Thursday, January 15, 2009

A Very Smart (and very scary) Post on What's to Come

From Decline and Fall of Western Civilization (gotta love that blog title) comes the best commentary I saw today. Which is to be expected as he links to some of our favorites, wraps it up in a neat little package and drops it off, like a flaming turd on the doorstep.
I'll get you started with the first few paragraphs but the whole thing is worth your time:

how stimulus might lead to trade war
martin wolf's latest piece in the ft has touched off some very thoughtful commentary which, to complete the circle, is summed up at ft alphaville.

starting out with the mathematics of stimulus:

Last week, President-elect Barack Obama duly unveiled his American recovery and reinvestment plan. Its title was aptly chosen, for Mr Obama spoke, astonishingly, as if the policies of the rest of the world had no bearing on the fate of the US. He spoke, too, as if a large fiscal stimulus would be enough to restore prosperity. If that is what he believes, Mr Obama is in for a shock. The difficulties he confronts are much deeper and more global than that. ...

First, the Japanese policymakers who told everyone the US was in danger of falling into a prolonged period of economic weakness were right. ...

Any complacency about US recovery prospects is perilous. Moreover, the fact that the US has a structural current account deficit has bearing on the second point Mr Obama’s advisers must make. Fiscal stimulus is a necessary palliative for a debt-encumbered economy afflicted by falling asset prices. But the likely longevity and scale of the needed fiscal deficits are quite scary. ...

indeed, yves smith does the sums and finds

So if I have this right, "needed" stimulus is the 10% (full employment" deficit + 7%, or 17% in each of the next two years. What Obama is delivering is 5% over two years, or 2.5% a year, plus a baseline of 8.3%, for a total of 10.7%.

So to get where we need to get (if you buy the logic of this sort of exercise) is an additional 6.3% PER ANNUM deficit as a % of GDP. Remember, Obama's plan is roughly 2.5% per year. 6.3/2.5= 2.5 times.

Read that again, If you believe the math, Obama's program would need to be 2.5 times bigger to live up to its billing. And that is before you get into details like "tax cuts are likely to be less effective than other measures".

which is what wolf means when he says

As long as the private sector seeks to reduce its debt and the current account is in structural deficit, the US must run big fiscal deficits if it is to sustain full employment. That leads to the third point Mr Obama’s advisers must make. This is that running huge fiscal deficits for years is indeed possible. But the US could get away with this only if default were out of the question. ...

[Therefore] It is necessary to make structural changes in the US and world economies first. This is the last point Mr Obama’s advisers must make.

those changes -- which smith labels "sobering" -- are, first, a credible programme for what Americans call “deleveraging”, involving banking system nationalization and forced debt-to-equity swaps as well as the punishment of holders of all manner of securitized receivables; and second, a reduction in the structural current account deficit ostensibly through a reduction in consumption and the encouragement of exports...MORE