Paul Krugman is a jackass (2 Viewers)

[adonis]

To be clear, based on my own (wildly imperfect) understanding of the arguments favoring a fiscal stimulus and the counterarguments against a fiscal stimulus, I think that a fiscal stimulus could theoretically work to temporarily reduce unemployment, increase productivity, and overall amount to a Good Thing™ (although that's debatable).

But I think when an actual stimulus is passed by actual politicians trying to please actual special-interest lobbyists, the result is very likely to be wasteful and inefficient.

I think that's certainly a concern, and I have my doubts about the ability of congress to put forward a functional stimulus, but it's our best bet. With your (and my admittedly) imperfect arguments on this issue, do you see any reason to believe that further austerity measures/spending cuts will lead us out of this recession?

Of course.For one thing, see Ireland.

More importantly, I think we'll be led out of the recession no matter what policy we follow. Austerity, stimulus, something in between . . . recessions don't last forever in an economy like ours. Whatever we do will lead us out of the recession. (But some things we might do would prove much more costly than other things.)

Even more importantly, I think the best way to get out of a recession is to follow sound fiscal policy and to focus on increasing productivity. I also think that the private sector will generally spend a dollar at the current margin more productively than the government will. So transferring money from the private sector to the government (by way of increased government spending) may well lead us out of the recession more slowly (and with greater lasting budgetary pain) than the alternative strategy of reducing government spending, thus reducing the current or future tax burden, and thus likely enhancing our long-term economic outlook.

It doesn't look like Ireland is a good example, since any improvements it's experiencing seem to be due to some combination of deflation and exporting more goods, rather than creating or encouraging job creation internally. I agree though about sound fiscal policy, although I think defining it is difficult, as many people with a lot of experience disagree on what that looks like.

Regarding the private industry, I agree that in general private industry spends a dollar better, but with low demand, even if they have a dollar in hand, that doesn't mean that they will spend it right now, either on a project, or on employment, until they see demand increasing. To me that means that while private industry in the (primarily) free market is the best way to spend money and to achieve efficiency and productivity, the whole system relies on demand, and in times of recession, it's lacking, especially in deep ones.

So essentially, the question I ask in this situation is, what is the most efficient way to stimulate demand in the economy FASTER than it otherwise would be increased otherwise, because I agree eventually it'll come back regardless. To me, the biggest question is how can policies increase demand. Do you ask a different question?

Allow the housing market to bottom.

Are you saying that allowing the housing market to bottom will increase demand? Or...hmmm..not sure what you're saying here.

When you see what's going on across the country, you see the recession, what questions do you ask to help guide what actions are taken?

 

[Alex P Keaton]

To be clear, based on my own (wildly imperfect) understanding of the arguments favoring a fiscal stimulus and the counterarguments against a fiscal stimulus, I think that a fiscal stimulus could theoretically work to temporarily reduce unemployment, increase productivity, and overall amount to a Good Thing™ (although that's debatable).

But I think when an actual stimulus is passed by actual politicians trying to please actual special-interest lobbyists, the result is very likely to be wasteful and inefficient.

I think that's certainly a concern, and I have my doubts about the ability of congress to put forward a functional stimulus, but it's our best bet. With your (and my admittedly) imperfect arguments on this issue, do you see any reason to believe that further austerity measures/spending cuts will lead us out of this recession?

Of course.For one thing, see Ireland.

More importantly, I think we'll be led out of the recession no matter what policy we follow. Austerity, stimulus, something in between . . . recessions don't last forever in an economy like ours. Whatever we do will lead us out of the recession. (But some things we might do would prove much more costly than other things.)

Even more importantly, I think the best way to get out of a recession is to follow sound fiscal policy and to focus on increasing productivity. I also think that the private sector will generally spend a dollar at the current margin more productively than the government will. So transferring money from the private sector to the government (by way of increased government spending) may well lead us out of the recession more slowly (and with greater lasting budgetary pain) than the alternative strategy of reducing government spending, thus reducing the current or future tax burden, and thus likely enhancing our long-term economic outlook.

It doesn't look like Ireland is a good example, since any improvements it's experiencing seem to be due to some combination of deflation and exporting more goods, rather than creating or encouraging job creation internally. I agree though about sound fiscal policy, although I think defining it is difficult, as many people with a lot of experience disagree on what that looks like.

Regarding the private industry, I agree that in general private industry spends a dollar better, but with low demand, even if they have a dollar in hand, that doesn't mean that they will spend it right now, either on a project, or on employment, until they see demand increasing. To me that means that while private industry in the (primarily) free market is the best way to spend money and to achieve efficiency and productivity, the whole system relies on demand, and in times of recession, it's lacking, especially in deep ones.

So essentially, the question I ask in this situation is, what is the most efficient way to stimulate demand in the economy FASTER than it otherwise would be increased otherwise, because I agree eventually it'll come back regardless. To me, the biggest question is how can policies increase demand. Do you ask a different question?

Allow the housing market to bottom.

Are you saying that allowing the housing market to bottom will increase demand? Or...hmmm..not sure what you're saying here.

When you see what's going on across the country, you see the recession, what questions do you ask to help guide what actions are taken?

Until we stop reinflating bubbles, we are unlikely to see sustainable demand increases. This isn't tough to understand.

 

[adonis]

To be clear, based on my own (wildly imperfect) understanding of the arguments favoring a fiscal stimulus and the counterarguments against a fiscal stimulus, I think that a fiscal stimulus could theoretically work to temporarily reduce unemployment, increase productivity, and overall amount to a Good Thing™ (although that's debatable).

But I think when an actual stimulus is passed by actual politicians trying to please actual special-interest lobbyists, the result is very likely to be wasteful and inefficient.

I think that's certainly a concern, and I have my doubts about the ability of congress to put forward a functional stimulus, but it's our best bet. With your (and my admittedly) imperfect arguments on this issue, do you see any reason to believe that further austerity measures/spending cuts will lead us out of this recession?

Of course.For one thing, see Ireland.

More importantly, I think we'll be led out of the recession no matter what policy we follow. Austerity, stimulus, something in between . . . recessions don't last forever in an economy like ours. Whatever we do will lead us out of the recession. (But some things we might do would prove much more costly than other things.)

Even more importantly, I think the best way to get out of a recession is to follow sound fiscal policy and to focus on increasing productivity. I also think that the private sector will generally spend a dollar at the current margin more productively than the government will. So transferring money from the private sector to the government (by way of increased government spending) may well lead us out of the recession more slowly (and with greater lasting budgetary pain) than the alternative strategy of reducing government spending, thus reducing the current or future tax burden, and thus likely enhancing our long-term economic outlook.

It doesn't look like Ireland is a good example, since any improvements it's experiencing seem to be due to some combination of deflation and exporting more goods, rather than creating or encouraging job creation internally. I agree though about sound fiscal policy, although I think defining it is difficult, as many people with a lot of experience disagree on what that looks like.

Regarding the private industry, I agree that in general private industry spends a dollar better, but with low demand, even if they have a dollar in hand, that doesn't mean that they will spend it right now, either on a project, or on employment, until they see demand increasing. To me that means that while private industry in the (primarily) free market is the best way to spend money and to achieve efficiency and productivity, the whole system relies on demand, and in times of recession, it's lacking, especially in deep ones.

So essentially, the question I ask in this situation is, what is the most efficient way to stimulate demand in the economy FASTER than it otherwise would be increased otherwise, because I agree eventually it'll come back regardless. To me, the biggest question is how can policies increase demand. Do you ask a different question?

Allow the housing market to bottom.

Are you saying that allowing the housing market to bottom will increase demand? Or...hmmm..not sure what you're saying here.

When you see what's going on across the country, you see the recession, what questions do you ask to help guide what actions are taken?

Until we stop reinflating bubbles, we are unlikely to see sustainable demand increases. This isn't tough to understand.

What's tough to understand is what part of my post he was referring to with his answer.

 

[bueno]

To be clear, based on my own (wildly imperfect) understanding of the arguments favoring a fiscal stimulus and the counterarguments against a fiscal stimulus, I think that a fiscal stimulus could theoretically work to temporarily reduce unemployment, increase productivity, and overall amount to a Good Thing™ (although that's debatable).

But I think when an actual stimulus is passed by actual politicians trying to please actual special-interest lobbyists, the result is very likely to be wasteful and inefficient.

I think that's certainly a concern, and I have my doubts about the ability of congress to put forward a functional stimulus, but it's our best bet. With your (and my admittedly) imperfect arguments on this issue, do you see any reason to believe that further austerity measures/spending cuts will lead us out of this recession?

Of course.For one thing, see Ireland.

More importantly, I think we'll be led out of the recession no matter what policy we follow. Austerity, stimulus, something in between . . . recessions don't last forever in an economy like ours. Whatever we do will lead us out of the recession. (But some things we might do would prove much more costly than other things.)

Even more importantly, I think the best way to get out of a recession is to follow sound fiscal policy and to focus on increasing productivity. I also think that the private sector will generally spend a dollar at the current margin more productively than the government will. So transferring money from the private sector to the government (by way of increased government spending) may well lead us out of the recession more slowly (and with greater lasting budgetary pain) than the alternative strategy of reducing government spending, thus reducing the current or future tax burden, and thus likely enhancing our long-term economic outlook.

It doesn't look like Ireland is a good example, since any improvements it's experiencing seem to be due to some combination of deflation and exporting more goods, rather than creating or encouraging job creation internally. I agree though about sound fiscal policy, although I think defining it is difficult, as many people with a lot of experience disagree on what that looks like.

Regarding the private industry, I agree that in general private industry spends a dollar better, but with low demand, even if they have a dollar in hand, that doesn't mean that they will spend it right now, either on a project, or on employment, until they see demand increasing. To me that means that while private industry in the (primarily) free market is the best way to spend money and to achieve efficiency and productivity, the whole system relies on demand, and in times of recession, it's lacking, especially in deep ones.

So essentially, the question I ask in this situation is, what is the most efficient way to stimulate demand in the economy FASTER than it otherwise would be increased otherwise, because I agree eventually it'll come back regardless. To me, the biggest question is how can policies increase demand. Do you ask a different question?

Allow the housing market to bottom.

Are you saying that allowing the housing market to bottom will increase demand? Or...hmmm..not sure what you're saying here.

When you see what's going on across the country, you see the recession, what questions do you ask to help guide what actions are taken?

Let's unpack this a bit: how much money went to prop up banks?If banks think houses are overvalued are they going to lend money to buy an overvalued asset?

If people think houses are over-valued, will they buy houses?

The obvious answers to both are "of course not."

So if you want to increase demand for housing, you let the housing market bottom. We haven't done that. Efforts to keep interest rates low,hoping that low rates will stimulate demand for housing misses the point. People aren't interested in buying house because interest rates are not favorable. They are disinterested in buying houses because houses are over-valued.

 

[adonis]

To be clear, based on my own (wildly imperfect) understanding of the arguments favoring a fiscal stimulus and the counterarguments against a fiscal stimulus, I think that a fiscal stimulus could theoretically work to temporarily reduce unemployment, increase productivity, and overall amount to a Good Thing™ (although that's debatable).

But I think when an actual stimulus is passed by actual politicians trying to please actual special-interest lobbyists, the result is very likely to be wasteful and inefficient.

I think that's certainly a concern, and I have my doubts about the ability of congress to put forward a functional stimulus, but it's our best bet. With your (and my admittedly) imperfect arguments on this issue, do you see any reason to believe that further austerity measures/spending cuts will lead us out of this recession?

Of course.For one thing, see Ireland.

More importantly, I think we'll be led out of the recession no matter what policy we follow. Austerity, stimulus, something in between . . . recessions don't last forever in an economy like ours. Whatever we do will lead us out of the recession. (But some things we might do would prove much more costly than other things.)

Even more importantly, I think the best way to get out of a recession is to follow sound fiscal policy and to focus on increasing productivity. I also think that the private sector will generally spend a dollar at the current margin more productively than the government will. So transferring money from the private sector to the government (by way of increased government spending) may well lead us out of the recession more slowly (and with greater lasting budgetary pain) than the alternative strategy of reducing government spending, thus reducing the current or future tax burden, and thus likely enhancing our long-term economic outlook.

It doesn't look like Ireland is a good example, since any improvements it's experiencing seem to be due to some combination of deflation and exporting more goods, rather than creating or encouraging job creation internally. I agree though about sound fiscal policy, although I think defining it is difficult, as many people with a lot of experience disagree on what that looks like.

Regarding the private industry, I agree that in general private industry spends a dollar better, but with low demand, even if they have a dollar in hand, that doesn't mean that they will spend it right now, either on a project, or on employment, until they see demand increasing. To me that means that while private industry in the (primarily) free market is the best way to spend money and to achieve efficiency and productivity, the whole system relies on demand, and in times of recession, it's lacking, especially in deep ones.

So essentially, the question I ask in this situation is, what is the most efficient way to stimulate demand in the economy FASTER than it otherwise would be increased otherwise, because I agree eventually it'll come back regardless. To me, the biggest question is how can policies increase demand. Do you ask a different question?

Allow the housing market to bottom.

Are you saying that allowing the housing market to bottom will increase demand? Or...hmmm..not sure what you're saying here.

When you see what's going on across the country, you see the recession, what questions do you ask to help guide what actions are taken?

Let's unpack this a bit: how much money went to prop up banks?If banks think houses are overvalued are they going to lend money to buy an overvalued asset?

If people think houses are over-valued, will they buy houses?

The obvious answers to both are "of course not."

So if you want to increase demand for housing, you let the housing market bottom. We haven't done that. Efforts to keep interest rates low,hoping that low rates will stimulate demand for housing misses the point. People aren't interested in buying house because interest rates are not favorable. They are disinterested in buying houses because houses are over-valued.

You think this whole interest rate thing done by the fed is specifically targeting housing, as in, attempting to get people to buy more houses? You think that is their solution and approach to improving the economy?

 

[Maurile Tremblay]

Regarding the private industry, I agree that in general private industry spends a dollar better, but with low demand, even if they have a dollar in hand, that doesn't mean that they will spend it right now, either on a project, or on employment, until they see demand increasing. To me that means that while private industry in the (primarily) free market is the best way to spend money and to achieve efficiency and productivity, the whole system relies on demand, and in times of recession, it's lacking, especially in deep ones.

So essentially, the question I ask in this situation is, what is the most efficient way to stimulate demand in the economy FASTER than it otherwise would be increased otherwise, because I agree eventually it'll come back regardless. To me, the biggest question is how can policies increase demand. Do you ask a different question?

This is where the whole of macroeconomics just seems goofy to me. A lot of people smarter and better informed than me (like nearly all professional macroeconomists) talk about reduced aggregate demand as if the notion makes sense; so if I were to bet on who's right about it and who's wrong, I'd bet that I'm wrong. But I sure wish someone would explain why. It's a pretty big mystery that I'd be enormously grateful to have the solution to; but so far, I've never seen an explanation of reduced aggregate demand that makes sense to me.There's no such thing, as far as I can tell, as reduced aggregate demand for all goods and services that will result in less overall spending. All dollars get spent. The only alternative to spending a dollar is hiding it under a mattress. The mattress effect will always be negligible, as far as I can tell.

Investing or lending are not alternatives to spending, because investing and lending are types of spending. If I spend $100, I might buy a TV with it. If I invest $100 in a business, the business might buy a printer with it. If I lend $100 to a business, the business might buy a scanner with it. Businesses don't raise capital for the purpose of sitting on it: they borrow only so they can spend. Why are TVs inherently better for the economy than printers or scanners?

(And don't think that you're keeping your money out of the economy by depositing it in a checking account. When you do that, the bank invests it or lends it. The purchase of a printer or scanner is still the end result.)

For the most part, the only thing that will stop a given un-spent dollar from being invested or loaned (and therefore ultimately spent) is if expected risk-adjusted returns on investment and nominal interest rates are both negative. That will happen only if overall productivity drops to absurdly low levels. So again I'm back to wanting to improve overall productivity; and again, to me, that means keeping more money (at the current margin) in the private sector.

 

[bueno]

To be clear, based on my own (wildly imperfect) understanding of the arguments favoring a fiscal stimulus and the counterarguments against a fiscal stimulus, I think that a fiscal stimulus could theoretically work to temporarily reduce unemployment, increase productivity, and overall amount to a Good Thing™ (although that's debatable).

But I think when an actual stimulus is passed by actual politicians trying to please actual special-interest lobbyists, the result is very likely to be wasteful and inefficient.

I think that's certainly a concern, and I have my doubts about the ability of congress to put forward a functional stimulus, but it's our best bet. With your (and my admittedly) imperfect arguments on this issue, do you see any reason to believe that further austerity measures/spending cuts will lead us out of this recession?

Of course.For one thing, see Ireland.

More importantly, I think we'll be led out of the recession no matter what policy we follow. Austerity, stimulus, something in between . . . recessions don't last forever in an economy like ours. Whatever we do will lead us out of the recession. (But some things we might do would prove much more costly than other things.)

Even more importantly, I think the best way to get out of a recession is to follow sound fiscal policy and to focus on increasing productivity. I also think that the private sector will generally spend a dollar at the current margin more productively than the government will. So transferring money from the private sector to the government (by way of increased government spending) may well lead us out of the recession more slowly (and with greater lasting budgetary pain) than the alternative strategy of reducing government spending, thus reducing the current or future tax burden, and thus likely enhancing our long-term economic outlook.

It doesn't look like Ireland is a good example, since any improvements it's experiencing seem to be due to some combination of deflation and exporting more goods, rather than creating or encouraging job creation internally. I agree though about sound fiscal policy, although I think defining it is difficult, as many people with a lot of experience disagree on what that looks like.

Regarding the private industry, I agree that in general private industry spends a dollar better, but with low demand, even if they have a dollar in hand, that doesn't mean that they will spend it right now, either on a project, or on employment, until they see demand increasing. To me that means that while private industry in the (primarily) free market is the best way to spend money and to achieve efficiency and productivity, the whole system relies on demand, and in times of recession, it's lacking, especially in deep ones.

So essentially, the question I ask in this situation is, what is the most efficient way to stimulate demand in the economy FASTER than it otherwise would be increased otherwise, because I agree eventually it'll come back regardless. To me, the biggest question is how can policies increase demand. Do you ask a different question?

Allow the housing market to bottom.

Are you saying that allowing the housing market to bottom will increase demand? Or...hmmm..not sure what you're saying here.

When you see what's going on across the country, you see the recession, what questions do you ask to help guide what actions are taken?

Let's unpack this a bit: how much money went to prop up banks?If banks think houses are overvalued are they going to lend money to buy an overvalued asset?

If people think houses are over-valued, will they buy houses?

The obvious answers to both are "of course not."

So if you want to increase demand for housing, you let the housing market bottom. We haven't done that. Efforts to keep interest rates low,hoping that low rates will stimulate demand for housing misses the point. People aren't interested in buying house because interest rates are not favorable. They are disinterested in buying houses because houses are over-valued.

You think this whole interest rate thing done by the fed is specifically targeting housing, as in, attempting to get people to buy more houses? You think that is their solution and approach to improving the economy?

I think that is a large part of why the Fed wants to keep interest rates low, yes.

 

[bueno]

Regarding the private industry, I agree that in general private industry spends a dollar better, but with low demand, even if they have a dollar in hand, that doesn't mean that they will spend it right now, either on a project, or on employment, until they see demand increasing. To me that means that while private industry in the (primarily) free market is the best way to spend money and to achieve efficiency and productivity, the whole system relies on demand, and in times of recession, it's lacking, especially in deep ones.

So essentially, the question I ask in this situation is, what is the most efficient way to stimulate demand in the economy FASTER than it otherwise would be increased otherwise, because I agree eventually it'll come back regardless. To me, the biggest question is how can policies increase demand. Do you ask a different question?

This is where the whole of macroeconomics just seems goofy to me. A lot of people smarter and better informed than me (like nearly all professional macroeconomists) talk about reduced aggregate demand as if the notion makes sense; so if I were to bet on who's right about it and who's wrong, I'd bet that I'm wrong. But I sure wish someone would explain why. It's a pretty big mystery that I'd be enormously grateful to have the solution to; but so far, I've never seen an explanation of reduced aggregate demand that makes sense to me.There's no such thing, as far as I can tell, as reduced aggregate demand for all goods and services that will result in less overall spending. All dollars get spent. The only alternative to spending a dollar is hiding it under a mattress. The mattress effect will always be negligible, as far as I can tell.

Investing or lending are not alternatives to spending, because investing and lending are types of spending. If I spend $100, I might buy a TV with it. If I invest $100 in a business, the business might buy a printer with it. If I lend $100 to a business, the business might buy a scanner with it. Businesses don't raise capital for the purpose of sitting on it: they borrow only so they can spend. Why are TVs inherently better for the economy than printers or scanners?

(And don't think that you're keeping your money out of the economy by depositing it in a checking account. When you do that, the bank invests it or lends it. The purchase of a printer or scanner is still the end result.)

