Burning the Midnight Oil for Economic Populism
Let's do a quick run-down of the last couple of decades of US economic history.
(1) Inflate a residential property and internet start-up bubble. The long-term unsustainable expansion in credit provides the national income growth that starts the chattering classes talking about the "Great Moderation".
(2) The dotcom bubble bursts, and recovery from the dotcom bubble rests on further inflation of the residential property bubble.
(3) As double digit shares of the populations of China and India reach the point of being able to afford a personal internal combustion vehicle, demand for petroleum rises as global production reaches its peak.
(4) By 2007, with sluggish exports and investment in productive capacity, and real incomes that haven't yet recovered to the level of the height of the dotcom bubble, the primary engine of economic growth is the residential property bubble.
(5) The property bubble bursts in the US in the end of 2007. At the same time, as the US enters a mild recession, the ongoing oil price shock continues on the back of growing overseas demand.
(6) Sagging real incomes makes it impossible to paper over the pile of duplicity and fraud that the property bubble has been built on, and the FIRE sector (Finance, Insurance, and Real Estate) catches FIRE and threatens to burn down the economy.
(7) International financial contagion spreads the economic downturn worldwide.
(8) The massive collapse of asset values in the Panic of 2008 implies an extended saving/real investment imbalance, as wealth holders focus on rebuilding their wealth balances. This is sure to extend for seven years, if not more, so sure to be a drag on the economy until 2013 at the very least.
(9) There is no basis for expanded consumer credit, no basis for growth in exports and no basis for investment in productive capacity, since nobody is buying anything. With no basis for growth in residential property development, there is no possible source of demand to offset the saving / real investment imbalance except for deficit spending by government.
(10) After the deepest recession since the two recessions of the Great Depression (but a tiny tot of a recession compared to the Hoover Recession), there is a recovery based in part on catch up consumer demand and in part on growth in export revenues. But, of course, catch up consumer demand sooner or later catches up, and growth in export revenues is dependent upon people oversease not shooting their economies in the foot.
(11) The European Union proceeds to shoot its economy in the foot, repeatedly, under the weight of German economic folkviews in which the internal German EU surpluses are proof of moral superiority, and the creation of credit by German banks that it rests upon are proof of the moral inferiority of those German export markets that the German banks lend to.
(12) While US exports are not directly dependent upon the EU, what goes around comes around, and the self-selected recession by the EU is starting to show up in a drag on US export revenues.
(13) Growing export earnings spill over into investment in productive capacity, while stabilizing or declining export earnings, imply stagnant investment in real productive capacity. And total government spending on goods and services has been slowly declining in real terms for the past three years.
(14) And now the White House and the House Republican leadership is arguing over how much government spending to cut, in an effort to placate the confidence fairy and create growth because the Village has been chanting "public debt threatens growth", and chanting always makes things be true.
Generically, we can say that pursuing a "Grand Bargain" ~ balanced or unbalanced ~ is risking recession.
But right now, its simpler. Agreeing to a Grand Bargain will cause a recession. We do not have enough engines of economic growth at the moment to stand up to a massive undertow from increasing the current rate of decline in government spending as a share of GDP.
Message From Marley: Concrete Jungle
No sun will shine in my day today; (no sun will shine)
The high yellow moon won't come out to play:
(that high yellow moon won't come out to play)
I said (darkness) darkness has covered my light,
(and the stage) And has changed my day into night, yeah.
Where is the love to be found? (oo-ooh-ooh)
Won't someone tell me?
'Cause my (sweet life) life must be somewhere to be found -
(must be somewhere for me)
Instead of concrete jungle (jungle!)
Where the living is harder (concrete, jungle!).