How's the 600 billion going to affect the market and inflation?

[keegs]

Most generations carry memories of their economic experiences with them through their lives. Those who lived through the great depression tended to be very conservative financially. My parents' generation still think and act based on concerns about a revisit of the high inflation experienced in 1970s. My own early life experiences are certainly an influence on my own financial behavior. So yes, I would expect people to be more conservative following a period of economic adversity.

As to the latter, sadly I agree with you.

The generation that faced the depression resolved to pass legislation to regulate an over leveraged financial system, to set federal standards on wages and child labor and to establish old age insurance, established a system of community colleges....The result was an unprecedented period of shared prosperity in America.

The generation that faced 1970s stagflation resolved to reduce our dependence on imported oil and to tightened the money supply. When progress was underway on both we had morning in America.

 

[novaman]

Most generations carry memories of their economic experiences with them through their lives. Those who lived through the great depression tended to be very conservative financially. My parents' generation still think and act based on concerns about a revisit of the high inflation experienced in 1970s. My own early life experiences are certainly an influence on my own financial behavior. So yes, I would expect people to be more conservative following a period of economic adversity.

As to the latter, sadly I agree with you.

In analyzing why I behaved the way I did in Sept 2009, I'd have to say that the recent large downturn played a large role in my decision making process. I had anchored myself to a certain target value and decided to jump off the merry go round once I got there. I should have been looking at the bigger picture in terms of my time horizon.

 

[traineeinvestor]

The generation that faced the depression resolved to pass legislation to regulate an over leveraged financial system, to set federal standards on wages and child labor and to establish old age insurance, established a system of community colleges....The result was an unprecedented period of shared prosperity in America.

With respect, while these were good things, it was other factors which drove America's economic prosperity post WWII - not least that fact that following WWII Americal had no serious rival as a substantial free market economy.

 

[DoingHomework]

Buy an RV an plan to travel in the USA. Foreign travel will be expensive.

Gas will also be expensive.

 

[MichaelB]

With respect, while these were good things, it was other factors which drove America's economic prosperity post WWII - not least that fact that following WWII Americal had no serious rival as a substantial free market economy.

Right. Like the Marshall plan and the transportation infrastructure that soon followed - and a high savings rate.

The current bitter dialog among citizens about gov't spending is all the more striking given the prominent enabling role it has played in the past.

 

[dex]

Gas will also be expensive.

You don't have to drive far.

 

[DoingHomework]

I think the key to the success of QE2 or any other attempt to "fix" the economy depends on restoring confidence and, especially, creating jobs. While I understand the supposed link between looser money -> business borrowing -> job creation -> growth, I don't know how effective it will be. We (ok, not most people here but the collective we) need jobs now so that people actually have money to spend to create the demand that gives businesses confidence to expand. Supply-side arguments are perfectly valid but I don't know of a single business that will expand without a clear picture of the market and the demand.

$600B would have created a lot of jobs, even if only for a few years. I'm not suggesting a hand-out or a big jobs program, I'm just saying that a more direct approach to giving businesses confidence to hire might work better.

I don't think you will see any wealth effect unless we have asset price inflation. I'd love my stocks and property values to go up, but do we really want to create another bubble to get us out of the problems created by the last one?

The economy is not THAT bad, it is just growing slower than over the last 20 years or so and it took a big hit in size when real estate prices collapsed. So maybe where it is now is the "right" place. Maybe we need to deal with the jobs problem more directly rather than trying to stimulate growth artificially. Maybe encouraging early retirement to open up new positions...lower the IRA withdrawing age to 55 for example.

But I fear that the current crop of politicians running the country lacks the maturity to actually solve the country's problems rather than arguing over dogma and philosophy.

 

[Gone4Good]

The current bitter dialog among citizens about gov't spending is all the more striking given the prominent enabling role it has played in the past.

Because that historic role is either completely ignored or denied.

 

[dex]

Quote:
Originally Posted by traineeinvestor
With respect, while these were good things, it was other factors which drove America's economic prosperity post WWII - not least that fact that following WWII Americal had no serious rival as a substantial free market economy.

Right. Like the Marshall plan and the transportation infrastructure that soon followed - and a high savings rate.

The current bitter dialog among citizens about gov't spending is all the more striking given the prominent enabling role it has played in the past.

I don't understand your reply to traineeinvestor , it doesn't seem to follow, can you elaborate?

 

[Gone4Good]

Quote:
Originally Posted by traineeinvestor
With respect, while these were good things, it was other factors which drove America's economic prosperity post WWII - not least that fact that following WWII Americal had no serious rival as a substantial free market economy.

The following table shows U.S. net exports as a percentage of GDP from 1929 to 1955 (BEA Data). What you'll notice is that exports played a very small roll in our recovery, never getting much above 4% of GDP, and mostly staying below 1%. The bulge years in the late 1940's were in large part due to Marshall Plan spending.

Our post WWII growth was mostly about meeting domestic demand growth. Not selling stuff to a broken world.

 

[keegs]

With respect, while these were good things, it was other factors which drove America's economic prosperity post WWII - not least that fact that following WWII Americal had no serious rival as a substantial free market economy.

