Stage is Set for Next Recession*

September 3, 2014

The economy has been riding a crest as of lately. It should. Since the last recession began in 2008, between deficit spending by the federal government and monetary expansion by the Federal Reserve, over $10 trillion has been pumped into the economy.

But that’s come to an end. The Federal Reserve’s QE-whatever program has tapered to nearly nothing and ends in October. And perhaps more importantly, federal deficit spending has slowed to the point where it exactly matches the trade deficit. Check this chart of the growth in the national debt vs. the cumulative trade deficit:  Debt-Trade Deficit. The significance of this is that every time – every time – the growth in the national debt slows to the point where it begins to lag the trade deficit, the economy lapses into recession.

To understand why this happens, draw a line around the economy. Then add up the money flows that cross that line. Exports put money into the economy while imports take money out, meaning that a trade deficit is a net drain on the economy.  Taxes take money out of the economy while federal spending puts money back in.  So deficit spending (putting more money back into the economy than is taken out through taxes) has a stimulative effect on the economy while running a budget surplus is a net drain on the economy.  (The sustainability of deficit spending and the long-term effects are a whole separate discussion.)  Foreign investment puts money into the economy while American investment takes money out. In this case, net investment has consistently been a huge drain on the economy for decades as corporations have sunk all of their money into emerging foreign markets for a long time.

Add all of these up and we are now entering a phase where there is a net drain of money out of the economy. The problem is that economists and politicians lean on deficit spending to pull us out of recessions, but then grow nervous as the national debt soars. Eventually, the deficit spending has its predicted effect and the economy begins to recover.  Americans grow more confident, open their wallets, and take on more debt.  Federal revenue grows as incomes as corporate profits rise, and federal spending moderates as the need for social safety net spending (like unemployment benefits) decline, and as politicians grow eager to show fiscal restraint.

That’s all fine, but what economists and politicians alike fail to recognize is that, over the long haul, it’s impossible to balance the federal budget without first restoring a balance of trade. Otherwise, it’s inescapable that the net drain of money from the economy will drive it into recession.

It happened at the end of the Reagan-Bush era in the early ’90s.  It happened again at the end of the Clinton administration, when Clinton balanced the budget while simultaneously granting most-favored-nation status to China and sending our trade deficit soaring.  It happened again at the end of the “W” administration.

And now it will happen to President Obama.  He could avoid it, but he won’t.  He could boost spending, but that would forever label him as a reckless spender and give a boost to Republican candidates running on a platform of fiscal restraint.  Besides, Republicans in Congress wouldn’t stand for it, even if he wanted to do it.  Instead, he’ll fall into the same trap as his predecessors, hoping that history will remember him as one who did what needed to be done to end the recession, put the economy on solid footing and then restored fiscal sensibility – an economic trifecta that hasn’t happened before and won’t happen now because it can’t happen.

It may take a year or two for the net drain of money from the economy to bite, but it’s coming, so get ready.

* * * * *

* All “recessions” are determined by macro-economists to occur when the macro-economy, as measured by GDP (gross domestic product), shrinks for two consecutive quarters.  But there are actually two different kinds of such recession – the one we traditionally think of as being bad, and another kind that we’ve never witnessed that is actually beneficial.  The latter occurs when the decline in GDP is accompanied by a decline in the population when the population is above its optimal level, as it is in the U.S. and throughout most of the world.  In that scenario, the decline in population actually unleashes pent-up per capita consumption that has been strangled by over-crowding.  The decline in GDP is slower than the decline in population, resulting in an increase in demand for labor and rising incomes.  This is the recession that we’ve never seen before but should all be hoping for.


Deficit Spending Powers Economic Recovery

March 13, 2012

I thought I’d share with you some data that, I believe, explains the rebound in the economy that’s been gathering momentum in recent months.  The following is a chart that tracks the growth in the national debt vs. the cumulative trade deficit (expressed in current dollars) since 1976, the first year following our last trade surplus in 1975.  Highlighted in yellow are recessions. 

My theory is that, if you draw a line around the economy, periods of expansion occur when the money flow into the economy exceeds the money flow out, and recessions will occur when the inflow falls below that level.  Deficit spending by the federal government is the most significant flow of money in.  The trade deficit has steadily grown into the dominant outflow of money. 

Here’s the chart (use your browser “back” button to return to this post):  Cumulative Trade Deficit vs Growth in National Debt

Beginning with the first trade deficit in 1976 that followed our last surplus, the trade deficit began to gather steam until, for the first time in 1979, the cumulative trade deficit surpassed the growth in the national debt.  (In other words, at that point, there was a net outflow of money from the economy.)  A double-dip recession soon followed, lasting from January, 1980 until November of 1982. 

