Friday, January 18, 2008

Bad Medicine

The government has finally admitted that the Fed can't by itself prevent a recession and is now working to come up with a fiscal stimulus package.

(Open Parenthesis: The NY times yesterday ran an 8,000-word Ben Bernanke hagiography by Roger Lowenstein (
"The Education of Ben Bernanke"), accelerating its publication from this coming Sunday, to coincide with yesterday's testimony to Congress. It's a must read, as far as Beltway whitewashes go: it includes a lengthy explication of the Fed's history and limited power to shape the economy and blames Alan Greenspan for everything. What is poor, poor Professor Ben to do? Not subtle, but, then again, it wasn't meant to be. Close Parenthesis).

President and Congress are looking for a "quickie" economic stimulus package that will consist of personal tax cuts or rebates, plus some form of corporate investment incentive (e.g. faster depreciation). The whole thing is expected to come in at around $100 billion, or 0.70% of GDP.

Judging from the remedy being considered, it is clear that the diagnosis is grossly wrong. The doctors are prescribing aspirin to a patient whose splitting headache is caused by a brain tumor and not the hangover from last night's overindulgence. Let's look at the "medical" evidence - I won't provide charts because they have been posted here numerous times already.
  • Record high ratios of debt-to-GDP and debt-to-income.
  • Record high debt service ratio (debt payments-to-income).
  • Zero/negative saving rate; a hand-to-mouth existence.
  • Stagnant earned income growth.
  • Smallest job growth for a recovery ever (since at least 1940)
  • Low quality of new jobs, loss of high value-added manufacturing.
  • Rising disparities in wealth and income.
  • A generational time-bomb ticking away - baby boomer retirement.
Say you are a doctor, and this 350-lb smoking, drinking patient with asthma, high blood cholesterol, diabetes and heart disease walks into your office complaining of a headache. Obviously, you can't cure him overnight - but to just ask him if he had too much to drink last night is really, really bad medicine. The fellow needs a lifestyle overhaul, or he will be pushing up daisies soon enough.

"Take two and call me in the morning" is inadequate, irresponsible and dangerous for America's economic health.


  1. To add:
    - looming resource shortages
    - price of food and fuel increasing (due to shortages, erosion, global warming, etc)

    I think James Kunstler exaggerates a bit when he rants about the demise of suburban model of US life, but not too much.

    Your recipe for new energy infrastructure is the only sensible in the longer run - not only for the USA but for the rest of the world as well.

  2. Right ! but it does not mean that we should not increase social protection in this environment. probably a traditional budget deficit policy will not help to stimulate the economy, so the purpose of the government is to help people who will suffet from the necessary economic adjustment. By the way this situation reminds me so much the budget discussions in Japan in the early 90's ("supplementary budget" was the word !)
    Best regards¨

  3. Somewhat OT, but I think of interest to readers here given that it has been discussed before:

    Credit Default Swap graphic from the Big Picture blog.

  4. The fiscal stimulus is a palliative. It may reduce the pain a little and may not even do that if people use the money to pay off credit card debt.

  5. Hellasious:

    The lack of savings, extraordinary amount of debt, etc. would not be a problem if those resources had been allocated to productive causes.

    The operative question is "how do you get individuals to direct their expenditures into more productive directions?"

    My wife, of her own accord, came up with the idea of spending $12,000 of her own money to buy a wind turbine to generate power. One data point doesn't make a trend, but it provokes the question "where did that come from?".

    Reasoning from the specific to the general, I'm advocating a shift from "consumerism" to "producerism". It's never been easier, or cheaper, or more possible to create things, but actually very few of us do much of it.

    If we were a nation of creators, the debt wouldn't the problem, it would be the enabler.

    In your earlier posts, you made the synaptic leap from "got too much debt, that's bad" to "got an economy that isn't producing anything, that's bad".

    Would you consider applying your analytical and communications talents to the question of leading our society off the couch and into the workshop?

  6. "Say you are a doctor, and this 350-lb smoking, drinking patient with asthma, high blood cholesterol, diabetes and heart disease walks into your office complaining of a headache."

    That was in 1999. Today a few more complications have developed.....

