Do you agree that we are now a credit/service based economy

[Sexxxy Sites]

as opposed to an agricultural based, industrial based, technological based economy? Do you think that a credit/service based economy can survive?

[ADL Colin]

Services are the largest part of the US economy but still not 50%. Services made up 42% of 2008 GDP.

Services 42%
Non Durable goods 21%
Government Spending 20%
Private Investment 14%
Durable Goods 7%

That's a little more than 100% but then there is a negative for change in inventories and net exports.

I'd say that is a balanced economy. Not sure what you do better to optimize if anything.

[ADL Colin]

A few categories over 20 years

1987
Manufacturing 27%
Government 12%
Professional and Business Services 7%
Agriculture 2%

2007
Manufacturing 20%
Government 11%
Professional and Business Services 11%
Agriculture 1%

[Sexxxy Sites]

Prior to the turn of the 20th century our economy was an agricultural based economy and we fared well. During much of the 20th century we were an industrial based economy and fared well. We then became a technological based economy and fared well. Now it seems that our economy is based upon credit and services and we are not faring well. Can a credit based and service based economy survive?

[kane]

Originally Posted by ADL Colin

A few categories over 20 years

1987
Manufacturing 27%
Government 12%
Professional and Business Services 7%
Agriculture 2%

2007
Manufacturing 20%
Government 11%
Professional and Business Services 11%
Agriculture 1%

I have to admit I am a little surprised at how low agriculture is. It takes a lot of food to feed this country. You would think it would take a pretty big industry to grow/raise that food. Unless, of course, we are importing most of it.

[ADL Colin]

Originally Posted by Sexxxy Sites

Prior to the turn of the 20th century our economy was an agricultural based economy and we fared well. During much of the 20th century we were an industrial based economy and fared well. We then became a technological based economy and fared well. Now it seems that our economy is based upon credit and services and we are not faring well. Can a credit based and service based economy survive?

The worse recession in US history was probably 1873-79. That lasted over 5 years and ended the gilded age. 1907, 1920, 1929,1974, 1982. These were all nasty recessions. 1873 and 1929 were grand daddies. I wouldn't say they "fared well". The infamous 1907 panic that was solved by JP Morgan and led eventually to the FED. In 1920 there was a massive deflation. Somewhere around 20% in a year. 1974 and 1982 came with super nasty inflationary effects.

There were 12 recessions from 1854-1900. One every 3.8 years and they were deeper and longer than the ones in the 20th century on average. Then in the first half of the 20th century there were 12 recessions. One ever 4.2 years. In the second half of the 20th century there were 8 recessions, One every 6.2 years.

US Recessions have been further apart and weaker in time.

There have always been boom and bust cycles. You had the railroads, airlines, autos, various land speculation boom and busts. The list goes on.

As far as agriculture the last 20 years of the 19th century were murderous on farmers. As a result of technology and transportation "improvements" there was a deflation that put most farmers out of business. not to mention periodic droughts and land busts/booms with hot eastern money moving out to buy land on either side of the new railroad lines.

Just for fun. Let's go way back. How about the boom and bust in ancient rome when a large number of withdrawals under Tiberius caused a number of banks to be closed? There was a money shortage and deflation. Tiberius solved this by ruling that banks had to lend money at 0% interest. Inflation .

Problems, problems. Always problems. "You shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold."

[DaddyHalbucks]

I disagree. I think we are a union/ special interest/ welfare society. The performance of our economy backs me up.

[DaddyHalbucks]

If the US ever wants to regain its economic strength, it needs to end welfare, and expand manufacturing. Right now, it is doing the exact opposite.

[ADL Colin]

Originally Posted by kane

I have to admit I am a little surprised at how low agriculture is. It takes a lot of food to feed this country. You would think it would take a pretty big industry to grow/raise that food. Unless, of course, we are importing most of it.

Your intuition is correct. I think it's a matter of definition.

Food expenses make up 9.7% of GDP.

Yet Agriculture makes up 1.4% of gross output by industry.
Food and beverage and tobacco products make up 2.7% of gross out put by industry.
Not sure but I bet the difference is in price to retail. Like maybe restaurant sales are in another category.

