When a large country such as the USA outsources so much of its manufacturing to a huge communist country, China, for decades, it eventually leads to China setting the inflation rate, interest rates and the monetary policy of the USA. Yes, it's that simple. China overproduces raw materials on purpose, in order to keep prices low so that they can combine their low labor costs with low raw material costs to make the greatest possible profit on their manufactured goods. As a result of raw material overproduction, the world ends up with near-deflation. The world, including developed countries, end up looking more and more like communist China.
The government of the USA meekly allowed US corporations to turn their backs on American citizens for decades, creating the mess we're in. Why? Why?! The real price of low cost imports is very steep, we've learned. Next comes a debt default cycle that would otherwise have already occurred if interest rates had not fallen so quickly since last November. The stock market is very mislead in direction at this time. A decline of over 20% in the next 12 months is more likely than not. If Donald Trump is not reelected, the stock market will recover after that pullback.
7
Money is pooling up more and more.
2
Supply side economics is not working. There is an excess of money floating around looking for a place to settle down and there are few places left except to for those looking for cheaper money and there is plenty of that up for grabs after the big tax breaks the US just dished out to those who were already flush with cash.
All that cash and consumers are up to his ears in debt yet many can't afford basic needs for housing, healthcare and education because supply side economics hasn't found among the folks holding all the cash willing to provide those needs at a price consumers can afford.
Yet it now appears that the drive to accumulate cash has stooped to lock consumers inescapably in a debt trap from which they cannot escape: low wages, the lowest rates on savings and usury rates on debt.
Where does all the money go in the global economy drowning in cash except to inflate and float the value of assets and the egos of those who swim in it while the needs of our nation, its infrastructure, its research and development, to meet the challenge of climate change, and education are arbitrarily and capriciously disregarded and dismissed.
The Republican Party mob in Congress, Trump the don in the White House, and McConnell the capo in the senate have set a course for our nation we are fools to accept, a version of supply side economics, leading to disaster.
7
Beware: "This time is different" rarely is.
4
One unaddressed factor: 20 years of increased structural, systemic pressures that corporate interests - through Congress, the Supreme Court, and now our corrupt president - exert to limit workers' compensation.
That corruption: 1) maintains low employment, 2) channels America's increased GDP and income to the very richest and politically connected, and 3) curbs inflation as a by-product.
Elizabeth Warren's book concisely describes America's political & economic institutional rot.
https://www.goodreads.com/book/show/34196619-this-fight-is-our-fight
6
The odd thing is that inflation as measured by personal experience has been large. From 1985 until about 2002 when gasoline prices had been falling and nearly flat for over a decade, everyday purchases were also flat. The price of pizza, coffee, a sandwich at the local deli, grocery shopping etc... had been essentially flat for 15 years. Then 2000 stock market crash struck, and prices began to skyrocket for these everyday consumerables, yet inflation was supposedly low, while inflation in the '90s was much greater as measured by the government. My personal expenses have skyrocketed over this comparative 15 year period, and I have 30 years of quicken data to prove it. Is it possible the inflation calculations are designed to show inflation lower than it actually is experienced?
7
@Bill
Food and fuel prices are not included in inflation calculations.
3
What is going on?
1. Central banks are doing or planning quantitative easing, meaning they are buying long-term bonds, which raises their price thus lowering the yield. Former Fed Chair William Dudley explained that in an insightful January 2018 speech.
2. Economic growth is a function of productivity (output per worker) and the number of workers. Since the developed world is aging and resisting immigration, the growth in the number of workers is slowing. Since the massive productivity improvement from containerization has leveled out, the next big productivity thing hasn't happened yet. So we can expect about 2% growth in the U.S. when we aren't increasing the deficit.
3. Countries that owe debt in their own currency (like the U.S.) have little to fear from deficits, as Japan is demonstrating with its low interest rates and over 250% GDP national debt.
4. There is no crowding out, because savings by aging households is greater than investment by businesses, as big corporations in concentrated markets act more like oligopoly and monopoly, maximizing profits and doing stock buybacks rather than investing in capital and labor.
5. Workers don't have unions, even in service industries protected from international competition, so they are happy to get 2% raises instead of 5% each year that they deserve. They tacitly support upward redistribution when they vote Republican or against unions in the service sectors.
26
My humble opinion is the markets seeing stagnant wage growth keeping inflation in check
But is inflation really low ?
Compare the MSRP of a 1985 Chevy Tahoe with the equivalent vehicle today
Yet $85 in 1985 isn’t only worth $193.64 in 2027
My point ??
Cash value has slighly doubled
Vehicle price more than $48k
Way more than inflation
And don’t get me started on repairman costs
5
You don't hear this very often anymore but economics used to be referred to as "the dismal science". This is because it is the science of limited resources. Modern day economics is precisely the opposite of that. It is what business majors go into in order to pump themselves up about the possibility of endless money. As such nearly all protocols and regulations are designed to give that impression. Of course, in the world of largely non-renewable resources in which we live this simply cannot last forever. Even if we were to ever convert to 100% renewable energy anytime soon which is not very likely. With this in mind, economics will soon once again return to being the science of limited resources. Unfortunately, I fear, the world is in no way ready for this.
7
Yes, the emphasis on eternal growth is an illusion.
As my sister replied to someone's business admonition to "Keep on growing!", she answered, "Cancer keeps on growing, flowers know when to stop."
12
@old reprobate
Perhaps the economic flower hasn’t bloomed yet. Clearly growth improves efficiency. In 1980 it took 12000 btu of energy to produce a dollar of gdp.
Today? Only 4500.
The lesser developed countries clearly will see lower fertility rates after much more growth.
Your analogy is correct but perhaps not complete.
3
@John Huppenthal
If you are as old as I think you are, you remember when economists used to say that energy consumption was fixed to GDP, and that if energy consumption declined so would GDP. It seemed more likely that energy is just one cost, and if it goes up then substitutions can be made.
3
If you were not feeling a strong ache of skepticism during your undergraduate economics courses, you missed the point.
I think every good economics course I took started with a disclaimer from the professor along the lines of, “this is how we think things work, but nobody really knows.”
The idea that we can extrapolate from the relationships between a few key numbers into predictions for the real economy is silly. Ceteris paribus works in classroom models, not real life.
7
@Josh
Perhaps, but it helps to know what is correlated with what. And, if A is linked to E through six intermediate parts, it helps to know those linkages.
Part of the problem is that the tribal nature of man allows economists who would appeal to that collectivist spirit to use sophistry to deny plainly observable relationships.
Just regress country GDP against combined and total personal, social security, health and VAT taxes for someone making $50,000 per year.
You get a hugely negative relationship.
Economists fill our journals with articles denying that relationship.
As a result, they are dumbfounded when our GDP grows $680 billion in 2018 while the countries of the EU grow $210 billion.
5
Ceteris ain't so paribus after all.
1
I want to read more about theories of why this is so.
1
@S
Start by reading Carl Menger's "Principles of Economics."
The must read book to make sense of things.
Then Jude Wanniski's "The Way the World Works"
Also, track GDP and MZM money supply on the StLouis Federal Reserve Fred system.
5
‘Full employment’ in the U.S. still leaves many unemployed and many marginally employed at wages that will not support a decent standard of living. And so long as there are workers in China, or Vietnam, or Malaysia, or Brazil, or Poland or wherever who will toil long hours at low wages, American workers will have little or no leverage to demand higher pay, better working conditions or enhanced benefits. They’ll do what they’re told, or their jobs will vanish.
There’s a reason why Japanese and German auto makers have come to the red states of the Deep South to manufacture their cars: cheap and readily exploited labor. German and Japanese auto workers demand and receive a panoply of benefits and job security, much of that funded through taxation. Non-union labor in Alabama, South Carolina and Tennessee looks mighty good to Mercedes, Nissan and BMW. As an added bonus, those ‘conservative’ states suck up more federal tax dollars than they pay in, and thus are able to bleed the residents of ‘blue states’ while keeping their own state taxes lower than necessary to fund their own needs.
22
@chambolle
"They will do what they are told or their jobs will vanish..."
For the last ten years, that was true but less so now than ever before in history. There are now 7 million jobs for 5 million unemployed.
As a result the quit rate is now at an all-time record. People are leaving unsatisfactory jobs at a rate of 3.5 million per year.
There is a strong correlation between employee job satisfaction and profitability. Now that we have a running economy, there is a strong flow of workers from companies that don't or can't treat their employees well to companies that do.
2
The world would trust change if for most manufacturers “quality was job one”. Ya just might see wages rise.
2
@TR - Yup, the Fed's inflation rate is bogus.
My first house in Seattle was a 1000 square foot pier and post bungalow on a postage stamp sized lot, built from a Sears kit in the 1920s. It didn’t have central heating - a wood stove with a few electric baseboards to supplement. In 1986, the house cost $72,000; my mortgage was 10% and everyone urged me to lock that in because we might not see rates go that low again.
At the time, I was just a few years out of law school at a state university, where resident tuition was about $2,500 a year.
That house, in pretty much the same condition it was in 1986, recently turned over for about $1.1 million - 15 times the price in 1986. In-state tuition at that same law school today? Multiply by more than 10: $26,500 a year.
I’m quite sure wages are not 10 to 15 times what they were in 1986. And I am certain that a family earning today’s U.S. median income, about $60,000 per year, could not dream of buying even that modest little house, or putting a kid through law school without taking on substantial debt.
For that matter, a family earning $150,000 a year could not put $200,000 down on that little house and qualify for the $900,000 mortgage. Unless you’ve got substantial wealth or ‘monopoly money’ in the form of home equity in a similarly inflated market, you’re just out of luck. But you can go rent a 600 square foot studio in a the same neighborhood for about $3,000 a month, or pay about $4000 a month for a one bedroom instead.
13
@chambolle
Seattle has been distorted by both Microsoft and Amazon.
Both these companies got to grow tax free. Gates never paid a penny of personal income tax on that $100 billion fortune. It all just sat there in unrealized capital gains until he further sheltered it in a 501 C3.
Neither has Bezos paid a penny on his fortune. Yet, they both support increasing taxes on their smaller competitors who already pay 50% at the margin.
Supply side economics has produced a boom for Seattle.
4
@John Huppenthal You are changing the subject. We are talking about the fact that the free market, and neoliberal economics has not and never will work in a society that chooses to treat people fairly. We need our corporations to be working for us. Corporations are not persons.
5
@chambolle
So true, so true.
As anyone who lives on the West Coast can tell you, housing has inflated at an all time rate, making it unaffordable for the average salary. As soon as one moves to less preferred areas of the nation that isn’t happening.
The national inflation rate is a sham.
I think the inflation rate below 2% is misleading. If you look at the Shelter index by the St. Louis Fed which tracks inflation for rent as primary residence, the curve is practically parabolic. Overall rising rents may not reflect a significant rise in inflation because energy prices have been low. So, if you're an urban renter who mostly uses public transportation, you're definitely experiencing an inflation rate higher than 2%. This is important because it points to the fact that slow wage growth is still a massive problem even if inflation overall seems to be low.
4
Just a continuation of Bernanke's dream to transfer wealth
from savers and depositors to debtors, deadbeats, wall street and the banks. Politicians used savers and retirees in 2008 + to avoid raising taxes for bank and wall street bailouts. Powell
knows this as does the rest of the folks at the Fed.
Bernanke destroyed the value of $$ and distorted forever
interest rate levels for bad credit risks.
9
I haven’t been able to figure things out since the world went off the gold standard
8
@New World
Volcker had a defacto gold standard which held from 1983 to 2005. Gold was $425 or less for that entire period.
Then, the fed painted their tails white and ran with the antelope.
Gold went from $425 to $1800. Speculators in that hedge and hundreds of others walked away with over $10 trillion. Biggest heist in history. Real estate boomed and crashed the most.
Investment in productive enterprise stagnated and so did wages which depend on productivity growth.
4
As wealth disparity continues to grow in the world, and as the wealthy at the top continue to accumulate more wealth then they could ever actually use.... this is exactly what happens...... surplus accumulation is moved to where the wealthy feel it is safest. With the huge and determined influx of wealth across the world into Treasuries.... the pressure of demand it creates drives interest rates downward.. because the US can continue to reap the benefit of being a trusted haven to park money in Treasuries.
Used to be... the wealthy would invest their surplus into actual industries and businesses which in turn produced job, products and services, and the entire supply chain thrived. Now days.. they don't do this very much.. and instead either push their surplus through hedge funds, or into Treasury bonds.
I don't see this paradigm changing as long as wealth accumulation through market manipulation and parking of surplus in low risk investments is a thing for the very wealthy.
The very wealthy are effectively slowly draining the life out the economies of nations all over the world, and parking it in the very wealthy version of the old cookie jar.
Basically... Money not in circulation to actually grow and build things within the economy... is money wasted and opportunity lost for the entire economy.
14
Maybe the low interest rates with low inflation and low unemployment has something to do with the fact that a lot of the new jobs don't pay enough to push demand to inflationary levels. People just don't have the money to spend - one survey showed that 40% of Americans would have a tough time coming up with a spare $400 in an emergency. Little spending money = low inflation.
11
IMO, the confusion here (and elsewhere) arises from the mistaken notion that "economics" is a successful science. The scientific method works well for subjects grounded in objective reality, which are part of a universe structured by objective rules, like Newton's Laws of Motion, that exist independently of humans. In such contexts, causes and effects can (in principle and often in actuality) be discovered and understood.
In contrast, economies are grounded in subjective reality: they are emergent properties of humans' subjective decisions ("hunches") and actions. We might like to think that economics is grounded in discoverable, objective rules, but it's really grounded in aphorisms at best (e.g., "A penny saved is a penny earned."). All the slick, scientific-looking graphs and charts, and all the data, and all the dubious statistical analyses in the world won't change that. Economics is hard to understand because people are hard (maybe impossible!) to understand.
10
@RR Exactly. Economics is not a hard science. It needs to be based on what society needs and chooses, not on the decisions of only a few in our society. We need to look at economics as a social science, with sociologists at the table.
GDP growth and interest rates are primarily governed by population growth.
The USA has now unfortunately joined Japan and Europe in the “old, no babies, no immigrants” crowd.
As the world population gets older and older with fewer and fewer babies, the global economy will slow down more and more and more.
And we will look back nostalgically and say “remember when we used to have 2.5% GDP growth.”
5
@Clyde
3% last year
3.2% first quarter
3.2% in June for sure.
Stock market is forecasting 5
1
@Clyde
Some of the comments here, like yours, are making the situation clearer than the article does.
2
@Clyde, Your argument makes perfect sense to me, except I'd change
"And we will look back nostalgically and say “remember when we used to have 2.5% GDP growth.”
To:
And we will look back in disgust and say “remember when we used to NEED 2.5% GDP growth.”
2
A further explanation of Fed interest rate dogma was well-explained in these very NYTimes pages by Paul Krugman in 2015, which should be kept in mind when wondering why interest rate orthodoxy has become heterodoxy:
https://krugman.blogs.nytimes.com/2015/09/19/rate-rage/
In short, readers must remember the Federal Reserve is a banking consortium, which is interested in creating profits for its members.
At the same time, we are witnessing an object lesson in how financial austerity policies starved the global economy of investment and capital, now being supplied without increasing inflation.
5
So the academic experts don’t understand how things can be the way they are?
But these are the very experts to whom we should entrust economic and monetary decision making?
2
@Frank
Freidman said that a fed injection of money during the Great Depression would have also increased velocity of money and rescued the nation.
Velocity hasn’t been this low ever before, ever. All this money just produced stagnation. Freidman was wrong and the Fed has no replacement dogma.
Volcker said that keeping gold and other commodities stable in price would maximize money policy contribution to prosperity.
1983 to 2005. Good run. RIP for that policy. Gold is now over $1300 after being at $425 for twenty years.
