(What’s Left of) Our Economy: The New U.S. GDP Report Shows the Economy Not Just Shrinking but Bubblier Than Ever

Tags

bubbles, GDP, global financial crisis, Great Recession, gross domestic product, housing, inflation-adjusted growth, personal consumption, real GDP, toxic combination, {What's Left of) Our Economy

For an official report showing that the U.S. economy shrank, the Commerce Department’s initial read on the gross domestic product (GDP – the leading measure of the economy’s size) for the first quarter of this year garnered lots of good reviews. (See, e.g., here and here.)

According to these cheerleaders, when you look under the hood and examine why GDP fell, the details are encouraging – and even point to growth resuming shortly. I’m not so sure about that – and especially about the claim that the skyrocketing trade deficit so largely responsible for the negative print is only an accounting phenomenon that results from the peculiar way GDP changes are calculated, and therefore says nothing about the economy’s main fundamentals. (Indeed, I’ll have more to say on this point later this week.)

But if we’re going to examine carefully the components of the economy’s growth and shrinkage, let’s examine them all. Because some other key details of the latest GDP report – and some immediate predecessors – draw a more troubling picture. They show that the economy is looking even more bubble-ized than in the mid-2000s, when expansion became over-dependent on booms in consumer spending and housing, neglected the income, savings, and investment needed to generate sustainable growth, and inevitably imploded into the global financial crisis and ensuing Great Recession. 

The pre-crisis bloat in personal consumption and housing is clear from the magnitude they reached at the bubble-era’s peak. In the third quarter of 2005, this toxic combination of GDP components accounted for a then-record 73.90 percent of the total economy after inflation (the measure most widely followed) on a stand-still basis. And for that quarter, they were responsible for 85.26 percent of the 3.45 percent real growth that had taken place over the previous year.

During the first quarter of this year, consumer spending and housing accounted for 88.17 percent of the 3.57 percent real growth that had taken place since the first quarter of 2021. (Remember – inflation-adjusted growth for all of 2021was a strong 5.67 percent.) And on a stand-still basis, the toxic combination made up a new record 74.04 percent of the economy in price-adjusted terms. 

For the full year 2021, personal spending and housing represented 73.78 percent of inflation-adjusted GDP on a stand-still basis, and generated 101.5 percent of its constand dollar growth.  (Some other GDP components acted as drags on growth.) That stand-still number topped the old full-year record of 73.68 percent (also set in 2005) and share-of-growth figure trailed only the 114.3 percent in very-slow-growth 2016.    

There are three big differences, though, between the peak bubble period of the mid-2000s and today. Back then, the federal funds rate – the interest rate set by the Federal Reserve that strongly influences the cost of credit, and therefore the economic growth rate for the entire economy, was about four percent. Today, it’s in a range between 0.25 and 0.50 percent. That is, it’s only about a tenth as high.

In addition, the Fed hadn’t spent years stimulating the economy by buying tens of billions of dollars worth of government bonds and mortgage-backed securities each month. This disparity alone justifies concern about the health and durability of the current economic recovery. Finally, inflation during that bubble period was much lower.

Even worse, these purchases have now stopped and the central bank has made clear its determination to bring torrid current inflation down by raising interest rates. If these tightening moves cut back on toxic combination spending, it’ll be legitimate to ask where else adequate levels of U.S. economic growth are going to come from, and whether policymakers will try to revive the expansion in an even bubblier way.  

(What’s Left of) Our Economy: How to Really Make Trade Fair

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automotive, BBB, Biden administration, bubbles, Build Back Better, Canada, consumption, Donald Trump, electric vehicles, EVs, fossil fuels, manufacturing, Mexico, NAFTA, North America, production, tax breaks, Trade, U.S.-Mexico-Canada Agreement, USMCA, {What's Left of) Our Economy

There’s no doubt that the next few weeks will see a spate of (low-profile) news articles on how unhappy Canada and Mexico are about proposed new U.S. tax credits for purchasing electric vehicles (EVs) and how these measures could trigger a major new international trade dispute.

There’s also no doubt that any such disputes could be quickly resolved, and legitimate U.S. interests safeguarded, if only Washington would finally start basing U.S. trade policy on economic fundamentals and facts on the ground rather than on the abstract and downright childishly rigid notions of fairness that excessively influenced the approach taken by Donald Trump’s presidency.

