The Sequester

[DOR]

The US budget defict was 4.5% in Q-1 2013. Spending was down 2% in October-April FY2013, in nominal terms. Subtract 1.8% inflation and that’s -3.8%, give or take a tenth.
—Financial Times, May 13, 2013, p. 2

[zraver]

people have been screaming about inflation since 2008 and rates have fallen to historic lows. inflation has dipped and then held steady at these lows despite an extraordinary amount of inflationary action by the fed.

If you count the things that matter to John Q Public inflation has not remained low. Food and fuel inflation and the loss of buying power as the dollar sinks have been brutal. Ditto health care costs and tuition. Althernate methods of inflation monitoring show a 6-9% annual inflation rate.

[astralis]

that is true, the UK never did pay for a good chunk of it. hm...if we adjust for inflation and GDP size, that's worth $500+billion now...that'd be a nice chunk of stimulus money

[Doktor]

doktor,

not "for free". it was an exchange-- UK got weapons and foodstuffs and materiel, US got cold hard cash. this is WWI, when the Brits could still pay...

Check again. I believe they never repaid a part of the loan.

[snapper]

snapper,

this will be my last post on the matter because you just constantly repeat your points.



a bubble by definition IS exuberance and reckless gambling; note that it developed when inflation rates were (until the present day) also at their historic lows.

so the idea that the -Fed- made money cheap doesn't compute.



because there was a recession in 2001-2002.



but the stimulus of war production involved a huge expansion of the manufacturing base, which is not going to happen, by definition, in a developed economy. moreover, the sums spent, given the relative size of the US GDP at the time, were considerably greater, and for considerably longer.

US defense spending went from less than 1% of GDP in 1914 to 15% by 1918. the US alone went from total federal expenditures of $970 million in 1913 to spending 30 billion dollars from the entire war. the UK owed the US a further $4 billion by 1919, which doesn't include the billions which the UK did pay for by cashing in on US investments during the war, as well as the several billion more from other belligerents ($10 billion in loans altogether).

for comparison's sake, the US GDP in 1914 was approximately $36 billion. which means your argument regarding the comparison between WW1 spending and the stimulus would make sense if the stimulus was approximately $15 trillion spent over four years, and if the US had received another $3.5-4 trillion from the UK.

http://www.bloomberg.com/video/is-in...cfAnrEcHg.html

That for the macro theory and P.S as for the current stock market highs here's some input from Saxobank: http://www.tradingfloor.com/posts/ma...ies-1877566080

[astralis]

doktor,

not "for free". it was an exchange-- UK got weapons and foodstuffs and materiel, US got cold hard cash. this is WWI, when the Brits could still pay...

[Doktor]

which means your argument regarding the comparison between WW1 spending and the stimulus would make sense if the stimulus was approximately $15 trillion spent over four years, and if the US had received another $3.5-4 trillion from the UK.

Erm, no.

It means US has to spend $19tn, and send goods worth 4tn to UK for free.

[JAD_333]

JAD_333,

Apologies for missing your question on the Clinton Surpluses. The reason the debt continued to rise was very simple: interest payments. The change in the level of debt each year is determined (mainly) by two things: the budget balance and interest payments. Run massive deficits in years prior to a budget surplus and you will continue to see the total debt rising.

Bottom line, there were no Clinton surpluses. That is not to take away Clinton's achievement in coming closer to balance the budget than had been done in a long time.

“Inflation depends on future economic developments” . . . Hmm. Hard to argue with that, but I’d say it depends on demand. Just jacking up the money supply isn’t going to create inflation without a rise in demand.

Makes sense. But therein lies the rub. All that money sloshing around in corporate hands is going to get spent sooner or later.

“I don’t think the rate of growth and the rate of unemployment are tied to any rate of inflation” . . . Well, there you differ from the vast majority of mainstream macroeconomists. Including me.

Puzzling. How can anyone know what the rate of inflation will be just from knowing the rate of unemployment and the rate of growth? If you mean CPI growth, that's different, because it's inflation.

