This Article Best Explains Our Present Economy

[Yavin4]

This column explains everything in a nutshell about our current economy and where it's heading. This explains everything from A to Z. It's a must read for anyone that wants to know the truth about where this economy really is and where it's heading:

http://www.thestreet.com/markets/detox/10134346.html

If you get into an economic argument with a freeper refer them to this source.

[Frodo]

1. I don't think I'll be quoting Eavis in my next econ conversation

The guy has a lousy track record.

[FreakinDJ]

2. Would like to see him wrong on both counts

The present economy crumbling and Bush winning in 04.

I have been wondering myself what is propping up this falsely inflated economy. There is "No Meat" behind it, kinda like a over inflated gas bag (sorry Rush no pun intended)

[Frodo]

3. You can almost count on him being wrong on one.

I have a preference on which one, but I suspect it will be the markets.

Last year he said Dow down 15% Nasdaq down 30%. He was only off by a tiny bit. (Yeah right).

As for "propping up" the economy. It's the same thing that has "propped up" every capitalist economy for the last 100 years. Debt.

[Yavin4]

5. The Only Reason Why He Was Wrong...

is because no one could forsee the Fed keeping interest rates this low for this long, which he details in this article. Instead of brushing him off, please tell us why he's wrong. Brushing somone off with explaining why he's wrong is how Freepers argue.

Frodo, why can't you see through what's really happening to the economy. It's not all wine and roses. Yes, indicators are up, but they should be given the enourmous stimuli that it's gotten. Soon, these stimuli will wear off, and the economy will collapse.

Our economy is like baseball players on steroids. Before the league began testing, there were several players that hit 50 or more home runs. As soon as steroid testing started, no player hit even 50.

[Sir_Shrek]

6. OK...

"Yes, indicators are up, but they should be given the enourmous stimuli that it's gotten. Soon, these stimuli will wear off, and the economy will collapse."

So when the lack of things making the economy good run out, it will go bad? I think that's how it usually works anyway.

[Frodo]

7. Sure, I'd be happy to.

He wasn't just wrong because interest rates mirraculously stayed low. Rates stay low while the economy is in the dumps because there is little need to raise them (and the effect on a week economy would be disasterous). You start raising rates after growth begins again and (hopefully) before inflation takes strong root. Also, stock prices are affected far more by profits (and anticipated future profits) than interest rates. The Nasdaq being up 50% instead of down 30% is NOT because interest rates are 100 basis points lower than he expected. He was simply wrong. And he didn't say his prediction was predicated on a particular fed policy... He DID say that Capital One was about to crumble to less than a third of where it is today.

He predicted that the morgage market drying up would severely "hit" some big banks (even though very few "banks" carry ANY mortgage assets worth worrying about). Rising rates actually HELP banks whose mortgage business is in the servicing side (instead of origination).
Really none of his individual stock predictions came true.

He was wrong (in virtually every respect) on his predictions for Iraq (and keep in mind that this year's predictions are similar predicated on non-economic events).

His predictions for Japan were wrong as well. Interestingly, they are based on the same "super-debt" theory that his US predictions for this year are. Notice that Japan is running a deficit almost twice as big as the US deficit and it's currency is not plummeting like ours. The major european nations are running a 3% deficit and we are running a 4% deficit while japan is at 7%. Yet we are to believe that the massive difference between 3% & 4% is devestating the economy but 7% is no big deal?

Further statements like "real world inflation doesn't show up in the government numbers" combined with " Without the growth in debt and consumption fueled by Greenspan over the past three years, we would have had deflation" just make him look ignorant. So we're not sure which economy-destroying monster is going to get us... but we're sure that one of them will.

We're sure that rates are going to kill us but "what could cause a rise in rates? Perhaps..." ????? This is not the stuff of economic analysis.

And then the reason that growth isn't going to solve the problems of the economy??? Bush didn't cut taxes ENOUGH. He ignores tha fiscal and monetary policy act hand in hand. It doesn't matter (in the main) if you juice the economy by cutting taxes OR by boosting spending.. They both shove up the deficit. Bush's use of that "tool" is hardly that much less than raygun's.


Frodo, why can't you see through what's really happening to the economy. It's not all wine and roses. Yes, indicators are up, but they should be given the enourmous stimuli that it's gotten. Soon, these stimuli will wear off, and the economy will collapse.

