The US economy seems to be muddling through at modestly positive GDP growth, supported by a still sort of high enough 8% or so govt fiscal deficit.
The year and fiscal cliff is a looming disaster but it’s too soon for markets to discount a high chance of it actually happening.
Lower oil prices are helping the US consumer and the $US.
The stronger $US works against US exports some and earnings translations a bit as well. Weaker global demand also works against US exports.
Deficit spending in the euro zone has also been rising some, and after the latest rounds of austerity and subsequent deficit increasing weakness may total something close to 7% of GDP.
That should be enough to muddle through as well. Austerity hikes unemployment and deficits to the point where the resulting deficit is sufficient to sustain things. Without another round of austerity there should be some sort of stability of output and employment.
That is, while it’s doubtful the ‘new europe’ will engage in meaningful fiscal expansion, it may not proactively raise taxes and/or cut spending in any meaningful way, either.
So as the member nations stumble their way through each successive securities auction, it won’t surprise me if their economies sort of stabilize around 0 growth or so. And then begin to pick up a tiny bit. All supported by the current, higher levels of deficit spending.
And the lower euro could help their exports some as well.
Yes, there will be all kinds of credit related vol, but under it all there will be sales and profits taking place. The businesses that are still around are the survivors who know how to get by in this kind of economy, where, while slower than it ought to be, there is still about $40 trillion worth of goods and services getting bought/sold in the US and Europe. GDP growth has gone to near 0, but not GDP itself.
In The Forthcoming Profit Recession, I looked at Kalecki’s Profit Equation and how “government deficits have been the primary driver during this recovery.” Given the comparable size of US and European deficits, it stands to reason that European corporate profit margins will continue to be supported by large deficits too. Although the economic picture in the US remains better than Europe, it’s not clear the difference is as large as suggested by current stock markets (SPX = S&P 500; SX5E = Euro Stoxx 50).
Companies will still earn profits and still pay dividends. As fear grows, great opportunities to invest in lasting companies will multiply. Wise investors should be currently trying to figure out which companies will survive and at what price the risk/reward becomes a definite buy.
http://bubblesandbusts.blogspot.com/2012/05/is-non-existent-austerity-priced-in-to.html
Warren,
Over 2011 deficit in EA was ‘only’ 4.1%. See link below.
http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-23042012-AP/EN/2-23042012-AP-EN.PDF
Is ‘something close to 7%’ for 2012 not on the high side?
Do you expect Germany and France will increase their deficit this year?
maybe 6.5 or so overall the way things are going?
yes, most deficits seem to be coming in a bit higher than expected?
Warren, regarding Eurozone, although I agree with your logic that aggregate budget deficits will probably be sufficient to stabilise growth in aggregate, the more pressing macro issue is the imbalances – a country like spain is trying to reduce its deficit while the private sector delevers, which will probably lead to lower growth regardless of the budget deficit. Their economy will likely get worse which will lead to further property losses and social unrest and their overvalued currency means there’s not much they will be able to do about it.
I guess my point is that while I agree with your thoughts, I feel Europe is poised to get much worse in the relatively near-term and this is the real macro story. Your update suggests you’re really not all that worried about Europe given the aggregate budget deficit will probably see aggregate growth around zero…
true, but even Greece has a pretty large deficit now and further austerity isn’t likely near term?
also, note how some US states stay depressed well after national GDP recovers from a recession and stocks do just fine, etc.
so i’d say look for whether further austerity is actually implemented, and to what actual degree.
@WARREN MOSLER,
Summer’s boy delong has some counterproductive thoughts to yours perhaps?
Mosler: “note how some US states stay depressed well after national GDP recovers from a recession and stocks do just fine”
http://delong.typepad.com/sdj/2012/05/cardiff-garcia-crisis-policy-what-bagehot-said.html
The basic lesson we take from paper is rather that policymakers should be more worried about making the inclusive circle too small, and less worried about making it too big…. Inevitably this will lead to correspondingly greater concern about moral hazard than would a stricter rule…. But there is an appropriate way to mitigate that risk as well, which is to lend at a penalty rate. Back to DeLong:
And Bagehot’s fourth rule is that central bank lending in a financial crisis should be undertaken at a “penalty rate”: nobody–no organization, no manager, no trader, and no investor–should end the crisis in any sense happy that they were forced to rely on the government. This would appear to mean, particularly, that equity should be extinguished before the central bank begins providing support at interest rates that are at all concessionary.
