from my posts, I agree with much of what you say. I just question the term “fake economy.” “Fragile”? Quite possibly. “Fueled by credit boom”? Yes. But “Fake”? The purpose of an economy is to provide goods and services, and consumers able to afford them. By this definition (and ignoring rising inequality) the economy is real and doing OK.
I don’t understand what your view is. You call the economy “fake” or fragile. Do you think it’s heading for a recession? Apparently not, since you’re calling for interest rate hikes.
Governments and central banks all over the world are keeping interest rates low. Do you think they’re engaged in some sinister conspiracy? I think they’re desperately trying to keep their economies running. Central bank planners have implied they’d like to see a return to “normal” interest rates, but don’t know how to get there.
It’s rather mysterious to me why interest rates remain low 12 years after the credit crisis, but I think economists would agree that for a central bank to raise them right now would cause recession. (Remember that central banks have little control over long-term rates, yet we have seen “yield curve inversions” recently.)
I’m not sure what you mean. It is Super Bowl Sunday and perhaps my reading skills are not up to their usual self, but I don’t understand this at all.
I was simply responding to the contention that a lower income tax rate is not properly categorized as “goosing” or a government stimulus to the economy. It is traditional economic policy. Stating that lower tax rates are fueled by debt is a political argument that we could have, but it is not a stimulus as that word is used in economics.
Further, the argument assumes that taxes are “low” (or alternatively “high”) only when compared to the rates set by the Obama administration. That alone is the economic baseline by which “goosing,” normal, and high taxes are to be measured.
I confess that I thought we were going to have one in 2019 based on manufacturing data, a contracting Chinese economy, uncertainty in emerging markets, and a weak European banking sector. I thought we’d be there by now, but services are doing well in the US and the consumer is confident that they’ll be employed for another six months. In that general sense, you’re right nothing has changed, and my economic weather forecast was admittedly incorrect - completely wrong, actually.
But be that as it may, I think the climate, not the weather, is more important to assess. What we’re heading toward is far worse than a recession: unless things change dramatically at the political level, where headed into a situation in which there is a weak middle class that is perpetually fearful of slipping down to the lower rungs of the socioeconomic ladder, and those who represent the “underclasses” have little hope of ever escaping poverty. That’s one reason why I don’t care to make predictions about whether we will or will not have a recession anytime soon.
Without fundamental changes in the economy, I will continue to call any “growth” that we have fake, because it offers us a false sense of security and deludes us into believing that we’re back to where we ought to be. But we’re not, which brings me to this:
Indeed, and that’s because even though we’re 12 years after the financial crisis, we still have yet to recover from it. The idea that we recovered from the Great Recession of 2007-9 is as farcical as it was to suggest that the US had recovered from the Depression in 1939. The Eurozone economies have tried everything from austerity, which is politically unpopular, to negative interest rates in order to invigorate economic activity.
It’s because Americans haven’t really recovered from the recession. They don’t have the spending power they need. They have access to credit, but credit isn’t as good as a stable job that provides a middle class income. Moreover, critical services like healthcare and education have embraced the Wall Street business model, as opposed to having the characteristics of a public service model that other institutional systems have elsewhere. I’m not saying that we should have a government takeover of higher education and healthcare but that the influence needs to be a lot less capitalistic and more balanced and fairer to those who use these services. That’s not going to change until we have a change in values in this society that demands fairer taxation and more equitable distribution of resources.
Economy implies balance and fairness, not inequality and the concentration of wealth at the expense of the masses. Our economy isn’t really economical in terms of providing for the common weal. Thus, it’s fake.
We’ve allowed our “rulers” to load us up with astronomical amounts of unrepayable debt. We’ve robbed the future generations blind so that we can live large now.
The next economic crisis isn’t merely going to be a repeat of 2007-2008. There’s no way in hell we’re getting off that easily. The next crisis is going to be a currency crisis and a sovereign debt crisis. And the longer the "good times"go on, the more painful the “reckoning” is going to be.
Paul Krugman has been one of my heroes for decades, but I almost always read his words rather than listen to him speak. In this YouTube he is interviewed for 5 minutes.
[this may seem slightly off-topic, but is only slightly so. Deficit spending is discussed.]
…especially when you consider that the “good times” are disproportionately enriching the people at the top of the food chain. The rest of us are increasingly dependent on how the uber-rich decide to spend their money.
Here’s a good article that offers some evidence that our recent “growth” isn’t really all that impressive.
The nominal wages are increasing, but the purchase power has flat-lined. This was likely happening even before Trump took office, owing to the fact that as wages increased, access to capital increased, and spending increased, all of which fuels demand and results in higher costs.
Independent of anything Trump has done, banks have built up their reserves but as interest rates are still quite low, financial institutions and real estate investment firms are looking for ways to make their businesses more profitable, and they’ve done that by driving up demand in the real estate market. Moreover, local zoning laws in communities all across the country have made housing increasingly difficult or outright impossible to afford.
