A question for the economists out there

[eissa]

What's the prediction for the US economy next year? It seemed everyone was poo-pooing the tax cuts and how they would stimulate the economy and now we saw some improvement (ok, it was just one quarter, but enough to generate lots of media attention). Will this continue? How will this effect next year's election?

[mhr]

1. One Time Shot To Middle and Lower Classes

The Rich don't spend because their marginal propensity to consume is low.

So, unless their truly is a rebound in business investment, don't expect much but smoke and hot air.

[Wwagsthedog]

2. Keep your eye on long term interest rates

Right now they're on the rise. 30 year mortgage rate is nearing 6% for the second time this year. As they rise, it will cost more to borrow. Our huge debt will get more costly to support. Economy will get dicier. Note, the Brits just raised one of their basic interest rates.

Also note that the repugs will try to keep a positive spin on all this but they can't hide the growing budget deficit forever. Greenspan will try to keep short term rates low as long as he can but that is ignoring debt problems. He will try to get the current good news to last til the election. After that, find a secure place to hide. It could get ugly.

[eissa]

3. This line scares me...

"After that, find a secure place to hide. It could get ugly."

My fear is that if a democrat (hopefully) wins in '04, they may inherit a complete mess that he may not be able to recover from.

[Lefty48197]

4. Republicans ruin the economy, Democrats fix it

It's a historical fact. Not just when Bill Clinton cleared up Ronald Reagan's "trickle down" mess, but also when FDR cleared up the Hoover mess etc.

[Code_Name_D]

5. They may not be able to fix this.

History has seen our situation before, and with out exception, when armyes start macrhing to secure "economic intrests" while sufering huge domestic debt, only one thing has ever been seen to happen.

Total and absolute colasp. This isn't how nations die, but empires. The war in Iraq has delivered a mortal wound that I fear we can not recover from. Getting out NOW might soften the blow, and help the government servive the collaps, but furthering the war only seals our doom. Its one resone I am against Clark and Kerry, as they insist that we can not "be seen retreating."

[bemildred]

24. Indeed.

There is no reason at all to think that wisdom will prevail in Iraq.
The good news is that the underlying nation usually survives, and
in due course will be better for the removal of the parasite.

[saneperson]

26. You're kidding, right?

If we leave Iraq now, we will leave those people in a terrible position. We have liberated them from a terrible oppression, but you would have us leave now, before a demoracy is established, and allow the power vacuum to suck up more despots? How do you think THAT will affect the economy in the long run?

We must stay the course, and we should be grateful that the small gains we are seeing in the economy today are real gains, not based on the dotcom bubble (that was doomed to pop as soon as the masses realized these compaies didn't actually earn money, nor would they ever) during the Clinton years.

Those years prove that when people invest in business (Dow over 11K, NASDAQ over 5K), we all see the economy as being in good shape. But those investments need to be SOUND, not based on the dotcom frenzy that nearly crippled us when it broke. These Bush tax cuts will gradually and conservatively feed the economy; it has taken 3 years to barely turn the corner from the crash in 2000, let's not let that happen again.

As for the deficit, you're right; it needs to get better. But the way to do that is to decisively and positively conclude the Iraq situation (and do a good job, so the world will finally have to stop pointing fingers),and to start turning a profit in our country, meaning, don't just take all the tax money and spend it on more social programs - give some of it back, and let Americans spend and invest it where it makes sense, in the businesses that create jobs.

[shrike]

33. Have you any sons? I am certain that if you do, you are encouraging them

to sign up. I'm guessing that if you do, you're not. It makes me ill to see people like you, with nothing to lose, nothing to risk, urging us to "stay the course" for the "sake of the Iraqi people." I also have no doubt that during the months before the war you were calling these same folks "towelheads" or worse.

[rapier]

6. notes

13 discount rate cuts and it's result, the mortgage and consumer credit boom and the fastest swing into deficit, the largest in dollar terms in history,can explain the occasional growth spurt. Such would normally provide an inflationary boom.

