Tuesday, November 6, 2012

The Great Recession for Dummies

I would never imply that you great readers are somehow morons.  It's just that I'm tired of longwinded explanations of what happened these last four years, as if it's really complicated with a lot of different causes.  Probably, but why get caught on the details when you don't even know the big picture? 

Post Great Depression, this recession was truly amazing.  You can't fault the economists for not seeing it coming.  All those recessions and not a single time household debt creation went below 0%.  Yet 2008 refused to play nice with mean reversion and showed a different side to American households and consumers: the first and only refusal to take on debt.  Four years later, we are dead-cat bouncing our way back to 0%. 

The smart ones out there are already piecing together the answer to why our recovery sucks.  How did we deal with every other recession on that chart?  We lowered short term interest rates (Fed Funds rate)

Every other time, this worked almost in an almost Pavlovian fashion.  We get into a recession, the Fed lowers rates.  This incentivizes people to load up on more debt.  This debt is used to finance the next leg of economic growth.  However, this time, American consumers and households either no longer wanted to or no longer could take on any more debt, regardless of how low interest rates got.  Some prominent economists, most notably Richard Koo pointed this out and called it a balance sheet recession, which says our economy is fucked because the consumer's balance sheet is fucked from taking on all this debt and the severeness of the downturn, which inhibits their ability now to take on more debt.  Thus, it doesn't matter when rates get lower because if you are in deep enough debt, it doesn't even matter if rates are 0%.  All you are concerned with is paying off the debt you already owe. 

The takeaway is this: America likes to get out of recessions by lowering rates.  However, this is not working this time because people don't want to borrow any more regardless of how low rates get.  

So right away, the Fed is only marginally useful since the only thing it can do is lower/raise rates.  This was painfully obvious when they lowered fed funds rate to 0 in 09 yet the economy kept sucking.  So they had a team huddle and said well we already lowered short term rates, the only thing left to do is lower long term rates.  So Quantitative Easing was born.  They didn't mean to print money, they didn't even mean to devalue the dollar.  All they were trying to do was lower interest rates.  Why?  Because they can't do anything else.  You live by shifting rates, you die by it.  Somehow, Bernanke's awkward ass made it sound like the Fed is monetizing the debt and all hell broke loose.  He got spanked in Congress while driving around looking at bumper sticks saying "Stop Zimbabwe Ben."  The whole time he has the look on his face like what the fuck did I do? 

So monetary policy is out.  The only thing left is fiscal policy.  See Timothy Geithner is smart (unless it's tax time) so he keeps his mouth shut.  He never says when we run a deficit, we are printing money, but that's what happening.  Somehow Bernanke got blamed for it.  Tim recognizes the current flaccid nature of the Fed and has quietly taken up slack by running the biggest deficits known to mankind.  (Japan does not count as they are not human.  I have seen their pornography.)  These huge deficits are singlehandedly saving us from Japan 2.0, which I can't even begin to describe what the fuck is going on over there--literally the worst of both worlds.  Meanwhile, we have all these idiots begging to balance the budgets and for all the wrong reasons. 

Here's the thing: when we run deficits, all we are doing is pumping more money into the economy than we are taking out, either through lower taxes or bigger transfer payments, better known as government cheese and subsidies.  This saves us by paying off all that debt on all these household's balance sheets.  It's really just accounting.  No wonder economists suck at this.  There's no theory here.  It's just printing money and putting it in the correct column. 

So here's where I get crazy.  Everyone is for economic prosperity yet half of this population also wants a balanced budget because they mistakenly believe that will get us there.  No.  A balanced budget will bring us to negative GDP growth no questions asked.  YET I still believe in a balanced budget.  Why?  Because it is exactly this incessant search for short term prosperity that is fucking us up the ass.  2008 would not have been so severe if the powers that be did not train the people to load up on more debt every time rates got lowered.  It was the straw that broke the camel's back.  That's why it was so severe.  You don't think America ever had bubbles before?  Or banking failures before?  Or deflation before? 

Remaining on this path of large government deficits will ensure positive real GDP growth, or at least way better than if we did not have the deficit, but it is dangerous.  We are incentivizing an entire generation of Americans to not be self-sufficient.  Why work hard when the government will pick up the slack?  It's a frightening mindset and I'm not sure what it will entail.  When half the population lives on the government's dime, how does the other half react?  Does this not incentivize them to forget about productivity and focus on getting a slice of cheese?  Is there a tipping point? 

Fuck this, give me my depression.  We need to be purged.

TL;DR: Our economy sucks because we are in uncharted waters after 08.  We usually recover from recessions by lowering rates.  It didn't work this time as already debt-burdened households refused to take on more debt regardless of 0% interest rates.  Only thing helping us muddle through is our huge deficit, as by definition, it is paying off the debt on consumer's balance sheets.  If we remain down this road, we will ensure at least muddle through positive GDP growth, but its long term effects are dangerous as it incentivizes the people to depend on the government rather than working hard and being productive.