Ronald Reagan took office in January of 1981 and cut taxes, which then propelled federal deficit spending that again overtook the trade deficit, and the U.S. enjoyed about 7-1/2 years of expansion.  However, the trade deficit continued to worsen and the rate of deficit spending was slowed by President Bush’s increase in social security taxes.  By the late ’80s, the trade deficit threatened to overtake federal spending once again.  By July of 1990 we were back in recession.

Deficit spending took off again but, by this time, it was too late to salvage Bush’s presidency.  Bill Clinton was swept into office in 1991, thanks primarily to voter anger over the state of the economy.  Fate, and an explosion in deficit spending, were  kind to President Clinton.  The ’90s were marked by the rise of the  high tech industry – cell phones, personal computers and the dot-com boom all helped drive down the trade deficit and create a new flow of foreign money into the stock market, supplementing the flow of deficit spending.  The result was the longest period of uninterupted expansion in U.S. history. 

But Republicans made serious political inroads on growing concern over the explosion in the national debt, so President Clinton worked with Republicans to eliminate deficit spending, bringing the growth in the national debt to a halt in 2000.  In that same year, China was granted “most favored nation” status and was admitted to the World Trade Organization.  Immediately, our trade deficit began to explode in a way that had never been seen before.  And, at the same time, the dot-com bubble burst. 

But, aside from a very brief recession caused by the events of 9/11, real economic recession was held at bay by a new flow of foreign money into the housing market.  Upon the collapse of the stock market in March of 2000, investors promptly concluded that real estate was the safest place to be.  Foreign investors’ money poured into real estate and mortgage-backed securites, feeding a completely irrational housing boom.  Thanks to this new flow of foreign money, filling the void created by the slowdown in federal spending, the economic expansion continued, although it was hailed as a “jobless recovery.”  Virtually all of the recovery was concentrated among the top few percent of incomes while, truth be told, the rest of the economy was probably stuck in a mild recession. 

By 2006, the growth in the national debt once again fell behind the cumulative trade deficit.  That, coupled with the bursting of the housing bubble that dried up that flow of money into the economy, lead to the worst recession since the Great Depression, beginning in December, 2007.  President George W. Bush responded with an unprecedented explosion in deficit spending, a program continued by his successor, President Obama, to this day.  The growth in the national debt is now further ahead of the cumulative trade deficit than at any point in history.  The result is that the economy is slowly beginning to expand once again.

Look again at the chart.  Each time that deficit spending has begun to slow relative to the trade deficit, a recession has soon followed.  Each time, the government has responded with greater deficit spending, often in the form of tax cuts, leading to recovery.  Now look at the tail end of the chart.  The rate at which growth in the national debt outpaces the trade deficit has never been greater. 

This is a great strategy for an incumbent president in an election year.  But it’s not sustainable.  Both parties will tell you so.  Neither party will act on it.  Both parties use deficit spending to sustain an illusion of prosperity.  Democrats place the emphasis on taxing the rich to fund spending programs to curry favor with low and middle income workers.  Republicans favor cutting spending and cutting taxes for the wealthy to curry favor with upper income workers and those aspiring to an upper income.  The end result is the same – a growing national debt.  Until someone has the courage to address the real driving force behind deficit spending – the trade deficit – our national debt will continue its march skyward.


U6a Unemployment Climbs to 19.1%

September 4, 2009

 

http://www.bls.gov/news.release/empsit.nr0.htm

As reported by the Bureau of Labor Statistics this morning (see the above link), U3 unemployment (the measure most widely reported) rose in August to 9.7% from 9.4% in July.  But, as it always does when the economy enters recession, the government plays games with this figure, holding it down in an effort to prop up consumer confidence with the explanation that workers have been dropping out of the labor force. 

My calculation of unemployment  assumes a constant percentage of the population as the size of the labor force.  So, as the population grows, the size of the labor force grows proportionately.  (After all, it’s ridiculous to assume that the new members of the population don’t need a source of income.)  Using this method – what I call “U3a” – the unemployment rate rose in August by 0.3% (in line with the government’s reported rise) to 10.6%.  And U6a, the broader measure that includes discouraged workers and those working part-time when they need to find full-time jobs, rose to 19.1%.  (See the following spreadsheet for my calculation method.)

Unemployment Calculation PDF

As you can see, unemployment actually rose by about 466,000 (a figure you’ll find buried in the BLS report), and not the drop in non-farm jobs of 216,000, the figure that garners all the headlines.  This rise in unemployment is a combination of the decrease in the employment level of 392,000 (see column E) and the increase in the civilian labor force of 73,000 (see column B). 

Unemployment in the city of Detroit (using the government’s figures) has risen to 28.9%.  The city is truly experiencing “Great Depression” conditions. 

It’s entirely within the powers of the President to restore the nation to a condition of full employment by changing failed trade policies to establish a balance of trade in manufactured goods.  But thus far he has failed to act, choosing not to rock the World Trade Organization (WTO) boat and allowing grossly overpopulated nations to prey upon the American market and American jobs to sustain their badly bloated labor f0rces at Americans’ expense.  With global unemloyment at 30%, we can expect unemployment  in the U.S. to continue to rise as long as we participate in the WTO’s global unemployment-sharing scheme.


Economists at NBER Wake Up to Reality, Make Recession Official

December 1, 2008

http://www.reuters.com/article/ousiv/idUSTRE4B05YX20081201

The National Bureau of Economic Research has finally made official what has been obvious to everyone else for months:  the economy is in recession, and has been for a year now, just as I observed last week.

The economy slipped into recession in December 2007, the National Bureau of Economic Research, the prestigious private research institute that is regarded as the arbiter of U.S. recessions, declared on Monday.

They were probably worried that if they waited for a 2nd consecutive quarter of declining GDP like they usually do, data that wouldn’t be available until the end of January, they’d be in danger of calling a recession at a time when everyone else was starting to talk of a depression.  Or maybe they didn’t like me getting the jump on them. 

Here’s a quote from the article that I find particularly amusing:

The current downturn was particularly tricky to define because gross domestic product remained positive until the third quarter this year.

This was “tricky to define?”  Our entire financial system is in complete collapse, along with the construction and manufacturing sectors of the economy.  We’ve had ten straight months of job losses and weekly jobless claims topping a half million.  The government bail-outs now top $8 trillion and the entire global economy is in free fall.  All of this, and the NBER finds this recession “tricky to define?”  Maybe that tells us something about economists when a “presitgious private research institute” has such difficulty seeing and analyzing what’s going on around them.  Perhaps the receptionist at the NBER, frustrated with her co-worker economists, finally got up and whacked one of them upside the head with a two-by-four to wake him up!

But I suppose we shouldn’t expect more of the NBER than we get from our government economists.  The Bush White House maintained right up until the financial system’s collapse in October that “this economy is fundamentally sound!”, only a slight concession to reality from their earlier version, “this economy is strong and getting stronger!”  The only thing that was getting stronger was the smell. 

The White House acknowledged the NBER’s declaration, but said that did not change its course on coping with the financial crisis that has raged since August 2007.

“The most important things we can do for the economy right now are to return the financial and credit markets to normal, and to continue to make progress in housing, and that’s where we’ll continue to focus,” White House spokesman Tony Fratto said.

You do that, Tony.  You wouldn’t want to do anything really wild and crazy like maybe address our $700 billion trade deficit, bring our manufacturing jobs home and get real incomes rising again.  No, it’s much better to focus on restarting the debt machine.  If only we can find some suckers to lend us the money.


Recession Continues in 2nd Quarter of ’08, Now Entering 4th Consecutive Quarter

July 31, 2008

http://www.reuters.com/article/ousiv/idUSN3043337220080731?sp=true

The recession that began in the 4th quarter of 2007 continued in the 2nd quarter of this year and is now entering its 4th consecutive quarter. 

“Wait a minute!”, you may be saying.  “GDP grew at an annual rate of 1.9% this past quarter.  How can you call this a recession?”  The classic definition of a recession is two consecutive quarters of decline in GDP.  But that’s a terrible definition.  A much better definition is declining per capita chained GDP – in other words, GDP adjusted for inflation and population growth.  If this figure declines, then that means that every American’s share of the economy is getting smaller. 

In the 2nd quarter of ’08, per capita chained GDP declined 2.6%.  While total GDP grew at an annual rate of 1.9%, inflation rose at an annual rate of 4.2%.  So chained GDP fell by 2.3%.  And since the population grew during the 2nd quarter by about 900,000 people, or about 0.3%, then add that to the drop in chained GDP for a decline in per capita chained GDP of 2.6%.  This was the third consecutive quarter of decline.  Many experts expect at least two more quarters of such decline. 

By far, the biggest contributor to the decline is the trade deficit.  Eliminating the trade deficit would boost GDP by 5.7%.  Cutting legal immigration would also boost per capita chained GDP by 0.1% by slowing the growth in the number of “capitas.” 

Here’s some key excerpts from the article:

An emergency dose of government stimulus helped the economy grow at a 1.9 percent annual rate in the second quarter …

… Revised data from the Commerce Department released with the second-quarter figures on Thursday showed national output shrank in the final quarter of 2007…

… The moderation in core prices came despite a jump in overall prices of 4.2 percent …

… Payrolls have declined for six straight months, and analysts expect a drop of 75,000 to be reported for non-farm payrolls in July.

And matters are getting worse.  Just today, first time unemployment claims rose to 458,000 this week.  That’s an annual rate of about 15.5% of the entire labor force applying for unemployment every year. 

How bad will things have to get before the government acknowledges that our trade policies are unsustainable?


Recession Marches On

April 30, 2008

http://www.reuters.com/article/ousiv/idUSN2932297520080430

The above link is a Reuters report on the advance reading (the first pass) of Gross Domestic Product (GDP) for the first quarter of 2008.  But GDP is a lousy gauge of how well the economy’s doing because it doesn’t take into account inflation or population growth.  A much better measure is per capita chained GDP – which is GDP adjusted for both inflation and population growth.  As I reported in January, fourh quarter 2007 data for per capita chained GDP already placed us into recession:

http://openwindowpublishingco.com/cgi/wp/?p=60

If you can believe the Commerce Department’s report (which I believe is highly suspect), GDP held at the same rate as the fourth quarter, as did the rate of inflation.  (That is difficult to believe, isn’t it?  Watch for downward revisions in the coming weeks.)  With inflation running at an annual rate of 2.6% (supposedly) and population growth running at 1% per year (thanks to immigration), this 0.6% increase in GDP means that each American’s share of the economy has declined by another 3.0%. 

Folks, this is not a normal business cycle recession.  It’s not a temporary blip caused by the economy accelerating ahead of itself, waiting for other factors to catch up.  This is the culmination of decades of economic policy that consisted of nothing more than creating new rugs under which the filth of our exploding trade deficit could be swept.  The government is running out of yarn for weaving new rugs.  The mortgage meltdown has exposed the mess to the world and relegated America’s credit rating to junk status.  Our foreign creditors have cut us off and left us to face the truth – we’re bankrupt.  We’ve sold off a significant fraction of our national net worth to finance the trade deficit and, with the shrinking dollar eroding what’s left even faster, we’re rapidly approaching the day when there will be nothing left – when foreigners own us lock, stock and barrel.  There’ll be nothing left to finance the trade deficit and, when that day comes, watch out!  The recession will explode into a full-blown depression.  Will it come to that?  Maybe not – at least not right away.  The government and the Fed has their spinning wheels running full tilt in a desperate effort to produce more yarn for another shabby rug. 

Pete 


Relationship Between Population Decline and Recession

March 29, 2008

I was just reading an article about the recently reported decline in the population of major cities in the “rust belt” – cities like Detroit, Cleveland, Buffalo and Pittsburgh.  It’s no secret that these cities are losing population and the reason is no secret either.  The loss of manufacturing jobs is driving people to seek employment elsewhere in the U.S., primarily throughout the South.  This is especially true of young people who, upon graduation, find work wherever they can. 

This isn’t the first time we’ve seen this kind of population shift.  In the ’30s it was people fleeing the dust bowl, looking for work in California.  In the 1800s, people fled the potato famine in Ireland.  I’m sure each of you can identify other such situations.  In every case, a population decline has been precipitated by some tragic event.

But it suddenly dawned on me; people have come to accept that a declining population is a bad thing because, in the past, it has always been caused by something bad.  The cause and effect have become synonymous.  This is almost surely part of the reason that many people tend to recoil in horror if you suggest that the population needs to decline.  It immediately conjures up images of conditions that have driven population declines in the past.  In their minds, the cause and effect relationship has been reversed.

An economic recession, like we are experiencing in the “rust belt,” can certainly drive a population shift away from that area.  But there is no inverse relationship.  A population decline cannot cause an economic recession, at least not in per capita terms.  Certainly, if the population of a country declines by 50%, then its GDP will decline too, meeting the technical definition of an economic recession.  But, for the remaining population, the per capita GDP will be just as high, if not higher.  They will not be worse off economically.  In fact, if such a country were over-populated to begin with, the remaining population will actually experience a dramatic improvement in their quality of life. 

This is something we all need to be aware of when we broach the subject of population management with people – the fact that they have been conditioned to think of it in negative terms because of the muddling of cause and effect in situations that they’ve seen before. 

Pete


A 3-Year Recession?

