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Not a crisis, an epiphany: the FIRE Economy is not coming back

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  • Not a crisis, an epiphany: the FIRE Economy is not coming back

    Not a crisis, an epiphany: the FIRE Economy is not coming back

    Stocks crash up, crash down, crash up, crash down. Are we having fun yet?

    And how did we get here?

    After the 1990 technology stock market bubble–that the Greenspan Fed claimed never existed–crashed in 2000, the Fed and Congress hit the economic policy panic button to stimulate the economy before the next elections: low interest rates, tax cuts, deficit spending, and dollar depreciation. The dollar was at a 20 year high, oil near all time inflation-adjusted lows, the Fed Funds rates at a 10 year 6.5% peak, and the fiscal budget–as Bill Clinton will not let us forget–in surplus.

    The post-bubble economy faced a steep downhill run but at least it started from fiscal and monetary high ground.

    The economy weakened. So did the dollar; from 2002 to 2008 the trade-weighted exchange value of the dollar fell by 37%. The weak dollar let US manufacturers increase revenue from exports, one leg of the two legged stool of economic recovery.

    Here's how the dollar depreciation stimulus was reported from the perspective of one of the beneficiaries.
    Weaker Dollar Strengthens U.S. Agriculture
    February 2007 (USDA.gov)

    The depreciation of the dollar lifted U.S. agricultural exports to record-high levels, despite the gains falling short of their full potential.

    The depreciating U.S. dollar combined with strong economic growth in developing countries has increased the competitive advantage of U.S. agriculture and stimulated export demand for U.S. agricultural products.

    Despite depreciating against currencies of some U.S. trading partners, the dollar has been largely fixed against currencies of others, such as China, reducing potential gains in competitiveness.

    Trade policies and imperfect markets can also reduce the effects of depreciation, further diminishing the gains.

    In other words, a weak dollar has help US farmers' export sales, but "we" can do more. "We" can pressure the Chinese to let their currency float. Then "we" can depreciate the dollar more broadly and send even more exports overseas.

    The article above includes two charts to make its point.





    This was not the first time the US used monetary inflation and currency depreciation to re-inflate the economy. The 2003 to 2007 experiment bears striking parallels to the post Great Depression 1933 to 1937 period, but executed with modern monetary tools.

    Dollar Depreciation Re-inflation Echo

    Anchored to gold the dollar inflated 170% against a basket of commodities between 1929 and 1933. This dollar appreciation is popularly recalled as "deflation." Asset and commodities prices fell in turn. After reaching an exchange rate peak in 1933, the dollar plunged to pre-1929 levels after the US government called in gold, re-priced it, and deflated the dollar against gold by 41% from $20.67 to $35 per ounce.

    A return trip of 170% cumulative inflation in commodity prices over the next four years was even larger than the 112% inflation in commodities produced by the 37% dollar deflation that occurred during the 2002 to 2008 period.

    Between 1934 and 1937 dollar depreciation based re-inflation benefited farmers, commodity producers, and manufacturers much as today. Exports boomed and the incomes of farmers nearly doubled. iTuliper Jeff sent us an issue of American Agriculture, July 30, 1938. The 1938 cover article was similar to the USDA article from 2007, excerpted above. It was dramatically titled "Save Agriculture to Save America" and it makes its case with a decidedly low tech chart (scan below) that conveys parallel data from 60 years ago.



    The post 1929 bubble crash Keynesian cure of monetary inflation and currency depreciation ended the sharp contraction in the money supply that was, much like the impact of the credit default swap market today, feeding on itself, driving lenders and borrowers out of the market and choking off credit.

    Infrastructure programs employed millions, cutting the unemployment rate by more than 50%, from 25% to 10%. Yet by 1938, a mere four years after the re-inflation program began, the US economy was again running out of steam and slowing rapidly. It was again in recession in 1938, but when the US entered WWII in 1941 the economy was growing again. Whether the Keynesian re-inflation had finally taken hold or not will never be known–and will be forever debated–as demand created by the war economy took over.

    In 2008, the US policy makers find themselves trying to re-inflate an economy after the failure of efforts to re-inflate the post 2000 bubble economy but without the demand stimulus of a foreign war. Unlike 2001, the dollar is starting from near all time lows, oil from multi-decade highs, and the budget in deficit versus surplus.

    After attempts to re-inflate a re-inflated bubble economy fail, what do you do next?

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    Last edited by FRED; 10-16-08, 09:28 AM.

  • #2
    Re: Not a crisis, an epiphany: the FIRE Economy is not coming back

    Originally posted by EJ View Post
    What will they do next?

    __________

    Dammit EJ you're supposed to tell me

    Comment


    • #3
      Re: Not a crisis, an epiphany: the FIRE Economy is not coming back

      EJ,

      Thanks for the post and happy # 1,111 !

      Comment


      • #4
        Re: Not a crisis, an epiphany: the FIRE Economy is not coming back

        I guess this means that the alt-E bubble option is off the table?

        EJ - does this mean you're adding to your PM position?

        Comment


        • #5
          Re: Not a crisis, an epiphany: the FIRE Economy is not coming back

          My best guess. Ka and then Poom are still on the table, but the full measure of Ka has yet to be obtained. Sometimes the events have to unfold a little further before clear triangulation datapoints can be obtained. Predictions are derived from probabilities which have to firm up. Kudos to Janszen for the intelligence he offers to subscribers (for a pittance). We'll hope to obtain another "signpost" at the earliest possible date. I spent the better part of a year putting a lot of Janszen's theses down, yet his integrity has won me over. Don't forget us EJ. Many of us are out on the high seas here as to where we can remain positioned to survive the unfolding event.