And indeed, this is where we think the proper criticism of the various kinds of bailouts in the US should begin…. Sure, wiping out equity holders would likely have required something like nationalisation and all the difficulties that would bring. And the debate over future financial reforms will continue to be complicated…. But these issues don’t negate the case that the stakeholders of the biggest banks in particular got a sweeter deal than they deserved. Saying as much is not inconsistent with the wisdom of having bailouts in the first place….
Bag was fixed fx
If Greece exits the euro then all bets are off. A new situation will arise that will render all previous forecasts obsolete. Perhaps it’s true that “on average” Europe is tending toward zero growth but this is a pretty meaningless average for a Spaniard, a Greek or a Portuguese struggling with record unemployment and depressed levels of economic activity.
The time has come for the peripheral countries – not Germany or France – to determine the Union’s future. Greece out of the euro will bring the death of the single currency in a matter of months if not weeks. We should expect titanic efforts from the core countries to prevent such a development, maybe even including implementation of a transfer Union through the back door, before their public opinions so much as notice it.
@Jose,
Jose, if and when the euro experiment blows up, I think the bigger implication is why will people in china, india, USA,etc think they all need to remain under one centralized currency issuer too, in the link below it is talked about that DC has policy tools that are too blunt, but if you had 50 state currencies, they could probably more directly affect the currency users under them than DC can. Still one thing that india, china, USA, etc has going for us is the labor mobility issue, much easier to move around the currency empire, but not so in Europe. How does the spanish speaking unemployed default on thier spanish house and then move to germany where the jobs are? The analogy I see over here is lots of spanish speaking latin americans and mexicans are choosing to stay home and be unemployed than to come to USA and work, the benefits do not outweigh the negatives to many I talk too.
http://delong.typepad.com/sdj/2012/05/delong-summers-smackdown-watch-raghu-rajan-says-be-sensible.html
Raghu Rajan:
Sensible Keynesians see no easy way out: [W]hen persistent high unemployment leads the long term unemployed to lose the habits and skills that make them employable. This is probably the more pertinent case in several industrial countries, such as the US and Spain. Increasing employment in a sustainable way today could more than pay for itself if people who would otherwise drop out of the workforce earn incomes.
The key question then is whether more government spending can make a real difference to the most severe employment problems. Here the case for a general stimulus becomes less compelling. In the US, demand is weakest in communities where a boom and bust in house prices has left an overhang of household debt. Lower local demand has hit employment in industries such as retail and restaurants. A general increase in government spending may be too blunt – greater demand in New York is not going to help families eat out in Las Vegas (and hence create more restaurant jobs there). Targeted household debt write-offs in Las Vegas could be a better use of stimulus dollars…. Policy should instead help workers move where there are suitable jobs – for instance, by helping them offload their homes and the associated debt without the stigma of default….
and if each of us had our own currencies!
long live the money changers!
😉
@WARREN MOSLER,
LOL! Yah if there were 7 billion currencies, us currency traders would be in high demand, talk about job security!
Shouldn’t then we all be working to breaking india, europe, usa, china, etc into maybe 5 thousand currency blocs instead of a few hundred? 😉 Money changers have lotsa attention in the temple then!
Warren as a monetary scientist, certainly you challenge your own assumptions and become your own devil’s advocate as good scientists do.
You say one currency to rule all 7 billion with proper regulatory bodies and such to do proper counter-cyclical operations could be plausable. (my chinese friend would argue that we are already living that way today since all floating currencies at the macro level are really just 1 huge fiat system imposed on all 7 billion, but that it will soon die against a petro and gold convertability globally)
What have been your own “devil’s advocate” ideas of why 1 currency to rule them all maybe should be challenged or should not be? Several posters keep asking you about capital flight, but if there was 1 world currency, that concept makes no sense unless you flee into savings of oil or gold or in my case scifi books and biotech research students.
Lisa challenges you (respectfully) that mankind can’t unite and we all live as 7 billion borg under 1 currency.
As that 1000 year map of europe constantly blowing up shows, it seems hard for mankind at the macro level to want to be part of the borg through thier large political bodies, even though individually I think most would admit all 7 billion of us need to be friends and brothers to go forward in this universe.
I think the thing to take away in lisa’s point, it is hard to trust people that live far away in different cultures with different beliefs or values and all the other complexities, so humans don’t want to turn over power to larger political/monetary regimes out of fear and mistrust (and doubly so if those regimes are not similar to us), I am not sure this can be overcome quickly, these agenda 21 people in my area are religiously passionate about decentralization, no matter the benefits of borg unificiation, their fear of centralized power drowns out everything else. This applies to occupiers, ron paul supporters, terrorists, religous nutz, tax payers, etc etc = the number of groups of people it affect – the loss of control to some other body is beyond thier animal instincts to overcome. Perhaps with time these fears can be minimized and we can give them a sense of control in the larger bodies that affect them.
