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    May 2006

    Default 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 at 09:55 AM.

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