“They’re afraid of killing the goose that is laying the golden egg?” That’s it in a nutshell, and also their job descriptions: Pull the plug, but not too early and not too late. Better late than early.

‘dot.com bubble.’ – Here's the time line.

July 2, 1997 Asian Financial Crisis starts
Aug 17, 1998 Russian bond crisis hits (contagion)

Oct 15 and Nov 17 1998 Fed cuts rates

March 2000 Dot.Com bubble bursts.

June 30, Aug 24, Nov 16 1999 and Feb 2, Mar 21 2000 Fed raises rates by 0.25 points each time

May 16, 2000 Fed bumps up rates 0.50 points

March - November 2001 US in recession.

September 11, 2001

Jan – Dec 2001 Fed cuts rates from 6.5% to 1.75%.

Take it a little further and we see what got the housing industry excited. :)

[DOR]

JAD_333,

Apologies for missing your question on the Clinton Surpluses. The reason the debt continued to rise was very simple: interest payments. The change in the level of debt each year is determined (mainly) by two things: the budget balance and interest payments. Run massive deficits in years prior to a budget surplus and you will continue to see the total debt rising.

“Inflation depends on future economic developments” . . . Hmm. Hard to argue with that, but I’d say it depends on demand. Just jacking up the money supply isn’t going to create inflation without a rise in demand.

“I don’t think the rate of growth and the rate of unemployment are tied to any rate of inflation” . . . Well, there you differ from the vast majority of mainstream macroeconomists. Including me.

“They’re afraid of killing the goose that is laying the golden egg?” That’s it in a nutshell, and also their job descriptions: Pull the plug, but not too early and not too late. Better late than early.

‘dot.com bubble.’ – Here's the time line.

July 2, 1997 Asian Financial Crisis starts
Aug 17, 1998 Russian bond crisis hits (contagion)

Oct 15 and Nov 17 1998 Fed cuts rates

March 2000 Dot.Com bubble bursts.

June 30, Aug 24, Nov 16 1999 and Feb 2, Mar 21 2000 Fed raises rates by 0.25 points each time

May 16, 2000 Fed bumps up rates 0.50 points

March - November 2001 US in recession.

September 11, 2001

Jan – Dec 2001 Fed cuts rates from 6.5% to 1.75%.

[JAD_333]

JAD_333,

A few questions, if I may:

Certainly. even though you did not do me the courtesy of answering my question about why you call them "Clinton surpluses" when the debt rose in each year there was supposedly a surplus. But that aside, on to your question:

1. How long do we have to wait for inflation to rise to more than 6%, or even 10%?

Economists can't predict this kind of stuff and you want me to do it. I think the answer has to be conditional. Inflation depends on future economic developments. It may be that the demand I foresee will be less extensive. I remember mortgage rates of 3.5% in the late 1950s and I watched them climb to 16% in the 1980s. I used to predict rates would go back to 3.5% and people (younger than me) would look at me like I was crazy. Ask ASTY what rate he got recently. So, when will inflation take off? It'll be after we get back to 3% unemployment and GDP growth of 4-5%. After the CPI begins to reflect the rising cost of everything grown, mined and sucked up from wells.

2. If those mountains of cash corporates are sitting on flow back into the economy, would the unemployment rate drop to 6%, or to 3%?

If they flow in as capital expenditures and plant expansion, I would say 3% or lower

3. If those mountains of cash corporates are sitting on flow back into the economy, would the real growth rate rise to 4%, or to 7%?

If they buy significant goods and services with it, I would say the higher number, but 7 seems too high to me.

4. If we get 3% unemployment and 7% growth, or even 6% unemployment and 4% growth, would you still consider the corresponding inflation rate to be bad for the economy?

Depends on the CPI. I don't think the rate of growth and the rate of unemployment are tied to any rate of inflation.

5. Why would the Fed hesitate to raise interest rates under either scenario?

Because they're asleep? They're afraid of killing the goose that is laying the golden egg? Seriously, I would hope they'd raise rates before the economy becomes overheated...just what they didn't do after we'd recovered from the dot.com bubble.