@WARREN MOSLER, The way I look at it, the world is in the situation that the US was after the Panic of 1907. Tthe National Bank structure, wasn’t working, finally ended up with Fed in 1913.
Now the same thing globally.
Since we know the EZ can’t work without political centralization, I can’t wait for the global currency to show up.
We are probably going to see an attempt to bifurcate currencies, the US Trade Dollar redux.
(BTW, next year is Fed’s 100th birthday, woo hoo! Let’s start the part y now)
Warren, when you say “Austerity hikes unemployment and deficits”, I’m confused; thinking of Fullwiler’s ‘cross’ diagram, I knew that austerity should usually decrease GDP growth and probably increase debt/GDP, but shouldn’t austerity always lower the actual deficit as a % of GDP?
@Anders,
auto-stabilisers?
reduced spending = profits down and benefits up
Transfer payments rise and revenues fall with the slowdown
@Neil and Warren, I agree that a slowdown _ceteris paribus_ leads to a larger deficit because of auto stabilisers. But a slowdown that has resulted from austerity seems to me to lead to a smaller deficit, exactly because the govt has cut the level of unemployment benefit paid etc.
Don’t you see Fullwiler’s chart below as the right way to conceive of how austerity works (specificallyfocussing on the left/down movement of the green line)?
http://neweconomicperspectives.org/wp-content/uploads/2012/03/untitled-5.png
@Anders,
I’m not seeing that in the UK. Govt spending is still up in nominal terms, despite a hack and slash job on govt capital spending precisely because of the increase in benefits and other ‘welfare’ payments made.
The reduction in the deficit appears to come from the recovery in tax receipts, although it is difficult to know how much of that is due to tax rises.
@Neil Wilson, what’s your view on the Fullwiler chart? Do you see the shape of the “NG” line differently?
It seems a critically important chart to demonstrate why austerity is a bad idea. Without it, you need to tell a story involving multipliers – and people seem to get bogged down in competing empirical claims. With the Fullwiler chart you can ignore multipliers, debunking austerity on the simple basis that the NG line is flat or upward-sloping.
Incidentally, obvious point perhaps but it strikes me that austerity is sometimes exactly what the economy needs: in a time of supply-side shock (war, oil shock etc). But the ‘indication’ would be inflation risk, nothing else.
and euro zone deficits may now be high enough to support a bit of growth, which will be seen a proof austerity works, when in fact that same growth from the same size deficits could have begun with a proactive fiscal adjustment at prior higher levels of employment and output.
@Warren Mosler, yes that’s the pro-austerity narrative in the UK that Krugman points out here: http://krugman.blogs.nytimes.com/2012/05/27/austerity-defenses/
That’s why it’s so important to have a good analytical framework to highlight how austerity works.
A concern I’m getting, as I try to spread the MMT word in the UK, is that our banks typically never buy much in the way of govt bonds, so the ‘reserve drain’ account doesn’t get much traction with people.
Anders,
The ‘reserve drain’ line is archaic anyway. Interest on reserves has been in place for years and before that the BoE used Sterling bills to manage reserves – not Government Gilts.
Government Gilts have always been higher rate savings accounts for those that don’t want to spend their Sterling.
UK government gilts are largely the way our final salary pension schemes are funded. If we did the same to all final salary pensions as they have done to the UK Post Office Pension, the ‘UK National Debt’ would be cut by a third overnight.
@Anders,
Whether it lowers or raises deficits depends on many things–multipliers, size of austerity, trade balance (which depends on the rest of the world), etc., etc.
I actually did a post last summer using the SFB model to illustrate austerity, btw. See figure 6 here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1860625
@Scott Fullwiler, thanks for the reference.
Your paper sets out nicely the first-order effect of austerity, which is the left/down-ward movement of the green (govt) line in your “Fullwilerian Cross” diagram.
The distinction you make between the austerian approach and the deficit-owl approach is visible in the second-order effect – ie which way the red (non-govt) line then moves in response: up/left-ward, according to MMT, or down/right-ward, according to the austerians.
My initial reaction to this was that it seemed suspiciously to resemble the fallacious reasoning that after a demand curve moves to the left, the lower price will cause supply to fall so the supply curve will move too. But I appreciate that in your cross diagram, confidence effects (more likely negative than positive) may well cause the NG line to move in response to austerity measures.
Have you explored depicting in this framework what it would look like if the bond-vigilante-phobes were right? Perhaps they think that the red (NG) curve would move up/left-ward in the ABSENCE of austerity measures, as the opposite to the curve moving right/down-ward once austerity is implemented.