For the most part, the only thing that will stop a given un-spent dollar from being invested or loaned (and therefore ultimately spent) is if expected risk-adjusted returns on investment and nominal interest rates are both negative. That will happen only if overall productivity drops to absurdly low levels. So again I'm back to wanting to improve overall productivity; and again, to me, that means keeping more money (at the current margin) in the private sector.

The problem is, corporations (including banks) are not reinvesting - which is equivalent to putting the money under the mattress.

 

[adonis]

To be clear, based on my own (wildly imperfect) understanding of the arguments favoring a fiscal stimulus and the counterarguments against a fiscal stimulus, I think that a fiscal stimulus could theoretically work to temporarily reduce unemployment, increase productivity, and overall amount to a Good Thing™ (although that's debatable).

But I think when an actual stimulus is passed by actual politicians trying to please actual special-interest lobbyists, the result is very likely to be wasteful and inefficient.

I think that's certainly a concern, and I have my doubts about the ability of congress to put forward a functional stimulus, but it's our best bet. With your (and my admittedly) imperfect arguments on this issue, do you see any reason to believe that further austerity measures/spending cuts will lead us out of this recession?

Of course.For one thing, see Ireland.

More importantly, I think we'll be led out of the recession no matter what policy we follow. Austerity, stimulus, something in between . . . recessions don't last forever in an economy like ours. Whatever we do will lead us out of the recession. (But some things we might do would prove much more costly than other things.)

Even more importantly, I think the best way to get out of a recession is to follow sound fiscal policy and to focus on increasing productivity. I also think that the private sector will generally spend a dollar at the current margin more productively than the government will. So transferring money from the private sector to the government (by way of increased government spending) may well lead us out of the recession more slowly (and with greater lasting budgetary pain) than the alternative strategy of reducing government spending, thus reducing the current or future tax burden, and thus likely enhancing our long-term economic outlook.

It doesn't look like Ireland is a good example, since any improvements it's experiencing seem to be due to some combination of deflation and exporting more goods, rather than creating or encouraging job creation internally. I agree though about sound fiscal policy, although I think defining it is difficult, as many people with a lot of experience disagree on what that looks like.

Regarding the private industry, I agree that in general private industry spends a dollar better, but with low demand, even if they have a dollar in hand, that doesn't mean that they will spend it right now, either on a project, or on employment, until they see demand increasing. To me that means that while private industry in the (primarily) free market is the best way to spend money and to achieve efficiency and productivity, the whole system relies on demand, and in times of recession, it's lacking, especially in deep ones.

So essentially, the question I ask in this situation is, what is the most efficient way to stimulate demand in the economy FASTER than it otherwise would be increased otherwise, because I agree eventually it'll come back regardless. To me, the biggest question is how can policies increase demand. Do you ask a different question?

Allow the housing market to bottom.

Are you saying that allowing the housing market to bottom will increase demand? Or...hmmm..not sure what you're saying here.

When you see what's going on across the country, you see the recession, what questions do you ask to help guide what actions are taken?

Let's unpack this a bit: how much money went to prop up banks?If banks think houses are overvalued are they going to lend money to buy an overvalued asset?

If people think houses are over-valued, will they buy houses?

The obvious answers to both are "of course not."

So if you want to increase demand for housing, you let the housing market bottom. We haven't done that. Efforts to keep interest rates low,hoping that low rates will stimulate demand for housing misses the point. People aren't interested in buying house because interest rates are not favorable. They are disinterested in buying houses because houses are over-valued.

You think this whole interest rate thing done by the fed is specifically targeting housing, as in, attempting to get people to buy more houses? You think that is their solution and approach to improving the economy?

I think that is a large part of why the Fed wants to keep interest rates low, yes.

I don't think so. It's more broad than that, and while housing is affected, it's an attempt to spur investment by and in businesses, and to make it more attractive for them to take risks, considering the rates on the loans to do so are much lower.The problem though is that to make this situation more attractive for business, they need demand to pick up, then they'll start taking much more advantage of this cheap money, in sectors far more expansive than just housing.

The feds solution to our economic woes, as far as I've seen, is not centered on re-inflating the housing bubble.

 

[Maurile Tremblay]

Regarding the private industry, I agree that in general private industry spends a dollar better, but with low demand, even if they have a dollar in hand, that doesn't mean that they will spend it right now, either on a project, or on employment, until they see demand increasing. To me that means that while private industry in the (primarily) free market is the best way to spend money and to achieve efficiency and productivity, the whole system relies on demand, and in times of recession, it's lacking, especially in deep ones.

So essentially, the question I ask in this situation is, what is the most efficient way to stimulate demand in the economy FASTER than it otherwise would be increased otherwise, because I agree eventually it'll come back regardless. To me, the biggest question is how can policies increase demand. Do you ask a different question?

This is where the whole of macroeconomics just seems goofy to me. A lot of people smarter and better informed than me (like nearly all professional macroeconomists) talk about reduced aggregate demand as if the notion makes sense; so if I were to bet on who's right about it and who's wrong, I'd bet that I'm wrong. But I sure wish someone would explain why. It's a pretty big mystery that I'd be enormously grateful to have the solution to; but so far, I've never seen an explanation of reduced aggregate demand that makes sense to me.There's no such thing, as far as I can tell, as reduced aggregate demand for all goods and services that will result in less overall spending. All dollars get spent. The only alternative to spending a dollar is hiding it under a mattress. The mattress effect will always be negligible, as far as I can tell.

Investing or lending are not alternatives to spending, because investing and lending are types of spending. If I spend $100, I might buy a TV with it. If I invest $100 in a business, the business might buy a printer with it. If I lend $100 to a business, the business might buy a scanner with it. Businesses don't raise capital for the purpose of sitting on it: they borrow only so they can spend. Why are TVs inherently better for the economy than printers or scanners?

(And don't think that you're keeping your money out of the economy by depositing it in a checking account. When you do that, the bank invests it or lends it. The purchase of a printer or scanner is still the end result.)

For the most part, the only thing that will stop a given un-spent dollar from being invested or loaned (and therefore ultimately spent) is if expected risk-adjusted returns on investment and nominal interest rates are both negative. That will happen only if overall productivity drops to absurdly low levels. So again I'm back to wanting to improve overall productivity; and again, to me, that means keeping more money (at the current margin) in the private sector.

The problem is, corporations (including banks) are not reinvesting - which is equivalent to putting the money under the mattress.

Corporations keep their money in banks. Have banks increased their reserves in the last few years? I don't know the answer, but my first instinct is to doubt it.I just tried Googling the answer, though, and it appears that banks have increased their reserves in the last few years — in part because the Fed started paying interest on excess reserves in late 2008. Why would it do that? The obvious effect, it seems to me, would be to cause what people are referring to as "reduced aggregate demand" (i.e., a mattress effect).

This is an area I don't understand very well.

 

[adonis]

Regarding the private industry, I agree that in general private industry spends a dollar better, but with low demand, even if they have a dollar in hand, that doesn't mean that they will spend it right now, either on a project, or on employment, until they see demand increasing. To me that means that while private industry in the (primarily) free market is the best way to spend money and to achieve efficiency and productivity, the whole system relies on demand, and in times of recession, it's lacking, especially in deep ones.

So essentially, the question I ask in this situation is, what is the most efficient way to stimulate demand in the economy FASTER than it otherwise would be increased otherwise, because I agree eventually it'll come back regardless. To me, the biggest question is how can policies increase demand. Do you ask a different question?

This is where the whole of macroeconomics just seems goofy to me. A lot of people smarter and better informed than me (like nearly all professional macroeconomists) talk about reduced aggregate demand as if the notion makes sense; so if I were to bet on who's right about it and who's wrong, I'd bet that I'm wrong. But I sure wish someone would explain why. It's a pretty big mystery that I'd be enormously grateful to have the solution to; but so far, I've never seen an explanation of reduced aggregate demand that makes sense to me.There's no such thing, as far as I can tell, as reduced aggregate demand for all goods and services that will result in less overall spending. All dollars get spent. The only alternative to spending a dollar is hiding it under a mattress. The mattress effect will always be negligible, as far as I can tell.

Investing or lending are not alternatives to spending, because investing and lending are types of spending. If I spend $100, I might buy a TV with it. If I invest $100 in a business, the business might buy a printer with it. If I lend $100 to a business, the business might buy a scanner with it. Businesses don't raise capital for the purpose of sitting on it: they borrow only so they can spend. Why are TVs inherently better for the economy than printers or scanners?

(And don't think that you're keeping your money out of the economy by depositing it in a checking account. When you do that, the bank invests it or lends it. The purchase of a printer or scanner is still the end result.)

For the most part, the only thing that will stop a given un-spent dollar from being invested or loaned (and therefore ultimately spent) is if expected risk-adjusted returns on investment and nominal interest rates are both negative. That will happen only if overall productivity drops to absurdly low levels. So again I'm back to wanting to improve overall productivity; and again, to me, that means keeping more money (at the current margin) in the private sector.

It seems you're thinking about things in a static form rather than over time, dynamically. And I must admit that my understanding isn't too complex, as I'm sure many people who disagree with me can attest to.My understanding is the following:

Under normal growth scenarios, money moves in all different directions, whether savings, or investments, or simple spending. The money is channeled to companies who decide what to do with the money they're taking in, or having invested, and they can either sit on the money or expand, by investing in new employees, new plants, new whatevers. They do this by looking into the future and determining what the demand for their products will be, and let that guide the decisions on how to use what they have.

If they look into the future and see a reduction in demand, like they did a few years ago and still do, they would rather sit on their cash, than to throw it away when the demand isn't there to support their investments. As you stated, private industry is good at spending a dollar, and in general, they won't do it unless they think they can generate a return on it. Right now buinesses look at the demand, the economic outlook, and decide that expansion is not a sufficiently likely prospect, so they're doing OTHER things with their money.

The whole time, more people are entering the workplace, combined with those cut by companies who reduced their outlook due to sagging demand. It's a dynamic system where you have to grow in order to "stand still" so if we're not growing at a certain rate, we're regressing, and more people are out there with little income to buy things, more people are out there with LESS money to buy things than before because they've been laid off, more people are out there with less money because their homes collapsed in value...so basically a lot of the average person's wealth/income/money during the recession has been sucked out. Thus, aggregate demand is declining, leading businesses to either continue laying off people (until they hit some equilibrium of staff/ vs demand inherent in system) or sitting on cash until they see an increased appetite for products.

You're a smart guy, and probably have heard what I've presented, but I'm happy to put my understanding (limited as it is) out there for critique, or expansion by others, as I'm always happy to hear where my understanding can be improved.

So the short of it is that aggregate demand reduces if the economic growth is not increasing at some pre-determined rate it needs to grow at to keep up with new people entering the workforce, etc. Worse, if it's not only not growing, but it's actually shrinking due to layoffs, reduction in "value" of assets (housing, investments, etc), then we're hit in a huge way with a reduction in income/wealth and a decrease in demand follows. Not only that, but we actually had a negative savings rate for some time, so people have been focusing to some degree on paying down debt, which doesn't do much for demand.

Anyone can feel free to critique my views here. I'm no economist .

 

[bueno]

To be clear, based on my own (wildly imperfect) understanding of the arguments favoring a fiscal stimulus and the counterarguments against a fiscal stimulus, I think that a fiscal stimulus could theoretically work to temporarily reduce unemployment, increase productivity, and overall amount to a Good Thing™ (although that's debatable).

But I think when an actual stimulus is passed by actual politicians trying to please actual special-interest lobbyists, the result is very likely to be wasteful and inefficient.

I think that's certainly a concern, and I have my doubts about the ability of congress to put forward a functional stimulus, but it's our best bet. With your (and my admittedly) imperfect arguments on this issue, do you see any reason to believe that further austerity measures/spending cuts will lead us out of this recession?

Of course.For one thing, see Ireland.

More importantly, I think we'll be led out of the recession no matter what policy we follow. Austerity, stimulus, something in between . . . recessions don't last forever in an economy like ours. Whatever we do will lead us out of the recession. (But some things we might do would prove much more costly than other things.)

Even more importantly, I think the best way to get out of a recession is to follow sound fiscal policy and to focus on increasing productivity. I also think that the private sector will generally spend a dollar at the current margin more productively than the government will. So transferring money from the private sector to the government (by way of increased government spending) may well lead us out of the recession more slowly (and with greater lasting budgetary pain) than the alternative strategy of reducing government spending, thus reducing the current or future tax burden, and thus likely enhancing our long-term economic outlook.

It doesn't look like Ireland is a good example, since any improvements it's experiencing seem to be due to some combination of deflation and exporting more goods, rather than creating or encouraging job creation internally. I agree though about sound fiscal policy, although I think defining it is difficult, as many people with a lot of experience disagree on what that looks like.

Regarding the private industry, I agree that in general private industry spends a dollar better, but with low demand, even if they have a dollar in hand, that doesn't mean that they will spend it right now, either on a project, or on employment, until they see demand increasing. To me that means that while private industry in the (primarily) free market is the best way to spend money and to achieve efficiency and productivity, the whole system relies on demand, and in times of recession, it's lacking, especially in deep ones.

So essentially, the question I ask in this situation is, what is the most efficient way to stimulate demand in the economy FASTER than it otherwise would be increased otherwise, because I agree eventually it'll come back regardless. To me, the biggest question is how can policies increase demand. Do you ask a different question?

Allow the housing market to bottom.

Are you saying that allowing the housing market to bottom will increase demand? Or...hmmm..not sure what you're saying here.

When you see what's going on across the country, you see the recession, what questions do you ask to help guide what actions are taken?

Let's unpack this a bit: how much money went to prop up banks?If banks think houses are overvalued are they going to lend money to buy an overvalued asset?

If people think houses are over-valued, will they buy houses?

The obvious answers to both are "of course not."

So if you want to increase demand for housing, you let the housing market bottom. We haven't done that. Efforts to keep interest rates low,hoping that low rates will stimulate demand for housing misses the point. People aren't interested in buying house because interest rates are not favorable. They are disinterested in buying houses because houses are over-valued.

You think this whole interest rate thing done by the fed is specifically targeting housing, as in, attempting to get people to buy more houses? You think that is their solution and approach to improving the economy?

I think that is a large part of why the Fed wants to keep interest rates low, yes.

I don't think so. It's more broad than that, and while housing is affected, it's an attempt to spur investment by and in businesses, and to make it more attractive for them to take risks, considering the rates on the loans to do so are much lower.The problem though is that to make this situation more attractive for business, they need demand to pick up, then they'll start taking much more advantage of this cheap money, in sectors far more expansive than just housing.

The feds solution to our economic woes, as far as I've seen, is not centered on re-inflating the housing bubble.

I didn't say re-inflating, I was more referring to keeping the bubble from deflating further. No matter - let's address demand. How will low interest rates spur demand? If a company invests and produces products cheaper or more efficiently, it does not necessarily lead to lower prices (which would increase demand - maybe) because even with low interest rates, one has to recoup the initial investment. Without demand, there is no incentive to invest.So the Fed solution - keeping interest rates low - still doesn't work, because it doesn't increase demand, therefore, it does not make investment more attractive. Which is why banks and corporations are figuratively hiding their money under the mattress.

And in this case the mattress is investing in the dollar (through T-Bills or whatever) which is keeping the dollar stronger than it would be if demand were stronger. When this entire house of cards collapses, it will really suck.

 

[adonis]

Regarding the private industry, I agree that in general private industry spends a dollar better, but with low demand, even if they have a dollar in hand, that doesn't mean that they will spend it right now, either on a project, or on employment, until they see demand increasing. To me that means that while private industry in the (primarily) free market is the best way to spend money and to achieve efficiency and productivity, the whole system relies on demand, and in times of recession, it's lacking, especially in deep ones.

So essentially, the question I ask in this situation is, what is the most efficient way to stimulate demand in the economy FASTER than it otherwise would be increased otherwise, because I agree eventually it'll come back regardless. To me, the biggest question is how can policies increase demand. Do you ask a different question?

This is where the whole of macroeconomics just seems goofy to me. A lot of people smarter and better informed than me (like nearly all professional macroeconomists) talk about reduced aggregate demand as if the notion makes sense; so if I were to bet on who's right about it and who's wrong, I'd bet that I'm wrong. But I sure wish someone would explain why. It's a pretty big mystery that I'd be enormously grateful to have the solution to; but so far, I've never seen an explanation of reduced aggregate demand that makes sense to me.There's no such thing, as far as I can tell, as reduced aggregate demand for all goods and services that will result in less overall spending. All dollars get spent. The only alternative to spending a dollar is hiding it under a mattress. The mattress effect will always be negligible, as far as I can tell.

Investing or lending are not alternatives to spending, because investing and lending are types of spending. If I spend $100, I might buy a TV with it. If I invest $100 in a business, the business might buy a printer with it. If I lend $100 to a business, the business might buy a scanner with it. Businesses don't raise capital for the purpose of sitting on it: they borrow only so they can spend. Why are TVs inherently better for the economy than printers or scanners?

(And don't think that you're keeping your money out of the economy by depositing it in a checking account. When you do that, the bank invests it or lends it. The purchase of a printer or scanner is still the end result.)

For the most part, the only thing that will stop a given un-spent dollar from being invested or loaned (and therefore ultimately spent) is if expected risk-adjusted returns on investment and nominal interest rates are both negative. That will happen only if overall productivity drops to absurdly low levels. So again I'm back to wanting to improve overall productivity; and again, to me, that means keeping more money (at the current margin) in the private sector.

The problem is, corporations (including banks) are not reinvesting - which is equivalent to putting the money under the mattress.

Corporations keep their money in banks. Have banks increased their reserves in the last few years? I don't know the answer, but my first instinct is to doubt it.I just tried Googling the answer, though, and it appears that banks have increased their reserves in the last few years — in part because the Fed started paying interest on excess reserves in late 2008. Why would it do that? The obvious effect, it seems to me, would be to cause what people are referring to as "reduced aggregate demand" (i.e., a mattress effect).

This is an area I don't understand very well.

I"m not sure this is the same thing, but in the late 2008 time frame, banks were undercapitalized in many situations because they were over-leveraged and the bills came due, so I think they were encouraged to increase their reserves to protect them against a lot of the mortgage backed securities and other investments that turned out to be "toxic" that they were loaning against.

 

[bueno]

Regarding the private industry, I agree that in general private industry spends a dollar better, but with low demand, even if they have a dollar in hand, that doesn't mean that they will spend it right now, either on a project, or on employment, until they see demand increasing. To me that means that while private industry in the (primarily) free market is the best way to spend money and to achieve efficiency and productivity, the whole system relies on demand, and in times of recession, it's lacking, especially in deep ones.

So essentially, the question I ask in this situation is, what is the most efficient way to stimulate demand in the economy FASTER than it otherwise would be increased otherwise, because I agree eventually it'll come back regardless. To me, the biggest question is how can policies increase demand. Do you ask a different question?

This is where the whole of macroeconomics just seems goofy to me. A lot of people smarter and better informed than me (like nearly all professional macroeconomists) talk about reduced aggregate demand as if the notion makes sense; so if I were to bet on who's right about it and who's wrong, I'd bet that I'm wrong. But I sure wish someone would explain why. It's a pretty big mystery that I'd be enormously grateful to have the solution to; but so far, I've never seen an explanation of reduced aggregate demand that makes sense to me.There's no such thing, as far as I can tell, as reduced aggregate demand for all goods and services that will result in less overall spending. All dollars get spent. The only alternative to spending a dollar is hiding it under a mattress. The mattress effect will always be negligible, as far as I can tell.

Investing or lending are not alternatives to spending, because investing and lending are types of spending. If I spend $100, I might buy a TV with it. If I invest $100 in a business, the business might buy a printer with it. If I lend $100 to a business, the business might buy a scanner with it. Businesses don't raise capital for the purpose of sitting on it: they borrow only so they can spend. Why are TVs inherently better for the economy than printers or scanners?

(And don't think that you're keeping your money out of the economy by depositing it in a checking account. When you do that, the bank invests it or lends it. The purchase of a printer or scanner is still the end result.)

For the most part, the only thing that will stop a given un-spent dollar from being invested or loaned (and therefore ultimately spent) is if expected risk-adjusted returns on investment and nominal interest rates are both negative. That will happen only if overall productivity drops to absurdly low levels. So again I'm back to wanting to improve overall productivity; and again, to me, that means keeping more money (at the current margin) in the private sector.

The problem is, corporations (including banks) are not reinvesting - which is equivalent to putting the money under the mattress.

Corporations keep their money in banks. Have banks increased their reserves in the last few years? I don't know the answer, but my first instinct is to doubt it.I just tried Googling the answer, though, and it appears that banks have increased their reserves in the last few years — in part because the Fed started paying interest on excess reserves in late 2008. Why would it do that? The obvious effect, it seems to me, would be to cause what people are referring to as "reduced aggregate demand" (i.e., a mattress effect).

This is an area I don't understand very well.

