Is the Spending Binge Going to Be Effective?

[Lord Tammerlain]

Lord T, why is it that so many people don't understand the difference between types of recessions?

I would suggest people ignore of the causes of recessions and only see the recession it self.

Re the idiom

Cant see the forest through the trees

It is one reason you cant compare the recession/depression of 1921 to the great depression, different causes. It is why you can compare though the great depression to the what Japan has gone through over the last 20 years or so, they had roughly the same cause.

 

[imagep]

phattonez, I am assuming that the point you are alluding to is that our economy is supply side driven. That jobs and incomes and products are created by companies expanding, and thus an increase in available capital would increase business expansion. I don't disagree with that, but it is very much a "which came first, the chicken or the egg" issue. I believe that consumerism creates demand which creates expansion, you seem to believe that expansion creates jobs which creates demand and consumerism. I get that difference in opinion.

What I don't get is you insisting that there is apparently some type of lack of available capital for busineses to use to expand. Can you point to any specific times in history in the past 100 years or so where it is documented that businesses wanted to expand but were not able to expand because there was not enough investment money available? Not cases where an individual company couldn't gather the capital (typically when that happens it is because the business can not prove that it merrits outside capital), but time periods when there simply did not exist enough "investment" money in our overall economy to finance business expansions.

 

[VanceMack]

I know what you said

Notice how I said the US would not be in recovery mode yet, you stated the US would be two to three years into one by now. Given that the crisis only hit hard about 3 years ago being in a recovery for 2-3 years by now would be difficult

I disagree...obvously. I think the banking crisis started to really cap in 2007. I dont think it would take decades or even YEARS to see significant recovery. Regardless...NOTHING is going to change until we allow the inevitable to happen. We either continue to support overinflated marketas to the point that people cant afford to buy (=stagnation and high unemployment) or we bite the bullet and rebuild. There isnt an option C. I think everyone thinks if we can just ride all this out everything will be OK. Hogwash. The BEST we can hope to do is maintain status quo.

I really believe this could have been handled with the passage of two bits of legislation...one, force banks to sit down with their customers and renegotiate home loans. Im thinking 50 year .5 to 1.5% interests fixed...something along those lines. Two, pass a law that says any bank that goes under then the homeloan is absorbed by the bank and its backers by default and the title goes to the buyer free and clear. And no more selling/trading/brikering loans. You make the loan you stand by your investment with the customer.

Thats a start. Still have to bring industry and labor together and bring back the jobs...

 

[NolaMan]

That would be true if banks were lending at similar rates to deposits. Too bad that isn't true in any way shape or form.

It does not have to be true...when banks are not lending in the private market they buy T-bills, and that puts the money back into the economy anyway through a different channel.

 

[obvious Child]

It does not have to be true...when banks are not lending in the private market they buy T-bills, and that puts the money back into the economy anyway through a different channel.

Not necessarily. Not all banks did that. Furthermore, many just sat on it or sent it to the Federal Reserve. Furthermore, the change in who's spending it does significent change its impact.

 

[phattonez]

phattonez, I am assuming that the point you are alluding to is that our economy is supply side driven. That jobs and incomes and products are created by companies expanding, and thus an increase in available capital would increase business expansion. I don't disagree with that, but it is very much a "which came first, the chicken or the egg" issue. I believe that consumerism creates demand which creates expansion, you seem to believe that expansion creates jobs which creates demand and consumerism. I get that difference in opinion.

What I don't get is you insisting that there is apparently some type of lack of available capital for busineses to use to expand. Can you point to any specific times in history in the past 100 years or so where it is documented that businesses wanted to expand but were not able to expand because there was not enough investment money available? Not cases where an individual company couldn't gather the capital (typically when that happens it is because the business can not prove that it merrits outside capital), but time periods when there simply did not exist enough "investment" money in our overall economy to finance business expansions.

People don't work for no return. If you want something but have nothing to give me, why would I make that thing? The chicken and egg problem is solved in that it all starts with production. No production, no goods, nothing to demand.

