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  • predicting the next recession and the future of the economy

    PREDICTING THE NEXT RECESSION and the future of the economy


    i'd like to open a macro discussion about the timing of the next recession and the global economy's path forward. Ej said some time back that he expected a recession by 2018, and I think most people here have been running on that assumption. Certainly the stock, bond and commodity markets have been acting like that might be right. Nonetheless, it hasn't happened yet and although some see the fed's recent actions asa mistake, soon to be “corrected,” the fed, at least, is acting like a recession is not in sight.


    I recently came across an article reporting on ed hyman, an economist I used to follow and someone for whom I had a great deal of respect when I was paying attention to him. Hyman bases his opinion on ongoing interviews with over 300corporate cfo's as well as macro data. Although he's worried about the global debt burden, the headline is: “the next recession is five to six years away.”


    recent rises in inflation, especially the core pce – the fed's favorite indicator-seem to point to a pickup. Otoh, gary shilling points out that about half of that inflation rate is explained by a rise in owner's equivalent rent – a chimera indeed.


    Shilling has been a permabull on bonds, predicting lower interest rates and disinflation or outright deflation for over 30 years running. Otoh, he's beenright for over 30 years running. He's currently predicting more of the same.


    I recently posted in another thread the thought that “the new normal” of 2%, not 3%,growth may be a reflection of a slowdown in technological progress. Others [grg55 for one] have pointed to overcapacity, which is logically equivalent to saying inadequate demand. A recent commentary by immanuel wallerstein [can't post a link- it's not up on his website yet] sees this as the inevitable outcome ofneo-liberalism, in which corporations maximize their profits by squeezing labor costs, while the laborers so squeezed become less and less capable of generating demand. Wallerstein points to international institutions waking up to the risk of inadequate demand. A brief excerpt:


    Ist here what a recent article in Le Monde called a "timid"return by Establishment institutions to concern about sustaining demand? There are at least two signs of this, both of considerable weight. The International Monetary Fund (IMF) had long been the strongest pillar of neoliberal ideology, imposing its requirements on all governments that sought loans from it. However, in a memo released on Feb. 24, 2016, the IMF worried openly about how anemic world demand had become. It urged that finance ministers of the G-20move beyond monetary policies to encourage investments rather than savings in order to sustain demand by creating jobs. This was quite a turn-around for the IMF.

    At about the very same time (February 18), the Organization of EconomicCooperation and Development (OECD), a second major pillar of neoliberal ideology, released a memo that announced a similar turn-around. It said that it was urgent to engage "collectively"in actions that would sustain world demand.

    This reminded me of a recent post I made asking whether we all are becoming japanese. Here's the gist, as I wrote in an email to a friend:


    as i was walking my dog this morning i was thinking about the last several decades in japan. if the neo-keynsians are right, what country has applied more fiscal stimulus than japan? and i think that proportionately china runs a close second. and what i wanted to examine was the possibility that the whole globe is becoming japanese. of course some of japan’s problems are demographic, some are a function of its wealth pushing lower value work to the less developed countries, some of them areself-inflicted. when japan went into the slow lane u.s.commentators were quick to criticize their unwillingness to bear the pain of a quick liquidation of its zombie institutions. those same commentators were not so eager to liquidate zombies during the u.s. financial crisis. and i notice that china doesn’t seem to be in any rush to get rid of its sick soe’s and banks.


    perhaps the world has accumulated a great burden consisting of both huge deb tin every sector and dysfunctional instiutions that drag down potential growth. re the debt, the effect of nirp is interesting in that it squeezes bank margins beyond their ability to make profits by intermediating loans. meanwhile the hy sector is a shambles and is pulling up virtually all corporate rates.
    here’s a graph corporate bb’s, baa’s, a's and aaa's. it is my impression, and please correct me if i’m wrong, that economic growth tends to come fromt he companies that populate the lower tiers of the ratings hierarchy. so what’s happening doesn’t look like a recipe for growth going forward. jeremy grantham has written recently about how he is grappling with the fact that record high corporate profit rates aren’t mean-correcting in the way he anticipated. but if borrowing costs are rising and wages at the low end are rising as well, it appears that profits must start declining.


    thisi s all a long-winded way of asking the question: what will be the source of new growth? chinese growth pulled along growth in the commodity and low-value-added parts of the world. and chinese growth in turn was pulled along by demand from the rich countries ofthe world, especially that consumer of last resort- the u.s. but here’s a graph of personal consumption expenditures and disposable personal income[nominal]. i don’t find it encouraging. can you discern a silver lining? [i am bad at that, myself.]


    so my question: is the world becoming japanese?