1
Look at real estate markets. Local markets in most major cities and many desirable rural areas are being inflated by investor-driven overseas capital, assisted by software apps and other automated engines that direct speculators to places where, now, busloads of "tourists" are appearing except they are riding around in black SUVs or minivans with darkened windows.
Journalists in most regions can easily find such places.
5
The calculated national inflation rate is largely bogus. At best, you could call it the "inflation rate" that corporations and banks see year to year.
5
This is why I have never voted for a president or member of Congress based on the current state of the economy or even how well I am doing at the moment. There are simply too many variables, too many pushes and pulls, too many bubbles and crashes in the making and always, too much greed and too little "trickling down" to ordinary working people even in the best economic "moments." When I had money to dabble in the stock market, it became clear that the small investor was at the mercy of the big investors and I would have been just as well off going to Las Vegas. So now I vote for which candidate/party I can depend on to provide some security for productive workers when the Wall Street sharks move in for the kill. Now, I am also voting for the candidates who want to build in a floor of security by guaranteeing healthcare, guaranteeing childcare for working parents, guaranteeing a livable minimum wage, guaranteeing higher education to adjust to fast-changing market labor requirements. Republicans have never liked the concept of "security" for working people whose lives are not ordered on the "get rich quick" and "buy low, sell high" values of Wall Street. This growth, high-employment bubble will burst. When it does, there will be a few big winners and many losers. Then, "Who you gonna call?" Not Aetna and Citibank.
12
@abigail49
If everything in life is "guaranteed", why work?
Rogerson's work on the European welfare state showed exactly that. When you give people things that they would otherwise have to work for, they work less.
Plus, you have to tax more to be able to guarantee all those things. Nobel prize winner Edward Prescott showed that the higher taxes of Europe caused workers to start work later in life, retire earlier, take more sick leave take more vacation, work less ambitiously, and create companies that are worth less.
As a result, France's household income is $39,500 while our is $62,400. And, it is now going to get worse and worse. In 2018, we grew $680 billion while the EU countries grew $210 billion. Worse still for them, all of their growth was government growth.
1
On Dec. 22 of last year, after the S&P 500 closed at 2416, I left a comment telling investors to stick with stocks, because the dividend on the S&P was nearly what a 10-year Treasury Note paid. The S&P closed at a new record on Wednesday. A link to my comment is below as proof. Nothing has changed. The economists don’t know anything. No one understands the economy; not even me. But, this is the easiest market to invest in, because bonds don’t pay squat. Why would I want to put my money into something that pays lower than inflation? It's an easy decision. Nearly my entire net worth is in stocks. I have no bonds and very little cash. The market could melt up as a result of these ridiculous interest rates. If you’re not in, you should get in now. If you’re in, then just sit tight. The S&P 500 could be higher than 3200 before the year is out.
https://www.nytimes.com/2018/12/21/business/nasdaq-stocks-bear-market.html?comments#permid=29849340
3
@Mark
I agree completely, except. . . The current stock market is a kind of Ponzi scheme. That will become clear at the next economic or political crisis when everyone heads for the exits at once. A good reason to hold some cash to buy stocks when they go on sale.
6
@MainLaw
Yep, there is a distinct possibility that the next president will be a democrat who has pledged to increase our taxes by 14%, restoring our taxes to the 2013 to 2016 level.
Here is the total federal revenue growth in that period by calendar year:
2013: 12%
2014: 8%
2015: 4%
2016: negative 1%
We will be thrown back into this death spiral.
In 2008, a 50% reduction in the stock market was $8.5 trillion.
Today, it would be $16 trillion.
The shock would be much worse than the last shock.
Plus, again, it would be unlikely that people would understand that it is a predictive shock, not a resultant shock. Going down because of what is going to happen not what has happened.
1
Economics is not a science.
Economists are not scientists.
There are too many variables and unknowns to craft the double-blind experimental controlled tests that provide predictable and repeatable results.
Economics is gender, color aka race, ethnicity, national origin, faith, education, politics and history plus arithmetic. There is no Nobel Prize in Economic Science. There is the Swedish National Bank Prize in Memory of Alfred Nobel.
Thus orthodoxy in the supernatural faith meaning is an apt choice of words. Interest rates aka the vig are preferred by corrupt crony capitalist corporate plutocrat oligarch welfare organized crime lords.
Making your money work for you instead of you working for your money exposes the worshipful love of money as the root of all evil and pride as the deadliest most evil sin.
3
What’s to be “ befuddled “ about? America’s economy has been a house of mirrors since the seventies and the acceptance of Milton Friedman Economics as the road too riches gospel; much like the Madoff Fraud it has been executed with a wink and a nod among those capable of understanding its just “too good too be true” reality, but there was tons of money to be made at the expense of those not in the know in the meantime: mainly the working class stiffs about whom Greenspan decades ago famously quipped “ we can’t give them raises but we can give them credit”; too which he should have added will also allow “ us” to make tons of money charging usury(loan shark) credit card rates to the rank and file, further reinforced by laws that disallowed discharge of said debts, while still allowing the rich such as Trump to walk away from billions. How else does one explain an economy based 70% or more on the ability of people to borrow(not earn), enough money to continue buying the basics as well as junk they don’t need, this backed only by a fed with a printing press churning out fiat currency that is immediately turned into IOUs sold around the world based largely on the premise that our IOUs are safer than “ their” IOUs. Without low interest rates America’s house of cards would collapse the rest of the world knows this and was a primary reason for first the Japanese then the Chinese buying our debt, if our smoke and mirror economy collapses their export driven economies collapse.
11
@Ted
Household debt service as a percentage of disposable income is at the lowest level ever recorded.
Not quite as a bad a picture as you paint.
2
The FOMO economy like a bubble economy just lots of them. Then like all foam it goes flat.
1
Sounds like Japan. Low inflation, low interest rate, low unemployment. And ultimately low growth.
This seems the natural life cycle as an advanced economy ages. Empty nesters no longer consume as much young growing families, so inflation is low. Slower growth means less demand for loans, so interest rate is low. Retirees drop out of the labor force, so unemployment is low.
The opiod crisis hastens this macro-aging by prematurely taking workers out of the workforce (and the economy).
4
@William Fang
“...ultimately low growth...”
Japanese income tax rates are much higher than ours and their immigration is zero.
We also still have over 93 million adults not working who are being pulled into the labor force by the hundreds of thousands every month.
And, the tax burden is reasonable now when companies expand economic activity.
1
So many astute writers today on this article that I wish I could pick out a dozen of them and have them sit down and listen to them sort it out.
If I were to add or re-emphasize one thing? it is that we are living in a new world. It is useless (to me) to look back 50 years for consistent trends (other that some people are greedy and many people are still hungry). The new world puts an unlimited pool of workers in play thanks to high speed delivery vessels purposed for moving raw materials in and finished product out. Yes a slower version of this changed commerce back in the 1800s but today's container ships are like clipper ships of old on steroids.
So greedy people and/or corporations working in an insular manner for their own survival see only their tiny part of the picture. An unlimited work force stands by at the ready to work for them, hoping for some fish or chicken in their rice bowl this week, or a new family motorbike so that they can drive their three kids and wife around town. Into the mix we throw in AI and robotic labor.
I think it is pretty unpredictable ten years out. Those in the know will set up their fallback position. My recommendation is a small cabin with decent water and soil. Then start putting in your deep bed garden and learning how to heat and feed yourself. Just as a hobby of course. Just a second home. That is how I see this global economy working out.
Now back to the theories.
13
The problem is with trying to explain a multifactorial parameter with a single cause and effect paradigm. You need multifactorial models that are way to complicated to be described and understood even by many economists. The main driver of interest rates and inflation can be many different things and are often different at different times. Right now there is an uncertainty about Trump and his erratic trade policies. So a lot of money is taking flight into something more stable than stocks. US treasuries are an excellent place to park your money waiting for the outcome of the negotiations between US and China.
3
@Ivan
“...a lot of money is taking flight into something more stable than stocks.”
Stocks are at $33 trillion, an all time record. Up $9 trillion since Trump’s election.
1
I can't do the numbers, I assume Upshot can.
If wealth is congested at the top of the pyramid, and if wealth is looking for a safe haven for a portion (large or "small") of that wealth, where does it go? Real estate (I've heard it said, They're not making any more.) and bonds (Hey, tech and start-ups are eating up my precious time, baby.)? If real estate and bonds are parts of this non-investing, non-building America through the red-blooded entrepreneurship, safe-haven portfolio, doesn't this explain high prices in the condo market and low interest rates in the bond ring of fire? This churning toward a false and flaccid stability?
3
The author makes an egregious assumption: that I as a callow freshman at Penn in 1963, taking a two semester introductory Economics course [utilizing Samuelson and taught by and for the Wharton school], learned and understood a lot about fundamental economic theory.
As a pre med student in those halcyon days I found it excruciatingly and dizzyingly opaque: and, if truth be told, as a physician for almost 50 years it still is.
This article is a fine example of the tortuous thinking so beloved by economists.
9
The Fed sets interest rates through its open market operations. The bond vigilantes are spectators in the monetarily sovereign USA.
2
@Steve Bruns
“The fed sets interest rates.”
The fed sets some interest rates. Go look at rates in the early 1980s of 18%. The fed lost all control. It set no rates.
2
There is another possible explanation: Too much money chasing too few opportunities. If you are flush with cash, then you are desperate to find investment opportunities that will pay you more than just parking your money in a bank. If banks are flush with cash, then they pay lower interest rates on deposits because they can't make much of a profit because of the supply and demand of borrowers.
With the redistribution of wealth towards the top .01% of the population, the super wealth have fewer good investment options, so they are willing to take more risk for less return just to get their money working. The conventional wisdom is based on a more equitable distribution of wealth, and the resultant financial risk profile. Today's wealth distribution profile is substantially different from that in the path, and we are seeing it's effect in this "odd" yield curve.
20
@Penchant
Yeah, just about any and almost all of the benefits accruing from our economy are going to the top few earners many of whom do not “need” them.
4
@Penchant
“The wealth distribution is different from that in the past.”
Yes, our poor have cars, cellphones, running water, toilets, showers, sinks, beds, air conditioning, refrigerators, flat screen TVs, shoes and more calories than are healthy for them.
The poor children in India clean latrines with their bare hands to help support their families, don’t have shoes, live in shacks without electricity or running water and eat rats for calories.
Yes the distribution has changed radically in the last forty years.
2
@Sam Song
In 2018, the combined total employment of Blacks and Hispanics set ten all time records driving their unemployment down to the lowest levels ever recorded.
Also, in 2018, the bottom quartile gain the largest wage increase of any quartile with their wages going up by the largest amount in over 12 years.
Maybe we should allow them to prosper for a while before we change economic course.
1
The takeaway here is how much influence will “American” markets have in the years to come? Foreign investments and globalization signals a new age in capitalism that will morph into each currency vying on new ground and the winner(s) will take all.
1
The thesis of some economists is that there is a surplus of money to invest. Some 28.3 trillion dollars in US 401k plans alone, all chasing better, higher, yields. Then you have the financial sector now approaching 20% of US national GDP, and focused on financial engineering to create more wealth, in esoteric financial instruments, and not investing in Main Street economies.
This is money chasing more money in the short term. There is no investing in the future: infrastructure, medical research, new technologies on an adventurous, massive ,scale. It's the .01% seeking more abstract wealth and they are just adding more decimal places to their net worth; not actually doing anything with it.
24
@OSS Architect
“...no investing in...medical research...”
In 2018, healthcare research was $51 billion in the US, only $16 billion in much larger population E.U.
1
@OSS Architect
Which is why we need to tax it away from them and do something productive with it.
3
The market is pricing not just an interest rate cut, but several. The market is not only pricing the end of QT but the return of QE. "Free money forever" is the embedded expectation. Fed officials have done very little to discourage that thinking. Ever since the "Taper Tantrum" of 2013 the Fed has been in appeasement mode. With DJT and his surrogates jawboning Powell for a cut and the "secular stagnation" crowd (e.g. Bullard) convinced that "lower for longer" is our best worst option, the market has every reason to believe that cuts are coming with QE soon to follow --just in time as corporate buybacks lose steam and all that corporate debt issued needs to be rolled over.
The outsized benefit to corporations and the investor class no longer seems to be a political problem now that the "Tea Party" is fully on board with the "King of Debt." And most Americans will not share in the financial bonanza as credit is both constrained and rationed for most Americans. Payday lenders and 'Rent-a-Center are not adjusting rates based upon what the FOMC does or does not do. Good thing Mulvaney eliminated all the "ability to pay" restrictions upon payday lenders --it would be a shame of they can not take both "last can of Who Hash" and every can to be made over an infinite horizon.
4
MMTer here. Banging his head against a wall as usual.
Look, mainstream economists don’t understand money. They just don’t. Never have. They model the economy without money, if you can believe it.
If you want to understand how an economy with money in it works, you have to look up MMT.
We’ve been saying for years that government deficits don’t cause “crowding out”.
If you understand how money works in the economy you know this.
It’s too simple to explain. And yet Nobel prize winners don’t understand it because their basic understanding of money is wrong. Always has been.
3
The Obama administration engaged in quantitative easing - printing money to buy down high interest debt. Republicans screamed their head off about how he was going to wreck the economy. Over and over again they said Obamacare was a jobs killer. Clearly they don’t have a clue but they will get re-elected anyway.
4
@Michael
Yeah, and wreck the economy to boot.
2
@Michael
In Q1 nominal gdp inctreased at over an $1100 billion pace.
Money supply increased $30 billion.
So, all those stagnant pools of money are being injected with value.
Very healthy.
Chill, everything is going to be ok.
2
The real issue is the confusion flowing from the head of the table in the WH. Since even Trump does not what is coming out of his empty brain box from moment to moment, no one can plan effectively on a balanced economic position being espoused daily or otherwise. Without being rid of the chaos of our current government, it is difficult to gauge the negative changes now in effect from two and half years of Trump.
6
@NOTATE REDMOND
Chaos may be a good thing. Prevents the herd from stampeding. Somehow, magically, he seems to get to the right position despite having really screwed up theories.
Inflation is going to zero and interest rates are going to one percent.
1
The latest trend of falling interest rates started when the Federal Reserve reversed the move to unload its balance sheet. The Fed is sustaining aggressive monetary policies (i.e. low interest rates and buying/keeping all sorts of bad assets) way beyond what was required to mitigate the effects of the GFC. Unintended consequences of this reckless attitude include repricing of risky assets to silly levels, explosion of private debt, and, the aggravation of inequalities. The Federal Reserve should focus on its main missions which are controlling inflation and promote full employment and leave asset pricing to the market.
2
@FCH
“Explosion of private debt.”
Household debt service as a percent of disposable income is at the lowest in recorded history.
Federal debt service is less than half of peak, only 1.6%.
1
@FCH
Bernanke's legacy.
1
@John Huppenthal
You've twice claimed that household debt service/disposable income is at its lowest point in recorded history. What is your source for this claim? What about plain old household debt/household income? As with federal debt service, so here: Low interest rates can temporally displace the effects of rising debt.
1
Trump wants lower interest rates for the primary goal to reduce his personal and family’s debt.
9
If true market conditions were in play, interest rates would rise. The EU has negative real interest rates and France just issued their first 10yr bond at a whopping -0.13%. The world economy has been on life support since the gold standard was abolished.
The big players are keeping interest rates down to keep the stock markets up, and their earnings. If and when interest rates return to historical levels of 5-7% the US debt, along with the world's economies, will simply crash. Buy gold.
1
@Jon Galt
Gold is not the answer.. and hasn't been for a hundred years.
Gold is a commodity used in the tech industry, and hence in high demand. But it's still a commodity and as such.. more vulnerable to normal commodity cycles then interest rates or currencies.