The tax cut is only part of the deficit thing and hardly the prime mover.

At best 3% growth, as measured by the lying commerce dept., thru the election is my guess. Unevenly distributed of course. All the income growth will be going, as always, to the top two deciles and the real estate and financial speculators. Stll, if that 3% holds enough to make it an election non factor.

Not that the Dems have even a hint of an answer to our problems. (well Edwards has addressed them a bit). THe at best slow growth trend I see for years and years to come (at best, barring a financial accident) promises headaches for all politicians)

[Code_Name_D]

7. Acording to Krugman

The only plan that can reverse this trend, is exactly the plan that would be "political suiside." The rasing of taxes, and they would have to be drastic in order to stave off disaster.

As Dilbert keeps noting. "We're doomed, arn't we."

[rapier]

8. notes

I respectfully disagree to the extent that the government deficit is not the biggest prbolem by a long shot. If slow growth is the question then short and intermediate term deficits should help.

The biggest problem is structural and difficult to summarize easily but I name it either the Credit Bubble or Financial Arbitrage Capitalism. (Both courtesy of Doug Noland and his Credit Bubble Bulletin.
http://www.prudentbear.com/archive_home_com.asp?category=18

The nature of Corpratism, finance and Wall St. are the author of much of our current economic, political and cultural position now.

Please look at Noland. For starters just take each recent column and look at the charts which appear at the top. Without exception they show trends going parabolic. Be it foreign central bank dollar reserves, mortgages outstanding, total consumer credit outstanding, money supply, etc. etc. One might not understand the exact meaning of each but when one sees chart after chart going up at ever steeper angles one can appreciate that in the world of finance and money extraordinary things are happening. Anyone with even a casual appreciation of such charts knows that these trends cannot be maintained. Something big is happening and something bad is likely to happen when those charts slow their ascent and reverse.

[Code_Name_D]

10. Precisly the problem

I shouldn't have just mentioned the nationl debt. But it is only a part of the whole debt sructure. But if debt is growing so quickly, can we every realy call it "growth?"

Indeed, the whole popaganda about the recent growth delibritly ignores costs and debts. Its a giant shell game that isn't just hidding the picture, but ment to hide the picture.

This makes a real recovery litterly imposible, and an absolute colasp inebitable. We arn't just buring our head in the sand here, but bauring it in between the rail road trackes.

[EconomicsDude]

9. Hmm, IIRC...

Strong growth in 2004. The Blue Chip Economic Indicators survey of 50 professional forecasters has the economy growing at 4.2% in 2004. The fourth quarter of this year is expected to be 3.8%. As for unemployment the consensus forecast is that the economy will add 146,000 jobs a month next year. This should bring unemployment down a few percentage points, maybe as low as 5.8%.

[rapier]

11. maybe

Could be. That is if there isn't a financial accident. Or how about this. GDP grows by 4% next year, but inflation is 6%. Not sure that's growth but everyone will tell us it is, and that's all that counts anymore.

[EconomicsDude]

15. 6% Inflation?

Bwahahaha...now that's funny.

[rapier]

16. Yes, we have no inflation.

What's so funny. The CRB index is on the verge of breaking thru 8 year highs. That measures grains and gold, both very strong. Oil is flirting again with $32, an important pivot point. Health care is up of course, double digit. Most services in general are rising. Residential Real Estate is rising strongly we know. Etc. etc. etc.


Now those things are all measured in dollars of course. Uncle Buck is sick and every time he shows a slight recovery and stands up he collapses. Need I remind that we import lots of stuff and sooner or later that weaker dollar is going to translate into higher prices.


"Yes, we have no inflation" and "Uncle Buck's sickbed" courtesy of Capital Stool.
http://www.capitalstool.com/index.htm

[EconomicsDude]

27. Everybody is talking deflation...

...and you are talking inflation. Well I suppose if it does happen you can claim to be quite the forecaster.