    This raises for me another question: does the continuation of the new normal, a sluggish, japanese style global economy, postpone an outright recession?
    Last edited by jk; 03-01-16, 09:55 AM.

  • #2
    Re: predicting the next recession and the future of the economy

    [QUOTE=jk;302276]PREDICTING THE NEXT RECESSION and the future of the economy

    Ist here what a recent article in Le Monde called a "timid"return by Establishment institutions to concern about sustaining demand? There are at least two signs of this, both of considerable weight. The International Monetary Fund (IMF) had long been the strongest pillar of neoliberal ideology, imposing its requirements on all governments that sought loans from it. However, in a memo released on Feb. 24, 2016, the IMF worried openly about how anemic world demand had become. It urged that finance ministers of the G-20move beyond monetary policies to encourage investments rather than savings in order to sustain demand by creating jobs. This was quite a turn-around for the IMF.

    At about the very same time (February 18), the Organization of EconomicCooperation and Development (OECD), a second major pillar of neoliberal ideology, released a memo that announced a similar turn-around. It said that it was urgent to engage "collectively"in actions that would sustain world demand.


    This is what I wrote in March last year and is also why I believed the world wasn't heading for a 1937 moment.


    I've been thinking about this (the fact that markets are driven by political decisions) recently and I think it's fair to say that the economy and markets have always been driven politically by powerful groups but in favour of who has always been up for grabs. I think we are transitioning from one in favour of bankers (which we were used to and so could predict) towards one in favour of "other" business interests whose needs are no longer aligned with bankers. However it is not totally clear to the general public that this has happened yet.

    My thinking is that CEOs and executives at SP 500 companies all made out like bandits in the last 25 years along with the bankers with the continuous fall in interest rates etc. However the newer generation of Executives (especially those in the retail sector) can't maintain and justify their pay. Their interests are no longer aligned with those of the banks. The bankers are now denying them a free ride to which they feel they are entitled just like their predecessors.
    Call me optimistic but I don't think we are headed for a 1937 style "mistake". It's just against the interests of too many other powerful lobby groubs. The Starbucks, Apples, GMs, Fords etc of this world depend on consumers in the long run. They depend on disposable income. Now consumers will have to earn their disposable income rather than cash it out of the house. Business knows this. Slow real wage rises are happening and interest rates will be allowed to lag behind without crashing the economy. So called bond vigilantes may demand higher interest rates but they won't have their wishes fulfilled.
    All businesses rely on consumers. But if those consumers are spending all their money on debt servicing and taxes then sooner or later your profits will go down and you may even go out of business and have to wave bye bye to your 10 million dollar salary. The pols don't mind small businesses going to the wall because they don't fund them. What is unique about SP 500 companies is the influence they have. It is now in their interest that consumers are saved from debt whereas previously it was in their interest that consumers took on debt to fund their next purchase.
    Utility/public infrastructure companies will be where investment flows in an attempt to sustain demand. However because of the West having hit "peak consumerism" I am predicting that Africa will be a beneficiary because they are the "last great market" and because migration from Africa is a huge political problem(especially for Europe) going forward. Remember you heard it here first!
    Last edited by llanlad2; 03-01-16, 06:02 PM.

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    • #3
      Re: predicting the next recession and the future of the economy

      1. profits going down does not impact ceo's salary. that's been my observation, anyway. and they still get a "bonus" on top of that.

