Thoughts on the economy

[teejayevans]

Lets see, recessions in 1994, 2001, 2008....hmmm...2015 here we come, perfect timing for the next election cycle.
TJ

[rbmrtn]

And also the 1980 recession and the '87 crash... nice 7 year cycle there!

[Finance Dave]

Quote:

Originally Posted by MasterBlaster Japan tried a very similar approach and now look where they are. Debt at 225 percent of GDP sluggish to no growth an ageing population at risk Could this be us in a decade ?

Remember back about 15-20 years when everyone said the Japanese were going to own America? They were buying everything in sight, running our car companies out of business (well, that actually almost did happen last year lol), etc. Well, no one is talking about Japan today as an economic superpower.

[Independent]

Quote:

Originally Posted by sheehs1 5. There are but a few places to put your money.

We can see this one right on this board. Lots of our members have both stock funds and long term bond funds. They also have target asset allocations and re-balance periodically.

Falling interest rates => increased bond prices => over-weighted bond funds => selling bonds and buying stocks.

Many people who aren't so mechanical about it make the same decision.

Or, we can say that the theoretical stock price is some discounted value of future profits. The discount rate is typically a "risk free" bond. If the yields on those bonds fall, the theoretical stock price should go up, even if there is no change in anticipated profits.

[HFWR]

Quote:

Originally Posted by Finance Dave Remember back about 15-20 years when everyone said the Japanese were going to own America? They were buying everything in sight, running our car companies out of business (well, that actually almost did happen last year lol), etc. Well, no one is talking about Japan today as an economic superpower.

Japan is still the third largest economy, though...

[clifp]

Quote:

Originally Posted by HFWR Japan is still the third largest economy, though...

Yes but they were #2 and there was some (foolish IMO) talk of them being #1 by the end of the century. Didn't quite work out that way.

[Hamlet]

When you manage to produce the same amount of goods with 10% fewer people, it generally makes for very good profits.

Quote:

Originally Posted by ducky911 how are earnings up but employment flat?

[ERD50]

Quote:

Originally Posted by HFWR Japan is still the third largest economy, though...

Quote:

Originally Posted by clifp Yes but they were #2 and there was some (foolish IMO) talk of them being #1 by the end of the century. Didn't quite work out that way.

I'm curious - we hear about how Japan's economy has been flat-lined (or worse?) for decades (or something along those lines). But what does that mean for the average Japanese person/family? I get the impression that life goes on. Are they in bad shape, doing OK, or just barely managing, or what? I just don't have any perspective on this.

-ERD50

[Gone4Good]

Quote:

Originally Posted by ERD50 I'm curious - we hear about how Japan's economy has been flat-lined (or worse?) for decades (or something along those lines). But what does that mean for the average Japanese person/family? I get the impression that life goes on. Are they in bad shape, doing OK, or just barely managing, or what? I just don't have any perspective on this. -ERD50

My understanding is that things in Japan are not as bad as many in the West assume. From the outside we look at a stock market that never recovered and a GDP that never seems to grow and conclude things must be horrible. Life on the ground is a bit of a different story. Much of Japan's aggregate GDP stagnation can be explained by an ageing population and shrinking workforce. According to economist Tyler Cowen:

Quote:

Between 1990-2007, GDP per working age adult increased by 31.8% in the United States, by 29.6% in EU.15 and by 31.0% in Japan. The figures are nearly identical! Japan has simply not been growing slower than other advanced countries once we adjust for demographic change.

So you can imagine the income of the average Japanese worker should have kept pace with their international peers. Meanwhile, Japan's unemployment rate is roughly half of ours at 4.3% and has rarely exceeded 5% over the past 30 years and never exceeded 6%. We might be so lucky.

[Alan]

Quote:

Originally Posted by Gone4Good My understanding is that things in Japan are not as bad as many in the West assume. From the outside we look at a stock market that never recovered and a GDP that never seems to grow and conclude things must be horrible. Life on the ground is a bit of a different story. Much of Japan's aggregate GDP stagnation can be explained by an ageing population and shrinking workforce. According to economist Tyler Cowen: The other thing to consider is that Japan's unemployment rate is currently 4.3% and has rarely exceeded 5% over the past 3 decades. We might be so lucky.