[rapier]

29. notes

I'm not a forecaster. It is already a reality. Lots of things are inflating. Energy, commodities, health care, home prices, education, cable and on and on.

"everyone" means basicly the Fed, who is looking for an excuse to keep rates too low. They have to keep rates too low so they use this deflation meme as an excuse. (Yes, there is a deflationary trend in many manufactured goods, courtesy mostly of China but that's anothe issue which loose monetary policy is ill equiped to solve) Which may bring more inflation and its brother a weaker dollar.

I'm not a forecaster. I don't have a clue to the future. Some things are inflating, some are deflating. Above all else the Fed and Wall St. and politicians of all stripes fear above all else the deflation of financial assets, particularly stocks. You know the bull market was just inflation of stock prices.

Sheesh, even CNN talks about it. Not FOX I'm sure.
http://money.cnn.com/2003/11/14/markets/inflation/index.htm

[many a good man]

31. Might we see inflation as policy?

With P/E ratios so unrealistic can we expect a policy of inflation in the near future to keep these book values buoyed?

Isn't deflation unheard of in the postwar period? It sounds scary. In fact, downright depressing !

[rapier]

32. notes

Inflation policy has been in place for years. Just not the inflation you think of. The bull market in stocks and financial assets was simply the inflation of those assets. As you mention, PE's and other traditonal measures of 'value' are thru the roof. Their prices were inflated.

Residential real estate inflation is of course a policy goal.

Both these policies were the desired consequence of the low interest rate regeim of the Fed and the manic credit creation machine built by the GSE's and Wall St.

As to the inflation we are more familiar with. That too is now policy. The Fed for over a year has done everything in it power rhetoricly to kill the dollar and on reason is that it want's inflation. It still has as its main goal asset price inflation but goods and service inflation are desireable to them too to greese the skids for the anemic economy. One thing they can't tolerate however is higher long term interest rates so part of the policy is to deny there is any price inflation, even as commodity indexes reach multi year highs. Medical and college costs and myriad other things as well go up too.

There has been deflation of manufactured goods. This was a policy wished for my many, those of the right who hate Americans workers who they thing make too m uch money. No pol endorses this idea but pols have been led by the nose by the interests who do.

.

[PROGRESSIVE1]

17. The lowest under Clinton was 3.9% in late 1999. Realistically...

I could see unemployment falling between 5.1%-4.5% if things really get better under a Democratic administration. It won't be 1990's but it will be much better than what Bush has given us!

[EconomicsDude]

28. Actually...

...it'll probably fall to the low 5.x% range irrespective of whether or not it is a Democrat or Republican who wins in 2004. This economy is starting to expand, and it looks like the jobless nature of the recovery is over. If a Democrat wins, he'll be in the same situation Clinton was in, coming into office with an economic expansion well underway.

[Code_Name_D]

30. Dude, you have been saying that ever sence you came here.

At what point will you concead that your past predictions have been proven wrong.

"Emplyment is a lagging indecator," remeber that? With your qurter window has come and gone, and emplyment is still dropping. Ot dose this window span 15 years like it did with Ragan/Bush?

[mhr]

34. Experienced Professional, Now Unemployed For 39 Months, Still No Prospects

What planet are you living on? It is not the same one I inhabit.

[reprobate]

12. What does this say about the economy?

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=102&topic_id=215048&mesg_id=215048

Article says insider trading highest recorded yet. CEOs selling their stock options.

[rapier]

13. notes on stock option grants

Insider selling, in Sept. I believe, was a record. Something like 50 to 1, in dollar terms I think.

