I Love Larry Kotlikoff(Partly Because He Can't Stand Krugman)

[Texas Proud]

Thank you. High praise, especially someone not inclined to see my point of view.


It’s certainly true that markets can go from euphoria to panic in the blink of an eye – we’ve seen it in practice. It's also true that countries who issue debt in their own currencies have some special advantages that make them less susceptible to these kinds of panics. Having said that, credible entitlement and tax reforms can go a long way to solidifying confidence in our long-term fiscal solvency. This stuff can be done without creating a near-term fiscal drag and should be put on the front burner.

Another point worth considering is that the single biggest contributor to our current deficits isn’t anything people primarily talk about (stimulus, Bush tax cuts, wars, etc); it is recession and sub-par growth. A full-employment policy is a deficit reduction policy.

I agree that the biggest problem is that revenue has dropped a lot with all the people out of work... and getting them back to work would fix a lot of the sins that people talk about... but I do not think that it will fix our deficit problem since as a pct. of GDP it is still to high...

 

[Texas Proud]

The question was to give the anti-keynesians a chance to explain away the HUGE government expenditures of WWII as the obvious solution that ended the depression. This is not possible. The government temporarily took up a huge percentage of the economy. This temporarily crested demand and jobs and then the economy recovered and the government stepped out. This is flat out a success of Keynesian policy. But it took Huge government investment. The lesser efforts of the New Deal, as big as they were could not jump start the economy. But the power of the government to SAVE a sputtering economy is undeniable in this instance. The antiKeynsians refuse to acknowledge this FACTUAL account of history. War and extraction did not end the depression. Huge government spending did. And huge government investment does not only have to be to blow stuff and people up. We need new roads new bridges new transportation new energy projects. We CAN invest Huge monies in smart projects and it can start a recovery. BUT then these projects MUST be temporary so the government shoves the economy into gear but then gets out of the way. It could work. It did before.

I guess you missed the fact that after WWII the only large economy that was not destroyed was the US... we had a slight advantage over the rest of the world... Also, a lot of money was spent rebuilding what was destroyed which also created jobs etc....

Today, we have neither of these benefits.... the rest of the world has unused capacity and we have to much housing and building already... until we get rid of the excess, there will not be a good recovery....

 

[Texas Proud]

Isn't this the Broken Window Fallacy . . . the idea that we can't create growth by destroying something, even if it's replacement creates a job?

I always love when WWII comes up, because we start to see some arguments break down. There is a reason why Ha won't answer the question "by what mechanisim did WWII end the depression" even though he's the one who said it did. He won't answer because he doesn't like the answer.

But the conflicts go deeper than just a dislike for government spending as "stimuls." WWII represents the worst kind of government spending, it's worse than digging holes and filling them in. It's worse than pointless (from a purely economic point of view) it's destructive to both physical and human capital. It is the "broken window fallacy" writ enormous.

But it's even worse than that. The WWII war effort didn't just include destructive government spending. It imposed unthinkable regulations on every aspect of society, dictating from on-high such mundane things as how much sugar a household could buy.

It's an interesting paradox for people to think through.

One other thing that WWII did to help unemployment is kill off people in the range of 50 to 70 million people... probably most of working age... I don't think we want to go there to fix our problem today...

It is kind of hard to use WWII as an example of Keynesian at work...

Plus, tell me when we will use the rest of his theory about running a surplus to pay down the debt created by the stimulus We don't see a surplus proposed by ANYBODY for the next 10 years... even when the current problems are long gone....

 

[FinanceDude]

We seem to have lost Gone4Good on this thread..........

 

[explanade]

Doesn't Boeing have the right to move their jobs whereever they want, or is that now illegal? I suppose it would be better to move them overseas, and lose those jobs forever? Companies have been moving jobs to right to work states for decades. Master Lock here in Wisconsin moved all their jobs to Tennessee because the wages were so much lower. They could have moved them to China but they didn't........

