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Thursday, March 11, 2010

What If 2007 Was 1980?

Regarding my prior post....

This is the initial claims trajectory by week after the trough as designated by NBER. NBER hasn't officially named a trough for the recession beginning in December, 2007, but I am assuming it was May 2009. There was a clear freight pickup in June of 2009.

What's perturbing about the initial claims trajectory is that it appears to be more similar to 1980 than to 1982. About two years of initial claims are covered on this graph. As you can see, the 1980 recovery segued smoothly into the 1981-82 recession. That is why the green line turns up again.

The three recessions (per NBER) are:
January 1980 ending in July 1980.
July 1981 ending in November 1982.
December 2007 ending in....

NBER refuses to name the trough for the latest recession until GDP reaches its former level, so they may have their doubts. Many economists feel that the 1980-1983 period is one cycle, not two.

We are certainly not going to be helped by the mechanics in the 1982 recovery: From the always-useful St. Louis Fed Fred, we have two graphs covering total household debt and real retail sales for the 1977-1985 and 2005-20010 periods:

As we emerged from the 1982 recession, people needed a lot of stuff (remember, there was a bad recession in the mid-1970s, then the two shown here), rates had dropped, and, well, people borrowed and bought. Everything. Cars, clothes, appliances, houses. They needed a LOT.

This really goosed the economy, especially since in those days we made appliances, clothing and cars. Everybody got hired to make that stuff, and then the new employees ran out and bought the cars, clothing and appliances. It was a pleasing cycle. I lived through it, so I'm not going to call it virtuous, but it darned sure was a heck of a lot better than the previous cycle.

Ehrlich aside, the 70s were hardly virtuous either. During much of that decade our chief growth industries were illicit drugs, mood rings, platform shoes, stoner college professors, political scandals and the invention of STDs that Medical Science Did Not Know How To Cure. There was a reason Ronald Reagan came as a relief.

This brings us to the present:
Just to keep y'all interested I have cruelly changed the series colors. The green line is the blue line in the prior graph, and the red line line is the green line in the prior graph. That's simple, right?

I would prefer that you open up these graphs in other tabs and look at them, because real retail sales has changed its fundamental relationship with outstanding household debt, and that is one of the important things about these two graphs.

But you know what - I could make all the lines yellow in this graph and it would still be a whole lot of nuthin' as far as recovery fuel.

Needless to say, housing sales aren't going to cause explosive growth this year either.

So that's what's making that huge sucking sound I've been hearing.

BTW, some say tomorrows Retail Sales number could be up big. Stay tuned.
If we don't manufacture anymore, how is a stimulus
going to provide more than a temporary lift ?

We are certainly not going to be helped by the mechanics in the 1982 recovery:

I think I have a [sarcastic] solution to our problems.

As we know, the 1980s and 1990s seemed like pretty good decades. Let's assume at least some of that was due to constantly falling interest rates.


In 1980, the Fed Funds Rate averaged 13.35%.

In 2009, the Fed Funds Rate averaged 0.16%.

All we need to do is lower the rate another 13.19% to -13.03% over the next 30 years. With rates so low, everyone can afford to refinance their home loans. In fact, the more you owe the more income you'll be getting off of your debt. Wouldn't it be nice to be paid to owe money? I don't think anyone would complain.

Problem solved!

My word verification was "nonicris", which I think is short for non-crisis! See! It's all coming together quite nicely. Sigh.

I'm now beating my forehead against my desk.
Thanks for the update! Love visiting your blog!!

Common Cents
CF - That would help stocks, but in the long run it is real retail sales. Those are a month deferred - they are calculated on the second reading, not the advance.

I still maintain we have a possible window through to a sustained (if somewhat weak) recovery, but it seems to be narrowing very rapidly.

I think claims will get better, but by how much? This is why I have been so neurotic about the extension of unemployment benefits.
Sporkfed - that is one of the problems. A lot of the basics that consumers buy in a recovery are stemming more from other economies. As consumers spend, the trade balance tends to go negative.

It is a very hard problem to fix. Tariffs won't do it - there would be retaliation, and a lot of components that our manufacturers use are imported.

One way is to concentrate on energy first; cheap energy can do a whole lot to encourage manufacturers. France in the seventies was a great example.
Mark - there is no snark that you can snark so extreme that some economist has not already proposed it.

The problem with the negative rate is that of course no one will lend at that rate. Using the superb econo-brilliance of his economically spiffed-up mind, one rather prominent economist sort of threw out the idea of confiscating a good portion of everyone's currency at a set future date as a way of getting them to spend it first.

Can you, with your paltry, un-economically-spiffed mind detect the problem?

"Can you, with your paltry, un-economically-spiffed mind detect the problem?"

From May 2009...


Mankiw's "currency crisis" solution would prevent ongoing deflation problems. It's pure genius!

Snark snark!
That's pretty darned good, Mark.

Of course, the other problem is that people don't hold on to CURRENCY these days - except for the very poor people. Most currency either gets deposited in banks or is flowing through the stores.

So the change would really hit banks (10% of their currency in their vaults would go piffle), merchants (likewise), and poor people.

The prospect of galvanizing your economy by brutalizing the banks, the merchants, and the poor defies categorization. Perhaps it is best filed in the drawer labeled "The beatings will continue until morale improves."

Such a move would of course not impact those who really have money to spend - after all, you would hardly be liquidating your TIPS!

But now that I've made rude remarks about Mankiw's proposal (I didn't bring up his name, you did), let me point out that I forgot all about the census jobs last year, which was almost as bad an error.
BTW, there was a reason I brought that up other than snark. I have been wondering about how China escapes, and the combination of high inflation and a property bubble is going to fuel the flames. Bloomberg article:
Consumer prices rose a more-than-forecast 2.7 percent in February, the most in 16 months, the statistics bureau said in Beijing yesterday. The increase means the rate exceeds the one- year deposit rate of 2.25 percent.

I don't know how China can escape either.

On the one hand, I'm told that they need to let their currency appreciate to help control inflation. They must fight inflation before we do if only because inflation hits the poorest first (food and energy).

On the other hand, an appreciating currency can help trigger a deflationary mess. Skyscapers, hot property, overcapacity, income inequality, easy money? They seem to have the foundations of a complete economic "miracle", just like we had heading into The Great Depression.

In any event, I suspect that the price of "Grow At Any Price" Chinese government policies will be tested in the coming years.
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