The insider buy sell ratio used to be a fairly good indicator for the market but no more with the advent of stock option grants. These shares are not bought, the are printed up and given away to the execs. so that alone skews the numbers. (that is not technically accurate. They buy the shares at drastically reduced prices)

You heard me right, for the most part these shares are new issues. You have certainly all heard of the company stock buy backs that were the hallmark of the bull market. The story was that companies could best spend thier money and "maximize shareholder value" by taking stock off the market. Well a funny thing about that. Many companies bought back lots of stock but then turned around and issued just as much to the execs. SOme companies issued as many or even more stocks than they retired. In other words companies took cash on hand to buy back stock in order, they said, to boost stock prices, then turned around and issued new stocks for a pittance. The level of courruption which option grants represents cannot be overstated. The funny thing is that stock owners loved it. Go figure. One stands is awe of the success of the propoganda that allows people to cheer their own screwing.


As to the high numbers now. The insiders of course don't have to sell the moment they get the stocks. If insiders think the stock is going up it is smart for them to hold for awhile. Looked at in that light the massive selling now indicates a less than rosy future being predicted by insiders. Still, the predictive quality of this information is not to be taked too seriously.

[Code_Name_D]

14. Its also a good way to stay in control.

Buy up all of the little blocks of sold stocks (2 here, 5 there, 13 over here) then re-issue the stock options into the hands of the CEOs. Its a good way to insure that a right people keep a majority of the stocks, while not being locked down with them.

[blu_dog]

18. It's going to rock

Get ready, the economy is going to explode! You can bad mouth Shrub and praise Clinton all you want, it is about to take off.

The only real question is what will inflation do? Hard to say.

[rapier]

19. Yes, we have no inflation II

What's inflation going to do? Well, let's see. Todays PPI number was .8% for the month, that's 9.6% annualized. A blip? Maybe. One thing is almost certain, the days of the reported <3% are gone for the time being. That would be at least as long as the dollar continues to weaken and China is booming and dragging up the price of everything from tin to soybeans to shipping rates.

So perhaps the economy will boom. I doubt it but will give the benefit of the doubt. Can the bond market continue to ignore that. Will Al keep the discount rate at 1% in the face of let's say 5%+ inflation? He probaby will. In which case look for more dollar weakness. Long rates Al can't control. With mortgages now going over 6% will housing inflation continue. I doubt it.

The saga of the last 10 + years has been the inflation of financial and real estate asset prices. Made possible by a madcap accelleration in money and credit. Well the chickens have come home to roost. Get ready for prices of things, not paper to start inflating.

This may give corps. some pricing power but it won't help the consumer.

[many a good man]

20. Why no change in $-Yuan ?

The dollar has fallen more than 35% against the Euro but it keeps holding steady against the Yuan. Why is that? Isn't our greatest trade deficit with China? Japan also seems to be pegging its currency to ours.

If Asian central banks hold or own 75% of all dollars or US equities, how does this situation do anything to help our economy, other than making European vacations excessively expensive? Won't this keep inflation lower? Or is it just the next shoe to drop that will flatten us?

[rapier]

21. notes

If you mean against the Chinese currency it's called commonly called the renminbi. Weird I know.

The official Chinese policy is to keep the currency steady. This they can do because among other things there is very little of the renminbi outside China in foreign hands. So there is little trade in it. This is made possible by the fact that they have a trade surplus with everyone and therefor have excess currencies, particularly dollars to use to do their import buying. THey pay for nothing as far as I know with their currency.

So in a world of floating exchange, the so called market solution, China has opted out. That they were allowed to do this and have a closed banking and financial system, yet allowed all those trade agreements was and is a disaster. If not a disaster it was two other things. First it was an assalt on the pricipals that the free market globalization pushers embrace. Second it was and is a disaster in that it has thrown worldwide manufacturing into a deflation.

The yen has in fact rallied strongly against the dollar, despite the massive intervention of the Japanese.

Asian central banks don't hold 75% of all dollars nor equities. They do now hold massive dollar surpluses. However they don't do that by sitting on the dollars. Rather the central banks buy US government bonds. In other words they recycle the excess dollars back to us and get our bonds in return.

There are dozens of important points about this. One is that this has been a gigantic money loser for them. Bond prices have fallen sharply and that has been made worse by the falling dollar. A double whammy.The thing is central banks don't give a shit about losing money. Whoes to know. What does it matter to the average citizen? Nothing.