Well, whatever the reason or the methodology, banks, corporations and investors are keeping their money on the sidelines. I think this is in part because certain sectors (mainly housing) has not bottomed yet (and this is because of government intervention), and in part because there is a large amount of uncertainty (in part because the cost of ObamaCare is still unknown, but there are other reasons) and in part because low demand does not justify investment.

 

[adonis]

I didn't say re-inflating, I was more referring to keeping the bubble from deflating further. No matter - let's address demand. How will low interest rates spur demand? If a company invests and produces products cheaper or more efficiently, it does not necessarily lead to lower prices (which would increase demand - maybe) because even with low interest rates, one has to recoup the initial investment. Without demand, there is no incentive to invest.So the Fed solution - keeping interest rates low - still doesn't work, because it doesn't increase demand, therefore, it does not make investment more attractive. Which is why banks and corporations are figuratively hiding their money under the mattress.And in this case the mattress is investing in the dollar (through T-Bills or whatever) which is keeping the dollar stronger than it would be if demand were stronger. When this entire house of cards collapses, it will really suck.

Some other person was saying "re-inflating". ANyway, I think it's a mistake to see the fed's moves and think "housing", because it's much more broad an action than just that.I'm not sure low interest rates will spur demand, nor are they intended to necessarily. It's all a balance. What a business wouldn't consider doing using a loan of 7% they might do using a loan of 4% or 2%, and at some point, you go so low that you find that the interest rate isn't the limiting factor in the decision. So that's one way that lowering the rate COULD affect business decisions, not necessarily demand, but just normal business decisions made when they look at cost-benefit ratio's, and the interest rate of the borrowed money is part of that ratio.The fed is essentially lubricating the system, trying to make the entire economy SUPER liquid, in the hopes that almost any project anyone wants to do can be financed relatively cheaply. They're hoping they're removing any monetary based impediment to the decision of whether to act or not.The fed isn't the only country investing in the dollar, as worldwide investments have all of a sudden increased substantially in risk, and people still see the US as a safe bet. Regardless though, the fed policy will improve the economy ONCE demand picks back up, and not until then. They don't really see demand picking up for a few years, but in terms of monetary policy, they can't do much more to make it EASIER to borrow money, spur investment, etc etc etc.So what we need to do is either just wait for the demand to pick up, or we can do something to increase demand through policies. Sure it'll not be the most efficient method, but acting to speed up the recovery seems a good thing to do, vs just sitting and waiting for demand to pick back up, or WORSE, more cuts which will almost certainly lead to decreased demand in the short term, at a time where we're wanting it to increase.That goes back to my comments about, YES, we have a deficit problem, but it's a long-term problem, not a short-term emergency. The short term emergency we face is low demand, yet we're fighting the austerity fight.

 

[adonis]

Regarding the private industry, I agree that in general private industry spends a dollar better, but with low demand, even if they have a dollar in hand, that doesn't mean that they will spend it right now, either on a project, or on employment, until they see demand increasing. To me that means that while private industry in the (primarily) free market is the best way to spend money and to achieve efficiency and productivity, the whole system relies on demand, and in times of recession, it's lacking, especially in deep ones.

So essentially, the question I ask in this situation is, what is the most efficient way to stimulate demand in the economy FASTER than it otherwise would be increased otherwise, because I agree eventually it'll come back regardless. To me, the biggest question is how can policies increase demand. Do you ask a different question?

This is where the whole of macroeconomics just seems goofy to me. A lot of people smarter and better informed than me (like nearly all professional macroeconomists) talk about reduced aggregate demand as if the notion makes sense; so if I were to bet on who's right about it and who's wrong, I'd bet that I'm wrong. But I sure wish someone would explain why. It's a pretty big mystery that I'd be enormously grateful to have the solution to; but so far, I've never seen an explanation of reduced aggregate demand that makes sense to me.There's no such thing, as far as I can tell, as reduced aggregate demand for all goods and services that will result in less overall spending. All dollars get spent. The only alternative to spending a dollar is hiding it under a mattress. The mattress effect will always be negligible, as far as I can tell.

Investing or lending are not alternatives to spending, because investing and lending are types of spending. If I spend $100, I might buy a TV with it. If I invest $100 in a business, the business might buy a printer with it. If I lend $100 to a business, the business might buy a scanner with it. Businesses don't raise capital for the purpose of sitting on it: they borrow only so they can spend. Why are TVs inherently better for the economy than printers or scanners?

(And don't think that you're keeping your money out of the economy by depositing it in a checking account. When you do that, the bank invests it or lends it. The purchase of a printer or scanner is still the end result.)

For the most part, the only thing that will stop a given un-spent dollar from being invested or loaned (and therefore ultimately spent) is if expected risk-adjusted returns on investment and nominal interest rates are both negative. That will happen only if overall productivity drops to absurdly low levels. So again I'm back to wanting to improve overall productivity; and again, to me, that means keeping more money (at the current margin) in the private sector.

The problem is, corporations (including banks) are not reinvesting - which is equivalent to putting the money under the mattress.

Corporations keep their money in banks. Have banks increased their reserves in the last few years? I don't know the answer, but my first instinct is to doubt it.I just tried Googling the answer, though, and it appears that banks have increased their reserves in the last few years — in part because the Fed started paying interest on excess reserves in late 2008. Why would it do that? The obvious effect, it seems to me, would be to cause what people are referring to as "reduced aggregate demand" (i.e., a mattress effect).

This is an area I don't understand very well.

Well, whatever the reason or the methodology, banks, corporations and investors are keeping their money on the sidelines. I think this is in part because certain sectors (mainly housing) has not bottomed yet (and this is because of government intervention), and in part because there is a large amount of uncertainty (in part because the cost of ObamaCare is still unknown, but there are other reasons) and in part because low demand does not justify investment.

I don't understand how you can say the housing industry isn't bottoming because of government intervention. Foreclosures are STILL happening at a rapid rate, houses in most inflated areas have collapsed in value, people are walking away from their homes, and in recent memory it has never been harder to qualify for a loan.The government is trying like crazy to get more banks to loan to people, but the banks are not doing it because a) the homes people are trying to finance are worth a lot less than before or b) they're high credit risks or c) some other of a variety of different reasons the bank won't loan money. It's rampant out there, and it's very hard to get a loan, which means it's very unlikely the banks are facilitating the government in propping up the housing market.

 

[bueno]

I didn't say re-inflating, I was more referring to keeping the bubble from deflating further. No matter - let's address demand. How will low interest rates spur demand? If a company invests and produces products cheaper or more efficiently, it does not necessarily lead to lower prices (which would increase demand - maybe) because even with low interest rates, one has to recoup the initial investment. Without demand, there is no incentive to invest.So the Fed solution - keeping interest rates low - still doesn't work, because it doesn't increase demand, therefore, it does not make investment more attractive. Which is why banks and corporations are figuratively hiding their money under the mattress.And in this case the mattress is investing in the dollar (through T-Bills or whatever) which is keeping the dollar stronger than it would be if demand were stronger. When this entire house of cards collapses, it will really suck.

Some other person was saying "re-inflating". ANyway, I think it's a mistake to see the fed's moves and think "housing", because it's much more broad an action than just that.I'm not sure low interest rates will spur demand, nor are they intended to necessarily. It's all a balance. What a business wouldn't consider doing using a loan of 7% they might do using a loan of 4% or 2%, and at some point, you go so low that you find that the interest rate isn't the limiting factor in the decision. So that's one way that lowering the rate COULD affect business decisions, not necessarily demand, but just normal business decisions made when they look at cost-benefit ratio's, and the interest rate of the borrowed money is part of that ratio.The fed is essentially lubricating the system, trying to make the entire economy SUPER liquid, in the hopes that almost any project anyone wants to do can be financed relatively cheaply. They're hoping they're removing any monetary based impediment to the decision of whether to act or not.The fed isn't the only country investing in the dollar, as worldwide investments have all of a sudden increased substantially in risk, and people still see the US as a safe bet. Regardless though, the fed policy will improve the economy ONCE demand picks back up, and not until then. They don't really see demand picking up for a few years, but in terms of monetary policy, they can't do much more to make it EASIER to borrow money, spur investment, etc etc etc.So what we need to do is either just wait for the demand to pick up, or we can do something to increase demand through policies. Sure it'll not be the most efficient method, but acting to speed up the recovery seems a good thing to do, vs just sitting and waiting for demand to pick back up, or WORSE, more cuts which will almost certainly lead to decreased demand in the short term, at a time where we're wanting it to increase.That goes back to my comments about, YES, we have a deficit problem, but it's a long-term problem, not a short-term emergency. The short term emergency we face is low demand, yet we're fighting the austerity fight.

Well you are hitting several points here. In regard to the strength of the dollar, we have to look at the alternatives. Markets are down world-wide and other currencies are weak only in comparison to ours. If you have to keep money invested (as many institutions do) and you aren't investing in stocks, the dollar is the only place to go.Now, dismissing the dollar argument, let's go back to our discussion of the fed and demand. Making it easier to borrow money does not make borrowing money a good decision. When I look at cost-benefit decisions for my business, the first factor is not interest rates. It is demand for my product. Interest rates do nothing to change demand for my product. In fact, looking at what is happening in the markets right now, a zero percent interest rate would not motivate me to borrow money.The only thing I can see that will increase demand is to give people more money to spend. There is only one way the government can do that. However, to give people more money to spend (through tax decreases), one has to cut spending, given the size of our debt.The situation is a lot different today than during the Reagan era. No one will argue that Reagan increased our debt. However, if your total debt is less than your income, you can go into debt. When your total debt is approaching your income level, you cannot. So while I can forgive Reagan, when our debt was low compared to GDP, it is harder to forgive Obama, when our debt is approaching or exceeding our GDP.Too much wine tonight. I hope this is coherent.

 

[bueno]

Regarding the private industry, I agree that in general private industry spends a dollar better, but with low demand, even if they have a dollar in hand, that doesn't mean that they will spend it right now, either on a project, or on employment, until they see demand increasing. To me that means that while private industry in the (primarily) free market is the best way to spend money and to achieve efficiency and productivity, the whole system relies on demand, and in times of recession, it's lacking, especially in deep ones.

So essentially, the question I ask in this situation is, what is the most efficient way to stimulate demand in the economy FASTER than it otherwise would be increased otherwise, because I agree eventually it'll come back regardless. To me, the biggest question is how can policies increase demand. Do you ask a different question?

This is where the whole of macroeconomics just seems goofy to me. A lot of people smarter and better informed than me (like nearly all professional macroeconomists) talk about reduced aggregate demand as if the notion makes sense; so if I were to bet on who's right about it and who's wrong, I'd bet that I'm wrong. But I sure wish someone would explain why. It's a pretty big mystery that I'd be enormously grateful to have the solution to; but so far, I've never seen an explanation of reduced aggregate demand that makes sense to me.There's no such thing, as far as I can tell, as reduced aggregate demand for all goods and services that will result in less overall spending. All dollars get spent. The only alternative to spending a dollar is hiding it under a mattress. The mattress effect will always be negligible, as far as I can tell.

Investing or lending are not alternatives to spending, because investing and lending are types of spending. If I spend $100, I might buy a TV with it. If I invest $100 in a business, the business might buy a printer with it. If I lend $100 to a business, the business might buy a scanner with it. Businesses don't raise capital for the purpose of sitting on it: they borrow only so they can spend. Why are TVs inherently better for the economy than printers or scanners?

(And don't think that you're keeping your money out of the economy by depositing it in a checking account. When you do that, the bank invests it or lends it. The purchase of a printer or scanner is still the end result.)

For the most part, the only thing that will stop a given un-spent dollar from being invested or loaned (and therefore ultimately spent) is if expected risk-adjusted returns on investment and nominal interest rates are both negative. That will happen only if overall productivity drops to absurdly low levels. So again I'm back to wanting to improve overall productivity; and again, to me, that means keeping more money (at the current margin) in the private sector.

The problem is, corporations (including banks) are not reinvesting - which is equivalent to putting the money under the mattress.

Corporations keep their money in banks. Have banks increased their reserves in the last few years? I don't know the answer, but my first instinct is to doubt it.I just tried Googling the answer, though, and it appears that banks have increased their reserves in the last few years — in part because the Fed started paying interest on excess reserves in late 2008. Why would it do that? The obvious effect, it seems to me, would be to cause what people are referring to as "reduced aggregate demand" (i.e., a mattress effect).

This is an area I don't understand very well.

Well, whatever the reason or the methodology, banks, corporations and investors are keeping their money on the sidelines. I think this is in part because certain sectors (mainly housing) has not bottomed yet (and this is because of government intervention), and in part because there is a large amount of uncertainty (in part because the cost of ObamaCare is still unknown, but there are other reasons) and in part because low demand does not justify investment.

I don't understand how you can say the housing industry isn't bottoming because of government intervention. Foreclosures are STILL happening at a rapid rate, houses in most inflated areas have collapsed in value, people are walking away from their homes, and in recent memory it has never been harder to qualify for a loan.The government is trying like crazy to get more banks to loan to people, but the banks are not doing it because a) the homes people are trying to finance are worth a lot less than before or b) they're high credit risks or c) some other of a variety of different reasons the bank won't loan money. It's rampant out there, and it's very hard to get a loan, which means it's very unlikely the banks are facilitating the government in propping up the housing market.

Let me explain it to you:1. The government is trying like crazy to get more banks to loan to people.

2. the homes people are trying to finance are worth a lot less than before.

3. bank won't loan money.

If the government gets out of the way and let the market bottom, rather than trying like crazy to get banks to loan to people, then the market will bottom.

 

[adonis]

I didn't say re-inflating, I was more referring to keeping the bubble from deflating further. No matter - let's address demand. How will low interest rates spur demand? If a company invests and produces products cheaper or more efficiently, it does not necessarily lead to lower prices (which would increase demand - maybe) because even with low interest rates, one has to recoup the initial investment. Without demand, there is no incentive to invest.So the Fed solution - keeping interest rates low - still doesn't work, because it doesn't increase demand, therefore, it does not make investment more attractive. Which is why banks and corporations are figuratively hiding their money under the mattress.And in this case the mattress is investing in the dollar (through T-Bills or whatever) which is keeping the dollar stronger than it would be if demand were stronger. When this entire house of cards collapses, it will really suck.

Some other person was saying "re-inflating". ANyway, I think it's a mistake to see the fed's moves and think "housing", because it's much more broad an action than just that.I'm not sure low interest rates will spur demand, nor are they intended to necessarily. It's all a balance. What a business wouldn't consider doing using a loan of 7% they might do using a loan of 4% or 2%, and at some point, you go so low that you find that the interest rate isn't the limiting factor in the decision. So that's one way that lowering the rate COULD affect business decisions, not necessarily demand, but just normal business decisions made when they look at cost-benefit ratio's, and the interest rate of the borrowed money is part of that ratio.The fed is essentially lubricating the system, trying to make the entire economy SUPER liquid, in the hopes that almost any project anyone wants to do can be financed relatively cheaply. They're hoping they're removing any monetary based impediment to the decision of whether to act or not.The fed isn't the only country investing in the dollar, as worldwide investments have all of a sudden increased substantially in risk, and people still see the US as a safe bet. Regardless though, the fed policy will improve the economy ONCE demand picks back up, and not until then. They don't really see demand picking up for a few years, but in terms of monetary policy, they can't do much more to make it EASIER to borrow money, spur investment, etc etc etc.So what we need to do is either just wait for the demand to pick up, or we can do something to increase demand through policies. Sure it'll not be the most efficient method, but acting to speed up the recovery seems a good thing to do, vs just sitting and waiting for demand to pick back up, or WORSE, more cuts which will almost certainly lead to decreased demand in the short term, at a time where we're wanting it to increase.That goes back to my comments about, YES, we have a deficit problem, but it's a long-term problem, not a short-term emergency. The short term emergency we face is low demand, yet we're fighting the austerity fight.

Well you are hitting several points here. In regard to the strength of the dollar, we have to look at the alternatives. Markets are down world-wide and other currencies are weak only in comparison to ours. If you have to keep money invested (as many institutions do) and you aren't investing in stocks, the dollar is the only place to go.Now, dismissing the dollar argument, let's go back to our discussion of the fed and demand. Making it easier to borrow money does not make borrowing money a good decision. When I look at cost-benefit decisions for my business, the first factor is not interest rates. It is demand for my product. Interest rates do nothing to change demand for my product. In fact, looking at what is happening in the markets right now, a zero percent interest rate would not motivate me to borrow money.The only thing I can see that will increase demand is to give people more money to spend. There is only one way the government can do that. However, to give people more money to spend (through tax decreases), one has to cut spending, given the size of our debt.The situation is a lot different today than during the Reagan era. No one will argue that Reagan increased our debt. However, if your total debt is less than your income, you can go into debt. When your total debt is approaching your income level, you cannot. So while I can forgive Reagan, when our debt was low compared to GDP, it is harder to forgive Obama, when our debt is approaching or exceeding our GDP.Too much wine tonight. I hope this is coherent.

Fairly coherent, and I agree with your comments about demand playing the biggest role.However, if your business were bigger, I think some of the decision you'd be looking at might cause interest rates to play a bigger role in determining whether you act, whether buying a new building/facility, investing in equipment, etc. Anything that requires a big loan that you'd been VERY close to justifying, if the interest rate on that loan drops way down, it makes the proposition more attractive, but certainly if demand dropped more, then it might not be enticing, and I agree that this is what we're seeing. THe fed has done all it can to make investment and taking out loans to spur growth more attractive, but the demand just isn't there to justify these decisions. All the fed can do, and has done, is give these businesses some longer term idea of how long rates will stay where they are, which is helpful in business planning.There are many differences between today and Reagan era, not including the depth of the recession, and perhaps the interest rates on money we can borrow, ones you listed, and many more.The comment you make is right, the government has to borrow in order to increase demand, but at the rates the government can borrow at RIGHT now, the interest rates are HISTORICALLY low, making it a much more attractive prospect than ever before. As a business person, surely you could evaluate the cost of borrowing at these low rates and stimulating the economy into increasing demand, increasing revenues, and getting us back on track sooner (experiencing a reduced revenue loss due to a prolonged recession) vs letting the situation work itself out, taking longer to come out of the recession, resulting in years of less than optimal growth.Certainly there's some guesswork going into numerical figures that calculate the cost of stimulating the economy through deficit spending now, and the interest paid on that debt, vs the increased revenue we'll see over time, compared to not doing anything. My assumption at this point is that the costs of acting now outweigh the costs in paying back the short term debt+interest, since rates are very low, and every year that goes by in a "depressed" economy is a lot of money we're out, on the order of trillions of dollars.So it seems you see that demand is a problem. Do you also see that if we focus on spending cuts now, we're going to further reduce demand? How is that going to help the situation?

 

[adonis]

Regarding the private industry, I agree that in general private industry spends a dollar better, but with low demand, even if they have a dollar in hand, that doesn't mean that they will spend it right now, either on a project, or on employment, until they see demand increasing. To me that means that while private industry in the (primarily) free market is the best way to spend money and to achieve efficiency and productivity, the whole system relies on demand, and in times of recession, it's lacking, especially in deep ones.

So essentially, the question I ask in this situation is, what is the most efficient way to stimulate demand in the economy FASTER than it otherwise would be increased otherwise, because I agree eventually it'll come back regardless. To me, the biggest question is how can policies increase demand. Do you ask a different question?

This is where the whole of macroeconomics just seems goofy to me. A lot of people smarter and better informed than me (like nearly all professional macroeconomists) talk about reduced aggregate demand as if the notion makes sense; so if I were to bet on who's right about it and who's wrong, I'd bet that I'm wrong. But I sure wish someone would explain why. It's a pretty big mystery that I'd be enormously grateful to have the solution to; but so far, I've never seen an explanation of reduced aggregate demand that makes sense to me.There's no such thing, as far as I can tell, as reduced aggregate demand for all goods and services that will result in less overall spending. All dollars get spent. The only alternative to spending a dollar is hiding it under a mattress. The mattress effect will always be negligible, as far as I can tell.

Investing or lending are not alternatives to spending, because investing and lending are types of spending. If I spend $100, I might buy a TV with it. If I invest $100 in a business, the business might buy a printer with it. If I lend $100 to a business, the business might buy a scanner with it. Businesses don't raise capital for the purpose of sitting on it: they borrow only so they can spend. Why are TVs inherently better for the economy than printers or scanners?

(And don't think that you're keeping your money out of the economy by depositing it in a checking account. When you do that, the bank invests it or lends it. The purchase of a printer or scanner is still the end result.)

For the most part, the only thing that will stop a given un-spent dollar from being invested or loaned (and therefore ultimately spent) is if expected risk-adjusted returns on investment and nominal interest rates are both negative. That will happen only if overall productivity drops to absurdly low levels. So again I'm back to wanting to improve overall productivity; and again, to me, that means keeping more money (at the current margin) in the private sector.

The problem is, corporations (including banks) are not reinvesting - which is equivalent to putting the money under the mattress.