The regulation environment is one big reason why the top 500 companies in America are sitting on over $1 trillion in cash and not reinvesting in new facilities, markets, creating jobs, etc. The govt says they want the private sector to create jobs, then regulates them into oblivion so its not worth it.

Apparently there are decades-old labor laws involved when Boeing was suppose to be bargaining in good faith with their existing workers and then decided to threaten to move out of state.

If you don't like the laws, change them but don't demand exemptions for certain companies.

As far as "regulation causing companies not to create jobs" that's typical RW malarkey. They're sitting on cash because they don't see a return on investment from using that money to expand capacity, create more jobs, because demand is weak. With 9% unemployment in the US and even weaker economies in Europe, where are the sales going to come from? Typical opportunism to push an ideology when it has nothing to do with facts on the ground, like how initially the tax cuts 10 years ago were about giving money back to people and then when the economy weakened, it was to be for stimulus.

The EPA and other regulatory agencies didn't do much in the last decade and then we ended up with the financial sector behaving recklessly, which is a big part of why we're in these economic straits now. So the solution is more of the same, let companies do their own thing, because they have our best interests at heart?

 

[FinanceDude]

If you don't like the laws, change them but don't demand exemptions for certain companies.

Seems that the govt is setting a bad example by offering thousands of exemptions to groups and companies from having to enroll in the Affordable Health Act.........so I guess it's more of "do as I do, not as I say"??

As far as "regulation causing companies not to create jobs" that's typical RW malarkey. They're sitting on cash because they don't see a return on investment from using that money to expand capacity, create more jobs, because demand is weak. With 9% unemployment in the US and even weaker economies in Europe, where are the sales going to come from?

If I take your comment at face value, then the proposed $450 billion Jobs Bill is not necessary, since companies would not expand anyway due to a lack of demand. I could not have said it better myself........

 

[explanade]

Yeah because people who get pay checks from the govt., either directly or through contractors, do not spend money, thus do not contribute to demand.

Because there are no businesses which depend on govt. workers who are customers.

 

[FinanceDude]

Yeah because people who get pay checks from the govt., either directly or through contractors, do not spend money, thus do not contribute to demand.

Because there are no businesses which depend on govt. workers who are customers.

You think government is the answer, and I do not. It's as simple as that.........

 

[Gone4Good]

One other thing that WWII did to help unemployment is kill off people in the range of 50 to 70 million people... probably most of working age... I don't think we want to go there to fix our problem today...

I'm a big proponent of testing theory against observable data (which has been a repeated theme of mine throughout this thread).

So, if WWII reduced unemployment primarily by killing off the work force, what would we expect to see? If this were the only driver, we'd actually expect to see GDP decline. Even if we only killed off the unemployed, they still contribute to the economy to some extent. Their absence from the economy has to be a subtraction.

What did we actually see? Here's GDP growth from 1930-1950. We see a rebound from the bottom of the Depression until the 1937 "Recession within a Depression" (mentioned here). And we see a large bulge in GDP during the war years, followed by a decline after the war's resolution.

That pattern suggests that WWII added to GDP while we were fighting it, and subtracted from GDP during demobilization.

I added a second chart showing changes in Government Investment, you'll see it coorelates nicely with changes in GDP.

 

[urn2bfree]

WWII did not kill off 50- 70 million US laborers...you are off only by around 50- 70 million (since the actual number was closer to 100,000 or 1/10th of 1 million)--
it killed off that many of our competition's laborers.
The war did not help the economy just by employing fighting soldiers- it helped by ramping up industrial production--US govt spending ended up something like half of GDP---there is nothing inherently necessary that such government spending be on war-- it could be on roads and bridges and energy--such projects need to be temporary so that private enterprise will take over after it gets off the mat it currently occupies. But in the meantime- all those new workers with paychecks will buy stuff thus ramping up demand and flushing out more production- more jobs, more demand etc...
Also there is the dirtly little secret nobody acknowledges which is that the babies of the baby boomers just are not at the natural age of big consumption..they are just reaching that stage- of having babies and buying minivans and car seats and houses....but until those 75million citizens created from 1982-1994 get to that point we suffer thru the current lull that comes when large segments of the poopulation either alreaddy have the stuff they need or can't yet afford or see the use of getting that stuff...that will change and the economy will recover...again it always does when population booms reach their 30's.