It's use as a marker or stabilizer for currency values is long long gone in the world economy. And it's not coming back. If fact.. as a commodity in the tech industry... a major downturn in the world economy would most likely drive gold prices down next time.
2
@Chuck
In 2005, Gold went from $425 to $1800. Gold bugs and other hedge investors walked away with over $10 trillion. Biggest heist in history, all courtesy of the Fed abandoning the Volcker commodity pricing rule. Set up the housing crisis too.
Will the Fed find a way forward to keeping money valuable?
1
It's amusing when economists say things like "this isn't the way things are supposed to work" (or some suchlike) when macroeconomic factors don't behave the way they think they should. As if money, and human perception of it, is tangible and quantifiable. As if they are actual things. Money is a construct of the human mind invented in order to ease human interaction as a medium of exchange. Money is as empty and unreal as any dream except for the consequences it has on human behaviors due to their belief in it. Money is an agreement. An idea. When the agreement ends money is just numbers on paper and screens. A flawless diamond is just a shiny, hard rock except in the human mind. The value of commodities and currencies are never static because value doesn't actually exist. The theories on the movements of value amount to little more than self-fulfilling prophecies. The fact that supposed money experts are consistently baffled by the ongoing evolution of human economies, and how they react to human perceptions, is a testament to economists' ability to believe in their own expertise, even in the face of ever-mounting contrary evidence. They are consistently wrong in their prognostications, yet they soldier on as if somehow they must develop some sort of unifying grand theory that will explain everything money does eventually. Good luck with that because what money does has everything to do with luck and so little to do with the human ability to understand why it does it.
10
@Gowan McAvity
Money the universal commodity, in which the value of all the others is reflected, has evolved its form from that during simple commodity production and exchange (cattle, shells, and even copper, silver and gold) to the ideal one of extended commodity (paper notes, promissory notes, securities, bitcoins, etc. ) or proper capital production. Both reflect labor time spent in the production of commodities. the former in a direct way and the latter in an indirect manner (thereby its ideal character of representing homogenous social labor time). Nevertheless, they are real as they were not created by whimsies of the imagination but born of socio historical practices (i.e. of necessity).
The problem happens when money is disconnected or conceptualized apart from value production (or labor time spent on its production). If I believe that interest does not relate to surplus value, then I believe in the mystical or magical idea that money breed money (as many think of interest).
The global value chains are just a means to transfer value from one place to another and realize it in the socially accepted form of social value (i.e. money). National economies in that sense are the real imaginary that misleads to believe in the empirical forms (profits, interest rate, wages, etc.) of this substance (socially necessary labor time or value)
2
@Enri
So, "Socio historical practices" and "value as labor time spent" are real because they have to be real (ie of necessity)? That's convenient. Those phrases are simply economic constructs of the human mind and have no tangibility (just like money), no matter how "necessary" certain humans may think they are. They are not "real". They are human perceptions about the value of their time and labor, so yes, they are certainly whimsies subject to the vagaries of non-quantifiable human conventions and belief systems. The value of labor varies with perception and exists only in the minds of the humans that believe and act upon what they agree to see it as.
1
@Gowan McAvity or just go back to your Adam Smith,...”labor is the first exchange”
1
There seems to be a clear consensus here that inequality and hoarding of wealth by the very richest among us are driving this trend. Note that there is one presidential candidate who understood this a long time ago and has proposals to address it: Elizabeth Warren.
17
@Jomo Took the words out of my mouth (or off my keyboard).
"It’s the idea that as unemployment falls, eventually it will cause an outburst of inflation..." But falling unemployment is supposed to bring higher wages; it hasn't. Perhaps in the age of automation, capital has found a low-cost substitute for labor, putting a ceiling on wages.
4
@Doug Fuhr
“Falling unemployment is supposed to bring higher wages.”
Maybe not.
Maybe higher productivity brings higher wages.
Productivity is up and wages are up. Increased in 2018 at the fastest pace since 2007.
1
@Jomo
“Driving this trend...”
Lower interest rates, much higher employment, higher wages.
Yes indeed, Warren intends to do something about it.
1
When the data doesn’t make sense, there is likely missing data. Like the credit default swap crisis that only the truly savvy insiders foresaw, we on the outside will only understand this later when Michael Lewis explains it to us. An element of the explanation will be that the BLS counts a $200K IT job equivalent to a $20K food service job. The two don’t drive demand (i.e. inflation) with the same vigor.
6
@Robert B
Wages are up so the job mix doesn’t seem to be at fault. But, yes, welfare dependency is down 5.2 million so likely, lower skilled workers are entering the market in droves.
A good thing, an incredibly good thing.
1
1) The wealthy few cannot ever spend all the money that has come their way and so they bury it on treasure islands. If that money ever got out and began swirling around the world and got into our hands, inflation would explode;
2) Therefore, inequality is keeping inflation low since the wealthy just save their money and invest it in things that keep it safe at low-interest rates;
3) Low-interest rates are targeted by monetarists because it keeps the buried/ invested money from inflating too much and the wealthy are fine with this just so all their wealth is safe;
4) Low unemployment reflects a large workforce of low-paid service sector workers with little to no benefits. These masses have to scrape by paycheck to paycheck and have little buying power;
Conclusion: Massive amounts of the money in the developed nations have found safe refuge in the low-interest savings/ investment holes that keep this money from seeing the light of day, and the masses are not really making that much money for themselves, so the rat wheel is not speeding up and overheating. Inequality is saving us from a recession/ depression, but this will only last for so long until the buried money gets out, it can't stay buried forever, especially if we gat a war.
10
@Chris
The wealthy bury it on treasure islands.
Nope.
The 16,000 taxpayers that Ocasio-Cortez has targeted with her 90% marginal tax rate have invested over $4?trillion in businesses that employ over 20 million people and that hired over 1million people last year.
These businesses would be wiped if Ocasios tax goes into place after the next election and would have been wiped out if Warrens tax had been in place the last 30 years.
1
@John Huppenthal -- Nope.
That money is buried in investments that are safe havens for cash that include minimal investment returns in trade for the safety of the investment. It is precisely the fact that the money has been safeguarded by its investment in low risk, low-return vehicles that the wealthiest keep it out of our hands so that they don't have to work to get it back from us: that money is not nor will it ever make its way to us in any meaningful way, if it did we see it by now.
Your claim is spurious and baseless: at best shareholders are the ones picking up the scraps while these plutocrats are inflating the price of fatuous art just to find ways of investing their money in things that will not do anything for the economy lest they overheat the economy.
1
It seems the Phillips curve was based on premises unique to a particular era. When those given premises changed, the power of Phillips’ correlation to predict future inflation fails
From 2001 to 2020 the US economy exists in a different economic world than the world economy when the correlation of the Phillips curve was first described.
Phillips’ economic world had powerful unions, the cold war, a huge defense budget, high and progressive tax rates, limited world trade. The list of differences in the American Economy in ,say, 1970 vs 2020 is greater than the similarities.
To expect the Phillips curve today to predict future inflation rates is to expect the Earth’s gravitational constant to predict high jump records on the moon. Economics is not physics. When conditions—premises— fail in economics then economic predictions based on those premises must fail. The charge to the world’s economists today is to determine which of the classic laws of economics still apply in today’s world economy.
5
@Thomas
Man I think you conveyed that very well! I am tuck this chestnut away! My thoughts exactly.
1
So neither the CBO, the Fed, or private economists have a clue how the economy is functioning. Clearly the markets have responded to factors not being taken into account by the current economic models. They are all running models based on past data which no longer applies.
The implications are profound: As citizens we no longer can trust any government economic predictions. As voters we should not believe any politician’s predictions for the economic impact of any program they propose. As investors best to follow Warren Buffett’s advice and invest and hold solid companies for the long term ignoring any attempts to time the markets.
3
Interesting that I spoke with my sister yesterday, a truck driver. She mentioned that her income is going down, because the large trucking companies are bringing in foreigners on visas and employing them as truck drivers with far lower wages, which in turn is now affecting the compensation of all truck drivers.
The U.S. cracks down on immigrants yet allows corporate interests to work the system to their advantage. Short term benefits to the consumer class, long term detriment to the employee class and our government who will wind up subsidizing a greater share of the working class who can’t make ends meet.
Increasing wealth in the hands of the very top tier who put that capital into cash & bonds explains lower priced capital.
16
Technology has dramatically lowered the transactional cost of finding a new job or hiring a new employee. No matter how subjectively hard it feels to find a in or find a new hire, it is so much easier to find and apply for openings, or find and consider resumes than ever before. (Let alone to verify details). The extreme example of this is the gig economy—everyone becomes an independent contractor rated through Angie’s list or Craig’s list or whatever other mechanism, available for hire at almost no transaction cost.
So the inflation-free unemployment rate has dropped accordingly. Nothing to do with Trump or any economics policy. Just technological innovation.
Whether this is a net good, and who gets the benefit, is another question. E.g., Uber is great for consumers, and shareholders, but horrible for taxi drivers.
2
The tariffs are doing exactly what they have been crafted to do.
1
I might suggest that it's the Baby Boomer's fault. As they age, they consume less, reducing the pressure on prices.
They also aren't buying new homes, etc. Demographics are hard to over come.
2
Low unemployment isn't being caused by the economy right now. It's the result of so many the undocumented workers being removed from the workforce. If you work in an industry that traditionally hires a lot of undocumented workers (construction, restaurants, et al) then you likely got a raise recently but it's not enough to make up for what the undocumented people had been spending so consumer spending over all is going down even though lots of people have gotten raises.
1
The whole world has come to believe everything must be cheaper. It’s truly amazing to watch how many people can’t understand the correlation between that and wages not rising. Choice of product for usage by a typical business is centrally concerned with cost. If a CEO chooses quality for purchasing he won’t be CEO long. This idea of cheaper and cheaper explains quite a bit of what is wrong. Time to call a spade a spade.
2
While economic behavior can't be attributed to any single cause alone, here's an r factor that might help explain the new rules of this strange economy: a system highly rigged in favor of production over labor.
Who opposes higher wages and restricted borrowing? Certainly not frontline employees, whose earnings in real terms are mainly flat or falling. Neither do they tend to access loans for anything other than autos and homes.
But major employers resist paying employees more and love unregulated financing. Of our system now serves MNCs as our masters, then they are definitely seeing thkings work to their advantage.
7
Since most people buy cars and houses based on monthly payments, low interest rates just increase selling prices. Good if you own the assets being sold, bad if interest rise.
Low interest rates are part of the decimation of the middle class and the rich getting richer. If you are lucky to have money to invest, to get any return you have to put it into the stock market. Private equity has been gobbling up public companies, so there are fewer and fewer investment choices. Private equity and venture capital have so much money that the average investor has no chance to take a risk and thereby benefit from a start up. 60 years ago anyone could have bought Xerox stock before they introduced the copy machine. Even the biggest dividend paying stocks are under threat from private equity as wel.
11
Isn't this straightforward IS/LM? The increase in the deficit is because of the tax cuts, not increased federal spending. The tax cuts result in more money in the hands of the wealthy, who are saving most all of it without increasing spending, so savings are going up, resulting in lower interest rates. Now if the fed tries to counter soft demand by lowering interest rates....
7
@solon
"...not increased federal spending..."
Annual rate of spending is up $472 billion since q4 of 2016 and the deficit is $780 in 2018. The deficit was already $580 billion in 2016.
Yes, spending is a big part of the problem.
1
Correct me if I'm wrong, but the more one is willing to pay for a bond, the less yield it throws off as a percentage of the price paid.
Smart money, which smells instability well in advance of the average grazing sheep, is getting out of risky assets and into treasury bonds, depressing the yield. Purchase of lots of treasuries lately is, in accordance with orthodoxy, pushing yields down. Likewise, precious metals and virtual currencies, other safer havens, are also rising as a measure of perceived instability. (Bitcoin has nearly tripled in the last 6 months. Gold and other PM's are also rising, disproportionate to change in dollar value.)
We are in that place where the economy is still generally perceived as stable, and there is no pervasive doubt that the government will pay it's bills; but there are also storm clouds indicating that the regular herd investor is about to be caught holding the bag. Smarter money is selling to the herd and going to safety.
3
There is one simple solution to the problem...put the majority of money in the majority of people's hands. Those people will save and they will spend! What we have now is the 1% willing to collapse a system so they can keep all of the money. I just hop the collapse comes on Trump's watch!
14
An "expert" is someone from another city. In this case, the experts are from another planet. A dart board has constantly beaten "expert predictions". Maybe a 2X4 over the head would get their attention and knock some common sense into their heads, but I doubt it.
3
How do we know we are getting accurate economic data from this administration? This administration determines the joblessness rate, the unemployment rate, and inflation. They are cooking the books on the environment and pretty much everything else. How sure are you that they aren't cooking the books on economic data?
9
The mystery is partially explained by the false assumption that it is a closed economy driving both interest rates and unemployment.
Krugman has repeatedly pointed out that much of our debt is financed by *foreign* borrowers. Americans don't save as much as foreigners. As pointed out in this article, US bonds are attractive and get gobbled up by the rest of the world.
Employment numbers are for the US only. That is not the same market that is doing the borrowing of bonds.
"Unemployment is low and talented workers scarce." Every time that statistic is quoted, they omit the fact that "unemployment" numbers don't account for the record low employment involvement -- people who have dropped out of the labor force because there are no well paying jobs that match their skill levels. In a real free market labor would negotiate higher wages. Wages are rising but only slowly.
That means that much of the labor market is for low skill service jobs, a non-competitive market since many of those people must work 2 or 3 jobs to make ends meet. Once a person has a job, he doesn't get more-employed by taking a second job! So the optimistic statistics that politicians like don't describe the whole picture.
Finally, the rebuttal to my argument says that "many" employers have open positions since they can't find trained workers. That argument NEVER quantifies "many". The economic numbers indicate that those whiners are making noise out of proportion to the number of jobs they offer.
10
Modern Monetary Theory ( MMT ) ... your time has come.
4
It’s manipulated, silly, like everything — and everyone — else.
When wealth is so over-concentrated in so few hands, as it is now, a very few fiduciaries, commercial entities and individuals can (and do) exercise outsized control over debt instrument prices. The tail wags the dog.
In due time higher rates will accrue to their financial advantage and when it does look out below. American savers have already been robbed blind, for nearly a decade. American retirees will be robbed next by the deflating value of securities held in retirement accounts, pension funds and IRAs.
5
The dismal science is clueless. Yet we keep pretending that they have something to say.
7
When you have a study built around a limited set of data that excludes important factors (population growth, the environment) and never questions basic assumptions (that growth is somehow a moral good, to be pursued without end), you have junk science.
That’s what economics is: the voodoo magic of our modern day society, with its practitioners listened to like sages, and rewarded like kings despite being right less often than a random flip of the coin.
5
I think the old rules still apply.
1
The Republican party has a strangle hold on the levers of power in so many states where decisions which have national consequences are made. And the economic policies of the Republican party do not work and have not worked for some time. Like the "ugly" American stereotype faced with communicating with people who don't speak his language, simply raising his voice and saying the same words louder does not achieve results.
The next person to head the executive branch will need to be a person who can attract the best talent available in the US to government service. The economy in the US and the global economy cannot wait until 2024 to begin the clean-up from Trump and the Republican party.
8
@Lynda. I think there's a vast pool of brilliantly qualified people who would be eager to help President Warren begin to turn this disaster around. Trump has slim pickin's from third-tier Fox blowhards and wife beaters. The unfilled posts and hopelessly unqualified appointees have created huge problems.
Wow. I never expected Modern Monetary Theory to be proven right so blatantly. For all the college students out there, they do have a new textbook: it’s by Bill Mitchell, Randall Wray Andrew Martin Watts, and it’s called, fittingly, Macroeconomics.