    Today our patient is a 350-lb crack smoking, heroin shooting, cigarette smoking, drinking patient with asthma, kidney and liver failure, high blood cholesterol, diabetes and heart disease. Who lives in a perpetual state of denial....


    And hope for the best.

    Best regards,


  7. ...irresponsible and dangerous for America's economic health.

    In other words, the status quo, policy-wise.

  8. Sending out checks for a few hundred dollars seems to me a bit like pissing in the ocean after being stung by a jellyfish -- missing the point, but not really causing any harm.

  9. Well, I'm hoping they've decided to let the s*** hit the fan now when we're 12 months away from the next set of audited financials.

    The very fact that it looks like they've given up trying to find a way to sweep the 500-lb drug-addicted gorilla under the carpet is a step in the right direction. Even if the only medicine you've got to give your druggie patient is aspirin -- it's still better to put him in detox -- and give him the aspirin.

  10. Not on topic but of interest I would think.

    What the hell went on with 3-mth Tbills yesterday and today?

    Wanting minds inquire to know.

    Set Time = 1 Month.


  11. Forget the prescriptions for a minute - focus on the matter on hand. Specifically ask yourselves; what are my assumptions about a modern economy? Whence it came? Where it is? Whither it goes?

    In other words is it a given that an economy MUST grow in order to thrive - (like a shark must continually swim forward). Or do you have some other sort of model?
    I am presuming your ideas for rescuing the US economy have some underlying beliefs.

    Next ask yourself how the current mess was created, NOT who made it, rather HOW it was made so!

    At this point you should have a reasonable idea whether or not the problem can be resolved by human design or will resolve itself!

    I read that NYT article by Lowenstein - pretty sad stuff. However, if you have not yet read it I suggest you only read as far as the end of the first paragraph, then STOP. Now, read Bernanke's speech of Jan 10th 2008; url the
    Now finish the Lowentein article. Ben is clueless about a depression!

    The situation reminds me of a pilot who got AAA for Take-off and In-flight, but FFF for Landing.

    Brian P

  12. It's interesting. Ask most folks on these boards if they like the idea of tax cuts and they are in favor of those. When it comes to giving back to the rest of us, suddenly it becomes something besides a tax cut ;)

    As for what people spend this on, it is still going to go to companies, which will have a slightly less ugly balance sheet. Far better to give a rebate than one of those training programs that just gives money to the schools. If I do get a rebate, mine goes towards solar panels/water system/and gardening supplies.

  13. I remember very well the last downturns. Each time we had a sort of stimulus package with no long time effect. This is like farting in a huricane ! Cash and gold are king !

  14. long time reader. best blog out there. do you have any information / insight to why the baltic exchange dry index

    would fall off the map? i understood that this is a non-speculative tracking index of shipping rates.

  15. Re: Baltic dry

    This is an index that tracks SPOT charter rates for dry bulk carriers (coal, ores, wheat, sugar, etc). By spot is mean one voyage rates, as opposed to time-charter.

    Because of the way ships are built and financed these days,most vessels are time chartered. This way lenders are more certain that their loans will be properly serviced.

    This leaves fewer vessels available in the spot trade. If there is a sudden, temporary need for ships, rates can ramp up quickly - and just as suddenly go down after the demand goes away. This is partly what happened in the last few months.

    Also, there ARE freight forward contracts (i.e. futures) that trade OTC, though only for pros.

    The surprise was not the recent drop, but how high BDI had jumped. $180.000 per day for a Capesize was truly incredible money...


  16. With my $800 government handout, I'm going to buy one of these games for each of my daughters:

    Hello Kitty Shopping Spree Game (Bookworm Edition) The ultimate game of friendship, shopping and sharing.

    It’s a party for Tippy! Shop for a new outfit and buy a birthday present with this fun and fashionable Hello Kitty® board game. You can make ATM withdrawals, borrow money from friends, get discount coupons and even take express shuttles to your favorite stores! Be the quickest shopper as you collect your dress, shoes, handbag, hair accessory and gift so you can be dressed and at Tippy’s birthday party just in time to start the celebration!

    Ages 7+
    2-4 players

  17. Lewis Black on how to stimulate the economy