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Sunday, August 7, 2011

The Great Contraction

So says Ezra Klein. Some of what he writes does make sense:
...Recessions...imply a very particular economic phenomena: a business-cycle recession, in which the drop is quick, and the recovery is usually similarly swift. That is not what we’re in. That is not what financial crises are. And mistaking one for the other has, in his opinion, cost us a fortune.

Financial crises are not about the business cycle falling out of whack. They’re about debt. Lots of it. And that’s why they’re so resistant to efforts to speed a recovery. Whereas you normally get out of a recession by lowering interest rates and persuading consumers to spend, the period after a financial crisis is marked by consumers trying to dig out from under a mountain of borrowed money. You can accelerate that process, but it’s hard to do. But first you must correctly diagnose the problem.

Rogoff has suggested we call this period the “Great Contraction” in order to distinguish it from more normal recessions. You may or may not like the name, but consider this: When we talk about double-dip recessions, that implies, as the National Bureau of Economic Research has said, that the recession ended in summer 2009, and we’ve been recovering ever since. The Great Contraction, conversely, suggests we have been, and remain, mired in an ongoing financial crisis. Which better describes the economy you see?...
Read the entire essay HERE. I'm no fan of Klein's, but I think that he has some valid points in that essay.

Of course, what we call this disastrous economic situation doesn't matter. But how our so-called leaders analyze it DOES matter because the economic policy for addressing a recession and a depression is different.

Clearly, what Obamanomics has done is not the proper way to address the depression we're in.

I keep referring to the term "depression" because, in my view, we are indeed in a great depression — not a recession.

If our policy makers cannot use the "d" word, then let them use the term "contraction." I, for one, am sick and tired of hearing the words "recession" (or whatever euphemism the Obama regime is using) and "shared sacrifice."


  1. Hussein couldnt run a lemonade stand ! have a fabulous Sunday my friend~! :)

  2. Never allow a surgeon to operate until you’re satisfied with the diagnosis. Leftists in this country are seriously confused: a number of these people, such as Kucinich and Reid, continue to want the government to raise taxes and spend more. Even self-styled Trotskyite and former Obama economic advisor Leo Hindery suggests that these ideas are non-starters. This government is spending $300 billion each month; of that, $180 billion comes from tax revenues, while borrowing the remaining $120 billion. Remember, this is every single month. Do the math … so as Silverfiddle pointed out today, the only recovery plan considered viable by the CBO is the Paul Ryan initiative.

    As long as we’re doing the math, why not consider the following: we should encourage everyone to develop a sense of ownership, and yet government policy does just the opposite. While the top 1% of working Americans pays 38% of federal revenues, the top 5% pay 60%, and the top 25% pay 86% … 51% of working Americans pay no taxes at all. How is this shared sacrifice? How does this create a sense of ownership? I first of all do not believe that 51% of the American people are living below the poverty level, but an even greater concern is that more than half of the American people become advocates for communist ideology. They’ll support Obama because he offers them something, for nothing, paid for by “rich people.” Clearly, the tax burden in this country rests upon the shoulders of the middle class, and government policy encourages poor people to eschew social mobility; they are better off where they are.

    IMO, this is part of the plan to develop a sense of hopelessness among the American people. If you destroy the spirit of America, you destroy America. This is exactly where the left intends to take this country … to soviet hell.

  3. The Klein remedy - Re-inflate the bubble!!!

    Until this country AND its' people begin living within their means, it will NEVER recover.

  4. We DON'T need any more presidential advisors and Fed Chairmen who know how to play clever accounting tricks. Especially those that involve simply printing more money.

  5. Average duration of unemployment right now is longer than during the Great Depression.
    I read "The Forgotten Man" by Amity Shlaes a few years ago, and similarities by what the federal government was doing then and what it is doing now are blood-curling.

  6. FJ,
    The Klein remedy - Re-inflate the bubble!!!

    Let me be clear: I don't think the Klein remedy is the way to go.

    That said, I think he's right that we're in something much more serious than a recession.

  7. There is not one individual in the current adminstration and maybe just a handful in the entire congress who understands economics so don't hold your breath until we are finally under water.

  8. The Fed to roll out QE3:

    The U.S. Federal Reserve will extend its program to purchase the nation’s debts and stabilize long- term interest rates after Standard & Poor’s downgraded its credit rating, according to an adviser to China’s central bank.

    The Fed will roll out quantitative easing 3, a tactic to purchase treasuries, Li Daokui, an adviser to the People’s Bank of China, wrote in his microblog weibo.com. Institutional investors will be forced to sell long-term U.S. debt, which may cause financial turbulence, he wrote....

    And from this source:

    QE3 Might Help the Markets, but It Won’t Save the Economy: Lance Roberts

    [There is] renewed talk of another round of quantitative easing -- the Federal Reserve's stimulus program to spur growth by buying up government bonds.

    Lance Roberts, CEO and chief strategist of Streettalk Advisors, says there is nothing more certain than QE3 and the potential for another recession. "The trend of the data is all negative, so barring any quantitative easing program from the Fed, we will probably be in a recession by the end of the year."

    Roberts is of the mind that the Fed will step in to help stave off another recession, but the potential for it to work after QE1 and QE2 is not great due to the law of diminishing returns.

    To top that off, he says markets, not consumers, will feel all the benefits if QE3 should come to pass. Consumers will actually take a beating because commodity prices -- oil and food prices -- will jump as the Fed pumps more dollars into the economy....

  9. Mustang,
    This government is spending $300 billion each month; of that, $180 billion comes from tax revenues, while borrowing the remaining $120 billion. Remember, this is every single month.

