Economic outlook 'unusually uncertain'

[deflateIT]

Washington (CNNMoney.com) -- Federal Reserve Chairman Ben Bernanke warned Congress Wednesday that the economic outlook remains "unusually uncertain," but stopped short of revealing what the Fed might do to sustain the shaky U.S. recovery.

(Full story)

Unusual outlook calls for unusual measures. Thanks Ben, copy that. Gold anyone?

[ThePythonicCow]

Re: Economic outlook 'unusually uncertain'

Try the one here - http://www.debtdeflation.com/blogs/w...chTalk2010.mp4 That is better and with more detail

Nice - thank-you.

My understanding of what Keen is saying is that one of the outcomes (about the best that can be expected) that he sees as possible is much like what EJ predicted once, as I recall, which is oscillating stagflation. The economy starts to sag, the government injects a stimulus, the economy struggles back up a bit then sags again, and round and round we go.

I also take Keen as saying that if the government fails to deliver on one of these stimulus rounds, then the economy would sink into a deflationary depression. I think by deflation here Keen means falling wages and prices for goods, but I am unsure of this. From what I can tell, EJ agrees on this, except that EJ is confident that the government will not fail to deliver the periodic injections of stimulus required to keep the economy from collapse.

The places where I perceive Keen and EJ differing are:

• Keen is less confident than EJ that he can predict what the politicians will do.
• Keen seems more concerned than EJ with the excessive debt and excessive profits to the bankers than EJ.
• Keen does not figure that the oscillating stagflation and repeated stimuli will extinguish that debt very quickly; rather it mostly just moves the to the public books (socializes it.)
• Keen does not figure that the repeated stimuli in this scenario are all that much inflationary, rather border-line deflationary, hence they would take (lost) decades to extinguish the excessive debt, absent systemic default or restructuring.

P.S. -- Drat. Once again, the (buggy?) vBulletin software on this forum has given my post a wrong time stamp, making it the oldest, hence first, post on this thread, rather than the eleventh (11^th) post which it should be.

[Mega]

Re: Economic outlook 'unusually uncertain'

The Question is not if they print, they already are.............its do they DARE allow it lose, risk inflation?
Mike

[DRumsfeld2000]

Re: Economic outlook 'unusually uncertain'

The Question is not if they print, they already are.............its do they DARE allow it lose, risk inflation?
Mike

It has little to do with inflation, it is deflation that is here or coming. Quite simply, the Fed believes that it has to print vast amounts of money as it sees no option as it tries to head off deflation. The option is to take the pain now and get debt out of the system. The Fed will not do this and maybe it is too late as so much money has already been thrown at the problem. What ever they do, hell cometh and very soon.

[tsetsefly]

Re: Economic outlook 'unusually uncertain'

what else can they do to spur inflation? Isn't ben almost out of bullets?

[dummass]

Re: Economic outlook 'unusually uncertain'

[QUOTE] "unusually uncertain," [QUOTE]

Well..."Conundrum" had already been used and his thesaurus was in the car.

It's not so easy following Greenspan's legacy.

[Rajiv]

Re: Economic outlook 'unusually uncertain'

It has little to do with inflation, it is deflation that is here or coming. Quite simply, the Fed believes that it has to print vast amounts of money as it sees no option as it tries to head off deflation. The option is to take the pain now and get debt out of the system. The Fed will not do this and maybe it is too late as so much money has already been thrown at the problem. What ever they do, hell cometh and very soon.

A good set of different articles may shed some light on this conundrum

first from Michael Snyder - So Are We Facing A Credit Crunch In 2010?

