Stephen S. Roach — The American Consumer is Not Okay

The spin-doctors are hard at work talking up America’s subpar economic recovery. All eyes are on households. Thanks to falling unemployment, rising home values, and record stock prices, an emerging consensus of forecasters, market participants, and policymakers has now concluded that the American consumer is finally back.

Don’t believe it. First, consider the facts: Over the 21 quarters since the beginning of 2008, real (inflation-adjusted) personal consumption has risen at an average annual rate of just 0.9%. That is by far the most protracted period of weakness in real US consumer demand since the end of World War II – and a massive slowdown from the pre-crisis pace of 3.6% annual real consumption growth from 1996 to 2007.

With household consumption accounting for about 70% of the US economy, that 2.7-percentage-point gap between pre-crisis and post-crisis trends has been enough to knock 1.9 percentage points off the post-crisis trend in real GDP growth. Look no further for the cause of unacceptably high US unemployment....

Project Syndicate

The American Consumer is Not Okay


Stephen S. Roach was Chairman of Morgan Stanley Asia and the firm's Chief Economist, and currently is a senior fellow at Yale University’s Jackson Institute of Global Affairs.

Kenneth Rogoff — Europe’s Lost Keynesians

Rogoff calls for debt writedowns.

Project Syndicate
Europe’s Lost Keynesians
Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University

Stephen Roach — America’s Strategy Vacuum

As the quintessential laissez-faire system, the US outsources strategy to the invisible hand of the market, with the government locked into a reactive approach to unexpected problems. Thus, both monetary and fiscal policy have been focused on cleaning up after a crisis rather than on how to avoid another one.

Project Syndicate
America’s Strategy Vacuum
Stephen S. Roach | formerly Chairman of Morgan Stanley Asia and the firm's Chief Economist, and currently a senior fellow at Yale University’s Jackson Institute of Global Affairs and a senior lecturer at Yale’s School of Management

Claudio Borio — Macroeconomics and the financial cycle: Hamlet without the Prince?

Since the early 1980s, the financial cycle has re-emerged as a major force driving the macroeconomy, but economic analysis has not caught up. This column argues that macroeconomics without the financial cycle is like Hamlet without the Prince. Economic analysis and policies – monetary, fiscal, and prudential – should be adjusted to fully account for the financial cycles, but here more analytic work is needed. The question of how we address the bust and balance-sheet recession that follow the boom deserves special attention.

VOX

Macroeconomics and the financial cycle: Hamlet without the Prince?
Claudio Borio | Deputy Head of the Monetary and Economic Department and Director of Research and Statistics, Bank for International Settlements

BIS finally getting with it? While encouraging, Borio's post reveals that while he has recognized the problem and begun to come to grips with it, he has not realized yet that it has been addressed and largely resolved. Someone please direct him over to Levy Institute.

Winterspeak — Koo goes cuckoo

Richard Koo became famous for his concept of a "balance sheet recession," which many confused with MMT. Now Koo makes clear how far he is from MMT.

Winterspeak.com
Koo goes cuckoo
Winterspeak

John Carney — Maybe Going Off the 'Cliff' Won't Be So Bad

John Carney looks at Jan Haztius's latest letter and Wynne Godley.

CNBC NetNet
Maybe Going Off the 'Cliff' Won't Be So Bad
John Carney | Senior Editor

Joe Weisenthal — Several Top Economists Privately Told Obama That He Screwed Up The Recovery In One Major Way

A number of economists privately told Obama that his recovery policies were weak in one key area: They didn't do enough to address the mountain of homeowner debt.

Business Insider
Several Top Economists Privately Told Obama That He Screwed Up The Recovery In One Major Way
Joe Weisenthal

Stephen Roach— Macro Malpractice

The wrong medicine is being applied to America’s economy. Having misdiagnosed the ailment, policymakers have prescribed untested experimental medicine with potentially grave side effects.