February 27, 2008

http://www.marketwatch.com/news/story/bernankes-recession-here-11-reasons/story.aspx?guid=%7B39D13A23-5028-4976-9883-BB1975099038%7D

I thought this was a great article.  I can’t find fault with any of Paul Farrell’s 11 reasons, and most of them can be tied either directly or indirectly to our trade deficit.  Will the recession last until 2011?  Well, I doubt it.  I believe that the government will weave a new rug under which to sweep these problems more quickly than that.  But the next recovery won’t feel like much of a recovery (kind of like the most recent one) and the next recession will come sooner and be deeper than anyone would like.  But let’s get through this one first.

Pete


Is This Recession Just a Normal “Business Cycle” Recession?

February 7, 2008

I don’t see it that way.  This is actually the 2nd recession that is a direct result of the effects of a rising population density and/or attempting to engage in free trade with nations much more densely populated than ourselves. 

The first occurred in ‘91-’92.  At that time, the downsizing of companies in response to foreign competition was fierce.  Every day, more companies announced tens of thousands of job reductions.  It was pretty tough to avoid a recession in that environment. 

That recession was ended by a confluence of three factors:  (1) A wave of optimism that accompanied the election of Bill Clinton, who vowed to turn the economy around, (2) a high-tech explosion that introduced cell phones and the internet to the American economy in a big way, and (3) lower interest rates, although this last factor was dwarfed by the first two. 

The brief recession in 2001 was due to the bursting of the “dot-com” bubble and collapse of the NASDAQ stock market, followed by the effects of 9/11.

But the recession we now find ourselves in is the 2nd caused by the effects of population density which, over the years since the ‘91-’92 recession, have continued to grow.  But, during the period following the 2001 recession, these effects were masked by three things:  (1) unprecedented deficit spending by the government, (2) money fleeing the stock market and seeking shelter in real estate, driving the housing boom and, once again, (3) unprecedented cuts in the Fed’s interest rates, also helping to fuel the housing boom. 

But the housing boom couldn’t be sustained once the flight of money from the stock market subsided.  Lending standards were reduced in a vain attempt to keep it going, selling homes to people who couldn’t afford them because their wages hadn’t kept pace with inflation.  Now the debt binge is over.  Our foreign benefactors aren’t happy about losing their money and are demanding safer investments.  So the easy money that kept us going the last few years has dried up.  And, by this time, all those “high tech” jobs created during the ’90s, which at that time were ballyhooed as our economic salvation, had long since been exported, just like all of our other manufacturing jobs.  Now we’re left to face reality – an economy with a manufacturing sector, one of the key pillars of any economy, that has been almost completely gutted.  Even jobs in the services sector, another one-time supposed savior, have been fleeing the country. 

How will we pull ourselves out of this recession?  Well, although it was our debt binge that papered over our economic problems for the last few years, the government believes we need to make it easier for Americans to keep borrowing and spending.  They are printing money to lavish on the banks to artificially shore up their reserves.  They want Fannie Mae and Freddie Mac to be able to make bigger loans.  All of this will ultimately make these entities more insolvent.  It will probably work for a while and this recession will end, but our problems will continue to grow.

This isn’t just the normal business cycle at work.  The government is running out of rugs under which to sweep our problems.  Until they come up with some way to restore balance to our trade picture (and tariffs are the only way), the underlying problem will continue to grow, regardless of what else they do.  Count on it. 

Pete


Middle Class Can’t Afford Homes

January 31, 2008

http://money.cnn.com/2008/01/29/real_estate/Housing_unaffordability_persists/index.htm?section=money_mostpopular

This article is proof of what I’ve been saying about our current recession.  You have to look past the most obvious symptoms – like the burst of the housing bubble – to find what’s really going on if we want to take meaningful action. 

Even in spite of the decline in housing prices, the middle class still isn’t even close to being able to afford an average home.  Why?  Because incomes haven’t kept pace with inflation?  Why?  Because we’ve carved out much of the entire manufacturing sector of our economy and given it away to foreign countries for nothing in return. 

Labor obeys the law of supply and demand as much as any other commodity.  Take away a big piece of the labor demand and the price will drop.  Wages will go down.  Balance our trade equation with a tariff structure (one indexed to population density), and that demand for labor will come back home and restore wage growth. 

We can cut interest rates and pass stimulus packages until the cows come home; in the long run it won’t make a bit of difference in stemming our economic decline.  We have to take meaningful action to address real problems instead of treating only the symptoms.  You can’t cure the flu by wiping your runny nose.  Neither can we fix our economy with actions that don’t address the real problem.

Pete