 

[explanade]

You think government is the answer, and I do not. It's as simple as that.........

Ah cliches and smiles when you got no substance to your arguments beyond talking points.

You make assumptions because I don't subscribe to the same ideology -- govt. is the problem, blah, blah, blah.

If govt. can't fix the economic problems, where is private enterprise to the rescue? They're not doing much at the moment, are they? Not that they have any obligation beyond maximizing shareholder value.

Oh, it's the EPA's fault, imagine that, an agency which has existed for over 40 years is now all of a sudden the problem for all the economic ills of the country?

Scapegoating is so useful.

 

[Gone4Good]

You think government is the answer, and I do not. It's as simple as that.........

How about "sometimes it is and sometimes it isn't."

Blanket statements are rarely true. Most things depend on specifics. One size doesn't fit all.

Here's an old post elaborating a bit on that as it relates to economics (specifically why "Supply-Side" remedies were the right ones for the problems of the late 70's but are not applicable to today).

A sample . . .

So if you have a situation where supply constraints impede economic growth, the proper course of action is to remove those constraints. Evidence of a Supply constrained slump is elevated inflation in the face of high unemployment. That sounds a lot like the late 1970’s. And indeed, an oil embargo, high taxes and high regulation constrained supply. In that environment loose money only served to accelerate inflation. Given that backdrop, the proper policy response was to break the oil embargo, cut taxes, remove regulatory barriers to economic growth, and tighten monetary policy.

Fast forward to today, and the economic difficulties look nothing like those of the late 70’s. Instead of a supply constrained economy, our economy suffers from excess supply and inadequate demand. The big picture symptoms of a demand constrained economy are high unemployment and falling inflation, which is what we have today.

It’s telling that nearly all of the economists and pundits who predicted run away inflation because of monetary easing also suggest that reduced taxes and regulation are the keys to recovery. They’ve fundamentally misdiagnosed the problem because they only see the world through the supply side of the equation. They still think it's 1979. So they're stunned as inflation continues to fall in the face of unprecedented monetary expansion and contort themselves in various directions to explain it when the answer is simple. Aggregate demand collapsed. Period. Full stop.

This actually brings us full-circle in this thread. That interest rates and inflation have not soared should tell people important things about what's ailing our economy. The above quote was written a year ago, and yet all some people have done since then is roll forward their predictions of when rates will soar. Maybe it's time to re-evaluate the assumptions.

 

[Texas Proud]

WWII did not kill off 50- 70 million US laborers...you are off only by around 50- 70 million (since the actual number was closer to 100,000 or 1/10th of 1 million)--
it killed off that many of our competition's laborers.
The war did not help the economy just by employing fighting soldiers- it helped by ramping up industrial production--US govt spending ended up something like half of GDP---there is nothing inherently necessary that such government spending be on war-- it could be on roads and bridges and energy--such projects need to be temporary so that private enterprise will take over after it gets off the mat it currently occupies. But in the meantime- all those new workers with paychecks will buy stuff thus ramping up demand and flushing out more production- more jobs, more demand etc...
Also there is the dirtly little secret nobody acknowledges which is that the babies of the baby boomers just are not at the natural age of big consumption..they are just reaching that stage- of having babies and buying minivans and car seats and houses....but until those 75million citizens created from 1982-1994 get to that point we suffer thru the current lull that comes when large segments of the poopulation either alreaddy have the stuff they need or can't yet afford or see the use of getting that stuff...that will change and the economy will recover...again it always does when population booms reach their 30's.

I did not say US laborers... I said it killed off that many people...

You don't think that the 20 million or so Germans who were killed did not produce something Or the English, Russians, Italians, French etc. etc?

Not having these people and most of Europe destroyed meant that there was a lot of demand for products and housing... the US got the benefit of having manufacturing plants and a ready work force... that is why private enterprise took over.... there was stuff that needed to be replaced after it was destroyed....