The Canadian and Mexican complaints concern a provision in the Biden administration’s Build Back Better (BBB) bill that’s been passed by the House of Representatives but is stuck so far in the Senate. In order to encourage more EV sales, and help speed a transition away from fossil fuel use for climate change reasons, the latest version of BBB would award a refundable tax break of up to $12,500 for most purchases of these vehicles.

The idea is controversial because the administration and other BBB supporters see these rebates as a great opportunity to promote EV production and jobs in the United State by reserving his subsidy for vehicles Made in America. (As you’ll see here, the actual proposed rules get more complicated still – and could change some more.) And according to Canada and Mexico, this arrangement also violates the terms of the U.S.-Mexico-Canada-Agreement (USMCA) governing North American trade that replaced the old NAFTA during the Trump years in July, 2020.

Because USMCA largely reflects those prevailing concepts of global economic equity, Canada and Mexico probably have a strong case. But that’s only because this framework continues classifying all countries signing a trade agreement as economic equals. Even worse, there’s no better illustration of this position’s absurdity is the economy of North America.

After all, the United States has always accounted for vast majority of the continent’s total economic output and therefore market for traded goods. According for the latest (2020) World Bank figures, the the United States turned out 87.51 percent of North America’s gross product adjusted for inflation. And when it comes to new car and light truck sales, the U.S. share was 84.24 percent in 2019 (the last full pre-pandemic year, measured by units, and as calculated from here, here, and here).

But in 2019, the United States produced only 68.88 percent of all light vehicles made in North America (also measured by units and calculated from here, here, and here.) Moreover, more than 70 percent of all vehicles manufactured in Mexico were exported to the United States according to the latest U.S. government figures. And for Canada, the most recent data pegs this share at just under 54 percent (based on and calculated from here and here).

What this means is that, without the American market, there probably wouldn’t even be any Canadian and Mexican auto industries at all. They simply wouldn’t have enough customers to reach and maintain the production scale needed to make any economic sense.

So real fairness, stemming from the nature of the North American economy and the North American motor vehicle industry, leads to an obvious solution: Give vehicles from Canada and Mexico shares of the EV tax credits that match their shares of the continent’s light vehicle sales – just under 16 percent.

Therefore, using, say, 2019 as a baseline, from now on, the first just-under-16 percent of their combined light vehicle exports to the United States would be eligible for the credits for each successive year, and the rest would need to be offered at each manufacturer’s full price (a pretty plastic notion in the auto industry, I know, but a decision that would need to be left to whatever the manufacturers choose).

Nothing in this decision would force Canada or Mexico to subject themselves to these requirements; they would remain, as they always have been, completely free to try to sell as many EVs as they could to other markets (including each other’s).

What would change dramatically, though, is a situation that’s needlessly harmed the productive heart of the U.S. economy for far too long, resulting from trade agreements that lock America into an outsized consuming and importing role, but an undersized production and exporting role. In other words, what would change dramatically is a strategy bearing heavy responsibility for addicting the nation to bubble-ized growth. And forgive me for not being impressed by whatever legalistic arguments Mexico, Canada, any other country, or the global economics and trade policy establishments, are sure to raise in objection.

Those Stubborn Facts: How to Keep Inflating a China Bubble

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bubbles, China, Evergrande, finance, investment, investors, property, real estate, Those Stubborn Facts, Wall Street

Share of global finance industry recommendations on China

investment that were “buys” at the start of this year, before its giant

real estate firms started going broke: 86 percent

 

Share of global finance industry recommendations on China

investment that are “buys” today, when its giant real estate firms

have started going broke: 87 percent

 

(Source: “Down Is Still Up for Foreign Investors Piling Into China,” by Nikos Chrysoloras and Abhishek Vishnoi, Bloomberg.com, October 16, 2021, China Stock Market: Down Is Still Up for Foreign Investors – Bloomberg)

 

(What’s Left of) Our Economy: Dangerous New Bubbles or a Virus Mirage?