The post war economy was driven by FNMA, defense spending, the interstate highway system. Returning Vets used their GI bill to attend college, to buy homes, start families. They bought cars, home appliances, built an American middle class.

These were shared goals driven by government policies and a tax base that supported it.

 

[MichaelB]

The following table shows U.S. net exports as a percentage of GDP from 1929 to 1955 (BEA Data). What you'll notice is that exports played a very small roll in our recovery, never getting much above 4% of GDP, and mostly staying below 1%. The bulge years in the late 1940's were in large part due to Marshall Plan spending.

Our post WWII growth was mostly about meeting domestic demand growth. Not selling stuff to a broken world.

Right.

 

[haha]

Because that historic role is either completely ignored or denied.

No; it's because there is a large difference between cash for clunkers, propping up our non-competitive auto industry, enabling non-economic over-investment in big houses---and the post war road building, GI bill, etc that were intelligent investments in productivity.

Spending this last few years leaves debt on the liability side, but no offsetting meaningful asset.

Ha

 

[MichaelB]

Originally Posted by traineeinvestor
With respect, while these were good things, it was other factors which drove America's economic prosperity post WWII - not least that fact that following WWII Americal had no serious rival as a substantial free market economy.

I don't understand your reply to traineeinvestor , it doesn't seem to follow, can you elaborate?

The US period of economic development post WW2 is remarkable. Internal demand, investment, real GDP, population, business profitability, labor productivity all grew, unevenly but nonetheless strongly, for more than a generation. It was both inwardly focused and self sustaining. This is unique in the world. Many things contributed to this, the most significant being the US labor force and industrial base survived the war unlike other major countries. The US was poised to compete and faced no real global competition.

Still, there were other very significant elements, such as:

The Marshall Plan, which created demand for capital goods production just when the US was the major global producer.

The GI Bill, which enabled vets to get higher education and supported the US university system.

Land availability plus FHA (credit, mortgage) enabled a generation to secure credit, build houses, accumulate wealth and stimulate employment.

The transportation infrastructure (RR, highway system, air transport) enabled production and population to be decoupled. This may be the most underappreciated factor of success.

Social infrastructure (police / fire / schools / healthcare / churches) everywhere, especially the “in-between small town rural and large city” where most of the US lives. This was enabled by the transportation infrastructure and encouraged by state and federal policy with substantial federal grants and tax relief.

The US Military, not only for the security it has provided much of the world but also support to research and development. Other US gov’t support to research has also been critically important.

The common element in these things is that they were all gov’t sponsored or enabled. Some are pre-WW2, such as railroads and FHA. The list is not complete. But the point is that our economic miracle is quite an accomplishment, but one that would not have happened without these key gov’t initiatives.

 

[keegs]

....Absolutely

 

[Gone4Good]

No; it's because there is a large difference between cash for clunkers, propping up our non-competitive auto industry, enabling non-economic over-investment in big houses---and the post war road building, GI bill, etc that were intelligent investments in productivity.

Except I don't see any support today for spending on infrastructure or education aid or, really, anything at all. I challenge you to find a government program that would gain a plurality of people agreeing that it is an "intelligent investment in productivity." It doesn't exist in today's climate. Everything the government does, or can do, is seen as having overwhelmingly large, negative consequences. Fiscal policy is crowded out, nullified by Ricardian Equivalence, and wasted. Monetary policy creates asset bubbles, hyperinflation and a death spiral for the dollar.

Here's the WSJ Op-Ed page cheering the death of rail expansion linking NYC and Northern NJ. This sounds to me like an "intelligent investment in productivity" but it ain't gonna happen.

 

[dex]

The common element in these things is that they were all gov’t sponsored or enabled. Some are pre-WW2, such as railroads and FHA. The list is not complete. But the point is that our economic miracle is quite an accomplishment, but one that would not have happened without these key gov’t initiatives.

OK thanks and I agree. As, haha points out there are beneficial and not so beneficial gov't sponsored or enabled programs. Many of the recent programs have not been beneficial.

No; it's because there is a large difference between cash for clunkers, propping up our non-competitive auto industry, enabling non-economic over-investment in big houses---and the post war road building, GI bill, etc that were intelligent investments in productivity.

Spending this last few years leaves debt on the liability side, but no offsetting meaningful asset.

Ha

 

[keegs]

Except I don't see any support today for spending on infrastructure or education aid or, really, anything at all. In fact, there's no acknowledgment that the government is capable of doing anything beneficial. Everything is seen as having overwhelmingly large, negative consequences. Fiscal policy is crowded out, nullified by Ricardian Equivalence, and wasted. Monetary policy creates asset bubbles, hyperinflation and a death spiral for the dollar.

I want to say it's part of a strategy.

Advocate for policies using emotional narratives about freedom, liberty, American exceptionalism and rugged individualism .......that will almost certainly create disaster (e.g. huge deficits and regulatory mayhem) and then blame the consequences on the incompetence of government.

