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Tilting at Windmills

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January 30, 2008
By: Kevin Drum

NEXT STOP: RECESSIONVILLE....Fasten your seatbelts. Economic growth is tanking and inflation is spiking:

Gross domestic product rose at a seasonally adjusted 0.6% annual rate October through December, the Commerce Department said Wednesday in the first estimate of fourth-quarter GDP.

Aside from the housing slump, slowing consumer spending, inventory liquidation and lower overseas sales restrained the economy. The 0.6% pace wasn't only much slower than the third-quarter's racing 4.9%, it was far below expectations on Wall Street.

....The price index for personal consumption expenditures rose by 3.9% after increasing 1.8% in the third quarter. The much-watched PCE price gauge excluding food and energy increased 2.7% after rising 2.0% in the third quarter.

It looks like Alan Greenspan was right: his successors are going to have a much harder job than he did because they won't have the luxury of working in a low-inflation environment. Greenspan could focus on economic growth without worrying much about stoking inflation, but Ben Bernanke can't. He's got a housing bubble that's blown up, a credit crunch, slowing consumer demand, and rising inflation. The right policy response is tricky and delicate.

Kevin Drum 12:45 PM Permalink | Trackbacks | Comments (60)

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Comments

Greenspan's "legacy" and "brilliance" looks worse by the day.

Posted by: Jimm on January 30, 2008 at 12:52 PM | PERMALINK

i think this situation absolutely requires that a really futile and stupid gesture be done on somebody's part.

Posted by: cleek on January 30, 2008 at 12:52 PM | PERMALINK

Economic growth is tanking and inflation is spiking

And the Fed's reaction is, of course, going to be to continue to prop up bubbles and stoke inflation.

Posted by: Disputo on January 30, 2008 at 12:55 PM | PERMALINK

Greenspan could focus on economic growth without worrying much about stoking inflation

WRONG! It's true that Greenspan didn't worry about inflation, but he sure as hell should have! His policies of easy credit are a big part why we're in this mess.

Posted by: afferent input on January 30, 2008 at 12:57 PM | PERMALINK

I'm not so sure we're going into a recession. The 3rd quarter growth in GDP was so large that it set a high benchmark for the 4th quarter. If you combine the 3rd and 4th quarters, the average GDP growth in these two quarters was 2.75%, which is not too bad.

Posted by: ex-liberal on January 30, 2008 at 12:58 PM | PERMALINK

NEXT STOP: RECESSIONVILLE

Actually, your quotes prove we are not in a recession. Right now we have a GDP of seasonally adjusted 0.6%. But according to useconomy.about.com/od/grossdomesticproduct/f/Recession.htm
"The official definition of recession is when GDP growth is negative for consecutive two quarters or more."
Since 0.6 is positive and not negative, we are not in a recession - not even close.

Posted by: Al on January 30, 2008 at 1:01 PM | PERMALINK

ex-liberal: good point. If you combine by net worth to Bill Gates', you get an average of around $28 billion, which is not too bad.

Posted by: josh on January 30, 2008 at 1:02 PM | PERMALINK

LMAO @ ex-lib's "everyone did their Xmas shopping four months early" theory.

Posted by: Disputo on January 30, 2008 at 1:03 PM | PERMALINK

Stagflation! Ahhhhhh!!

Posted by: Steve W. on January 30, 2008 at 1:04 PM | PERMALINK

Also LMAO @ Al who doesn't know the difference between 07Q4 and 08Q1.

Posted by: Disputo on January 30, 2008 at 1:05 PM | PERMALINK

This did not occur by accident. Itls the war, stupid. A trillion dollars flushed away matters. Secondly, how can we not consider energy and food when discussing this economy? My God, oil inflation is, what 400-percent over the last few years? That number has helped some elites and oilmen, but has tanked the economy. There is no rational way to prop up the economy that does not involve a Presidential resignation. The man is clueless and was given free reign by a now hand-wringing press. Bush is a disaster in all ways. His malfeasance and incompetence are as bottomless as this recession. Let's put the blame where it belongs. He had no business running a paper route.

Posted by: Sparko on January 30, 2008 at 1:07 PM | PERMALINK

On Yahoo news is an article talking about an interview Greenspan gave to german press, that is supposed to come out tomorrow.

Greenie says there is nothing the Fed can do to stop the recession from coming on.