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bubbles, business investment, CCP Virus, consumer spending, coronavirus, COVID 19, Financial Crisis, GDP, Great Recession, gross domestic product, housing, lockdowns, logistics, nonresidential fixed investment, real GDP, recession, recovery, reopening, Richard F. Moody, semiconductor shortage, toxic combination, transportation, West Coast ports, {What's Left of) Our Economy

Here’s a great example of how badly the U.S. economy might be getting distorted by last year’s steep, sharp, largely government-mandated recession, and by the V-shaped recovery experienced since then.as CCPVirus-related restrictions have been lifted. Therefore, it’s also a great example of how the many of the resulting statistics may still be of limited usefulness at best in figuring out the economy’s underlying health.

The possible example?  New official figures showing that, as of the second quarter of this year, the U.S. economy is even more dangerously bubble-ized than it was just before the financial crisis of 2007-08.

As RealityChek regulars might recall, for several years I wrote regularly on what I called the quality of America’s growth. (Here‘s my most recent post.) I viewed the subject as important because there’s broad agreement that a big reason the financial crisis erupted was the over-reliance earlier in that decade n the wrong kind of growth. Specifically, personal spending and housing had become predominant engines of expansion – and therefore prosperity. Their bloated roles inflated intertwined bubbles whose bursting nearly collapsed the U.S. and entire global economies, and produced the worst American economic downturn since the Great Depression of the 1930s.

As a result, there was equally broad agreement that the nation needed to transform what you might call its business model from one depending largely on borrowing, spending, and paying for them by counting on home prices to rise forever, to one based on saving, investing, and producing. As former President Obama cogently put it, America needed “an economy built to last.”

Therefore, I decided to track how well the nation was succeeding at this version of “build back better” by monitoring the official quarterly reports on economic growth to examine the importance of housing and consumption (which I called the “toxic combination”) in the nation’s economic profile and whether and how they were changing.

For some perspective, in the third quarter of 2005, as the spending and housing bubbles were at their worst, these two segments of the economy accounted for 73.90 percent of the gross domestic product (GDP – the standard measure of the economy’s size) adjusted for inflation (the most widely followed of the GDP data. By the end of the Great Recession caused by the bursting of these bubbles, in the second quarter of 2009, this figure was down to 71.55 percent – mainly because housing had crashed.

At the end of the Obama administration (the fourth quarter of 2016), the toxic combination has rebounded to represent 72.31 percent of after-inflation GDP. So in quality-of-growth terms, the economy was heading in the wrong direction. And under President Trump, this discouraging trend continued. As of the fourth quarter of 2019 (the last quarter before the pandemic began significantly affecting the economy), this figure rose further, to 73.19 percent.

Yesterday, the government reported on GDP for the second quarter of this year, and it revealed that the toxic combination share of the economy in constant dollar terms to 74.24 percent. In other words, the toxic combination had become a bigger part of the economy than during the most heated housing and spending bubble days.

But does that mean that the economy really is even more, and more worrisomely lopsided than it was back then? That’s far from clear. Pessimists could argue that recent growth has relied heavily on the unprecedented fiscal and monetary stimulus provided by Washington since spring, 2020. Optimists could point out that far from overspending, consumers have been saving massively. Something else of note: Business investment’s share of real GDP in the second quarter of this year came to 14.80 percent – awfully lofty by recent standards.  During the 2005 peak of the last bubble, that spending (officially called “nonresidential fixed investment”) was 11.62 percent. 

My own take is that this situation mainly reflects the unexpected strength of the reopening-driven recovery and the transportation and logistics bottlenecks it’s created. An succinct summary of the situation was provided by Richard F. Moody, chief economist of Regions Bank. He wrote yesterday that the new GDP data “embody the predicament facing the U.S. economy, which is that the supply side of the economy has simply been unable to keep pace with demand.” The result is not only the strong recent inflation figures, but a ballooning of personal spending’s share of the economy.

Moody expects that both problems will end “later rather than sooner,” and for all I know, he (and other inflation pessimists) are right. But unless you believe that West Coast ports will remain clogged forever, that semiconductors will remain in short supply forever, that truck drivers will remain scarce forever, that businesses will never adjust adequately to any of this, and/or that new CCP Virus variants will keep the whole economy on lockdown-related pins and needles forever, the important point is that these problems will end. Once they do, or when the end is in sight, we’ll be able to figure out just how bubbly the economy has or hasn’t grown – but not, I’m afraid, one moment sooner.