So it must be that various parts of the "food chain" total to 9.7% but that the agriculture part - defined as farms, forestry, fishing and "related" is just 1.4%

[ADL Colin]

Originally Posted by DaddyHalbucks

The performance of our economy backs me up.

Compared to whom? The entire G7 is in a recession. Japan much worse than the US so far. We boom, we bust. They come, they go.

[ADL Colin]

Originally Posted by DaddyHalbucks

If the US ever wants to regain its economic strength, it needs to end welfare, and expand manufacturing. Right now, it is doing the exact opposite.

No because of "Comparative advantage".

For the most part China is in the Industrial age because they have a cheap workforce.
They do "cheap labor" well. The US and most of the western world are in the information age. We build computers and software and more advanced tech like airplanes and f-22 raptors.

[Sexxxy Sites]

I recognize the ups and downs, but in the long run our economy continued to grow until it became the worlds largest, which is what I meant by fared well. We are still the worlds largest economy. If you agree that we are now a credit based and service based economy my question still goes unanswered. Can a credit based and service based economy survive? To add another question if it can survive can a credit based and service based economy remain as the worlds largest economy?

[kane]

Originally Posted by ADL Colin

Your intuition is correct. I think it's a matter of definition.

Food expenses make up 9.7% of GDP.

Yet Agriculture makes up 1.4% of gross output by industry.
Food and beverage and tobacco products make up 2.7% of gross out put by industry.
Not sure but I bet the difference is in price to retail. Like maybe restaurant sales are in another category.

So it must be that various parts of the "food chain" total to 9.7% but that the agriculture part - defined as farms, forestry, fishing and "related" is just 1.4%

That would make sense. If they break up sales to restaurants and things like that you could easily see how it could appear smaller than it might actually be.

I wonder what percentage of the food grown/manufactured in this country is controlled by just a few large companies. I got to thinking about this with the recent peanut scare. It seems like the company that has had those health problems processed and made peanut based products for a ton of industries. The other day I was at my store and about 20% of the cookie isle had recall notices on it. I wonder how much of that market they control.

[ADL Colin]

Originally Posted by kane

That would make sense. If they break up sales to restaurants and things like that you could easily see how it could appear smaller than it might actually be.

As I was driving home today I also thought of Coca Cola, Pepsi, Kraft, Kellog's and so on which are probably all in the "food and beverage" but not under Ag. Even Samuel Adams. But no longer BUD.

[ADL Colin]

Originally Posted by Sexxxy Sites

I recognize the ups and downs, but in the long run our economy continued to grow until it became the worlds largest, which is what I meant by fared well. We are still the worlds largest economy. If you agree that we are now a credit based and service based economy my question still goes unanswered. Can a credit based and service based economy survive? To add another question if it can survive can a credit based and service based economy remain as the worlds largest economy?

From my point of view I was answering your question. Our economy looks roughly like this:

Services 42%
Non Durable goods 21%
Government Spending 20%
Private Investment 14%
Durable Goods 7%

I dunno if calling it "service based economy" or not leads to any additional understanding.
based on the fact that roughly 42% of the economy is services does that make it "service based" when 58% of the economy is NOT services. If I had to label it i'd call it a diversified economy.

yeah I do think the US economy is diversified enough to continue to grow at a long-term average of 5 or 6% per year including inflation. As far as being the world's largest eventually China will be larger because of its population. Right now they are in the process of industrializing and urbanizing. Eventually their economy will get more sophisticated, their per capital income will grow and they will be larger than the US. 25 years? 50 years? 80 years? It really doesn't matter. They have the demographics. There is also the EU is you want to view it is one economy. whether you do or not I don't think it matters much. There's no reward for being "largest economy". The EU and US do a LOT of business together. I bought my car from Germany and am very happy with it.

As far as the US, I think you can see its diversity by looking at its largest companies. GE, Microsoft, Wal Mart, Proctor and Gamble, Pfizer, Caterpillar, Deere, Berkshire, Exxon, Chevron, Johnson and johnson, IBM, Coca Cola, Google, Cisco, Apple, Intel, Hewlett Packard, Oracle. The US is a huge diversified economy.