See what you're missing. Four months ago "indicators were up". Now it isn't "indicators" any more. The economy itself is clearly running warmer. Four months ago we were arguing about whether the leading indicators really meant what the economists said they did. NOW, virtually every number looks good and there is no question what is going on, but many here insist that it is all lies. YES there will be a reckoning, but not this year. What "really happening in the economy" is obviously being missed by all the experts.

[Yavin4]

8. My Rebuttal

So, why are rates at HISTORICAL lows. Aren't you a part of the rah-rah Bush economy crowd that keeps telling us that economy is roaring. How do you reconcile HISTORICALLY LOW INTEREST RATES with a Bush booming economy?

Also, stock prices are affected far more by profits (and anticipated future profits) than interest rates. The Nasdaq being up 50% instead of down 30% is NOT because interest rates are 100 basis points lower than he expected.

Right, and interest rate policies directly affect profits because interest expense is a drag on profits. Higher interest rates mean higher costs on business, consumers, suppliers, vendors, etc. Thus, what the Fed does has a direct bearing on stocks. If I'm wrong, then why does every word out of Greenspan's mouth is listened to on the Street as if it's the word of God.

The Nasdaq being up 50% instead of down 30% is NOT because interest rates are 100 basis points lower than he expected. He was simply wrong. And he didn't say his prediction was predicated on a particular fed policy... He DID say that Capital One was about to crumble to less than a third of where it is today.

If you read both columns together, you see that he is saying that the Fed is taking a huge gamble with its interest rate policy. By implication, you can clearly see that he's using the 2003 policy moves to explain why his 2003 predictions were wrong.

No one can be 100% accurate with their predictions, but his analysis of the Fed's actions are dead on. Also, his Iraq prediction was not far off from the truth.

Now, I know you're a rah-rah Bush economy supporter. That's all fine, but I'm here to warn you that you're making the kind of mistake that causes economic crashes. You're confusing debt growth with real growth. Every positive economic stat that you're seeing is built on the back of easy to get credit, and once that credit gets just a little bit more expensive, WHAMO! a crash.

[Frodo]

10. I'm afraid you don't get it/.

Rates were at historical lows for the entire Clinton presidency. it didn't change the fact that the economy was doing well. Without the specter of inflation, there was no need to raise rates. People who think there is THAT much difference between 2% and, say, 4.5% just don't have a long enough memory.

Since when did "low interest rates" become a bad thing? The whole point in balancing the budget under Clinton was that it would result in lower interest rates and people would save tons on their mortgages etc.

If I'm wrong, then why does every word out of Greenspan's mouth is listened to on the Street as if it's the word of God.

Because monetary policy is actually more than just an interest rate. But a 100 or 200 pt move in the Dow seems like big news THAT DAY, but is really trivial. I could easily see the Dow jump UP the first time the Fed raises rates (as it has gone DOWN in the past when they were lowered) because it signals that the Fed thinks the economy is TOO hot.


No one can be 100% accurate with their predictions,
But he's shown that you can come pretty darn close to 100% wrong.

Now, I know you're a rah-rah Bush economy supporter. That's all fine, but I'm here to warn you that you're making the kind of mistake that causes economic crashes. You're confusing debt growth with real growth. Every positive economic stat that you're seeing is built on the back of easy to get credit, and once that credit gets just a little bit more expensive, WHAMO! a crash.


Forget the "Bush" anything. I've been very consistent in calling it the way I saw it. The sky does not become purple if we determine that "blue" will help Bush get elected. BUT running around yelling that the sky IS purple WILL get us clobered. I've just called for a shift of message away from the two-issue "economy/Iraq" message and on to things Bush has done that WILL NOT change/improve prior to the election. One thing he says (and I'm sure you agree with him) is that the economy is likely to look REALLY good come November. HE thinks that means we automatically lose. It doesn't have to be that way unless WE keep the mantra "the economy, stupid" going.

As for credit/debt? What you don't get is that EVERY REAL is based in large part on increases in credit. The 80's massive debt increase gave us only a short recession in the early 90's. This spending actaully isn't as big (and the article says so) yet you expect a far worse result?

[Yavin4]

13. My Second Rebuttal

Rates were at historical lows for the entire Clinton presidency. it didn't change the fact that the economy was doing well. Without the specter of inflation, there was no need to raise rates. People who think there is THAT much difference between 2% and, say, 4.5% just don't have a long enough memory.