(What’s Left of) Our Economy: The U.S. is Racing to the Bottom in Growth Quality Again

Tags

Barack Obama, bubbles, Financial Crisis, GDP, Great Recession, gross domestic product, housing, personal consumption, Trump, {What's Left of) Our Economy

Although Thursday’s latest official report on U.S. economic growth was encouraging from a trade policy and national self-sufficiency perspective, as I contended, it was much less heartening from a quality of growth perspective. That, as known by RealityChek regulars, is the crucial issue of whether America’s output is being powered by the kind of engines that can last, or by the kinds (specifically housing spending and personal consumption) that tend to inflate bubbles and produce calamitous burstings.

Specifically, Thursday’s figures pegging a pretty solid rate of economic growth  both for the fourth quarter of 2019 (2.06 percent at an annual rate), and for the entirety of last year (2.33 percent least preliminarily), also made clear that way too much of this growth stemmed from housing and personal consumption – which I call the toxic combination because their combined and indeed intertwined bloat produced the last (terrifying) financial crisis and ensuing (punishing) Great Recession.

The highlights (lowlights?): On a quarterly basis, the toxic combination’s share of the total U.S. economy (technically, the gross domestic product, or GDP) in real terms (how all the following dollar figures will be presented) during the last three months of last year came to 72.91 percent. That’s nothing less than the highest such figure during the current economic recovery.

The personal consumption share alone totaled 69.78 percent of inflation-adjusted GDP and actually fell slightly from the third quarter’s 69.79 percent. Even so, that figure was the recovery’s second highest. The housing share of the after-inflation economy hit 3.13 percent – up from the third quarter’s 3.10 percent, but the highest total only since the fourth quarter of 2018 (3.16 percent). That’s an indication that housing spending has been notably subdued for about the last three years – and in fact that only personal consumption levels still deserve that “toxic” label.

On a yearly basis, the combined personal consumption and housing share of price-adjusted GDP climbed from 72.68 percent in 2018 to 72.90 percent in 2019 – the highest such level since the 73.04 percent of 2006, when the bubbles were about to burst. Personal consumption climbed from 69.45 percent in 2018 to 69.79 percent – its highest since 2004, when the previous decade’s bubbles were inflating strongly. De-toxified housing’s real GDP share fell from 3.23 percent in 2018 to 3.11 percent in 2019 – its lowest level since 2014’s 2.98 percent.

Another sign of some recent decline in the quality of U.S. growth: the combined personal consumption and housing share not of constant dollar GDP on a standstill basis, but on the economy’s annual real growth. In 2019, they powered 74.25 percent of a 2.33 percent expansion in after-inflation output. The previous year’s share was just 68.62 percent.

This performance still leaves Trump era price-adjusted growth less bubblier and higher quality by this measure than growth during Barack Obama’s presidency (as shown by the table below). But it’s a regression all the same – as growth itself slowed:

                                  Toxic combination share of total growth      Total growth

09-10:                                               46.92%                                       2.56%

10-11:                                               80.63%                                       1.55%

11-12:                                               60.91%                                       2.25%

12-13:                                               73.89%                                       1.84%

13-14:                                             117.22%                                       2.53%

14-15:                                              96.90%                                        2.91%

15-16:                                            130.00%                                         1.64%

16-17:                                               86.82%                                        2.37%

17-18:                                               68.62%                                        2.93%

18-19″                                              74.25%                                        2.33%

In fact, overall, 80.74 percent of U.S. inflation-adjusted growth during the 32 full quarters of the Obama presidency’s stewardship of the economy stemmed from the growth of personal consumption and housing. The figure for the eleven quarters of the Trump economy has totaled 74.12 percent. But that Trump percentage is gaining on the Obama figure, and this kind of race to the bottom in growth quality isn’t one the President and his supporters should want to win.

(What’s Left of) Our Economy: Why Amazon.com Could Kill the Entire Economy

Tags

Amazon.com, bubble decade, bubbles, consumption, credit, Financial Crisis, gig economy, Great Depression, Great Recession, Henry George School of Social Science, housing, housing bubble, production, productivity, Robin Gaster, {What's Left of) Our Economy

Yesterday I was in New York City, on one of my monthly trips to attend board meetings of the Henry George School of Social Science, an economic research and educational institute I serve as a Trustee. And beforehand, I was privileged to moderate a school seminar focusing on the possibly revolutionary economic as well as social and cultural implications of Amazon.com’s move into book publishing.