 

[MichaelB]

No; it's because there is a large difference between cash for clunkers, propping up our non-competitive auto industry, enabling non-economic over-investment in big houses---and the post war road building, GI bill, etc that were intelligent investments in productivity.

Spending this last few years leaves debt on the liability side, but no offsetting meaningful asset.

Ha

We cross posted but said something similar. I fully agree that the bulk of spending has shifted from enabling to entitlements with much less economic impact.

 

[haha]

Except I don't see any support today for spending on infrastructure or education aid or, really, anything at all. I challenge you to find a government program that would gain a plurality of people agreeing that it is an "intelligent investment in productivity." It doesn't exist in today's climate. Everything the government does, or can do, is seen as having overwhelmingly large, negative consequences.

That could reflect nothing more than a realization that in recent years, governments tend not to accomplish much, but they do spend much. The choice does not seem to be between wise public infrastructure spending and and trying to stimulate consumption with handouts, but between wasted handout spending and putting the spending brakes on until there is some indication that someone with power has some sense.

As Niall Ferguson says, the consumption goosing will be gone, but the debt will remain. Then if our leadership ever wakes up to our huge national need for infrastructure of all sorts- energy, transportation, education- the money is already wasted. Spenders tend to assume that there is no effective brake on total debt, but this is an article of faith, not something for which we have evidence.

The fact that we seem to have gotten away with this so far only means that any limit has not been reached.

But there are warning signs. Look at wheat, sugar, oil, gold, silver, Euro- all have exploded since June. Looks to me like these are not separate commodity bull markets in the middle of an economic slowdown, but simply a well established bear market in USD.

 

[Meadbh]

And then there's the theory of Expansionary Fiscal Contraction, which suggests that, at least in some cases (generally smaller economies), more government spending is not necessarily better (YMMV):

ScienceDirect - Journal of Macroeconomics : Expansionary fiscal contraction: A theoretical exploration

The myth of expansionary fiscal contraction : David Osler

 

[jayc]

Now that the Fed is committing to buy $600 billion more in government bonds by the middle of next year in an attempt to breathe new life into a struggling U.S. economy, what should we expect in the markets over the next few years and how should we be positioning our portfolios?

Buy dividend paying utilities and certain CEFs. Rates will stay low and stock price should increase a little from current levels. Sell covered options and be ready to bail in a moments notice when the plan backfires and rates start up. This will certainly put pressure on the already bond bubble. Government always overpay for everything and this is no different if they buy bonds in the open market.

 

[keegs]

....but does it have legs?


Nov. 8 (Bloomberg) -- More U.S. executives than ever are increasing earnings forecasts compared with those lowering them, helped by almost $2 trillion of Federal Reserve spending and a recovery in the global economy.

CEOs Most Optimistic on U.S. Profits in Bull Signal (Update1) - Bloomberg.com

 

[Gone4Good]

But there are warning signs. Look at wheat, sugar, oil, gold, silver, Euro- all have exploded since June. Looks to me like these are not separate commodity bull markets in the middle of an economic slowdown, but simply a well established bear market in USD.

I'm not sure that a single-minded focus on commodity prices, to the exclusion of all other data by some folks, is all that helpful. If commodity prices are increasing in real terms because of growing demand from emerging economies that means what, exactly for U.S. monetary policy? Is the recommendation that we should try to offset international demand growth by destroying growth at home for the sole purpose of keeping commodity prices stable?

Here's a graph showing the real change in commodity prices for the last twenty years (data from the St. Louis Fed). This graph tells me, well, I'm not really certain what it tells me. That real commodity prices are about the same level they were in 1990? That commodity prices are volatile? That prices have gone up since 2000 in real terms, but down by the same amount in the 10 years prior while the tech bubble was blowing?

I guess one thing it tells me is that if we're going to set monetary policy based solely on changes in real commodity prices, then it would appear that monetary policy was too restrictive during the 1990s. Anyone care to make that argument?

 

[MichaelB]

I'm not sure that a single-minded focus on commodity prices, to the exclusion of all other data by some folks, is all that helpful. If commodity prices are increasing in real terms because of growing demand from emerging economies that means what, exactly for U.S. monetary policy? Is the recommendation that we should try to offset international demand growth by destroying growth at home for the sole purpose of keeping commodity prices stable?

Here's a graph showing the real change in commodity prices for the last twenty years (data from the St. Louis Fed). This graph tells me, well, I'm not really certain what it tells me. That real commodity prices are about the same level they were in 1990? That commodity prices are volatile? That prices have gone up since 2000 in real terms, but down by the same amount in the 10 years prior while the tech bubble was blowing?

I guess one thing it tells me is that if we're going to set monetary policy based solely on changes in real commodity prices, then it would appear that monetary policy was too restrictive during the 1990s. Anyone care to make that argument?

The only commodity that seems to have a direct affect on the overall economy is petroleum - and apparently in the $90 per barrel range it becomes a negative factor. Other commodities, especially agricultural, respond much more rapidly to price volatility because production is more easily increased and demand is subject to substitution.

If commodity prices remained at current levels but employment grew the net impact would still be quite positive for the US economy.