5
There’s one expert who accurately predicted today’s and years of falling interest rates (since the late 1980s) as well as the housing bubble in the early 2000’s leading to the Great Recession) producing the best yielding investment of zero Bonds.
A Gary Shilling
This new way the economy works when wealth is concentrated in the 1%.
9
What if we aren't measuring inflation accurately?
SS went up this year, approx 2.5% for its first increase in 3 years. While one bedroom apts here are $2500. Lunch costs almost 20 bucks. Gas is $4/gal. An older 2 bedroom, 1 bath, on a 6th acre costs $750,000.
CBO, FED who are you talking to? What's in your market basket?
16
1. Frankly I am fairly uninterested in interest rates. I think the main reason that have an effect on the economy is that people have been told they will have an effect.
Personally I would prefer that the federal government not borrow from the public at all. Since it can create as much money as it needs out of thin air, it can use that money to pay for government operations.
2. But what about inflation? I am very interested in inflation. Let's if we can understand why there is little despite all the data that mainstream economics says should increase inflation.
Irwin prattles about higher deficits causing higher inflation. I suppose he means the higher deficit means more money in the economy and more money implies more inflation.
Right, but there are two other factors. The first, which is very pertinent now, is the velocity of money. That is the frequency that money changes hands in domestic commerce. A billion sitting in Daddy Warbucks basement or invested in financial speculation affects prices little if at all. The lower velocity, the lower prices.
Since the crash, velocity has plunged. See
https://www.stlouisfed.org/on-the-economy/2014/september/what-does-money-velocity-tell-us-about-low-inflation-in-the-us
Why has this happened?
It's inequality. Practically all the economic gains since 2008 have gone to the Rich. They spend a smaller percentage of their money and use the rest for speculation. If this is correct. the stock market should have surged.
It has.
14
As of June the SA CPI was 1.9%, barely below the Feds target of 2%. CPI was 1.8%.
Fear of Donald Trump on the world stage and an instant worldwide catastrophe he may cause from nuclear war to disasters in Venezuela, the middle east and a whole host of hot spots may well be the single biggest factor in declining interest rates. Fear usually causes investors to load up on US treasuries. The strong equity markets may be nothing more than a reflection of declining interest rates and an expectation they will continue to decline as long as Trump is in the Oval Office. He doesn't need the Fed to lower interest rates. His insanity is doing it for him.
7
We have been here before. Easy credit, homes being used as ATM’s, consumer debt growing. The “ too big to fail “ crowd with help of the Fed are at it again. Eventually the bills come due and the bankruptcies begin. A Democrat in the WH will have the job of fixing things ....again.
3
"Lower long-term rates imply that investors expect even lower growth and inflation than had seemed probable just weeks ago."
Not any investors I know.
2
Bottom line: President Trump's economic policies have given us an economy that's so good (liberal) economists are baffled.
This is one of many reasons why President Trump is going to be reelected. It's the economy, stupid.
3
When money in the bank pays this little interest and for so long, nothing good will come of it. People cannot be 100 percent in the S&P their entire lives. People who save in a bank are being played for fools. The problem is this could go on for another 10 years.
5
Whatever the cause, savers have no income from their lifetime of building a nest egg, while the Trumps of the world profit from the low rates.
When did you last hear a politician mention this as a problem?
12
@IJMA We sure haven't heard about it from the Dems.
They appear to be more concerned with health coverage for the undocumented among us.
And I'm a Democrat...
1
You know you're in a bubble when people speculate that the rules of economics no longer apply. You know the bubble is about to burst when people actually believe the rules of economics no longer apply.
4
Great piece Neil. the old "closed loop" theory no longer adds up. It's a global equation driven by credit - floating currencies. There is no real stability. This is what we signed up for decades ago (thought we we smart). Everything chases cheap labor; a global market flooded with more supply than demand; squeezing the math for the last penny of efficiency; ruthless competition. And, there is no escape - just print more money. "Creditopia."
3
@badman
"...driven by credit..."
Perhaps.
In 2016, the 7th year of the recovery, nominal gdp growth was $485 billion while federal debt grew $580 billion.
In 2018, the 9th year of the recovery, nominal gdp growth was $1,070 billion while federal debt grew $780 billion.
Perhaps not.
"Everything chases cheap labor..."
Perhaps.
In 2018, real GDP growth in the U.S. was $680 billion for 330 million people with an median wage of $50,000 and, at most, 35 million unemployed people that might consider coming into the workforce.
In 2018, real GDP growth in China was $720 billion for 1.4 billion people with a median wage of $11,500 and with 600 million people who are officially employed.
If pursuit of cheap labor is the dominant force, it is not obvious.
1
@John Huppenthal
Perhaps.
I have suspected that some of the collateral damage from the the 2008 crises: a decade long period of extraordinary low rates,the purchase of all the junk bonds created by Wall street (trillions worth), an an absolute refusal to significantly increase wages by companies at large. I think we have distored the system so that the classical yield curve and other constructs no longer operate as they have for the past decades. Currently observations are not dissuading me of this. RIP Milton Friedman and your outdated monetarist policies.
What the author and the comments miss is that interest rates have been falling for forty years. This particularly true for long term interest rates. In October of 1981 30 year mortgages had an average interest rate of 18.75% but today it is 3.73%. Even in depth of the Great Recession in 2009, the average 30 year mortgage was over 5%. If you look at a graph, it almost a straight line down. This is the result of a long term structural change in the credit market. Credit is a commodity like any other, the price (interest rate) is influenced by the balance of supply and demand. The supply of long term credit keeps increasing while demand does not keep pace. There is so much credit available that even the massive Republican deficits cannot begin to “crowd out” other demand.
http://bit.ly/2l4LkQ2
2
Economics is based on the fallacious assumption that economic systems follow eternal mathematical laws just as physical systems do. But markets are driven by animal spirits, and subject to ever changing conditions and relations. Based on a false premise, economics must inevitably reach false conclusions. No one should be surprised.
2
I think we have too much US dollars sitting in the world. As we do MORE sanctions against other countries, people readily learn that we weaponize our dollars. It alerts people stop using US dollars. And those dollars have no place to go but come back, thus causing interest rate to fall.
2
The Phillips Curve, the inverse relationship between inflation and unemployment, is based on historical data that preceded hyper-globalization. Prior to this, economic models were based on what were, in effect, closed economies, with trade flows representing a relatively small portion of overall economic activity.
The creation of the current global free trade regime and the opening of capital accounts to international mobility have created a new set of facts that have not been integrated into theoretical economic models (so much for "lifetime learning"). Keynes famously said "when the facts change, so do my opinions." But we live in an age in which facts are denied or ignored if they don't conform to predispositions.
5
Thank you for posting this. Elegant summary!
1
Trump effect baby!! Yeah!!
1
Ah, the Dismal Science! So many theories, so little explanation.
1
Nobody flashes back to the Jacksonsian period. Only major diff, Jackson paid off the national debt, but the country was mired in a major "depression" for about 2 decades. One might say the US was saved by a war. Anyway, I know it is unorthodox, but I would give it a look. As David Blanchflower would say, try some walking around data, and kick the models to the curb for now.
1
During middle of Global financial meltdown during Obama era, I watched an otherwise excellent discussion among "top 4 Economists in the world"- all Noble Laureates. It was Charlie Rose show in PBS. At the end of the heavy duty discussion the host asked all of them the same question- who would they recommend to Obama to get out of the crisis and how to safeguard our global economy. Those 4 "experts" were divided in the middle- 2 proposing something totally 180 degree opposite to what other two were suggesting.
Long live economics, which seems to be more like arts than science and its beauty seem to lie on the eyes of beholders than data and logic-- bluffing for any person trained in science!
6
I don't know exactly what the inflation rate is supposed to measure by my real inflation rate is not 2%
7
The cruelty of low interest rates is that savers that can ill afford playing the casino stock and bond markets because they lose big time money-twice in the last 20 years. Assurances of quick recoveries may occur. It took 25 years after the Great Depression to merely recover 1930's losses. Keep in mind capital flows external to the US Dollar which may soon not be the reserve currency that could play havoc on our markets. A Presidential candidate that offered a FEDERAL 4-5% interest rate for long term savers(maturities 3-5 years) would win in a landslide.
4
@tennvol30736 And those funds could establish a Federal Housing Bank, that funded a Tenn. Valley Authority style low cost housing organization (See PBS News Hr, Auburn architecture students built single family houses for $30-$40,000). Train those who need living wage jobs, the incarcerated job skills to build them, including low cost mortgages.
2
@tennvol30736,
"...they lose big time money-twice in the last 20 years...". They only lost if they panicked and sold .
2
@Charles Becker When one has lost 50% of their money, probably in hindsight, lot easier to say. In the 1930's (never happen again?), those that didn't panic lost it all. Your thinking is an illusion repeatedly planted by financial capital heard enough times becomes fact? My emphasis is in the form of a question. Past is not prologue.
1
Many comments suggest classic economics arguments, supply matching demand, excessive capital from income inequality, but perhaps the president's actions are partly responsible.
Trump's main talent is creating fear which may explain the conundrum. Business uncertainty caused by Trump's actions means increasing unwillingness to make investments. If businesses had more confidence, a primary demand for capital would go up and with it, inflation.
7
This is a little frightening because we don’t seem to know how things work anymore, which portends very poorly for the next big downturn. Especially with rates near historic lows. What are we going to do next time we need to avoid another Great Depression? Can’t drive down rates to spur investment — we already did that, and then kept the rates low.
12
@Tim
I agree, Tim. It seems to me that we've used all the tricks in the books before so there is nothing left to try next time. Maybe because wages are stagnant, the only way to spur buyers to purchase cars and homes is to offer very low interest rates, so car and homes sales may not say that much about the health of the economy. In addition, the number of jobs created may not mean much if they are mostly for more low wage jobs, adding to the same problem. It all seems like a house of cards to me because there is little REAL wealth (savings, property assets) in most people's hands, so I can easily see it all come crashing down; if it does it will be worse than 2008.
3
I read a very interesting article back in 2011 about the work by economist Richard Hokenson, who did work on demographics as related to economics. In the article, he stated that the shocks coming in the future would be deflationary, not inflationary, because of declining populations in most of the Western world. Many people giggled at his theory. But he a) had pretty good data to back it up and b) has been very right. His primary argument was, young people spend money, not old people.
The thing is, that is not changing in the West, and particularly, our current administration is bound and determined to prevent the one source of potential young people being added to the US population, immigrants.
Lots of inflation is a bad thing. But a little inflation is a good thing. And deflation is a very bad thing, we saw that in the 1930s.
10
The June jobs report came in much better than expected and the stock market....well, it sold off, of course, because all Wall St. cares about at this point is lower interest rates, a hope that may be dashed due to the strong jobs number. The 10-year treasury bond also saw its rate move up, from 1.95% to 2.06%, quite a leap percentage-wise. Here's hoping the Fed will at least hold steady in late-July and perhaps begin another push toward "normalization" of interest rates if the 10-year continues to see increased rates.
6
Every time is different.
Many economists are fretting about the supposedly low inflation not hitting their unsubstantiated target of 2% (Paul Volcker is an extremely notable exception to this group).
What is not adequately modeled by these economists is the shift in bargaining power away from workers - union membership has plummeted, overseas competition has grown, worldwide shipping has dropped in price, and the internet allows pricing transparency. Buy something on Amazon and you don't know who made it or where, and it makes little difference. It will arrive on your doorstep in a couple of days no matter what.
Throwing more money into our system won't change bargaining power. Most of the money will continue to gravitate to those that have the most power.
Rather than standing around and complaining about being confused that the current situation doesn't fit the old model, these economists should spend their time figuring how how to improve their model to agree with reality.
11
@John, there are researchers at MIT (e.g., Acemoglu) who have documented that most industries in the US have become more concentrated since the early 1980s, meaning fewer firms are responsible for a larger amount of the sales of that industry. This means there is evidence that your conjecture is correct; firm market power is increasing. So fewer firms control more output and also control more inputs that go into that output. This leads to models of firm market power in input markets. The extreme is called monopsony where there is only one buyer of the input, as opposed to monopoly where there is only one seller. Think of Walmart in a small town where it dominates the local labor market. It can set wages to a low level and reap extra profit from doing so.
1
There's a supply vs demand issue that's being overlooked here. As a general rule, rich people invest, and poor people spend. When you shift the wealth dramatically towards rich people, as we have in the last few decades, you are going to end up with a lot more dollars chasing a lot less demand. And that's going to drive rates down even in a tight labor market.
36
@A
Good point. Employment may be up, but are wages rising to match? (More jobs at McDonald's replacing middle management jobs, or well paid automotive jobs, for example).
And if many Americans are working 2 or more gigs per day, then there goes the demand for anything leisure-related--tourism, sports, music, restaurants, date night clothes, etc.
3
@A Your analysis is probably correct. You're not the only person to propose it. The idea should have been raised in this NYT article. When the US first passed income taxes, many wealthy inheritors from the gilded age moved their money into low interest tax free bonds. Low interest rates weren't a concern to them because the return was more than enough to support their family's lifestyle. Today, low interest rates correspond to low risk. A credible strategy to retain great wealth is to avoid risk by taking low return. Since wealth is so concentrated now, the large supply of low risk investment reduces interest rates.
2
Seems like it might be a simple case of Say's Law (1803) which predates modern Keynesian economics by a long shot. Ballooning wealth creation among the 0.1 per cent, and among tax free corporations leads to a global glut of money chasing too few real investment opportunities, so the price falls.
19
Shouldn't too much money chasing too few goods (investment opportunities) cause the price of those investment opportunities to rise? I'm one of those that hasn't been in an Econ class in decades, though I'm sure I remember that tenet correctly.
2
@Texan
I got everything wrong in economics, so I'm inclined to say no, but I'll probably be wrong again.
But I don't think so.
Imagine, automobiles suddenly improved to where they can now get 100s of miles per gallon of gas. We'd consume lots less gas, but the price at the pump would skyrocket, because when you need it, you need it, and the gas station knows you'll pay out once a month.
1
@Texan Yes. you remember correctly. But in this situation the "goods" in question are financial loans. When the price of a loan goes higher, the interest rate goes lower. In market terms, bond prices are increasing.
1
Economics is an art/putting horse behind the cart/experts in the field agree/there is little symmetry/like the aimless wind that blows/economics little knows/where it's going day by day/despite what Mr. Powell may say.
10
I remember my late mentor, Herbert Simon, a Nobel Laureate in Economics, telling me how he'd studied under five Nobel laureates at the University of Chicago, but when he returned home to work in the Milwaukee Planning Department, he found that none of their theories worked in practice. That led him to become a pioneer in the field of behavioral economics that introduced psychology of human decision-making into the "dismal science."
19
@Paul Wortman; Maybe it should be economists who are "on the couch." The resistance to reality and the insistence that set topology and matrix algebra will yield anything but publications had led the profession astray for two generations.
In physics, the role model for economists, no "theory" is more than a hypothesis until confirmed by evidence. Einstein's general theory was accepted only when Eddington confirmed that light bent. In economics, facts, including institutional realities, get in the way of "pretty mathematics." And now "the resistance" is to behavioural economics. Sad.
1
There is inflation—but it’s in the stock market. Real wages haven’t increased, so there’s no domestic price pressure. That’s in fact the big break with past history (with many factors responsible). However the stock market has gotten a double impetus from the tax cuts: corporate profits were immediately raised and much of that money went into stock buybacks.
Normal countries don’t incur massive deficits in good times so as to transfer that money to the already rich. So it’s not surprising that the results show up in different ways.
34
@Jerryg Stock prices have inflated due to lower interest rates due to two mechanisms. First, the costs of borrowing to speculate in the market are lower. That reduces the risk of speculation, attracting more speculators. Second investors seeking income buy dividend paying stocks to maintain the income that bonds no longer return. That increases their risk but maintains their income.