Corporations keep their money in banks. Have banks increased their reserves in the last few years? I don't know the answer, but my first instinct is to doubt it.I just tried Googling the answer, though, and it appears that banks have increased their reserves in the last few years — in part because the Fed started paying interest on excess reserves in late 2008. Why would it do that? The obvious effect, it seems to me, would be to cause what people are referring to as "reduced aggregate demand" (i.e., a mattress effect).

This is an area I don't understand very well.

Well, whatever the reason or the methodology, banks, corporations and investors are keeping their money on the sidelines. I think this is in part because certain sectors (mainly housing) has not bottomed yet (and this is because of government intervention), and in part because there is a large amount of uncertainty (in part because the cost of ObamaCare is still unknown, but there are other reasons) and in part because low demand does not justify investment.

I don't understand how you can say the housing industry isn't bottoming because of government intervention. Foreclosures are STILL happening at a rapid rate, houses in most inflated areas have collapsed in value, people are walking away from their homes, and in recent memory it has never been harder to qualify for a loan.The government is trying like crazy to get more banks to loan to people, but the banks are not doing it because a) the homes people are trying to finance are worth a lot less than before or b) they're high credit risks or c) some other of a variety of different reasons the bank won't loan money. It's rampant out there, and it's very hard to get a loan, which means it's very unlikely the banks are facilitating the government in propping up the housing market.

Let me explain it to you:1. The government is trying like crazy to get more banks to loan to people.

2. the homes people are trying to finance are worth a lot less than before.

3. bank won't loan money.

If the government gets out of the way and let the market bottom, rather than trying like crazy to get banks to loan to people, then the market will bottom.

But, the government isn't preventing the housing market from correcting itself. It's providing incentives to help people refinance and get loans, but the banks themselves are standing in the gap, as they should, against poor investment decisions. You seem yourself in those 3 points to show that government is not keeping house prices inflated, try as (you say) they might.

 

[bueno]

I didn't say re-inflating, I was more referring to keeping the bubble from deflating further. No matter - let's address demand. How will low interest rates spur demand? If a company invests and produces products cheaper or more efficiently, it does not necessarily lead to lower prices (which would increase demand - maybe) because even with low interest rates, one has to recoup the initial investment. Without demand, there is no incentive to invest.

So the Fed solution - keeping interest rates low - still doesn't work, because it doesn't increase demand, therefore, it does not make investment more attractive. Which is why banks and corporations are figuratively hiding their money under the mattress.

And in this case the mattress is investing in the dollar (through T-Bills or whatever) which is keeping the dollar stronger than it would be if demand were stronger. When this entire house of cards collapses, it will really suck.

Some other person was saying "re-inflating". ANyway, I think it's a mistake to see the fed's moves and think "housing", because it's much more broad an action than just that.I'm not sure low interest rates will spur demand, nor are they intended to necessarily. It's all a balance. What a business wouldn't consider doing using a loan of 7% they might do using a loan of 4% or 2%, and at some point, you go so low that you find that the interest rate isn't the limiting factor in the decision. So that's one way that lowering the rate COULD affect business decisions, not necessarily demand, but just normal business decisions made when they look at cost-benefit ratio's, and the interest rate of the borrowed money is part of that ratio.

The fed is essentially lubricating the system, trying to make the entire economy SUPER liquid, in the hopes that almost any project anyone wants to do can be financed relatively cheaply. They're hoping they're removing any monetary based impediment to the decision of whether to act or not.

The fed isn't the only country investing in the dollar, as worldwide investments have all of a sudden increased substantially in risk, and people still see the US as a safe bet.

Regardless though, the fed policy will improve the economy ONCE demand picks back up, and not until then. They don't really see demand picking up for a few years, but in terms of monetary policy, they can't do much more to make it EASIER to borrow money, spur investment, etc etc etc.

So what we need to do is either just wait for the demand to pick up, or we can do something to increase demand through policies. Sure it'll not be the most efficient method, but acting to speed up the recovery seems a good thing to do, vs just sitting and waiting for demand to pick back up, or WORSE, more cuts which will almost certainly lead to decreased demand in the short term, at a time where we're wanting it to increase.

That goes back to my comments about, YES, we have a deficit problem, but it's a long-term problem, not a short-term emergency. The short term emergency we face is low demand, yet we're fighting the austerity fight.

Well you are hitting several points here. In regard to the strength of the dollar, we have to look at the alternatives. Markets are down world-wide and other currencies are weak only in comparison to ours. If you have to keep money invested (as many institutions do) and you aren't investing in stocks, the dollar is the only place to go.Now, dismissing the dollar argument, let's go back to our discussion of the fed and demand. Making it easier to borrow money does not make borrowing money a good decision. When I look at cost-benefit decisions for my business, the first factor is not interest rates. It is demand for my product. Interest rates do nothing to change demand for my product. In fact, looking at what is happening in the markets right now, a zero percent interest rate would not motivate me to borrow money.

The only thing I can see that will increase demand is to give people more money to spend. There is only one way the government can do that. However, to give people more money to spend (through tax decreases), one has to cut spending, given the size of our debt.

The situation is a lot different today than during the Reagan era. No one will argue that Reagan increased our debt. However, if your total debt is less than your income, you can go into debt. When your total debt is approaching your income level, you cannot. So while I can forgive Reagan, when our debt was low compared to GDP, it is harder to forgive Obama, when our debt is approaching or exceeding our GDP.

Too much wine tonight. I hope this is coherent.

Fairly coherent, and I agree with your comments about demand playing the biggest role.However, if your business were bigger, I think some of the decision you'd be looking at might cause interest rates to play a bigger role in determining whether you act, whether buying a new building/facility, investing in equipment, etc. Anything that requires a big loan that you'd been VERY close to justifying, if the interest rate on that loan drops way down, it makes the proposition more attractive, but certainly if demand dropped more, then it might not be enticing, and I agree that this is what we're seeing. THe fed has done all it can to make investment and taking out loans to spur growth more attractive, but the demand just isn't there to justify these decisions. All the fed can do, and has done, is give these businesses some longer term idea of how long rates will stay where they are, which is helpful in business planning.

There are many differences between today and Reagan era, not including the depth of the recession, and perhaps the interest rates on money we can borrow, ones you listed, and many more.

The comment you make is right, the government has to borrow in order to increase demand, but at the rates the government can borrow at RIGHT now, the interest rates are HISTORICALLY low, making it a much more attractive prospect than ever before.

As a business person, surely you could evaluate the cost of borrowing at these low rates and stimulating the economy into increasing demand, increasing revenues, and getting us back on track sooner (experiencing a reduced revenue loss due to a prolonged recession) vs letting the situation work itself out, taking longer to come out of the recession, resulting in years of less than optimal growth.

Certainly there's some guesswork going into numerical figures that calculate the cost of stimulating the economy through deficit spending now, and the interest paid on that debt, vs the increased revenue we'll see over time, compared to not doing anything. My assumption at this point is that the costs of acting now outweigh the costs in paying back the short term debt+interest, since rates are very low, and every year that goes by in a "depressed" economy is a lot of money we're out, on the order of trillions of dollars.

So it seems you see that demand is a problem. Do you also see that if we focus on spending cuts now, we're going to further reduce demand? How is that going to help the situation?

Well, it depends on future interest rates when discussing the US debt. So long as the Fed is acting to keep T-Bill rates low, everything appears to work. But how long can they print money to buy T-Bills without triggering inflation? (they are doing other smoke-and-mirrors tricks to keep inflation low, except on food and fuel of course, which is not included in the CPI, but that's another argument).The bottom line, is that without some increase in revenue, I cannot borrow money - I cannot afford the loan payments - not matter what the interest rates. I don't think I am the only business in this situation. The money may be "out" in the future is irrelevant. If I see a reason to invest in the future, I really won't be "out" that much money.

Again, the wine is kicking in. Hope I'm making sense.

 

[bueno]

Regarding the private industry, I agree that in general private industry spends a dollar better, but with low demand, even if they have a dollar in hand, that doesn't mean that they will spend it right now, either on a project, or on employment, until they see demand increasing. To me that means that while private industry in the (primarily) free market is the best way to spend money and to achieve efficiency and productivity, the whole system relies on demand, and in times of recession, it's lacking, especially in deep ones.

So essentially, the question I ask in this situation is, what is the most efficient way to stimulate demand in the economy FASTER than it otherwise would be increased otherwise, because I agree eventually it'll come back regardless. To me, the biggest question is how can policies increase demand. Do you ask a different question?

This is where the whole of macroeconomics just seems goofy to me. A lot of people smarter and better informed than me (like nearly all professional macroeconomists) talk about reduced aggregate demand as if the notion makes sense; so if I were to bet on who's right about it and who's wrong, I'd bet that I'm wrong. But I sure wish someone would explain why. It's a pretty big mystery that I'd be enormously grateful to have the solution to; but so far, I've never seen an explanation of reduced aggregate demand that makes sense to me.There's no such thing, as far as I can tell, as reduced aggregate demand for all goods and services that will result in less overall spending. All dollars get spent. The only alternative to spending a dollar is hiding it under a mattress. The mattress effect will always be negligible, as far as I can tell.

Investing or lending are not alternatives to spending, because investing and lending are types of spending. If I spend $100, I might buy a TV with it. If I invest $100 in a business, the business might buy a printer with it. If I lend $100 to a business, the business might buy a scanner with it. Businesses don't raise capital for the purpose of sitting on it: they borrow only so they can spend. Why are TVs inherently better for the economy than printers or scanners?

(And don't think that you're keeping your money out of the economy by depositing it in a checking account. When you do that, the bank invests it or lends it. The purchase of a printer or scanner is still the end result.)

For the most part, the only thing that will stop a given un-spent dollar from being invested or loaned (and therefore ultimately spent) is if expected risk-adjusted returns on investment and nominal interest rates are both negative. That will happen only if overall productivity drops to absurdly low levels. So again I'm back to wanting to improve overall productivity; and again, to me, that means keeping more money (at the current margin) in the private sector.

The problem is, corporations (including banks) are not reinvesting - which is equivalent to putting the money under the mattress.

Corporations keep their money in banks. Have banks increased their reserves in the last few years? I don't know the answer, but my first instinct is to doubt it.I just tried Googling the answer, though, and it appears that banks have increased their reserves in the last few years — in part because the Fed started paying interest on excess reserves in late 2008. Why would it do that? The obvious effect, it seems to me, would be to cause what people are referring to as "reduced aggregate demand" (i.e., a mattress effect).

This is an area I don't understand very well.

Well, whatever the reason or the methodology, banks, corporations and investors are keeping their money on the sidelines. I think this is in part because certain sectors (mainly housing) has not bottomed yet (and this is because of government intervention), and in part because there is a large amount of uncertainty (in part because the cost of ObamaCare is still unknown, but there are other reasons) and in part because low demand does not justify investment.

I don't understand how you can say the housing industry isn't bottoming because of government intervention. Foreclosures are STILL happening at a rapid rate, houses in most inflated areas have collapsed in value, people are walking away from their homes, and in recent memory it has never been harder to qualify for a loan.The government is trying like crazy to get more banks to loan to people, but the banks are not doing it because a) the homes people are trying to finance are worth a lot less than before or b) they're high credit risks or c) some other of a variety of different reasons the bank won't loan money. It's rampant out there, and it's very hard to get a loan, which means it's very unlikely the banks are facilitating the government in propping up the housing market.

Let me explain it to you:1. The government is trying like crazy to get more banks to loan to people.

2. the homes people are trying to finance are worth a lot less than before.

3. bank won't loan money.

If the government gets out of the way and let the market bottom, rather than trying like crazy to get banks to loan to people, then the market will bottom.

But, the government isn't preventing the housing market from correcting itself. It's providing incentives to help people refinance and get loans, but the banks themselves are standing in the gap, as they should, against poor investment decisions. You seem yourself in those 3 points to show that government is not keeping house prices inflated, try as (you say) they might.

There are other issues involved, including discouraging foreclosures. I'm not going to do the research tonight to back up that assertion - too much red, red wine - making me feel fine.

 

[Slapdash]

I didn't say re-inflating, I was more referring to keeping the bubble from deflating further. No matter - let's address demand. How will low interest rates spur demand? If a company invests and produces products cheaper or more efficiently, it does not necessarily lead to lower prices (which would increase demand - maybe) because even with low interest rates, one has to recoup the initial investment. Without demand, there is no incentive to invest.

So the Fed solution - keeping interest rates low - still doesn't work, because it doesn't increase demand, therefore, it does not make investment more attractive. Which is why banks and corporations are figuratively hiding their money under the mattress.

And in this case the mattress is investing in the dollar (through T-Bills or whatever) which is keeping the dollar stronger than it would be if demand were stronger. When this entire house of cards collapses, it will really suck.

Some other person was saying "re-inflating". ANyway, I think it's a mistake to see the fed's moves and think "housing", because it's much more broad an action than just that.I'm not sure low interest rates will spur demand, nor are they intended to necessarily. It's all a balance. What a business wouldn't consider doing using a loan of 7% they might do using a loan of 4% or 2%, and at some point, you go so low that you find that the interest rate isn't the limiting factor in the decision. So that's one way that lowering the rate COULD affect business decisions, not necessarily demand, but just normal business decisions made when they look at cost-benefit ratio's, and the interest rate of the borrowed money is part of that ratio.

The fed is essentially lubricating the system, trying to make the entire economy SUPER liquid, in the hopes that almost any project anyone wants to do can be financed relatively cheaply. They're hoping they're removing any monetary based impediment to the decision of whether to act or not.

The fed isn't the only country investing in the dollar, as worldwide investments have all of a sudden increased substantially in risk, and people still see the US as a safe bet.

Regardless though, the fed policy will improve the economy ONCE demand picks back up, and not until then. They don't really see demand picking up for a few years, but in terms of monetary policy, they can't do much more to make it EASIER to borrow money, spur investment, etc etc etc.

So what we need to do is either just wait for the demand to pick up, or we can do something to increase demand through policies. Sure it'll not be the most efficient method, but acting to speed up the recovery seems a good thing to do, vs just sitting and waiting for demand to pick back up, or WORSE, more cuts which will almost certainly lead to decreased demand in the short term, at a time where we're wanting it to increase.

That goes back to my comments about, YES, we have a deficit problem, but it's a long-term problem, not a short-term emergency. The short term emergency we face is low demand, yet we're fighting the austerity fight.

Well you are hitting several points here. In regard to the strength of the dollar, we have to look at the alternatives. Markets are down world-wide and other currencies are weak only in comparison to ours. If you have to keep money invested (as many institutions do) and you aren't investing in stocks, the dollar is the only place to go.Now, dismissing the dollar argument, let's go back to our discussion of the fed and demand. Making it easier to borrow money does not make borrowing money a good decision. When I look at cost-benefit decisions for my business, the first factor is not interest rates. It is demand for my product. Interest rates do nothing to change demand for my product. In fact, looking at what is happening in the markets right now, a zero percent interest rate would not motivate me to borrow money.

The only thing I can see that will increase demand is to give people more money to spend. There is only one way the government can do that. However, to give people more money to spend (through tax decreases), one has to cut spending, given the size of our debt.

The situation is a lot different today than during the Reagan era. No one will argue that Reagan increased our debt. However, if your total debt is less than your income, you can go into debt. When your total debt is approaching your income level, you cannot. So while I can forgive Reagan, when our debt was low compared to GDP, it is harder to forgive Obama, when our debt is approaching or exceeding our GDP.

Too much wine tonight. I hope this is coherent.

Fairly coherent, and I agree with your comments about demand playing the biggest role.However, if your business were bigger, I think some of the decision you'd be looking at might cause interest rates to play a bigger role in determining whether you act, whether buying a new building/facility, investing in equipment, etc. Anything that requires a big loan that you'd been VERY close to justifying, if the interest rate on that loan drops way down, it makes the proposition more attractive, but certainly if demand dropped more, then it might not be enticing, and I agree that this is what we're seeing. THe fed has done all it can to make investment and taking out loans to spur growth more attractive, but the demand just isn't there to justify these decisions. All the fed can do, and has done, is give these businesses some longer term idea of how long rates will stay where they are, which is helpful in business planning.

There are many differences between today and Reagan era, not including the depth of the recession, and perhaps the interest rates on money we can borrow, ones you listed, and many more.

The comment you make is right, the government has to borrow in order to increase demand, but at the rates the government can borrow at RIGHT now, the interest rates are HISTORICALLY low, making it a much more attractive prospect than ever before.

As a business person, surely you could evaluate the cost of borrowing at these low rates and stimulating the economy into increasing demand, increasing revenues, and getting us back on track sooner (experiencing a reduced revenue loss due to a prolonged recession) vs letting the situation work itself out, taking longer to come out of the recession, resulting in years of less than optimal growth.

Certainly there's some guesswork going into numerical figures that calculate the cost of stimulating the economy through deficit spending now, and the interest paid on that debt, vs the increased revenue we'll see over time, compared to not doing anything. My assumption at this point is that the costs of acting now outweigh the costs in paying back the short term debt+interest, since rates are very low, and every year that goes by in a "depressed" economy is a lot of money we're out, on the order of trillions of dollars.

So it seems you see that demand is a problem. Do you also see that if we focus on spending cuts now, we're going to further reduce demand? How is that going to help the situation?

Well, it depends on future interest rates when discussing the US debt. So long as the Fed is acting to keep T-Bill rates low, everything appears to work. But how long can they print money to buy T-Bills without triggering inflation? (they are doing other smoke-and-mirrors tricks to keep inflation low, except on food and fuel of course, which is not included in the CPI, but that's another argument).The bottom line, is that without some increase in revenue, I cannot borrow money - I cannot afford the loan payments - not matter what the interest rates. I don't think I am the only business in this situation. The money may be "out" in the future is irrelevant. If I see a reason to invest in the future, I really won't be "out" that much money.

Again, the wine is kicking in. Hope I'm making sense.

 

[Slapdash]

Regarding the private industry, I agree that in general private industry spends a dollar better, but with low demand, even if they have a dollar in hand, that doesn't mean that they will spend it right now, either on a project, or on employment, until they see demand increasing. To me that means that while private industry in the (primarily) free market is the best way to spend money and to achieve efficiency and productivity, the whole system relies on demand, and in times of recession, it's lacking, especially in deep ones.

So essentially, the question I ask in this situation is, what is the most efficient way to stimulate demand in the economy FASTER than it otherwise would be increased otherwise, because I agree eventually it'll come back regardless. To me, the biggest question is how can policies increase demand. Do you ask a different question?

This is where the whole of macroeconomics just seems goofy to me. A lot of people smarter and better informed than me (like nearly all professional macroeconomists) talk about reduced aggregate demand as if the notion makes sense; so if I were to bet on who's right about it and who's wrong, I'd bet that I'm wrong. But I sure wish someone would explain why. It's a pretty big mystery that I'd be enormously grateful to have the solution to; but so far, I've never seen an explanation of reduced aggregate demand that makes sense to me.

There's no such thing, as far as I can tell, as reduced aggregate demand for all goods and services that will result in less overall spending. All dollars get spent. The only alternative to spending a dollar is hiding it under a mattress. The mattress effect will always be negligible, as far as I can tell.

Investing or lending are not alternatives to spending, because investing and lending are types of spending. If I spend $100, I might buy a TV with it. If I invest $100 in a business, the business might buy a printer with it. If I lend $100 to a business, the business might buy a scanner with it. Businesses don't raise capital for the purpose of sitting on it: they borrow only so they can spend. Why are TVs inherently better for the economy than printers or scanners?

(And don't think that you're keeping your money out of the economy by depositing it in a checking account. When you do that, the bank invests it or lends it. The purchase of a printer or scanner is still the end result.)

For the most part, the only thing that will stop a given un-spent dollar from being invested or loaned (and therefore ultimately spent) is if expected risk-adjusted returns on investment and nominal interest rates are both negative. That will happen only if overall productivity drops to absurdly low levels. So again I'm back to wanting to improve overall productivity; and again, to me, that means keeping more money (at the current margin) in the private sector.

MT, all dollars do not get spent. The idea is that reduced demanded for all goods and services will be accompanied by an excess demand for safe(money and money-like) assets which reduces nominal spending. This increased liquidity preference(particularly by financial institutions and corporations) results in dollars being used to increase portfolios of these safe assets as opposed to lending and investing. I think the trends in money markets and other data for the last few years are pretty supportive with this occurring.

 

[Slapdash]

Regarding the private industry, I agree that in general private industry spends a dollar better, but with low demand, even if they have a dollar in hand, that doesn't mean that they will spend it right now, either on a project, or on employment, until they see demand increasing. To me that means that while private industry in the (primarily) free market is the best way to spend money and to achieve efficiency and productivity, the whole system relies on demand, and in times of recession, it's lacking, especially in deep ones.

So essentially, the question I ask in this situation is, what is the most efficient way to stimulate demand in the economy FASTER than it otherwise would be increased otherwise, because I agree eventually it'll come back regardless. To me, the biggest question is how can policies increase demand. Do you ask a different question?

