Market's dog daze

The dog days of summer are being accompanied by howls of pain today from investors. Decisively contradicting predictions that the end of the tragic-comic debt ceiling “debate” in Washington would lead to a market revival, all major U.S. indexes, indeed indexes around the world, began a series of heart-, if not market-stopping drops. Why the markets reacted as they did speaks to investors’ ability to peer beyond the day’s rhetorical surge in support of deficit-reduction to ten years of austerity glooming ahead. They apparently did not like the perspective just as a funeral procession of economic reports indicated that the U.S. economy had stopped dead in its tracks: Consumer spending is down; unemployment remains persistent; private sector job creation negligible and the public sector job force primed for decimation. The beleaguered U.S. middle class, unable now to sustain its standard of living on credit or through cashing in home equity, can expect no structural relief from Congress. In fact, quite the opposite seems more likely even as tax-payers residing within America’s Olympian brackets continue to stuff excess income under cushy mattresses.

For months Keynesian economists still brave enough to raise their heads in the Austrian-enriched cultural fray have worried that federal budget-builders were on the verge of repeating the mistakes of 1937 when premature attention to spending restraint revived what had been a defeated Great Depression. But these worrywarts may be in error. Increasingly the nation seems poised on the edge, not of 1937, but, say, 1930 when a brief recovery from the crash of 1929 served only as a deceptive prelude to a deeper national economic fall. The Tea Party’s dutiful dead-enders in Washington got what they wanted out of the epic debt ceiling struggle of 2011. The nation has elected a path toward austerity at precisely the worst possible time. Wall Street sees it; does anyone in Washington?

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Joshua DeCuir
7 years 2 months ago
"The nation has elected a path toward austerity at precisely the worst possible time. Wall Street sees it; does anyone in Washington?"

As one of the most knowledgeable Keynesians noted today, the dive in the markets very likely has more to do with what's occurring in the Eurozone and Asia than the debt debate.  Ezra Klein writes:

"The impoverished and reckless economic policy conversation in Washington isn’t helping to cope with these trends, but even if we got our act together, the reality is that we have limited influence over what happens in China or in the Eurozone and Japan. And it’s not even clear how much an ideal policy response would do to speed America’s recovery."

And no one predicted the debt ceiling would resurge markets, only avert default.  And the reason the credit rating downgrade was threatened???  Unsustainable borrowing by the government to keep spending.  So pray tell how spending MORE would avert a credit downgrade AND keep markets surging?
7 years 2 months ago
Budget restraint during the Great Depression as the cause for its longevity?  From the mouth of FDR's Secretary of the Treasury, Henry Morgenthau, in May of 1939.

''We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong…somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises…. I say after eight years of this Administration we have just as much unemployment as when we started…. And an enormous debt to boot!'' 

The Democrats were as anti business then as they are now trying to fix everything with government policy.  They are repeating many of the same mistakes that they made in the 1930's, over regulating and restricting business.  But they will blame it on someone else just as Obama blames the mess he supposedly inherited on George Bush when he and his Democrat congressional buddies had more to do with it than Bush.

The Tea Party didn't get what they wanted.   They wanted about 8 Trillion in deductions in government spending in the next 10 years and they only got 2 trillion.
Tom Maher
7 years 2 months ago
Heads up.

There are hugh events going on in the world economy that has nothing to do with the author's views on recent debt ceiling politcal issues or his views on Keynesian economics. Additionally the American economic data has once again shown a stagnant economy totally unable to even minimally crteate jobs.  

Don't look now but the European debt problems are spreading and worsening. The 500 plus decline in the Dow Jones stock market index reflects panic over European debt and American debt both of which are hugh and out of control and with no credible plan of correction or any evidence of firm national resolve to correct their national debt problem.  

It is time for everyone to tune into the European debt problem  This has been building since March 2010 and is still not resolved.  Its hugh and growing and can impacting  the world financial markets the way the toxic assets of the collapsed  of the housing market in 2008 did,  Greece is being bailed out for the second time and Greece debt is still rated very risky and likely to default.  How could it not?  When a country debt owed is 140 percent of its annual yeartly GDP?  Greece though relatively small can bring down the world finacial markets all by itself.  And Italy, Spain , Ireland and Portugal all have too-much-debt problems. (As does the United States.)  

Do you know how badly impacted the world financial system would be if any one of the many nations having too much debt to GDP defaults under their  heavy burden of debt?  Any default would be a world changing event in magnitude.   If any one of these European nations defaults the 2008 world financial meltdown event would likely be repeated.

