Thursday, June 3, 2010

Get Ready For the Double Dip

By Cujo 359: All rights and most wrongs reserved

It looks like the end of the stimulus has arrived, Bloomberg reported yesterday:

The biggest slump in commodities since Lehman Brothers Holdings Inc. collapsed is undermining Wall Street forecasts for accelerating economic growth and higher prices for everything from copper to crude oil.

The Journal of Commerce Industrial Price Commodity Smoothed Price Index that tracks the growth rate of steel, cattle hides, tallow and burlap plunged 57 percent in May, two years after a decline that foreshadowed the worst recession in half a century. The index of 18 industrial materials declined the most since October 2008 as Europe’s debt crisis widened and China took steps to curb growth.

Commodities extended their slump today, led by declines in industrial metals and energy prices, as separate reports showed manufacturing slowdowns last month in China, Europe and the U.S.

Commodities’ Biggest Drop Since Lehman Is Bear Signal (Update4)

Folks considerably more in tune with the economy than I have been saying for months that there would be another slump come the summer. I tend to believe those predictions, because last year's stimulus money has about run its course, and what was wrong with the economy early last year is still wrong: out-of-control investment houses that have world governments by the short and curlies, lack of consumer credit for any reasonable price (sure, you can get a loan from your credit card, but that's the sort of loan you used to get from a guy in a pinstriped suit), and no new jobs to speak of.

So what are the geniuses in Washington doing about this? Not much:

The weeklong turmoil in the House reflected increasing anxiety among fiscally conservative Democrats unhappy about adding to the deficit as the national debt closes in on $13 trillion. The initial version of the bill approached the $200 billion mark, over the next 10 years, and would have added $134 billion to the deficit.

When that legislation came under assault, the Democratic leadership twice made cuts to the bill’s price tag.

Lawmakers also approved, by 245-177, a $22 billion provision to delay a scheduled 21 percent cut in Medicare reimbursements to doctors until 2012. That action brought the deficit cost of the bill to $54 billion, according to the Congressional Budget Office.

House passes big jobs bill

This is what started out as a laughably small "jobs bill". In the end, it became extensions for benefits, which were helpful, aid to states that was way too small to do any real good, and tax cuts that, as usual, won't do a damn bit of good.

In short, we're going into a recession with even worse debt than we already had, and these meatheads are worried about the debt. It's as if 1937 never happened:

The 1937 relapse in the US [GDP shrinkage] was a clear result of tightening fiscal policy. All through the 1930s the attacks on fiscal intervention were fierce and prevented the governments from expanding sufficiently. Earlier in the 1930s, the neo-classical remedies had been tried and things got worse as Modern Monetary Theory (MMT) would predict. For example, cutting wages may have reduced costs but it also reduced demand.

However, Mandel agreed that (world) “economy did not conclusively recover until 1939, when military spending started to ramp up before World War II” but fails to draw the logical conclusion. This was a period when the deficit terrorists became patriotic and governments could spend what they wanted to to prosecute their military ambitions.

At that point the fiscal stimulus was sufficient to create full employment (and labour scarcity) whereas during the 1930s, fiscal policy exerted clear positive impacts but not sufficient to really wipe out the aggregate demand failure that allowed the bank collapse to spill into the real sector in the first place.

Fiscal policy worked – evidence

Here's the problem: without much greater employment, there will be no recovery. Without government spending that's well above normal, there will be no return to high employment numbers. This was proved by the 1937 relapse and the eventual recovery, starting in 1938, that was fueled by new military spending. If it hadn't been for World War II, America might have been in the Great Depression for another decade or two. As the author of that article, among others, there were plenty of folks willing to spend money on weapons but not improving the economy.

This time, we don't have WWII to save our economic asses. Our military budget is already way larger than the rest of the world's. Realistically, there's not much farther we can expand it without fueling an arms race with China and Russia. Military spending isn't all that useful for creating economic resources, either. It would probably be better to build roads to nowhere than to expand the military, from an economic perspective. At least the roads might eventually lead somewhere.

We're in for a rough time. I don't know how to avoid it, because our leaders are either too stupid or too feckless to fix this. They'll continue to insist that austerity measures, which won't affect them, of course, are needed. In reality, that's only true for places like the European countries that are tied to the euro. Countries that have their own currency can ignore such considerations, as long as they don't spend so much that they cause inflation. As that Bloomberg article indicates, we appear headed for deflation, if anything.

Unfortunately, the people who matter don't believe that. They aren't even good economists.

If you don't like that state of affairs, you might want to consider letting your Congress and your President know. It might not do any good, but it can't hurt.