[kane]

Originally Posted by ADL Colin

As I was driving home today I also thought of Coca Cola, Pepsi, Kraft, Kellog's and so on which are probably all in the "food and beverage" but not under Ag. Even Samuel Adams. But no longer BUD.

I read the other day that Sam Adams is now the largest US owned brewery. It was Bud until they were sold last year.

So do the things used to make beer like wheat, barley and hops then not count as agriculture?

[kane]

Originally Posted by Sexxxy Sites

as opposed to an agricultural based, industrial based, technological based economy? Do you think that a credit/service based economy can survive?

To answer the main question I would say that we are not yet a credit/service based economy, although I think we are more and more becoming a credit based economy and if we are not careful we could become a credit/service based economy.

Here are some thoughts on us being a credit based economy. I read the other day that the average wage in the US is around $16 per hour. The average house cost around 180K (that number was pre housing market collapse.) Obviously both of these can vary greatly depending on where in the country you live, but this was the national average. At that rate the average wage earner cannot afford the average house. So they can buy a cheaper house (if they can find one) or rent. But if that is the average house cost, rent won't be that much cheaper than buying. So they use up more and more of the income on housing. In doing this it frees up less income for other things so people are using credit more and more to get those things. Also with the cost of some things growing faster than incomes the only way to get them for most is credit. Without credit most people wouldn't be able to purchase a new car. Many people would not be able to take a nice vacation or buy some decent furniture for their house. Since our economy is reliant on consumer spending for its well being it relies on credit to help people spend money. This can open an entire new conversation about responsible spending VS excess spending and living withing your means, but that is another discussion.

Can a society that is mostly credit/service based survive and thrive? I would say no. If you go to just about any third world shithole of a country most of them have a few things in common. 1. they have some kind of a corrupt or over powerful government and 2. they don't produce anything that they sell to other countries. So instead of manufacturing or creating things that they sell to other places they just sell stuff to each other so there is no infuse of extra money into the system, they just pass the same money back and forth for different things and the overall wealth of the country doesn't grow.

Just my thought.

[kane]

Originally Posted by ADL Colin

From my point of view I was answering your question. Our economy looks roughly like this:

Services 42%
Non Durable goods 21%
Government Spending 20%
Private Investment 14%
Durable Goods 7%

I dunno if calling it "service based economy" or not leads to any additional understanding.
based on the fact that roughly 42% of the economy is services does that make it "service based" when 58% of the economy is NOT services. If I had to label it i'd call it a diversified economy.

yeah I do think the US economy is diversified enough to continue to grow at a long-term average of 5 or 6% per year including inflation. As far as being the world's largest eventually China will be larger because of its population. Right now they are in the process of industrializing and urbanizing. Eventually their economy will get more sophisticated, their per capital income will grow and they will be larger than the US. 25 years? 50 years? 80 years? It really doesn't matter. They have the demographics. There is also the EU is you want to view it is one economy. whether you do or not I don't think it matters much. There's no reward for being "largest economy". The EU and US do a LOT of business together. I bought my car from Germany and am very happy with it.

As far as the US, I think you can see its diversity by looking at its largest companies. GE, Microsoft, Wal Mart, Proctor and Gamble, Pfizer, Caterpillar, Deere, Berkshire, Exxon, Chevron, Johnson and johnson, IBM, Coca Cola, Google, Cisco, Apple, Intel, Hewlett Packard, Oracle. The US is a huge diversified economy.

A friend of mine hosted an exchange student from China this year. She is a bright, nice kid and is a senior in high school ( or their equivalent to high school.) She was talking about the competition to get into colleges over there and how intense it is. College is paid for by the government, but there is still a lot of competition to get into schools. She is going to study to be an accountant and she had good enough grades to get into a top school. She said that for almost all kids going to college isn't an idea, it is almost considered a requirement. Most kids just consider college an extension of high school and something they must do. There is very few kids that are considering not going to college and just getting a job.

With attitudes like that I think China will make pretty swift moves in many technology industries and they will industrialize pretty quickly. I don't know how long it will take them, but I agree with you when you say they will eventually become the largest economy on the planet. With all those people just the sheer numbers will eventually take them there.