And no one believes the Obama admistration is able to handle even an ordinary world economic slowdown that is now going on let alone a major European debt default  shiock to the world financial markets.
7 years 2 months ago
''Will the next few months lead to 1937, '39 or '31? All are possible, but it seems to me '31 is still in the mix.'' 

They were all bad years.  We do not have to repeat the mistakes of the past but here we are again doing the same things.  Spending has never worked.  It didn't work in the 1930's, it didn't work in the 1970's and it didn't work in 2009-2011.  Unleashing business is the only way to get it done but we have a president and an administration that is anti business so getting rid of him should be the first objective.

''All we need now is a painful round of budget balancing tax hikes and a modern variant of Smoot-Hawley and I think we can expect to time warp right there.''

And I wonder which party is for tax hikes and protectionist policies.  The Republicans have been pressing for free trade with Colombia, Panama and Korea and Obama has held them up.  Yes, let's get rid of him and his people before we really get screwed up.  Paul Ryan was pressing for reducing tax rates that were actually revenue neutral in order to encourage people to spend more and drive money to more efficient use but he has been mocked.
7 years 2 months ago
Kevin -

The whole notion of the dearth of federal spending is a canard.  Did you bother with the details of the Budget Control Act?  If so, then you know the "cutting" is a loose use of the word insofar as the first round of "cuts" is actually a series of caps on projected federal appropriations for FY 2012, which caps are tied to the current budget baseline.  Now keep in mind that the current baselines are already the highest they've been in the history of the nation.  The second stage of "cuts" are to be determined by the Supercommittee, so as of yet, they are imaginary!  If that Supercommittee fails to report a bill, then the "trigger" of automatic cuts across the board is pulled, but those cuts are spelled out over TEN years (from 2012 no less)!  So it's not as if the spigot is shut off all at once.  Moreover, the Bush tax cuts are STILL slated to expire in 2012, so its not as if tax increases are impossible (unless of course you don't think democrats have the nerve to steel their spines for that fight).

I agree wholeheartedly with your infrastructure comments, and indeed a bipartisan bill is already pending in the Senate to do just that.  The problem, however, is that the notion of "stimulus" has been discredited, and, in my opinion, the Democrats are wholely to blame for that.  As Bill Galston points out yesterday, they controlled spending and taxing for some four years during this crisis; indeed Pres. Obama allowed Congressional Democrats free rein to draft the stimulus bill of their choice in the first months of his presidency.  They could have raised taxes AND raised the debt ceiling all while the Republicans were still a minority in the House.  They failed to do so, and in failing to do so, all the while making the promises of recovery from "investment", they now own the failed notion of stimulating our way out.

There are any number of ways to "grow" our way out of the recession, but to my mind, shaped by the readings that I do, they all go through some grand compromise that involves spending cuts, entitelemt, and tax reform.
7 years 2 months ago

There are quite good resources on the internet and in the libraries to learn about economics essentially for free.  It just takes time to expose yourself to the ideas.  I have a business school education and have been exposed to economics both in school and in the private sector but actually learned a lot from the khan academy about finance, money and banking.

Salman Khan is one of the hottest things in education today and I highly recommend his videos which are simplistic but very good.  Also most libraries have several courses by the Teaching Company that are college or graduate level and you can find some very good ones on economics.  One of the good things is that there is little politics in either.  It is impossible to get away from it in today's world as people spin everything to their own agenda but after awhile you will know it when you hear it.

I also recommend Deirdre McCloskey's books on the history of economics and capitalism.  They are very easy reading and informative if you like history.  Some of her stuff is available for nothing on the internet.
Stanley Kopacz
7 years 2 months ago
You hit the nail on the head.  Economics is not hard science.  Anybody who says they know how it works is a voodoo priest, whether liberal or conservative.  We were unregulated in the nineteenth century and mostly prosperous but we were taking over land from the indians and the spanish.  At the same time, new technologies in electricity and transportation opened up other uncharted territories in the tech realm.  We had a depression in the last century and government spending, albeit it for war, seems to have cured it in the forties, and we partied for thirty years.  But then again, the rest of the world was devastated and our manufacturing base was intact.  Since then, the rest of the world caught up and even surpassed us in manufacturing process control.  Economics is not isolated or the fundament.  Right now, I'm not sure there is an economic solution.  I know a proper and legitimate path forward is not possible until the financial realm is reregulated, just like a steam engine, which I DO understand.  And we have to make votes count again, more than lobbyist bribes.  if a new cheap energy source, a room temperature superconductor or warp drive were discovered,  the economy would take off, no matter what congress did and how crooked they are.
Brendan McGrath
7 years 2 months ago
To JR, thank you for your reply with all the helpful information - I doubt I'll have time to look into all that (I'd rather read theology), but I appreciate the suggestions.  At the same time, I think I'd echo what Stanley and David have said about how even when people are educated about it, they still tend to divide into different schools of thought, and then you watch the news (even something more respectable like the News Hour), and it's just like, "pick the one you want to believe." 