BULL!!! Check this link which clearly shows interest rate policy for the past 14 years:

http://www.federalreserve.gov/fomc/fundsrate.htm
Scroll down the page to see the Fed's interest rate policy chart

The lowest rate under Clinton was 3.25% and that was at the very beginning of his term. That was far from historical. He left rates low for one year only.

People who think there is THAT much difference between 2% and, say, 4.5% just don't have a long enough memory.

No, there's not that much difference between 2% and 4.5%, BUT there is a hell of a lot of difference between 5.25%, the rate under Clinton in 1996, well before the tech boom and 1% now under Bush at the end of Bush II's first term.

Since when did "low interest rates" become a bad thing? The whole point in balancing the budget under Clinton was that it would result in lower interest rates and people would save tons on their mortgages etc.

It's not a bad thing at all, when you have a balanced budget, but when you have historic deficits, which is what we have, it's horrible.

Because monetary policy is actually more than just an interest rate. But a 100 or 200 pt move in the Dow seems like big news THAT DAY, but is really trivial. I could easily see the Dow jump UP the first time the Fed raises rates (as it has gone DOWN in the past when they were lowered) because it signals that the Fed thinks the economy is TOO hot.

That's just plain wrong. Do you understand monetary policy at all? Do you understand that when the fed sets rates it affects all debts? So, if the Fed raises rates, that means less profits because of higher interest costs. Do you understand that?

Forget the "Bush" anything. I've been very consistent in calling it the way I saw it. The sky does not become purple if we determine that "blue" will help Bush get elected. BUT running around yelling that the sky IS purple WILL get us clobered. I've just called for a shift of message away from the two-issue "economy/Iraq" message and on to things Bush has done that WILL NOT change/improve prior to the election. One thing he says (and I'm sure you agree with him) is that the economy is likely to look REALLY good come November. HE thinks that means we automatically lose. It doesn't have to be that way unless WE keep the mantra "the economy, stupid" going.

It's extremely important for all Democrats to tell the public the truth that this recovery is built on a house of debt that will tumble if we don't take steps now to correct it.

As for credit/debt? What you don't get is that EVERY REAL is based in large part on increases in credit. The 80's massive debt increase gave us only a short recession in the early 90's. This spending actaully isn't as big (and the article says so) yet you expect a far worse result?

What you don't understand is that the difference between the debts of the 80s and the 90s is that we had a dominant industry that was creating spectacular growth. That industry allowed us to pay back that debt. That industry is the reason why we ran a surplus. Why we had low unemployment. That industry was IT.

We no longer have that industry around to bail us out.

Finally, your Freeper is showing. Whenever you need to rebutt an argument, you reach for the Clinton angle. That's twice in one thread where you've used Freeper arguing tactics.

[Frodo]

18. Again, you miss the point.

The difference between 2% and 5% is negligible when compared to fed rates in the mid 70's early 80's that were well into the double digits.

What you miss is that the Fed's primary mission (perhaps ONLY mission in some eyes) is to control inflation. They have done that successfully for the last twenty years or so through some dramatically different fiscal policy periods. Growth under Clinton got hot enough that inflation was a possiblity and they acted (a little too hastily in my mind) to combat that. When DEFLATION was the potential risk they went out of their way to fight THAT devil as well. 1% may not have been low enough if things hadn't heated up a tad last year. Japan actually hit 0% and couldn't fight it off.

It's not a bad thing at all, when you have a balanced budget, but when you have historic deficits, which is what we have, it's horrible.

I'm afraid that doesn't make much sense. If anything, lower rates keep the price of that massive deficit down. If rates were 3% higher right now we'd have BIGGER deficits just due to the interest on the debt.

That's just plain wrong. Do you understand monetary policy at all? Do you understand that when the fed sets rates it affects all debts? So, if the Fed raises rates, that means less profits because of higher interest costs. Do you understand that?

Sorry, that's a gross oversimplification. First of all it doesn't affect "all debts". In fact it affects hardly ANY debts. Mortgages are impacted almost not at all by fed policy. Commercial finance IS, but any company would still find a hundred basis points from here pretty attractive. The market HAS gone down when rates were lowered unexpectedly because people realized that it meant the fed was more worried about the economy than they had been and people adjusted their view to account for that, rather than the rate itself. Similarly, an increase in rates could signal that they have zero fear of deflation and that the economy was roaring (thus a fear of inflation).