Doing roads and bridges etc. etc. (or whatever you want to build) is not going to mean at the end of that spending there is a need for more stuff... most people have enough stuff already... and are only replacing when it wears out.... the demand curve after WWII and today is quite different..

 

[Texas Proud]

I'm a big proponent of testing theory against observable data (which has been a repeated theme of mine throughout this thread).

So, if WWII reduced unemployment primarily by killing off the work force, what would we expect to see? If this were the only driver, we'd actually expect to see GDP decline. Even if we only killed off the unemployed, they still contribute to the economy to some extent. Their absence from the economy has to be a subtraction.

What did we actually see? Here's GDP growth from 1930-1950. We see a rebound from the bottom of the Depression until the 1937 "Recession within a Depression" (mentioned here). And we see a large bulge in GDP during the war years, followed by a decline after the war's resolution.

That pattern suggests that WWII added to GDP while we were fighting it, and subtracted from GDP during demobilization.

I added a second chart showing changes in Government Investment, you'll see it coorelates nicely with changes in GDP.

As noted by another poster... I did not say it killed off US citizens.... so the graphs you show do not reflect the destruction of Europe and Asia...


I do not have any argument that gvmt spending helps out GDP.... it does... during WWII most of that GDP was in the building of weapons (ships, planes, tanks, bullets etc. etc.)... My parents had either a 1940 or a 1941 Ford... it was the last year that a car was produced until the end of the war (from what my mom tells me)....

SO, production of items that many people wanted or needed in peace time were not produced... creating a demand that had to be satisfied... and it was... and the economy was great for a long time...


We are not in the same situation... we do not have a pent up demand for stuff... gvmt spending that will increase GDP will mean GDP will go down when it stops and as far as we know nothing else will change... except that we will have a larger debt...

Why not put up the debt as a % of GDP and show that before the war it was 'low'... at the end of the war it was close to or over 100%... and then it went back down....

Today we have debt as a % of GDP close to or over 100% BEFORE we spend the kind of money you propose.... where do we go to 125%? 150% And how do we get it back down to the 30% or 40% that seems to be an OK level

 

[Gone4Good]

Not having these people and most of Europe destroyed meant that there was a lot of demand for products and housing... the US got the benefit of having manufacturing plants and a ready work force... that is why private enterprise took over.... there was stuff that needed to be replaced after it was destroyed......

This is something that is often said, but the evidence doesn't really support it.

Yes, more charts. This time showing Net Exports as a % of GDP from 1930 to 1960. The first thing to note is the scale on the Y-Axis. It tops out at +2% of GDP. That means that our exports never reached more than 2% of our GDP during the entire period we were supposed to be supplying a broken world with goods.

The second thing to note is that net exports is mostly negative. We do see a bulge in the late 40's from the Marshall Plan, but the story here is not one that supports the view that exports are what pulled us out of the Great Depression.

 

[Texas Proud]

How about "sometimes it is and sometimes it isn't."

Blanket statements are rarely true. Most things depend on specifics. One size doesn't fit all.

Here's an old post elaborating a bit on that as it relates to economics (specifically why "Supply-Side" remedies were the right ones for the problems of the late 70's but are not applicable to today).

A sample . . .



This actually brings us full-circle in this thread. That interest rates and inflation have not soared should tell people important things about what's ailing our economy. The above quote was written a year ago, and yet all some people have done since then is roll forward their predictions of when rates will soar. Maybe it's time to re-evaluate the assumptions.

To me it is still the flight to quality.... where else would you invest money today My boss asks me all the time... Most of Europe is worse off than we are... (which brings up the question... why? my answer is their debt is a big cause)... China is a big % of Asia.... and their economy has slowed... they do not have open markets... India is corrupt and also closed... South America is doing better, but they are not that big.. same with Australia and New Zealand....

So, nobody is doing great... nobody has a pull on capital right now... so you suck it up and invest in what is still considered the safest investment.... hoping that something changes..

