An Ugly Balance Sheet Indeed

Mark Thoma:

This is What a Balance-Sheet Recession Looks Like, and It’s Not Pretty:

Stephen Gordon says these graphs make him grateful that Canada is not the US:

This is what a balance-sheet recession looks like, and it’s not pretty, Worthwhile Canadian Initiative: I had never heard the expression “balance-sheet recession” before this recent episode, and it’s time I got around a comparison of the household balance sheets of the US and Canada. Of all my “Canada is not the US” posts, this is the one that makes me most grateful.

The quarterly data goes back to 1990, and it’s good to put the last few years in context. I’ve scaled all the series by price (the consumption spending deflator) and population. Here is the net worth series:


There’s been talk of a Japan-like ‘lost decade’ in the US; that seems optimistic. US real per capita net worth is back to what it was back in 1999.

The US problem is on the assets side:


The effect of the recent recession on assets in Canada is similar to that of the demise of the dot-com boom.

Aggregate household liabilities have also fallen in the US, but as can be seen in the net worth data, not by enough:


Few will be surprised to learn that the collapse of US house prices had an important effect on US asset holdings:


Although the fall in US housing assets was more dramatic, other assets lost value as well:


And lastly (although if someone can think of another interesting graph, I may add it), here is real per capita housing equity:


The US data go back to 1952, so I was able to check the last time the real, per capita value of US housing equity was at its current level. Even after looking at all of these graphs, the answer astonished me: 1978. Nineteen seventy-freaking-eight.

(Via Economist’s View (Mark Thoma).)

Yes, Macroeconomics 101 is Correct

“Some Simple Deficit Reduction Arithmetic”:

Kash Mansori notes that it takes more than a $100 cut in government spending to cut the deficit by $100. The reason is fairly simple. A cut in government spending causes output and income to fall, and the resulting fall in tax revenue increases the deficit offsetting some of the gain from the cut in spending…

When the policies they want to pursue have large negative effect on the deficit, the economy, employment etc. Republicans invent a story where the pain goes away. Somehow, the deficit actually falls, output goes up, and employment is stimulated even if it runs counter to obvious intuition. When tax cuts are the goal, we are told that tax cuts lead to so much additional effort that revenues actually go up and this reduces the deficit. We can cut taxes, and reduce the deficit! This magical answer is, of course, nonsense, but Republicans were able to hoodwink quite a few people into believing this.

(Via Economist’s View (Mark Thoma).)

Read Mansori’s entire article.  It’s worth it.  A few nuggets:

Somehow, this simple exercise in macroeconomic math seems beyond the reach of policymakers around the world.

  • Many Republicans (and some Democrats) in Washington continue to believe that they can close a $1 trillion deficit by simply cutting $1 trillion in spending, and are apparently hoping to use the debt ceiling vote to do exactly that.
  • The Cameron government in the UK embarked on an austerity program last year to try to reduce its budget deficit, and now mysteriously keeps missing its deficit reduction targets as the UK economy shrinks.
  • The Greek government was forced into enacting a number of austerity measures last year, and… surprise, surprise… is now missing its deficit targets.

Pain without Purpose

Pain without Purpose:

“And here we reach the limits of my mental horizons as a neoliberal, as a technocrat, and as a mainstream neoclassical economist. Right now, the global economy is suffering a grand mal seizure of slack demand and high unemployment. We know the cures. Yet we seem determined to inflict further suffering on the patient.”

(Via Grasping Reality with Both Hands.)

Political ideology trumps technocratic know-how.  In other words, non-professionals think they know more than the pros.  And we know where that leads.

Family budgets aren’t economies.  The government is not our parent nor does it fund the workings of the economy.  Yet we keep repeating that damn fool “tighten our belts” meme.  The price of ignorance, sophomoric ignorance at that is high.

Axis of Depression

Axis of Depression –

“So what’s really motivating the G.O.P. attack on the Fed? Mr. Bernanke and his colleagues were clearly caught by surprise, but the budget expert Stan Collender predicted it all. Back in August, he warned Mr. Bernanke that ‘with Republican policy makers seeing economic hardship as the path to election glory,’ they would be ‘opposed to any actions taken by the Federal Reserve that would make the economy better.’ In short, their real fear is not that Fed actions will be harmful, it is that they might succeed.

