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Great Crash to Rival ’29?
The good news, as Allister Heath puts it, is it’s not yet clear whether this is the beginning of a major recession. It could just be a major correction, right? (This debate has the feeling you have when you live in an earthquake-prone area and the ground rumbles. Was that a foreshock? Maybe the earth just relieved a little excess pressure and now it’ll be okay?)
The bad news is that I think he’s right about what would happen if there were another financial crash. I think it would sink capitalism for good and probably liberal democracy with it:
We are too fragile, fiscally as well as psychologically. Our economies, cultures and polities are still paying a heavy price for the Great Recession; another collapse, especially were it to be accompanied by a fresh banking bailout by the taxpayer, would trigger a cataclysmic, uncontrollable backlash.
The public, whose faith in elites and the private sector was rattled after 2007-09, would simply not wear it. Its anger would be so explosive, so-all encompassing that it would threaten the very survival of free trade, of globalisation and of the market-based economy. There would be calls for wage and price controls, punitive, ultra-progressive taxes, a war on the City and arbitrary jail sentences.
For fear of allowing extremist or populist parties through the door, mainstream politicians would end up adopting much of this agenda, with devastating implications for our long-term prosperity. Central banks, in desperation, would embrace the purest form of money-printing: they would start giving consumers actual cash to spend, temporarily turbo-charging demand while destroying any remaining respect for the idea that money needs to be earned.
History never repeats itself exactly, but the last time a recession was met by pure, unadulterated populism was in the Thirties, when the Americans turned a stock market crash and a series of monetary policy blunders into a depression. …
You can read the whole grim thing, which unfortunately I think is exactly right, and tell me whether you agree with his conclusion:
The sorry truth is that there is very little that governments can do at this stage, apart from battening down the hatches and hoping that central banks succeed in kicking our problems even further down the road.
Can you think of a better idea?
And what’s your theory about why the markets are doing this? Everyone has one, but there’s so little way of testing any of them that I’m thinking “animal spirits” is about as good an explanation as any. In other words, The Stock Market Wotan is Angry.
Published in General
Regarding the discussion if we are in another bubble. Arguably there was an over allocation of capital to upstream energy production.
From a broader macro perspective let me ask the other participants: Was the level of bank debt relative to GDP excessive, high, or a bubble in 2008?
My reason for asking is your opinion of the following:
GDP since its 2008 peak has risen 22.15%
Bank Credit has risen 23.3%.
If we considered our situation precarious in 2008 why do we not consider it so now?
Your thoughts?
Clair: “And what’s your theory about why the markets are doing this? Everyone has one, but there’s so little way of testing any of them that I’m thinking “animal spirits” is about as good an explanation as any. In other words, The Stock Market Wotan is Angry.”
When we abandoned the Creator God of Western Judeo-Christianity, we invited Wotan to be our god. This is the cost.
Deuteronomy 30:19: “Today I have given you the choice between life and death, between blessings and curses. Now I call on heaven and earth to witness the choice you make. Oh, that you would choose life, so that you and your descendants might live!“
God even answered this for us.
Columbo:
I agree. This is consistent with the Republican’s taking control of the House in 2010 where the power of the purse resides.
Really? How? Given the condition of the financial markets and the results of the NH primary how could it be worse?
Respectfully, you can’t be serious. Governments can and do always make it worse.
Agree.
There is a disconnect here. Some point out the public’s distinct lack of trust in institutions, but then we are told that we will turn to our institutions if and when we have a crash. I am beginning to believe that we conservatives and libertarians are not seeing our own strength and popularity. Except for the millenials every other demographic group has no trust in the government, it hardly seems likely that we will turn to it.
Son of Spengler:
And I return the compliment by acknowledging the truth of your observation regarding the current potential “government debt bubble”. Well said.
And, I must point out, who is lurking behind this possible “bubble”. The exact same socialists who created (yes, with the help of some “select friends of Bill” on Wall Street) the 2008 real estate bubble by forcing banks to make ludicrous loans in order to force their brand of social engineering into the economy. George W. Bush and a Congressional Committee led by Rep. Richard Baker tried to address this in 2004 with the … Fannie Mae/Freddie Mac Hearings 2004 … but they were rebuffed by Barney.
Prick the 2008 bubble, and you reveal Barney Frank. If there is a current bubble to burst, the one who blew it into existence was Barack Hussein Obama.
You mean, “let the market be a market”: what a concept.
Can’t be allowed. Allowing the market be a market does not allow powerful interested parties to game the system in their favor.
What we need is massive deregulation across the entire economy.
But there’s no mood for that among the general public, or within the governing class.