I also think that inflation is higher than what is published in what matters to me.... food, gas and utilities.... oh, and health care... my other expenses are more fixed, housing and auto, as I am not buying in these areas....



Just wanted to add.... in front of my house they are putting in a 'new' street.... I don't know why, but they have jacked hammered up the 'old' one and putting in a new one.... I have not been able to get an answer as to why... and the section that is actually bad (that is broken and sunk down) is NOT being replaced.... but the good sections.... to me, a waste of money, but it does employ people... But if you are going to do these kind of projects, at least do them on the places that NEED them...

 

[Gone4Good]

SO, production of items that many people wanted or needed in peace time were not produced... creating a demand that had to be satisfied... and it was... and the economy was great for a long time...

We are not in the same situation... we do not have a pent up demand for stuff... gvmt spending that will increase GDP will mean GDP will go down when it stops and as far as we know nothing else will change... except that we will have a larger debt...

I agree that war rationing added to pent-up demand and meeting that demand helped spur recovery. But unmet demand existed long before rationing was instituted. What do you think bread lines reflect? What do you think 9.1% unemployment reflects today? How can it reflect anything other than a lot of people who have unmet needs.

And it's not true that we repaid apreciable amounts of debt after WWII. The chart you're referring to shows Debt / GDP. Nominal debt declined only modestly after the war, before starting to go up again in nominal terms beginning in 1949.

It was growth that lowered our debt burden.

 

[Gone4Good]

To me it is still the flight to quality....

Thank you.

You may not realize it, but what you're suggesting is the very heart of the "Keynsiean" liquidity trap argument.

The argument from before was that one person's consumption is another person's income. Everyone can't reduce their consumption (increase their savings) at the same time without reducing income. In normal times, the supply and demand for savings is reflected by interest rates. When more savers want to save, interest rates fall causing some previous savers to spend. Income (meaning GDP in this case) remains uneffected.

But suppose demand for savings is so high that it drives the equilibrium clearing price below zero . . . so many people want to save simultaneously that only negative interest rates could induce some of them to spend? Because we can't lower interst rates below zero, the market can't clear. In that environment, attempts to increase savings lower income at the macro level. The lower income frustrates attempts to increase savings and the process continues.

Flights to quality at zero interest rates is exactly the definintion of a liquidity trap.

 

[Texas Proud]

Thank you.

You may not realize it, but what you're suggesting is the very heart of the "Keynsiean" liquidity trap argument.

The argument from before was that one person's consumption is another person's income. Everyone can't reduce their consumption (increase their savings) at the same time without reducing income. In normal times, the supply and demand for savings is reflected by interest rates. When more savers want to save, interest rates fall causing some previous savers to spend. Income (meaning GDP in this case) remains uneffected.

But suppose demand for savings is so high that it drives the equilibrium clearing price below zero . . . so many people want to save simultaneously that only negative interest rates could induce some of them to spend? Because we can't lower interst rates below zero, the market can't clear. In that environment, attempts to increase savings lower income at the macro level. The lower income frustrates attempts to increase savings and the process continues.

Flights to quality at zero interest rates is exactly the definintion of a liquidity trap.

It also sounds like where Japan was 20 years ago.... how has their spending worked out

The article is 2 years old, but still makes the point... it did not work.

Learning from Japan: Infrastructure Spending Won't Boost the Economy

I am not disagreeing with you on a number of the problems... I just don't see that the solution is to pile more debt on top of all the debt we have...

PS.... I also don't think cutting taxes will do it either....


IMO, the problem can not be fixed quickly... it will be a long and slow recovery... lots of people's standard of living will (or already has) gone down... they will not ever get back to where they were... and for a good number of them might be a good thing since they can LBYM instead of on every increasing debt....

Back in the 30s, the bread lines etc. were a face on the problem... we still have 'bread lines'... look how many people have their kids on free lunch and free breakfast... look how many people are on food stamps or some other fed program.... we have more programs now than back then...