Hence the axis of depression. No doubt some of Mr. Bernanke’s critics are motivated by sincere intellectual conviction, but the core reason for the attack on the Fed is self-interest, pure and simple. China and Germany want America to stay uncompetitive; Republicans want the economy to stay weak as long as there’s a Democrat in the White House.”

(Via Grasping Reality with Both Hands.)

I long suspected this when I saw the GOP opposing its own policies when they came from a Democrat in the White House.  They know that opposition to Obama is more about high unemployment than support for the GOP.  It’s party before country which is all pretty disgusting until I realized that the real blame lies with us, the fools.  We are the ones who should laugh in Mike Pence’s face when he suggests that The Fed should focus only on stabilizing prices against the law that created it amidst the worst unemployment we’ve seen in decades.  To quote the Federal Reserve Act, the purpose of The Fed “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”   Nope.  Instead, all too many of us cheer and then blame the Obama Administration for high unemployment!

You get the government you deserve.  Always.

Budget Sense and Nonsense « The Baseline Scenario

Budget Sense and Nonsense « The Baseline Scenario:

“So, let’s recap. The medium-term deficit problem was created by Bush tax cuts and by an unfunded Bush-era expansion of Medicare. The long-term deficit problem is all about Medicare. Yet the only solution that Republicans can think of is reducing spending–but not Medicare spending. Of course, this shouldn’t surprise us; Mitch McConnell gave us this, after all:*”
CBPP Deficit Analysis
Mitch McConnell Flip Flop Press Releases

(Via The Baseline Scenario.)

A picture is worth a thousand words.

Rational Markets

Justin Fox | The Daily Show | Comedy Central:

The Daily Show With Jon Stewart Mon – Thurs 11p / 10c
Justin Fox
Daily Show
Full Episodes
Political Humor Economic Crisis

(Via The Daily Show.)

Why regulation, but not regulators, is necessary.

Reading the Employment Report: Focus on Hours, Not Heads – Freakonomics Blog –

Reading the Employment Report: Focus on Hours, Not Heads – Freakonomics Blog –

“Any evidence of ‘green shoots’ appearing in recent months disappears in this broader measure. The recession continues apace. If current trends continue, we are in for a frightening time.”

(Via Freakonomics Blog.)

Wall Street and the Third World |

Wall Street and the Third World |

“The former Communist countries generally turned, after the dismal failure of their postwar system, to market capitalism, replacing Karl Marx with Milton Friedman as their god. The new religion has not served them well. Many countries may conclude not simply that unfettered capitalism, American-style, has failed but that the very concept of a market economy has failed, and is indeed unworkable under any circumstances. Old-style Communism won’t be back, but a variety of forms of excessive market intervention will return. And these will fail. The poor suffered under market fundamentalism—we had trickle-up economics, not trickle-down economics. But the poor will suffer again under these new regimes, which will not deliver growth. Without growth there cannot be sustainable poverty reduction. There has been no successful economy that has not relied heavily on markets. Poverty feeds disaffection. The inevitable downturns, hard to manage in any case, but especially so by governments brought to power on the basis of rage against American-style capitalism, will lead to more poverty. The con?sequences for global stability and American security are obvious.”

(Via Vanity Fair.)

Great and succinct critique on market fundamentalism (“free markets can solve any problem”).

Krugman vs. Ferguson: Letting the Data Speak – Freakonomics Blog –

Krugman vs. Ferguson: Letting the Data Speak – Freakonomics Blog –

“In fact, the recent increase in Treasury yields is almost entirely due to a reduction in the probability of the deflationary (low nominal interest rates) scenario. Score this round for Krugman.
While Ferguson wrongly diagnosed the cause of the rise in interest rates, he is right that the markets are spooked about the risk of an inflationary breakout. There’s about a 7 percent chance that 25-year interest rates will exceed 10 percent, although surprisingly, this risk was slightly higher back in February. This is a fairly extreme scenario: long-term interest rates have not been above 10 percent since inflation was tamed in the mid-1980’s.”

(Via NY Times.)

Ed Krugman – Stay the Course

Op-Ed Columnist – Stay the Course –

“The debate over economic policy has taken a predictable yet ominous turn: the crisis seems to be easing, and a chorus of critics is already demanding that the Federal Reserve and the Obama administration abandon their rescue efforts. For those who know their history, it’s déjà vu all over again — literally.”

(Via NY Times.)

Does anyone pay attention to history?