[Sexxxy Sites]

Originally Posted by kane

To answer the main question I would say that we are not yet a credit/service based economy, although I think we are more and more becoming a credit based economy and if we are not careful we could become a credit/service based economy.

Here are some thoughts on us being a credit based economy. I read the other day that the average wage in the US is around $16 per hour. The average house cost around 180K (that number was pre housing market collapse.) Obviously both of these can vary greatly depending on where in the country you live, but this was the national average. At that rate the average wage earner cannot afford the average house. So they can buy a cheaper house (if they can find one) or rent. But if that is the average house cost, rent won't be that much cheaper than buying. So they use up more and more of the income on housing. In doing this it frees up less income for other things so people are using credit more and more to get those things. Also with the cost of some things growing faster than incomes the only way to get them for most is credit. Without credit most people wouldn't be able to purchase a new car. Many people would not be able to take a nice vacation or buy some decent furniture for their house. Since our economy is reliant on consumer spending for its well being it relies on credit to help people spend money. This can open an entire new conversation about responsible spending VS excess spending and living withing your means, but that is another discussion.

Can a society that is mostly credit/service based survive and thrive? I would say no. If you go to just about any third world shithole of a country most of them have a few things in common. 1. they have some kind of a corrupt or over powerful government and 2. they don't produce anything that they sell to other countries. So instead of manufacturing or creating things that they sell to other places they just sell stuff to each other so there is no infuse of extra money into the system, they just pass the same money back and forth for different things and the overall wealth of the country doesn't grow.

Just my thought.

Colin's posted stats:

1987
Manufacturing 27%
Government 12%
Professional and Business Services 7%
Agriculture 2%

2007
Manufacturing 20%
Government 11%
Professional and Business Services 11%
Agriculture 1%

2008
Services 42%
Non Durable goods 21%
Government Spending 20%
Private Investment 14%
Durable Goods 7%

Since 42% services far exceeds any other single aspect of our economy I maintain that we have a service based economy and since it appears that the services, manufacturing, and agricultural aspect is highly dependent upon credit and the consumer is higly dependent upon credit, I maintain that we are currently a service and credit based economy. I, personally, do not think that a service/credit based economy can survive in the long run let alone maintain our current status as being the worlds largest economy.

[ADL Colin]

Originally Posted by kane

I read the other day that Sam Adams is now the largest US owned brewery. It was Bud until they were sold last year.

So do the things used to make beer like wheat, barley and hops then not count as agriculture?

Yeah, I owned some BUD stock. That turned out nicely. This would seem to be a great opportunity for Samuel Adams now - to brand themselves as the largest American brewery and they sure do have a great name for that.

I believe that yes, the growing and bringing to market of wheat, barley and hops count as "agriculture" on the books.

[ADL Colin]

Originally Posted by Sexxxy Sites

I, personally, do not think that a service/credit based economy can survive in the long run let alone maintain our current status as being the worlds largest economy.

One thing to keep in mind is that people were increasing their debt as their assets were rising in value. Mistakenly in my opinion though not necessarily irrationally. If consumers were experiencing a true increase in their wealth - through their home values - then it was not irrational nor necessarily even imprudent to increase their debt. Unfortunately most were under the mistaken impression that "real estate never drops in value". This one belief, so prevalent just 5 years ago has caused an immense number of bad decisions.

Let's fast forward to the present though. Not just Americans but most people in the world are now deleveraging their personal balance sheets. Let's look at the American stats though. For the first time in 50 years household debt is shrinking. Not necessarily in the healthiest way but true nonetheless. In the last quarter consumer credit rose at its lowest rate in 16 years. So there is deleveraging going on - some of it intentional, some of it not. As people now realize that their asset prices were inflated they are now making the decision to delever their balance sheets by decreasing their debt relative to their assets. At the same time the personal savings rate has increased from 0% to around 3%. It will quite possibly go higher.

One thing from basic economics is that savings becomes investment . So when the economy starts to finally recover there will be an acceleration due to savings transmitting into investment.