 

[Lord Tammerlain]

People don't work for no return. If you want something but have nothing to give me, why would I make that thing? The chicken and egg problem is solved in that it all starts with production. No production, no goods, nothing to demand.

Overall it does not matter which comes first, they have to exist in tandem otherwise the other is useless.

A product has to exist for demand for it to be fulfilled, and for a product to sell demand has to exist for it.


If I produce the worlds most effective mouse trap, but no one wants to buy it at the price I can produce it, that supply is useless, and demand for such a mouse trap is useless unless someone is producing it

And for demand to exist, th

 

[NolaMan]

Not necessarily. Not all banks did that. Furthermore, many just sat on it or sent it to the Federal Reserve.

Yea, but if a bank sends it to the Federal Reserve in order to meet its reserve requirements and has an excess, that is loaned out to other banks in "overnight" loans to get a return and help other banks meet their reserve requirements. Most of this money remains available within the system, and it is not really "removed" from the economy.

Furthermore, the change in who's spending it does significent change its impact.

I don't disagree, I would prefer to see it spent in the private sector, but I will not dispute that government spending will create a multiplier as well.

 

[imagep]

People don't work for no return. If you want something but have nothing to give me, why would I make that thing?

EXACTLY!!! Businesses are not going to make more stuff until people start spending money. Thats why production will not increase until spending increases. Consumer or government spending HAS to come first!

There is already plenty of cash available just waiting for businesses to use to expand with, but until demand increases, it just aint gonna happen. Just look at recent headlines:

Blue Cross raises rates while hoarding cash, new study says

The big question is whether companies will stop hoarding cash and start spending more to expand their operations and hire freely. They're likely to do that only after they feel confident that demand from their customers will justify the cost of new hires. Outside the financial sector, American companies had stockpiled more than $1.8 trillion in cash through the end of March, a 26 percent increase over the same period in 2009.

The Associated Press: Hope for economy in strong manufacturing reports

Seven out of 10 nonprofit Blue Cross Blue Shield plans held at least three times the amount regulators require them to maintain for minimal solvency, according to a report from Consumers Union. The independent group found that 10 plans collectively held $9.1 billion in surplus funds in 2009, or about $855 per member per year. That's up from $4.6 billion in 2001, or $395 per member per year.

Blue Cross raises rates while hoarding cash, new study says

Judging from corporate profits, we should be enjoying a powerful economic recovery. ... Government statistics through the first quarter (the latest available) show that profits have recovered 87 percent of what they lost in the recession. When second-quarter results are tabulated, profits may exceed their previous peak.

... They’re sitting on huge cash reserves: a record of $838 billion for industrial companies in the Standard & Poor’s 500 index (companies like Apple, Boeing and Caterpillar) at the end of March, up 26 percent from a year earlier. “They have the wherewithal to do whatever they want - hire; make new investments; raise dividends; do mergers and acquisitions,” says S&P’s Howard Silverblatt. Historically, higher profits lead to higher employment, says Mark Zandi of Moody’s Economy.com.

Bowling Green Daily News

...
Wells Fargo, the biggest U.S. mortgage lender, topped quarterly profit estimates on Wednesday - helped by a shrinking pool of bad debt. That means the San Francisco bank can earmark less money to cover loan losses. The company still faces challenges: Demand for business and consumer loans remains sluggish

The Week in Bay Area Business

Often, in the past, Canadian banks have been accused of failing to fill business demand for fresh loans. Now, the problem is said to be lack of demand from business, a reflection in large part of corporate anxiety over the global economy, especially the U.S. economy...
Instead of rushing to invest in anticipation of strong growth, Canadian businesses are hoarding cash, tapping financial markets to raise longer-term capital. But they are not hitting the banks. As TD Economics reported in a recent review of chartered bank assets, "Business credit is not yet showing clear pickup, as would fit with heightened business investment." TD economist Grant Bishop said "with businesses also stockpiling cash ... it is not clear that the surge in corporate profits has been been sued to finance new capital investment....The key to growth is business confidence...