You can watch the eye-opening presentation by economic and technology consultant Robin Gaster here, but I’m posting this item for another reason: It’s an opportunity to spotlight and explore a little further two Big Think questions raised toward the event’s end.

The first concerns what Amazon’s overall success means for the rough balance that any soundly structured economic needs between consumption and production. As known by RealityChek readers, consumption’s over-growth during the previous decade deserves major blame for the terrifying financial crisis and ensuing Great Recession – whose longer term effects have included the weakest (though longest) economic recovery in American history. (See, e.g., here.)

Simply put, the purchases (in particular of homes) by too many Americans way outpaced their ability to finance this spending responsibly, artificially and unprecedentedly cheap credit eagerly offered by the country’s foreign creditors and the Federal Reserve filled the gap. But once major repayment concerns (inevitably) surfaced, the consumption boom was exposed as a mega-bubble that proceeded to collapse and plunge the entire world economy into the deepest abyss since the Great Depression of the 1930s.

As also known by RealityChek regulars, U.S. consumption nowadays isn’t much below the dangerous and ultimately disastrous levels it reached during the Bubble Decade. And one of the points made by Gaster yesterday (full disclosure: he’s a personal friend as well as a valued professional colleague) is that by using its matchless market power to squeeze its supplier companies in industry after industry to provide their goods (and services, in the case of logistics companies) at the lowest possible prices, Amazon has delivered almost miraculous benefits to consumers (not only record low prices, but amazing convenience). But this very success may be threatening the ability of the economy’s productive dimension to play its vital role in two ways.

First, it may drive producing businesses out of business by denying them the profitability needed to survive over any length of time. Second, Amazon’s success may encourage so many of its suppliers to stay afloat by cutting labor costs so drastically that it prevents the vast majority of consumers who are also workers from financing adequate levels of consumption with their incomes, not via unsustainable borrowing. Indeed, as Gaster noted, it may push many of these suppliers to adopt Amazon’s practice of turning as much of it own enormous workforce into gig employees – i.e., workers paid bare bones wages and denied both benefits and any meaningful job security. And that can only undermine their ability to finance consumption responsibly and sustainably. 

I tried to identify a possible silver lining: The pricing pressures exerted by Amazon could force many of its suppliers to compensate, and preserve and even expand their profits, by boosting productivity. Such efficiency improvements would be an undeniable plus for the entire economy, and historically, anyway, they’ve helped workers, too, by creating entirely new industries and related new opportunities (along, eventually, with higher wages). Gaster was somewhat skeptical, and I can’t say I blame him. History never repeats itself exactly.

But to navigate the future successfully, Americans will need to know what’s emerging in the present. And when it comes to the economic impact of a trail-blazing, disruption-spreading corporate behemoth like Amazon, I can think of only one better place to start than Gaster’s presentation yesterday –  his upcoming book on the subject. I’ll be sure to plug it here on RealityChek as soon as it’s out.

(What’s Left of) Our Economy: Is Growth’s Quality Again Turning for the Worse?

Tags

bubbles, Financial Crisis, GDP, Great Recession, gross domestic product, housing, inflation-adjusted growth, Obama, personal consumption, real GDP, real growth, toxic combination, Trump, {What's Left of) Our Economy

“The consumer will save us,” or some variation thereof, has become a rallying cry for those believing that the U.S. economy will avoid recession, at least for the foreseeable future. For RealityChek regulars, however, it’s a red flag, possibly revealing that too many economy watchers have forgotten, or never learned, the most important lesson of the global financial crisis of the previous decade and the Great Recession it triggered: The quality of American growth matters at least as much as the quantity – and more specifically, economic expansion that’s too heavily reliant on consuming rather than producing is too likely to end in tears.

That’s why last week’s latest official report on America’s economic growth has me somewhat worried. It’s true, as I reported, that it contained some good news on the trade front, showing a continuing Trump administration trend of decent growth rates no longer tightly linked with huge, soaring trade deficits. But the figures (the second look of three looks at the second quarter’s performance – at least for the time being) also confirm major backsliding when it comes to the domestic determinants of healthy and unhealthy growth – a big surge in the role of consumption and housing combined as growth engines. That’s exactly the toxic combination that inflated the last decade’s historic bubble. And it could become a reversal of a positive Trump-period trend.