Project Syndicate
Macro Malpractice
Stephen S. Roach | former Chairman of Morgan Stanley Asia and the firm's Chief Economist, and currently a senior fellow at Yale University’s Jackson Institute of Global Affairs and a senior lecturer at Yale’s School of Management

Zero Hedge — Richard Koo Explains It's Not The Fed, Stupid; It's The Fiscal Cliff!

While Koo-nesianism is only one ideological branch removed from Keynesianism, Nomura's Richard Koo's diagnosis of the crisis the advanced economies of the world faces has been spot on. We have discussed the concept of the balance sheet recession many times and this three-and-a-half minute clip from Bloomberg TV provides the most succinct explanation of not just how we got here but why the Fed is now impotent (which may come as a surprise to those buying stocks) and why it is the fiscal cliff that everyone should be worried about. As Koo notes, the US "is beginning to look more like Japan... going through the same process that Japan went through 15 years earlier." The Japanese experience made it clear that when the private sector is minimizing debt (or deleveraging) with very low interest rates, there is little that monetary policy can do.The government cannot tell the private sector don't repay your balance sheets because private sector must repair its balance sheets. In Koo's words: "the only thing the government can do is to spend the money that the private sector has saved and put that back into the income stream" - which (rightly or wrongly) places the US economy in the hands of the US Congress (and makes the Fed irrelevant).

Zero Hedge
Richard Koo Explains It's Not The Fed, Stupid; It's The Fiscal Cliff!
Submitted by Tyler Durden

Edward Harrison — Stephen Roach: Fed dangles QE3 ‘crack’ cocaine as ‘raw meat’ for markets

Stephen Roach:

QE1 worked because it was in the midst of wrenching crisis. QE2 failed, despite what the Fed’s research shows. Twist 1 has failed. Twist 2 is failing. When 70% of the economy is in a balance sheet recession and the growth rate for 18 quarters in row has been at less than 1% at an average annual rate, consumers are telling you something. They want to pay down debt and rebuild saving and all of the monetary stimulus in the world is not going to change what is a perfectly rational response. So the idea that the Fed is going to step in and save the day, it has not worked in the past except during the depths of the crisis and i give them credit for that.

Read it at Credit Writedowns
Stephen Roach: Fed dangles QE3 ‘crack’ cocaine as ‘raw meat’ for markets
Edward Harrison

Richard Koo: Where do we go from here? 3/5

Richard Koo: Where do we go from here? 3/5

(h/t Clonal in comments)

Richard Koo, Chief Economist, Nomura Research Institute at the Closing Panel entitled "Overhangs, Uncertainty and Political Order: Where Do We Go From Here?" at the Institute for New Economic Thinking's (INET) Paradigm Lost Conference in Berlin. April 14, 2012. #inetberlin

Tim Duy — What Are We Expecting From Housing?

My take is that Tim Duy gets this one more right that Bill McBride (Calculated Risk). This is a balance sheet recession, bordering on a depression. Dr. Housing Bubble is also in agreement — the chief determinant of the housing market is, of course, demand, and demand is a function of affordability, i.e., price to income, as well as rate of price change. Banks were lending more on less than satisfactory income based on quickly moving prices, extending credit more liberal than normal. That's over as long as deleveraging goes on, and there is no indication that consumers' balance sheets are yet in decent shape. It's not even a sure thing that the bottom is in yet.

Read it at Tim Duy's Fed Watch
What Are We Expecting From Housing?
by Tim Duy

FT — Richard Koo’s semi-successful attempt to persuade Germans about balance sheet recession

Koo's conclusion:  "I therefore expect German policymakers will continue to focus on treating the patient’s diabetes while largely ignoring his case of pneumonia."

Read it at The Financial Times | FT Alphaville
Richard Koo’s semi-successful attempt to persuade Germans about balance sheet recession
Posted by Kate Mackenzie

(h/t Scott Fullwiler via Twitter)

Reading not so far behind the lines in the post, Germany is pursuing disaster capitalism, and "structural reform" is basically wage repression in the name of competitiveness — in other words, an international race to the bottom in which workers take the hit with a vague and unenforceable promise of benefitting eventually from trickle down. Same old neoliberal nonsense.

