The critical question is can final demand pick up where stimulus leaves off?

As Henry Liu points out, monetarists do not understand that fiat money is a credit instrument, not a debt instrument.

Credit may come from sources other than banks

Firstly, it’s possible to create a monetary system upon trade credit – the Swiss WIR is an example of a credit clearing union where billions of Swiss Francs’ worth of goods and services change hands not FOR Swiss Francs, but by reference to them. I think that in the Internet Age this type of ‘Peer to Peer’ credit is capable of becoming pervasive, with the right trust framework.

Secondly, Treasuries may create credit directly – and indeed this was the premise of the Social Credit movement pre -WW2. There is no need for Central Banks – Hong Kong demonstrates this empirically, as they have never had one.

I believe that – pending any internet driven changes -it is the duty of governments to create public credit necessary for the creation of private and public assets. This process would be managed by service-providers-formerly-known-as-banks within parameters laid down by a Monetary Authority.

To those who say that Public Credit would be ‘inflationary’ I respectfully point out that it would be less inflationary than the existing broken system dying of capital starvation because:

(a) operating costs would be less, since the service providers would receive performance related pay;

(b) default experience would probably be less than recent disasters;

(c) there would be no unnecessary costs in terms of dividends to shareholders, since the only capital needed is that required for operating costs.

In other words, we should ramp up QE drastically not for the purpose of buying existing financial assets (and bailing out the rich) but for investment in productive assets. If private banks cannot or will not create credit on the basis of their own balance sheet then they may instead manage credit creation on the basis of the public balance sheet.

Finally, the problem is not really a shortage of credit, but a shortage of the credit worthy. Here I agree with Buiter and Taleb: if debt cannot be paid, it will not be paid, and what is needed is a debt/equity swap on a massive scale.

Maybe not equity as know we it, though….

http://www.slideshare.net/ChrisJCook/equity-shares-a-solution-to-the-credit-crash-presentation

By the way, when I say “you you can’t go out and say this and this is ” I mean figuratively, not you Lavrenti personally. Thanks again.

Ed

Now it’s super bowl time!

It seems clear that central bank inflation targeting has been shown as a failure.

Would you think that a system of targeting inflation AND private sector debt levels, would work?

As you say debt increases are stealing growth from the future and if debt levels increase for too long, a long period of very low economic growth is inevitable.

But from what I see governments are desperately trying to convince us to re-start on our debt binge, with their continual bleating about how banks are not lending.

Thanks for your great web-site.

But, you can’t go out and say this and this is definitely going to happen. That’s just nonsense in an environment where a large part of economic forecasting depends on what the government is likely to do. You can give odds as I have just done but you can’t make definitive statements right now.

My odds are tilted toward double dip, largely because POLITICAL pressure to withdraw stimulus is so great and that is EXACTLY what I said three months ago. Recall this post:

http://www.creditwritedowns.com/2009/10/the-recession-is-over-but-the-depression-has-just-begun.html

Deficit spending on this scale is politically unacceptable and will come to an end as soon as the economy shows any signs of life (say 2 to 3% growth for one year). Therefore, at the first sign of economic strength, the Federal Government will raise taxes and/or cut spending. The result will be a deep recession with higher unemployment and lower stock prices.

When I wrote that in October I thought stimulus would last at least through 2010. But it is already likely to be withdrawn and that makes the deep recession I warned would come when the stimulus was withdrawn more likely to come by late 2010 or 2011 – which is what I am now saying. To my eyes that is very consistent.

See also
http://www.creditwritedowns.com/2009/11/i-am-now-moving-from-multi-year-recovery-to-a-double-dip-baseline.html

which outlines the specific reasoning when I made the change in November.

In September, I might have said 50-60% multi-year recovery chance 30-40% double dip, 10% V-shaped recovery, 10% GDII. Now, I see Double dip as say 50%, multi-year (weak) recovery as 40%.

“I take neither side. I am just not that clairvoyant. Both scenarios are plausible outcomes.”

And this when you’ve clearly postulated that we’re in a secular downturn? Anything’s plausible, I suppose, but this sounds more like butt covering than economic forecasting. Come on, guy.

http://online.barrons.com/article/SB125270796110504703.html

and what happen? a rally of 50%+ in the stock markets. Now you ask people the same question and they say it is going to be a good economic growth, so can you guess what will happen? Stocks follow social mood, not news or indexes. At some point reality will deflate the mood as people cannot pay their bills and unemployment does not stop, and then…bang! crash again! we never learn, we just follow the herd

I think this disagreement as to the resolution at which people view their prognostications is a major contributor to the disconnect between those who trade for a living and those who are simply trying to find a good long term investment for their low-yielding savings.

So 2003-2007 is now to be classified as a multi-year fake recovery, too? Then we’re really already on the second leg of the double dip. We might need to invent a letter to describe a shape with three dips.
Perhaps diminishing sine-wave was the most accurate. Durations of each fake recovery shorten due to the learning effect. There will be fewer suckers to sustain each subsequent upswing and ultimately we end up with where Japan is now.

The fundamental equation is the deflationary effect of a collapse of trillions of dollars of credit and loan defaults. These were triggered by $147 USD/bbl oil prices. The $2 trillion the US gov has dumped into the system is a fraction of the deflationary effect of 10-15 trillion in evaporated credit and loan losses.

I guess yet-to-be-digested sums it up well enough. The indigestion is of fatal proportion and the wheels have come off the economic wagon – globally.