According to those official data, consumption and housing in the second quarter fueled 150 percent of that period’s 2.02 percent annualized inflation-adjusted growth – the most closely followed measure of change in gross domestic product (GDP – economists’ term for the economy as a whole). A figure greater than 100 percent, by the way, is possible because other components of GDP can subtract from growth – and in the second quarter, obviously did..

That 150 percent figure is the biggest by far since the third and fourth quarters of 2015. The only saving grace for that figure is that back in 2015, much stronger performance in personal consumption and housing was producing only roughly comparable overall growth.

The second quarter numbers are somewhat better on a standstill basis, but point in the wrong direction as well. From March through June this year, the toxic combination represented 72.67 percent of the economy in constant dollar terms. That’s the highest level since the fourth quarter of 2017 (72.87 percent). Moreover, back then, the economy was growing a good deal faster (at a 3.50 versus a 2.02 percent annual rate).

None of this means that the U.S. economy is now firmly on an unhealthy growth track. In fact, the worrisome second quarter “growth contribution” figures followed an especially good first quarter. From January through March, personal consumption and housing together produced only 23.87 percent of that stretch’s solid 3.01 percent annualized real growth – the lowest such figure since the fourth quarter of 2011 (16.38 percent of 4.64 percent annualized growth).

On a standstill basis, the last time that the toxic combination represented a lower share of the total economy in real terms was the fourth quarter of 2015 (72.15 percent). And during that period, there was almost (0.13 percent) real annualized economic growth.

Further, the Trump healthy growth record so far is better than the record during President Obama’s two terms in office. During the latter’s administrations, the toxic combination generated 80.74 percent of its $2.2537 trillion in after-inflation growth. Under President Trump, personal consumption plus housing has been responsible for 72.64 percent of $1.002 trillion of such growth. (Both calculations begin the these two administrations in the second quarter of their first year in office, since Inauguration Day doesn’t take place until January 20.)

Real growth, moreover, has been somewhat faster so far. Over 32 quarters, the U.S. economy grew by 18.44 percent after inflation under Obama. Over nine Trump quarters, the economy has become 5.56 percent larger – which translates into 19.80 percent growth over a 32-quarter stretch. All in all, that’s a pretty good reflection on this President’s performance.

Economically, though, the big question is whether it will continue. And politically, it’s whether it will suffice, in tandem with any other perceived strengths, to bring a second Trump term.

(What’s Left of) Our Economy: Could Main Street Have Done Better Than the Fed?

Tags

Ben Bernanke, bubbles, Federal Reserve, Financial Crisis, Great Recession, Lawrence Summers, Leonard Vincent Gilleo, recovery, secular stagnation, Washington Post, {What's Left of) Our Economy

If you’re seeking major insights into America’s recent economic and financial history, a barber’s obituary probably wouldn’t be the place you’d start looking. But if you checked out the notice placed in the Washington Post yesterday for Leonard Vincent Gilleo, you might rethink your assumptions. Because Mr. Gilleo plied his trade at the Federal Reserve. For decades. And although the bio written (presumably by his family) might have gotten a little tongue-in-cheek, it’s arguable enough that the Fed has helped make such a hash of the nation’s economy, especially for the last two decades, that a tantalizing claim in the obit deserves to be taken seriously.

According to the notice, Gilleo’s “clients included former Fed Chairmen Arthur Burns, Paul Volker [sic], Alan Greenspan and Ben Bernanke, as well as US Ambassadors, Secret Service brass, White House Press Secretaries, and hundreds of PhD economists and State Department personnel.”

And his customers, we’re told, didn’t let him just stick to his scissors: “Standing behind his barber’s chair, Lenny served as the common man sounding board to many economic policy decisions made by the Fed.”

Now comes the kicker: “In fact, had his layman’s advice been taken seriously, Black Monday, the bursting of the dot-com bubble, and the financial crisis of 2008 could have all been avoided.”