On top of that there is a lot of pent-up demand. If you look at the ratio of registered vehicles in the US to sales over time you will see a massive increase to 23.9 years. This would represent the turnover ratio and is clearly unsustainable. As nobel laureate Krugman has said "at current rates of sale it would take 23.9 years to replace the existing vehicle stock. Obviously, that won?t happen. Even if the desired number of vehicles doesn?t rise, people will start replacing vehicles that wear out (use), rust away (decay), or just are so much worse than newer models that they?re worth replacing to get the spiffy new features (obsolescence). As autos go, so goes the capital stock. In the long run, we will have a spontaneous economic recovery, even if all current policy initiatives fail."

Then we had yesterday's news that housing starts were falling at such an alarming rate that they will soon reach zero!. obviously not possible. As the recession drags on people are putting off decisions to purchase a new vehicle that they need. Some people, interested in purchasing their first home, are waiting for prices to stop falling. This is true for all kinds of things such as home improvements, home and auto repairs and so on. The result of very rational uncertainty over their and the economy's prospects. But as true as it always is savings will become investment and combined with pent-up demand will cause economic growth.

I've wandered a bit from your conversation but I thought this was interesting anyway.

[ADL Colin]

Sexxxy Sites,

Why do you think that a manufacturing based economy is more sustainable than a service based one? Is that what you are saying?

[Libertine]

Originally Posted by DaddyHalbucks

If the US ever wants to regain its economic strength, it needs to end welfare, and expand manufacturing. Right now, it is doing the exact opposite.

Horrible idea.

Competing in manufacturing with countries that have plenty of cheap labor available is a dead-end situation. Even more so when you realize that with the progress in robotics, more and more labor will be replaced by machines.

[Sexxxy Sites]

Originally Posted by ADL Colin

Sexxxy Sites,

Why do you think that a manufacturing based economy is more sustainable than a service based one? Is that what you are saying?

Suppose there is a small town whose businesses provide services for farmers surrounding the town. Suppose a factory that manufactures widgets is built near the town. The town increases in population as more and more businesses are created to provide services for more and more people that are employed by the widget factory. Farms are being sold so that housing projects can be built to provide the increased population with housing and suburbs are built with more businesses to provide services to the ever growing population.

Then at some point in time the widget factory that has been relying heavily upon credit from its inception through its expansion finds that it has over extended itself, declares bankruptcy and goes out of business. The towns businesses that provide services now do not have anyone to provide services to as the people that paid for these services do not have an income. The farmers sold their farms to the expanding townsmen so businesses that provided them services are not needed so the town cannot even revert back to its agricultural based economy.

Of course the other scenario is that the Widget factory simply moved its operation overseas to reduce its overhead and increase its profits. Either way the town dies as it no longer has an agricultural/manufacturing base to provide services to.

[StuartD]

Originally Posted by DaddyHalbucks

If the US ever wants to regain its economic strength, it needs to end welfare, and expand manufacturing. Right now, it is doing the exact opposite.

You missed the boat on manufacturing. The US (and most other countries) can't possibly hope to compete with the asian countries that do most of the manufacturing now.

As for welfare, there are plenty of nations with comparable or more welfare and are able to manage just fine. Just because you can't wrap your head around it, doesn't mean that it can't be done properly.

[Pleasurepays]

credit is another example of the mad financial race to the bottom we have been engaged in, which spending more and more money you don't have inevitably evolves into.

we created a system that made it insanely easy to be over leveraged in every way... and rewards it. banks are over leveraged as are the citizens as is the country/government itself. our country relies more and more on credit to get by. the entire economy depends on credit to create the conditions to get more credit and it all has to collapse from time to time since its nothing more than a simple pyramid scheme - ... we live in a world where its became normal to borrow money from the bank to buy a 3.00 sandwich. its totally fucking insane.

when the credit ponzi scheme collapses... what do we do? we call a few people on Wall Street "greedy"... we haul a few bankers before Congress, we blame everyone but ourselves and then ... the funniest of all... we try to correct a cultural problem of borrowing.. by doing what? by borrowing the largest amount of money that's every been borrowed.

wow

[HorseShit]

things that will survive:

alcohol

[Sexxxy Sites]

Originally Posted by Pleasurepays

credit is another example of the mad financial race to the bottom we have been engaged in, which spending more and more money you don't have inevitably evolves into.

