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GDP, M&A, EBITDA, P/E, NASDAQ, Econo-thread Part 11
Hehe you have it easy, except for everyone thinking you are all amoral, moneygrabbing devil-worshippers.
But that I could live with. You see non-qualified people don't presume to barrage you every day with ill-considered and incorrect opinions on a subject you have presumably spent years and years honing your knowledge. The cross that economists have to bear is that _everyone_ has opinions, with precious few taking the time to understand whether those opinions have any merit or not.
I applaud those that do take some time to understand what are key issues for the world economy, but of course these people are sometimes the most annoying of all. A little knowledge is a dangerous thing.
"You see non-qualified people don't presume to barrage you every day with ill-considered and incorrect opinions on a subject you have presumably spent years and years honing your knowledge."
You need to work on the arcane qualities of economics. Works well with law - but then you get the "explain it in a way I can udnerstand", which can be worse....
Only exception is oddly enough EU law. Every one and his dog has an opinion on curved cucumbers.
You need to work on the arcane qualities of economics. Works well with law - but then you get the "explain it in a way I can udnerstand", which can be worse....
You know for a while I tried. After much futile debate the realisation hit me that most people don't want to understand the economic issues they are spouting off about. Instead, they are content to have strong opinions and thus seem intelligent, regardless of the inherent merit of the opinions.
And you are right about explaining arcane things. Most of the time I can do a good job of cutting through the technical crap and explaining the heart of an issue, just something you get better at after teaching at university. However there are some points that although crystal clear to anyone with a good understanding of calculus are very hard to explain otherwise. In fact quite appropriately given the discussion above the dynamics of a deflationary spiral is one of these things.
I'll have a shot, because the basic points are easy. But understanding the dynamics and potential solutions to deflationary spirals (and why one macroeconomic outlook is similar or dissimilar to another) requires knowledge of the relevant models.
Let's take a story something like this. Country x has a huge boom in investment, which gets out of hand and capital is indeed misallocated. Now investment demand (a component of aggregate demand, which determines output, employment and the price level) is muted, at the same time as overcapacity due to prior investment leads to downward pressure on prices. A recession is a potential outcome, but it depends on the consumer sector. If the consumer can hold up aggregate demand whilst investment is flagging any downturn will be very brief and not that potent.
Country x is Japan and the US, but here the stories differ. Japan's bubble was widespread, including the property market. The US bubble was largely confined to one section of the stock market. When the Japanese bubble burst consumer weren't willing to hold up aggregate demand, and the deflationary spiral was allowed to start. Once deflation sets in it fuels itself.........there is no incentive to consume today if you believe deflation will continue........and it is characterising the role of beliefs in the story that makes it hard to explain without mathematics.
So the US bubble was not as widespread as the Japanese one, that is one of the key differences I alluded to earlier. The consumer was (and still just about is) doing a good job of holding everything. together. Another key difference is that institutionally Japan has problems........the BOJ blamed other govt institutions, and they blamed the BOJ. Noone wanted to take responsibility and get Japan out of the rut. Monetary and fiscal policy was woefully inept over the relevant period. Unfortunately the rut, once entered, is ever harder to escape.
The third difference is (was!) the state of corporate governance and the banking sector. The crisis was exacerbated by corruption here.
So (wow, long post, I hope this helps ), why is 50/50 on the US becoming like Japan too pessimistic in my professional opinion? Well a few months ago 1/10 would have been pessimistic, but things aren't quite as rosy right now. The formerly undisputed state of corporate governance in the US is now very much tarnished, there are signs that the bubble may have been slightly more widespread than previously thought. What is more the fed. is starting to make excuses, and the consumer is getting cautious.
However, the root causes still have a ways to go before looking anything like Japan. Personally I feel such a spiral cannot happen without some monstrous bad luck and policy errors that will not occur. I would say a 1/4 chance, maybe 1/3 if you catch me in a pessimistic mood. I'm not saying it can't happen........hell, economists believed liquidity traps were impossible 10 years ago.......but it requires a whole lot of sh1t to hit the fan yet.
I still don't see how calculus features there, but ok. Also I don't believe in liquidity traps or that deflation is Japan's real problem. But be that as it may....
"If the consumer can hold up aggregate demand whilst investment is flagging any downturn will be very brief and not that potent."
This does not take account of the supply side which suffers longer term from reduced investment levels. Also the US consumer has a very low savings rate, loads of debt and runs on asset inflation and equity extraction in housing. Neither are sustainable.