      2. everybody talks about infrastructure but no one does much about it, at least in this country. there has to be some private profit to grease the wheels and the pols' palms. is it time to resurrect our long-ago discussion of public-private partnerships?

      Comment


      • #4
        Re: predicting the next recession and the future of the economy

        Originally posted by jk View Post
        PREDICTING THE NEXT RECESSION and the future of the economy

        i'd like to open a macro discussion about the timing of the next recession and the global economy's path forward. Ej said some time back that he expected a recession by 2018, and I think most people here have been running on that assumption. Certainly the stock, bond and commodity markets have been acting like that might be right. Nonetheless, it hasn't happened yet and although some see the fed's recent actions asa mistake, soon to be “corrected,” the fed, at least, is acting like a recession is not in sight.
        Last summer I saw a long term Systems chart, from 2003 to 2019, showing a dramatic drop in equities about mid-2018.

        Can anyone tell me the thread where that chart was posted? I'd like to look at it again in context.

        Finster, does your chart still display that dramatic decline??
        If the thunder don't get you then the lightning will.

        Comment


        • #5
          Re: predicting the next recession and the future of the economy

          Originally posted by Ellen Z View Post
          Last summer I saw a long term Systems chart, from 2003 to 2019, showing a dramatic drop in equities about mid-2018.

          Can anyone tell me the thread where that chart was posted? I'd like to look at it again in context.

          Finster, does your chart still display that dramatic decline??
          here's one posted 10/3/15 that goes into 2017 without much drama.
          and here's the one posted 7/7/15 that shows a big crash late 2017-early 2018. HOWEVER it is my understanding that finster revised his program in between those 2 dates, so it's not clear the revised program would produce the same results.

          edit: notice, e.g., that the earlier showed a big dip in tbonds [i.e. rates up sharply] from about 1/15 to 7/16. the later version doesn't show that. and of course, it hasn't happened.
          Last edited by jk; 03-02-16, 09:33 AM.

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          • #6
            Re: predicting the next recession and the future of the economy

            Originally posted by jk View Post
            2. everybody talks about infrastructure but no one does much about it, at least in this country. there has to be some private profit to grease the wheels and the pols' palms. is it time to resurrect our long-ago discussion of public-private partnerships?
            In the US we still have the infrastructure arrow in our quiver. We can put everyone in the country to work repairing our infrastructure for years. As long as this one is not used, I'm not concerned. A QE supported infrastructure rebuild will come before a massive recession. Of course I could be wrong. If I am, we'll be living in a new world and we'll have to learn to understand it.

            Comment


            • #7
              Re: predicting the next recession and the future of the economy

              Originally posted by santafe2 View Post
              In the US we still have the infrastructure arrow in our quiver. We can put everyone in the country to work repairing our infrastructure for years. As long as this one is not used, I'm not concerned. A QE supported infrastructure rebuild will come before a massive recession. Of course I could be wrong. If I am, we'll be living in a new world and we'll have to learn to understand it.
              the japanese put enormous sums into infrastructure, both useful and superfluous, to little effect. the chinese have done the same to somewhat greater effect, but with enormous misallocation of capital. how do you see it working differently here?

              Comment


              • #8
                Re: predicting the next recession and the future of the economy

                Originally posted by jk View Post
                the japanese put enormous sums into infrastructure, both useful and superfluous, to little effect. the chinese have done the same to somewhat greater effect, but with enormous misallocation of capital. how do you see it working differently here?
                There are degrees of everything, and what is good in small amounts can be bad in large amounts.
                I think it's fair to use the phrase "self-evident" as a reason that appropriate amounts of public infrastructure are good for the economy and for quality of life.

                We used public tax dollars to create our interstate highways; local roads; public schools; municipal water and sewer systems; bridges and tunnels; air traffic control system and airports; ports and harbors....
                The economy of the U.S. has prospered because we have them.

                Building bridges to nowhere, or empty ghost cities, or elaborate palatial office buildings for public workers doesn't help at all.

                Certainly we can tell the difference between the two and rebuild and upgrade our useful public infrastructures.
                If our nation has become so inept that we can't keep the scoundrels and fools from squandering the budgets, well, we are probably doomed regardless.