          Comment


          • #6
            Re: Not a crisis, an epiphany: the FIRE Economy is not coming back

            Originally posted by EJ View Post
            In 2008, the US policy makers find themselves re-inflating a deflating re-inflated economy but without the demand stimulus of a foreign war.
            My information is that there are in fact two foreign wars, but perhaps my sourcing is faulty. I'll ask my command on Friday.

            Maybe if the wars were bigger, or required more industrial production to support...

            Although equipment spending must be up, I wonder if most of the war spending is going to military pay and non-manufactured/non-value-added consumables (e.g. fuel). Anyone know where a breakdown of war expenses might be tallied?
            Last edited by ASH; 10-15-08, 11:57 PM.

            Comment


            • #7
              Re: Not a crisis, an epiphany: the FIRE Economy is not coming back

              Whats do they do next ?
              crash1.jpg

              Oops done that, or is it half way ???
              Attached Files

              Comment


              • #8
                Re: Not a crisis, an epiphany: the FIRE Economy is not coming back

                Originally posted by ASH View Post
                My information is that there are in fact two foreign wars, but perhaps my sourcing is faulty. I'll ask my command on Friday.

                Maybe if the wars were bigger, or required more industrial production to support...

                Although equipment spending must be up, I wonder if most of the war spending is going to labor and non-manufactured/non-value-added consumables (e.g. fuel). Anyone know where a breakdown of war expenses might be tallied?
                Ever looked at the impact of WWII on the US economy?
                Ed.

                Comment


                • #9
                  Re: Not a crisis, an epiphany: the FIRE Economy is not coming back

                  Originally posted by FRED View Post
                  Ever looked at the impact of WWII on the US economy?
                  yes
                  http://www.entomology.umn.edu/chironomidae/MNmining.htm
                  The depression of the 1930s dramatically slowed production, and by 1932 fewer than 2000 miners were working. Huge demand for steel for WWII again caused a boom in ore production on the Mesabi Range.

                  Comment


                  • #10
                    Re: Not a crisis, an epiphany: the FIRE Economy is not coming back

                    Originally posted by FRED View Post
                    Ever looked at the impact of WWII on the US economy?
                    Yes. I often use the big grin smiley when I'm intentionally being an ass. At least I think I'm funny.

                    Still, the question about how efficient our present war expenditures are at stimulating economic activity stands. I know the scale of the war effort compared to the size of the economy doesn't compare, but I also wonder if present war spending is less efficient than WWII at keeping people employed. Seems to me we make fewer weapons at much higher unit cost, and the labor used in the manufacture tends to be tilted toward a small number of highly-paid engineers and technicians as opposed to a large number of lower-paid manual laborers. I work at the periphery of the defense industry, but in R&D, so all I see is small-volume/high-wage.

                    Comment


                    • #11
                      Re: Not a crisis, an epiphany: the FIRE Economy is not coming back

                      Originally posted by ASH View Post
                      I work at the periphery of the defense industry, but in R&D, so all I see is small-volume/high-wage.
                      Ultimately, under the exigencies of extended war, quantity (e.g. "Liberty ships," AKA production) trumps quality . . . just ask the WWII germans (superior technology, inferior quantities) . . .

                      Comment


                      • #12
                        Re: Not a crisis, an epiphany: the FIRE Economy is not coming back

                        I fear we are in for a bust. What becomes of the US dollar?

                        Comment


                        • #13
                          Re: Not a crisis, an epiphany: the FIRE Economy is not coming back

                          I'm rather new here and maybe misread what you try to say... so are you saying that the measures to re-inflate will continue to fail?

                          In that case of course your friendly government will bomb iran and maybe pakistan for good measure :eek:

                          Comment


                          • #14
                            Re: Not a crisis, an epiphany: the FIRE Economy is not coming back

                            After attempts to re-inflate a re-inflated bubble economy fail, what do you do next?


                            If attempts to re-inflate fail, then don't you get true deflation, assuming the existing currency system persists?
                            Outside of a dog, a book is man's best friend. Inside of a dog, it's too dark to read. -Groucho

                            Comment


                            • #15
                              Re: Not a crisis, an epiphany: the FIRE Economy is not coming back

                              What's next?

                              Damn, I was hoping you'd tell me too as I haven't got a clue.

                              Probably like other people here, I'm an EJ junkie needing my reassurance fix.

                              As long as it doesn't revert back to the Middle Ages (in most respects), I don't mind. I mean, walled towns, duty on traders entering and exiting, wars between tiny counties, hard physical labour on the land, a diet of wheat and potatoes etc. At least we have countries and the US is virtually a whole continent. We've come a long way in breaking down barriers and building trust. Now this little set back in trust has me peeved. Who let the thieves in? And how bad will the damage be? How can the damage be repaired?

                              I think the answer to the last question fundamentally has to be in Primary school education. Morality must now be taught in amongst English and other subjects at the primary level. When I was a kid the only morality from school I can remember was Aesop's Fables. Children's books and TV programmes contained messages as well though. Anyone remember the "Mr. Men" series - "Mr. Greedy" and others. Also the He-man cartoons were so in your face they sounded like a government infomercial. Don't do drugs etc.

                              On that note I think I need to start a new thread.

                              Comment

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