But the fundamental cause of lower interest rates is the Fed has increased its balance sheet beyond the economy's need for money(probably for political purposes). The excess money, not needed for consumption to meet human needs, is concentrated to a very few number of people who put it into low risk credit instruments.
1
This is what happens whenever the rich get tax cuts - they put the money in stocks and bonds ; ergo falling interest rates.
21
Have you missed the negative yields on German and Japanese 10 year notes? That's where we're headed.
Trump is demanding the FED return to the emergency measures enacted during the Great Recession: zero % interest rate policy (ZIRP) and quantitative easing (QE), even though the economy is still quite strong.
Chairman Powell's attempts to normalize interest rate policy and the FED's balance sheet so the FED could have means to counter a future recession only served to have Trump threaten to fire him. Trump is interested in getting re-elected in 2020, and wants supportive monetary conditions.
Regrettably, Chairman Powell capitulated, went completely dovish and joined the Trump 2020 re-election campaign.
7
Every day that the stock market falls -- as it is doing today -- is a good day for being optimistic about the future of this country.
4
We've been burned before by the adage "This time is different". Somehow, at the end, the rules of economics always proves it wrong.
9
I am so sick of everyone regardless of party affiliation or philosophy bowing down to the hungry goddess of economic growth; as if this is so obviously a beneficial goal that it is to be sought after ceaselessly. I demur. Unlimited growth represents rising “material” living standards which in capitalism only means rising consumption. And it is this consumption that is destroying our one and only planetary environment and perhaps edging us toward species extinction. True progress would be an awareness that there exist higher and more spiritually satisfying goals in life than acquiring more “stuff”.
43
@Chuck Burton
Well said. I wish I could get a million people to read this. Such intense consumerism is terrible. For the environment. For the Soul. For the kids and grand kids.
3
@Chuck Burton On a global scale, I agree. But wealth (and consumption) isn't uniformly distributed. Much wealth is loaned to gain additional wealth and impoverishes(lowering the consumption) of the borrower.
The real purpose of worshiping the "hungry goddess of economic growth" is that prospect of growth gives hope to relatively impoverished people that they can become wealthy. Absent that hope, impoverished people are much more likely to demand a larger share of the existing wealth. The fundamental assumption is that all humans seek and desire to become wealthy, increasing their personal consumption, convenience, ease, and social status. Just from empirical history, that assumption seems pretty well founded.
1
@Chuck Burton
Thanks for saying this, Chuck. In nature, there is no such thing as unlimited growth. Even a thousand-year-old tree or massive whale has limits. Why are humans so arrogant as to think we can keep growing, both in numbers and material possessions, without consequences?
2
Once you set aside the belief tax rates having no effect on economic growth, the current situation follows a completely orderly set of economic principles.
Nominal GDP growth in the first quarter was upwards of $270 billion. Money supply growth was a miserly $30 billion. Anytime the economy is stacking more purchasing power into money, downward pressure is being put on interest rates.
Now, we have 220,000 new workers making and spending $11 billion, driving $3 billion in tax revenues.
In fluid mechanics they have concepts of laminar flow and chaotic flow. Trump's shocks create a chaotic flow, breaking up herd activity. Each entity is making decisions based on the reality facing them, not running with the herd. This is really positive because it breaks up boom and bust cycling energy.
And, the usual surge of taxation to higher and higher percentages of GDP isn't happening. Economists have had no understanding as to why this phenomena drove both inflation and made the economy susceptible to recessions. At least not to the extent of previous cycles. That 21% corporate tax rate is a limiting level. But, it is going to yield a gusher of revenue. The IRS reported in 2016 that the median tax rate for a large corporation was 4% (as compared to the average of 18%). That will now rise every year.
Perfect virtuous cycle.
Now we just need to convince the totalitarian collectivists that the collective good is being well served by this set of policies. Won't be easy.
2
@John Huppenthal So, it would seem that it's OK to raise taxes on the wealthy, and not to worry that the $11 billion new workers will spend will cause inflation. Is this the new "quantum economics" where the old Newtonian laws no longer apply and we have to live with the "Trump uncertainty principle"?
11
@John Huppenthal So the bull in a china shop does do something good, creative destruction and all that, eh? Who knew.
1
@John Huppenthal "it is going to yield a gusher of revenue". Uh huh. Just wait. The fact that the deficit is zooming up right now is totally irrelevant. There's a gusher of revenue coming. I predict it will arrive at the same time as the Republicans' replacement for Obamacare.
1
There is no contradiction: the capital account is compensating for the losses of the trade account.
The middle class has the parochial vision that the economy is just trade. But that isn't the case in the capitalist system: you have trade and capital ("finance"). This fundamental misunderstanding lead the middle classes of the capitalist countries to commit cardinal mistakes, such as religiously support for low debt and inflation and neoliberalism and austerity.
USA's yield curve has just inverted in this quarter. Financialisation is rising, not lowering, precisely because, this time, there's no "real economy" scape to the low profitability of the American social capital (i.e. the total American private sector).
Financialisation is the symptom, not the cause, for lower profitability and, eventually, crises. To put it in other words, when financialisation happens, it is because the "real economy" had already failed decades ago. Neoliberalism was a symptom of the "Keynesian consensus" failure, not its cause; the same way, austerity is a symptom of neoliberalism's failure, not its cause.
4
Just once I'd like to see the article that says:
"The economy is doing great because a loaf of bread now costs half as much..."
Or...
"The economy is doing poor because Greg is only making 12$ an hour packing those boxes..."
---
What we get is rich-people metrics. Interest rates, stock indexes, arbitrary unemployment numbers... The reason nothing gets better for the working man out here is because all of the metrics we use to measure how good it is out here, only affect the rich. We read the metrics for the rich people and assume it must be "trickling down".
But with wages still at 1970s level and the cost of everything double what it was less that 10 years ago... the little guy is losing. The whole time everyone is telling them how great it is... they're just losing.
Everyday wages and the cost of everyday items... that's the only REAL metric to measure our economy. Because the health of our economy is directly tied to middle class spending. It's middle-out... not trickle-down.
80
Totally agree. Those writing the articles on the wonders of trickledown don’t live in the hourly wage earners world.
4
@J The little guy is losing because he has been propagandized into wanting as much “stuff” as he can grab without worrying about whether he can actually afford it. Bad for him, bad for his family, friends and community and devastating to the health of our only planet.
3
@J
The average Joe has the boot of the 1% firmly pressing on his neck.
The boot will never lift willingly.
It has to be cut off.
1
Do the CBO assumptions include Donald Trump's deliberate manipulation of the markets to produce very short term pictures of the American economy. Do they include the assumption that worker wages will be suppressed even when we are at or near full employment? Do they include a full understanding of the global marketplace that reflects a radical shift in the forces affecting our REAL economy. It looks to me like we need a new logarithm for measuring it.
11
Although some of the comments below start to make the connection, why aren't mainstream economic academics and journalists making the connection, or at least seriously looking at the possibility, that the trends toward low interest rates as a long-term phenomenon and toward concentration of wealth and income are causative rather than coincidental? Simple supply and demand. More money is in the hands of those who want to and are able to save and invest it - creating demand for stocks, bonds and other investments (driving up stock prices and driving down interest rates), rather than being in the hands of those who need to spend it immediately on goods and services - creating demand that would boost growth and inflation. Our economic model is out of balance, which is bad for all of us in the long term. More equal distribution of income and assets would be better for all of us in the long term.
90
Spot on John! Our economy is going through a major transition driven largely by rapidly advancing technology that is eliminating jobs, particularly higher paying jobs, and concentrating wealth in the hands of the owners and users of the technology. Job losses are moving up the food chain such as in the accounting profession of which I am a part. A low labor participation rate and the fact that job creation is at the low end of the pay scale account for a low unemployment rate coupled with a low inflation rate. Two things are needed: 1) A new approach to wealth distribution, and 2) Better education to equip people for jobs that will require significantly higher technical and thinking skills.
14
Hooray for John!
Here's an historical reference for you. In it the author shows that the is a strong correlation between inequality and financial speculation.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1661746
3
Hmmmm. Maybe, just maybe, the way experts square the circle is to believe that short term economic prospects are fine because we are enjoying immediate growth fueled by unprecedented deficit spending, but know that this is absolutely unsustainable and that the bill is going to come due in the intermediate term meaning that the 5 and 10 year outlooks are net negative.
This doesn’t seem like rocket science.
13
"it (CBO) assumes that when the government borrows more, higher deficits will cause interest rates to rise"
Irwin then states: "Generations of college economics students have been taught that this is simply how things work"
Why is there an assumption that higher government deficits will cause interest rates to rise?
The historical data shows the exact opposite occurring.
The ten-year peaked at almost 15% in the early 1980's. Reagan proceeded to implement massive annual budget deficits in the ensuing years. Interest rates proceeded to fall throughout the 1980's as the deficit was increasing.
The fact that college students are being taught a false assumption perhaps explains why most economics "experts" don't know what they are talking about.
9
@John
We’re you alive during the 1980’s? I remember getting double digit interest rates on CDs. Then in 1985 when we bought our first (and only) house, the interest rate was 16 and 7/8ths %. Yes 16 7/8%. It was a competitive rate then.
Despite paying such a high interest rate for our loan, buying our house has been one of our best financial decisions. Small house, not fancy, good neighborhood. Now that the mortgage has been paid off we’re financially secure. Note that we never used our equity to finance our lifestyle during the term of the loan, but rather just paid it off.
2
Wow, all about economic theory, new and old, and nowhere do I see the idea that our society is now a caste society.
The military has 1,000 overseas bases and has steadily self-selected. The middle class has been absorbed into the low service worker sector. Education devolves into merchants, and the elite are even more elitist.
It seems like only yesterday we were reading in college novels about how the low were desperate to become high class via marriage, etc., which became the media blitz of the middle class and homeownership whose bubble has now burst, U S homeownership never having gotten over 39% ranked globally and is now 37%. No commenters speculated on the necessity of US public being owners of their land which our founding fathers deemed essential. We have become casted.
13
@katesisco
A caste society. That captures the phenomena, perhaps better than trying to get people to see that we are rebuilding a class system.
The problem with economics is that it is hardly exact. In providing language to talk about how economies work the terms themselves influence the interpretations. And it is all truly difficult to explain in simple terms.
There is more money than was ever imaginable at the top; those in the lowest income categories have almost no chance of ever leaving their caste. And the middle layers -a broad middle class which made the US different - and provided hope - are being pushed downward. Most of our leaders come from the top, so -nomatter what their values - they tend to have a bias toward the top, reluctant to make substantial changes.
7
@katesisco
It became a caste system when they instituted the so-called Volunteer Military.
(hey kid, you want opportunity? Off to Kabul with ya!)
2
This piece is a bit frustrating in that it avoids explaining important technical concepts like the Philips curve or Romer's Inflation Adjustment model. Instead it suggests that students in intermediate macroeconomic courses are taught some truisms that sound rather like "centrist" (or Neoliberal) political ideology. It definitely *is* a puzzle that persistent low unemployment is not yet generating robust growth in nominal wages and inflation. That does indeed conflict with past understandings of the Non-Accelerating Inflation Rate of Unemployment (NAIRU). But how about a dive into current research on the intersection between labor economics and short-run macro?
8
@Alces Hill
The essential problem is that the Neo-Classical Economics (and its international cousin Leo-liberal Economics) doesn't care about the theories developed by Classical Economists. They give lip service to Smith, while ignoring much of what he said, and are openly hostile to Keynes, who explained the Great Recession.
Classical Economics had actual theories (like the Phillips Curve), mathematical relationships between different aspects of the economy, that each had an affect on each other. Equations were created to model these relationships, and data was used to set the coefficients so that we can have a basic understanding of how the economy worked.
Perfect Market Theory was developed so that we can tell the difference between a market good, and something that markets would be bad at distributing efficiently. The whole point of markets was to distribute goods efficiently, so when it fails at that job, it was the job of democracy to step in. {(Health Insurance fails all of the tests of a market good for example. Insurance markets deliver bad healthcare.)
There were warnings about monopolies, market domination, and obscene profits.
Neo-Classical Economics threw all that in the trash to announce that government is the problem, (except when it is giving money to the owners of capital) and that all of the things Classical Economists warned about are meaningless.
According to modern Neo-Classical, Supply Side Economics, tax cuts and deregulation are all that we need.
3
It's the inequality. The middle class are hurting, as is the lower working class; there is plenty of money around, and this is what skews the statistics. It's just not falling in the hands of those who shop in other than Gucci stores; and that shopping isn't enough to buoy an economy.
24
@Terence
Yes, Demand Drives the Economy. Supply follows demand.
Demand is driven by wages. the wage worker is the consumer. Wages have been flat for 50 years, and the only reason that demand is going up is because consumer debt has gone up.
Tax cuts do not go into the economy. They go to global financial bubbles. These bubbles are actually created by the global rich so that they can pop them and profit from them.
If the richest people in the country take their tax cuts and throw it into say, tech stocks, they rise sharply. Then the small investors jump in and push the prices up more. Then one day, all of the mega-rich shareholders sell at the same time. Then the small investors sell the price drops, and next week the big guys can buy it all back at half price.
These bubbles created by excess cash flowing around parts of the economy where it is unneeded is disruptive to the world economy.
Meanwhile the 60% of the population that works for a wage, whose productivity (wealth produced divided by hours worked) is up over 40%, and none of that has gone to wages. It has all been taken by global corporate shareholders whose wealth is skyrocketing, while the economy limps along.
The extremes determine averages. Average economic numbers look good because the extreme wealth of a few brings up the numbers. But the underlying economy is being hollowed out to do it, with consumer debt driving demand.
6
@McGloin
Too true. " The only reason that demand is going up is because consumer debt has gone up."
How many low and middle class workers are buying their basic needs with a credit card, (and not one zeroed out monthly)? That's a demand with a clear and ugly end in sight.
1
It seems we've engaged in an experiment on the economy: What will happen if you make a huge cut in corporate taxes at a time of low unemployment and low inflation? In other words, what will happen if you juice the economy at a time when it is doing okay without intervention? It is too soon to gauge the outcome, but we may be getting the initial glimpse of how this experiment unfolds. First obervation: The rules don't apply.
10
Central banks have short end rates below zero. You have to pay to deposit money. This is a huge distribution from poor to rich. Inflation is not zero, far from it. The poor are still paying for the excesses of the 90s and early 2000’s. Raise interest rates, raise taxes on the wealthy and spend money on infrastructure.
16
@David
Yes, the FED gave away $3 trillion in NET free money to global banks over ten years under Quantitative Easing II.
The global banks have so much excess cash on hand that the FED has to pay them MORE MONEY to raise rates!
If that money had actually gone into the economy, as the FED had hoped, the economy would have rebounded quickly after the Great Recession, but back then, the banks were openly saying that they would not invest in a weak economy. Catch 22.
Instead the banks threw that money into the global derivatives casino. er market, and drove up the price of stocks, without investing in the actual driver of productivity and consumption: humans.
The $3 trillion that the FED gave away to global banks comes to $9,000 per U.S. Citizen, or $36,000 for a family of four. That money comes from the U.S. treasury and belongs to U.S. Citizens, not global banks.
IF that money had been equally distributed between its true owners, we could have paid off mortgage, education, and consumer debt, invested in small businesses, or just gone shopping.
All of that would have made consumers richer, which would have grown the economy from the bottom up: demand creating a need for supply, causing investment to go where it is needed.
In the age of the internet, putting greedy bankers between the money supply and the people that own it is no longer necessary.
The FED should decide how much it wants to grow the money supply, and the IRS should divide that equally among all citizens.
4
I believe our economic models assume increasing consumer demand and unlimited availability of resources. We’re now in a situation where resources are finite (as physics tells us), and consumers lack the funds to provide endless increasing consumption... perhaps because all their funds go to making payments on their payday loans and credit cards.