What you don't understand is that the difference between the debts of the 80s and the 90s is that we had a dominant industry that was creating spectacular growth. That industry allowed us to pay back that debt. That industry is the reason why we ran a surplus. Why we had low unemployment. That industry was IT.

I'm sorry... WHAT industry? Where did you study economics? I know it's fashionable to throw everything at the feet of the alst three years (or previous eight if you root for the other team). but our economy changed a LONG time ago. Japan was out-producing us in many ways in the 70's and now it's India that's taking jobs. Banks shifted from 60/40 FT/PT to 40/60 in the late 80's early 90's, the rise of PT-low-benefit jobs has been an ongoing shift. Textile jobs here in NC have been hurt by NAFTA, but they were running out at record level before that too.

WHAT "dominant industry" did we have in the 90's that we lack today?

Skip the "freeper tactics". If you can't win an argument with facts you call the other guy names. THAT is the "freeper tactic" here. I presume that it is generally agreed here that the eight years under Clinton were pretty good economicly. Therefore, comparisons to those eight years are entirely valid. We have record bankruptcies now and everyone says THAT is the sign of a failing economy - while ignoring that the records we are breaking were from when we had a good economy (I won't say the "C" word).


And we NEVER "paid back that debt". The total debt still got (slightly) bigger even AFTER we balanced the budget (I'd give credit to "C", but you'd get all upset again - who is it that freaks out at the mention of his name? Freepers?). Personal debt didn't go remarkably down and savings rates were awful.

The REAL success was that people's income went up so fast that the increase in debt was more than manageable. Going from $5,000 on your credit card to $10,000 is terrible if you make 20k/yr. Get a raise to 40k/yr and it's easier. Ongoing rapid growth without inflation or unemployment was the key to success. Things are too unsettled to do it again.

[Yavin4]

19. My Third Rebuttal

What you miss is that the Fed's primary mission (perhaps ONLY mission in some eyes) is to control inflation. They have done that successfully for the last twenty years or so through some dramatically different fiscal policy periods. Growth under Clinton got hot enough that inflation was a possiblity and they acted (a little too hastily in my mind) to combat that.

You want to have things both ways. On the one hand, you want to say that we're having a boom economy, and then on the other hand, you want to say that the Fed is justified to keep rates low because the economy is in bad shape. Bush had the greatest "growth" in 20 years, so why didn't the Fed raise rates on him like they did under Clinton when he had high growth rates. Also, where was the "over-heated" growth in 1996, the Dow was trading at half of today's level,
(Link: http://bigcharts.marketwatch.com/javachart/javachart.asp?symb=DJIA&time=&freq=), yet the Fed had interest rates at 5.25%.

I'm afraid that doesn't make much sense. If anything, lower rates keep the price of that massive deficit down. If rates were 3% higher right now we'd have BIGGER deficits just due to the interest on the debt.

I'll explain it to you. Keeping deficits down is a signal to the world that you're serious about paying off your debts. This was the deal that Greenspan proposed to Clinton in early 1993. He told Clinton to back off of his stimulus package and focus on erasing the deficit. In return Greenspan would keep the debt down, Greenspan went back on his word a year later.

I'm sorry... WHAT industry? Where did you study economics? I know it's fashionable to throw everything at the feet of the alst three years (or previous eight if you root for the other team). but our economy changed a LONG time ago

I have an MBA. Have you studied Schumpter waves? Whenever there's technological innovations, you have rapid growth. In the 80's, semi-conductors transformed our entire economy. For instance, when Reagan came into office in 1981, there were no ATM machines. When he left in 1988, they were everywhere, and that's one tiny example of the impact of IT. Another example is WalMart. WalMart was one of the first corporations to use IT to manage their inventory. I could go on.

We no longer have IT as a dominant industry in this country.

Skip the "freeper tactics". If you can't win an argument with facts you call the other guy names. THAT is the "freeper tactic" here.

You are the one using "Freeper" arguments. When I made my point about Greenspan, in typical Freeper style, you made a false claim about Clinton also getting low interest rates from Greenspan.

My overall point to you Frodo is that you're mistaken in the belief that what we're seeing today economically is based entirely on cheap debt, an argument that was clearly made in the article. Has he been wrong in the past? Sure. Who hasn't?