    IMO, very few Americans know that or have come to terms with what that means!

    They’ll support Obama because he offers them something, for nothing, paid for by “rich people.”

    If Obama is re-elected and the present policies continue, America will become a Third World country -- because of that sense of entitlement you just mentioned, i.e., take from the rich and give to the poor.

  10. That said, I think he's right that we're in something much more serious than a recession.

    Exactly. But the Obama Administration claims to have long ago FIXED those problems with the Frank-Dodd financial regulations... so it does nothing but "wait" for the economy to recover.

    Does anyone here believe that Frank-Dodd fixed ANYTHING? THEY CAUSED the crisis, for Pete's sake!

    And until we UNDO THAT MESS, we're NEVER going to recover. Because all we're doing is throwing "good" money after "bad"... and the more we throw, the "badder" it gets.

  11. The Frank-Dodd bill was a partisan hack-job written by Democrats. THEY (the "Friends of Angelos") certainly aren't going to ever repudiate it.

  12. You remember Barney Frank's defense of his gay lover's program before the House Banking Committee, don't you?

    The Congressional Budget Office (CBO) says the real cost of the federal government guaranteeing the business of failed mortgage giants Fannie Mae and Freddie Mac is $317 billion -- not the $130 billion normally claimed by the Obama administration.

    In a report delivered to the House Budget Committee on June 2, the CBO said a “fair value” accounting of guaranteeing the two defunct mortgage companies – known as Government Sponsored Enterprises (GSEs) – was more than twice as high as the Office of Management and Budget had accounted for.

  13. They say that the definition of insanity is doing the same thing over and over, expecting a different result. But in 2010, the voters RETURNED Barney Frank to the US House of Representatives.

    Well, nothing's changed, Massachusetts. Will you send him back again in 2012?

  14. I too frequently read Ezra Klein. He is a lib, but he's an honest one, and like AOW, I find his article to be factual and interesting, even if I disagree with his liberal conclusions.

    Dodd-Frank solved nothing. Either the government needs to make the banks downsizes and regulate what they do, or government needs to get completely out, to include removing all safeguards.

    QE3 will at best re-inflate the bubble, at worst simply devalue our currency to toilet paper status and made the debt even more dangerously larger.

    Our elites have failed us folks. The monitarists and Keynesians have brought us to the brink of calamity.

    When will somebody in charge figure out that its time to turn this over to the people and give liberty and personal responsibility a try?

  15. monitarists and Keynesians

    Doesn't leave a lot of choice if both failed.

    Yes sir Dorothy, we ain't in Kansas.

  16. Monitarism hasn't failed. It hasn't been tried. No one has Reagan's balls and Obama's too vested in the status quo inflate and bail.

    Raising interest rates would push millions into default on their mortgages. Now if we burned all those foreclosed homes, we'f be poised again for an economic recovery. But no one has the "political will" it would take to create what many STILL believe to be an "avertible" man-made crisis.

    ANd that's the dilemna. Some still believe in Santa Claus, and that the crisis to be "avertible".

  17. If people can't earn a RETURN on their investments (since the "monetarists" are holding interest rates at 0%) NOBODY is going to invest. What's the point? Your money's SAFER in gold or stuffed under your mattress.

    Now if they RAISED interest rates, that Might entice some money into the economy. But short of that, WHY BOTHER?

  18. In G_d we Trust. In Monetarists, we acknowledge a yellow streak wider than the Grand Canyon running down their backs.

  19. Of course there has been no recovery. Main Street america knows that even if Obama and the democrats don't. Call it contratction or call it depression is just semantics. QE 3 will make Wall Street and the banksters happy but it will do nothing about our debt. No matter what we think of the credit rating agencies they will do what they must do and it won't be long be fore they downgrade the US credit even further. That will bring about higher interest rate on our bonds and the only way we will be able to service our debtis with the printing machines.

  20. Silverfiddle, question.

    Do you see the economy as a zero sum game?

    Is co-operation required to maximize all outcomes?

    I think your answers are:


    Can't be optimized.

    Mine are Yes, Yes.

  21. Farmer, there's a lot of talk about "the new monetarism". Sure sign it's dead.

  22. A policy that requires you bring a stick to a system that's otherwise "all carrots" will never be implemented.... at least not by a populist like Clintama-Bush.

    If you're the Fed chairman, you don't NEED the aggravation. No human being can withstand the political pressure that comes with managing a multi-trillion dollar economy. There's too much money to be made in the "round-offs".

  23. Hmmm. A 'contraction'. I wonder if this might be an indicator of a birthing process? And what kind of offspring will this birth deliver?

  24. AOW @ "That said, I think he's right that we're in something much more serious than a recession."

    AOW - the other evening in a large, mixed crowd where discussions of the economy were underway, I uttered the unspeakable: depression. The room actually went quiet, but no one tried to refute me. I think deep down everyone really knows that if we aren't in it, we are teetering on the brink.


    Sorry for my absence here yesterday. I had planned on blogging all day long.

    But a miracle occurred!

    Mr. AOW and I had a visitor, one of my cousins whom I hadn't seen since 2006. She stayed 7.5 hours!

    It was a great afternoon and evening. Mr. AOW and I get so few visitors nowadays.

  26. AOW: I'm glad Klein made the distinction between a business cycle recession and a financial crisis. Stimuli don't help with the latter, other than to create more overleveraging.

  27. Two appropriate proverbs:

    "A rose by any other name smells as sweet."

    And, even better....

    "A dead mackerel by moonlight still stinks."


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