We’re hitting the end of the Ponzi Scheme economic models. Small wonder they list their predictive value
27
@John M - If your assumption that we are running out of resources were correct, then indeed, you would be correct that we would be in trouble.
But there are no shortages. Money is NOT a finite resource since the federal government can create as much as it needs out out of thin air. It will run out of money the day after the NFL runs out of points.
But you are again correct that we need to get more money to the people who need it and would spend it, not to the people who do not need it and would use it to speculate.
But that a solvable problem. Just have the gov create money & spend it on reasonable stuff like fixing roads & bridges, supporting education & research, a new power grid to support sustainable energy, etc.
And we would not have too much inflation, since as "everybody" knows, the more you produce, the lower prices, & reasonable spending would ramp up production.
PS The physicists currently tell us that that the universe is infinite, so in theory, we need never run out of resources.
In a much more practical vein, as far as we are concerned now, the solar system has enough resources to last us for a very long time.
And we have had the tech to get at these resources for quite a while. Just imagine where we would be if we had reversed our space & defense budgets. We would be living in O'Neil habitats in Earth orbit, mining asteroids in the Belt, receiving loads of energy from efficient space based solar receptors, etc.
What we lack is the will.
2
@John M
Yep, bravo; you've got it! No escape.
2
The well-off and wealthy only get that way by having enough consumer spending and government spending (gov't is a consumer!) So the consumers have to be enabled and occasionally rescued or--more wealth can't happen. Perhaps then, we won't be able to rely on the usual mechanisms to raise the pay of workers and professionals. It may be that the minimum wage needs to be used to get money into consumers' hands. More taxes on wealthy and curtail tax incentives to corporations/businesses, and tax investment incomes more to pay for it. And if social security is not supported adequately, then the generation that sees that go away will also see economic decline/disaster.
5
Bond investors expect the Fed to cut federal funds because of politics, not because they have insight into the economic future ( which is an absurd idea). Trump will appoint directors who will do what he wants, which is cut rates on the assumption that this will have favorable effects on stock prices, if not the economy.
16
@skeptonomist
Trump is in the real estate business. He needs to be very highly leveraged. Real estate also does very well during periods of falling interest rates. He has a huge vested interest in dropping rates. I don't think he cares much about stocks.
1
Cliches happen when something of value is overused. That is what has happened to Thomas Kuhn's observation of science summarized in the phrase "paradigm shift." What has been lost is his observation of the process whereby an old paradigm morphs into a new one. First the existing paradigm provides useful solutions to present problems. Then new data emerge that do not fit the frame so current believers stretch the frsme to fit the new information. Finally more new data and the inability of the old view to address current issues results in the near total breakdown of the old mindset. A new paradigm does not immediately emerge. First there is a period of confusion.
In this process we are either approaching or in the next to the last phase.
Experts cannot explain inflation, productivity, interest rates, or economic growth rates. Explanations of rising income inequality fall back on 1848 models.
When Capital dominates interest rates should be high. Any person having ever run a business will support this basic idea. So if Capital is not dominating, and Labor is not dominating, and Land owners are not dominating, What is?
A fourth Something is rising and, in basic economic terms substituting for Capital, Labor, and Land, all of whose prices are all falling (Interest rates, Wage rates, and (e.g.) oil prices).
Capitalism as a theory replaced feudalism, which emphasized only Land and Labor. Our next theory will be a Post Capitalistic one, as will our society.
8
@Privelege Checked - very interesting comment about the fourth Something. I don't know that the following are "Somethings" but IMO they are helping to lower the price of the three Somethings simultaneously:
1) We've greatly reduced frictional costs in the economy by matching buyers and sellers in markets like travel (Uber, AirBnB) and retail (Amazon, Alibaba).
2) The cost of goods sold was always low in markets like movies and music (near-zero marginal costs). This has spread to many other markets(videogames, apps, software of any kind)
3) Access to information has become incredibly widely available and cheap (wikipedia has over 300 languages) and over 4 billion people have internet access (56% globally, >80% in the developed world).
I don't know what the fourth Something is, but when transactional costs drop, marginal costs drop, and market awareness increases, I think we've given capitalism at least a few more decades.
3
@Raul Campos My fifteen year old nephew told me when I used the phrase Post Capitalism that I really meant Socialism. I replied that Socialism is a Capitalistic idea in that it affirms Capital as a force and in humanistic terms is AntiCapital, so I do not mean Socialism. Quantum Physics did not radically overthrow Newtonian Physics as much as it subsumed it and relegated it to a boundaried sphere. So will it be with Capitalism.
In theoretic terms success comes not when everyone embraces a viewpoint but when it becomes a foundational block for what comes next. Capitalism succeeded (See the End Of History) but it is now in its Evening stage.
2
@Privelege Checked
That is a very well written post
2
When profits are at record high (which they have been for about 6 years) and wealth is sitting with fewer and fewer people (which it is), there's lots of money chasing investment opportunities.
And given the increasing feeling that expansion can't last, the money is going into safe options.
10
@Paul’52. I agree. As an older fairly well-off investor I am spending less, and shifting investments more into cash these days, thinking these "good times" can't last too much longer. As there are more older people, they tend to play it safer and shift into bonds and cash, and that is bound to decrease interest rates.
I feel for those who don't even have investments to shift, and have to really scrimp.
2
You have it right. Too much profit and wealth accumulation at the top = too much cash sloshing around in too few hands = search for investments especially safe investments = downward pressure on interest rates which makes borrowing look like a safe strategy. If more of the profits were being distributed more widely (to workers, for example) we would have inflation.
2
Deficits are self financing and force interes rates *down* if nothing is done about it.
Banks-Primary Dealers *have to buy* Treasuries at the auction or they stop enjoying their Primary Dealer status.
The sequence is:
1) Create ex nihilo and sell X bonds to primary dealers. They have to buy. The Treasury now has X dollars.
2) Spend X dollars. X excess reserves now reside in the interbank market pushing the interest rates *down*.
3) Primary dealers sell their bonds to banks holding those excess reserves and trying to get rid of them.
4) If nobody wants the bonds, the short rate goes above the Fed’s target and it automatically adds reserves and buys the bonds thus... financing the government... Hey, just some benign interest rate targetting 😉
Voila: looks like private investors allowed the government to run deficits by agreeing to buy its bonds while in reality the government deficit financed itself, it creates the reserves the financial sector then uses to buy the newly issued bonds.
6
With so much money concentrated in the hands of the wealthy, who have few unmet needs or desires, there is no shortage of money to drive up interest rates.
And business today doesn't need huge amounts of money to build big factories filled with big machines. A few good geeks sitting around computers is pretty much all a business needs.
15
I wonder how much of this is driven by the actual unemployment rate being higher than this advertised number - people who simply aren't looking for jobs or unable to file unemployment claims. I also wonder how much of this is fear that this administration is volatile enough that it could do something unexpected and damaging and people want to keep their money as safe as they can in the interim.
22
I'm in a solid GenX middle-class household. We pretty much already own the things we need. Replacing existing items is about the only time we make anything close to a major purchase. We have $$$ to spend, but don't feel the need to buy more than we actively use or to upgrade to the shiny version of the newest thing when the older one works just fine. If you're counting on folks like us to grow the economy, we are going to let you down.
136
@JBC This is pretty much our whole economy, and is why growth at 2% isn't "low." It's what happens when most people have all the cars and TVs they need.
The era of 1 car/family, 1 TV/family, 1 air conditioner/house, was the era of 4% growth.
17
@JBC Is it fair then to infer that the tax cut did not spur new spending by yours or similarly situated households, and therefore will not stimulate economic growth? Would a better use of such excess dollars be to aggregare them and stimulate economic growth by doing something big that only government can do like improving our infrastructure?
19
@JBC. Right on!
2
Is it really so mysterious? Labor participation rates remain low, even compared to a few years ago -- American businesses have ensured that there's so little profit in work, millions don't bother.
Add that to unproductive deficit spending (e.g., tax cuts to those who don't spend in the real economy), high personal debt burdens among those who would otherwise spend, an aging population and patent and monopoly rents which drain the economy (chiefly drug prices and to a lesser degree, software and telecom tithes).
Where exactly is the growth supposed to come from, when ordinary people have no money to spend?
And Neil Irwin *is* aware that Modern Monetary Theory correctly predicted this result and has for years?
For those who look at the economy rather dogma, may this *is* it's supposed to work?
30
@jrd modern monetary theory predicted government bond bubbles?
1
Why do economists still think inflation is a thing? The economy has doubled since 1975 while real wages have remained stagnant. Demand pull inflation only occurs when aggregate demand outstrips long term aggregate supply.
We are producing twice the amount of stuff and not consuming any of that additional production. We should be seeing no inflation and that is what we are seeing.
22
Yet another analysis that fails to discuss the core issue : demographic aging.
Fertility declines as economies attain higher levels of development, and the gap between mortality and fertility rates closes.
The transient expansion in working age population - the 'baby boomers' of the postwar era, expands household demand and labor supply.
In the later stages of this population-driven expansion, increasing in-migration and automation offsets declines in labor supply as the workforce ages and retires, but demand necessarily contracts - or more accurately - shifts to address the 'burden of dependency', the growing need for health, social and welfare services and payout of pensions.
Investment in technology-driven transformation delivers large early returns, which diminish with time as real limits to productivity growth appear.
These later stages are characterized by cheap and abundant energy and raw materials, significantly compressed product lifecycles, and high levels of waste and other externalities that remain unaccounted for -- the economy requires massive and unsustainable over-consumption. Risk is concentrated within less-developed economies with young populations.
Low unemployment rates, low interest rates, low inflation and low consumer demand are characteristics of a new demographic era, in which sustainability, stability and steady-state become the overriding objectives.
What do you call a mathematician who fails to get a job in the physics department?
20
@Mikhail A victim of her own tautological illusions?
2
It's not the money supply, it's the distribution. In the present circumstances the increase in money supply is concentrated with the wealthy, they invest in financial assets rather than spending it on real goods and services. Hence, the record high stock market and bond valuations (low interest rates), while inflationary pressures are muted.
40
@CWP2
Its encouraging that most NY Times commenters seem to understand the problems now. If only the economists would listen.
1
Economists don't think money is important, (they believe it replace barter also wrong) so they leave it out of their models even though the production of it by private banks is what separates capitalism from other economic systems.
If your models leave out the most important element, most of your predictions will end up being wrong.
1
@Tim Your post appears to ignore an entire field in economics, Monetary Economics. You might want to do a little research in Monetary Economics or take a Money and Banking course before declaring they do not exist. Note the money supply is considered a major determinant of the level of aggregate economic activity.
https://www.investopedia.com/terms/m/monetary_theory.asp
1
@CWP2
Not sure want to get my knowledge from an Investopedia article much of which the author of this article uses to debunk economics.
For a better understanding I would recommend: Repeat After Me: Banks Cannot and Do Not Lend Out Reserves by Paul Sheard; The Nature of Money by Geoffrey Ingham; Debt: The First 5000 Years by David Graeber; Where Does Money Comes From by Josh Ryan-Collins, Tony Greenham, Richard Werner, Andrew Jackson, and an oldy but a goody What Is Money by A Mitchel Innes.
2
The economy is complex and non-linear. Sensitive dependence on initial conditions will result in unpredictable results. The existing models and theory are based on historical data and do not reflect current conditions.
The actions of irrational players, changes to society, demographics, technology, climate, and disease all lead to uncertainty.
2
What you don't seem to grasp is how terrible things are in the rest of the world. Capital is flooding into the US because in the rest of the world there is simply no safety for capital. The rest of the world -- South Africa, South America, Arabia, Europe, Asia -- has become a pit of terror for anyone with funds. What you're seeing is fear.
20
@James Ribe
And would that be an intentional result of extending the 2008 collapse so that the rest of the world --EU--could push austerity? My Goodness, that would imply this entire scenario has been managed globally by the world's power brokers. Now that the collapse is here, my guess is that there is going to be a fire sale of assets--primarily land-- in the third world. Goodness Gracious what a surprise.
1
You all keep mentioning the rich. Who are they? I'm guessing it's anyone with more money than you. Do you realize that everyone in the US is in the global top 10%. Do you really believe that you are responsible for low interest rates?
3
@michael, you ask who the rich are. You then make assertions that nobody really knows and that their guesses are deeply wrong. I'm sorry, but the factual basis for this problem has been described in mind numbing detail in this newspaper and many others for several years now. Careful measurements and other verified data show clearly how unusual this current era is compared to historical norms. This large body of information also shows that the US has had long periods of high growth when the distribution of wealth was much more even than it is now.
2
So basically for us to have this Goldilocks economy, all that needs to happen is that the rest of the world has to collapse?
Seems kind of shortsighted.
2
I think the markets and the economy are just enjoying the corrupt, oversightless, free for all right now. Like teens having a party when their parents are away for the weekend.
13
Economics 101 actually tells you that trickle down economics is nonsense and the majority of economists warned that the Trump tax plan would lead to exactly this. Not really a surprise despite the columnist’s wide-eyed puzzlement.
46
Can best be explained by demographics. An awful lot of old people in developed countries not spending, because older people don't spend. They don't fuel inflation. This will last another twenty years, until the American boomers, the highest spending demographic in history, die off.
11
I had expected negative interest rates throughout Europe and Asia. My conjecture is that as long as there is an unknown catalyst in the oval office negative interest will not be reintroduced.
I continue to ponder why we must grow an economy whose size threatens our biological sustainability. Have we evolved beyond Homo Sapiens into a species more correctly called Homo non compos mentis.
I don't know how to explain to people who have no discretionary income that there is a huge surplus of money and huge overproduction potential. We are drowning in wealth and can't spend near quickly enough.
11
This is just what Keynes meant when he wrote “A sound banker, alas! is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.”
Interest rates going to zero around the world with lower and lower growth just points out the bankruptcy of relying on fossil fuels, which brought us this fake, ruinous and environmentally disastrous growth. Degrowth and a steady state economy is the answer.
7
". . . but the slow growth in much of the world has acted on a brake on how much the Fed can raise rates. . ."
Shouldn't that be "acted as a brake" rather than "on a brake"?
2
Chase Bank has not lowered its Prime Rate or the interest rate on my HELOC. Why not?
15
Perhaps the "logic" is not holding up right now because we are in an unusual period, with an inept president who has slapped tariffs on many countries with no real plan for negotiating treaties with them, after ripping up earlier treaties.
Falling bond rates are a harbinger of an economic downturn. I keep hoping for better interest rates to fund my retirement, but it's not likely in the near future.
4
Pronouncements of paradigm shifts are a reliable leading indicator for crashes.
9
All the money printing that has been going on since the financial crisis has been building a mess with horrible rates for savings and bonds. That has hurt countless people saving for retirement or those in retirement who seek a steady return on their assets.
There is going to be a payday for all the Quantitative Easing and the distortions to the world's economy and it will be ugly.
10
When EU countries have negative interest rates.....think about that. You pay for the privilege of lending your money....investment capital will go to where returns are positive, and safe.
The more money that flows into US debt markets, the lower interest rates go. Instead of worrying about this, it was never cheaper in our lifetimes to renew infrastructure and refinance old debt at higher rates. Its an opportunity, not a problem.
14
There's a financial tsunami coming, and millions of people whose futures are vested in 401ks are sitting blissfully on the beach, unaware that they're about to be wiped out.
5
@Mike Beebe
Mike, please give us your take on how this will occur.
1
Interest rates went down because Wall Street went into a tail spin. Stock prices are the primary driver of interest rates. Trump's triumphalist view on the economy is based on stock prices. What could be the outcome of all this is a serious bout of disinflation. As in 1929. Now the GOP has thrown every bit of stimulus into the economy to keep corporations flush. Something they would never have dreamed of doing when Obama was president.
14
Is it different this time?