I also believe that the average Japanese person does not invest in the stock and bond market so a flat market means nothing to them directly.

[Khufu]

Quote:

Originally Posted by David1961 I didn’t major in economics, and actually don’t have a very good knowledge of how the economy works, but I’m becoming increasingly concerned that the fed has to keep taking action to stimulate the economy. Don’t get me wrong, I love it when my investments go up (awesome day so far today), but part of me believes things are a lot worse that we are led to believe and the fed is artificially keeping our economy on life support. Does anyone share these concerns or am I just too cynical? Isn't it healthy for the economy to go in cycles?

If I may say so, you, like most people, probably think of the national economy as like a household, which is something we all understand at least to some degree. For a household to borrow money, to spend more when its income is reduced is a reckless policy that will eventually lead to financial ruin. However, the national economy, even though it comprises, among other things, all the households in the country, is itself nothing like a household. A better analogy would be to a human body for which demand, i.e. borrowing and spending, is like flowing blood. If the blood doesn't flow the body will die. Unlike a human body though, the economy can die in pieces and to a degree, but as far as the essential life-giving aspect of maintaining demand the analogy has value.

So, the Fed's policy of lowering interest rates to the point of the zero rate lower bound and then buying up bonds to provide liquidity, is an attempt to stimulate demand by lowering the cost of money. You are right that "things" are worse than you realize because those "things" are jobs that people need and don't have. In huge numbers. You probably don't realize the extent to which the US is in a jobs depression, either because you still have one yourself or you don't need one. In addition to the lives that are being ruined, the output of those workers who are not engaged during this period is forever lost, which constitutes the "output gap" in GDP.

But the effect of monetary policy, which is the best the Fed can do, is limited and insufficient. Despite the complaints of the Hooverites, gold bugs and inflationistas, the Fed is not the cause of the jobs depression. The $8 trillion losses in the housing bubble plus the related losses in the financial markets are the cause. As in all other cases of recessions caused by the bursting of debt and speculation bubbles, the recovery is very slow. It would be much better if the govt pursued a fiscal policy of borrowing and increasing spending, such as investment in education, infrastructure and research in a wide range of areas from medical to energy. But the shocking polarization of wealth in America during the last few decades has also polarized politics to the point that investments in the future of this kind are no longer acceptable to the 1% because their interests have diverged from those of the middle class.

[clifp]

Quote:

Originally Posted by ERD50 I'm curious - we hear about how Japan's economy has been flat-lined (or worse?) for decades (or something along those lines). But what does that mean for the average Japanese person/family? I get the impression that life goes on. Are they in bad shape, doing OK, or just barely managing, or what? I just don't have any perspective on this. -ERD50

It seems to me that several years ago we had a Japanese forum member who spent a lot of time in the US. IIRC and I could easily be wrong but he painted a pretty dismal picture.

I am pretty familiar with the Hawaii tourism business. When I first moved here in 2000. Hawaii had 1.8 million Japanese visitor and 4.3 Mil US tourist. In 2010 the number of Japanese visitors had shrunk to 1.2 Mil while the US had increased to 4.8 Mil. (We say huge increases in visitors for the rest of Asia). Just as importantly the spending per Japanese visitor also declined. So I can say there was a pretty dramatic cutback in Japanese retirees traveling to Hawaii.

It seems to me the person to ask is Wade Pfau. I would think with his knowledge of retirement and living in Japan, he could publish some interesting things.

I personally would love to know how Japanese retirees without pension adapted to a zero interest environment.

Any of you who have corresponded with him want to make the suggestion?

[Khufu]

Quote:

Originally Posted by clifp I personally would love to know how Japanese retirees without pension adapted to a zero interest environment.

