Monday, November 9, 2009

Animal spirits update


Data to October.  Unemployment is assumed to climb to 11.1 percent in a year and then decline.  I still expect “animal spirits” to climb up to about zero in 2012.  The last couple of times they rose to zero from depressed levels in a presidential election year were 1972, followed by Nixon’s resignation, and 1976, followed by the electorate’s rejection of the Republicans.  President Obama faces an ugly national mood.

Confidence will stagger upward till 2012 even if unemployment rises to 13 percent over coming quarters according to the “animal spirits” model.

The recession forecasting model, which forecast the last two recessions a year or more ahead in real time, well ahead of the consensus, sees no NBER-defined “recession” in the coming year.  Output and demand aggregates can be expected to grow, although I think the collapse of consumption (November 2009 commentary) due to increased saving will crimp growth.


This economic situation is unfortunate in that a majority of people will retain their jobs and houses and will have very little incentive to adopt changes that appear risky or expensive to them.  The process of marginalization of the lower strata that has been so evident over the post-Reagan years will become pronounced.  I think any American can understand how this can happen.  Most of us have little job security, much to lose, and there is no safety net to speak of.  Congress’s recent extension of unemployment benefits only highlights this sad fact.  Most of us have friends who have lost their jobs and are dealing with losing their houses and their family’s way of life in short order if adequate employment is not found.  And of course our politicians will do nothing fundamental until events force their hand, in which case they are likely to serve the hand that feeds them.

This is what the late stages of failure of the social contract might look like.  As regular readers know, I subscribe to the thesis of Strauss and Howe’s The Fourth Turning in this regard.  It is a couple of economists’ melding of economic long wave theory with a theory of generational archetypes.  Anglo-American history has been punctuated by crises about every saeculum, the length of a long human lifetime, or about 80 years, in a sequence like this: 1688, 1776, 1860, 1940,…2020?

The crisis will unfold with bankruptcies of the federal government, states, pensions, banks, and anything else that is insolvent and resistant to the Fed’s ministrations of reflation.  Will Hank Paulson’s threat to impose martial law come true?  Will the unemployed cease to pay taxes on whatever pick-up work they can get?  Will a barter economy emerge?  Will we all be living hand to mouth?  Certainly there is another hard leg down coming—for most people, maybe not so much for the rich.  One way to look at the past thirty years is to note that to counter a slowing economy the rich have simply increased their share of income and lowered the tax rates they pay on it.  The fact the share of taxes paid by the rich has gone up only shows that inequality has increased faster than tax rates have gone down.

It is not necessary to comment on the obscene remarks by the head of Goldman Sachs alleging that he is “doing God’s work.”

See Robert Samuelson’s article on the IMF’s view of world fiscal policy.  Note that even a sustained 6 percent inflation won’t solve our problem, even if it didn’t damage our currency.

I still expect the next debt-deflationary collapse to come in 2013 or 2014.  There doesn’t seem to be much danger of inflation before then.

1 comment:

  1. Could you clarify what you mean by "changes that appear risky or expensive to them."
    Thank you