Wednesday, February 17, 2010

Economic Rant.....

Paul Krugman has stated that the government stimulus was not enough. He is concerned about the possibility of a "liquidity trap", of the type that the Japanese fell into in the 90's. Their recession worsened, and lasted over a decade. He sees a lot of similarities with our current situation. Small stimuluses, just enough to avoid the brink, but not enough to turn it around. Strange that so many ignore history. Additionally, I don't think that Summers and crew have handled this well. Obama has been positive because, well, that's his job to increase consumer and investor confidence. Right now. GDP predictions for 09 were all over the place, for example, 3rd Q estimates were first at 3.5%, then revised to 2.8%, and finally revised to 2.2%. Additionally, the 3.5% estimates only represeted 0.5% of real growth once government spending was excluded. REAL GDP growth was still negative. There is no vector in the marketplace ready to really stimulate and grow the economy. Energy maybe, in 5 years or so, but the infrastructure is not there to do it currently. The excesses of spending and credit obligations of the last 30-40 years are not going to simply work their way through the system in 1-2 years.

I haven't even touched on jobs yet, but with minus GDP growth, it ain't gonna happen. Okun's Law states that you need 3% of growth in production to get a 1% growth in employment. However, this only represents a 0.5% decrease in unemployment, as the modeling suggests that at least 0.5% of that 1% is an increase in hours worked by those already employed. We're nowhere NEAR 3% yet.

I'm also stuck on the dollar because while it helps our export market, the combination of a weak dollar and prolonged low interest rates creates a real potential for severe inflation. Although right now, most economists think we will hit a deflationary period first. The IMF actually is calling for countries to raise interest rates, and to aim for a consistent 4% inflation goal. It won't help us now, but they are thinking of ways to try and prepare to deal with future events. Additionally, we import more than we export. We are a consumer nation, and while a weak dollar will help a few companies, many others who import components and pieces will only have to raise prices... and there's that pesky inflation again.

2 comments:

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