At first, this might look nonsensical – or the kind of good-natured fun that’s common when we want to remember the deceased fondly. But think of the economic news since Black Monday – the stock market crash of October 19, 1987. The nation experienced a short and relatively shallow recession around the turn of the decade; a strong but initially jobless recovery that turned into a record expansion fueled largely by a technology-driven stock market bubble; another short, shallow recession; a recovery that turned out to be another, much bigger bubble inflated by record levels of easy money supplied by (Alan Greenspan’s) Fed; a terrifying global financial crisis resulting from that bubble’s inevitable bursting; and the recovery from the ensuing Great Recession that began in mid-2009 – the weakest on record.

It’s true that Fed Chair Ben Bernanke in particular is credited by many with preventing the most recent financial crisis from becoming a catastrophic global depression – and rejecting the advice of politicians and economists who argued that the central bank was preventing a restoration of genuine economic health by providing crutches that were too strong for too long.

But it’s also clear that Bernanke, his successor Janet Yellen, and her successor Jerome Powell have chosen the easy way to end the crisis – simply flooding the economy with as much cheap credit as necessary to keep it afloat – and that they have no viable exit plan. It’s clear as well that Bernanke and his mid-2000s colleagues missed the glaring warning signs that the growth of the 2000s was dangerously unhealthy growth.

Less clear, but most important, the Fed’s response to the last financial crisis continued a practice of fostering acceptable levels of growth and employment by showering the economy with levels of stimulus that have been so excessive as to be unsustainable, and bound to risk damaging collapses.

Economist Lawrence Summers was the first to identify this pattern, which he calls secular stagnation.

I’m not saying that I believe Gilleo had better answers. I am saying that it’s not completely crazy to recognize how dreadfully these most credentialed of our economic experts have performed, and to suspect that less technical, academicky mastery and more real-world experience and common sense (plus some backbone) would have left the economy considerably better off than at present. And P.S.: I can think of worse uses of my time than contacting Gilleo’s family to see if they were serious, and if so, what his advice actually was.

(What’s Left of) Our Economy: America’s Growth and Savings Dilemma in a Nutshell

Tags

bubbles, Financial Crisis, GDP, gross domestic product, housing, Maurie Backman, personal consumption, real GDP, recovery, The Motley Fool, USAToday, {What's Left of) Our Economy

An intriguing op-ed in USAToday provides a great opportunity to return to an important subject RealityChek has neglected a bit in recent weeks – the quality of America’s economic growth.

The article, by Maurie Backman of the Motley Fool investing website, does a fine job of scolding Americans for not saving enough – and of debunking many of the excuses heard for their lack of thrift. One of his especially interesting arguments: No matter how little one earns, it’s always possible to save something.

This is literally true, although economists widely agree on the seemingly commonsense proposition that (all else equal, of course!) the less you earn, the harder you’ll find saving, and in fact the less you’ll save. But what I immediately began thinking about is a major implication of this pattern. Namely, if Americans started saving even a little more, wouldn’t future economic growth be even slower than it’s been? At least unless the country found some other engine of growth – like investment or trade?

The light shed by the latest data on America’s growth shows just what an enormous transition this will entail. These numbers come from the government’s second read on the gross domestic product for the fourth quarter of last year and how its changed. (We’ll get one more fourth quarter figure next week and that will be the final result for that period – until a more comprehensive set of revisions is released a little further down the road.)

What they reveal is that the economy nowadays has never been more consumption-heavy. In fact, it’s even more consumption-heavy than at its peak during the mutually reinforcing credit and housing bubbles of the previous decade – which eventually collapsed into the worst financial crisis to hit the United States and the world since the 1930s.

During the fourth quarter, personal consumption as a share of the inflation-adjusted gross domestic product (GDP) hit 69.64 percent. That slightly eclipsed the former record of 69.60 percent – which dates only from the second quarter of last year.

So is it time to hit the economic panic button? Not (quite?) yet. Because housing – the second part of the toxic combination that helped trigger the crisis – still remains depressed compared with the previous decade’s levels. Housing’s share of real GDP peaked in the second quarter of 2005 at 6.17 percent. During the fourth quarter of last year, it was a relatively subdued 3.52 percent.

As a result, the toxic combination’s total share of the economy after adjusting for prices stood at 73.16 percent. That’s a bit lower than the old combined record of 73.27 percent (during the third quarter of 2005). But it’s only a bit lower.

