Joseph Stiglitz is warning of a double dip recession in Europe because governments are becoming overly concerned with their deficits. Europe has similar fears but emphases weaknesses in US private sector housing demand that they some claim call for an increased US fiscal stimulus.
Equity markets around the world – including Australia – are tipping trouble ahead. Uncertainty over the election outcome in Australia seems to be having a minor influence compared to fears of a global recession. The banks are being hammered.
These gloomy expectations have a self-fulfilling character. It is deeply troubling.
It’s always been demographics Harry-
http://blog.atimes.net/?p=1547
Essentially savings and investment is all about old people lending to young people to fund their retirement while the young borrow to house themselves and invest in new and existing business opportunities. Demographics has seen savings supply exceed demand and that means prices must fall but that’s not what aging Keensians thought as they hocked up whole nations to prevent that happening until they couldn’t hock them any more and here we all are. You can throw more money at it but there’s not enough worthy borrowers to lend it to now. That wasn’t the case in the 70s when a bulging youth generation grabbed every cracker you threw at it and drove inflation through the roof with it. Welcome to Minsky moment stagflation folks and later the Great Moderation from the early 80s as that generation in its prime began to take advantage of increasing financial innovation and sophistication to garner the capital it needed to take over the reins and fund new IT startups and the like. The same financial innovation and derivation that would eventually evolve into fuelling the greatest asset bubble the the world has ever seen and fool everyone that real savings had accrued to a generation. No Keynesian money printing can prevent the obvious now as goldman points out. That’s essentially why our Govt should never have used fiscal stimulus because it was really squandering a desperately needed Future Fund that was never enough for the forseeable future. We’re better off than some but still face that fundamental demographic truth.
You can print money and drive down interest rates to zero and all that happens is the banks want a third up front or else they’ll lend their trillion dollars in excess reserves back to the Fed-
http://www.businessspectator.com.au/bs.nsf/Article/US-economy-Dow-Jones-Wall-Street-housing-double-di-pd20100825-8MSUW?OpenDocument&src=mp
Plenty more where that came from eh Keensians?
So observa would neither print money nor do a fiscal stimulus. I can just see how such a policy would reflate the economy – not. And on any reasonable intergenerational accounting, Australian baby boomers are more than paying their way – we can certainly afford a big stimulus.
However, I do agree that demographics matters far more than most economists realise. But the biggest risk of having an old population is *microeconomic* stagnation – the old are far keener on stabilty than innovation and are certainly not fond of creative destruction. Expect chronically low productivty growth.
Incidentally, Harry, you seemed to be strangely quiet about the ridiculous Coalition campaign theme of “massive government debt our grandchildren will still be paying off”. I assume it’s shame at their dishonesty.
Not true DD. In last Saturday’s Australian I expressly described abbot’s claims about Labor’s debt as untrue. The debt matters but the exaggerations are silly.
I agree demographic issues are important. An aging population means a longer term trend to less housing investment and hence depressed economies.
hc @ #4 said:
Is this what you think happened to Japan? Superficially it looks that way. The Japanese population is getting more senile, which will put a damper on household formation with the inevitable constriction in consumer demand.
As well the senility of the population increases pressure on both the welfare state (higher taxes for dependents) and workfare state (skilled labour shortages).
But the Japs also had a ginormous equity and property bubble through the late eighties-early nineties. Leading to the so-called Lost Decade from the early nineties-early noughties. Most commentators put Japanese stagnant economic performance down to households and companies amortising their crippling debt levels ie a prolonged wealthfare state recession.
Meanwhile the Japanese state has been rapidly accumulating debt as part of a decade+ effort to fiscally stimulate the economy. Perhaps it has staved off an even worse recession.
In any case, Japan is rather exceptional. Economic theory does not imply that economies contract because their populations are aging. Any more than economic theory implies that economies expand due to population “youthing”.
Its just that economic history does tend to support those propositions.
What is clear is that the massive intrusion of financial institutions into industrial concerns over the past decade has been the source of much economic mischief: instability, inefficiency and inequity. And the debt hangover can have nothing but a deflationary effect, whether it remains with firms or households or is kicked upstairs to the state.
Only the US, as the world’s global largest economy and currency reserve, has the luxury of being able to endlessly print money. Strangely enough they have not availed themselves of this opportunity.
hc @ #4 said:
That is the an oft-put point of view about Japan. But South Korea has an aging population and a birth rate south of Japan. Yet its economy continues to boom.
The difference between the two states is the accumulation of unserviceable debt, not the dissipation of youthful spirits.
Japan allowed an orgy of financial speculation through the eighties. And they never really tackled the root cause, which would have meant allowing some notable firms and banks to go under. Since then the Japanese have been lugging around a partially zombified economy.
Meanwhile the South Koreans bit the bullet and allowed their “Too Big To Fail” firms to go under. The result is that the SK’s have shrugged off the incubus of financial debt and have surged ahead industrially.
The takehome message: keep the financial speculators away from the industrial producers. If someone wants to have a flutter on the stock market, all well and good. But let them do it with their own money, not their stockholders, depositors or tax-payers.
And if their bet fails then let them go belly up and trudge home shirtless. No more morally hazardous Central Bank Puts where institutional third parties bankroll reckless speculation and conspicuous consumption.
Heads they win and tails we lose does not sound like a sporting wager to me.
“So observa would neither print money nor do a fiscal stimulus.” No that’s not true re stimulus although it is with funny money. To the extent that we were running a real surplus that was always available to spend in a downturn and perhaps some modest deficit for another year or so at most. However there’s no point in continually hocking populations up publicly as there’s a day of fiscal reckoning. That reckoning is usually imposed via inflation of the money supply and declining real incomes as a result of deliberately targetting 2-3% theft of savings, assuming asset prices are stable in the process. When they’re not there’s a double whammy and worse to come should there be a structural demographic deficit underlying it all. While Australia is the standout exception it’s clear why Wall Street and Keensian Govts are symbiotic parasites more generally now-
http://www.nytimes.com/2010/08/19/business/19muni.html
“Yes, they charged the State of New Jersey with fraud, but there’s no price paid here,” said Lynn E. Turner, a former chief accountant for the S.E.C. who helped with the pension investigation in San Diego. “There’s no fine, and no accountability on the part of any individuals.”
Sound familiar?
Symbiotic Keensian parasite to symbiotic Wall Street parasite- I’m warning you for the very last time that if you keep up with this parasitic behaviour and continually make our parasitic behaviour look bad well.. well.. we’re.. we’re gunna…
http://www.news.com.au/business/breaking-news/us-federal-reserve-chief-says-close-unstable-banks/story-e6frfkur-1225913624767
What, close down Fannie and Freddie…? Yeah, riiiiight!