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Thread: The American Output Gap Trap Part I: We have three years to escape or were dead meat - Eric Janszen

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    Default The American Output Gap Trap Part I: We have three years to escape or were dead meat - Eric Janszen

    The American Output Gap Trap Part I: We have three years to escape or were dead meat
    Politics is the gentle art of getting votes from the poor and campaign funds from the rich by promising to protect each from the other.
    Oscar Ameringer
    The contraction phase of the Great Recession left America with a $1 trillion gap between actual and potential economic growth. The economy must grow at a rate of at least 4% per year starting now in order to reach growth potential before the next recession opens the gap further a few years from now. If we fail to meet this deadline, the American political economy will enter a second circle of hell as chronic economic pain from high prices and low wages morphs into a self-destructive cycle of class conflict and political deadlock. The stakes are high, yet the only escape from the output gap trap isnt even in the menu of mainstream debate.

    Our dire situation is summed up in the two presentations below.

    Email this presentation to a friend or embed it on your site.

    The American Output Gap Trap: No Way Out?

    Email this presentation to a friend or embed it on your site.
    Politics is not the art of the possible. It consists in choosing between the disastrous and the unpalatable.
    John Kenneth Galbraith

    US policy makers must among three options to escape the output gap trap or enter the second circle of economic hell. Which is the least disastrous and most palatable, to whom, and why? What will happen if none of them are pursued? This question defines the new era, the Output Gap Trap era that has replaced the Bubble Cycle era that we identified early in the last decade. As we make our case for how the next decade will look, we build our model of the complex dynamics that will determine the direction of assets globally.

    (This analysis forms one of the three essential building blocks of our Next Ten Years forecast.)

    The American Output Gap Trap Part II: Inflation, deflation, and the un-debate

    When the people lose faith and dont know what to believe in, they dont believe in nothing, they believe in anything.

    CI: In the Ask EJ section of iTulip a subscriber asks you What do you think about all this hyperinflation-is-coming stuff thats been circulating on the Internet lately? You answer the question there [tk], but before this interview you told me you have a comment on the subject of extreme forecasts overall.

    EJ: I attribute the recent flurry of extreme flation forecasts, of an impending deflation spiral or conversely of imminent hyperinflation, to the perverse effects of the recession on the advertising revenue driven mainstream and blogger business model.

    CI: Explain.

    EJ: Think back to before the crisis. October 2006 we warned of a massive financial crisis and recession starting by the end of Q4 2007 as the inevitable fallout of the housing bubble. Even though anyone who was paying attention could see that the economy had rolled over by the middle of 2007, a year after the housing bubble started to deflate, the dominant storyline on the economy in the mainstream was that the housing bust is no big deal, and even if it turned into a crisis it certainly wont be bad enough to cause a massive recession.

    Fast-forward two and a half years. After the crash, whats the dominant storyline now? There are several but two dominate.

    One is the double dip recession and deflation well get if we cut public spending to stimulate the economy. The other is the debt and currency crisis and inflation well get if we keep trying to expand the public debt to pay for stimulus programs. These policy bookends frame the economic policy debate. Problem is, the framework is out of context with the economic reality. Its an as if ideology-charged framework of belief systems.

    CI: As-if economics...

    EJ: Yes. The double-dippers argue that ongoing fiscal stimulus is the road we must take to avoid a second recession in a repeat of 1938, as if public spending will make the credit bubble era debt go away in a few quarters rather than commit the US to a decade of rising public debt and government spending dependence, as if the US in 2010 is Japan in 1995, with a huge trade surplus and capital account deficit, and as if we as a net foreign debtor can afford to expand the public debt for 15 years to muddle our way through a balance sheet recession to avoid a political confrontation with the banking lobby. The debt crisis prognosticators, on the other hand, understand the limits of a debtor nations balance sheet but they offer an equally fantastical solution, to cut spending and the deficits, as if the US was in a business cycle recession not a balance sheet recession and millions of households didnt have trillions of debt payments to make.

    CI: Whos right? more... $ubscription...

    iTulip Select: The Investment Thesis for the Next Cycle

    For a concise, readable summary of iTulip concepts read Eric Janszen's September 2010 book The Postcatastrophe Economy: Rebuilding America and Avoiding the Next Bubble.

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    Last edited by EJ; 10-08-10 at 01:02 PM.

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