A stray thought, though related - suppose the economy really goes down: what effect might it have on religious practices in the country, and specifically on Catholic culture?  I absolutely dread the consequences for Catholic schools, but if things got bad enough, who knows, maybe people would be more inclined to become priests and religious if there weren't as many other opportunities.
7 years 2 months ago

Nearly all the hard sciences and engineering are based on the laws of physics.  They determine the properties of elements and how they combine, how rocks and other elements form to make the planet, how weather happens etc.  Within these there is often controversy as to what has caused what but whatever happened, happened due to the laws of physics.  No one is saying the laws of physics are arbitrary.  A slightly less determined hard science area is the life sciences where we have a computer like program imposed on the natural forces and not quite as understandable but yet one that is the result of forces we can study and understand.  Again no one is saying it is an arbitrary system.  It is several layers of complexity higher than the natural world but one that runs on basic forces.

The social sciences and economics is one of them is based on another layer of complexity and is based on human nature or what we might call the natural law.  There is a human nature and we are designed that way and one cannot wish it away though many actually do believe they can design it away.  Because it is not as clearly consistent as the laws of nature the variation and complexity is much greater.  But it is there and not arbitrary.  So to argue in a way that economics is a matter of picking your choice of what you like is nonsense.  The forces are not as clear as the physical world but there are forces operating and they are consistent over every human society.  By saying that you will pick what you personally like is not exactly like saying I will chose to wish gravity away and prefer a world where I can fly at will but close.

If you want to understand the great debates then one must spend some time at understanding human nature and how it interacts with the world.  We all do that by just living in the world but the complexity is great and to truly understand it one must start to unravel the complexity to then understand what makes sense.  People can do that in various way and often the smartest do it by participating in activity that let's you see the world in action.  People join organizations and witness first hand other people in action and get an understanding of human nature. Running a business is an eye opener as one has to make a profit or close and in the process one runs into human nature at every turn and the laws of economics.  One can also study it and learn about the basic forces that work or one can pursue other things but then they abrogate their right to understand something and comment on it.  Just as  I have not learned any engineering nor have I ever built anything of consequence, I then abrogate the right to comment on the process. 

I am reacting to your comment that you do not know who to chose and just pick the one you like best.  My response has been that learning something about it will set one free from such a situation and provide one with the basis for choosing and not just emotionally pick the one they want to believe.  There is truth out there but too often people just vent and go with their gut reactions and few or no facts.  It happens all the time on this blog.
Tom Maher
7 years 2 months ago
Standard and Poors's downgrade of U.S. governent debt is just more  evidence that the United States has a very serious debt problem that urgently needs to be corrected.  Standard and Poors warns that fufther downgrades are possible.

The Republicans in Congress showed great leadership in refusing to raise the national debt ceiling without spending cuts equal or greater to the amount the debt ceiling was being raised.  This hugh political fight in Congress and with the President sucessfully gained spending urgently needed spending cuts and did not as in the pass trillions of dollars of debt to automatically accumulate by unrestrained, run-away governemnt spedning . 

Standard and Poors is not the Tea Party. It purpose as credit rating agency is to warn investors that the United States while still very able to pay its debt has become a less certain creditor.  S and P notes as does the International Monetary Fund that the United States does not have a credible plan to finance the exploding costs of its many entitlement progrms.  These cost sucha s medicare are approoaching infinity where even if everyone was taxed at 100 percent of their income there would still be not enough revenue to pay for these programs and pay off what it owes to bond holders.  There are limits to spending that the admisnitration and the Keynesians continues to ignore.
ed gleason
7 years 2 months ago
As for what economic advise to follow, both sides agree it's smart to buy when there is blood on the stock market floor. For the long term.... I have no long term but my grandchildren do. I went to cash, fearing a Tea Party caused default, so now I have a cash mop to slowly wipe up the blood.
John Barbieri
7 years 2 months ago
Jeff Landry makes sense. Kevin Clarke doesn't.
ed gleason
7 years 2 months ago
Let me see if I got these above posters right. TPs wanted more cuts, and wanted a default , but cooler GOP ' heads' prevailed.... and everyones 401K has declined about 15% and going lower by the minute. And GOP says Lets stop unemployment benefits for the lazy, and keep defense expenses at least where they are. Bridges, roads, airports, trains, ports will remain just as Eisenhower built them in the 50s because private capital is sacred..Let China get full employment building high speed everything.. 2 trillion that US corps stashed overseas will remain there till the GOP can get control and bring it back tax free.. The action of 'real' American Christians... To whom do we send a thank you note?  
Tom Maher
7 years 2 months ago
Ed Gleason (#5)