we created a system that made it insanely easy to be over leveraged in every way... and rewards it. banks are over leveraged as are the citizens as is the country/government itself. our country relies more and more on credit to get by. the entire economy depends on credit to create the conditions to get more credit and it all has to collapse from time to time since its nothing more than a simple pyramid scheme - ... we live in a world where its became normal to borrow money from the bank to buy a 3.00 sandwich. its totally fucking insane.

when the credit ponzi scheme collapses... what do we do? we call a few people on Wall Street "greedy"... we haul a few bankers before Congress, we blame everyone but ourselves and then ... the funniest of all... we try to correct a cultural problem of borrowing.. by doing what? by borrowing the largest amount of money that's every been borrowed.

wow

I like you do not see the logic to it. Loaning/borrowing money caused the housing problems. Loaning/borrowing money caused the banking problems. So how can anyone think that the government loaning/borrowing/printing money to provide these institutions the ability to resume the very thing that created the problems in the first place can solve the problem other than on a very short term basis.

I repeat that I cannot see anyway that a credit/service based economy can surive long term. When one does not produce Widgets and/or the Widget factory is operated on ever expanding credit it seems to me that collapse is inevitable.

[ADL Colin]

Originally Posted by Sexxxy Sites

Of course the other scenario is that the Widget factory simply moved its operation overseas to reduce its overhead and increase its profits. Either way the town dies as it no longer has an agricultural/manufacturing base to provide services to.

Yeah. In that case you are fucked whether your economy is service-based, agro-based *or* manufacturing based. ;-)

It should be pointed out that US manufacturing is not shrinking. It is that the services industry is growing much faster.

Manufacturing
1987 $2.4 trillion
1997 $3.8 trillion
2007 $5.0 trillion

In many cases it is American companies that are using Asian labor to manufacture goods which are then being imported to the US and being sold by those same American companies.. Apple and Nike manufacture shoes and iPods in Asia and then import them to the US. Apple and Nike benefit from that. Overall so does the American consumer in that the price of many goods is cheaper than it would otherwise be. Of course there are great Asian companies too; Mitsubishi, Toyota, Samsung and so on. The American consumer is voting with his wallet though. We prefer those cheaper goods and are happy with the quality. That is fine with me. And of course once that dollar makes it overseas it has to be invested back in the United States (Other than those dollars held in Eurodollar accounts, I believe). This is because of the identity Current Account = Capital Account + Financial Account. And since the capital account is so small the current account is roughly the financial account. In other words, those dollars come back to the US to purchase assets and financial assets (bonds, stocks, Radio City Music Hall).

My point of view is that the US cannot excel in every area of every industry. It's an intensely competitive world. US manufacturing has managed to grow faster than the inflation rate. Some of the greatest manufacturing companies in the world are in the US and they look to have a great future especially in combination with the growth of the BRIC countries. An example being a company like Caterpillar that looks to benefit greatly from Chinese and Brazilian growth by selling them equipment that will be used to mine commodities once the commodity bull-run resumes. There are hundreds of other such examples.

[ADL Colin]

Originally Posted by Sexxxy Sites

So how can anyone think that the government loaning/borrowing/printing money to provide these institutions the ability to resume the very thing that created the problems in the first place can solve the problem other than on a very short term basis.

These are not just the solutions in the US but the solutions in nearly every country in the world. A central banks that acts as the lender of last resort and deficit spending in order to stimulate aggregate demand according to the principles laid out by Keynes.

Before the government acted as a lender of last resort to banks private banks did. Go back to 1907 and JP Morgan put together the rescue that provided liquidity to banks. It is easier and more reliable for the government to do it - and it is the system that pretty much every country in the world uses.

Consider the situation in which the central bank does not act as a lender of last resort. With the failure of just a few institutions the entire credit system came to a halt in September of 2007. Banks stopped lending to each other because the counter-party risk was judged to be too great, the commercial paper market completely froze and left institutions with no short term funding. The TED spread, which is one credit market indicator jumped from .5 to 4.0. It has since retreated to under 1.0 again. Still elevated but at least not scary.