In short, we’re screwed.
It could have been worse if Obama and the EPA had gotten a strangle hold on fracking on private land they would like, or if they’d managed to regulate the internet and technology that makes it possible as they do everything else. Elect a Democrat and that regulation won’t be far behind. What we are seeing isn’t a bubble as some suggest, it’s stagnation and weak credit demand masked by Fed purchases.
I thought Ms. Noonan wrote a weekly column?
In the 15 minutes I spent reading and reflecting upon the comments to your post I have gained more insight on soci0-economic matters than I could gain in 52 Peggy Noonan columns.
You would have to agree the quality of the writing, and the economic analysis in these comments far exceeds anything Ms. Noonan could ever hope to write.
One further comment, I thought there was an unwritten rule at Ricochet to avoid references to Ms. Noonan after her support for Obama.
What we have seen in the economy and word affairs in the last 7 years was entirely foreseeable, unless you are Ms. Noonan.
Excellent questions Claire and great responses by many.
Our method of analyzing economic metrics has become topsy turvy. CBO allows garbage in-garbage out numbers to be used for political means. Prognosticators are self serving: Shorts are usually always bearish while Bulls pour more gasoline on the Fed induced bonfire.
Meanwhile the disconnect is growing. The market behavior vacillates hourly between blinkered/insular myopic moves to panic driven hysterics. At this moment the Nikkei is down almost 800 but because oil has momentarily popped the Dow is up over 200.
Yet the unsophisticated public are lead by shiny objects like Mexican financed border walls or pitchforks and torches being handed out at the corner of Wall Street and Broad. Even worse, most don’t care. We’re too busy fattening ourselves on TMZ and freedom fries.
To answer your first point about another crisis resulting in the end of capitalism, I fear the biggest threat to capitalism is ourselves. The fact Bernie has the youth is terrifying. We, as Conservatives, can no longer assume they will grow out of it. Our schools have indoctrinated generations and they are now becoming policy makers in local and national office. When the next recession hits their centralized FDR response will be warmly welcomed.
I surely would, but you didn’t ask me how to join Ricochet, you asked me how to get a column at the WSJ. Now, to join Ricochet …
Why should they care? There is absolutely nothing they can do about it and they know it. They have to worry about how to keep their jobs and feed their family. The economy and the markets are for the rich, something they know they will never ever be.
If worry and fear are the conventional wisdom (and I’ve been hearing it enough to believe that it is), then that is a good reason to believe it is wrong.
Economic policy makers of all political stripes despise recession. They use every tool at their disposal to eliminate it at the first whiff of its emergence.
Likewise, forestry experts despised fire. For decades they landed on every errant spark with both feet. Only recently have they realized that fire is a necessary part of the lifecycle of a healthy forest. It clears away choking undergrowth and brings down diseased trees making room for new growth. The heat actually causes seeds to germinate. Lots of the effort spent fighting small fires only resulted in setting the conditions for a conflagration.
That is where we are in economics today. All the effort spent over the past decades fighting recessions has left global economies choked with the undergrowth of excessive regulation and permeated with diseased firms that should have been allowed to topple long before.
Why are there so few start-ups – the chief job creators in a recovery period? There is precious little room for them.
The conflagration is now almost inevitable.
So did FDR. I mean, that is why we got the New Deal.
That was funny and well-played. I am reaching for my credit card to change my membership status . . .
This is the best summary of my intuition on the economy that I’ve ever seen.
Note that this didn’t start with Obama, nor even is it the exclusive fault of Democrats in general. There are plenty of nominal Republicans who believe in an active role for the government in “managing” the economy, who differ from Democrats only in priorities and tactics, where they differ at all.
I sent the Telegraph article, along with Claire’s comments, to my old man who knows a thing or two about economics. I got back the following response which I think is worth printing in full:
That was more of a political scare article than an economic or financial article.
The market is reacting, over-reacting really, to falling oil prices, China and the continuing slow motion crack-up in Europe.
I suspect the desire of people like those at the Telegraph to influence the up-coming Euro vote in England is the motivation of the Telegraph.
The US does not export to China in any significant fashion. The downturn in China means their growth rate has dropped from 10% to 6%. On a more basic plane they are running into the problem of running a controlled economy. That is a good thing.
This might lead to the fall of Communism there. Trump addresses imports from China and rails against our trade deals. Even if he were elected, he would never get punitive measures that would harm the US economy through Congress. Nor would a President Sanders (he will not be the candidate, by the way).
The other thing bugging the markets is oil. A little long term perspective is helpful here, also some common sense.