Who do we have to thank for the results of our economic policies?   Why President Obama and the Democrat controlled 111th Congress of course.   The administration faithfully as good Keynesian should spent almost a trillion dollars on their very own stimulus program over the last three years and also created massive new mandatory health care entitlement programs for everyone impacting most businesses in America.    

The problem is no one has seen or heard of any positive economic results coming from the Obama stimulus or new health care law  Most of the stimulus money went to states and local governments.  And "public works" in the 21st cenury means primium labor rates to a few union members working on existing stuctures.  No  one is interested in wasting more stimulus money on 1930s economic tactics that do not work in today's economy.

This is not the 1930s were stimulus money flows to everyone through useful new public works projects.  Today's economic stimulus reworks what already exsits.  Mass repaving of roads and reworking of existing structures adds little or  no new economic benefit to the economy.  The policy results: consistant 9 plus percent unemployment and not to mention the accounting trickery where tens of millions who are not longer  even codisered part of the workforce they have been unemployed for so long. 

Here's an idea: Maybe the inept government economic policies are the problem rather then the solution. 

And opps speaking of inept the Treasury just announce the other day that the U.S. debt is now 100 percent of GDP.  Is anyone in Washington taking care of the economy? 
Do you know how much financial resources it takes to finance a national debt as big as  our entire economy?  Answer: more than the economy has.  We are dangerously dependent on obaining needed credit from the world credit market.

Our hugh and growing national debt itself is a job killer because to service our national debt massivley diverts investments funds from the private sector that creates jobs to finance our massive national debt.    Our national debt is a black hole sucking up all the capital needed for a growing economy and economic health.  
7 years 2 months ago
Some people have not got the word.  The Democratic National Committee said the deficit/debt decision earlier this week was a magnificent win for Obama.  So our Democrate leaning friends should be excited and the Republicans dismayed.

So I guess the stock market slide will end and all will be hunky dory again because if Obama won the debt ceiling battle, our 401K would be sound again so some have promised.

Also as I seem to remember there was one president criticized for the size of the roads bill in 2006, about $250 billion at the time as being extravagant and another president who seemed to say shovel ready in every other paragraph just 2 years ago and spent over $800 billion.  You would think with all that money spent on infrastructure every construction guy in the country should be at work.  

Also I didn't know Eisenhower was still president since he must still be with us if he is the only one that ever did infrastructure spending and nothing hasn't changed since he was president.  I live in the Hudson Valley so maybe we are all like Rip van Winkle here and have slept through Eisenhower's long presidency.  They must not have term limited the guy.
Brendan McGrath
7 years 2 months ago
I'm always at a loss as to what to think/believe when it comes to all these financial and economic assertions and arguments.  I mean, is there any way of one school of thought or political party actually persuading another that they're wrong, and changing their mind?  How on earth do we know what's true?  It's almost like deciding which of two religions is true, although to be honest I'm more certain about that than I am about economic matters.

One thing that occurs to me is that I wish the corporations that are stockpiling money would consider the lillies and start hiring people - i.e., stop worrying about the future and start worrying about helping/employing those who need it.  Of course, that might be foolish, but you know what St. Paul says about foolishness and wisdom.

As John Paul II said, the first law of economics is the Word of God.
Joshua DeCuir
7 years 2 months ago
From the NY Times, some 30 minutes ago:

"Standard & Poor’s removed the United States government from its list of risk-free borrowers on Friday night, citing concern about the rising burden of long-term federal debt.

The ratings agency had threatened the downgrade if the government did not act to reduce the federal debt by at least $4 trillion over the next decade. Earlier this week, Congress instead passed a plan to reduce the debt by at least $2.1 trillion."


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