Things are starting to tank on Wall Street now.
Tomorrow should be a good bloodbath. Cause we all know that when Greenie speaks, the world takes his words as biblical.

Posted by: optical weenie on January 30, 2008 at 1:14 PM | PERMALINK

>"Ben Bernanke can't. He's got a housing bubble that's blown up, a credit crunch, slowing consumer demand, and rising inflation."

Don't forget a runaway trade deficit and collosal federal budget deficit.

The argument is correct though, there is nothing the Fed or US government can do for a quick fix this time around. They may have a bucket, but all the wells are dry.

Another 'nasty little secret' (via MetaFilter this morning...) 92 US banks are technically insolvent already (negative reserves) and are being kept afloat by the new emergency funds transfer mechanism... to the tune of $50 billion or so. Names of the banks are being kept secret.

Hmmm... do ya figure that maybe the USA shouldn't have given up control of it's own currency to private bankers?

Posted by: Buford on January 30, 2008 at 1:20 PM | PERMALINK

Josh,

While it is important to use care when taking averages in this case the difference between percents and value is important. It is that difference that make the point that ex-liberal is relying. That difference also makes his point not ridiculous.

Posted by: AMW on January 30, 2008 at 1:21 PM | PERMALINK

All of the newly impoverished should build their Hooverville in Crawford, TX.

Posted by: Brojo on January 30, 2008 at 1:25 PM | PERMALINK

92 US banks are technically insolvent already

Back in the day there used to be runs on banks if they looked to be going under. Now with deposit insurance this no longer happens, but without sufficient regulation it's an invitation for dishonest operators to run private banks into the ground and leave the taxpayers with an expensive mess to clean up.

BTW, didn't the last Bush administration also leave behind a massive, expensive mess in the banking sector?

Posted by: jimBOB on January 30, 2008 at 1:27 PM | PERMALINK

0.6% my ass. This number is undoubtedly fudged just like every other number that comes out of this administration. My guess is that the actual number is very negative. They wanted to fudge it up to about 2% but that would have been way too much, so they settled on 0.6%.

Hey? That's better than half a percentage point!

Posted by: elmo on January 30, 2008 at 1:29 PM | PERMALINK

cleek - we're just the guys to do it.

Posted by: kenga on January 30, 2008 at 1:29 PM | PERMALINK

At best, it is Stagflation.

But my bet is that the numbers are fudged and that .6 will be negative quite soon.

Posted by: Chris on January 30, 2008 at 1:38 PM | PERMALINK

For much of his tenure Greenspan was able to work with President Clinton, Treasury Secretary Rubin and Lawrence Summers. Bernanke has to clean-up after Greenspan's work with G.W. Bush, Karl Rove and an assortment of forgettable, mediocre intellects in the Treasury Department. Competence matters. It will be at least 13 months before Bernanke can rely on competent support from within Treasury.

Posted by: rk on January 30, 2008 at 2:08 PM | PERMALINK

Inflation spikes and the Fed cuts another .5%, just to give it a little boost I suppose.

One word people. SAVE. Don't be the dumb ass that spends all he/she has to save the economy, You'll end up on your own and broke.

Posted by: elmo on January 30, 2008 at 2:20 PM | PERMALINK

Oh, if you have to spend, hit the garage sales early so you don't miss out on the really good shit...

Posted by: elmo on January 30, 2008 at 2:22 PM | PERMALINK
the average GDP growth in these two quarters was 2.75%, which is not too bad.ex-lax at 12:58 PM
You could look to Bush's overall record of growth

Kennedy-Johnson -- 5.2%
Clinton -- 3.6%
Reagan -- 3.4%
Carter -- 3.4%
Nixon-Ford -- 2.7%
Bush II --2.6%
Bush I --1.9%

It's a record that only a daddy would point to with pride
This should be labeled the Second Bush/Greenspan recession.

Posted by: Mike on January 30, 2008 at 2:35 PM | PERMALINK

This train does not stop at Recessionville; we're on the express that goes straight to Stagflationtown.

Posted by: cmdicely on January 30, 2008 at 2:39 PM | PERMALINK

Elmo,
You gonna list what you got for sale in your garage. I have a whole dollar just itching to be spent in my pocket.

Posted by: optical weenie on January 30, 2008 at 3:05 PM | PERMALINK

Save? With high inflation and low interest rates? Inflation penalizes every saver. We are screwed no matter what we do.