Mike Konczal — The IMF Goes All-Out on Balance-Sheet Recessions, Providing Sanity on Economic Policy

The literature summary I just put out on balance-sheet recessions examines the recent April 2012 World Economic Report by the IMF. It is remarkable how important this report is. The relevant part is Chapter 3, Dealing with Household Debt. This IMF report is well to the Keynesian side of almost all major US debate, and its recommedations and observations are incredibly sensible. You should read it all, but I want to point out five few high-level arguments they make:

Read it at Next New Deal | RortyBomb
The IMF Goes All-Out on Balance-Sheet Recessions, Providing Sanity on Economic Policy
by Mike Konczal

Dr. Housing Bubble — The lingering problems of negative equity

The recent Federal Reserve report is troubling for a variety of reasons but a large factor contributing to the decline in net worth of Americans is the over reliance on real estate. You simply do not lose 40 percent of your net worth in three years and expect minimal impacts to the economy. It was also enlightening to see that the bottom 90 percent of American households actually saw their income fall in this period. So again the question remains, why would housing prices move up when incomes are falling for the vast majority? It also may answer why prime markets, those targeting the 10 percent that did see incomes rise are in fact stable or moving up. Yet overall the negative equity situation is one in which a large number of American families are impacted and will have long lasting effects on housing moving forward.

Read it at Dr. Housing Bubble
The lingering problems of negative equity – Over 10 million Americans are underwater with 1 million having loan-to-value ratios of 150 percent or higher
by Dr. Housing Bubble

Dr. Housing Bubble is on this.

Peter Dorman — The Main Point

Macroeconomics is complicated and political economy is devilish, so it is easy to get lost in the details.  From time to time, it’s good to come up for air—to remember what the fundamental issue is.  In a way, the debate over structural versus cyclical factors invites us to do just that.

Suppose the current recession/depression is mainly structural.... If the structuralist story is right, the ongoing slump is necessary and unavoidable and will end only when we have fashioned the resources for producing the right stuff. 

If the cyclical story is predominately true, however, we have neither the wrong people nor the wrong capital stock.  We have all the ingredients it takes to have a vibrant economy that can fully employ our populations and generate a standard of living that surpasses what we had in the past and that keeps growing further.... If you accept the cyclical story, and the evidence certainly weighs in its favor, you should not accept another month, much less year after year, of excuses for austerity.

Read it at Econospeak
The Main Point

by Peter Dorman

(h/t Dan Crawford at Angry Bear)

Sums it up nicely.

John Carney — Do We Need Inflation to Cure the Economy?

How do we inflate our way out of these problems without a credit expansion that will only make them worse? It seems to me that the only way out would be inflationary spending. That is, direct money creation by the Treasury Department to spend on government programs unfunded by debt or taxes.

Read it at CNBC NetNet
Do We Need Inflation to Cure the Economy?

by John Carney | Senior Editor

John seems to think that government spending to provide the space for increased non-government saving desire and to close the output gap would be "inflationary spending." Why? 

It seems that term "inflationary" is being used so loosely as to be misleading. In the loose use, all spending is inflationary. If so, then "inflationary" is redundant and can be eliminated using the rule of parsimony. It's really significance is rhetorical rather than descriptive, i.e., normative in that is based on moralizing.

By definition money saved is not money spent, and closing the output gap means bring more existing capacity on line in order to meet rising demand. Inflation doesn't kick in until effective demand is rising faster than the economy can expand to meet it. Where's the problem so many idle resources, like millions of workers idle, notional demand high, and too little money in the system to fund effective demand, deleveraging, and rebuilding drawn down savings. And lack a rebuilding of consumer balance sheets and increasing workers incomes, consumer lending, a primary economic driver, continue to lag.