"Japan's bubble was widespread, including the property market. The US bubble was largely confined to one section of the stock market."
You do not think the US is in a housing bubble ?
"Another key difference is that institutionally Japan has problems........the BOJ blamed other govt institutions, and they blamed the BOJ."
And what was Alan's Jackson hole speech all about ?
"Monetary and fiscal policy was woefully inept over the relevant period."
How so ?
"The third difference is (was!) the state of corporate governance and the banking sector."
Replace Japan's banking sector with US structured finance and you have a similar situation.
"Well a few months ago 1/10 would have been pessimistic..."
I was at the 10 % chance back in 1999...
"but it requires a whole lot of sh1t to hit the fan yet."
Depends on what outcome you mean there. The US is due for some major rebalancing. The interesting question for me is whether the Fed can achieve a sort of low-growth equilibrium with all the crap they pull. The 50 % non-Japan is based on market forces overwhelming the Fed and getting a recession that liquidates all the malinvestment.
You are right on the points on sustainability in paragraph 3. The question is how imbalances correct themselves. If they do so in an orderly fashion a Japanese scenario is out of the question, period. Of course that is not assured........currencies overshoot on the way down........there may well be a fallout from property........Also, benign behaviour from the crucial oil market is by no means assured right now.
As to not believing deflation is Japan's problem, well, that's just silly. There are supply side issues, but these merely exacerbate the underlying problem. It is a demand side problem, period, and anyone who says otherwise is wrong.
"The 50 % non-Japan is based on market forces overwhelming the Fed and getting a recession that liquidates all the malinvestment"
This last paragraph is the awful bit. The notion that recession is somehow good because it removes the excesses of a boom is somehow karmic, makes sense right? Well, karmic it may be, but that does not stop it being catastrophrically wrong. And what's more it is a dangerous idea that must be dispelled at all costs. Bygones are forever bygones, current AD is what is relevant to potential double dips and in the extreme the dreaded deflation. The fed and monetary policy are the first line of defence against any slide into deflation - to believe otherwise is foolish in the extreme. I realise it is attractive to make comments about the useless fed, and how they are shortsighted etc........I like to do it myself at times .......but believe me the guys at the fed know far far more about these issues than any well-meaning law professors.
"As to not believing deflation is Japan's problem, well, that's just silly."
Quite categoric on your part, but Japan has put in a lot of demand. At points the consumer side got some traction, and vast deficit spending. Deflation also came a bit later (mid 90s). And if deflation is such a problem, what about the pre-1930s boom and bust cycles that saw deflation ? Why did the economy rebound ?
"This last paragraph is the awful bit."
You'e awfully conventional in your economics.
"Bygones are forever bygones, current AD is what is relevant to potential double dips and in the extreme the dreaded deflation."
With a messed up capital stock ? AD can hold you above water, but any recovery will lapse.
".....but believe me the guys at the fed know far far more about these issues than any well-meaning law professors."
Yeah, like the Fed knew so much more than Hayek in 1929, right ?
DrSpike, do you believe in the Taylor rule? What would you have to say on the fact that the BOJ and the Fed acted in exact accordance to it? (I'm not sure where I had seen that grapgh though)
And please, don't give me any of that "you're are wrong because I'm right" crap. I'm sure you are well capable of giving substantial arguments.
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No, I'm still making use of George's crappy dail-up but I'll be leaving in an hour and a half.
BTW, we had a discussion about the impact of the index tracking strategy. Would anyone happen to know how much of the stock market funds that prescribe to this strategy control?
DISCLAIMER: the author of the above written texts does not warrant or assume any legal liability or responsibility for any offence and insult; disrespect, arrogance and related forms of demeaning behaviour; discrimination based on race, gender, age, income class, body mass, living area, political voting-record, football fan-ship and musical preference; insensitivity towards material, emotional or spiritual distress; and attempted emotional or financial black-mailing, skirt-chasing or death-threats perceived by the reader of the said written texts.
Hey you know it's good I've saved the first Irving-Fisher-thread to my HD. So you can find jewels of Fed competence from march 2000 by former member Wayne Angell:
"This economy can go on expanding for another nine years. This is a wonderful new era that couldn't have happened without a vigilant Fed. The Fed's expertise in developing the business cycle has reached a level where we no longer have the boom and bust after-effect of it."
"The wealth effect that comes from Americans getting wealthy in the stock market and the real estate market does tend to create a lot more economic activity and with that prices can rise."
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