Consider the situation in which government doesn't stimulate aggregate demand through deficit spending. Aggregate Demand is C+I+G+(X-I) where :
C = consumption
I = Investment
G = Government spending
X-I - exports -imports

Consider Consumption. Obviously the consumer isn't spending. That is the problem. The consumer's confidence is low and thus he is saving and paying down debt. The savings rate has jumped from about 0% to 4%. The less he spends, the smaller the economy the more unemployment. How to stimulate that? Give him some money. Back to that in a minute.

How about Investment? Businesses won't invest in this environment. Just the opposite. They are hoarding cash and laying off people in order to survive.

X-I = a wash for all intents and purposes.

G is our only choice. So the government spends money and increases aggregate demand which typically gets the economy moving. Eventually the increased demand translates into higher GDP, wages, employment and so forth leading to greater consumer confidence. On the tax side, when taxes are lowered there is a marginal propensity to consume. Say it is 2/3. That means that 2/3 of money given back in the form of tax rebates will be spent in the economy. That increases the "C" (consumer spending) above. The other 1/3 goes into savings which becomes investment as total savings in the economy = investment. Eventually the pent-up demand and savings are translated into purchases and investment. The savings in the banks get loaned out to business that expand. People who are putting off purchases such as new cars will eventually come and purchase them once confidence resumes. The current rate of car purchases indicates the consumer will keep his car for 23 years before replacing it. Obviously that won't stick. Let's call that "pent-up demand".

On top of that the FED purchases treasuries in the open market increasing the money supply. The purchase of treasuries increases the demand for them and thus increases their price. As a result interest rates are lowered increasing the demand for loans.

Consider the opposite case which happened during the Great Depression. Instead of increasing the money supply the FED decreased the money supply. It fell 33% from 1929 to 1933. In Friedman and Schwarz' Monetary History of the United States it is precisely this error that blew a recession up into a depression. Everywhere the money supply was shrinking, held up by the gold standard. Almost immediately after relaxing the gold standard and increasing the money supply the US economy started to grow. 12 months after that day GDP was up 17%. 11% the next year. 14% the next year. In one of Bernanke's papers he shows that the earlier a country came off the gold standard and inflated their money supply the faster they recovered from the recession. Also, the government tried to balance the budget, increased taxes and increased tariffs. No wonder we do the opposite now.

Why do we inflate the money supply and deficit spend in order to get the economy going? Why is that 90% of economists think that is the best options? Because the alternative is too painful.

[Sexxxy Sites]

Originally Posted by ADL Colin

These are not just the solutions in the US but the solutions in nearly every country in the world. A central banks that acts as the lender of last resort and deficit spending in order to stimulate aggregate demand according to the principles laid out by Keynes.

Before the government acted as a lender of last resort to banks private banks did. Go back to 1907 and JP Morgan put together the rescue that provided liquidity to banks. It is easier and more reliable for the government to do it - and it is the system that pretty much every country in the world uses.

Consider the situation in which the central bank does not act as a lender of last resort. With the failure of just a few institutions the entire credit system came to a halt in September of 2007. Banks stopped lending to each other because the counter-party risk was judged to be too great, the commercial paper market completely froze and left institutions with no short term funding. The TED spread, which is one credit market indicator jumped from .5 to 4.0. It has since retreated to under 1.0 again. Still elevated but at least not scary.

Consider the situation in which government doesn't stimulate aggregate demand through deficit spending. Aggregate Demand is C+I+G+(X-I) where :
C = consumption
I = Investment
G = Government spending
X-I - exports -imports

Consider Consumption. Obviously the consumer isn't spending. That is the problem. The consumer's confidence is low and thus he is saving and paying down debt. The savings rate has jumped from about 0% to 4%. The less he spends, the smaller the economy the more unemployment. How to stimulate that? Give him some money. Back to that in a minute.

How about Investment? Businesses won't invest in this environment. Just the opposite. They are hoarding cash and laying off people in order to survive.

X-I = a wash for all intents and purposes.