This is where the whole of macroeconomics just seems goofy to me. A lot of people smarter and better informed than me (like nearly all professional macroeconomists) talk about reduced aggregate demand as if the notion makes sense; so if I were to bet on who's right about it and who's wrong, I'd bet that I'm wrong. But I sure wish someone would explain why. It's a pretty big mystery that I'd be enormously grateful to have the solution to; but so far, I've never seen an explanation of reduced aggregate demand that makes sense to me.There's no such thing, as far as I can tell, as reduced aggregate demand for all goods and services that will result in less overall spending. All dollars get spent. The only alternative to spending a dollar is hiding it under a mattress. The mattress effect will always be negligible, as far as I can tell.

Investing or lending are not alternatives to spending, because investing and lending are types of spending. If I spend $100, I might buy a TV with it. If I invest $100 in a business, the business might buy a printer with it. If I lend $100 to a business, the business might buy a scanner with it. Businesses don't raise capital for the purpose of sitting on it: they borrow only so they can spend. Why are TVs inherently better for the economy than printers or scanners?

(And don't think that you're keeping your money out of the economy by depositing it in a checking account. When you do that, the bank invests it or lends it. The purchase of a printer or scanner is still the end result.)

For the most part, the only thing that will stop a given un-spent dollar from being invested or loaned (and therefore ultimately spent) is if expected risk-adjusted returns on investment and nominal interest rates are both negative. That will happen only if overall productivity drops to absurdly low levels. So again I'm back to wanting to improve overall productivity; and again, to me, that means keeping more money (at the current margin) in the private sector.

The problem is, corporations (including banks) are not reinvesting - which is equivalent to putting the money under the mattress.

Corporations keep their money in banks. Have banks increased their reserves in the last few years? I don't know the answer, but my first instinct is to doubt it.I just tried Googling the answer, though, and it appears that banks have increased their reserves in the last few years — in part because the Fed started paying interest on excess reserves in late 2008. Why would it do that? The obvious effect, it seems to me, would be to cause what people are referring to as "reduced aggregate demand" (i.e., a mattress effect).

This is an area I don't understand very well.

I think paying IOER is a pretty bad idea for helping demand, particularly in this kind of slump.

 

[pantagrapher]

Euro Zone Death TripBy PAUL KRUGMANPublished: September 25, 2011Is it possible to be both terrified and bored? That’s how I feel about the negotiations now under way over how to respond to Europe’s economic crisis, and I suspect other observers share the sentiment.On one side, Europe’s situation is really, really scary: with countries that account for a third of the euro area’s economy now under speculative attack, the single currency’s very existence is being threatened — and a euro collapse could inflict vast damage on the world.On the other side, European policy makers seem set to deliver more of the same. They’ll probably find a way to provide more credit to countries in trouble, which may or may not stave off imminent disaster. But they don’t seem at all ready to acknowledge a crucial fact — namely, that without more expansionary fiscal and monetary policies in Europe’s stronger economies, all of their rescue attempts will fail.The story so far: The introduction of the euro in 1999 led to a vast boom in lending to Europe’s peripheral economies, because investors believed (wrongly) that the shared currency made Greek or Spanish debt just as safe as German debt. Contrary to what you often hear, this lending boom wasn’t mostly financing profligate government spending — Spain and Ireland actually ran budget surpluses on the eve of the crisis, and had low levels of debt. Instead, the inflows of money mainly fueled huge booms in private spending, especially on housing.But when the lending boom abruptly ended, the result was both an economic and a fiscal crisis. Savage recessions drove down tax receipts, pushing budgets deep into the red; meanwhile, the cost of bank bailouts led to a sudden increase in public debt. And one result was a collapse of investor confidence in the peripheral nations’ bonds.So now what? Europe’s answer has been to demand harsh fiscal austerity, especially sharp cuts in public spending, from troubled debtors, meanwhile providing stopgap financing until private-investor confidence returns. Can this strategy work?Not for Greece, which actually was fiscally profligate during the good years, and owes more than it can plausibly repay. Probably not for Ireland and Portugal, which for different reasons also have heavy debt burdens. But given a favorable external environment — specifically, a strong overall European economy with moderate inflation — Spain, which even now has relatively low debt, and Italy, which has a high level of debt but surprisingly small deficits, could possibly pull it off.Unfortunately, European policy makers seem determined to deny those debtors the environment they need.Think of it this way: private demand in the debtor countries has plunged with the end of the debt-financed boom. Meanwhile, public-sector spending is also being sharply reduced by austerity programs. So where are jobs and growth supposed to come from? The answer has to be exports, mainly to other European countries.But exports can’t boom if creditor countries are also implementing austerity policies, quite possibly pushing Europe as a whole back into recession.Also, the debtor nations need to cut prices and costs relative to creditor countries like Germany, which wouldn’t be too hard if Germany had 3 or 4 percent inflation, allowing the debtors to gain ground simply by having low or zero inflation. But the European Central Bank has a deflationary bias — it made a terrible mistake by raising interest rates in 2008 just as the financial crisis was gathering strength, and showed that it has learned nothing by repeating that mistake this year.As a result, the market now expects very low inflation in Germany — around 1 percent over the next five years — which implies significant deflation in the debtor nations. This will both deepen their slumps and increase the real burden of their debts, more or less ensuring that all rescue efforts will fail.And I see no sign at all that European policy elites are ready to rethink their hard-money-and-austerity dogma.Part of the problem may be that those policy elites have a selective historical memory. They love to talk about the German inflation of the early 1920s — a story that, as it happens, has no bearing on our current situation. Yet they almost never talk about a much more relevant example: the policies of Heinrich Brüning, Germany’s chancellor from 1930 to 1932, whose insistence on balancing budgets and preserving the gold standard made the Great Depression even worse in Germany than in the rest of Europe — setting the stage for you-know-what.Now, I don’t expect anything that bad to happen in 21st-century Europe. But there is a very wide gap between what the euro needs to survive and what European leaders are willing to do, or even talk about doing. And given that gap, it’s hard to find reasons for optimism.

 

[pantagrapher]

Lucas In Context (Wonkish)Via Mark Thoma, Noah Smith is puzzled by Robert Lucas. I thought it might be helpful to think of Lucas now in terms of the history of economic thought. By the way, I basically lived through the story I’m about to tell, so this is more or less first-hand.So, here’s the history of macro in brief.1. In the beginning was Keynesian economics, which was ad hoc in the sense that on some important issues it relied on observed stylized facts rather than trying to deduce everything from first principles. Notably, it just assumed that nominal wages are sticky, because they evidently are.2. In the 1960s a number of economists started trying to provide “microfoundations”, deriving wage and price stickiness from some kind of maximizing behavior. This early work had a big payoff: the Friedman/Phelps prediction that sustained inflation would get “built in”, and that the historical tradeoff between inflation and unemployment would vanish.3. In the 1970s, Lucas and disciples take it up a notch, arguing that we should assume rational expectations: people make the best predictions possible given the available information. But in that case, how can we explain the observed stickiness of wages and prices? Lucas argued for a “signal processing” approach, in which individuals can’t immediately distinguish between changes in their wage or price relative to others — changes to which they should respond by altering supply — and overall changes in the price level.4. In the 1980s, the Lucas project failed — pure and simple. It became obvious that recessions last too long, and there are too many sources of information, for rational confusion to explain business cycles. Nice try, with a lot of clever modeling, but it just didn’t work.5. One response to the failure of the Lucas project was the rise of New Keynesian economics. This basically went back to ad hoc assumptions about wages and prices, with a bit of hand-waving about menu costs and bounded rationality. The difference from old Keynesian economics was the effort to use as much maximizing logic as possible to interpret spending decisions. I find NK economics useful, if only as a way to check my logic, although it’s not really clear if it’s any better than old-fashioned Keynesianism.6. The other response, by those who had already invested vast effort and their careers in the Lucas project, was to drop the whole original purpose of the project, which was to explain why demand shocks matter. They turned instead to real business cycle models, which asserted that the ups and downs of the economy are caused by technological shocks magnified by rational labor supply responses. Full disclosure: this has always seemed absurd to me; as many have pointed out, the idea that the unemployed during a recession are voluntarily choosing to take time off is something only a professor could believe. But the math was impressive, and RBC became a self-contained, self-replicating intellectual world.7. The Lesser Depression arrives. It’s clearly not a technological shock; clearly, also, nobody is confused about whether we’re in a slump, as the old Lucas model required.In fact, it looks a lot like what Keynes described, and old-Keynesian models work very well, thank you, both at explaining it and in making predictions about such things as interest rates and the effects of fiscal austerity. But the descendants of the Lucas project know that Keynes was wrong — it’s what their teachers and their teachers’ teachers have been saying all these years. They cannot accept anything resembling a Keynesian explanation without devaluing everything they’ve done with their intellectual lives.So it must be Obama’s fault!

 

[humpback]

I don't understand how you can say the housing industry isn't bottoming because of government intervention. Foreclosures are STILL happening at a rapid rate, houses in most inflated areas have collapsed in value, people are walking away from their homes, and in recent memory it has never been harder to qualify for a loan.The government is trying like crazy to get more banks to loan to people, but the banks are not doing it because a) the homes people are trying to finance are worth a lot less than before or b) they're high credit risks or c) some other of a variety of different reasons the bank won't loan money. It's rampant out there, and it's very hard to get a loan, which means it's very unlikely the banks are facilitating the government in propping up the housing market.

Sure, foreclosures are still happening, values have collapsed, and people are walking away, but not to the levels that would have been if there hadn't been government intervention. It's very clear that they are intervening in the housing market (whether you think we should be or not is a different story), and that is why we haven't found a floor yet. Use the same "how much worse things would have been without the stimulus" argument.The banks aren't lending not because the home values are worth a lot less than before, it's because there is a good chance they will be worth a lot less still in the future. Think about a stock- just because it went from $50/sh to $25/sh doesn't mean it can't or shouldn't go to $10/sh. Obviously economic/job market concerns are a major factor as well when it comes to tighter lending practices.

 

[Slapdash]

I don't understand how you can say the housing industry isn't bottoming because of government intervention. Foreclosures are STILL happening at a rapid rate, houses in most inflated areas have collapsed in value, people are walking away from their homes, and in recent memory it has never been harder to qualify for a loan.

The government is trying like crazy to get more banks to loan to people, but the banks are not doing it because a) the homes people are trying to finance are worth a lot less than before or b) they're high credit risks or c) some other of a variety of different reasons the bank won't loan money. It's rampant out there, and it's very hard to get a loan, which means it's very unlikely the banks are facilitating the government in propping up the housing market.

Sure, foreclosures are still happening, values have collapsed, and people are walking away, but not to the levels that would have been if there hadn't been government intervention. It's very clear that they are intervening in the housing market (whether you think we should be or not is a different story), and that is why we haven't found a floor yet. Use the same "how much worse things would have been without the stimulus" argument.The banks aren't lending not because the home values are worth a lot less than before, it's because there is a good chance they will be worth a lot less still in the future. Think about a stock- just because it went from $50/sh to $25/sh doesn't mean it can't or shouldn't go to $10/sh. Obviously economic/job market concerns are a major factor as well when it comes to tighter lending practices.

Lending standards are indeed tighter but, even at credit levels that qualify, loan demand is extremely low right now. I do get the impression from people I speak to that loan demand is the key limiting factor right now FWIW. Clearly they are all intertwined.

 

[humpback]

Some other person was saying "re-inflating". ANyway, I think it's a mistake to see the fed's moves and think "housing", because it's much more broad an action than just that.I'm not sure low interest rates will spur demand, nor are they intended to necessarily. It's all a balance. What a business wouldn't consider doing using a loan of 7% they might do using a loan of 4% or 2%, and at some point, you go so low that you find that the interest rate isn't the limiting factor in the decision. So that's one way that lowering the rate COULD affect business decisions, not necessarily demand, but just normal business decisions made when they look at cost-benefit ratio's, and the interest rate of the borrowed money is part of that ratio.The fed is essentially lubricating the system, trying to make the entire economy SUPER liquid, in the hopes that almost any project anyone wants to do can be financed relatively cheaply. They're hoping they're removing any monetary based impediment to the decision of whether to act or not.The fed isn't the only country investing in the dollar, as worldwide investments have all of a sudden increased substantially in risk, and people still see the US as a safe bet. Regardless though, the fed policy will improve the economy ONCE demand picks back up, and not until then. They don't really see demand picking up for a few years, but in terms of monetary policy, they can't do much more to make it EASIER to borrow money, spur investment, etc etc etc.So what we need to do is either just wait for the demand to pick up, or we can do something to increase demand through policies. Sure it'll not be the most efficient method, but acting to speed up the recovery seems a good thing to do, vs just sitting and waiting for demand to pick back up, or WORSE, more cuts which will almost certainly lead to decreased demand in the short term, at a time where we're wanting it to increase.That goes back to my comments about, YES, we have a deficit problem, but it's a long-term problem, not a short-term emergency. The short term emergency we face is low demand, yet we're fighting the austerity fight.

We are already at historically low interest rates, and have been for years, so rates aren't the limiting decision. You've said yourself several times that it all comes down to demand- why would a business decide to expand if they had to pay 3% but not 6% if there is no change in demand? You have to worry about paying back the principal before interest even enters the equation.The counter-argument that you keep dismissing is that uncertainty is exacerbating the lack of demand. Some of that uncertanty is due to our deficits and debt levels. If people are worried about our future, it makes sense that they would be hesitant to spend more money today and save more for tomorrow. If we remove some of uncertainty, perhaps people would open up their checkbooks and spend more again.I've said it many times, but IMO this is a bigger issue than most people want to admit. We became so overleveraged at the peak of the market that we still have quite a ways to go to get back to healthy levels. When a good deal of your growth was fueled by a bubble, and it's magnified due to massive amounts of leverage, it's pretty painful when that bubble pops. Bubbles don't last forever even if we spend like they do.

 

[adonis]

We are already at historically low interest rates, and have been for years, so rates aren't the limiting decision. You've said yourself several times that it all comes down to demand- why would a business decide to expand if they had to pay 3% but not 6% if there is no change in demand? You have to worry about paying back the principal before interest even enters the equation.The counter-argument that you keep dismissing is that uncertainty is exacerbating the lack of demand. Some of that uncertanty is due to our deficits and debt levels. If people are worried about our future, it makes sense that they would be hesitant to spend more money today and save more for tomorrow. If we remove some of uncertainty, perhaps people would open up their checkbooks and spend more again.I've said it many times, but IMO this is a bigger issue than most people want to admit. We became so overleveraged at the peak of the market that we still have quite a ways to go to get back to healthy levels. When a good deal of your growth was fueled by a bubble, and it's magnified due to massive amounts of leverage, it's pretty painful when that bubble pops. Bubbles don't last forever even if we spend like they do.

I agree with much of what you wrote, although I don't think you define "uncertainty" very well. Uncertainty about inflation, uncertainty about short-term/long-term demand, uncertainty about economic/financial policies, uncertainty and political system shutting down government/allowing debt default/etc. Lots of things to be uncertain about, but I'd speculate that most businesses are most concerned about the uncertainty surrounding demand improving. Inflation concerns have largely been eased in the short-mid term. The others are still concerns I think, but don't affect as many industries as we may want to believe.And regarding interest rates guiding investment decisions, whether in people or plants or equipment, interest rates do matter, and it can make sense to invest even in periods of low demand, if the price is right. Like I said, it's all about what's in your analysis to determine at what cost does it make sense to do a certain project, and if interest rates drop the cost below the equilibrium line, the project is viable. I think the fed has done all it can to get all of that low-hanging fruit, and we're still in need of more to get things going.That's why stimulating demand is the issue we should be focusing on. Right now, the markets show us that there's no significant short term concern that we'll default on our debts, so to me that means some of the deficit fears, regarding uncertainty or whatever, are overblown. So again, we go back to demand as being front and center, the problem that needs to be addressed.I'm happy for congress to have a debate on HOW to stimulate demand in the most sensible and prudent way possible, but they're not having that debate. Tea party guys are saying that deficit reduction is the most important thing in the world, and anything short of that they won't allow, and the republicans are following suit, which basically is holding congress hostage.What's more interesting to me is that the Tea Party guys are misinterpreting their mandate, or whatever you want to call it. They believe they were voted in because the American people wanted them to go in and reduce deficits. Well, that may be true for a lot of people, but I'm here to tell you that the support these candidates received was due, largely, to the poor economic situation, and their response to the poor situation, and the inability of those in congress to fix it quickly, was to vote in anti-establishment people to show their frustration, and not as a blanket acceptance of their policies.My point here is to say that if the economy was doing fine, and we had these high levels of debt, these tea party guys would not have been elected. Their election is more about a dissatisfaction with the economy, than it is about concerns about deficits, because in a good economy, with the same deficits, these guys would not have been elected.Similarly, obama and his administration overplayed their hands in their election, which was largely a repudiation of the bush era, and concern about the financial situation unfolding during the election. They took it as a mandate to ram through their policies, some of which I supported, and they're paying the political price for that action.So basically, to summarize, the problem is demand, demand, demand. Focusing on other issues is a red herring, containing some sense of political grandstanding, in my opinion. I know there are legitimate gripes out there about government, size, deficits and all, but if we're wanting to improve the job situation, and help the economy recover quickly, we should be focused on ways to stimulate demand, rather than focusing on austerity measures. And those tea party guys sticking to their guns, are just as guilty as misrepresenting their mandate, or misinterpreting it, as Obama and his administration were when they were elected.

 

[humpback]

I don't understand how you can say the housing industry isn't bottoming because of government intervention. Foreclosures are STILL happening at a rapid rate, houses in most inflated areas have collapsed in value, people are walking away from their homes, and in recent memory it has never been harder to qualify for a loan.

The government is trying like crazy to get more banks to loan to people, but the banks are not doing it because a) the homes people are trying to finance are worth a lot less than before or b) they're high credit risks or c) some other of a variety of different reasons the bank won't loan money. It's rampant out there, and it's very hard to get a loan, which means it's very unlikely the banks are facilitating the government in propping up the housing market.

Sure, foreclosures are still happening, values have collapsed, and people are walking away, but not to the levels that would have been if there hadn't been government intervention. It's very clear that they are intervening in the housing market (whether you think we should be or not is a different story), and that is why we haven't found a floor yet. Use the same "how much worse things would have been without the stimulus" argument.The banks aren't lending not because the home values are worth a lot less than before, it's because there is a good chance they will be worth a lot less still in the future. Think about a stock- just because it went from $50/sh to $25/sh doesn't mean it can't or shouldn't go to $10/sh. Obviously economic/job market concerns are a major factor as well when it comes to tighter lending practices.

Lending standards are indeed tighter but, even at credit levels that qualify, loan demand is extremely low right now. I do get the impression from people I speak to that loan demand is the key limiting factor right now FWIW. Clearly they are all intertwined.

I agree- even if you qualify for a loan, there are plenty of reasons why you should be hesitant to make major purchases right now. I know I certainly wouldn't be rushing out to buy a home right now (edit- in most markets).

 

[humpback]

We are already at historically low interest rates, and have been for years, so rates aren't the limiting decision. You've said yourself several times that it all comes down to demand- why would a business decide to expand if they had to pay 3% but not 6% if there is no change in demand? You have to worry about paying back the principal before interest even enters the equation.The counter-argument that you keep dismissing is that uncertainty is exacerbating the lack of demand. Some of that uncertanty is due to our deficits and debt levels. If people are worried about our future, it makes sense that they would be hesitant to spend more money today and save more for tomorrow. If we remove some of uncertainty, perhaps people would open up their checkbooks and spend more again.I've said it many times, but IMO this is a bigger issue than most people want to admit. We became so overleveraged at the peak of the market that we still have quite a ways to go to get back to healthy levels. When a good deal of your growth was fueled by a bubble, and it's magnified due to massive amounts of leverage, it's pretty painful when that bubble pops. Bubbles don't last forever even if we spend like they do.