What they want most of all is to keep the export game going and that means recycle the dollars back to us. During the 90s bubble all the excess dollars were flooding Wall St. That is essentially over. As the trade defecit has grown relentlessly it has only been this dollar recycling by the Asians, particularly the Chineese that has kept the dollars fall from being a massive disaster instead of a moderate rout.

It is uncertain if this game can or will go on. At some point for various reasons they might say enough is enough, we don't want your stinking Treasury Bonds. (All it might take is for one loudmouth politician to suggest we might not honor the bonds held by the Chinese. Something quite possible going forward as the China as the enemy card is waiting in the wings as the next big thing) (It migiht be noted that all sorts of GOP politicians have said quite openly that we will not honor or pay off the Treasury Bonds held by Social Security. It's difficult to get ones mind around the concept that it is forbidden to even mention default on our obligations unless they happen to be to American citizens, in which case it is seen as practially a point of honor. If anything paints a picture of our weird politics, this is it)

Anyway a dollar crisis is well within the realm of possibility. In fact last week was a disaster for the dollar. This carries with it all sorts of baggage including inflation.

There is no way to figure this all out and even less chance of predicting what will happen. All one can say is that among the possibilities few are good, most are moderately bad, for us the Ameridan citizen, and a few are massive disasters the likes of which have never been seen.

[many a good man]

22. So where would the inflation come from?

If the "renminbi" stays pegged to the dollar, Chinese imports should be more expensive but won't be, interests rates should go up but won't (appreciably),housing prices won't go up, and stock prices should go down but probably won't. Bear with me; I'm not arguing with you, I'm just trying to figure this out.

Normally, too many dollars chasing too few goods results in inflation. But now it looks like that doesn't happen any more. We inflate credit which goes to Asia for their goods and comes back as t-notes to finance our federal budget deficit. So are you saying that inflation will result from dollar depreciation against all currencies in the world EXCEPT China?

It sounds crazy that anyone would even think of calling into question the "full faith and credit" of the USA because its the only thing keeping the wheel spinning. It seems supremely ironic that our fate is in the hands of China, our greatest economic competitor in the 21st century.

I guess energy prices will also have a hand to play in the unfolding scenario. Continuing uncertainty in Iraq paired with terrorist activity against Saudi Arabia would send oil prices rocketing. Or an early withdrawal from Iraq leaving behind an uncooperative government could lead to a situation like that in the 70s, where Arab nations controlled more than 35% of world oil production, allowing it the power to set prices. And if they gang up with Russia, and set those prices in Euros, it will definitely all be over...

To get back to the original post, the oil scenario is probably outside the scope of 1-2 years, so I can't help but see things pretty much keep on the same track as they are now. I see foreign policy as playing a huge role in our domestic economy next year. Decisions made in Iraq, SA, Russia and China may have a greater impact than traditional economic indicators.

China may take some kind of symbolic action to force US economic policy more to their liking. Other nations may combat US hegemony by sticking it to us economically. Or things may stay exactly the same...

[rapier]

23. notes

While it's true that Chinese imports should remain stable price wise because of the dollar link that does not include the underlyining inflation now ongoing in commodites.

Inflation is comming in the price of commodities as China is buying stuff from oil to tin to soybeans etc. ect. etc. hand over fist. The CRB index, a common measuerment index of commodity inflation is now at an eigth year high. They have to, along with everyone else, increase their prices to account for raw material prices.

While China is the big dog we import lots of stuff from elsewhere and here the floating exchange rate does apply. A falling dollar means higher prices here.

I should note on a very short term basis the disaster in the dollar last week is now continuing as the world markets are now open for Monday 11/17. Here again muli year, in this case lows, are now reached.

ONe way or another the lower dollar means domestic inflation.

Domestic inflation means higher interest rates.

Higher interest rates probably mean deflation of financial assets, that means stocks. (Bonds automaticly go down with higher interest rates, they are one and the same)

[Name removed]

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