Peter Dorman — Macro and Micro: The Case of Balance Sheet Recessions

To continue some random thoughts about the role of microeconomics in macro, consider the notion of a balance sheet recession.  Like most others who came to see this as an essential ingredient of the current crisis, my route was via the financial balances framework—for instance, the Wynne Godley version.  I saw the problem in aggregate/net terms: the US household sector in the mid 00's was running up unsustainable debt loads, especially through the medium of the housing bubble.

This is a purely macroeconomic perspective, and one can go a long way with it.  Nevertheless, one can go even further by filling out some of the microeconomic aspects.

One that has attracted a lot of attention is the role of inequality between households.  This takes us from net to gross balances: the accumulation of large debts among some households adds fragility and eventually drag to the system notwithstanding the net wealth accumulation of other households.  The inequality/debt nexus has been examined at a purely macro level, but to dig further we would need to disentangle the threads: which households in particular are going into hock, what motivates them to do this, how are collateral constraints imposed or lifted, etc.  Even with statistical controls, aggregate analysis can only point to association, not causal pathways.

But there are other micro aspects to household balances that are worth exploring.  Some that occur to me are:

Dorman poses some good questions that he claims require empirical answers, therefore disaggregation to the micro level in order to answer.

Read the rest at Econospeak
Macro and Micro: The Case of Balance Sheet Recessions

by Peter Dorman | Evergreen State, Olympia WA

(h/t Mark Thoma)

Konczal — Administration switching positions toward balance sheet recession?

The White House also looks to be on team balance sheet....

When Noam Scheiber wrote about how the administration viewed the economy in late 2010, he explicitly contrasted its wonks’ opinions with that of the balance sheet recession theorist Richard Koo. So is this a revolution within the administration? Is this why it is now pushing for writedowns and refinancing, after having left housing on the side for the past three years? Let’s hope so, since I consider being three years late to the party better than never showing up.

Read it at Rortybomb
Is the Administration Joining Team Balance-Sheet Recession?

by Mike Konczal

Still no sectoral balances mentioned. I guess they haven't discovered MMT yet, or Wynne Godley, either.

John Carney — Why Does Bernanke Lie to Us? Why Can't He Just Admit What the Problem Is?

Read it at CNBC NetNet
Why Does Bernanke Lie to Us? Why Can't He Just Admit What the Problem Is?

by John Carney | Senior Editor

John explains correctly (from the POV of MMT) that this is a "balance sheet recession" in the sense that the issue is excessive leverage as a hangover of the financial crisis and that the private sector continues to deleverage. The increased saving and deleveraging results in demand leakage, and debt-adversity creates reluctance to borrow. Moreover, the financial crisis has resulted in tighter credit, fewer qualified loan applicants, and a reluctance to borrow in the face of adversity or uncertainty.

All well and good. However, John cites Reinhart & Rogoff as a chief piece of evidence. But R&R is about public debt, whereas the issue is excessive private debt applying the analysis of Irving Fisher and Hyman Minsky. Moreover, R&R is a flawed study as many have pointed out.

Bill Mitchell, Watch out for spam! and We will not pay for your crisis

Cullen Roche, Debunking Reinhart And Rogoff and Further Debunking Reinhart & Rogoff

Yeva Nersisyan, The Myths About Government Debt and Deficit as Told By Carmen Reinhart and Kenneth Rogoff and More Reasons to Doubt Rogoff and Reinhart

Richard Koo, Paul Krugman, and the MMT economists, as well as Post Keynesians like John T. Harvey all cite private debt as the issue and say that the government's fiscal balance has to increase to make space for increased private desire to save in the face of the external sector saving as well. This means larger government debt, since deficits are required by law to be offset with tsy issuance. 

While deficit doves warn that the budget must be balanced over the business cycle, MMT economists dismiss this as unfounded. See Scott Fullwiler on the intertemporal government budget constraint (IGBC) in "Interest Rates and Fiscal Sustainability."

So John is correct that Bernanke and the Fed are not coming clean, but the issue is private sector indebtedness and saving-deleveraging rather than public debt, either presently or in the foreseeable future owing to a supposed IGBC.