The answer has always been no in the past. Is it just that the failure of congress to supply useful fiscal stimulus has prolonged historically slow recovery from financial recession? Seems like responsible economists (Summers, Krugman, et al) are asking the right questions.
Of course the current powers don't pay attention to responsible economists, which brings us back to job 1; get rid of the radical Republicans.
8
Of course they keep falling.
Because is no real growth, no real demand, just asset inflation, with associated employment uptick, underlaid by stagflation
And the free money is as good as stopping stagflation as alcohol is to the alcoholic. It just keeps it going. Doesnt solve the problem.
11
Yes there certainly is "pressure to think a certain way about Islam and Muslims," and Trump expresses and legitimizes it as US policy. If we're going to make comparisons with the French Revolution, one might think of the Reign of Terror that this administration has established in the deliberate chaos and cruelty at the southern border, attacks upon the free press, Congress, the judiciary , the Department of Justice, and threats of imprisonment of political adversaries and critics.
3
Orthodox economics emerged in an era of scarcity. Even as late as 1900 few families had more than one pair of shoes, and had not yet a suit. New economics must reckon with surplus. There are 5 pairs of shoes and cannot quite 'afford' a 6th pair. Or, the family auto is of average age and a new GMC Acadia is out reach. Yet there are 278 million autos in use. No super market has empty shelves. No auto dealer is short of cars. No lady's wear retailer lacks a selection. And there is no shortage of investment capital.
The concern is for more. Enough is stagnation. The bete noir for stagnation is Japan. But just what is the status of that so-called stagnant economy? Here is what OECD reports:
"Japan performs well in some measures of well-being in the Better Life Index. Japan ranks at the top in personal security. It ranks above the OECD average in income and wealth, education and skills, jobs and earnings, housing, personal security, and environmental quality."
An orthodox economic model has here a stagnant economy. A new era economic model has here a stable economy. Japan has consistently recorded a surplus in its current account since 1981. Japan's current account surplus in December 2017 was 1480 billion yen.
Legacy economics has become an ideology for capitalist expansion and wealth creation. Interest rates are low and so
mortgages are in order. Modernizing the fleet of autos on the road is in order...and infrastructure for them.
5
@Wolfgang Price
A stasis economy is a casted society, India for example.
1
I see a lot of intellectualization going on by the author and the posters.
Let's cut to the chase. Bottom line is going from boom to bust can take a long time. In fact the two greatest busts in modern times the depression and the Great Recession took 10 yrs. to implode.
So with the Trump "boom" based on corporate welfare, insane trade wars, massive national debt, massive consumer debt, turning grads into lifetime debtors, SS and Medicare going bankrupt with baby boomers aging etc. etc. the bust will come. The only question is when.
It could be anywheres from tomorrow to seven yrs. from now.
7
This is why we call it the "dismal science".
That is half right. It is surely dismal and it is obviously not science.
1
No wonder we turn cynical in our later years. Just about everything they taught us turns out not to be true. I even eat eggs now.
10
Most the comments seem to grasp the concept. Income redistribution to the wealthy and corporations. Funny that this is so difficult for your expert to understand.
25
So, Economics is not Physics : the Laws change because society changes. I agree that the main reason for this " new normal" is that population is getting older . Older people have few consumer needs ; but the costs- prices of medical care are increasing and that adds to this logic. Finally , a sarcastic note: with age, people gets less stupid and realize that consumerims is not the answer !
16
All the models still work just fine. The only difference is that, in the era of hyper globalization, and when the US GDP is only ~20% of global GDP, you need to model the entire G20 or OECD economies to get proper results.
In 1950 there was little globalization and the US economy was ~50% of GDP. So modeling just the US economy (US unemployment, US interest rates, etc) was a good approximation.
That is no longer true, and less so each year.
21
@Baron95...an excellent point. Others here have commented that the US is not a closed system. However, the global economy is a closed system and that’s what should be modeled and measured.
1
@Baron95
Yep. Back in the old days we used to call international transactions "leakages." Great post.
2
This is not a new normal, it is a system that is out of balance, building tension as in plate tectonics. When the tension is released it will break the global financial system like a twig and we will get the Great Depression v2.0.
Dark age ahead.
13
It's called Secular Stagnation. Interest rates are low because private sector demand for funds is much smaller than its supply. For decades, our collective desire to save has far exceeded our collective desire to invest. Money saved but not invested is withdrawn from the economy, stifling demand. Rates have been falling for 35 years. This isn't a cyclical blip.
When the private sector doesn't want to invest, then the government must step in and become "the investor of last resort".Last time we had secular stagnation, the 1930s, it took a World War to end the Great Depression. Government budget deficits needed to finance the war brought unemployment down from almost 20% to 1% in five years.
We don't need another world war to fix our economy this time. Increased government spending, a higher budget deficit used to invest in our collective future or a Universal Basic Income to support consumer spending will boost demand and stimulate wage growth. Otherwise, rates will stay close to zero for the foreseeable future.
11
The prevailing economic model worked when automation and technological change resulted in improved productivity and an increasingly skilled workforce. Things are different now because technological change results in less need for labor and diminishes the power of labor to raise wages. If manufacturing can be either automated or produced by globalization in countries with low wages and low environmental standards then inflation is unlikely. As more highly skilled positions become automated there will be even less pressure on wages. The result will be even more income inequality between the owners of capital (and their political servants) and the rest of the world. The old model that meant that better productivity meant wage growth and low inflation will be replaced by better productivity meaning less employment (augmented by an aging population in the developed world), wage stagnation and low to no inflation.
13
"It is terrible news if you want to see faster global economic growth in the years ahead."
in other words, it's great news in the face of climate change; slower growth means slower growth in carbon emissions. it's great news for pensioners and low income families, and businesses interested to borrow in order to build out a sustainable civilization. if global and durable, it might depress population growth.
it asks us to question why the growth orthodoxy is desirable, or necessary, why we believe unlimited growth is realistic rather than fantastic, why we need more technology when we barely understand and ineptly misuse the technology we have, why we continue with a ponzi scheme of debt on the backs of future generations.
it gives us more time to ask: where are we headed, and what do we expect to find when we get there?
26
@drollere
A stasis economy is where we're headed managed by AI. We will be similar to India in castes.
3
This cycle is not necessarily out of historic context, but all the evidence is not in yet. Economic expansions tend to follow a bell curve, with an average length of cycle which is shorter than the current economic expansion. While economic expansions may not die of old age, they do tend to die from economic imbalances that tend to build up over time. If we get a recession pretty soon or if we are already in a recession, the current economic cycle will simply go down in the history books as longer than normal. Long interest rates tend to be above short interest rates at the end of economic expansions mostly because there is a recognition lag. It takes time for the Federal Reserve to realize and decide the economy is contracting and that Federal Funds rates need to decline. So the long interest rate tends to anticipate future changes in the Federal Funds rates and short term interest rates. The late cycle fiscal stimulation tended to prolong the current cycle but it did not necessarliy eliminate the possibility of recession.
1
All lines are curves.
The last 200 years, the period in which modern economic orthodoxy has been set, has been a time of incredible change, growth, uncertainty, and increase of almost every measure.
But what if we are nearing the end of history in the sense that growth, population, wealth and change by every measure now slows to an historic (pre industrial revolution) norm.
Then you would expect to see a more subtle economics. A more finely calibrated and tuned economic engine.
In spite of the catastrophically bombastic news cycle and social media, divisive politics and a new awareness of the things we are doing wrong, the truth is people have never had it so good. More people are living better, healthier, safer, more peacefully today on the planet than in all of history. As much as politics tries to turn fear, and anger into power, many people, quietly content with their lot, are turning off, tuning out, and taking it easy.
For good and bad we're on a new point in the curve of economics. A high flat plane where everything just runs a little cooler. We need new economic models and metaphors to match.
11
I just hope that corporations don’t use the continued low rates to continue overextending their debt. No trend lasts forever. And I don’t want to see another meltdown like the one at the end of W’s adminisration.
3
All this is evidence of a dysfunctional market, isn't it? Could it be that all that "quantitative easing" after the great recession, coupled with the huge tax gifts for the wealthy under Trump oversupplied the haves with liquidity, but did squat for the many who could use some longer term loans to buy their first home, but don't have the income to be deemed a good credit risk? I agree with others here who believe that it's a case of those who could borrow don't need to, while those who need to borrow can't. This is also a failure of the Fed, which was so busy saving investment bankers and their fat bonuses that they forgot to help everyday people.
46
@Pete in Downtown...a bit misguided , Pete. The Fed did not bail out Lehman, Bear Stearns, and many others. It’s fashionable these days to blame the Fed, but, in spite of some mistakes, they saved the system.
1
@Patrick alexander
Yes, the Fed did not bail out Lehman Bros.
However, the Fed did gave away a net of $3 trillion to global banks with no interest loans and buying their junk real estate securities at face value.
The Fed was expecting them to pump it back into the economy but the banks refused saying they wouldn't invest until the economy came back. (Catch 22!)
Now the global banks have so much cash that when the Fed wants them to cut rates, the Fed has to pay them! That means they get even more cash!
The Fed gave away about $9,000 for each citizen of the USA $36,000 for a family of four) to global banks. What did we get for it?
1
Deficits usually mean the government is spending on projects, leading to more employment, demand for labor, higher wages and inflation. But our massive deficit increase is due the massive tax cuts for corporations and the wealthy, which has not gone to labor but to wealth hoarding. Simple really. The only solution would seem to be government redirection of revenue to jobs programs and infrastructure. Otherwise we will become Japan, constant shrinking in a deflation trap.
41
The author: "The first step, though, is for all those in a position to influence economic policy to ask deep questions about whether what they learned in a college economics classroom all those years ago might no longer be so." This statement may be a step in the right direction, because the author is recognizing there is a problem. In one of my comments to one of Paul Krugman's columns, I referred to some aspects of present Economics as "GOFE" (Good Old Fashion Economics), Economics prior to globalization and automation. Outsourcing is affecting not only durable goods but also software engineering and services.
The present situation has not been altered by Trump's tariffs because many companies are avoiding them by moving the last step in the manufacturing process from China to Vietnam and other countries, for the product to be classified as made in Vietnam and not in China.
3
Those who really need to borrow (e.g. would-be first-time homebuyers) can't afford it; their already-high debt load plus the high cost of living prevents it.
Those can afford to borrow, the rich, who clearly have more money than they know what to do with, don't need to. Hence, instead of investing in human capital or common physical infrastructure, which would boost productivity and national income, they spending it buying back stock to take companies private, or buy congressmen, or otherwise fund endeavors which will further increase their personal wealth either without benefiting society or actually costing society (e.g. Walmart family members who are worth billions, while their low-wage employees are eligible for food stamps).
102
In the old days, when young workers got raises, they would spend it on consumer goods. Now, with so much student loan, credit card, and medical debt, their raises go conscientiously to paying down that debt.
Until consumers are out of debt, rising wages can't cause inflation because those raises aren't circulating in the broader economy.
70
@Jim Dotzler
Except there aren't really any rising wages for most. When people are making less than they were 25 years ago for the same job...something is wrong.
If you look at suicide rates and drug and alcohol abuse it paints a picture of what is seriously wrong in this country.
When we are at essentially full employment and wages still are not rising, after being stagnant for 3 decades, while the top 1% live in the stratosphere and get all the wealth increases...we don't need sophisticated economic theory to figure out what is wrong.
27
10 years from now this will be known as the inequality bubble. Just when you think the economy isn't following the old rules, the bubble pops and everyone realizes the old rules still hold.
66
Seems its time to restructure our economic output which is based on an outdated model that relies on a majority as middle class..which is no longer...so with that "middle' income of disparate demos now less then 50% of overall income output, plus the lower income levels...our near 70% consumer spend reliance is outdated!
The growing gap between the rich and the poor under this heavily weighted (and again, outdated) economic structure with our GDP model will continue to emit artificially "low" inflation rates e.g. 1.8%) while food continues to rise as does most utilities, property taxes. We need to replace the blue collar economy with the "green" collar economy on a mass level...that can straddle both white collar and blue collar positions...don't see this happening.
10
Personally, what I love about these low rates is that my creditors can now lower the interest rates on my loans. I'm waiting. I'm waiting. I'm waiting.
56
It seemed obvious to me who has no formal economic trainig that when the tax cuts produced the expected two trillion dollar deficit that the USA would have sell the bonds to finance the deficit with a higher interest rate.
That did not happen because it seems the customers for our bonds are world wide.
The tight job market did not produce inflation from increasing wages because wages have not increased because workers know that their jobs could go in a heart beat if the company moves to another country with a much lower wage scale.
At the low end of the wage scale every fast food and low end restaurant has help wanted signs but seem unwilling to increase wages to attract workers.
Even our local post office has a help wanted sign. In a small town as ours is a USPS job was considered to be a plumb.
Perhaps those not employed have trouble passing the drug screening but something quite unusual is happening in our economy.
48
@Edward B. Blau
The lack of political precedent for this fascist administration here challenges economic theory because the assumptions underpinning the system have been violated. The way I see it the implosion is coming and will be equal and opposite to the records now set. I think this will simply be another gilded age to collapse into another Great Depression which will further push the “partisan death spiral.” Probably we will also lose reserve currency status. Then a strong liberal turn akin to the new deal may occur if any of the organs of Federalism remain to bring us back from Fascism. If economics doesn’t apply, use history.
8
I think low interest rates are not so mysterious. It is just a sign that the world is awash in excess capital, due to hitherto unimaginable levels of inequality. To put it bluntly, the world's top 10% of so have simply run out of places to park their exploding wealth, and are desperate for investments that yield any return at all. Meanwhile, aging populations, lack of spending power among the bottom 40-50%, and ecological restraints all tend to reduce the availability of investments.
299
@Larry You nailed it. Too much money in too few hands means that the rich are desperately chasing investment vehicles. This is why the stock market is so high. It doesn't reflect anything about the economy as a whole or about the value of the companies selling the stocks, but, for those who have it, it's the only place to put their money.
96
@Kaleberg The low interest rates are more than likely a result of printed money(interest rate manipulation by mainly the Fed). In all likelihood, they are buying up most the the Treasury notes ($4 trillion infused into the economy in 2008-2009 has not returned and then some). Not sure this game can last forever.
4
@Kaleberg
Yes but.......
recall how the Nazi generals inspected and claimed estates in Poland before their invasion, since there is no land in the in the developed areas not claimed, AFRICA has become the default choice.
One imagines had the Deep Water Horizon not exploded, the progress toward sea bed exploration would be well underway. One imagines this created money glut is purposely being directed to fund sea bed exploration.
1
It all traces back to the wealth/income inequality, I think. There are so much money sloshing around, but they are all at the top 1% who don't need it. Instead of spending, the money is chasing yield. So we have asset bubble and lower interest rate instead of inflation. The tax cut only exacerbated the inequality problem by giving most benefit to the rich.
Same thing goes for the unemployment rate. Since the sellers don't have the pricing power, they'll do all kinds of gymnastics to keep their (labor) cost down instead. They are now employing people once considered unemployable rather than raising wages to attract the employables.
It's possible that low interest/unemployment rate could continue indefinitely, I suppose. I'm still betting that the asset bubble will eventually burst when businesses start to report lower earnings and we'll enter recession regardless of the interest rate.
90
Economic orthodoxy is falling only for those who did not keep up with the economic literature .
The relationship between inflation and unemployment, known as the Phillips curve , broke down a decade ago.
This is known as the flattening as the Phillips curve.