Over the past several decades, one of the primary engines of U.S. economic prosperity has been a constantly expanding debt spiral. As long as the U.S. government, state governments, businesses and American consumers could all continue to borrow increasingly large amounts of money, the economy was going to continue to grow and “the greatest party on earth” could continue. But many of us knew that if anything ever came along and significantly interrupted that debt spiral, it could cause a credit crunch even more severe than we saw at the beginning of the Great Depression back in the 1930s. You see, back in the “roaring 20s”, American businesses and consumers had leveraged themselves like never before. Debt soared to record levels and when the credit spigot was suddenly turned off the whole thing came crashing down and it took an entire decade and a world war to recover. Well, today things are frighteningly similar. Over the past 30 years we have piled up unprecedented mountains of debt. In fact, today our entire economic system is based on debt. So what would a credit crunch do to an economy based on debt? Well, it would absolutely devastate it of course. So are we facing a credit crunch in 2010? Yes. Consumer credit in the United States has already contracted during 15 of the past 16 months, and there is every indication that things are about to get even worse.

The truth is that once a deflationary cycle starts, it tends to feed on itself. People quit spending money, banks quit making loans and everyone starts hoarding cash.

And right now there is a lot of fear out there. According to one major indicator, consumer sentiment declined in early July to its lowest in 11 months.

U.S. consumers are starting to pay down debt and are holding on to their money. Others can’t spend more money because they are out of work or are completely tapped out.

But without more spending, the U.S. economy won’t get revved up again. And if the U.S. economy does not get going soon, there are going to be more foreclosures, more bankruptcies and even more jobs lost.

In a recent article for The Telegraph, Ambrose Evans-Pritchard set out some of the statistics that show that the U.S. economy is in really, really bad shape right now….

TheUS workforce has shrunk by a 1mover the past two months as discouraged jobless give up the hunt. Retail sales have fallen for the past two months. New homes sales crashed to 300,000 in May after tax credits ran out, the lowest since records began in 1963. Mortgage applications have fallen by 42pc to 13-year low since April. Paul Dales at Capital Economics said the “shadow inventory” of unsold properties has risen to 7.8m. “The double dip in housing has begun,” he said.

It seems like almost everyone is using the words “double dip” these days.

It is almost as if it was already a foregone conclusion.

But the truth is that this would have just been one long economic decline if the U.S. government (and many of the other governments around the globe) had not pumped so much “stimulus” into their economies over the past several years.

Now that governments around the world are pulling back and are beginning to implement austerity measures, the “sugar rush” of the stimulus money is wearing off and the original economic decline is resuming.

All that the trillions in “stimulus” did was to give the world economy a temporary boost and get us into a whole lot more debt.

In his recent article entitled “The U.S. Is On The Edge Of A Growing Deflationary Sinkhole”, Lorimer Wilson did a really good job of detailing how all of this debt has gotten us into a complete and total mess….

Capitalism cannot function unless its constantly compounding debt is serviced and/or paid down. Today, the U.S., the world’s largest debtor, can no longer pay what it owes except by rolling its debt forward and borrowing more [in] what the late economist Hyman Minsky called ponzi-financing, financing common in the final stages of mature capital systems.

The amount of outstanding U.S. debt, according to Martin D. Weiss, www.moneyandmarkets.com, has now reached levels that can never be paid off. The United States government and its agencies have, by far,
- the largest pile-up of interest-bearing debts ($15.6 trillion),
- the largest accumulation of unsecured obligations (over $60 trillion),
- the largest yearly deficit ($1.6 trillion), and
- the greatest indebtedness to the rest of the world ($4.8 trillion).

The truth is that the United States is in the early stages of a truly historic financial implosion.

Earlier this year, all of the focus was on the European sovereign debt crisis, but now all eyes are turning back to the U.S. once again. David Bloom, currency chief at HSBC, recently remarked that world financial markets are extremely concerned about the state of the U.S. economy right now….

“We’re in a world of rotating sovereign crises. The market seems to become obsessed with one idea at a time, then violently swings towards another. People thought the euro would break-up. Now we’re moving into a new phase because we’re hearing alarm bells of a US double dip.”

Without direct intervention from the U.S. government, the U.S. financial system is headed for a world of hurt.

The truth is that the credit markets are freezing up, and without efficiently operating credit markets, the economic system we have constructed simply will not work.

The following information comes courtesy of the Consumer Metrics Institute. If you have never visited their site, you should, because it is packed full of excellent data. In their most recent report, they do a good job of detailing the astounding credit contraction that we have been witnessing….

During the past week there has been a flurry of Federal Reserve reports and commentary concerning the levels of credit in the current economy. The two most notable were:

► On July 8th they reported that the level of seasonally adjusted outstanding U.S. Consumer Credit (their G.19 report) decreased during May by $9.1 billion, representing an annualized rate of credit contraction of 4.5%. Although even this change is above the average for the preceding twelve months, it is much smaller than a quiet revision to the previously published April U.S. Consumer Credit figure — which is now reported to have decreased by $14.9 billion (a 7.3% annualized contraction rate).

The Federal Reserve fails to put these numbers into perspective:

1) Consumer credit has contracted during 15 of the past 16 reported months, and it is down a record total $148 billion over that time span.
2) The $14.9 billion in credit ‘lost’ during just April is the second highest monthly amount in history, second only to the $23.4 billion ‘lost’ during November, 2009.
3) And the nearly 6% cumulative reduction in consumer credit over the past 16 months is the largest (on a percentage basis) for any 16 month span since September 1944 — when FDR was still in the White House and people were buying War Bonds instead of tightly rationed consumer goods.

► On July 12th Federal Reserve Chairman Ben Bernanke noted that small businesses were not getting the loans that they need to create new jobs. The Federal Reserve’s own data reports that lending to small businesses dropped to below $670 billion in Q1 2010, down about $40 billion (5.6%) from two years ago.

The New York Times reported Mr. Bernanke wondered: “How much of this reduction has been driven by weaker demand for loans from small businesses, how much by a deterioration in the financial condition of small businesses during the economic downturn, and how much by restricted credit availability? No doubt all three factors have played a role.”

Small businesses, which account for over 60% of gross job creation, are not - for whatever reason - tapping into the credit necessary to create those jobs.

If you know anything about economics, the excerpt that you just read should be chilling you to your bones right about now.

Without loans, businesses can’t start or expand, consumers cannot buy homes or vehicles and retail spending will be in the toilet.

But, as a recent USA Today article pointed out, part of the problem is that so many Americans now have very, very low credit scores….

Figures provided by FICO show that 25.5% of consumers - nearly 43.4 million people - now have a credit score of 599 or below, marking them as poor risks for lenders. It’s unlikely they will be able to get credit cards, auto loans or mortgages under the tighter lending standards banks now use.

As I recently pointed out on The American Dream blog, historically only about 15 percent of Americans have had credit scores that low.

So can the U.S. economy fully recover if the number of Americans that are a bad credit risk has nearly doubled?

That is a very good question.

As I noted in a previous article, the truth is that the retail sector is already a huge mess, and if we don’t get the American people pulling out their credit cards soon this holiday season may not be very jolly at all….

Vacancies and lease rates at U.S. shopping centers continued to get even worse during the second quarter of 2010. In fact, in some of the most depressed areas of the United States, many malls and shopping centers could end up looking like ghost towns by the time Christmas rolls around.

So this is the point where Barack Obama comes riding in on his white horse and rescues the U.S. economy, right?

Well, at this point Obama has joined with the other G20 leaders in pledging to get government spending under control.

So right now there are not any plans for new stimulus packages.

But as the U.S. economy starts sinking into a deflationary depression, the temptation to pump up the economy with even more government spending will become too great.

This will especially be true the closer to the election of 2012 that we get. By the time election season rolls around, Obama will likely be much more willing to pile up even more debt for a short-term economic boost.

So yes, we are headed for a complete and total economic nightmare, but exactly how it all plays out is going to depend a lot on what Barack Obama, the Federal Reserve, other world leaders and other central banks decide to do.

For the moment, we are heading for an absolutely brutal credit crunch, and if something is not done quickly, it is going to dramatically slow down the world economy.

The graphs from the Consumer Metrics Institute are quite illustrative

Couple this with Steve Keen's - Are We “It” Yet?

If you’ve downloaded and read the paper and presentation I posted in my previous entry, then there’s nothing new for you to read in the body of this post; the main addition is the video below of my talk.

Steve Keen's Debtwatch Podcast with Stuart Cameron



That in part gives you rather too good a view of the back of the heads of Randy Wray and Dimitry Papadimitriou, both of whom sat down in front of the camera after my talk began, but the slides are still easily visible.

Soon I’ll publish another post with the video of the talk I gave in New York to Debtwatch members, which has substantially more background on the model and the approach I take to modelling in general, and an extremely good and lengthy discussion.

Abstract

My 1995 paper on modeling Minsky’s Financial Instability Hypothesis concluded with the statement that its “chaotic dynamics … should warn us against accepting a period of relative tranquility in a capitalist economy as anything other than a lull before the storm” ((Keen 1995, p. 634)). That storm duly arrived, after the lull of the “Great Moderation”. Only a Fisher-Keynes-Minsky vision of the macroeconomy can make sense of this crisis, and the need for a fully fledged Minskian monetary dynamic macroeconomic model is now clearly acute.

I also introduce a new free tool for dynamic modeling which is tailored to modeling financial flows–QED. See pages 49-53 the Appendix for details.

Empirics

As Vicki Chick so succinctly put it, Minsky the Cassandra was an optimist ((Chick 2001)). The stabilizing mechanisms that Minsky initially felt would help prevent “It” from happening again ((Minsky 1982)) have been overwhelmed by a relentless accumulation of private sector debt, which have reached levels that dwarf those which caused “It” eighty years ago. Though “It” has not yet definitively happened again, neither did our forebears in the 1930s realize that they were in “It” at the time—as a perusal of the Wall Street Journal from those days will confirm:

Market observers are watching the current rally closely since it has lasted about 10 days, or about the same as the technical rally starting in late April that gave way to a renewed bear movement. It’s believed “ability of the rising trend to carry on for several days more would strengthen indications of a definite turn in the main trend of prices.” (Dimitrovsky 2008, Wall Street Journal June 16 1931)

A comparison of 1930s data to today emphasizes that the same debt-deflationary factors that gave us the Great Depression are active now; the only differences are that both the private sector deflationary forces and the government reaction are much greater today.
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Also from Keen - Are We It Yet posted

and Naked Capitalism and My Scary Minsky Model

I met with Yves Smith of Naked Capitalism on the weekend, at a superb Japanese restaurant that only New York locals could find (and I’ll keep its location quiet for their benefit–too much publicity could spoil a spectacular thing). Yves was kind enough to post details of my latest academic paper at her site in a post she entitled “Steve Keen’s scary Minsky model“.

Yves found the model scary, not because it revealed anything about the economy that she didn’t already know, but because it so easily reproduced the Ponzi features of the economy she knows so well.

I have yet to attempt to fit the model to data–and given its nonlinearity, that won’t be easy–but its qualitative behavior is very close to what we’ve experienced. As in the real world, a series of booms and busts give the superficial appearance of an economy entering a “Great Moderation”–just before it collapses.





The motive force driving the crash is the ratio of debt to GDP–a key feature of the real world that the mainstream economists who dominate the world’s academic university departments, Central Banks and Treasuries ignore. In the model, as in the real world, this ratio rises in a boom as businesses take on debt to finance investment and speculation, and then falls in a slump when things don’t work out in line with the euphoric expectations that developed during the boom. Cash flows during the slump don’t allow borrowers to reduce the debt to GDP ratio to the pre-boom level, but the period of relative stability after the crisis leads to expectations–and debt–taking off once more.






Ultimately, such an extreme level of debt is accumulated that debt servicing exceeds available cash flows, and a permanent slump ensues–a Depression.
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[ThePythonicCow]

Re: Economic outlook 'unusually uncertain'

Couple this with Steve Keen's - Are We “It” Yet?

Thanks for posting the link. It took me a bit to get around to read it, but it's well worth at least half understanding.

The fundamental difference between most economists and Keen is deep. Keen handles dynamic flows, unstable systems and debt far better than most.

Check out the chart on page 45 of the paper, showing the income of workers and capitalists growing more and more stable over multiple decades, as the income of bankers rises gradually, then the system rapidly breaks down, as the bankers income leaps up and everyone else's portion of the total income pie collapses. On the next page, we see real growth rates and inflation rates become more and more stable, their oscillations flattening out over several decades, then they both rapidly collapse. Ever increasing debt supports the "Great Moderation", until it doesn't any more and then we encounter major debt deflation (I highlight debt here, to distinguish this from price inflation or deflation.)

We're not even half-way through the necessary debt clearing, however we go about it.

[Rajiv]

Re: Economic outlook 'unusually uncertain'

Thanks for posting the link. It took me a bit to get around to read it, but it's well worth at least half understanding.

The fundamental difference between most economists and Keen is deep. Keen handles dynamic flows, unstable systems and debt far better than most.

Check out the chart on page 45 of the paper, showing the income of workers and capitalists growing more and more stable over multiple decades, as the income of bankers rises gradually, then the system rapidly breaks down, as the bankers income leaps up and everyone else's portion of the total income pie collapses. On the next page, we see real growth rates and inflation rates become more and more stable, their oscillations flattening out over several decades, then they both rapidly collapse. Ever increasing debt supports the "Great Moderation", until it doesn't any more and then we encounter major debt deflation (I highlight debt here, to distinguish this from price inflation or deflation.)

We're not even half-way through the necessary debt clearing, however we go about it.

I hope you looked at the video as well. He does a very good job of explaining his thoughts.

[ThePythonicCow]

Re: Economic outlook 'unusually uncertain'

I hope you looked at the video as well. He does a very good job of explaining his thoughts.

I started to look at the video, but my hearing is poor, and I have trouble understanding audio that is picked up from the auditorium speakers using a room mike rather than directly off the close mike feed.

[Rajiv]

Re: Economic outlook 'unusually uncertain'

I started to look at the video, but my hearing is poor, and I have trouble understanding audio that is picked up from the auditorium speakers using a room mike rather than directly off the close mike feed.

Try the one here - http://www.debtdeflation.com/blogs/w...chTalk2010.mp4 That is better and with more detail

[Rajiv]

Re: Economic outlook 'unusually uncertain'

P.S. -- Drat. Once again, the (buggy?) vBulletin software on this forum has given my post a wrong time stamp, making it the oldest, hence first, post on this thread, rather than the eleventh (11^th) post which it should be.

As well as making it the last thread on the forum. Hopefully this corrects that

[don]

Re: Economic outlook 'unusually uncertain'

[QUOTE=dummass;169006][QUOTE] "unusually uncertain,"

Well..."Conundrum" had already been used and his thesaurus was in the car.

It's not so easy following Greenspan's legacy.

It appears the Master of Obfuscation is lowering his guard of late.

“We’re still nowhere near the bottom of the home price thing,” Greenspan told CNBC in an interview.

Sir Alan, your out-of-touch-with-the-rest-of-us is painfully on display. Your class slip is showing

[metalman]

Re: Economic outlook 'unusually uncertain'

[QUOTE=dummass;169006][QUOTE] "unusually uncertain,"

Well..."Conundrum" had already been used and his thesaurus was in the car.

It's not so easy following Greenspan's legacy.

'unusually uncertain' is a shitload better than his 'no housing crash' crap in 2006. he's improving.

but if i read ej's volcker encounter right 'we're fucked... it's a matter of time' is the unofficial view.

next up... the 'politically awakened masses' must be corralled by fear...

http://www.itulip.com/video/loveyou.mp4

thx largo for finding the vid

[don]

Re: Economic outlook 'unusually uncertain'

[QUOTE=metalman;169781][QUOTE=dummass;169006]

next up... the 'politically awakened masses' must be corralled by fear...

http://www.itulip.com/video/loveyou.mp4

thx largo for finding the vid

That's what happens when the White Man loses his Burden.