According to the Times deflation in Japan benefits retirees who see the purchasing power of their yen increasing.

http://www.nytimes.com/2012/08/02/wo...oc.semityn.www

[Tyro]

Quote:

Originally Posted by Khufu It would be much better if the govt pursued a fiscal policy of borrowing and increasing spending, such as investment in education, infrastructure and research in a wide range of areas from medical to energy. But the shocking polarization of wealth in America during the last few decades has also polarized politics to the point that investments in the future of this kind are no longer acceptable to the 1% because their interests have diverged from those of the middle class.

+1

The economy is a complex situation, and economics an empirical science. Economists have never been in agreement about how things work, and that seems to apply even moreso today. Since the 1980s, 3 things began to happen that changed our economy for the long term -- perhaps (probably) forever.

1. We shifted from a production-based economy to a service-based economy (productivity is increased, but in a service-based economy, that can occur {as pointed out in the QE-3 thread} that it doesn't take 10x as many employees to increase production of services by 10x)
2. The trade deficit went negative for the first time since the American industrial revolution
   Balance of trade - Wikipedia, the free encyclopedia
3. Our net international investment position began a longterm downward trend
   Net international investment position - Wikipedia, the free encyclopedia

The rules of the game -- in fact the entire game (IMO) -- has shifted, yet some are still playing with the old (pre-1980s) play book (that doesn't, and won't, work anymore). We also need to pay more attention to the world economy than just our own to a greater degree than ever before.

Whilst the economists argue it out, the system will have to figure it out, and that will take some time.

Part of what may benefit the Japanese is that they have always planned and invested for the long term, while we have tended to look for the quick fix band-aid approach to the economy. This is why I agree with Khufu above -- investing in education, infrastructure, and research will create jobs and (IMO) lay the foundation for future economic health (though the road may be rough & rocky).

[tmm99]

Quote:

Originally Posted by MasterBlaster Japan tried a very similar approach and now look where they are. Debt at 225 percent of GDP sluggish to no growth an ageing population at risk Could this be us in a decade ?

I believe Nikkei Index is at the level it was around 1983. The interest rate is 0.00%. Slight deflation from what I can see. How could you live off of savings or investment?? Government bonds??

[HFWR]

All this funny money is scary indeed, but it could be that, with the chance to delever provided by cheap money, and the eventual equilibrium in housing and construction that will happen naturally given enough time, Big Ben might turn out to be the smartest guy in the room. Of course, the last time we used that phrase, it was about Enron's management...

[audreyh1]

Quote:

Originally Posted by Khufu If I may say so, you, like most people, probably think of the national economy as like a household, which is something we all understand at least to some degree. For a household to borrow money, to spend more when its income is reduced is a reckless policy that will eventually lead to financial ruin. However, the national economy, even though it comprises, among other things, all the households in the country, is itself nothing like a household. A better analogy would be to a human body for which demand, i.e. borrowing and spending, is like flowing blood. If the blood doesn't flow the body will die. Unlike a human body though, the economy can die in pieces and to a degree, but as far as the essential life-giving aspect of maintaining demand the analogy has value. So, the Fed's policy of lowering interest rates to the point of the zero rate lower bound and then buying up bonds to provide liquidity, is an attempt to stimulate demand by lowering the cost of money. You are right that "things" are worse than you realize because those "things" are jobs that people need and don't have. In huge numbers. You probably don't realize the extent to which the US is in a jobs depression, either because you still have one yourself or you don't need one. In addition to the lives that are being ruined, the output of those workers who are not engaged during this period is forever lost, which constitutes the "output gap" in GDP. But the effect of monetary policy, which is the best the Fed can do, is limited and insufficient. Despite the complaints of the Hooverites, gold bugs and inflationistas, the Fed is not the cause of the jobs depression. The $8 trillion losses in the housing bubble plus the related losses in the financial markets are the cause. As in all other cases of recessions caused by the bursting of debt and speculation bubbles, the recovery is very slow. It would be much better if the govt pursued a fiscal policy of borrowing and increasing spending, such as investment in education, infrastructure and research in a wide range of areas from medical to energy. But the shocking polarization of wealth in America during the last few decades has also polarized politics to the point that investments in the future of this kind are no longer acceptable to the 1% because their interests have diverged from those of the middle class.

