Dude! Where’s My Recovery?

[girl gone mad]

Steve Keen understands something neoclassical economists consistently fail to grasp. Banks lend money into existence first, then seek reserves later. Private sector liabilities are not perfectly balanced by private sector assets. We still have much debt deleveraging ahead.

Dude! Where’s My Recovery?
by Steve Keen
http://www.debtdeflation.com/blogs/

I initially planned to call this post “Economic Growth, Asset Markets and the Credit Accelerator”, but recent negative data out of America makes me think that this title is more in line with conversations currently taking place in the White House.

According to the NBER, the “Great Recession” is now two years behind us, but the recovery that normally follows a recession has not occurred. While growth did rise for a while, it has been anaemic compared to the norm after a recession, and it is already trending down. Growth needs to exceed 3 per cent per annum to reduce unemployment—the rule of thumb known as Okun’s Law—and it needs to be substantially higher than this to make serious inroads into it. Instead, growth barely peeped its head above Okun’s level. It is now below it again, and trending down.



Unemployment is therefore rising once more, and with it, Obama’s chances of re-election are rapidly fading.



Obama was assured by his advisors that this wouldn’t happen. Right from the first Economic Report of the President that he received from Bush’s outgoing Chairman of the Council of Economic Advisers Ed Lazear in January 2009, he was assured that “the deeper the downturn, the stronger the recovery”. On the basis of the regression shown in Chart 1-9 of that report (on page 54), I am sure that Obama was told that real growth would probably exceed 5 per cent per annum—because this is what Ed Lazear told me after my session at the Australian Conference of Economists in September 2009.

I disputed this analysis then (see “In the Dark on Cause and Effect, Debtwatch October 2009“), and events have certainly borne out my analysis rather than the conventional wisdom. To give an idea of how wrong this guidance was, the peak to trough decline in the Great Recession—the x-axis in Lazear’s Chart—was over 6 percent. His regression equation therefore predicted that GDP growth in the 2 years after the recession ended would have been over 12 percent. If this equation had born fruit, US Real GDP would be $14.37 trillion in June 2011, versus the recorded $13.44 trillion in March 2011.

So why has the conventional wisdom been so wrong? Largely because it has ignored the role of private debt—which brings me back to my original title.

http://www.debtdeflation.com/blogs">more...

[ixion]

1. This 'graph nails it, I think:

It becomes a bad thing when this additional credit goes, not to entrepreneurs, but to Ponzi merchants in the finance sector, who use it not to innovate or add to productive capacity, but to gamble on asset prices. This adds to debt levels without adding to the economy’s capacity to service them, leading to a blowout in the ratio of private debt to GDP. Ultimately, this process leads to a crisis like the one we are now in, where so much debt has been taken on that the growth of debt comes to an end. The economy then enters not a recession, but a Depression.

This is exactly what has happened, and the result will be just what the author says it will be: a depression.

[JDPriestly]

4. And this is why the rich are getting much, much richer while the rest of

us, whether we borrowed money or saved, makes no difference, are losing out.

The rich are making their money from the massive Ponzi scheme, not from real investments. A lot of it, in my opinion, is due to the fact that we are terrified of trying new technologies (yes, it looks like we are advancing rapidly in terms of technology, but we are really being quite conservative) especially in terms of energy.

Nearly every aspect of our society that would involve real investment -- like education -- is hurting. Costs are too high for those who need the products or services.

In spite of the debt levels that he talks about, there is no money for the things that are really needed.

That is why I think that his analysis supports artificially forcing a broader distribution, a redistribution of wealth from those who simply buy assets and "invest" in Ponzi schemes to those who would use the money to satisfy real needs and buy real products and useful services (like education and medical care).

Am I way off?

It does make a difference what debt is used to pay for. It does make a difference how wealth is distributed in a society.

[dkf]

2. This is the key to the puzzle I have been wondering about...

"In a well-functioning capitalist system, the main recipients of credit are entrepreneurs who have an idea, but not the money needed to put it into action:

It becomes a bad thing when this additional credit goes, not to entrepreneurs, but to Ponzi merchants in the finance sector, who use it not to innovate or add to productive capacity, but to gamble on asset prices. This adds to debt levels without adding to the economy’s capacity to service them, leading to a blowout in the ratio of private debt to GDP. Ultimately, this process leads to a crisis like the one we are now in, where so much debt has been taken on that the growth of debt comes to an end. The economy then enters not a recession, but a depression. "

...

In these inevitable times of recession, what can we do to channel the entrepreneurial spirit in people who get laid off?

[JDPriestly]

5. Precisely. We should tax those who benefit from the Ponzi schemes

and redistribute that wealth in some form that is not just a massive giveaway to people who would use it well including people who would start businesses but also people who would create consumer demand.

By taxing those who benefit from Ponzi schemes, I mean increasing capital gains taxes. They were decreased maybe under Bush, maybe before. If you sell a house, you should pay some tax on the gain -- doesn't have to be high. Then that revenue to the government could be used to give small business loans and/or to fund education, maybe invest in alternative energy that will make us less dependent on foreign oil.

[grasswire]

6. I think the entrepreneurial spirit exists

It's just that capital is very very hard to find.

In my experience and locale, anyway.

[dkf]

8. I agree. So what is the mechanism that get the funds to where they need to be.

That is what Obama etal should have concentrated on. Maybe even looking at private public partnerships for venture capital.

[snot]

3. V. interesting, but I got lost during the 2d half of tge article; can anyone

possibly summarize it in lay terms?

[bemildred]

7. I love pretty charts with little squiggly lines.

They make me feel so much more affirmative about how things are going.

[Hawkowl]

9. Too bad Obama sided with the bankers

The billionaires and the bankers are sitting on all that cash and that is going to keep unemployment high and fuck his re-election chances. Maybe, he will get re-elected and get A FUCKING CLUE. Tax cuts, billionaires, and banksters are destroying the world. They can't save him.

[Maven]

10. Well, sure. He doubled down on the same banker-friendly supply side recipe that sank the economy

in the first place.

What's that old chestnut about the definition of insanity?