G is our only choice. So the government spends money and increases aggregate demand which typically gets the economy moving. Eventually the increased demand translates into higher GDP, wages, employment and so forth leading to greater consumer confidence. On the tax side, when taxes are lowered there is a marginal propensity to consume. Say it is 2/3. That means that 2/3 of money given back in the form of tax rebates will be spent in the economy. That increases the "C" (consumer spending) above. The other 1/3 goes into savings which becomes investment as total savings in the economy = investment. Eventually the pent-up demand and savings are translated into purchases and investment. The savings in the banks get loaned out to business that expand. People who are putting off purchases such as new cars will eventually come and purchase them once confidence resumes. The current rate of car purchases indicates the consumer will keep his car for 23 years before replacing it. Obviously that won't stick. Let's call that "pent-up demand".

On top of that the FED purchases treasuries in the open market increasing the money supply. The purchase of treasuries increases the demand for them and thus increases their price. As a result interest rates are lowered increasing the demand for loans.

Consider the opposite case which happened during the Great Depression. Instead of increasing the money supply the FED decreased the money supply. It fell 33% from 1929 to 1933. In Friedman and Schwarz' Monetary History of the United States it is precisely this error that blew a recession up into a depression. Everywhere the money supply was shrinking, held up by the gold standard. Almost immediately after relaxing the gold standard and increasing the money supply the US economy started to grow. 12 months after that day GDP was up 17%. 11% the next year. 14% the next year. In one of Bernanke's papers he shows that the earlier a country came off the gold standard and inflated their money supply the faster they recovered from the recession. Also, the government tried to balance the budget, increased taxes and increased tariffs. No wonder we do the opposite now.

Why do we inflate the money supply and deficit spend in order to get the economy going? Why is that 90% of economists think that is the best options? Because the alternative is too painful.

Both of us will have to wait and see if the process works at all, or does work but only for the short term, or it does work and the US economy continues to grow and maintain its status as the worlds largest economy for the long term (at least until China, or perhaps some other country, may, or may not surpass us). I personally predict it will be for the short term, if it works at all.

[Pleasurepays]

Originally Posted by Sexxxy Sites

I like you do not see the logic to it. Loaning/borrowing money caused the housing problems. Loaning/borrowing money caused the banking problems. So how can anyone think that the government loaning/borrowing/printing money to provide these institutions the ability to resume the very thing that created the problems in the first place can solve the problem other than on a very short term basis.

I repeat that I cannot see anyway that a credit/service based economy can survive long term. When one does not produce Widgets and/or the Widget factory is operated on ever expanding credit it seems to me that collapse is inevitable.

there are two ways to look at this. a bank does not cause a loan. a person borrows money. a bank does not cause a person to pay for a Big Mac with a credit card... a person does. a bank does not cause a person to buy at house with payments being 40-50% of their income - a person makes that choice.

business credit is not "all forms of credit" and is not the core of the issue we face today. the problem we face today is the result of a complete and total failure at every level of society to not act like fucking idiots.

the problems are not there just because "a business", "a banker" or a "some other thing" is the problem. the problem is also cultural and societal.

and you are repeating the same thing i have said.... dependence on credit leads to greater dependence on credit until the whole thing collapses. your refusal to borrow money to aggressively expand is all fine and well.. but it will ultimately mean your own destruction as a company when competitors are borrowing aggressively (even irresponsibly)

this is why i have always said that the whole system needs to collapse and reset.. instead, we are rewarding failure and horrible/irresponsible judgment at the expense of those who act responsibly. that's just as backwards as the issues and the behaviors that brought us to this place to begin with.

Hillary Clinton had to fly to China last week to beg the Chinese to buy more U.S. debt. That in itself should tell you something. The financial markets tank every time Obama or someone in his administration talks about whats coming, future plans, solutions etc. That should also tell you something.

[ADL Colin]

Originally Posted by Sexxxy Sites

Both of us will have to wait and see if the process works at all, or does work but only for the short term, or it does work and the US economy continues to grow and maintain its status as the worlds largest economy for the long term (at least until China, or perhaps some other country, may, or may not surpass us). I personally predict it will be for the short term, if it works at all.

US GDP per person grows pretty steadily. Check out this chart. I'd say the long-term trend is really clear. Sometimes we get a little off trend. We can wait until we get back on trend or we can deficit spend at the cost of some additional debt and inflation. I'd prefer the latter. it's just too painful on too many people for too long to have too much of an output gap for too long.



Now here is the historical output gap and projected output gap without stimulus.



Here is a closer view: