The Ghetto Economist and Dulce on Double-Dip Recession
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There has been increasing talk in the media of a possible Double Dip recession so Dulce and I are offering our informed opinion as a public service. Allow me to present our credentials.
UCLA has one of the finest economics schools in the nation, and in 1972 I was offered a scholarship by the UCLA Native American Studies Dept which I’m sure is somewhere on the same campus as the Economics Dept, possibly even close by. Although I shrewdly chose to take a job in a factory so I could have the $ to take my girlfriend Carmen out and never actually enrolled there or even visited the campus I still cherish my college memories.
Along with Alan Greenspan, Ben Bernanke, Timmy Geithner and a host of media pundits, Dulce was unaware of the housing bubble. I might add like a certain vice-presidential candidate she also is unaware that Africa is a continent. So if shared qualifications mean anything, Dulce is fully capable of offering incisive analysis on both economic and political topics.
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Briefly, a recession is when an economy suffers negative growth for two or more quarters. A double-dip or W-Shaped recession is when an economy begins a recovery then slides back into recession. We are in a recovery phase, yet the economy continues to shed jobs. Some businesses continue to pay shareholder dividends by cutting their workforce. Thus they show a profit on paper but it is adding nothing to the real economy, in fact it hurts by adding to the unemployed ( larger pool of available workers serves to push wages down) as well as lowering tax revenue and increasing unemployment payouts ( adding to the deficit). Most of the force behind the recovery has been the Stimulus and an inventory bounce.
Even with sales and services and revenue down, at a given point all businesses need to “restock their shelves” but unless business is booming an inventory bounce will not turn things around. And my understanding is the Stimulus is 75% spent.
Our total private sector debt is six times US Govt Public Debt. US Govt Public Debt is all debt owed to anyone other than the govt itself. Nations, investment funds, individuals. Gross debt is adding US govt debt owed to itself, example the Social Security Trust Fund. The interest on this debt goes right back into the Treasury so I think Public Debt is a more valid comparison to private debt. This private sector debt should be of far more concern than US public debt. A sovereign govt has funding options not available to the private sector, and until the private sector (households and businesses) repairs its balance sheets by paying down debt it will not be able to create the effective aggregate demand that drives a consumption oriented economy such as ours. Right now this can only come from the govt.
Monetary policy (Federal Reserve adding to bank reserves) has been ineffective. Partially this is due to banks being unwilling to lend for various reasons, but much of this is due to the supply end of our economy not wanting to borrow. Overcapacity is one culprit, there is hella excess shoes and cars and video games, a vast backlog of unsold housing.
There is also a lack of consumer confidence, even those not in debt are reluctant to spend.
Then there are those private balance sheets we’d mentioned. Until debt is paid down businesses will be reluctant to borrow and households reluctant to go further into debt. So saying banks are unwilling to lend is only part of our problem, the far larger part is lack of sufficient aggregate demand to purchase needed goods and services to grow the economy. If the private sector is not putting dollars into the economy then the ONLY source for those dollars is govt spending. We need further stimulus to spur demand and grow the economy until the private sector can contribute again.
The deficit/debt hawks in both parties who wish to curtail govt spending in the interest of balancing the budget and lowering the debt are WRONG. Not only will cutting govt spending increase the deficit (less fiscal stimulus = shrinking economy = further unemployment = less tax revenue + more people collecting unemployment) but it will by accounting identity force MORE debt onto the private sector while not decreasing govt Public Debt.
It’s not gonna be easy but I see no alternative.
Neither does Dulce.
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Great post, Oso. What a cyclical free-for-all f’up we’re stuck in, huh?
In the words of our Jess-AYUP.
Actually this isn’t Doomsday Scenario. Those people speak of us being a Banana Republic, bartering for food. Stockpiling goods, putting $ in gold.
I may not have made my point well. I believe we will muddle through with years of high unemployment and lowered expectations. With well-directed fiscal policy we can greatly lessen the pain, but I don’t anticipate that happening due to the three-headed monster of lobbyists/crony capitalism, partisan politics and stupidity.
I agree completely. I think that we will have a recovery, but it will be a very long and tough road ahead. Our economy isn’t what it used to be, our manufacturing base is diluted by exportation of those jobs.
We had a booming economy before but a lot of it was based on smoke and mirrors of hedge funds and speculation. That shell game will return in different forms for Wall Street but the middle class is going to get squeezed hard.
Let’s hope that electronic trinkets like cell phones and flat screen TV’S will continue to drop in price and be available to keep the general population sedate. Don’t want any “bonfire and pitchfork” crowds forming.
I hear that man. The torch and pitchfork crowds lean rightward.
I like the cat so I don’t care…;-)
She is horribly spoiled and well-loved.
I am a huge Dulce fan but sometimes I think she has a tendency to shout “fire” when there is only a wee bit of smoke. As she undoubtedly knows I am not a fan of doomsday scenarios. Regardless, this was a most interesting read and it was certainly food for thought (wet not dry) 🙂
Dulce tends to have extreme opinions. Even worse she claws the rug which I rarely do!
I’ve been known to claw a rug or two… 🙂
Your qualifications have me Rofl’ing! Especially Dulce who seems imminently more qualified to run for Senate than many who actually do.
It used to be SOP… gov spending … just look at the infrastructure spending that NEEDS to done. As a small business woman suffering under the second worst summer of sales in a row; WHAT FUCKING RECOVERY IS THAT YOU SPEAK OF O MIGHTY ECO-MYSTIC? And now, everyone I know who was offered the Obama policy of foreclosure (CARE) re-negociation, is being renigged on by Bank of America (the rat bastards). You’ll forgive my fury and my serious case of “r u kidding me man?” … because I only see failure from the government side. Worse, they give to retrieve it back w/o care. Many people. But, Oso and I are in, perhaps, the worst states hit by the monetary malady…. Cali and FL.
Oso, we must create our own demand for business… if, like me, you are flying solo. I get it. It is troubling times still and we haven’t even mentioned the ongoing eco-crisis in the Gulf of Mexico. (YES! It is still going on!)
Great post Oso.
Gwen, you didn’t actually think that TARP, Toxic Asset Recovery Plan, was meant for anybody but investment bankers did you? I mean, cmon…you have toxic assets and then you have TOXIC ASSETS.
Those mortgage banks were leveraged out to the max and they are holding on, hoping to stay below the radar of “troubled bank” oversight.
I have heard of people having to resubmit their applications for financial restructure on their mortgages 6 or 7 times because somehow the paperwork keeps getting “lost”. Why shouldn’t they just walk from the loans when they are so far “underwater” so to speak? Some sort of honor or morals? Do you think the banks would think twice about it if the shoe was on the other foot?
What are the Ghetto economist’s views on deflation? Is this something that we should be worried about? Could we be headed in the same direction as Japan? When times are good, does Dulce get more wet cat food than dry?
You know what, I think deflation is our future due to the combination of overcapacity and low velocity of $, $ cycling thru the economy slower than normal. If we consider inflation as too much $ chasing too few goods, then what we have now is not enough $ chasing too many goods.
People who fear inflation look at the trillion + the Fed threw into the banks, but don’t consider the fact that banks are sitting on that $ and not loaning it out. They put it into treasuries or buy back stock or speculate but it isn’t in the real economy.
I think we’ll see dropping wages and prices, people not spending due to lack of confidence but also cause they expect prices to drop further.
I see us like Japan, but IMO Japan actually did quite well. That is, their people remained employed. They have high private sector savings, cultural thing plus they have a trade surplus which balances their fiscal deficit spending. And they suppress imports to keep up domestic consumption.
So I think we’ll have a long period of no growth, but unlike Japan we’ll have high unemployment which will probably cause the ranks of the middle class to thin out and increase the disparity between rich and poor. If we would work to devalue the dollar I think it would help, we’d export more and it would raise the price of imports.
Dulce is horribly picky but currently is willing to eat Friskies wet food and rejects the healthy stuff from Trader Joes.
Kitty does junk food! Lol. Good for Dulce!
MM- FIRE!!!!!!!
LOL Gwen!!