Wednesday, April 29, 2009

Another beautiful example of how our belief system keeps us poor

First quarter GDP came in down, 6.1%, equating to a loss in output and national income of $125 billion.

GDP = C + G + I + NE
Where, C=Personal consumption; G=Government spending and investment; I=Business investment and; NE=Net exports (exports-imports)

The three components of GDP that always tend to add to overall output--Personal Consumption, Government Spending and Investment and Business Investment--tell a very interesting story.

While personal consumption rose from Q4 2008, it is still $200 billion below the peak seen last year, so it remains weak. Business investment has plummeted--absolutely cratered!

But here is the shocking part: Governemnt spending and investment fell in the first quarter. FELL!!

With consumers tapped out, out of work or unable to get credit and with business seeing their profits fall or going bust and not able to get credit either, the only hope for an increase in GDP or just something that could arrest the decline would be HIGHER LEVELS OF GOVERNMENT SPENDING.

Yet, government spending is falling.

This is so sad because the only thing that precludes us from getting out of the mess that we are in now is a warped and fallacy-laden belief system that causes us to view government spending as bad, even as the facts show otherwise.

The longer we allow this to continue, the greater the risk that our economy loses competitiveness vis-a-vis other countries of the world. And if that happens, the true legacy that we leave to our kids and grandkids will not be higher levels of government debt, but a lower standard of living and more poverty.

It is an outrage and a great failing of President Obama that he has allowed this to happen. Because of a character flaw that causes him to feel the need to be surrounded by those who represent the status quo--or worse--deficit hawks and debt "terrorists" we are rapidly allowing the wealth producing capacity of our nation to waste away.

By the time anyone realizes it, it will be too late.


Matt Franko said...

another thing I have been trying (time permitting) to track is the rate at which the Treasury is selling Bonds. If you look at the DTS, it shows redemptions of 4T ytd, and sales of 5.1T ytd., I interpret that they have net sold 1.1T ytd, but the Govt (as you point out) has not increased spending by 1.1T, does this mean they have drained the reserves before they have created the new reserves? (ie "borrowed" the money before they spend it). It does us no good if the Govt does not act "in paradigm". If so no wonder treasurys have been falling.

Resp, Matt

mike norman said...


Remember, too, that the Fed creates reserves by a keystroke on a computer and its various lending programs have led to an increase in system reserves. The Treasury's sales function to manage the level of those reserves. One way to look at it is that system reserves would have been $1.1 trillion higher had the Treasury not "net sold" that amount.

Treasuries are falling (modestly) because the market probably sees that the growth in the Fed's balance sheet is not accelerating higher anymore and, if anything, the prospect of the Fed "taking back" some of that liquidity increases each day as the stock market goes higher and the economic news becomes less bad.

STF said...

Matt, if I may . . .

The Tsy has been selling more bonds and building up its account at the Fed, but there are still several hundred $B in excess reserves nonetheless. In its annual report, the NY Fed noted that the sales have the effect of draining excess balances.

The Tsy is prohibited from overnight overdrafts from the Fed, so it always will appear to sell bonds first to the unitiated. But the Fed in normal times does a repo to add the balances if there aren't sufficient to settle the auction that morning. Doesn't need to now.

The Tsy 10 year rate has moved b/n 2.7% and 3% for about 4 months now, aside from a temporary drop to 2.5% on the day the Fed announced increased purchases. I don't see any negative affect from increased sales on T-note or T-bond rates . . . note, in addition, that the Fed has been a net supplier of Tsy's, too, over the past 1.5 years. Long-term Tsy rates will edge up when the economy appears to be doing better (and thus Fed expected to raise at some point) or if the Fed otherwise hints it will raise rates (say, if oil prices rise). My suspicion is the economy bottoming out is behind the move over the past few days of the 10Y a tad above 3%.


STF said...

Mike . . . agreed