Trump’s policies have not only not helped, but the tax cuts in the upper tax brackets have led to the pooling of wealth. Portions of profits that could go back to either paying employees directly or to government offices for spending on public services and infrastructure, have instead remained pooled in the hands of the wealthy. The irony is that as our economy supposedly “improves,” there’s not only no material benefit for basic wage earners, in some cases, their earning power actually decreases. Unfortunately, it takes some education to understand all of this and for most people, this complicated analysis and explanation just doesn’t make sense. The news media tell them the economy’s fine, and at least people have jobs and incomes. This isn’t the American Dream, but it’s the American Dream we’ve come to accept.
This is as good as it gets until the next recession. And when that recession comes, this country won’t have the savings to survive it on their own, and they will have an administration that is woefully unprepared to deal with it on a policy level. Moreover, they, like Herbert Hoover, this administration might be philosophically opposed to intervening and instead let market forces do their work on culling the herd - er, I mean, restoring economic balance.
I agree with much of asahi’s post, but the comparison to Herbert Hoover may be misleading. Hoover responded to the 1929 crisis with tax hikes, higher interest rates, and a big deflation: the average DEflation rate over the 4-year period 1929-1933 was a whopping 13 percent annually. (A major problem was that the U.S. lacked a “sovereign currency.” Like most of the world, it was tied to the gold standard.)
The Trump Administration, or any Administration, will respond to the next recession oppositely to Hoover’s path: with fiscal stimulus, lowering interest rates and, possibly, promoting INflation.
The problem is that if interest rates are low, there isn’t much room to lower them anymore. If there is a gigantic deficit already, there will be opposition to increasing it with stimulus.
During the Great Recession remember how Republicans were claiming that people were unemployed because they just didn’t look hard enough? Remember how the Obama stimulus was opposed? Those people are in charge now. If we’re lucky they are hypocrites and will do the right thing, but I think many of them are true believers.
Those Republicans are why we have a trillion dollars of deficits today rather than about 500 to 600 billion. They themselves don’t care about deficits…unless a Democrat is in the White House. If we get another recession, the worst thing that could happen would be to have a Republican congress and a Democrat in the White House. At that point, Republicans will all of the sudden get concerned about debt/deficits, and block any needed stimulus.
I wrote “fiscal stimulus” to encompass both types of stimulus: more tax cuts (Republican), or infrastructure spending and/or welfare transfers (Democratic).
There is a way to get negative “real” interest rates without negative nominal rates: inflation. With the global economy so interconnected, and much of the world in slow-down, it may seem difficult to achieve inflation now, even if we wanted to, but it can be done. First step would be forcing China to revalue its currency upward.
Oh they’d be in favor of more tax cuts, but only if they mostly go to the rich which would have little impact on a demand-driven recession.
If the customers of a business can’t afford to buy their products, tax policy encouraging investment isn’t going to do any damn good. That’s something Republicans never seem to be able to grasp. Or, more likely, the people giving them money don’t want them to grasp it.
I agree that inflation would be useful, but in a deflationary environment it might be hard to pull off. Notice I didn’t write against that as a policy.
The Fed printing money (metaphorically) would help, but I think the Republicans might have a fit about it.
Indeed, the Republican answer to every recession is austerity, not stimulus. Their answer to a recession would be cutting medicaid, cutting medicare, cutting the department of education, cutting bureaucracy at federal agencies, cutting everything except the Department of Defense, Border Patrol, and DHS - those departments will expand to deal with rising political tensions.
No, it depends on what party occupies the White House. In 2008, Republicans worked with Bush and with Democrats to pass a tax rebate stimulus, and then to pass TARP. They had to be cajoled a little bit, but enough of them went along with Bush.
Fast forward to 2009, when the recession had kicked into overdrive. Obama was in the White House. All of the sudden, Republicans will be part of no deal on stimulus at all. And in 2011, when they were in the majority in the house, they almost forced a default when fighting a debt ceiling increase. This was when the economy was still in a mini-depression. They would not have done this if a Republican were in the White House.
Fast forward to 2017-today, and they’re all OK with deficits now that Trump is in the White House.
Republicans use fiscal policy as a political weapon to punish Democrats whenever they can. See Krugman’s article on this. He lays it out pretty good.
Enough of them did - back then. We’re a loooong way from 2008, my friend.
The election was over by then and they went back to being their usual anti-stimulus selves. The recession wasn’t their problem and they could blame unemployment and everything else on Obama. In 2008, they backed stimulus because they knew that they had to in order to have any chance at winning the White House, but that schtick was over once the race was done.
There’s no way to say they wouldn’t have. There’s no evidence that they would have supported stimulus through generous spending programs. They weren’t acting out of character when they threatened to default on fighting a debt ceiling increase - they were very much in character. Had they been in power they would have probably passed tax cuts, which would have justified slight debt ceiling increases along the way. Debt ceiling increases don’t materially result in stimulus. We’re having to make minimum payments on the interest itself.
Sure they are, because when push comes to shove, they will argue that we can no longer afford social programs like Obamacare, SS, Medicare, and Medicaid. There’s an extreme austerity endgame.