A very interesting and well presented perspective. I hadn't thought about the roots of our current polarization quite in that way, but I think you have a great point.

I agree about what caused the jobs depression, and without those industries rebounding (yet), the jobs haven't returned. There is more though - a shift in attitude of company hiring policies. Companies in ALL industries went very lean in response to the credit crunch/financial crisis of 2008 (this also caused the recession), and they are now inclined to stay that way - maximizing profits and minimizing hiring. The competition (demand) that usually spurs hiring and investment just doesn't exist at the moment.

[Nemo2]

I fail to see where 'jobs' are coming from; unlike bygone eras there is virtually nothing that requires masses of unskilled/semi-skilled workers.

Most everything is automated, and therefore non labor intensive; I had the opportunity to tour our local Proctor & Gamble plant recently, and although it was admittedly the evening shift I was quite surprised by how few employees it requires to operate a large factory.

The days of masses of 'working class' people making good money in industry is over, and I simply cannot envision them ever returning.......the guy who used to put the hubcaps on as the cars rolled off the assembly line...gone forever.

Combine that with the goods manufactured overseas; we were scanning over a flyer/catalogue today and looking at the prices of appliances......thinking of the individual costs starting from the mining/making of the base materials utilized, the factory, boxing, shipping, on/offloading, trucking, advertising, stocking in stores, rents, operating costs, insurance...etc, etc, and wondering how, (even if all the employees along the way were paid zero), how they can sell these things and still make a profit.

You cannot just 'make jobs up', regardless of the need for them; there has to be a demand, and there has to be a profit...other than pork barreling with taxpayer's money who's going to knowingly invest in losing propositions?

[Midpack]

Quote:

Originally Posted by Nemo2 I fail to see where 'jobs' are coming from; unlike bygone eras there is virtually nothing that requires masses of unskilled/semi-skilled workers. Most everything is automated, and therefore non labor intensive; I had the opportunity to tour our local Proctor & Gamble plant recently, and although it was admittedly the evening shift I was quite surprised by how few employees it requires to operate a large factory.

I can attest to this, I made a career of improving manufacturing productivity. When I retired, my plant had revenues of $2.2 million per employee, so labor had become almost trivial despite the very high wages/hour (and benefits) we paid. It was nothing like that when I began my manufacturing career in the late 70's, labor was a huge cost component.

And with so many unknowns ahead, no business would hire anyone they're not absolutely positive they'd need for the long run - we surely didn't. While profits are indeed generally high (now) with volume somewhat restored, when the next downturn hits and volume gets whacked, profits will also evaporate - it's not a linear correlation as many of you undoubtedly know. So lean is the name of the game (LEAN and lean). That trend is not new, it's been going on for decades and the 2008 meltdown just made productivity increases all the more critical.

[brewer12345]

Quote:

Originally Posted by Nemo2 I fail to see where 'jobs' are coming from; unlike bygone eras there is virtually nothing that requires masses of unskilled/semi-skilled workers. Most everything is automated, and therefore non labor intensive; I had the opportunity to tour our local Proctor & Gamble plant recently, and although it was admittedly the evening shift I was quite surprised by how few employees it requires to operate a large factory. The days of masses of 'working class' people making good money in industry is over, and I simply cannot envision them ever returning.......the guy who used to put the hubcaps on as the cars rolled off the assembly line...gone forever. Combine that with the goods manufactured overseas; we were scanning over a flyer/catalogue today and looking at the prices of appliances......thinking of the individual costs starting from the mining/making of the base materials utilized, the factory, boxing, shipping, on/offloading, trucking, advertising, stocking in stores, rents, operating costs, insurance...etc, etc, and wondering how, (even if all the employees along the way were paid zero), how they can sell these things and still make a profit. You cannot just 'make jobs up', regardless of the need for them; there has to be a demand, and there has to be a profit...other than pork barreling with taxpayer's money who's going to knowingly invest in losing propositions?

I guess we are entering the utopian future envisioned long ago where much of the populace no longer had to work as robots did most of the labor and we all have flying cars...