I agree with much of what you wrote, although I don't think you define "uncertainty" very well. Uncertainty about inflation, uncertainty about short-term/long-term demand, uncertainty about economic/financial policies, uncertainty and political system shutting down government/allowing debt default/etc. Lots of things to be uncertain about, but I'd speculate that most businesses are most concerned about the uncertainty surrounding demand improving. Inflation concerns have largely been eased in the short-mid term. The others are still concerns I think, but don't affect as many industries as we may want to believe.And regarding interest rates guiding investment decisions, whether in people or plants or equipment, interest rates do matter, and it can make sense to invest even in periods of low demand, if the price is right. Like I said, it's all about what's in your analysis to determine at what cost does it make sense to do a certain project, and if interest rates drop the cost below the equilibrium line, the project is viable. I think the fed has done all it can to get all of that low-hanging fruit, and we're still in need of more to get things going.That's why stimulating demand is the issue we should be focusing on. Right now, the markets show us that there's no significant short term concern that we'll default on our debts, so to me that means some of the deficit fears, regarding uncertainty or whatever, are overblown. So again, we go back to demand as being front and center, the problem that needs to be addressed.I'm happy for congress to have a debate on HOW to stimulate demand in the most sensible and prudent way possible, but they're not having that debate. Tea party guys are saying that deficit reduction is the most important thing in the world, and anything short of that they won't allow, and the republicans are following suit, which basically is holding congress hostage.What's more interesting to me is that the Tea Party guys are misinterpreting their mandate, or whatever you want to call it. They believe they were voted in because the American people wanted them to go in and reduce deficits. Well, that may be true for a lot of people, but I'm here to tell you that the support these candidates received was due, largely, to the poor economic situation, and their response to the poor situation, and the inability of those in congress to fix it quickly, was to vote in anti-establishment people to show their frustration, and not as a blanket acceptance of their policies.My point here is to say that if the economy was doing fine, and we had these high levels of debt, these tea party guys would not have been elected. Their election is more about a dissatisfaction with the economy, than it is about concerns about deficits, because in a good economy, with the same deficits, these guys would not have been elected.Similarly, obama and his administration overplayed their hands in their election, which was largely a repudiation of the bush era, and concern about the financial situation unfolding during the election. They took it as a mandate to ram through their policies, some of which I supported, and they're paying the political price for that action.So basically, to summarize, the problem is demand, demand, demand. Focusing on other issues is a red herring, containing some sense of political grandstanding, in my opinion. I know there are legitimate gripes out there about government, size, deficits and all, but if we're wanting to improve the job situation, and help the economy recover quickly, we should be focused on ways to stimulate demand, rather than focusing on austerity measures. And those tea party guys sticking to their guns, are just as guilty as misrepresenting their mandate, or misinterpreting it, as Obama and his administration were when they were elected.

Yes, rates are a factor, just not right now- rates have been very low for a long time, they really can't go much lower at all, so that isn't a reason for not borrowing money right now. It's really a non-issue for this discussion.Sure, uncertainty covers many things for different people- the economy, jobs, demand, taxes, regulations, elections, etc. There is always going to be uncertainty obviously, but there does seem to be more now than usual.Again, it's the "chicken or the egg" thing. Is lack of demand causing uncertainty, or is uncertainty causing lack of demand? With the way our economy is so dependent on consumer spending, I'd say it's both. Some people will be less uncertain if we get our deficits and debts under control, overhaul our tax code, reduce regulations, tweak entitlements, etc. You may not agree, but many people do. It isn't a red herring if these are the reasons why people aren't spending money.I agree demand is a problem, I just don't think there is an easy solution. Much of the growth in demand was due to the housing bubble- that never should have existed. It wouldn't have been as big of an issue if we weren't so overleveraged (just like it isn't an issue for people who bought before the bubble and didn't cash out every other year). That leverage fueled our economy, and now the deleveraging is dragging it down. However, I think it's absolutely necessary if we're going to have a healthy economy. It just isn't sustainable to be overleveraged and continue to spend more money than you take in.

 

[pantagrapher]

Hidden in the MiddleGreg Sargent touches on a point I’ve been meaning to make; he does it in the context of third-party fantasies, but it’s true more broadly of calls for “centrism”. Namely, the hypothetical position self-proclaimed centrists want somebody to take — Michael Bloomberg, a chastened Obama, whatever — is almost always the position actually held by the Democratic party. But to seem “balanced”, the pundits involved have to ignore that inconvenient fact.Greg puts it this way:"One of the two parties already occupies the approximate ideological space that these commentators themselves are describing as the dream middle ground that allegedly can only be staked out by a third party.That party is known as the “Democratic Party,” and it alreadly holds many of the positions these commentators want a third party to espouse."Well, it’s not just the third party thing. I was struck by this passage in Tom Friedman’s last column:"We know what to do — a Grand Bargain: short-term stimulus to ease us through this deleveraging process, debt restructuring in the housing market and long-term budget-cutting to put our fiscal house in order. None of this is easy and the economy will not be fixed overnight; it will take years. But there is every chance it will get healed if our two parties construct the Grand Bargain we need."Who is the “we” who knows this? Well, me; Christy Romer; President Obama. The GOP, on the other hand, is fiercely opposed to any form of stimulus — it insists that we need to slash spending right now, that anti-stimulus is the way to create jobs. And anger over the prospect of helping delinquent debtors was, you might recall, where the Tea Party got started.That is, what Tom describes as the centrist position both parties know they should adopt, but refuse to do because of partisanship on both sides, is in fact the actually existing position of the Democratic party — a position that Republicans denounce as “socialist.”I know that admitting that Barack Obama is already the candidate of centrists’ dreams would be awkward, would make it hard to adopt the stance that both sides are equally at fault. But that is the truth.

 

[adonis]

Yes, rates are a factor, just not right now- rates have been very low for a long time, they really can't go much lower at all, so that isn't a reason for not borrowing money right now. It's really a non-issue for this discussion.Sure, uncertainty covers many things for different people- the economy, jobs, demand, taxes, regulations, elections, etc. There is always going to be uncertainty obviously, but there does seem to be more now than usual.Again, it's the "chicken or the egg" thing. Is lack of demand causing uncertainty, or is uncertainty causing lack of demand? With the way our economy is so dependent on consumer spending, I'd say it's both. Some people will be less uncertain if we get our deficits and debts under control, overhaul our tax code, reduce regulations, tweak entitlements, etc. You may not agree, but many people do. It isn't a red herring if these are the reasons why people aren't spending money.I agree demand is a problem, I just don't think there is an easy solution. Much of the growth in demand was due to the housing bubble- that never should have existed. It wouldn't have been as big of an issue if we weren't so overleveraged (just like it isn't an issue for people who bought before the bubble and didn't cash out every other year). That leverage fueled our economy, and now the deleveraging is dragging it down. However, I think it's absolutely necessary if we're going to have a healthy economy. It just isn't sustainable to be overleveraged and continue to spend more money than you take in.

Again, I agree with most everything you say here, especially the over-leveraged part. I don't think the lack of demand is largely driven by uncertainty, as I see it driven by a huge sucking of wealth out of the country.We talk about collapsing housing prices, which have been the biggest store of wealth for most people, and in many cases, it's all gone and they're left underwater. What's more, a lot of retirement accounts were really hit hard when the boom went bust, sending ripples through the investment banking sector, collapse of Lehman, etc, thereby pulling a lot more wealth out of people's accounts. Add onto that all of the layoffs and cuts that have gone along, more people unemployed, putting less and less into the economy, and people focusing more on savings and paying off debt, and you have all of these factors causing a decrease in demand, without even beginning to talk about anything due to uncertainty on a consumer level (and that does exist).But the gong i keep hammering is that we have a demand problem that supersedes our deficit problem, and that if our focus is to get the economy going again ASAP, we should be having a national debate about how best to stimulate our economy, yet that's not the focus (until Obama's jobs plan at least) of our national politics. It's like someone said (not exactly this, but similar) that we're worried about a broken ankle when we're going into cardiac arrest. Focus on the most pressing thing first, lack of demand, then focus on deficits, or do both at the same time, but what a big part of our government, lead by the Tea Party, is that our sole focus should be on spending cuts. It's the wrong focus.

 

[humpback]

Yes, rates are a factor, just not right now- rates have been very low for a long time, they really can't go much lower at all, so that isn't a reason for not borrowing money right now. It's really a non-issue for this discussion.Sure, uncertainty covers many things for different people- the economy, jobs, demand, taxes, regulations, elections, etc. There is always going to be uncertainty obviously, but there does seem to be more now than usual.Again, it's the "chicken or the egg" thing. Is lack of demand causing uncertainty, or is uncertainty causing lack of demand? With the way our economy is so dependent on consumer spending, I'd say it's both. Some people will be less uncertain if we get our deficits and debts under control, overhaul our tax code, reduce regulations, tweak entitlements, etc. You may not agree, but many people do. It isn't a red herring if these are the reasons why people aren't spending money.I agree demand is a problem, I just don't think there is an easy solution. Much of the growth in demand was due to the housing bubble- that never should have existed. It wouldn't have been as big of an issue if we weren't so overleveraged (just like it isn't an issue for people who bought before the bubble and didn't cash out every other year). That leverage fueled our economy, and now the deleveraging is dragging it down. However, I think it's absolutely necessary if we're going to have a healthy economy. It just isn't sustainable to be overleveraged and continue to spend more money than you take in.

Again, I agree with most everything you say here, especially the over-leveraged part. I don't think the lack of demand is largely driven by uncertainty, as I see it driven by a huge sucking of wealth out of the country.We talk about collapsing housing prices, which have been the biggest store of wealth for most people, and in many cases, it's all gone and they're left underwater. What's more, a lot of retirement accounts were really hit hard when the boom went bust, sending ripples through the investment banking sector, collapse of Lehman, etc, thereby pulling a lot more wealth out of people's accounts. Add onto that all of the layoffs and cuts that have gone along, more people unemployed, putting less and less into the economy, and people focusing more on savings and paying off debt, and you have all of these factors causing a decrease in demand, without even beginning to talk about anything due to uncertainty on a consumer level (and that does exist).But the gong i keep hammering is that we have a demand problem that supersedes our deficit problem, and that if our focus is to get the economy going again ASAP, we should be having a national debate about how best to stimulate our economy, yet that's not the focus (until Obama's jobs plan at least) of our national politics. It's like someone said (not exactly this, but similar) that we're worried about a broken ankle when we're going into cardiac arrest. Focus on the most pressing thing first, lack of demand, then focus on deficits, or do both at the same time, but what a big part of our government, lead by the Tea Party, is that our sole focus should be on spending cuts. It's the wrong focus.

Yes, all of those things you mentioned are issues. However, the issues wouldn't have been as large if we weren't so overleveraged. All markets fluctuate, that's how they work (and healthy), but it causes chaos when there is little to no equity involved- it would be like if we allowed people to buy stocks with none of their own money, just finance the whole purchase. It doesn't make any sense, yet that's what so many people were doing (and encouraged to do by government) with housing. It works great when things go up, terrible when they go down. Much of our "growth" during the boom was a mirage, and what we are dealing with now is closer to normal than the boom times were. It sucks, but that's just how it is.That's fine if you think the demand problem is greater than our deficit problem, and the lack of demand isn't largely driven by uncertainty, but that doesn't mean you're right. There is lot's of money sitting on the sidelines right now, and the 2 main reasons business owners are giving for not putting it to work are demand and uncertainty. Even if you say that uncertainty has zero impact on lack of demand, uncertaintly by itself is a big reason why businesses aren't investing right now. If you think uncertainty drives lack of demand like many people do, by combining the two you get by far the biggest reason given.What I'm saying is we shouldn't be stimulating short term demand by using more leverage. Even with our slightly higher savings rates, we still don't save nearly enough and have far too much debt. IMO, we need to stop focusing on the short term and move towards long term sustainable growth- pushing people to go out and buy TVs and such gives a little boost temporarily, but once it runs out we're right back to where we were, only further in debt.

 

[adonis]

What I'm saying is we shouldn't be stimulating short term demand by using more leverage. Even with our slightly higher savings rates, we still don't save nearly enough and have far too much debt. IMO, we need to stop focusing on the short term and move towards long term sustainable growth- pushing people to go out and buy TVs and such gives a little boost temporarily, but once it runs out we're right back to where we were, only further in debt.

Why not?If demand is our biggest issue, and interest rates are historically low on loans, why should we not be using debt to help prop us back up? Short term debt, not long term entitlement increases.

It should be a cost analysis. What is the cost of borrowing money now, what is the expected return. What is the cost of doing nothing? Compare the two. No one seems to be reasonably doing this.

We have estimates on how much our GDP should be growing, ideally, per year without recession. We can estimate how much we're losing via this recession, and how much we're under a "normal" GDP. We can calculate how much income/revenue we'd be losing if we don't come out of the recession very soon, so that gives us a baseline against which to measure other options.

I'm not encouraging individuals to go out and go into credit card debt, but rather to use stimulus projects smartly, to identify areas to invest in, create some jobs in that area, and create a ripple effect in the economy due to the infused money, which was borrowed at very low rates, to jump-start the economy again and move closer to the GDP we should be having, sooner.

 

[tommyGunZ]

What I'm saying is we shouldn't be stimulating short term demand by using more leverage. Even with our slightly higher savings rates, we still don't save nearly enough and have far too much debt. IMO, we need to stop focusing on the short term and move towards long term sustainable growth- pushing people to go out and buy TVs and such gives a little boost temporarily, but once it runs out we're right back to where we were, only further in debt.

Why not?If demand is our biggest issue, and interest rates are historically low on loans, why should we not be using debt to help prop us back up? Short term debt, not long term entitlement increases.

It should be a cost analysis. What is the cost of borrowing money now, what is the expected return. What is the cost of doing nothing? Compare the two. No one seems to be reasonably doing this.

We have estimates on how much our GDP should be growing, ideally, per year without recession. We can estimate how much we're losing via this recession, and how much we're under a "normal" GDP. We can calculate how much income/revenue we'd be losing if we don't come out of the recession very soon, so that gives us a baseline against which to measure other options.

I'm not encouraging individuals to go out and go into credit card debt, but rather to use stimulus projects smartly, to identify areas to invest in, create some jobs in that area, and create a ripple effect in the economy due to the infused money, which was borrowed at very low rates, to jump-start the economy again and move closer to the GDP we should be having, sooner.

I disagree w/re to the bold - there are people who are doing this. Unfortunately, I don't think those on the right are including the 2nd part of the analysis (economic costs of doing nothing) when they push austerity policy in the short term.

 

[humpback]

What I'm saying is we shouldn't be stimulating short term demand by using more leverage. Even with our slightly higher savings rates, we still don't save nearly enough and have far too much debt. IMO, we need to stop focusing on the short term and move towards long term sustainable growth- pushing people to go out and buy TVs and such gives a little boost temporarily, but once it runs out we're right back to where we were, only further in debt.

Why not?If demand is our biggest issue, and interest rates are historically low on loans, why should we not be using debt to help prop us back up? Short term debt, not long term entitlement increases.

It should be a cost analysis. What is the cost of borrowing money now, what is the expected return. What is the cost of doing nothing? Compare the two. No one seems to be reasonably doing this.

We have estimates on how much our GDP should be growing, ideally, per year without recession. We can estimate how much we're losing via this recession, and how much we're under a "normal" GDP. We can calculate how much income/revenue we'd be losing if we don't come out of the recession very soon, so that gives us a baseline against which to measure other options.

I'm not encouraging individuals to go out and go into credit card debt, but rather to use stimulus projects smartly, to identify areas to invest in, create some jobs in that area, and create a ripple effect in the economy due to the infused money, which was borrowed at very low rates, to jump-start the economy again and move closer to the GDP we should be having, sooner.

Because focusing on the short term does not fix the long term issues we are facing. We don't need to be "propped up", we need to make long-term investments that will spur real, long term growth.I'm all for doing the cost analysis, but the problem is that they are all only estimates. As much as many people want to disagree, no one can accurately say how much the tax cuts cost us, how many jobs were saved or created by the stimulus, or what impact any particular fiscal or monetary policy had on the economy. Take any estimate, tweak a couple of variables one way or the other, and you could arrive at a completely different conclusion. They aren't worth the paper they are printed on, yet people parade them around like they are indisputable evidence to support their opinions. Maybe no one seems to be doing it because it's kind of pointless- you can come up with one set of numbers and some one else can come up with a completely different one, and no one knows which is more accurate.

I think we differ on the problem- you think it's lack of demand. While I agree that's a problem, IMO it's only a problem because of the flaws in our system. Having an economy driven by consumer spending, much of it on credit, is unsustainable. Once you get a downturn, and the credit stops flowing as freely, things grind to a halt. We can't expect to reap all the benefits of booms fueled by overleverage without feeling the pain of deleveraging.

I'm not against stimulus spending altogether, but I am if it's going to look like the last one. We need to return the focus to the longer term, and realize that this deleveraging is going to take time to work itself through the system. Long term investments take time, and politicians don't like that- they need the numbers to look good before the next election, not years from now.

 

[pantagrapher]

What I'm saying is we shouldn't be stimulating short term demand by using more leverage. Even with our slightly higher savings rates, we still don't save nearly enough and have far too much debt. IMO, we need to stop focusing on the short term and move towards long term sustainable growth- pushing people to go out and buy TVs and such gives a little boost temporarily, but once it runs out we're right back to where we were, only further in debt.

Why not?If demand is our biggest issue, and interest rates are historically low on loans, why should we not be using debt to help prop us back up? Short term debt, not long term entitlement increases.

It should be a cost analysis. What is the cost of borrowing money now, what is the expected return. What is the cost of doing nothing? Compare the two. No one seems to be reasonably doing this.

We have estimates on how much our GDP should be growing, ideally, per year without recession. We can estimate how much we're losing via this recession, and how much we're under a "normal" GDP. We can calculate how much income/revenue we'd be losing if we don't come out of the recession very soon, so that gives us a baseline against which to measure other options.

I'm not encouraging individuals to go out and go into credit card debt, but rather to use stimulus projects smartly, to identify areas to invest in, create some jobs in that area, and create a ripple effect in the economy due to the infused money, which was borrowed at very low rates, to jump-start the economy again and move closer to the GDP we should be having, sooner.

Because focusing on the short term does not fix the long term issues we are facing. We don't need to be "propped up", we need to make long-term investments that will spur real, long term growth.I'm all for doing the cost analysis, but the problem is that they are all only estimates. As much as many people want to disagree, no one can accurately say how much the tax cuts cost us, how many jobs were saved or created by the stimulus, or what impact any particular fiscal or monetary policy had on the economy. Take any estimate, tweak a couple of variables one way or the other, and you could arrive at a completely different conclusion. They aren't worth the paper they are printed on, yet people parade them around like they are indisputable evidence to support their opinions. Maybe no one seems to be doing it because it's kind of pointless- you can come up with one set of numbers and some one else can come up with a completely different one, and no one knows which is more accurate.

I think we differ on the problem- you think it's lack of demand. While I agree that's a problem, IMO it's only a problem because of the flaws in our system. Having an economy driven by consumer spending, much of it on credit, is unsustainable. Once you get a downturn, and the credit stops flowing as freely, things grind to a halt. We can't expect to reap all the benefits of booms fueled by overleverage without feeling the pain of deleveraging.

I'm not against stimulus spending altogether, but I am if it's going to look like the last one. We need to return the focus to the longer term, and realize that this deleveraging is going to take time to work itself through the system. Long term investments take time, and politicians don't like that- they need the numbers to look good before the next election, not years from now.

This idea that there's no right and wrong because anyone can "tweak a couple variables one way or the other" and arrive at a different conclusion seems overly cynical to me. Trying to explain the effect of stimulus or tax cuts on the economy isn't pointless. Saying it is is just a way to dismiss everything and prescribe inaction. I think Krugman has been careful and consistent in his economic analysis. He's not using numbers and variables he dreamed up. He's using the same numbers other people have access to and explaining them. It's no secret that I think he's right. If you think he's been wrong, you've had plenty of opportunity to try to explain why.

I would agree that no one knows accurately how much effect tax cuts or stimulus have. But demanding complete accuracy is a bit pedantic. I think it's safe to draw some conclusions or make predictions based on estimates in cases where we're talking about massive national economies.

 

[humpback]

What I'm saying is we shouldn't be stimulating short term demand by using more leverage. Even with our slightly higher savings rates, we still don't save nearly enough and have far too much debt. IMO, we need to stop focusing on the short term and move towards long term sustainable growth- pushing people to go out and buy TVs and such gives a little boost temporarily, but once it runs out we're right back to where we were, only further in debt.

Why not?If demand is our biggest issue, and interest rates are historically low on loans, why should we not be using debt to help prop us back up? Short term debt, not long term entitlement increases.

It should be a cost analysis. What is the cost of borrowing money now, what is the expected return. What is the cost of doing nothing? Compare the two. No one seems to be reasonably doing this.

We have estimates on how much our GDP should be growing, ideally, per year without recession. We can estimate how much we're losing via this recession, and how much we're under a "normal" GDP. We can calculate how much income/revenue we'd be losing if we don't come out of the recession very soon, so that gives us a baseline against which to measure other options.

I'm not encouraging individuals to go out and go into credit card debt, but rather to use stimulus projects smartly, to identify areas to invest in, create some jobs in that area, and create a ripple effect in the economy due to the infused money, which was borrowed at very low rates, to jump-start the economy again and move closer to the GDP we should be having, sooner.

Because focusing on the short term does not fix the long term issues we are facing. We don't need to be "propped up", we need to make long-term investments that will spur real, long term growth.I'm all for doing the cost analysis, but the problem is that they are all only estimates. As much as many people want to disagree, no one can accurately say how much the tax cuts cost us, how many jobs were saved or created by the stimulus, or what impact any particular fiscal or monetary policy had on the economy. Take any estimate, tweak a couple of variables one way or the other, and you could arrive at a completely different conclusion. They aren't worth the paper they are printed on, yet people parade them around like they are indisputable evidence to support their opinions. Maybe no one seems to be doing it because it's kind of pointless- you can come up with one set of numbers and some one else can come up with a completely different one, and no one knows which is more accurate.