How'd I do teach? :)

During Reagan's presidency, federal income tax rates were lowered significantly with the signing of the bipartisan Economic Recovery Tax Act of 1981, which lowered the top marginal tax bracket from 70% to 50% and the lowest bracket from 14% to 11%. However other tax increases passed by Congress and signed by Reagan, ensured that tax revenues over his two terms were 18.2% of GDP as compared to 18.1% over the 40-year period 1970-2010.
(Wikipedia)

I know what you're getting at, but to make your point you'll have to show that the offsetting tax increases Congress passed took away the tax savings people in the lower brackets got from the income tax cuts.

[astralis]

snapper,

this will be my last post on the matter because you just constantly repeat your points.

The housing bubble, which is a false reality created by Greenspan's flooring of interest rates after the dotcom burst, caused exuberance and reckless gambling.

a bubble by definition IS exuberance and reckless gambling; note that it developed when inflation rates were (until the present day) also at their historic lows.

so the idea that the -Fed- made money cheap doesn't compute.

Why did the Fed keep interest rates below 2% from the end of 2001 to the start of 2004?

because there was a recession in 2001-2002.

Hold on the 'stimulus' of war production ended 3 years before 1921.

but the stimulus of war production involved a huge expansion of the manufacturing base, which is not going to happen, by definition, in a developed economy. moreover, the sums spent, given the relative size of the US GDP at the time, were considerably greater, and for considerably longer.

US defense spending went from less than 1% of GDP in 1914 to 15% by 1918. the US alone went from total federal expenditures of $970 million in 1913 to spending 30 billion dollars from the entire war. the UK owed the US a further $4 billion by 1919, which doesn't include the billions which the UK did pay for by cashing in on US investments during the war, as well as the several billion more from other belligerents ($10 billion in loans altogether).

for comparison's sake, the US GDP in 1914 was approximately $36 billion. which means your argument regarding the comparison between WW1 spending and the stimulus would make sense if the stimulus was approximately $15 trillion spent over four years, and if the US had received another $3.5-4 trillion from the UK.

[snapper]

i already gave an explanation above. of course they're related, and both were in full swing by the time the Fed took any action.

To my mind they are both the same - there is no division. The housing bubble, which is a false reality created by Greenspan's flooring of interest rates after the dotcom burst, caused exuberance and reckless gambling. On Jan 18 2008 Bernanke said "[The U.S. economy] has a strong labor force, excellent productivity and technology, and a deep and liquid financial market that is in the process of repairing itself." Overnight this changed. Suddenly liquidity, as you call it, vanished. Where did it go? Real people lost real money - not fed 'magic money'. They were induced to invest though because the Fed money cheap.

the bubble was NOT created by the Fed. much of the hot money came from unprecedented chinese/international monies flowing into the system. the 2000-2004 period was a global inflationary period, as the international economy grew faster during this period than it ever did in world history.

So the Chinese were encouraging people to buy houses? The Chinese were buying bonds and while this possibly inflationary you can't blame others entirely for the crash. If this was the case why did interest rates only start rising in 2004? Why did the Fed keep interest rates below 2% from the end of 2001 to the start of 2004?

there WAS a huge stimulus-- it was called World War 1. the War spurred a huge development of american industry-- munitions, automative, and ship-building, much of this funded by the UK and to a lesser extent, france.

Hold on the 'stimulus' of war production ended 3 years before 1921. On this basis Obama's 'stimulus' should take effect this year right? But given that there was large development of US industry and that - according to your version of history - it took 2-3 years before the US troops returned to the workforce to cause deflation how did the US get out of deflation?

in any case, trying to compare Industrial-age employment to the current information-age employment is foolish. far easier to employ huge numbers of unskilled/semi-skilled workers in the former.

All the more reason to tax people and decrease wealth creation to indoctrinate future generations right? Even in education there is inflation. The more that is spent by the Government the worse education children get.

in the specific scenario of a liquidity trap, a slightly higher inflation rate would indeed be a good thing. note the qualifiers.