 

[urn2bfree]

Ir we can kick start the economy there WILL be increased demand- as I pointed out with the demographic facts....some of the lack of demand for housing right now is that 57 year olds and 21 year olds do not buy houses. They don't. The Baby Boomers peak was around 1957. The Echo boom peaked in 1990-guess what happened when the Baby Boomer peak turned 21...economic slump. Then they got older and they did what people have been doing for centuries- they married, had kids, bought houses, cars, baby clothes, schools had to be built, etc..it will happen no matter what, slowly and surely with more pain if we do the wrong stuff or we can have an economy booming and ready for them if we kick start it. the only power strong enough to kick start it is BIG Deep pocketed government.

This is not what the govt haters want to believe, it unfortunately is true.
Funny how the same people want to talk about the government having to balance its books like any household- thinking the government is just like the rest of us... but somehow the government is not like the rest of us when it spends. Even though it can spend HUGE amounts as a customer- why would that not be part of demand like the rest of us....either it is just like us or it is isn't (I dont think it is) but their arguments are all based on half baked notions that it is and ignore the full implications of the comparison.

 

[FinanceDude]

Ir we can kick start the economy there WILL be increased demand- as I pointed out with the demographic facts....some of the lack of demand for housing right now is that 57 year olds and 21 year olds do not buy houses. They don't. The Baby Boomers peak was around 1957. The Echo boom peaked in 1990-guess what happened when the Baby Boomer peak turned 21...economic slump. Then they got older and they did what people have been doing for centuries- they married, had kids, bought houses, cars, baby clothes, schools had to be built, etc..it will happen no matter what, slowly and surely with more pain if we do the wrong stuff or we can have an economy booming and ready for them if we kick start it. the only power strong enough to kick start it is BIG Deep pocketed government.

How much kick-starting? $3 trillion, $5 trillion, $15 trillion? So far, there has been little to no effect. Maybe we have slowed down the next Depression but 9% unemplyment isnt going to pay the bills for very long. Infrastructure spending will give some TEMPORARY jobs, but after the project is done and the federal money is gone, then what?

This is not what the govt haters want to believe, it unfortunately is true.
Funny how the same people want to talk about the government having to balance its books like any household- thinking the government is just like the rest of us... but somehow the government is not like the rest of us when it spends. Even though it can spend HUGE amounts as a customer- why would that not be part of demand like the rest of us....either it is just like us or it is isn't (I dont think it is) but their arguments are all based on half baked notions that it is and ignore the full implications of the comparison.

VERY FEW governments run surpluses for any length of time. However, we are in a place we have not been as far as in debt since World War II. What is the catalyst NOW that will bring the next wave of prosperity and productivity to the US? It sure doesn't seem to be in manufacturing, DW has been in manfacturing for 25 years and she says this is the worst she's ever seen it............

 

[M Paquette]

Ir we can kick start the economy there WILL be increased demand

I don't think you'll be able to 'kick start' the economy just yet. Remember, this is a balance sheet recession and recovery. We'll still be in recovery mode until all those consumer and commercial balance sheets get back to reasonably sustainable long term levels. That point is years out.

What the government can do is lessen the severity of the impact of The Great Unwinding, trying to keep the economy moving until the private sector is strong enough to carry the load.

To give folks some idea of where we are at, for the 'little people' living off of a salary or hourly wages, the current debt to income ratio is around 154% as of Q4 2010, down by 7.5% from the pre-recession peak at almost 162% The long term level for 1960-1980 was below 80%.

For the rest of us, including our interest and dividend income, bonuses, CEO salaries and whatnot, the debt to income measure is about 100%, still high, but below the pre-recession peak of 112%. [1]

All those consumers are deleveraging, paying down debt, or falling into various forms of default and having the debt written off. It's a slow process, though. Household income levels are down, with today's Census Bureau report showing median household income at $49,445, down 7.1% from the 1999 peak.

We are looking at several more years before consumer demand for goods, 70% of our economy, will be able to pick up. All that cash flow that would normally be rippling through shops, businesses, and contractors, to wholesalers and materials suppliers is instead paying down pre-existing debt, going back into capital reserves of overextended lenders trying to get their house in order.