I think we differ on the problem- you think it's lack of demand. While I agree that's a problem, IMO it's only a problem because of the flaws in our system. Having an economy driven by consumer spending, much of it on credit, is unsustainable. Once you get a downturn, and the credit stops flowing as freely, things grind to a halt. We can't expect to reap all the benefits of booms fueled by overleverage without feeling the pain of deleveraging.

I'm not against stimulus spending altogether, but I am if it's going to look like the last one. We need to return the focus to the longer term, and realize that this deleveraging is going to take time to work itself through the system. Long term investments take time, and politicians don't like that- they need the numbers to look good before the next election, not years from now.

This idea that there's no right and wrong because anyone can "tweak a couple variables one way or the other" and arrive at a different conclusion seems overly cynical to me. Trying to explain the effect of stimulus or tax cuts on the economy isn't pointless. Saying it is is just a way to dismiss everything and prescribe inaction. I think Krugman has been careful and consistent in his economic analysis. He's not using numbers and variables he dreamed up. He's using the same numbers other people have access to and explaining them. It's no secret that I think he's right. If you think he's been wrong, you've had plenty of opportunity to try to explain why.

I would agree that no one knows accurately how much effect tax cuts or stimulus have. But demanding complete accuracy is a bit pedantic. I think it's safe to draw some conclusions or make predictions based on estimates in cases where we're talking about massive national economies.

Let me guess- your side is always right, and anyone who disagrees is always wrong?Where did I say I'm demanding complete accuracy? All I said is that it's impossible to get it (even after the fact with most of these), so people should stop treating estimates as facts.

I disagree with your last sentence- how is it safe to draw conclusions when there is no consensus? You're obviously going to believe the side that supports your argument, others will use their "estimates" to draw the opposite conclusion. There's a reason why there is more than one economic theory, with the keyword being "theory".

 

[tommyGunZ]

What I'm saying is we shouldn't be stimulating short term demand by using more leverage. Even with our slightly higher savings rates, we still don't save nearly enough and have far too much debt. IMO, we need to stop focusing on the short term and move towards long term sustainable growth- pushing people to go out and buy TVs and such gives a little boost temporarily, but once it runs out we're right back to where we were, only further in debt.

Why not?If demand is our biggest issue, and interest rates are historically low on loans, why should we not be using debt to help prop us back up? Short term debt, not long term entitlement increases.

It should be a cost analysis. What is the cost of borrowing money now, what is the expected return. What is the cost of doing nothing? Compare the two. No one seems to be reasonably doing this.

We have estimates on how much our GDP should be growing, ideally, per year without recession. We can estimate how much we're losing via this recession, and how much we're under a "normal" GDP. We can calculate how much income/revenue we'd be losing if we don't come out of the recession very soon, so that gives us a baseline against which to measure other options.

I'm not encouraging individuals to go out and go into credit card debt, but rather to use stimulus projects smartly, to identify areas to invest in, create some jobs in that area, and create a ripple effect in the economy due to the infused money, which was borrowed at very low rates, to jump-start the economy again and move closer to the GDP we should be having, sooner.

Because focusing on the short term does not fix the long term issues we are facing. We don't need to be "propped up", we need to make long-term investments that will spur real, long term growth.I'm all for doing the cost analysis, but the problem is that they are all only estimates. As much as many people want to disagree, no one can accurately say how much the tax cuts cost us, how many jobs were saved or created by the stimulus, or what impact any particular fiscal or monetary policy had on the economy. Take any estimate, tweak a couple of variables one way or the other, and you could arrive at a completely different conclusion. They aren't worth the paper they are printed on, yet people parade them around like they are indisputable evidence to support their opinions. Maybe no one seems to be doing it because it's kind of pointless- you can come up with one set of numbers and some one else can come up with a completely different one, and no one knows which is more accurate.

I think we differ on the problem- you think it's lack of demand. While I agree that's a problem, IMO it's only a problem because of the flaws in our system. Having an economy driven by consumer spending, much of it on credit, is unsustainable. Once you get a downturn, and the credit stops flowing as freely, things grind to a halt. We can't expect to reap all the benefits of booms fueled by overleverage without feeling the pain of deleveraging.

I'm not against stimulus spending altogether, but I am if it's going to look like the last one. We need to return the focus to the longer term, and realize that this deleveraging is going to take time to work itself through the system. Long term investments take time, and politicians don't like that- they need the numbers to look good before the next election, not years from now.

This idea that there's no right and wrong because anyone can "tweak a couple variables one way or the other" and arrive at a different conclusion seems overly cynical to me. Trying to explain the effect of stimulus or tax cuts on the economy isn't pointless. Saying it is is just a way to dismiss everything and prescribe inaction. I think Krugman has been careful and consistent in his economic analysis. He's not using numbers and variables he dreamed up. He's using the same numbers other people have access to and explaining them. It's no secret that I think he's right. If you think he's been wrong, you've had plenty of opportunity to try to explain why.

I would agree that no one knows accurately how much effect tax cuts or stimulus have. But demanding complete accuracy is a bit pedantic. I think it's safe to draw some conclusions or make predictions based on estimates in cases where we're talking about massive national economies.

Let me guess- your side is always right, and anyone who disagrees is always wrong?Where did I say I'm demanding complete accuracy? All I said is that it's impossible to get it (even after the fact with most of these), so people should stop treating estimates as facts.

I disagree with your last sentence- how is it safe to draw conclusions when there is no consensus? You're obviously going to believe the side that supports your argument, others will use their "estimates" to draw the opposite conclusion. There's a reason why there is more than one economic theory, with the keyword being "theory".

Thanks for raising the discourse. Do you have a newsletter I can subscribe to?

 

[humpback]

What I'm saying is we shouldn't be stimulating short term demand by using more leverage. Even with our slightly higher savings rates, we still don't save nearly enough and have far too much debt. IMO, we need to stop focusing on the short term and move towards long term sustainable growth- pushing people to go out and buy TVs and such gives a little boost temporarily, but once it runs out we're right back to where we were, only further in debt.

Why not?If demand is our biggest issue, and interest rates are historically low on loans, why should we not be using debt to help prop us back up? Short term debt, not long term entitlement increases.

It should be a cost analysis. What is the cost of borrowing money now, what is the expected return. What is the cost of doing nothing? Compare the two. No one seems to be reasonably doing this.

We have estimates on how much our GDP should be growing, ideally, per year without recession. We can estimate how much we're losing via this recession, and how much we're under a "normal" GDP. We can calculate how much income/revenue we'd be losing if we don't come out of the recession very soon, so that gives us a baseline against which to measure other options.

I'm not encouraging individuals to go out and go into credit card debt, but rather to use stimulus projects smartly, to identify areas to invest in, create some jobs in that area, and create a ripple effect in the economy due to the infused money, which was borrowed at very low rates, to jump-start the economy again and move closer to the GDP we should be having, sooner.

Because focusing on the short term does not fix the long term issues we are facing. We don't need to be "propped up", we need to make long-term investments that will spur real, long term growth.I'm all for doing the cost analysis, but the problem is that they are all only estimates. As much as many people want to disagree, no one can accurately say how much the tax cuts cost us, how many jobs were saved or created by the stimulus, or what impact any particular fiscal or monetary policy had on the economy. Take any estimate, tweak a couple of variables one way or the other, and you could arrive at a completely different conclusion. They aren't worth the paper they are printed on, yet people parade them around like they are indisputable evidence to support their opinions. Maybe no one seems to be doing it because it's kind of pointless- you can come up with one set of numbers and some one else can come up with a completely different one, and no one knows which is more accurate.

I think we differ on the problem- you think it's lack of demand. While I agree that's a problem, IMO it's only a problem because of the flaws in our system. Having an economy driven by consumer spending, much of it on credit, is unsustainable. Once you get a downturn, and the credit stops flowing as freely, things grind to a halt. We can't expect to reap all the benefits of booms fueled by overleverage without feeling the pain of deleveraging.

I'm not against stimulus spending altogether, but I am if it's going to look like the last one. We need to return the focus to the longer term, and realize that this deleveraging is going to take time to work itself through the system. Long term investments take time, and politicians don't like that- they need the numbers to look good before the next election, not years from now.

This idea that there's no right and wrong because anyone can "tweak a couple variables one way or the other" and arrive at a different conclusion seems overly cynical to me. Trying to explain the effect of stimulus or tax cuts on the economy isn't pointless. Saying it is is just a way to dismiss everything and prescribe inaction. I think Krugman has been careful and consistent in his economic analysis. He's not using numbers and variables he dreamed up. He's using the same numbers other people have access to and explaining them. It's no secret that I think he's right. If you think he's been wrong, you've had plenty of opportunity to try to explain why.

I would agree that no one knows accurately how much effect tax cuts or stimulus have. But demanding complete accuracy is a bit pedantic. I think it's safe to draw some conclusions or make predictions based on estimates in cases where we're talking about massive national economies.

Let me guess- your side is always right, and anyone who disagrees is always wrong?Where did I say I'm demanding complete accuracy? All I said is that it's impossible to get it (even after the fact with most of these), so people should stop treating estimates as facts.

I disagree with your last sentence- how is it safe to draw conclusions when there is no consensus? You're obviously going to believe the side that supports your argument, others will use their "estimates" to draw the opposite conclusion. There's a reason why there is more than one economic theory, with the keyword being "theory".

Thanks for raising the discourse. Do you have a newsletter I can subscribe to?

Thanks for adding nothing to the conversation, once again.

 

[bueno]

I didn't say re-inflating, I was more referring to keeping the bubble from deflating further. No matter - let's address demand. How will low interest rates spur demand? If a company invests and produces products cheaper or more efficiently, it does not necessarily lead to lower prices (which would increase demand - maybe) because even with low interest rates, one has to recoup the initial investment. Without demand, there is no incentive to invest.

So the Fed solution - keeping interest rates low - still doesn't work, because it doesn't increase demand, therefore, it does not make investment more attractive. Which is why banks and corporations are figuratively hiding their money under the mattress.

And in this case the mattress is investing in the dollar (through T-Bills or whatever) which is keeping the dollar stronger than it would be if demand were stronger. When this entire house of cards collapses, it will really suck.

Some other person was saying "re-inflating". ANyway, I think it's a mistake to see the fed's moves and think "housing", because it's much more broad an action than just that.I'm not sure low interest rates will spur demand, nor are they intended to necessarily. It's all a balance. What a business wouldn't consider doing using a loan of 7% they might do using a loan of 4% or 2%, and at some point, you go so low that you find that the interest rate isn't the limiting factor in the decision. So that's one way that lowering the rate COULD affect business decisions, not necessarily demand, but just normal business decisions made when they look at cost-benefit ratio's, and the interest rate of the borrowed money is part of that ratio.

The fed is essentially lubricating the system, trying to make the entire economy SUPER liquid, in the hopes that almost any project anyone wants to do can be financed relatively cheaply. They're hoping they're removing any monetary based impediment to the decision of whether to act or not.

The fed isn't the only country investing in the dollar, as worldwide investments have all of a sudden increased substantially in risk, and people still see the US as a safe bet.

Regardless though, the fed policy will improve the economy ONCE demand picks back up, and not until then. They don't really see demand picking up for a few years, but in terms of monetary policy, they can't do much more to make it EASIER to borrow money, spur investment, etc etc etc.

So what we need to do is either just wait for the demand to pick up, or we can do something to increase demand through policies. Sure it'll not be the most efficient method, but acting to speed up the recovery seems a good thing to do, vs just sitting and waiting for demand to pick back up, or WORSE, more cuts which will almost certainly lead to decreased demand in the short term, at a time where we're wanting it to increase.

That goes back to my comments about, YES, we have a deficit problem, but it's a long-term problem, not a short-term emergency. The short term emergency we face is low demand, yet we're fighting the austerity fight.

Well you are hitting several points here. In regard to the strength of the dollar, we have to look at the alternatives. Markets are down world-wide and other currencies are weak only in comparison to ours. If you have to keep money invested (as many institutions do) and you aren't investing in stocks, the dollar is the only place to go.Now, dismissing the dollar argument, let's go back to our discussion of the fed and demand. Making it easier to borrow money does not make borrowing money a good decision. When I look at cost-benefit decisions for my business, the first factor is not interest rates. It is demand for my product. Interest rates do nothing to change demand for my product. In fact, looking at what is happening in the markets right now, a zero percent interest rate would not motivate me to borrow money.

The only thing I can see that will increase demand is to give people more money to spend. There is only one way the government can do that. However, to give people more money to spend (through tax decreases), one has to cut spending, given the size of our debt.

The situation is a lot different today than during the Reagan era. No one will argue that Reagan increased our debt. However, if your total debt is less than your income, you can go into debt. When your total debt is approaching your income level, you cannot. So while I can forgive Reagan, when our debt was low compared to GDP, it is harder to forgive Obama, when our debt is approaching or exceeding our GDP.

Too much wine tonight. I hope this is coherent.

Fairly coherent, and I agree with your comments about demand playing the biggest role.However, if your business were bigger, I think some of the decision you'd be looking at might cause interest rates to play a bigger role in determining whether you act, whether buying a new building/facility, investing in equipment, etc. Anything that requires a big loan that you'd been VERY close to justifying, if the interest rate on that loan drops way down, it makes the proposition more attractive, but certainly if demand dropped more, then it might not be enticing, and I agree that this is what we're seeing. THe fed has done all it can to make investment and taking out loans to spur growth more attractive, but the demand just isn't there to justify these decisions. All the fed can do, and has done, is give these businesses some longer term idea of how long rates will stay where they are, which is helpful in business planning.

There are many differences between today and Reagan era, not including the depth of the recession, and perhaps the interest rates on money we can borrow, ones you listed, and many more.

The comment you make is right, the government has to borrow in order to increase demand, but at the rates the government can borrow at RIGHT now, the interest rates are HISTORICALLY low, making it a much more attractive prospect than ever before.

As a business person, surely you could evaluate the cost of borrowing at these low rates and stimulating the economy into increasing demand, increasing revenues, and getting us back on track sooner (experiencing a reduced revenue loss due to a prolonged recession) vs letting the situation work itself out, taking longer to come out of the recession, resulting in years of less than optimal growth.

Certainly there's some guesswork going into numerical figures that calculate the cost of stimulating the economy through deficit spending now, and the interest paid on that debt, vs the increased revenue we'll see over time, compared to not doing anything. My assumption at this point is that the costs of acting now outweigh the costs in paying back the short term debt+interest, since rates are very low, and every year that goes by in a "depressed" economy is a lot of money we're out, on the order of trillions of dollars.

So it seems you see that demand is a problem. Do you also see that if we focus on spending cuts now, we're going to further reduce demand? How is that going to help the situation?

Well, it depends on future interest rates when discussing the US debt. So long as the Fed is acting to keep T-Bill rates low, everything appears to work. But how long can they print money to buy T-Bills without triggering inflation? (they are doing other smoke-and-mirrors tricks to keep inflation low, except on food and fuel of course, which is not included in the CPI, but that's another argument).The bottom line, is that without some increase in revenue, I cannot borrow money - I cannot afford the loan payments - not matter what the interest rates. I don't think I am the only business in this situation. The money may be "out" in the future is irrelevant. If I see a reason to invest in the future, I really won't be "out" that much money.

Again, the wine is kicking in. Hope I'm making sense.

Sigh. The most widely reported CPI is called the core CPI. The core CPI excludes goods with high price volatility, such as food and energy. Look it up - it's something someone in your business ought to know.

 

[bueno]

We are already at historically low interest rates, and have been for years, so rates aren't the limiting decision. You've said yourself several times that it all comes down to demand- why would a business decide to expand if they had to pay 3% but not 6% if there is no change in demand? You have to worry about paying back the principal before interest even enters the equation.The counter-argument that you keep dismissing is that uncertainty is exacerbating the lack of demand. Some of that uncertanty is due to our deficits and debt levels. If people are worried about our future, it makes sense that they would be hesitant to spend more money today and save more for tomorrow. If we remove some of uncertainty, perhaps people would open up their checkbooks and spend more again.I've said it many times, but IMO this is a bigger issue than most people want to admit. We became so overleveraged at the peak of the market that we still have quite a ways to go to get back to healthy levels. When a good deal of your growth was fueled by a bubble, and it's magnified due to massive amounts of leverage, it's pretty painful when that bubble pops. Bubbles don't last forever even if we spend like they do.

I agree with much of what you wrote, although I don't think you define "uncertainty" very well. Uncertainty about inflation, uncertainty about short-term/long-term demand, uncertainty about economic/financial policies, uncertainty and political system shutting down government/allowing debt default/etc. Lots of things to be uncertain about, but I'd speculate that most businesses are most concerned about the uncertainty surrounding demand improving. Inflation concerns have largely been eased in the short-mid term. The others are still concerns I think, but don't affect as many industries as we may want to believe.And regarding interest rates guiding investment decisions, whether in people or plants or equipment, interest rates do matter, and it can make sense to invest even in periods of low demand, if the price is right. Like I said, it's all about what's in your analysis to determine at what cost does it make sense to do a certain project, and if interest rates drop the cost below the equilibrium line, the project is viable. I think the fed has done all it can to get all of that low-hanging fruit, and we're still in need of more to get things going.That's why stimulating demand is the issue we should be focusing on. Right now, the markets show us that there's no significant short term concern that we'll default on our debts, so to me that means some of the deficit fears, regarding uncertainty or whatever, are overblown. So again, we go back to demand as being front and center, the problem that needs to be addressed.I'm happy for congress to have a debate on HOW to stimulate demand in the most sensible and prudent way possible, but they're not having that debate. Tea party guys are saying that deficit reduction is the most important thing in the world, and anything short of that they won't allow, and the republicans are following suit, which basically is holding congress hostage.What's more interesting to me is that the Tea Party guys are misinterpreting their mandate, or whatever you want to call it. They believe they were voted in because the American people wanted them to go in and reduce deficits. Well, that may be true for a lot of people, but I'm here to tell you that the support these candidates received was due, largely, to the poor economic situation, and their response to the poor situation, and the inability of those in congress to fix it quickly, was to vote in anti-establishment people to show their frustration, and not as a blanket acceptance of their policies.My point here is to say that if the economy was doing fine, and we had these high levels of debt, these tea party guys would not have been elected. Their election is more about a dissatisfaction with the economy, than it is about concerns about deficits, because in a good economy, with the same deficits, these guys would not have been elected.Similarly, obama and his administration overplayed their hands in their election, which was largely a repudiation of the bush era, and concern about the financial situation unfolding during the election. They took it as a mandate to ram through their policies, some of which I supported, and they're paying the political price for that action.So basically, to summarize, the problem is demand, demand, demand. Focusing on other issues is a red herring, containing some sense of political grandstanding, in my opinion. I know there are legitimate gripes out there about government, size, deficits and all, but if we're wanting to improve the job situation, and help the economy recover quickly, we should be focused on ways to stimulate demand, rather than focusing on austerity measures. And those tea party guys sticking to their guns, are just as guilty as misrepresenting their mandate, or misinterpreting it, as Obama and his administration were when they were elected.

Discounted cash flow- return on investment. Something maybe you should study a little harder. Not trying to be condescending - I just don't think you understand the concept.

 

[bueno]

Yes, rates are a factor, just not right now- rates have been very low for a long time, they really can't go much lower at all, so that isn't a reason for not borrowing money right now. It's really a non-issue for this discussion.

Sure, uncertainty covers many things for different people- the economy, jobs, demand, taxes, regulations, elections, etc. There is always going to be uncertainty obviously, but there does seem to be more now than usual.

Again, it's the "chicken or the egg" thing. Is lack of demand causing uncertainty, or is uncertainty causing lack of demand? With the way our economy is so dependent on consumer spending, I'd say it's both. Some people will be less uncertain if we get our deficits and debts under control, overhaul our tax code, reduce regulations, tweak entitlements, etc. You may not agree, but many people do. It isn't a red herring if these are the reasons why people aren't spending money.

I agree demand is a problem, I just don't think there is an easy solution. Much of the growth in demand was due to the housing bubble- that never should have existed. It wouldn't have been as big of an issue if we weren't so overleveraged (just like it isn't an issue for people who bought before the bubble and didn't cash out every other year). That leverage fueled our economy, and now the deleveraging is dragging it down. However, I think it's absolutely necessary if we're going to have a healthy economy. It just isn't sustainable to be overleveraged and continue to spend more money than you take in.

Again, I agree with most everything you say here, especially the over-leveraged part. I don't think the lack of demand is largely driven by uncertainty, as I see it driven by a huge sucking of wealth out of the country.We talk about collapsing housing prices, which have been the biggest store of wealth for most people, and in many cases, it's all gone and they're left underwater. What's more, a lot of retirement accounts were really hit hard when the boom went bust, sending ripples through the investment banking sector, collapse of Lehman, etc, thereby pulling a lot more wealth out of people's accounts. Add onto that all of the layoffs and cuts that have gone along, more people unemployed, putting less and less into the economy, and people focusing more on savings and paying off debt, and you have all of these factors causing a decrease in demand, without even beginning to talk about anything due to uncertainty on a consumer level (and that does exist).