In my humble opinion…

1. The recent crash was the largest since the Great Depression and has YET TO BE DIGESTED. In particular, income and prices continue to fall.

2. The crash came on top of a fake recovery fed by high levels of consumer debt and stagnating income. Thus, many households are FUNDAMENTALLY UNABLE TO EXPAND CONSUMPTION.

3. Consumer and investor CONFIDENCE is down (as well it should be), based upon repeated recent setbacks to the economy and markets.

4. The false sense that we are recovering rapidly is deferring discussion of the additional government intervention that will be necessary to reinforce the safety net and stabilize the economy. (Health care reform IS a step in the right direction, however.)

Bernanke is using the same playbook. Only this time C&R RE, employment, trade, and the dollar are still stubbornly refusing to come back to norms.

I refuse to succumb to the green shooters who think he can keep rates low and print us out of this crisis. Not only do I see a crash coming, I see it in mucher wider scope than the equities markets. In retrospect I suspect future historians will blame it on compettition by China, Russia, & the Euro countries for a new reserve currency that destabilized the dollar. I believe that is a symptom, not a cause.

We Americans stubbornly refuse to get our own house in order. Austerity is what is needed. We need to bite the bullet hard and reconstruct a viable economy sans debt, built on savings, manufacturing high tech products the world needs and cannot get elsewhere, which sustained us up through the 1970′s. Without this, we are doomed – at best – to another bubble and crash. But I believe the most likely outcome this time around is simply a massive crash without the bubble.

Calculated Risk has said that residential construction normally leads a recovery. Residential construction is moribund and likely to remain that way for awhile.

Manufacturing is improving. My company’s customers supply intermediate goods to manufacturers making consumer products ranging from small toys to autos. They report business has improved dramatically in the last month.

Met with the bank (large regional) today on an LOC renewal. They report that wood products companies remain in the doldrums and see no hope for short- to medium-term improvement – a reflection of residential and commercial construction weakness. In general, all customers are cutting back on credit line usage and debt. Bank rep said Q3 and Q4 numbers will be weaker than Q2 because much of the Q2 profit was one-off; risk managers are not allowing new business fast enough to replace lost loan base.

ECRI and others are bullish on leading indicators. ECRI cites housing sales activity as a recovery indicator. But these are transactions involving existing inventory – not new construction – and are being juiced by Government subsidies and lax underwriting by FHA. Hard to see this activity as a harbinger of real recovery.

I remain agnostic.

As you point out, the 2003-2007 recovery was a fake recovery, and we are now worse off in many ways. It seems to me that the duration of the bear market rallies (fake recoveries) will get shorter and shorter as the basis for the fake recovery becomes more and more tenuous (which will happen by the definition of a fake recovery). The last fake recovery lasted 3-4 years (2003-2007). It’s not clear exactly how long the current fake recovery will last, but multi-year seems a stretch to me. Most all current investors will be considering the 2 relatively recent stock market crashes…

On top of that, many of the previous debts still have to be repaid.

On top of that, income is down big time. From http://www.motherjones.com/kevin-drum/2009/09/freefall-2008#comments:

the 2008 drop in median household income was the biggest since the Census Bureau started tracking this stuff in 1976. Income dropped $1,860 in 2008, and the next closest competitor is 1980, when it dropped $1,439. Last year was the worst year for household income in both absolute terms and percentage terms in the past three decades.

And, as Ezra says, that was only 2008. This year is likely to be as bad — or possibly worse. Income drops typically persist for several years during a recession, and the combined impact of this recession is almost certain to do more damage to middle class incomes than any recession since World War II.

It is far from clear.

I just don’t see the case for a renewed multi-year expansion. The U.S. consumer doesn’t have the assets to borrow against like before. And expecting China to fuel a global boom doesn’t make much sense either, since they are dependent upon exports and an undervalued currency…

LOL!
This big one again has been avoided by the phoney money printing the last decade or so. Unfortunately now reality will settle in as more and more pimps (Wall Street) types hype a strong recovery and bernanke is a genius non-sense.
The debt and leverage is still around while incomes are stagnant and the dollar is being questioned.
We may have a short term reprieve from our saviour Bennie Printman Bernanke, but the fundamentals of this lopsided economy are horrible and will take years to retructure and resurrect to a more balanced one.

The USA is insolvent. Bernake is hanging counterfeit destroying the dollar, we take in 2t and blow 4t out the door, we can’t sell/borrow vis-a-vis bond sales the difference so we counterfeit enough to service debt.

Our books are as cooked as Enron’s we owe north of 80 trillion.

The banks are and ever will be insolvent.

Housing will not recover, 24 million vacant and on the market homes, and buyers? There won’t be mortgage fraud again.

The market – a rigged casino, as the “Fed” (oh, that’s right if they tell the market will tank).

Employment- there is NO such thing as a jobless recovery.

Once the currency goes or the banks go the gig will be up.

Welcome to the new Banana Republic. The Fed blew up the market with too much money and too little regulation.

I’m still not convinced by the “printing money” factor explaining the stock rally, though no doubt it helped some. MZM is only up $150 billion or so from March, which is less than a 2% expansion in broad money supply… Now I know liquidity is more complicated than one money supply measure, but wouldn’t it require more than a 2% expansion to be the primary driver of a >50% expansion in stocks (for example)? What am I missing?

C’mon, friend, you can’t have savings without debt, and you can’t have capital investment without consumption.

Also: “The outlook is unclear.”

Yes it is. Always has been. Sometimes we fool ourselves into believing it’s not.