Read more: Business is missing

Time to Get Off Your Cash?
Companies are content to sit on their cash hoards, but investors are losing patience. What's a CFO to do?
Vincent Ryan - CFO Magazine
July 15, 2010
before the global financial crisis struck in 2008, corporate coffers were bulging with cash, opening companies to criticism for not putting the money to work.

Time to Get Off Your Cash? - CFO Magazine - July/August 2010 Issue - CFO.com

 

[phattonez]

EXACTLY!!! Businesses are not going to make more stuff until people start spending money. Thats why production will not increase until spending increases. Consumer or government spending HAS to come first!

No, because you have to trade for something valuable. You can't just demand it and expect it to be made unless you make something that the other person desires (at least in a barter economy, in indirect change you just trade value).

There is already plenty of cash available just waiting for businesses to use to expand with, but until demand increases, it just aint gonna happen. Just look at recent headlines:

Blue Cross raises rates while hoarding cash, new study says

The Associated Press: Hope for economy in strong manufacturing reports

Blue Cross raises rates while hoarding cash, new study says

Bowling Green Daily News

The Week in Bay Area Business



Time to Get Off Your Cash? - CFO Magazine - July/August 2010 Issue - CFO.com

So why do you think that companies are "hoarding?" Uncertainty from the government maybe? You know, at some point people will stop saving because the utility they expect from a dollar saved will not be greater than the utility they expect from a dollar spent (what with diminishing marginal utility).

Besides, artificially raising demand kind of ignores the basic point of the economy which is to give people what they want. Imagine some ficticious state where everyone has what they want. Artificially raising demand would do absolutely nothing for that economy because people already have what they want. Utility would not rise in result. In fact it would shrink because the means to raise that demand has to come from somewhere.

 

[cpwill]

Create net wealth no, create economic activity yes

ye olde broken window fallacy, eh?

 

[Lord Tammerlain]

ye olde broken window fallacy, eh?

Fallacy?

Does it or does it not create economic activity? It certainly does create economic activity

The issue is that it does not create wealth

 

[Kushinator]

No, because you have to trade for something valuable. You can't just demand it and expect it to be made unless you make something that the other person desires (at least in a barter economy, in indirect change you just trade value).

What about subsistence living? If I'm living off the land and get hungry (demand determinant) do I go hunt, pick food, or begin a garden (supply determinant) first? Demand is the initial action.

So why do you think that companies are "hoarding?" Uncertainty from the government maybe?

Nope. The demand for cash is infinitely elastic when short term interest rates approaches the zero bound. The only uncertainty can come in the form of taxes, inflation, conflicts etc..., yet expectation models can provide significant insight into sector orientated future sentiment.

You know, at some point people will stop saving because the utility they expect from a dollar saved will not be greater than the utility they expect from a dollar spent (what with diminishing marginal utility).

Firms and consumers are not saving as a means of achieving utility maximization; they are saving due to market uncertainty.

Besides, artificially raising demand kind of ignores the basic point of the economy which is to give people what they want. Imagine some ficticious state where everyone has what they want.

Then you have eliminated the point of using economic analysis.

Artificially raising demand would do absolutely nothing for that economy because people already have what they want. Utility would not rise in result. In fact it would shrink because the means to raise that demand has to come from somewhere.

See above.

 

[NolaMan]

Fallacy?

Does it or does it not create economic activity? It certainly does create economic activity

The issue is that it does not create wealth

It does create economic activity, but it also kills an equal amount of economic activity somewhere else.

 

[Lord Tammerlain]

It does create economic activity, but it also kills an equal amount of economic activity somewhere else.

It does not kill it, it may transfer it from one place and put it into another. It truely depends on how much leverage the banks have and if they have the room to loans above what private enterprise demands. If so, no economic activity was "killed"

 

[NolaMan]

It does not kill it, it may transfer it from one place and put it into another. It truely depends on how much leverage the banks have and if they have the room to loans above what private enterprise demands. If so, no economic activity was "killed"

"Kill" is perhaps the wrong word.. you are right. But in transferring it to somewhere else, it takes away a similiar amount of economic activity (perhaps not yet realized) from those from which it was transferred.