It'll be a while yet. The August 2011 Blue Chip Consensus Forecast extended with March 2011 Blue Chip long-run survey of 50 private sector forecasts has real GDP chugging along at around 2.6-3.1% til 2021 (it doesn't go past that...), and unemployment over 6% til 2017.


1. "From Keeping Up with the Joneses to Keeping Above Water: The Status of the US Consumer.", BlackRock Investment Institute

 

[urn2bfree]

We are looking at several more years before consumer demand for goods, 70% of our economy, will be able to pick up.

Yes it will be around the time a critical mass of the Echo Boom children reach age 30- ie 2014- new household formation jumps up rapidly around age 25, few people can stand to live with their parents after that and it jumps again at 30- these are facts of human behaviour- the necessity of getting the heck out of mom and dad's house will be the mother of invention. It worked with the last boom of babies, I am betting on this next generation to behave in largely the same way.

 

[devans0]

The liquidity trap and flight to quality makes sense. Demographics throughout the industrial world had produced a boomer generation that are now hitting retirement age. If I were predict what drives current consumption, I would have to say downsizing McMansion housing for seniors turning those super houses over to echo-boomers. The Boomers needs will lead to increased demand for condos or retirement cottages or the equivalent, and a quest for a simpler life. Super saving in such a world would sponge up excess money as pre retirement people hoards money. (seem familiar?, we are just ahead of the curve.) Inflation stays low. Consumption drops. Everyone wants to save, no one wants to buy. Japan's renowned saving rate led to stagnation there, We have the same dynamics here. I suspect that demographics will overwhelm any gov't interventions.

What will China do with their two adults producing one child policy? Their aged will really suffer. Our problems are dwarfed by what they face. Catholic countries and emerging nations will have the worker populations.

The other interesting areas will be the guns-into-plowshares effect as the new hardware and robotic advances move to peacetime production. Stealth car paint and ground based predator technology running lawnmowers and picking up the laundry...from Bangladesh..and geriatric (quest for fountain of youth) health care. No one can predict, but it will be interesting.

When will it change? The current boomers have to move out of jobs, and start spending down. I am in the middle boom cohort and would expect to reach normal retirement age in seven years. The middle boom cohort seems likely, so I call it in six to eight years. Then growth and inflation as the pent up savings starts to finally spend.

To look for specifics in economics isn't done, but I am curious to see how others see the future. Who comes out ahead? Who loses?

 

[Gone4Good]

Remember, this is a balance sheet recession and recovery. We'll still be in recovery mode until all those consumer and commercial balance sheets get back to reasonably sustainable long term levels.

. . .

To give folks some idea of where we are at, for the 'little people' living off of a salary or hourly wages, the current debt to income ratio is around 154% as of Q4 2010, down by 7.5% from the pre-recession peak at almost 162% The long term level for 1960-1980 was below 80%.

. . . .

Household income levels are down, with today's Census Bureau report showing median household income at $49,445, down 7.1% from the 1999 peak.

More evidence of the problem's nature.

Consider the ratio - Debt / Income. It's high, as pointed out above. But now consider the last statement "Household income levels are down . . ." Even as folks try to deleverage they can't because income falls. They may make some head way reducing the numerator, but it's little help when the denominator also falls. So debt burdens stay high despite attempts to save, despite default and restructuring.

Rewind a couple of posts . . .

Because we can't lower interst rates below zero, the market can't clear. In that environment, attempts to increase savings lower income at the macro level. The lower income frustrates attempts to increase savings and the process continues.

The problem is that we can't deleverage unless someone else steps up to "dis-save." The mechanisim that normally governs this (interest rates) is stuck out of equilibrium. Even with zero interest rates the price offered to savers is too high, so no one is willing to dis-save.

The solution to the problem is to find another way to allow folks to deleverage - inflation (if it can be manufactured), forced loan modification with bank recapitalization if necessary, etc.