[cont’d]
I keep seeing headline like, “Dow down on strong jobs numbers” or “Yellen sees weakness in economy, markets surge.” It seems that rather than investing in companies, people are betting on what the Fed will do.
First, oil prices have risen and declined hugely in the past. Indeed mineral markets all are subject to wild price fluctuations. The production and market price curves do not overlap because of the long lead time required to bring on new supply in response to rising prices. The lead time to bring on new production is pretty long and requires large amounts of capital. So when prices are rising its easy to get money to drill new wells. But it takes time to drill the wells, lay the pipe to get it to markets and so forth. Its not like making more cars in plants that already exist.
But unfortunately, by the time some of the production gets to market, there has developed an oversupply. Prices start to fall, but the new boys go ahead and dump their oil on the market. What else can they do? They aren’t going to shut in a brand new well and so inform their investors. So the glut continues to grow and prices keep going down as the market adjusts. Some of the small and over leveraged boys will lose their shirts. And some of the lenders to them will suffer losses. But the oil remains available and is valuable. People with spare cash (often the major oil companies) will buy up the distressed oil at low prices. They will be in a good position to make lots of money when oil prices inevitably start to rise.
[Cont’d]
The oil business is about 2% of our economy. Oil is a raw product used to make zillions of things and to fuel transportation. How is it a bad thing for an economy to experience low prices for a basic raw product? Consumers on average saved @ $600 a year last year from lower pump prices. Electric rates fell for individuals and businesses because petroleum is the largest fuel used to generate electricity. All plastics and fertilizers are becoming cheaper. And the list goes on.
We may head into a small recession this year, but don’t listen to the “open the wrists it’s all over crowd”.
Don’t take economic advice from Claire Berlinski and the Telegraph.
That is all that is driving the markets.
Assuming you are voicing their perspective, and not what truly is. People of all ages and socioeconomic status would do themselves well to learn that America’s movement (economic mobility) between classes are still the most versatile in the world, (tip of the hat to entrepreneurship). The numbers of people who will at at least one time in their lives enter the ‘upper class’ is unparalleled elsewhere.
Wonderful sound bite, does not really reflect reality for most. Even less so now that many of our middle class jobs have left the country. You sure your most versatile economy still exists? Maybe it did once put the people are sure you are wrong about its existence now.
Anecdotally, I’m sure the people feel you are right. I’m not saying there are not significant challenges to the American economy. I’ve been banging the drum louder than most complaining about the economic steering by Keynesians.
However, my point is that we no longer teach our kids their ability to prosper and move between classes based on their efforts and ingenuity. We are capitulating to the nattering nabobs of negativism. Are times tough? Of course. Does that mean people no longer have a shot at improving their lives? Of course not.
Imagine if we taught kids (and reminded ourselves) how to navigate through challenge instead of blaming bogeymen. How many of those kids would turn into another Mark Cuban or Bill Gates?
If us Conservatives also buy into the Sanders/Clinton scapegoating against capitalism, all is lost.
Here are some facts which shows the bad news about economic mobility are wrong.
http://www.heritage.org/research/reports/2013/07/a-guide-to-understanding-international-comparisons-of-economic-mobility
https://reason.com/blog/2015/12/10/the-middle-class-is-shrinking-because-th
http://www.nationalreview.com/corner/420794/economic-mobility-united-states-compared-europe-scandinavia
To the extent that it is not true, it is owing not to free trade but to the enormous shackles placed on American productivity and ingenuity by the overwhelming administrative state. And that’s a message that needs to be made clear to those who no longer feel any hope that they can better their lives.
Sounds a lot like “animal spirits”……
In all honesty though, we are dealing with the same junk regulatory scheme that existed since 1930. Many laws and taxes created back then still hamper the market. Even worse is that even more regulations and taxes have been created since then. The number of distortions from the Federal Reserve to the minimum wage exist and many of them are redundant in their effects on the market.
The sheer amount of inflation from the federal reserve alone has distorted the market in infinite ways. Providing an obscene amount (inflation from 1913 to now is around 2000%) of cash for demand and expanding industries to where they had no need to be and thus sucking up other related sectors and then those sectors crashing when the limits of our consumption occurred.
The Left’s accursed trickle down economics and their media lackeys have done well in crashing the system and then writing the narrative of how happened. Instead of the truth of market signals being faked by government interventionist policies we hear about greed and have to watch propaganda films like Wolf of Wall Street and the Big Short.
My only solace is knowing that the free market is the natural setting of our humanity. Our moral agency cannot be unmade.
There’s a huge difference between free trade (discouraged by Smoot-Hawley) and fair trade. Trump is only advocating that China’s freedom to manipulate its currency be revoked.