I agree with ex-lib though. If you average out the entire GDP since we started keeping track you will see that we never even had a Depression. It was just made up by those evil liberals to promote their socialistic agenda.

Posted by: Tripp on January 30, 2008 at 3:26 PM | PERMALINK

I like Henry C. K. Liu. His "A Failure of Central Banking" was good reading.

Posted by: Brojo on January 30, 2008 at 3:31 PM | PERMALINK

We are screwed no matter what we do.

Cool Tripp, then you won't mind if I take all your cash...

Posted by: elmo on January 30, 2008 at 3:43 PM | PERMALINK

No problem elmo. Looking in my pocket I've got about 38 cents. Take it.

Posted by: Tripp on January 30, 2008 at 3:47 PM | PERMALINK

38 cents Tripp? Why that is like having a 2009 dollar! Wow. Got any Pesos?

Posted by: Sparko on January 30, 2008 at 3:56 PM | PERMALINK

LOL!

Posted by: elmo on January 30, 2008 at 3:56 PM | PERMALINK

And, with a panicky half-point rate cut, Big Ben just blew it again. The ECB will once again NOT follow, I predict, and our dollar goes further in the tank. And, the rate cut will do little to help the housing market.

Posted by: SocraticGadfly on January 30, 2008 at 4:04 PM | PERMALINK

i think this situation absolutely requires that a really futile and stupid gesture be done on somebody's part.

The GOP are calling (as always) for Bush's tax cuts to be made permanent.

QED.

Posted by: Gregory on January 30, 2008 at 4:11 PM | PERMALINK

The US, usually through the IMF, tells countries that have managed their economies as poorly as the US has that they have to reduce consumption, reduce public spending and increase their savings. The US is not being asked to do these things, but is borrowing even more money to give to consumers so they will consume more. The train stops at Stagflationtown, then goes to Hyperinflationbad, and winds up in Depression Parish at the end of the line. I want to go back to Petticoat Junction.

Posted by: Brojo on January 30, 2008 at 4:23 PM | PERMALINK

There's a Hooters down the tracks from Petticoat Junction.

Posted by: Uncle Joe on January 30, 2008 at 4:35 PM | PERMALINK

sparko,

Got any Pesos?

No, but ten years ago when I returned from England I smartly brought five Pound coins back as souvenirs.

I figure in 2010 I can use those to buy a US car!

Posted by: Tripp on January 30, 2008 at 4:44 PM | PERMALINK

Inflation? Just the ticket to buy our way out of years of deficits. If we just devalue all those dollars we borrowed in the past...presto!

Posted by: Quaker in a Basement on January 30, 2008 at 4:58 PM | PERMALINK

Quaker,

Well, yeah, inflation is great for the debtors.

For those of us stupid enough to save or invest or have a fixed pension coming, well, not so much.

But I was thinking. If you average out the price of gas from when it first became available until now you will see that the price never went up! It stayed average.

Ex Liberal took actuarial science so he can tell you that's true.

Posted by: Tripp on January 30, 2008 at 5:05 PM | PERMALINK

This mess was a long time coming.Could war in Iraq have been to raise the oil price? Inflation will bail out debtors better than anything.

Posted by: dr dipstick on January 30, 2008 at 5:07 PM | PERMALINK

For those of us stupid enough to save...

So, your saying it's smarter to spend because having no dollars is better than having a deflated one?

I rolled my 401k into Euro funds over a year ago...

Posted by: elmo on January 30, 2008 at 5:25 PM | PERMALINK

"I rolled my 401k into Euro funds over a year ago..."

Bullshit

Posted by: Billy Bob on January 30, 2008 at 5:39 PM | PERMALINK

Don't be a player hater, Billy. I got your bullshit right here...

Posted by: elmo on January 30, 2008 at 6:01 PM | PERMALINK

cleek: i think this situation absolutely requires that a really futile and stupid gesture be done on somebody's part.

They (the Fed Board of Govs) has already made that gesture, repeatedly. Now, Congress is going to follow suit, by passing the Wall Street bailout . . . I mean stimulus, package.

Everytime the Fed cuts rate or Congress "stimulates" the economy, the price of gold, oil and ag commodities goes up. Socratic Gadfly (4:04 pm) nailed it.