                Comment


                • #9
                  Re: predicting the next recession and the future of the economy

                  Originally posted by jk View Post
                  the japanese put enormous sums into infrastructure, both useful and superfluous, to little effect. the chinese have done the same to somewhat greater effect, but with enormous misallocation of capital. how do you see it working differently here?
                  JK, was every decision taken by your firm or concern, present or past, always the correct one? Surely it has seen its share of misallocated resources, poor estimates, or any number of setbacks, mistakes and sometimes downright incompetence.

                  It's a fair question, but I'd follow with another. Why is it that government must be exempt from the ordinary and customary vices that afflict all operations everywhere? Is it really necessary for us to have perfect surety that every decision and dollar spent will achieve its maximum possible efficiency before we act?

                  Here it has worked differently and has been successful every time it is applied with enough scale and scope, whereas we have a perfect record of failure with regard to the financial engineering of the past two decades. Will there be waste, fraud and abuse. Yes, count on it. Is that reason enough not to even make a try? Should we condemn the next generations to peonage and wait to act until humanity perfects itself? Does not the prospect of global war motivate you at all to try something, anything rational, to avert that catastrophe?

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                  • #10
                    Re: predicting the next recession and the future of the economy

                    my concern wasn't waste, fraud, abuse or misallocation of funds. it was about efficacy.

                    i think appropriate infrastructure investment would pay off in productivity, and also that there are social goods which the gov't should provide irrespective of economic benefits. my question though is about the keynesian idea that fiscal policy can drive economic growth. i think we've dug ourselves into a deep hole with a huge debt burden at all levels and with a sclerotic and corrupted political system which supports a predatory corporate and financial system. i'm wondering if these structural problems - the debt and the corporate-political nexus - trump [sorry] any possible fiscal stimulus.

                    Comment


                    • #11
                      Re: predicting the next recession and the future of the economy

                      Originally posted by jk View Post
                      my concern wasn't waste, fraud, abuse or misallocation of funds. it was about efficacy.

                      i think appropriate infrastructure investment would pay off in productivity, and also that there are social goods which the gov't should provide irrespective of economic benefits. my question though is about the keynesian idea that fiscal policy can drive economic growth. i think we've dug ourselves into a deep hole with a huge debt burden at all levels and with a sclerotic and corrupted political system which supports a predatory corporate and financial system. i'm wondering if these structural problems - the debt and the corporate-political nexus - trump [sorry] any possible fiscal stimulus.
                      Those are excellent points, jk.
                      We have distorted our economy beyond recognition.

                      A rational economy structured in a traditional way has most of GDP in the good old production-consumption activities with a much smaller FIRE sector and a modest government sector completing the pie chart.

                      Today we have a huge FIRE sector, and huge government sector, and much smaller slice of the pie as production/consumption.

                      I'm not sure Keynes really deserves as much blame as he gets.
                      Keynesian stimulus in modest amounts or rare occasions inside a rationally structured economy really does work.

                      Your point about our "...sclerotic and corrupted political system which supports a predatory corporate and financial system..." are spot-on.
                      High frequency trading, building junk weapons systems, and bank bailouts add no value.
                      Central bankers who think "wealth effects" are as good as "wealth" are the inmates running this asylum.

                      Comment


                      • #12
                        Re: predicting the next recession and the future of the economy

                        Originally posted by jk View Post
                        the japanese put enormous sums into infrastructure, both useful and superfluous, to little effect. the chinese have done the same to somewhat greater effect, but with enormous misallocation of capital. how do you see it working differently here?
                        I didn't say it would work jk, only that we will spend trillions to support an infrastructure rebuild before we'll suffer a massive recession. It's better than another war.

                        Comment


                        • #13
                          Re: predicting the next recession and the future of the economy

                          Originally posted by santafe2 View Post
                          I didn't say it would work jk, only that we will spend trillions to support an infrastructure rebuild before we'll suffer a massive recession. It's better than another war.
                          A new New Deal organized along the lines of the public/private partnerships EJ proposes is the only thing between us and the slaughterhouse of WWIII.

