Friday, February 6, 2009

The Economics of Stagnation

From the Always Uncertain Predictions Dept. comes today's exhortation to all economists: dust off your (very) old textbooks and learn to live with (and perhaps love) an economy in stagnation - at least for a few years.

To wit, our Cloudy Ball predicts that, unlike previous economic cycles, the US will not see a rapid rebound after the current recession hits bottom and will instead scrape along at a -1% to +1% rate. Let's look at what the Ball is seeing..

Exhibit En (I'm counting in Danish today): Population growth has been declining from 1.4% annually in the early 1990's to 0.8% now. Population is (always) destiny; in recent years its growth came mostly from foreign immigration and that's going to slow down further as the recession bites and creates fewer opportunities for migrants.

Annual Population Growth (%)

Exhibit To: Layoffs are at the highest level in 27 years. More importantly, continued claims for unemployment insurance are at 4.8 million - the highest ever - meaning that laid-off workers cannot find a job quickly. And most importantly, prospects of a quick rebound in job creation are dim because of the nature of the economy: low-end service jobs, part-time jobs and underemployment are widespread.

Continued Claims for Unemployment Insurance (thousands)

Exhibit Tre: Pre-consumption. The explosion of debt meant that in previous years people consumed much more than they needed to, or could afford, versus their income. Household debt soared from 60% of disposable income to 102% in a mere eight years. Remember home equity loans, the house-as-credit-card scheme? People satisfied their consumption needs far into the future and won't be back spending with abandon any time soon. Putting it another way: don't overestimate the American consumer.
Soaring Debt for Households

Exhibit Fire: Saving is the new ethos. For an economy that's 75+% consumption the result is obvious, at least until we replace the borrow-spend-inflate assets model with a work-save-invest model. As they say in the fashion business, black is the new red.

Save For A Stormy Day

Exhibit Fem: Interest rates for long term Treasury bonds are at lows not seen in multiple decades (10-year bonds touched 2.1% before rebounding to 2.9%), even with quantitative easing and fiscal stimuli in unprecedented amounts. The bond market, at least, is betting heavily on a long, drawn out period of economic weakness, most probably out-and-out-deflation.

Gentlemen Prefer Bonds


  1. I wonder if you see the possibility of a sovereign default in a big western country (US, Canada, UK, eurozone, Switzerland)? I mean with nations going on a massive debt binge this year, there might be problems in financing all this crazyness. Note that eurozone countries cannot print money at will, and that the UK might be guaranteeing lots of debt denominated in foreign currencies.

    My point is, if there is some sort of big sovereign default it seems to be that chaos might follow (Iceland was small, now imagine Ireland or the UK defaulting)...

  2. I can't disagree with your assessment but I question what the bond market is telling us regarding deflation. Since bonds bottomed (or yields topped) in 1982, we have had relatively low inflation but inflation didn't out and out disappear over the past 25+ years. In fact by the time 2006-2007-2008 came around, one could argue that inflation was beginning to rage (look at housing, input costs like oil, food prices, etc) but the bond marke didn't spike in response to that inflation scare. I would almost argue that inflation is baked into the system and that bond yield have touched or are touching their highs (yield lows) from a 25+ year bull market. This would signal to me that inflation will be here sooner than you think, despite the very real deflationary scare right now. Who knows but thanks for the great work.

  3. It sounds like it might be a good time for some of the unemployed to look at getting a new vocation.
    There are many trade schools available at reasonable price. Tap into what direction our Country is going and what will be the biggest needs..example health care, new car technology, housing. It's out there just have to roll up you sleeves and go get it.
    This recession may take longer to get out of, but there are opportunities out there.