Posted by: DevilDog on January 30, 2008 at 6:17 PM | PERMALINK

At least Ben doesn't have to deal with that dangerous surplus Greenspan helped slay.

Posted by: jimbo on January 30, 2008 at 7:10 PM | PERMALINK

Don't take it so hard, Tripp. With a little Tabasco, cat food tastes just like...well, cat food and Tabasco, but it's full of protein.

Posted by: Quaker in a Basement on January 30, 2008 at 7:14 PM | PERMALINK
So, your saying it's smarter to spend because having no dollars is better than having a deflated one?

Presuming that what you spend the dollars you save provides greater utility than the expected utility of the declining dollars, yes. Having no dollars but some other thing of value is better than having dollars that over time provide less value than thing on which dollars could have earlier been spent.

Posted by: cmdicely on January 30, 2008 at 7:29 PM | PERMALINK
Well, yeah, inflation is great for the debtors.

Only from the standpoint of considering the relationship between their debt and the value of the goods and services that make up the inflation index used. If inflation isn't matched with, say, wage level increases, its not really good for debtors who work for a living and don't have substantial fixed (and, presumably, appreciating the same way as the inflation index) assets they could sell to pay off their debt.

Inflation, combined with stagnant wages, combined with decline in the value of the one significant asset (homes) that most people are likely to own is really, really bad for most real debtors, however good inflation might be for some idealized theoretical construct of "debtors".

Posted by: cmdicely on January 30, 2008 at 7:34 PM | PERMALINK

Does GDP bear any relationship to wealth?

Posted by: Luther on January 30, 2008 at 8:14 PM | PERMALINK

There is a way out of this, but we're going to have to sharply cut consumption of imported oil and drastically increase energy efficiency to bring down the energy share of GDP. Reintroduce steeply progressive income tax rates for people with incomes over $200K and use that money for spending instead of inflationary borrowing.

Posted by: Doc at the Radar Station on January 30, 2008 at 8:27 PM | PERMALINK

Currency?

It's all make believe!

The only things that matter are Gold and Oil - and those two markets are rigged and controlled by a very few colluding players.

So yeah - Greenspan had the luxury of $20/bbl. oil. Then Bush manipulated the petroleum market by starting a war in the Middle East. (and if you did not know this was going to happen when he was elected in 2000 - I'm saying it right now, you're STUPID - I made enough money on petroleum to offset my tech losses, but not my construction losses. At least I was smart enough to buy a more efficient car.

Now that we live in an era of $100/bbl oil, and there's not much that's going to bring it back down, I'd say Bernanke is screwed. We're all screwed. We need energy to survive. The second law of thermodynamics is going to bend us all over and have its way with us now. It was fun while it lasted, that nice extra little energy store that mother nature socked away underground for us for a few hundred million years. But we blew it all in the space of a few decades. Homo Sapiens: Stupidest species in the Universe.

Posted by: Mister Bogus on January 31, 2008 at 3:49 AM | PERMALINK

Presuming that what you spend the dollars you save provides greater utility than the expected utility of the declining dollars, yes. Having no dollars but some other thing of value is better than having dollars that over time provide less value than thing on which dollars could have earlier been spent.
Posted by: cmdicely


I've been singing this tune for couple of years now. Can ya'll hear me yet?

Go long on wheelbarrows.

THE ROAD TO HYPERINFLATION, Part 2
A failure of central banking
Henry C. K. Liu

[selected excerpts]

[snip]

'The last decade has been the most profligate global credit expansion in history, made possible by a new financial architecture that moved much of the activities out of regulated institutions and into financial instruments traded in unregulated markets by hedge funds that emphasized leverage over safety. By now there are undeniable signs that the subprime mortgage crisis is not an isolated problem, but the early signal of a systemic credit crisis that will engulf the entire financial world. '

[snip]

'The role central banking plays in support of this systematic fleecing of the helpless poor everywhere around the world to support the indigent rich in both advanced and emerging economies has been to flood the financial market with easy money, euphemistically referred to as maintaining liquidity, and to continually enlarge the money supply by financial deregulation to lubricate and sustain a persistently expanding debt bubble.'
http://www.atimes.com/atimes/Global_Economy/
JA30Dj03.html

'Money is not wealth. It is only a measurement of wealth. A given amount of money, qualified by the value of money as expressed in its purchasing power, represents an account of wealth at a given point in time in an operating market. Given a fixed amount of wealth, the value of money is inversely proportional to the amount of money the asset commands: the higher the asset price in money terms, the less valuable the money. When debt pushes asset prices up, it in effect pushes the value of money down in terms of purchasing power. In an inflationary environment, when prices are kept high by excess liquidity, monetized wealth stored in the underlying asset actually shrinks. This is the reason why hyperinflation destroys monetized wealth.'