It also occurs to me that the appropriate title for the x-axis should perhaps be “aggregate demand”. Austerity in wartime is of course legitimate – and indeed critically important – in order to manage down AD in line with the reduced level of aggregate supply.
Best wishes
What’s the latest word on Tax Backed (aka Mosler) bonds? At this point, they seem to be worth a try in say Greece or Spain.
Agreed! Put in a call earlier today
Warren:
Great article at Global Economic Intersection, cross-posted at Naked Capitalism!!
http://econintersect.com/b2evolution/blog2.php/2012/05/20/the-fable-of-moral-arithmetic
http://www.nakedcapitalism.com/2012/05/anonymous-the-fable-of-moral-arithmetic.html
Their analogy isn’t quite there but all nicely supportive!
Ughhh, govt spending equals strong economy. No.
You cannot print your way to prosperity.
@JBH, unless you are Epson
But you can unprint your way to heck
Reread 7dif?
Good morning mister Mosler.
This is the first time I have entered your web site and I would like to post my comment to this discussion.
I live in Italy and I am a 38 age old Italian citizen.
I can say that I agree with you with the description of European situation you have just written about.
In Italy the economic situation is worstening every month. Our new prime minister Monti is subtracing money from real economy and banks prefer to buy tresury debt notes rather than to offer new creadit to citizens and firms. So the private sector has no money to spend with all the negative conseguences you can imagin.
And the government has no money to spend due to the enormous public debit generated in the la 20 years.
So, it is a painful situation.
But I am not writing this comment to complain of this. Everyone will take care of himself to suvive in some way.
I am a very good stock trader and an enterpreneur.
I like to create thing that have value added inside.
In this moment of difficulties I would like to make you a question.
At a certain moment in the future, this european crisis will stop and a new espansion cicle will start again. I think that there will be an enormous change in the meantime. Many firms will declare defaul, many will be cloused and so on. A disater. And there will be a deep change in society.
I woulk like to know, if this scenario is true, and I really think it is, in which sector you would like to establish a new firm.
Which sectors or which business ideas do you think will be good to be followed in the next expansive cicle? Is there anything either inspiring or new in the USA economy to look at?
I will greatly appreciate a comment of yours.
Many thank,
Federico
@Federico,
I don’t know, but until the economy improves, undertakers should do fine.
Sorry, but what do you mean with the statement:
“undertakers should do fine” ?
Please, explain to me.
Federico
@Federico,
It was a joke:
undertaker/mortician = impresario di pompe funebri
To answer your original question, I would invest in the US, since it alone is at the leading edge of the expansionary phase of a new credit cycle.
Not sure if it’s your cup of tea, but I would buy real estate in the US to rent out. Preferably small apartments (1 bedroom or studio) in college towns. Try places in recovering distressed markets like Northern Florida (e.g. Tallahassee and Gainesville).
So after four years of deficit things are getting better. Really? I suppose we wait around until 2016 we will get unemployment down to 6%, the new NAIRU. Sounds like a winner to everyone? So if we get the recession all over again the deficit would get larger. I’m sorry but it starts to look like deficits forever lead to unemployment indefinitely.
Reread 7dif thanks
If possible, I would like to receive one polite answere of yours to my following post.
Many thanks in advance.
“Good morning mister Mosler.
This is the first time I have entered your web site and I would like to post my comment to this discussion.
I live in Italy and I am a 38 age old Italian citizen.
I can say that I agree with you with the description of European situation you have just written about.
In Italy the economic situation is worstening every month. Our new prime minister Monti is subtracing money from real economy and banks prefer to buy tresury debt notes rather than to offer new creadit to citizens and firms. So the private sector has no money to spend with all the negative conseguences you can imagin.
And the government has no money to spend due to the enormous public debit generated in the la 20 years.
So, it is a painful situation.
But I am not writing this comment to complain of this. Everyone will take care of himself to suvive in some way.
I am a very good stock trader and an enterpreneur.
I like to create thing that have value added inside.
In this moment of difficulties I would like to make you a question.
At a certain moment in the future, this european crisis will stop and a new espansion cicle will start again. I think that there will be an enormous change in the meantime. Many firms will declare defaul, many will be cloused and so on. A disater. And there will be a deep change in society.
I woulk like to know, if this scenario is true, and I really think it is, in which sector you would like to establish a new firm.
Which sectors or which business ideas do you think will be good to be followed in the next expansive cicle? Is there anything either inspiring or new in the USA economy to look at?
I will greatly appreciate a comment of yours.
Many thank,
Federico”
i’d just invest in the major stock indexes.
i’m not expert in which particular businesses may do better than others, sorry