I can agree that if private enterprise in one area has a low demand, it can be transferred to another area through the system that banks loan money to each other etc and will have a positive effect. But I do not think that is really what we are seeing now...in my opinion.

 

[Lord Tammerlain]

"Kill" is perhaps the wrong word.. you are right. But in transferring it to somewhere else, it takes away a similiar amount of economic activity (perhaps not yet realized) from those from which it was transferred.

I can agree that if private enterprise in one area has a low demand, it can be transferred to another area through the system that banks loan money to each other etc and will have a positive effect. But I do not think that is really what we are seeing now...in my opinion.

You feel that private enterprise/consumers have high demand at the moment?

That despite large amount of foreclosures, near bankrupcties of the banks (only kept alive by fed and accounting tricks, auto sales that have dropped from 15 million to less then 10 million, a minimum 8 months of housing supply ignoring the shadow inventory of foreclosed on homes that have not been put on the market, along with massive unemployment that private demand would be strong. Strong enough that the government borrowing from banks and such (which can only occur because the fed has taken on the bad assets of the banks) is preventing loans from being issued to nearly bankrupt individuals, and other enterprises

 

[phattonez]

You feel that private enterprise/consumers have high demand at the moment?

That despite large amount of foreclosures, near bankrupcties of the banks (only kept alive by fed and accounting tricks, auto sales that have dropped from 15 million to less then 10 million, a minimum 8 months of housing supply ignoring the shadow inventory of foreclosed on homes that have not been put on the market, along with massive unemployment that private demand would be strong. Strong enough that the government borrowing from banks and such (which can only occur because the fed has taken on the bad assets of the banks) is preventing loans from being issued to nearly bankrupt individuals, and other enterprises

So where are you going to steal economic activity in order to feed these failing enterprises and why is it worth taking money away from those that are doing well?

 

[phattonez]

What about subsistence living? If I'm living off the land and get hungry (demand determinant) do I go hunt, pick food, or begin a garden (supply determinant) first? Demand is the initial action.

Your demand means nothing, though, if there is nothing to demand.

Nope. The demand for cash is infinitely elastic when short term interest rates approaches the zero bound. The only uncertainty can come in the form of taxes, inflation, conflicts etc..., yet expectation models can provide significant insight into sector orientated future sentiment.

How can you just say no? Companies cannot even predict what it is going to cost to hire a worker with threats of new tax hikes, significant new regulations in the financial industry, etc. That is a MAJOR problem and is a significant factor in why employment is so low.

Firms and consumers are not saving as a means of achieving utility maximization; they are saving due to market uncertainty.

And why does the market still have this uncertainty? Why is there still so much risk? You don't think that because people don't know how government is going to interfere next is causing higher uncertainty than we would have if the market was left alone?

Then you have eliminated the point of using economic analysis.

No, in fact I've questioned what I perceive to be your goals of an economy which is slight growth, full employment, and subsistence for all. What I'm aiming for is the fulfillment of desires, which is the real point of an economy. We want people to be able to get what they want. When you artificially raise demand, then you ignore that basic point of an economy. I know it sounds preachy, but people are saving because they want to save, they want the security. We all know that they are not going to save forever. Deflationary spiral is a load.

 

[imagep]

Overall it does not matter which comes first, they have to exist in tandem otherwise the other is useless.

A product has to exist for demand for it to be fulfilled, and for a product to sell demand has to exist for it.


If I produce the worlds most effective mouse trap, but no one wants to buy it at the price I can produce it, that supply is useless, and demand for such a mouse trap is useless unless someone is producing it

And for demand to exist, th

I think what both of you guys are missing is that products will not be produced for long if there is not enough demand to support the production level. If demand drops, so will production. But demand can definately exist despite there being a limited supply of products. Many industries (like mine) don't produce anything until something is ordered in advance. My products are custom made to meet the individual consumers needs. I only produce when I have orders, and if I have no orders, I stop producing. It pretty much works the same way even with factories that mass produce generic items. Their production will reduce shortly after demand is reduced, and their production will increase shortly after demand is increased (there is a small buffer of existing inventory which explains the sort delay in response).