'It is clear that the developing pains of the credit crisis of 2007 are not evenly borne by all, with a select few who had caused the crisis walking away with millions in severance compensation, and the few who are selected to restructure the financial mess no doubt will gain millions, while the mass of victims are losing homes, jobs and pensions, with no end in sight. The trouble with unregulated finance capitalism is not just that it inevitably produces boom and busts, but that the gains and pains are distributed in obscene uneven proportions.'

Posted by: MsNThrope on January 31, 2008 at 11:41 AM | PERMALINK

Too funny by half:

It was fun while it lasted, that nice extra little energy store that mother nature socked away underground for us for a few hundred million years. But we blew it all in the space of a few decades. Homo Sapiens: Stupidest species in the Universe. Posted by: Mister Bogus

The very idea that geologic processes set in motion tens of millions of years ago had ANYTHING to do with the eventual, but probably fleeting, hegemony of a particularly clever but rapacious primate species is just hilarious.


"After 10 full years inside the GOP, 90 days among honest criminals wasn't really any great ordeal."- Allen Raymond

Posted by: MsNThrope on January 31, 2008 at 11:46 AM | PERMALINK

Quaker,

Don't take it so hard, Tripp. With a little Tabasco, cat food tastes just like...well, cat food and Tabasco, but it's full of protein.

Actually the last time I checked cat food, at least the canned kind, cost more that some human food like a can of Hormel hash or tuna.

But I do know that the 'flavored' dog biscuits, the kind with the different colors and shapes (cheese, beef, bacon, etc) all taste exactly the same. Kinda gritty but not too bad really.

Posted by: Tripp on January 31, 2008 at 11:56 AM | PERMALINK

I wonder if it will ever become economical to 'mine' our land fills and the oceans for plastic? There are areas the size of Texas in the oceans just full of plastic, killing the jellyfish and birds who try to eat it.

Posted by: Tripp on January 31, 2008 at 12:02 PM | PERMALINK

Presuming that what you spend the dollars you save provides greater utility than the expected utility of the declining dollars, yes.

The average joe needs to save his earning for food, shelter, you know...the necessities. But what the hell, go blow your tax rebate and paychecks on movies, nick-knacks and the such...

Posted by: elmo on January 31, 2008 at 12:04 PM | PERMALINK

In other words Greenspan leaves his successor holding the bag for bad decisions HE MADE.

And history repeats itself once again....

Posted by: Sean Scallon on January 31, 2008 at 12:45 PM | PERMALINK
The average joe needs to save his earning for food, shelter, you know...the necessities.

Perhaps. The "average Joe" also has choices about how to buy these things, and may have choices about whether to buy them incrementally as needed or frontload purchases. Now, shelter may be difficult to frontload for the average joe, but then despite general inflation, housing prices seem to falling (don't know what rents are doing, though.) Food certainly can be frontloaded to a degree by buying less-perishable goods in bulk. Lots of necessities can be stockpiled, if there is reason to believe that that would be beneficial.

But what the hell, go blow your tax rebate and paychecks on movies, nick-knacks and the such...

"Spending" isn't limited to entertainment. If you expect the dollars you have right now are going to become worth substantially less in the near future, it makes sense to convert as many of them as possible into useful (including, obviously, necessary) goods that will hold their value better than you expect dollars to, rather than holding on to the dollars to spend over time.

Posted by: cmdicely on January 31, 2008 at 12:57 PM | PERMALINK

Greenspan could focus on economic growth without worrying much about stoking inflation

This is false. Greenspan's solution was to change the measure of the CPI so it appeared that there was less inflation. Using 1980's CPI methodology, inflation was 6-7% in the 1990s.

Posted by: Walker on January 31, 2008 at 1:03 PM | PERMALINK

It has been an honor getting my balls busted by you, dice. I shall be making more trips to Sam's Wholesale, the last thing I want to do is to have to start dipping into my retirement...

Posted by: elmo on January 31, 2008 at 2:27 PM | PERMALINK




 

 

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