And therein lies the biggest dilemma facing American policymakers – whether in the White House or the Congress or the Federal Reserve: Spending-based growth is unhealthy and unsustainable – and the story usually ends very badly. But reorienting the country’s national business model and turning it into “an economy built to last” looks to be disruptive enough to exact major short-term costs.

(What’s Left of) Our Economy: Why the Trump-ers (So Far) Aren’t Wrong About the Dollar

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bubbles, consumption, currency, debt, dollar, exchange rates, finance, Financial Crisis, growth, inflation, investment, protectionism, Steve Mnuchin, Trade, Treasury Department, Trump, {What's Left of) Our Economy

The economics, finance, and business worlds are kind of up in arms over U.S. Treasury Secretary Steve Mnuchin’s suggestion earlier this week that a weaker U.S. dollar would be good for the American economy.

I say “kind of up in arms” because Mnuchin’s remarks were more nuanced than generally reported; because financial markets in particular seem to be on steroids and have barely reacted; and because he took pains afterwards to profess his confidence that, despite its recent falling value, nothing fundamental had changed to undermine the greenback’s historic appeal to investors. Indeed, just a little while ago, President Trump stated that he “ultimately” wants to see a strong dollar. 

I say “up in arms” to some extent because, the President’s newest words notwithstanding, no American Treasury Secretary has ever said anything remotely like this in public for decades; because Mnuchin’s original words looked suspiciously consistent with what the establishments in these interconnected economic worlds abhor as the Trump administration’s protectionist instincts on trade policy (because all else equal, a weak dollar promotes U.S. exports and curbs U.S. imports); and because dollar strength (and the big U.S. trade deficits it’s encouraged) has long been a cornerstone of the global economy, and a major growth engine for the numerous countries that rely on selling to Americans to promote their own output and employment. (Hence many of them fiddle around with their own currencies’ values to make sure they can sustain these strategies.) Many strong dollar proponents also claim that a weaker American currency could dangerously stoke inflation (especially by boosting import prices) and deter investment inflows into the United States.

But two crucial points are Missing in Action in the tumult sparked by Mnuchin’s remarks. One should be obvious but can’t be repeated often enough, especially in these current overwrought times: You can have too much and too little of a good thing. An overly weak dollar would cause major problems for the U.S. economy. So would an overly strong dollar. Therefore, the key is not to assume either extreme (especially in the absence of any evidence that they’re around the corner) but to figure out a dollar level that achieves the best combination of benefits.

The second has been much less much widely recognized even in calmer periods, but it’s closely related to my longstanding point about the importance of the quality of American growth. As I’ve written frequently, growth based largely on production and the growing incomes it generates place the economy on the soundest foundation. This approach may not always produce the fastest growth, but it fosters the growth that tends to last longest, and that’s least likely to inflate bubbles that then collapse into economic and financial crises).

Such disasters, as we should have learned, stem from growth largely based on borrowing and consuming – i.e., on shopping sprees that eventually can’t be paid for responsibly, and can only continue by racking up enormous debts. And other than legitimate (though clearly overblown nowadays) concerns about inflation, that’s a main reason why folks in finance – and everyone on their payroll in the U.S. government and the rest of Washington – like the strongest possible dollar. Until the merry-go-round stops, they make tons of money by lending to those borrowers.

Here’s where the dollar’s value comes in. A strong-ish greenback tends to result in that borrowing and consuming brand of growth. A weak-ish dollar tends to result in the healthier kind of growth. And as indicated by this chart showing the change in the dollar’s value (also called the exchange rate) against other currencies, only looked at over the shortest possible period could the dollar nowadays be called weak or even weakening. Over a much longer period, it’s obviously still well in “strong territory.” 

And it’s no coincidence, as I’ve also written, that although the U.S. economy seems to be making some slight progress toward creating healthier growth, it still has way too long a way to go – especially given that the current recovery from the crises and the painful recession that followed is now more than eight years old.

The lessons, then, look clear. If you only care about the fastest growth possible regardless of its makeup or the longer-term consequences, and/or if you think finance should be the dominant part of the American economy, you’ll join the chorus of critics scolding Mnuchin for even hinting that some further dollar decline wouldn’t be a disaster for the nation. If you’d like the economy to steer clear of near-meltdowns like the one experienced just about a decade ago, you’ll be applauding what still looks like a subtle call from him for a somewhat weaker dollar.