Think about a fast food place, are they going to keep making hamburgers between 2pm and 5pm at the same rate that they make from 11am-2pm and 5pm-7pm? Of course not, their production level matches their demand level. What about a massage parlor, do they give massages when they have no customers to massage? What about a roofing company - do they repair roofs when there is no one needing their roof repaired?

There can also be demand for products that are not in production for one reason or another. Don't you think that there is demand for anti-aging pills? Of course there is, but it goes unfulfiled because there are no legititmate anti-aging pills. There was certainly demand for viagra long before viagra was ever produced - if there was not a measurable demand for viagra, viagra would have never been marketed.

I think that phat's point is that unless people are working they have nothing to exchange for goods and thus they have to be working (and thus producing) before there is a demand for goods, sure there is some logic to that, but the REALITY is that there is no incentive for the company to produce (and hire people) until AFTER demand has been demonstrated. However it may not be true that people who don't produce have nothing to exchange for products, certainly there are lots of people (anyone with savings, people on unemployment or other entitlements) who don't work or produce who have money to use in exchange for goods.

Businesses absolutely WILL NOT produce without consumer demand, however consumers can definately have demand without businesses producing. Thus production follows demand. Demand HAS to increase before businesses expand.

 

[imagep]

...How can you just say no? Companies cannot even predict what it is going to cost to hire a worker with threats of new tax hikes, significant new regulations in the financial industry, etc. That is a MAJOR problem and is a significant factor in why employment is so low. And why does the market still have this uncertainty? Why is there still so much risk? You don't think that because people don't know how government is going to interfere next is causing higher uncertainty than we would have if the market was left alone?

To a certain extent I agree, but I think that the problem is much more due to uncertainty on the part of individuals - which has created a lack of demand. Individuals are not confident that they are going to get a raise, they are not confident that they will be paid for a full weeks work next week, they are not confident that they will even be able to keep their job. Thus they are spending less. It is entirely possible that individuals percieve that the government has failed at it's intervention, and that until a clear signal is sent from our government that our government will actually do something sensible to improve the economy, individual uncertainty will continue to harm our economy.

Doesn't look like there is going to be much government intervention, I am just hoping that a power shift in the next election will improve both business and individual economic confidence levels.

 

[phattonez]

People are producing but people are spending less. So I'm wondering what is being done with the goods that are produced. I mean, is anyone seriously going to tell me that the increase in saving is doing nothing for the economy?

 

[imagep]

People are producing but people are spending less. So I'm wondering what is being done with the goods that are produced. I mean, is anyone seriously going to tell me that the increase in saving is doing nothing for the economy?

I for one will tell you that. I don't know that excess goods are being produced, I have to assume that the high unemployment rate is an indicator that fewer goods and services are being produced.

People are producing less, and making less, and spending less. The production level at my business has decreased because demand has decreased, that has forced me to reduce my staff, which in turn now provides less in income to myself and the work force, so we all spend even less. I have paid down my debt (a little), but I don't know that the money that I have returned to the banks has be lent back out to anyone, they probably either still have the cash or they used the cash to cover losses on defaults.

That's what scares me about this economy. There is nothing to stop a spiral downward. Unless something changes, like someone letting loose of a lot more money in the form of spending, there may be no way to climb up once we hit bottom. Maybe we have already hit bottom, but from recent economic reports I am not at all sure about that. Bottom could be having an economy like in the stone age for all I know.

 

[Lord Tammerlain]

People are producing but people are spending less. So I'm wondering what is being done with the goods that are produced. I mean, is anyone seriously going to tell me that the increase in saving is doing nothing for the economy?

Depends on what is being done with the savings. If it just being kept in a bank to ensure the bank has the required capital reserves (due to loss's on loans) it will not stimulate the economy. It might keep the amount of lending from dropping even more (ie loans called back)

 

[Lord Tammerlain]

So where are you going to steal economic activity in order to feed these failing enterprises and why is it worth taking money away from those that are doing well?

You are only stealing economic activity if said economic activity would take place