But the gong i keep hammering is that we have a demand problem that supersedes our deficit problem, and that if our focus is to get the economy going again ASAP, we should be having a national debate about how best to stimulate our economy, yet that's not the focus (until Obama's jobs plan at least) of our national politics. It's like someone said (not exactly this, but similar) that we're worried about a broken ankle when we're going into cardiac arrest. Focus on the most pressing thing first, lack of demand, then focus on deficits, or do both at the same time, but what a big part of our government, lead by the Tea Party, is that our sole focus should be on spending cuts. It's the wrong focus.

I think it would be more accurate to say that the wealth was destroyed - it doesn't exist anymore. It wasn't sucked out of the country to somewhere else.

 

[adonis]

We are already at historically low interest rates, and have been for years, so rates aren't the limiting decision. You've said yourself several times that it all comes down to demand- why would a business decide to expand if they had to pay 3% but not 6% if there is no change in demand? You have to worry about paying back the principal before interest even enters the equation.The counter-argument that you keep dismissing is that uncertainty is exacerbating the lack of demand. Some of that uncertanty is due to our deficits and debt levels. If people are worried about our future, it makes sense that they would be hesitant to spend more money today and save more for tomorrow. If we remove some of uncertainty, perhaps people would open up their checkbooks and spend more again.I've said it many times, but IMO this is a bigger issue than most people want to admit. We became so overleveraged at the peak of the market that we still have quite a ways to go to get back to healthy levels. When a good deal of your growth was fueled by a bubble, and it's magnified due to massive amounts of leverage, it's pretty painful when that bubble pops. Bubbles don't last forever even if we spend like they do.

I agree with much of what you wrote, although I don't think you define "uncertainty" very well. Uncertainty about inflation, uncertainty about short-term/long-term demand, uncertainty about economic/financial policies, uncertainty and political system shutting down government/allowing debt default/etc. Lots of things to be uncertain about, but I'd speculate that most businesses are most concerned about the uncertainty surrounding demand improving. Inflation concerns have largely been eased in the short-mid term. The others are still concerns I think, but don't affect as many industries as we may want to believe.And regarding interest rates guiding investment decisions, whether in people or plants or equipment, interest rates do matter, and it can make sense to invest even in periods of low demand, if the price is right. Like I said, it's all about what's in your analysis to determine at what cost does it make sense to do a certain project, and if interest rates drop the cost below the equilibrium line, the project is viable. I think the fed has done all it can to get all of that low-hanging fruit, and we're still in need of more to get things going.That's why stimulating demand is the issue we should be focusing on. Right now, the markets show us that there's no significant short term concern that we'll default on our debts, so to me that means some of the deficit fears, regarding uncertainty or whatever, are overblown. So again, we go back to demand as being front and center, the problem that needs to be addressed.I'm happy for congress to have a debate on HOW to stimulate demand in the most sensible and prudent way possible, but they're not having that debate. Tea party guys are saying that deficit reduction is the most important thing in the world, and anything short of that they won't allow, and the republicans are following suit, which basically is holding congress hostage.What's more interesting to me is that the Tea Party guys are misinterpreting their mandate, or whatever you want to call it. They believe they were voted in because the American people wanted them to go in and reduce deficits. Well, that may be true for a lot of people, but I'm here to tell you that the support these candidates received was due, largely, to the poor economic situation, and their response to the poor situation, and the inability of those in congress to fix it quickly, was to vote in anti-establishment people to show their frustration, and not as a blanket acceptance of their policies.My point here is to say that if the economy was doing fine, and we had these high levels of debt, these tea party guys would not have been elected. Their election is more about a dissatisfaction with the economy, than it is about concerns about deficits, because in a good economy, with the same deficits, these guys would not have been elected.Similarly, obama and his administration overplayed their hands in their election, which was largely a repudiation of the bush era, and concern about the financial situation unfolding during the election. They took it as a mandate to ram through their policies, some of which I supported, and they're paying the political price for that action.So basically, to summarize, the problem is demand, demand, demand. Focusing on other issues is a red herring, containing some sense of political grandstanding, in my opinion. I know there are legitimate gripes out there about government, size, deficits and all, but if we're wanting to improve the job situation, and help the economy recover quickly, we should be focused on ways to stimulate demand, rather than focusing on austerity measures. And those tea party guys sticking to their guns, are just as guilty as misrepresenting their mandate, or misinterpreting it, as Obama and his administration were when they were elected.

Discounted cash flow- return on investment. Something maybe you should study a little harder. Not trying to be condescending - I just don't think you understand the concept.

What did I write that shows I don't understand a specific concept you're naming? Instead of just referring me to a concept, try explaining it and tying it to something specific that I said. I've had enough red win tonight myself so that whatever you type next might make sense.

 

[bueno]

We are already at historically low interest rates, and have been for years, so rates aren't the limiting decision. You've said yourself several times that it all comes down to demand- why would a business decide to expand if they had to pay 3% but not 6% if there is no change in demand? You have to worry about paying back the principal before interest even enters the equation.The counter-argument that you keep dismissing is that uncertainty is exacerbating the lack of demand. Some of that uncertanty is due to our deficits and debt levels. If people are worried about our future, it makes sense that they would be hesitant to spend more money today and save more for tomorrow. If we remove some of uncertainty, perhaps people would open up their checkbooks and spend more again.I've said it many times, but IMO this is a bigger issue than most people want to admit. We became so overleveraged at the peak of the market that we still have quite a ways to go to get back to healthy levels. When a good deal of your growth was fueled by a bubble, and it's magnified due to massive amounts of leverage, it's pretty painful when that bubble pops. Bubbles don't last forever even if we spend like they do.

I agree with much of what you wrote, although I don't think you define "uncertainty" very well. Uncertainty about inflation, uncertainty about short-term/long-term demand, uncertainty about economic/financial policies, uncertainty and political system shutting down government/allowing debt default/etc. Lots of things to be uncertain about, but I'd speculate that most businesses are most concerned about the uncertainty surrounding demand improving. Inflation concerns have largely been eased in the short-mid term. The others are still concerns I think, but don't affect as many industries as we may want to believe.And regarding interest rates guiding investment decisions, whether in people or plants or equipment, interest rates do matter, and it can make sense to invest even in periods of low demand, if the price is right. Like I said, it's all about what's in your analysis to determine at what cost does it make sense to do a certain project, and if interest rates drop the cost below the equilibrium line, the project is viable. I think the fed has done all it can to get all of that low-hanging fruit, and we're still in need of more to get things going.That's why stimulating demand is the issue we should be focusing on. Right now, the markets show us that there's no significant short term concern that we'll default on our debts, so to me that means some of the deficit fears, regarding uncertainty or whatever, are overblown. So again, we go back to demand as being front and center, the problem that needs to be addressed.I'm happy for congress to have a debate on HOW to stimulate demand in the most sensible and prudent way possible, but they're not having that debate. Tea party guys are saying that deficit reduction is the most important thing in the world, and anything short of that they won't allow, and the republicans are following suit, which basically is holding congress hostage.What's more interesting to me is that the Tea Party guys are misinterpreting their mandate, or whatever you want to call it. They believe they were voted in because the American people wanted them to go in and reduce deficits. Well, that may be true for a lot of people, but I'm here to tell you that the support these candidates received was due, largely, to the poor economic situation, and their response to the poor situation, and the inability of those in congress to fix it quickly, was to vote in anti-establishment people to show their frustration, and not as a blanket acceptance of their policies.My point here is to say that if the economy was doing fine, and we had these high levels of debt, these tea party guys would not have been elected. Their election is more about a dissatisfaction with the economy, than it is about concerns about deficits, because in a good economy, with the same deficits, these guys would not have been elected.Similarly, obama and his administration overplayed their hands in their election, which was largely a repudiation of the bush era, and concern about the financial situation unfolding during the election. They took it as a mandate to ram through their policies, some of which I supported, and they're paying the political price for that action.So basically, to summarize, the problem is demand, demand, demand. Focusing on other issues is a red herring, containing some sense of political grandstanding, in my opinion. I know there are legitimate gripes out there about government, size, deficits and all, but if we're wanting to improve the job situation, and help the economy recover quickly, we should be focused on ways to stimulate demand, rather than focusing on austerity measures. And those tea party guys sticking to their guns, are just as guilty as misrepresenting their mandate, or misinterpreting it, as Obama and his administration were when they were elected.

Discounted cash flow- return on investment. Something maybe you should study a little harder. Not trying to be condescending - I just don't think you understand the concept.

What did I write that shows I don't understand a specific concept you're naming? Instead of just referring me to a concept, try explaining it and tying it to something specific that I said. I've had enough red win tonight myself so that whatever you type next might make sense.

LOL - fair enough. I'm not very good at doing tables so the explanation is a little hard to read.As a business owner, when making an investment decision, two things are critical to me: the return on investment and the payback period. Rather than using ROI, I'm going to explain a related concept of Net Present Value (NPV).Payback period is how long it will take me to recoup my capital (or pay off the debt if I borrowed money). To calculate the NPV of an investment, I build a cumulative cash flow forecast that shows the investment in year 0, then the cash flow from that investment in subsequent years. There is obviously no reason to invest and take the risk of losing the investment if, after interest payments and inflation my money is better off being under my mattress. In fact, to take the risk, I need to know there is a profit. Most people discount their money 10-15% per year. At 15% profit is discounted:Capital Investment: $1,000,0000-1 years:0 .9286 $250,000 times 0.9286 = $232,1501-2 years: 0.7993 $250,000 times 0.7993 = $199,8252-3 years: 0.6879 $250,000 times 0.6879 = $171,9753-4 years: 0.5921 $250,000 times 0.5921 = $148,0254-5 years: 0.5096 $250,000 times 0.5096 = $127,400Total return at 15% rate of return: a little less than $880,000. Because the net present value (return minus capital investment) is negative, I don't make the investment. At today's low interest rates, there is no way the net present value will ever be positive, therefore there is no way I make the investment.Now, throw in uncertainty of interest rates, worries about inflation or lower demand (and therefore lower profit), uncertainty about the cost of ObamaCare, uncertainty over taxes, etc. and there is no way I make that investment.Where demand comes into the picture: if demand is stagnant, then my investment has to increase productivity or decrease cost. Either likely means fewer employees. Note that just because my costs might be lower, it doesn't mean that my product will cost less (which could increase demand for the product). I have an investment to recoup.So let's say that I have a capital investment of $1,000,000. I want a 15% return at today's inflation and interest rates. Let's say that in non-constant dollars, I make a profit before discounting for the time value of money of $250,000 per year.

 

[Slapdash]

I didn't say re-inflating, I was more referring to keeping the bubble from deflating further. No matter - let's address demand. How will low interest rates spur demand? If a company invests and produces products cheaper or more efficiently, it does not necessarily lead to lower prices (which would increase demand - maybe) because even with low interest rates, one has to recoup the initial investment. Without demand, there is no incentive to invest.

So the Fed solution - keeping interest rates low - still doesn't work, because it doesn't increase demand, therefore, it does not make investment more attractive. Which is why banks and corporations are figuratively hiding their money under the mattress.

And in this case the mattress is investing in the dollar (through T-Bills or whatever) which is keeping the dollar stronger than it would be if demand were stronger. When this entire house of cards collapses, it will really suck.

Some other person was saying "re-inflating". ANyway, I think it's a mistake to see the fed's moves and think "housing", because it's much more broad an action than just that.I'm not sure low interest rates will spur demand, nor are they intended to necessarily. It's all a balance. What a business wouldn't consider doing using a loan of 7% they might do using a loan of 4% or 2%, and at some point, you go so low that you find that the interest rate isn't the limiting factor in the decision. So that's one way that lowering the rate COULD affect business decisions, not necessarily demand, but just normal business decisions made when they look at cost-benefit ratio's, and the interest rate of the borrowed money is part of that ratio.

The fed is essentially lubricating the system, trying to make the entire economy SUPER liquid, in the hopes that almost any project anyone wants to do can be financed relatively cheaply. They're hoping they're removing any monetary based impediment to the decision of whether to act or not.

The fed isn't the only country investing in the dollar, as worldwide investments have all of a sudden increased substantially in risk, and people still see the US as a safe bet.

Regardless though, the fed policy will improve the economy ONCE demand picks back up, and not until then. They don't really see demand picking up for a few years, but in terms of monetary policy, they can't do much more to make it EASIER to borrow money, spur investment, etc etc etc.

So what we need to do is either just wait for the demand to pick up, or we can do something to increase demand through policies. Sure it'll not be the most efficient method, but acting to speed up the recovery seems a good thing to do, vs just sitting and waiting for demand to pick back up, or WORSE, more cuts which will almost certainly lead to decreased demand in the short term, at a time where we're wanting it to increase.

That goes back to my comments about, YES, we have a deficit problem, but it's a long-term problem, not a short-term emergency. The short term emergency we face is low demand, yet we're fighting the austerity fight.

Well you are hitting several points here. In regard to the strength of the dollar, we have to look at the alternatives. Markets are down world-wide and other currencies are weak only in comparison to ours. If you have to keep money invested (as many institutions do) and you aren't investing in stocks, the dollar is the only place to go.Now, dismissing the dollar argument, let's go back to our discussion of the fed and demand. Making it easier to borrow money does not make borrowing money a good decision. When I look at cost-benefit decisions for my business, the first factor is not interest rates. It is demand for my product. Interest rates do nothing to change demand for my product. In fact, looking at what is happening in the markets right now, a zero percent interest rate would not motivate me to borrow money.

The only thing I can see that will increase demand is to give people more money to spend. There is only one way the government can do that. However, to give people more money to spend (through tax decreases), one has to cut spending, given the size of our debt.

The situation is a lot different today than during the Reagan era. No one will argue that Reagan increased our debt. However, if your total debt is less than your income, you can go into debt. When your total debt is approaching your income level, you cannot. So while I can forgive Reagan, when our debt was low compared to GDP, it is harder to forgive Obama, when our debt is approaching or exceeding our GDP.

Too much wine tonight. I hope this is coherent.

Fairly coherent, and I agree with your comments about demand playing the biggest role.However, if your business were bigger, I think some of the decision you'd be looking at might cause interest rates to play a bigger role in determining whether you act, whether buying a new building/facility, investing in equipment, etc. Anything that requires a big loan that you'd been VERY close to justifying, if the interest rate on that loan drops way down, it makes the proposition more attractive, but certainly if demand dropped more, then it might not be enticing, and I agree that this is what we're seeing. THe fed has done all it can to make investment and taking out loans to spur growth more attractive, but the demand just isn't there to justify these decisions. All the fed can do, and has done, is give these businesses some longer term idea of how long rates will stay where they are, which is helpful in business planning.

There are many differences between today and Reagan era, not including the depth of the recession, and perhaps the interest rates on money we can borrow, ones you listed, and many more.

The comment you make is right, the government has to borrow in order to increase demand, but at the rates the government can borrow at RIGHT now, the interest rates are HISTORICALLY low, making it a much more attractive prospect than ever before.

As a business person, surely you could evaluate the cost of borrowing at these low rates and stimulating the economy into increasing demand, increasing revenues, and getting us back on track sooner (experiencing a reduced revenue loss due to a prolonged recession) vs letting the situation work itself out, taking longer to come out of the recession, resulting in years of less than optimal growth.

Certainly there's some guesswork going into numerical figures that calculate the cost of stimulating the economy through deficit spending now, and the interest paid on that debt, vs the increased revenue we'll see over time, compared to not doing anything. My assumption at this point is that the costs of acting now outweigh the costs in paying back the short term debt+interest, since rates are very low, and every year that goes by in a "depressed" economy is a lot of money we're out, on the order of trillions of dollars.

So it seems you see that demand is a problem. Do you also see that if we focus on spending cuts now, we're going to further reduce demand? How is that going to help the situation?

Well, it depends on future interest rates when discussing the US debt. So long as the Fed is acting to keep T-Bill rates low, everything appears to work. But how long can they print money to buy T-Bills without triggering inflation? (they are doing other smoke-and-mirrors tricks to keep inflation low, except on food and fuel of course, which is not included in the CPI, but that's another argument).The bottom line, is that without some increase in revenue, I cannot borrow money - I cannot afford the loan payments - not matter what the interest rates. I don't think I am the only business in this situation. The money may be "out" in the future is irrelevant. If I see a reason to invest in the future, I really won't be "out" that much money.

Again, the wine is kicking in. Hope I'm making sense.

Sigh. The most widely reported CPI is called the core CPI. The core CPI excludes goods with high price volatility, such as food and energy. Look it up - it's something someone in your business ought to know.

Not really. You could have just said core above instead of being misleading.

 

[pantagrapher]

What I'm saying is we shouldn't be stimulating short term demand by using more leverage. Even with our slightly higher savings rates, we still don't save nearly enough and have far too much debt. IMO, we need to stop focusing on the short term and move towards long term sustainable growth- pushing people to go out and buy TVs and such gives a little boost temporarily, but once it runs out we're right back to where we were, only further in debt.

Why not?If demand is our biggest issue, and interest rates are historically low on loans, why should we not be using debt to help prop us back up? Short term debt, not long term entitlement increases.

It should be a cost analysis. What is the cost of borrowing money now, what is the expected return. What is the cost of doing nothing? Compare the two. No one seems to be reasonably doing this.

We have estimates on how much our GDP should be growing, ideally, per year without recession. We can estimate how much we're losing via this recession, and how much we're under a "normal" GDP. We can calculate how much income/revenue we'd be losing if we don't come out of the recession very soon, so that gives us a baseline against which to measure other options.

I'm not encouraging individuals to go out and go into credit card debt, but rather to use stimulus projects smartly, to identify areas to invest in, create some jobs in that area, and create a ripple effect in the economy due to the infused money, which was borrowed at very low rates, to jump-start the economy again and move closer to the GDP we should be having, sooner.

Because focusing on the short term does not fix the long term issues we are facing. We don't need to be "propped up", we need to make long-term investments that will spur real, long term growth.I'm all for doing the cost analysis, but the problem is that they are all only estimates. As much as many people want to disagree, no one can accurately say how much the tax cuts cost us, how many jobs were saved or created by the stimulus, or what impact any particular fiscal or monetary policy had on the economy. Take any estimate, tweak a couple of variables one way or the other, and you could arrive at a completely different conclusion. They aren't worth the paper they are printed on, yet people parade them around like they are indisputable evidence to support their opinions. Maybe no one seems to be doing it because it's kind of pointless- you can come up with one set of numbers and some one else can come up with a completely different one, and no one knows which is more accurate.

I think we differ on the problem- you think it's lack of demand. While I agree that's a problem, IMO it's only a problem because of the flaws in our system. Having an economy driven by consumer spending, much of it on credit, is unsustainable. Once you get a downturn, and the credit stops flowing as freely, things grind to a halt. We can't expect to reap all the benefits of booms fueled by overleverage without feeling the pain of deleveraging.

I'm not against stimulus spending altogether, but I am if it's going to look like the last one. We need to return the focus to the longer term, and realize that this deleveraging is going to take time to work itself through the system. Long term investments take time, and politicians don't like that- they need the numbers to look good before the next election, not years from now.

This idea that there's no right and wrong because anyone can "tweak a couple variables one way or the other" and arrive at a different conclusion seems overly cynical to me. Trying to explain the effect of stimulus or tax cuts on the economy isn't pointless. Saying it is is just a way to dismiss everything and prescribe inaction. I think Krugman has been careful and consistent in his economic analysis. He's not using numbers and variables he dreamed up. He's using the same numbers other people have access to and explaining them. It's no secret that I think he's right. If you think he's been wrong, you've had plenty of opportunity to try to explain why.

I would agree that no one knows accurately how much effect tax cuts or stimulus have. But demanding complete accuracy is a bit pedantic. I think it's safe to draw some conclusions or make predictions based on estimates in cases where we're talking about massive national economies.

Let me guess- your side is always right, and anyone who disagrees is always wrong?Where did I say I'm demanding complete accuracy? All I said is that it's impossible to get it (even after the fact with most of these), so people should stop treating estimates as facts.

I disagree with your last sentence- how is it safe to draw conclusions when there is no consensus? You're obviously going to believe the side that supports your argument, others will use their "estimates" to draw the opposite conclusion. There's a reason why there is more than one economic theory, with the keyword being "theory".

First off, I don't know where you get your opening question. I've had ongoing productive arguments with several people in this thread. You made what I think is a cynical statement about economics. I disagreed and explained why.When you say "people should stop treating estimates as facts," (and "facts" is a problematic word; you initially said we can't assess the effect of stimulus or tax cuts, that it's all just estimates so why bother), you are implicitly demanding complete accuracy. Unless you get it, you don't think it's possible to draw any conclusions.

Last, we can revisit different theories and estimates and determine who was on the right track and who wasn't. So far, the Krugmans of the world have been right.