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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Skeet Shipman who wrote (1557)	3/9/2004 7:39:11 AM
From: Wyätt Gwyön	Respond to of 116555

because all the stimulus is "pushing on a string" in the face of record idle resources. it's useless and just pushes into the future and exacerbates the day of reckoning, which will consist of a massive deflationary debt depression. it is exacerbated because the stimulus is accompanied by more and more debt, which is what the debt depression will serve to unwind. right now, the economy is like a drunk who has just had three six packs and thinks a fourth will make him feel better.

To: Skeet Shipman who wrote (1557)	3/9/2004 9:25:57 AM
From: mishedlo	Respond to of 116555

All the answers are right here on this board and have been for some time. Outsourcing to India and China Increased Productivity Workers in the US working longer hours but those hours not being counted. Overcapacity for things on a global scale. India and China wages 1/20 of ours (or less) Rising health and benefit costs in the US Rising education levels overseas. The trend is just starting. Every job that can go overseas probably will. Mish

To: Skeet Shipman who wrote (1557)	3/9/2004 10:34:52 PM
From: CalculatedRisk	Respond to of 116555

Skeet, great question: “Why is there such low job growth with this recovery and fiscal/monetary stimulus?” I think you have to start with the stock bubble in the late 90s (I won’t bore anyone with why we had a bubble). The bubble led to the misallocation of capital and overcapacity in numerous industries. When the bubble burst, we had a recession (2001) that was primarily due to lower corporate investment. In fact, two of the biggest engines of our economy never missed a beat: consumer spending and real estate. Starting in early 2001, we had a significant stimulus to the economy. The Fed lowered the Fed fund rate from 6.5% at the beginning of 2001 to 1.75% by the end of the year (some of this was related to 9/11, but mostly this was in response to the weak economy). It was the accommodative Fed policy that kept consumer spending and real estate afloat. Meanwhile, Bush passed his massive tax cut plans. Now here is where the story gets a little tricky. Only minor portions of these tax plans were stimulative (like the child tax credit last fall – that I opposed too), and the rest of the tax cuts were actually a deflationary drag on the economy. The reason is simple: these tax cuts are primarily going to individuals already sitting on substantial liquid assets. There is no reason to invest in new facilities, equipment, hiring people; we already have overcapacity. It is not invested in new commercial buildings: we have overcapacity. It is not invested in residential rental property: still more overcapacity (vacancy rates have risen from 7.8% in 2001 to 10.2% today!) Maybe some of the money is invested in China or India, but that does not lead directly to job growth in America. So where is the money going? Primarily it is invested in stocks, bonds, treasuries, munis and other assets that do not create jobs. In some respects this is akin to hoarding by a few people. Take a small island: If the economy was based on coconuts and a single individual gathered up and stored all the coconuts, the economy would slow down. In fact, this type of activity is known to be deflationary! What we have is the Fed trying to inflate the economy with monetary policy (and creating a RE bubble), while the Bush administration is deflating the economy with misguided fiscal policy. But wait, it is actually worse. The Bush administration is also spending $5 Billion a month in Iraq (creates jobs in Iraq) and they have increased the defense budget significantly. Defense spending is known to have the lowest Kahn multiplier effect on the economy. So it is not just the misguided tax cuts, but it is their entire policy choices. At the same time, the forces that mish mentioned are also at work. This is especially true for outsourcing to China and India. We have lost about 2.9 million private sector jobs since Jan 2001, of which 2.7 million were manufacturing jobs (some lost to outsourcing, some lost to technology). Throughout the 90s, manufacturing was stable at about 17 million jobs, but manufacturing employment has now decreased to 14.3 million. We are just starting to see service jobs exported to India and other places (this is more fear than reality right now). The problem now is that the Fed has been fighting poor fiscal policy for almost 3 years, and has created significant bubbles in RE and consumer credit. Still, the problem is resolvable by repealing the Bush tax cuts, getting out of Iraq, and cutting back on the Bush defense spending programs. This will make the Fed’s actions inflationary. At the same time we need to tighten lending requirements (it is insane that we are loosening borrowing requirements right now), and slowly (very slowly) start raising the Fed funds rate. With the significant overcapacity built up in RE over the last couple of years (at least 800K rental units and 700K housing units over normal ratios), it is going to be difficult to slow down the RE market without a bust. But we need to try, or the unemployment from housing (construction, mortgage brokers, RE agents, etc) will be serious. Sorry for rambling on; I find it strange that no economic writer has picked up on the hoarding nature of Bush’s tax cut. Best to you!