  4. Given the real effects of workers saving to survive later " those who know there work is going away soon " how can we factor inflation as even a near term consideration?
    As more see the sign of the times
    it will be as Hell has conveyed.
    Banks held to down right contempt. The overall funds left namely 401k
    thats when the wheels fall off there fiat named demand? I guess what I mean is Capital and Labor ability to steer back to reality in the first place. Permagrouwth as we know is crippled if not dead for some time now and stagflation is the morning after. The real question still is the Govenment blood alcohol .08 or 4.0
    A 4.0 as to be so hammered it may not wake up as we ever will wait to see. This drunken horny sailor we know as Government still is so hammered years will tell not Stagflation which only measures the staggering path its still on? The brain of a oxymoron called government is damaged beyond repair "debt" and time conveys it only exists as politic in fear to its survival and nobody can fix it until it dies anyway. The meek will inherit the earth? What ever is left is the real question anyway. Numbers are great but there still blind anyway to those in power to public service in the true sense of reality. IMO

  5. Demography is fate, yet no one could establish a direct relation between population growth and economic activity. Taiwan for example was depopulating for a generation yet growing at 6 - 10% per year. Contrary examples abund, see Ethiopia or Bolivia with their decaying GNP.

  6. Say hello to my little friend deflation!

  7. Geez, good ole U.S. of A, welcome to the club !
    Western European economies have been exhibiting almost all of these features for quite some time now !
    Could it possibly be a major metaphysical crisis that sums us to get our acts together and find some MEANING in our lives that buying and spending doesn't give ?
    And, I'm afraid that I disagree with you on the ability to predict this time.
    It seems to me that we are oh so tiringly predictable. After the spending binge, the hangover, and the Scrooge reaction.
    I rather like John Maynard Keynes.
    He was such a baroque person and economist.
    His solutions, by going against a certain "common sense" (careful, I didn't say ALL common sense...) involved a kind of grace that the judeo-christian ideologies tried to bring into people's lives.
    Here we are in front of our angst at retirement.
    What are we going to live on if we don't SAVE ?
    This is where society's VALUES chip in : solidarity ?
    Scrooge ?
    Even Scrooge saw the light at the end, thank God.
    We ought to go back and read our Dickens.
    The nineteenth century was asking itself these questions, too.
    And WE still need to find these answers...

  8. The whole thing scares me...for the first time in my life I am afraid for the USA.
    Hell, it sounds like your an Obama Man, but the guy scares me. He is likable, and obvious a very smart person, but there is just something about him that is going against the grain of the freedoms Americans have.
    It scares me because he is steering us right into a communistic society...yes, I said it.
    It scares me because he has so much power and people like him so much..that the following is sort of dictatorship. It reminds me of the Pi Piper. Why is Washington so concerned about how many homes have their TV's fixed?? Are we going to be hearing from Washington more often, over TV broadcast?? Look, same thing goes with taking responsibility for you life. You either have cable and are cool, or you get on the phone and get a converter box...if you don't, you don't have a tv...but, no the Government has to step in and make a big bill out an issue that should be a personal responsibility.
    Sort of off the subject, but just a comment.
    Thanks for the blogs..they are great.

  9. Save and invest?

    But in what?

    Real estate?
    Auto and auto parts manufacturing?
    Semiconductor fab plants?
    LCD/plasma TV/display manufacturing?
    PC manufacturing?
    Other consumer electronics manufacturing?
    Container ships?
    Agricultural production?

    In what do we not already have a glut of productive capacity relative to consumer demand (and purchasing power), as the world's markets are now structured?

  10. Question: "In what do we not already have a glut of productive capacity relative to consumer demand (and purchasing power), as the world's markets are now structured?"

    Answer: A Green Energy Grid.

  11. I agree. This is a new era, and Green is the color.
    If your a Jr. in High School, or a old goat, like me, the future is in Green. Go where the Future is, and think outside the box - how Green can be used?
    I will always remember my Six Grade teacher, who gave us a lecture about how Computer's will be the jobs of the future. To this day, I can't believe how much that lecture influence me. And,I even remember thinking, "then that is what I will do"..and I did.