The reasons for the breakdown are well understood. The theory of the Phillips curve was developed for closed, national economies. The theory DOES NOT apply to global economy
To illustrate
Assume an employee of a US company operating in a global economy, ask for a salary increase hoping a low unemployment would induce the company to do so
The company can
1. Grant her wish, increasing the sales price of its products in the US market to cover the wage increase. Alas, this will it make it easier for Chinese competitors to put this US company out of business
2. Say no, citing Chinese competition, and cover production increases, should the US market demand by further outsourcing its supply chain
3. Import cheaper labour, willing to work for less than US
workers from abroad - a favorite of Silicon Valley via H1B visas, when their IT force, past 45 years old, gets too expensive
4. If the product, asset , or services is NOT exposed to global competition, the US has rampant inflation. The prime example for services is physician salaries, that from 2011 to 2018 increased 7% annually. The prime example for products are US defence items - still highly profitable to manufacture in the US
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@Woof
Thanks for the insights.
I've been thinking the same, but not in the depth that you clearly have.
Can you provide any good research that backs up this idea of imported deflation? I would like to learn more.
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@Woof
These are good points.
We exported our productive capital and intellectual capital over "open borders," demanded by "conservatives," who think that the owners of machinery should be allowed to ship "their" wealth anywhere, even if it means decimating entire regions, like the Rust Belt. Then they tell their ex-employees to blame people who make less than minimum wage instead of the billionaires who got rich firing them.
It was pretty obvious to many workers at the time that if you make Americans making $60 per hour with benefits compete with Chinese making $6 per day, then the
Republicans told us, it was the price of free markets, and that in the long we would all be better off. I'm pretty sure 50 years is the long run and it has decimated the American middle class, so the "conservatives," blame the Democrats who compromised with them instead of protecting the unions.
Now we are subsidizing the replacement of workers with machinery, without educating enough workers to run the machinery, which hurts productivity, capital utilization and GDP growth.
BTW, you mention that we "Import cheaper labor, willing to work for less than US
workers from abroad - a favorite of Silicon Valley via H1B visas, when their IT force, past 45 years old, gets too expensive."
The Trump immigration plan is to expand that, to import more high skilled legal 'merit based" immigrants to take high paying jobs from Americans.
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Do not expect inflation to remain low forever. The most important part of the financial realm? Looking toward the future, not last month's statistics. If inflation someday soars while a large number of Americans are still struggling day to day, you will see the 1970s all over again, not the 1980s.
What would cause inflation to soar? A drop in energy production and in international trade. Something sound familiar here? Imagine if China decided to stop sending goods to America; you can kiss your wallet goodbye, unless, of course, you are already in the 1%.
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When the 0,01% capture most of the additional wealth created by the economy this directly increases the pool of capital. The 0,01% do not earn salaries, they earn dividends, interest and capital gains. Ever higher capital stocks are chasing too few investment opportunities because demand, wages, are so weak.
It's not rocket science but when income distribution is a taboo subject for most economists, who after all are employed directly or indirectly by the 0,01%, then lower interest rates are deemed a mystery.
Consumer demand drives 2/3 of the US economy. Population growth is slowing to a crawl, wages have been stagnant for most Americans for nearly forty years. With gains in productivity, companies do not need to invest in new plants. There is plenty of capacity already available.
Interest rates are going down because the lack of consumer demand is not generating investment opportunities. Ever more capital is chasing ever fewer investment opportunities.
Look at the Trump tax cut. We were promised an investment boom. Instead, as most serious economists had predicted, the tax cut mostly went to increasing stock buy backs by companies. Putting yet more capital into the hands of the capital owning class.
Ever more capital chasing stagnant investment opportunities leads to lower returns. Economics 101.
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@rapatoul
After the epic fail of fusion, the promise of much improved batteries, the hydrogen leaf tech is going to surge, as well as the wind sail shipping Cousteau demonstrated decades ago.
@rapatoul
Agreed - and the stock buybacks - are occurring mainly in non-competitive industries dominated by a few mega corporations. These consolidations have grown exponentially since the days of St Ronnie when he gutted that part of the Justice department. Until we enforce anti-trust laws like it was 1935, we will have large companies that feel no pressure to compete in their own markets and therefore no pressure to spend on innovation, capacity or employees (raise wages).
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@rapatoul
Yes they keep telling us that capitalism=markets=democracy, and that government (which is actually democracy according to your Constitution) can only do bad things to the economy.
At the same time they tell us that capitalism can't work unless the government does constant favors for the owners of capital, including tax breaks, subsidies, and fat, no-bid, cost-plus contracts that transfer billions of dollars from our treasury to the owners of capital.
Even a corporation is a government interference in the market. A corporation does not exist until the government creates it.
The lie that capitalism equals markets is distorting the economy, slowing productivity growth, slowing GDP growth (compare average GDP growth in the 1970's to the 2010s).
Democracy is one person, one vote.
Markets is one dollar, one vote. That is not democracy, because some people have no dollars.
Capitalism is one billion dollars, one billion votes, and the people that have the money and own the shares (many are not even Americans, but live on other continents), are using their "votes" to hijack our government and use it for their purposes.
Save markets and democracy from Capitalism!
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Could it be simple supply and demand?
The people with money to invest are running out of good places to put it, so must put their money in very low interest places for safe investments.
Meanwhile, the people with a need to spend have very little money (or credit worthiness). They can borrow money--but only at extortionate rates.
Could it be that taking over 100% of the productivity gains from the past 30 years for the top 1% (but mostly the top .1%) has left the "rest" unable to buy more "stuff"?
Our demand should come from those who do not get rewarded enough for their work to exercise their pent-up demand.
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It has long been known that economic theory is a castle built on sand. A total rewrite of economic curriculum from bottom to top could help to reduce its use as a tool to confuse rather than clarify.
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Economists, like generals, fight the last war. Which would be OK if the future was only the continuation of past trends. Obviously that is not the case. Economists have been debating why accepted economic theories no longer seem to be working for most of the last half decade. For a good summarization I recommend J. Bradford Delong's Hiccup...or Endgame? As a former deputy secretary of the Treasury, his piece written some years ago is a useful primer.
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My thanks to all the knowledgeable commentors on this article. The economy is not in a vacuum. There is less trust in the U.S. in the long term, because of our political mess. I've heard that cited as (one of) the causes of bond rate inversion curve. Makes sense to me.
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Doesn't it seem if inflation isn't going up that means the money isn't flowing to the workers in a significant way? The people that would generate demand are the people on the bottom, not the top.
Or is the ground floor simply paying more for specific items at a higher cost which doesn't translate through the economy. For example finally being able to afford medical insurance, increased rents, paying college loans down.
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Low interest rates are being used to maintain debt service on the U.S. national debt that now exceeds 22 trillion dollars. The debt load, both public and private, will, at some point exceed any expectations that it can be reduced or serviced, and when that point arrives, new monetary policy will be required.
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@Smith
Fortunately, Modern Monetary Theory has already arrived.
Money is not consumed, like fuel, it is only transferred. While the flow of money may be diverted, the volume steadily increases as governments run deficits. As the volume increases, the cost of borrowing decreases. Inflation is determined by demand, Just because there is more supply does not mean demand increases.
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@beaconps Partly, regarding your point on inflation being determined by demand...The U.S. economy is do disparate in output for demand, except for essentials e.,g. food, energy, rent/mortgage, auto payments...that lacking demand is more wide ranging, like increased savings rate, cutting back on food/electricity and other "essentials"' that bring down the PCE index/rate which has direct affect on our inflation rate....we shouldn't be at a nearly 70% reliance on consumer spend.
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The institutional prerequisites for cost-push inflation are not in place. Workers do not have the bargaining power to demand real wage increases. Hence, no (or very little) inflation.
Crowding out of investment hasn't occurred because there exists a savings glut-- the result of severe income and wealth inequality.
Investment isn't strictly a function of interest costs, in any case. Keynes taught us this some time ago. It is a function of profit expectations. With excess savings and insufficient spending profit expectations are depressed.
Economics doesn't occur in a social, political and historical vacuum. If the old verities don't seem to hold it's because the world has changed.
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I would like to know if the projections factored in demographics. Older people save more, spend less and are more likely to invest in bonds.
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Not that surprising. We have an inverted yield curve, which usually precedes a recession, or at least sluggish economic growth. That means that demand for capital goods and capital goods production is softening, while consumer demand may also weaken.
And that results in lower, and declining interest rates. At least in the short-term, that's not at odds with "economic orthodoxy."
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@Sean
Exactly. Was waiting for someone to bring this up.
1
It is simple.
First, income and wealth inequality has resulted in an excessive concentration of capital. The world's wealth is $280 trillion dollars. Capital looks for investment. There is so much capital flowing around the world that it is driving down interest rates.
Second, there is limit to consumer demand in the most developed nations. Interest rates are so low that nearly everyone except for the homeless has a color flat-screen TV, a microwave, a DVD player, a cell phone, a refrigerator. (Washers and dryers are too bulky for small apartments; cars are expensive to maintain)
Solution? Tax the income and wealth of the wealthiest 75,300 people. Spread the money to the poorest 3.24 billion people who live on less than $2.50 a day.
That will increase interest rates and will spur inflation. And reduce poverty.
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@Brad How much tax do you propose? Realize needs to be tiered, at 55% thru 75% taxable income. Further, don't forget about immensely pollutive effect of all this "mass" (new) consumer consumptive output...further exacerbates our land degradation, landfills, increasingly acidified oceans...ALL this consumer is not 100% "green" wash!
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@robinhood377
I will let the technical experts debate the tax rates and how it is collected.
I agree that consumer consumption is a global problem. Personally I would tax all consumption with a "environmental tax" that accounts for the damage done by consumption. Somewhat like a value-added tax, but in this case it is based not on the value that is added but the harm that is done.
Mahatma Gandhi said "Live simply so that others may simply live."
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@robinhood377
Yes, we need to mobilize our resources to make everyone's lives better and avoid ecological disaster at the same time.
We can either figure out how to do this, or we can create Distopia.
Part of the solution will be markets. Markets do what they do well, really well. The problem of horse manure two feet deep in Manhattan was solved by the invention of the internal combustion engine. That engine is creating problems, but the price of renewables is now dropping lower than gas.
But markets don't do everything well, and that is where democracy is supposed to step in, using government. This is why Article I of the Constitution gives Congress the responsibility to tax and regulate trade.
One of the problems is that markets create perverse incentives that create more waste than necessary. Foe example, the U.S. is too focused on disposable goods, and technology that is obsolete or worn out a week after the warranty runs out. The need to keep selling something discourages quality goods that last, creating far more waste than necessary.
Fortunately, it turns out that it is not really money or stuff that motivates people.
Numerous studies are showing that what actually motivates people, after their basic human needs are met, is
-a sense of Mastery of a skill set.
-a sense of Autonomy in their work.
-a sense of Purpose in their work.
If people are in fulfilling jobs that satisfy these conditions they don't need to buy useless junk to fill the void.
2
The classic model of inflation is that goods are scarcer than demand, causing competition for those goods in the market and therefore inflation. But if goods are scarcer than demand, this creates opportunity for growth.
If inflation is low it indicates that supply and demand are well balanced, thus no need for growth. The economy has hit equilibrium.
This can happen at (almost) any level of unemployment. But it does mean the economy is in idle, and a reduction in demand will cause a downturn. When that happens it could be gradual, or it could be precipitous.
The cost of money is currently quite low. This would be an ideal time for the governments, federal, state, and local, to embark on long-term infrastructure refurbishment and development projects. Not only would it maintain full employment, but we might even get bridges which are safe to drive on.
And I might ride my unicorn to work today too.
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@Alternate Identity Actually that would be a good name for a car...Unicorn. Not sure why no one has used that...people might not believe it actually exists.
2
Take a look at the huge pools of money in pension funds and like accounts across the globe. Practically every nation now has huge amounts of savings looking to make money on money. Most of it is in pension funds that mandate some level of debt investment vs. equity. The by the book economists cited do not understand why the demand from debtors related levers do not work. Perhaps it is because the supply changes have a bigger impact. The article cites the money pools look for safety in the US, but does not discuss the relative size of those pools. We have trillions of dollars looking to buy debt. That demand raises the price and lowers the interest rate. A consequence of the global reach of capitalism and aging and more wealthy population, this impact could continue for a long time.
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Income inequality? The rich are getting a bigger share of the wealth produced by workers at the expense of workers getting less, so the rich have more capital to invest and most of everyone else has less to spend. Less consumer demand means less demand for investment and so less demand for capital and so lower interest rates.
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Force the rich to pay more for salary how? When the rich control the goverment and the arm. Forces. May need a revolution
4
Traditional economic theory about a falling unemployment rate stimulating spending and inflation also saw a strong correlation between low unemployment and real wages. The only portion of this analysis that we really need to think about is why real wage growth isn’t happening. If wages increased, spending would, too. That’s what’s missing in 2019.
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@Ryan Gau The only demographic group that has shown consistent growth in real wages since 1979 is adults with a bachelors degree or higher. All other groups by educational attainment have shown a decline with adults having only a high school diploma showing a 30% decline in real wages since 1979(as per the Bureau of Labor Statistics). Since only 30% of the adults in the US have a bachelors degree or higher I think we have prima facie case that our economy is evolving from a manufacturing based to a knowledge based one.
FYI, our manufacturing base is not not going away. The US is a close second to China in terms of manufacturing and it is still growing. The problem: technology/automation is rapidly increasing productivity in the US which in turn contributes to the declining number of manufacturing jobs. And the manufacturing jobs that are available require higher and higher skills to perform (read: higher educational levels).
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If real (adjusted for inflation) interest rates are zero or negative, then the incentive is for everyone to borrow as much as possible as there is no real cost. But if the rates should rise, then everyone will be in big, big trouble.
And, if incomes also do not rise much, then the current wealth inequality appears to be truly baked into the system.
So the economy appears to be "functioning" like the anti-stall system on a 737-Max!
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Demographics is the answer. If the overall population is relatively young, and the government runs huge deficits, the money will be spent on consumer goods and the economy, and inflation, will boom.
If half the population is over 50, you will see a different result. Everyone already has a house, a car, and enough clothes to last them out. They are worried about the future, and they will take that money and save it. This depresses prices and interest rates.
If you go around the world and compare the inflation and interest rates to the demographic profile, you will these tendencies in action. Countries like India, and parts of Africa, still have high inflation. In Japan and Europe, the rates are negative. The US has a relatively favorable demographic profile, but is held down by the trends in other advanced industrial countries.
Scariest of all, China is about to transition from relatively young to very old, and will probably be the next Japan.
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@Jonathan Hmm. I'm 61 and spend more money on myself and wife than ever. Donate to political and humanitarian causes, take vacations. We are spending our money down and know that we won't want to travel as much when older. During our working years was when we saved and worried about not having enough to retired. We could have it backward, I guess.
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@Jonathan: This argues for more immigration, not less. True?
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@Jonathan My only quibble is that in the US, 90% of the older population does not actually have excess income that they are putting into savings. Some are living off what they already saved, but a large majority are, or soon will be, living off of Social Security.
So you have a situation where the government is running large deficits, but that deficit spending is going to basic survival for older people. It's not that that the US's aging population is failing to buy consumer goods because they prefer to save. It's that they are failing to buy consumer goods because they can't afford them.
9
As an economist, I believe in the Solow-Swan non-steady state growth model. As technology cuts the cost of production, and increases the production output, the result is lower prices, and following lower prices, lower wages. We can do more with less economic input. In the long run this raises the standard of living, though it may not be apparent.
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@Rich Caroll Not sure any "neoclassical" growth model is applicable currently because our economy is in transition from a manufacturing economy upon which models like Solow-Swan are based and a knowledge based economy. When Solow-Swan was developed there was no such thing as a knowledge based economy. Who would have thought in 1987 that Google/Facebook/Internet of Things would be the driving force in our economy instead of GM or Ford. We are in uncharted economic territory.
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@Rich Caroll
You write: "... As technology cuts the cost of production, and increases the production output, the result is lower prices...."
This is not necessarily true. The result may be higher profits rather than lower prices.
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