And thus you repeat the same mistakes again.

Look, let's be real for minute. Given that more people are food stamps than ever before and wages are depressed inflation in real terms for the average person is higher than the manipulated statistics say. The same is true in the UK if you are a public employee; there was a pay freeze and now a 1% limit on pay increases - earnings are not keeping up with inflation. Now the purpose of this extra liquidity - of which Obama spent was it $1 trillion? and the Fed has created getting on for $3 trillion, is to encourage real money to follow this fiscal and monetary stimulus - to create demand. But ordinary people have very little money - that's why they receive food stamps. Well it's not got you too far has it? You have managed to create another 'stock bubble' and as we know from record highs a fall is likely next. Can't exactly lower interest rates further and of course should they rise - well it's over, it's Greece. How then is this artificial interference in the markets by the Fed at all beneficial to the US rather than just to the banks?

[DOR]

dalem,

I’ve lived though double-digit inflation and I’ve lived through prolonged deflation. Neither is optimal.

Through my work, I managed to get organizations like the World Economic Forum, the Heritage Foundation and others complying global indices to recognize that an economy’s record on inflation should be measured as the distance from zero.

What they had been doing prior to that was simply subtracting from the overall score for each point of inflation, and actually adding points for deflation (subtracting a minus number). It was the mechanical application of a concept that was only lightly understood by people who had never seen deflation, but they changed the way they calculate such things.

We know how to deal with inflation: raise interest rates. We struggle to deal with deflation. Wages and other costs easily rise, they do not easily fall. Given my druthers, I’ll take an equal amount of inflation, rather than an equal amount of deflation.

But, perhaps your experience is different.

= = = = =

JAD_333,

A few questions, if I may:

1. How long do we have to wait for inflation to rise to more than 6%, or even 10%?

2. If those mountains of cash corporates are sitting on flow back into the economy, would the unemployment rate drop to 6%, or to 3%?

3. If those mountains of cash corporates are sitting on flow back into the economy, would the real growth rate rise to 4%, or to 7%?

4. If we get 3% unemployment and 7% growth, or even 6% unemployment and 4% growth, would you still consider the corresponding inflation rate to be bad for the economy?

5. Why would the Fed hesitate to raise interest rates under either scenario?

= = = = =

Ronald Reagan—

During Reagan's presidency, federal income tax rates were lowered significantly with the signing of the bipartisan Economic Recovery Tax Act of 1981, which lowered the top marginal tax bracket from 70% to 50% and the lowest bracket from 14% to 11%. However other tax increases passed by Congress and signed by Reagan, ensured that tax revenues over his two terms were 18.2% of GDP as compared to 18.1% over the 40-year period 1970-2010.
(Wikipedia)

[astralis]

JAD,

Well, I think the boom in plant expansion will run all over whatever the Fed can do, and it'll create so much demand that prices of everything will move up quickly. Maybe the Fed can keep the resulting inflation down a bit, but it seems to me we're still in for a few years of 6++% inflation and perhaps higher.

i doubt there will be such a boom. the Fed sees "moderate growth" in the medium-term, and i agree.

if the Fed could keep control of inflation during the dot-com bubble and the the twin housing/credit bubbles, the resultant bounce-back from the recession can be handled.

the upper bound for inflation is the 6% level, and that's probably too high.

Anytime is good for tax cuts

i figure if Reagan could see the light...:)

[JAD_333]

JAD,


employment's always been a lagging indicator-- when it does happen, that'll be a big sign that the Fed will no longer need QE and can also raise rates.

Well, I think the boom in plant expansion will run all over whatever the Fed can do, and it'll create so much demand that prices of everything will move up quickly. Maybe the Fed can keep the resulting inflation down a bit, but it seems to me we're still in for a few years of 6++% inflation and perhaps higher. The positive side is that higher employment will improve revenues, which in turn will bring down the deficit. In the end, the average Joe gets the shaft.

the time for tax cuts is during a recession, not during the recovery. besides, as employment goes up, so will wages.

Anytime is good for tax cuts.:)