                          I too share JK's concern about efficacy, but considering how low we've sunk as a nation, how far removed we are from the basic precepts of equality and opportunity everyone of us profess to hold dear as Americans, well in my mind the economics of this are secondary to the the ethics of it. What we do must, with every bit of haste possible, restore America as a land of opportunity where work from all cognitive and physical LABOR is justly and proportionally rewarded and capital is tamed and leashed to serve the public good (remember that ancient concept?).

                          In 50 years we have taken America from the most egalitarian and upwardly mobile nation in human history to the most stratified and unequal society at any time in the past, anywhere in the world. And it is getting worse, actually accelerating before our very eyes. The rights of sovereignty and ownership have been permitted to blend together to a point where they are practically indistinguishable, and political power is exercised in the same manner as economic power.

                          If this process is permitted to continue to its logical end, we become what for all intents and purposes will be a feudal society similar to Saudi Arabia or Pre-revolutionary Russia, only with nuclear weapons and the largest fleet of carrier battle groups ever thought possible. Our anthems and creeds will be reduced to cruel and bitter punchlines. And none here will have amassed near enough capital in the remaining years before the gates close to save themselves. Count on that. We will all burn together and not one of us will be saved.

                          No society has survived such a condition without implosion or explosion. We will demonstrate our exceptionalism one way or another, either by rebuilding America's infrastructure (physical and moral) or destroying her and human civilization along with it.

                          Comment


                          • #14
                            Re: predicting the next recession and the future of the economy

                            Originally posted by Woodsman View Post
                            A new New Deal organized along the lines of the public/private partnerships EJ proposes is the only thing between us and the slaughterhouse of WWIII.

                            I too share JK's concern about efficacy, but considering how low we've sunk as a nation, how far removed we are from the basic precepts of equality and opportunity everyone of us profess to hold dear as Americans, well in my mind the economics of this are secondary to the the ethics of it. What we do must, with every bit of haste possible, restore America as a land of opportunity where work from all cognitive and physical LABOR is justly and proportionally rewarded and capital is tamed and leashed to serve the public good (remember that ancient concept?).

                            In 50 years we have taken America from the most egalitarian and upwardly mobile nation in human history to the most stratified and unequal society at any time in the past, anywhere in the world. And it is getting worse, actually accelerating before our very eyes. The rights of sovereignty and ownership have been permitted to blend together to a point where they are practically indistinguishable, and political power is exercised in the same manner as economic power.

                            If this process is permitted to continue to its logical end, we become what for all intents and purposes will be a feudal society similar to Saudi Arabia or Pre-revolutionary Russia, only with nuclear weapons and the largest fleet of carrier battle groups ever thought possible. Our anthems and creeds will be reduced to cruel and bitter punchlines. And none here will have amassed near enough capital in the remaining years before the gates close to save themselves. Count on that. We will all burn together and not one of us will be saved.

                            No society has survived such a condition without implosion or explosion. We will demonstrate our exceptionalism one way or another, either by rebuilding America's infrastructure (physical and moral) or destroying her and human civilization along with it.
                            sinners in the hands of an angry god?

                            woodsman, i think your points are well taken but your rhetoric is distractingly over the top.

                            "..the most stratified and unequal society at any time in the past, anywhere in the world."
                            ancient rome?
                            ancient greece?
                            the antebellum south?
                            anywhere in europe during the middle ages?
                            the indian caste system?
                            the japanese shogunate?
                            need i go on?

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                            • #15
                              Re: predicting the next recession and the future of the economy

                              Originally posted by jk View Post
                              ...need i go on?
                              How many Minuteman IIIs did the Japanese shogunate have?

                              If only there were a god to save us. Unfortunately, we're all we've got.

                              You don't need to go on, jk. We can respectfully disagree on that point. And I stand by my rhetoric as being perfectly appropriate to this moment.
                              Last edited by Woodsman; 03-04-16, 01:06 AM.

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