[rumguy]

21. Yavin delivers the smackdown!

We all know this economy is crap. The rich getting richer, the poor getting poor. Health insurance vanishing, and jobs paying less. Those are FACTS and no amount of freeper cheerleading can change that. This is an economy on a sugar high, and it will collapse in a big way. What will Freeps do then? I love it when freepers squeal!

[KoKo]

15. Excellent rebuttal, Yavin! Nothing else to say. N/t

[linazelle]

20. The primary prop for the economy is defense spending and it won't subside

during Bush's reign of terror. I think the economy will flourish this year--it won't be a critical factor in the election.

[NavajoRug]

9. Good point. Rule #1 when it comes to economic forecasting:

Pay no attention to anyone who starts off this year's predictions by trying to explain why last year's predictions were so far off.

[Frodo]

11. Close.

Don't pay any attention to people who are the outside edge of the predictions, were also out there last year and are trying to explain why they were wrong.

I have no problem with someone telling me to buy six stocks and have two turn out to be bears. I have no problem with someone forcasting a 5% growth and we get 11% (or -2%). You have to be realistic.

But to forcast record collapses (a FOURTH straight significant market decline) and get large growth? And have it explained by "well interest rates were at 2% instead of 4%" loses credibility with me.

[NavajoRug]

12. And he completely glossed over the role that . . .

. . . the changes in capital gains and dividend taxation have played in the rise of the stock market. If you are in the lowest tax bracket, your capital gains tax rate is 5% -- FIVE PERCENT!

That itself is incredible. . . Most states have sales taxes that are higher than that.

[Yavin4]

14. Yes, Bush's Economy Is Wonderful

Isn't it?

Reading your posts, I now understand why economic crashes happen. People lose sight of the difference between debt and equity. Debt flows so cheaply and easily that it starts to feel like equity. It's all well and good until one day someone realizes that this is really debt, not equity.

When that day happens...crash!

[NavajoRug]

16. I'm not sure I understand . . .

Suppose I'm in the lowest tax bracket. If I own a piece of property that cost me $50,000 five years ago, and I sell it for $100,0000 today, the tax I pay on the capital gain is $2,500 (5% of the $50,000 gain). Before last year it would have been $5,000 (10% of the $50,000 gain), and before 1995 it would have been $7,000 (14% of the gain).

So, depending on how you look at it -- I've saved either $2,500 or $4,500 in taxes on this transaction. What has that got to do with debt vs. equity?

[KoKo]

17. One has to have a history about Debt to Equity to understand it. Sadly

no matter how hard one tries to save a drowning person, the person may just drag you down with him.......but ...whatever.

[Sir_Shrek]

4. He's got balls....

He linked his 2003 predictions column.

[BurtWorm]

22. Krugman's column today cites a pessimistic paper by Robert Rubin

on the dangers inherent in private and public US debt:

http://www.nytimes.com/2004/01/06/opinion/06KRUG.html

All of this is conventional stuff, if anathema to administration apologists, who insist, in flat defiance of the facts, that they have a "plan" to cut the deficit in half. What's new is what Mr. Rubin and his co-authors say about the consequences. Rather than focusing on the gradual harm inflicted by deficits, they highlight the potential for catastrophe.

"Substantial ongoing deficits," they warn, "may severely and adversely affect expectations and confidence, which in turn can generate a self-reinforcing negative cycle among the underlying fiscal deficit, financial markets, and the real economy. . . . The potential costs and fallout from such fiscal and financial disarray provide perhaps the strongest motivation for avoiding substantial, ongoing budget deficits." In other words, do cry for us, Argentina: we may be heading down the same road.

Lest readers think that the most celebrated Treasury secretary since Alexander Hamilton has flipped his lid, the paper rather mischievously quotes at length from an earlier paper by Laurence Ball and N. Gregory Mankiw, who make a similar point. Mr. Mankiw is now the chairman of the president's Council of Economic Advisers, a job that requires him to support his boss's policies, and reassure the public that the budget deficit produced by those policies is manageable and not really a problem.

But here's what he wrote back in 1995, at a time when the federal deficit was much smaller than it is today, and headed down, not up: the risk of a crisis of confidence "may be the most important reason for seeking to reduce budget deficits. . . . As countries increase their debt, they wander into unfamiliar territory in which hard landings may lurk. If policymakers are prudent, they will not take the chance of learning what hard landings in countries are really like."

[rumguy]

23. kick