A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Friday, April 5, 2013

Transcript: Forecast Friday with Abbey Joseph Cohen and David Stockman




PLANS in the days AHEAD.  Right.

But first to David Stockman.  His new book is getting a lot of push-back from Wall Street.  The book The Great Deformation:  Corruption of Capitalism in America.  Stockton is the former budget director under Ronald Reagan.  Detractors, of course, do not pick on what we just played.  They find the weak spots, like Stockman's proposal to abolish deposit insurance for the big banks and let the markets discipline them.  Demand Side has made the point that markets are controlled by the big players even with government regulation, and even by government regulation.  No reason to expect market discipline to arise from the ashes.  But the points he makes here we agree with.
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Abbey Joseph Cohen is the perma-bull, or nearly so.  The points here we agree with because they are true.  Corporate profitability is high, corporations are fat with cash (re-fi'd at low rates, but levered up at lower rates, too.) What Cohen is wrong about is the poised to take off piece.  This is a great lesson of the Great Recession.  Corporate profitability does not equal economic health.  Quite the opposite in the current case.  Trickle down should have also been put to rest, as the rich do better and the rest of us are looking at a very uncertain future.  Particularly when the way out seems to be cut social security and constrict the returns to our pension plans.

Poised to take off?  No.  Without demand, corporations have nothing to invest in that will turn a profit. They don't invest because they have cash.  They don't invest because interest rates are low.  They invest because they intend to produce a profit.   Keynes 101.  If you pay them to invest, as we have for thirty years with tax cuts up the wazoo, they'll make their calculation, if they can save labor, they'll invest.  Now overcapacity and over-tech'd plants.

But there IS demand, you say.  Demand for gadgets. Demand for high-end merchandise and homes and durables.  This is not going to carry an economy that is cutting back, whose median income is stagnant or falling, who is underwater on its mortgage.  While the enormous effort to create a new bubble IS getting credit growing, it is a new bubble.  We agree with Stockman.

No.  The investment is all on the public side.  Infrastructure, education, new green energy, a DC transmission grid, direct hiring.  It's all there in the Congressional Progressive Caucus budget.  Instead of embracing it, of course, Obama has come out for public investment lite.  Not a bad idea, America bonds, or whatever.  But not learning from the ARRA, the last stimulus.  Too little, too much sugar for the business and finance side, not enough building and working and getting money into the real economy.  In this case, the good is the enemy of the adequate.

This week, we're back at the forecast spot in the order at ReMacro.  Our call was recession in December -- last December -- on the heels of the election.  Hasn't happened so far.  Are we close to pulling the plug on that call?  Close is a relative term.  Whatever the call in the short run, we'll be sticking with the long-term bouncing along the bottom with downside risks, see Cyprus and Eurozone austerity, austerity here at home, and so on.

Our problem with this Depression is the PR.  The advertising.

In the first Great Depression, as soon as the radical fixes came into play ... heck, it was just action by FDR ... the economy improved, growing at, what?  7+ percent per year, adding millions of jobs a year, 1933-1937.  Nobody said it was over until it was over.

This time, Obama gets into office.  Things bottomed, all right.  But on Main Street, that's where we are today.  We're just dealing with it.  On Wall Street, things are groovy, setting new highs every week.  Inside the Beltway, the conversation is not about jobs, recovery, or infrastructure.  It's about deficits and debt, and the austerity that is certain to make the deficits and debt worse, in spite of the PR.

Well, here's Stockman on the Ryan budget:


They didn't have good PR back in the First Depression.  They didn't have good economics then either, to start with, much the same as it is today.  But the PR and propaganda got a lot better.  The economics, not so much.  In economics, we still haven't caught on that corporations can move the demand curve with PR.  In PR, they have the idea very well, they can move the economics, they can move the government, they can tell us what to think.  Economics pretends we're still selling and buying in media-light 1930.  Today, that car, that's who you are.    Or that bag or beer or whatever.

So PR control of demand is under-understood by economists.  But how do you interact when you're a small person with no advertising budget.  Join with other small persons with no budget and do your own media?  I don't know.  It's one way.  I think Occupy had it going on for awhile.  May happen again.

Another alternative is to make an enemy  But everybody loves their MacDonalds and their Wal-Mart and their Exxon and their Ford.  Not good enough.  Wait! you say.  Maybe Exxon.  But people need an enemy they can see, and the counter girl at the Exxon register is not as easy to hate as the dark-skinned guy in the back of the store, or the white-haired woman in the BMW or the plethora of bad guys on TV.

So. PR for this Depression.  Much better. You'd think we were in recovery.  It helps when the floor of demand is there from unemployment insurance, food stamps, medicare and medicaid and good old social security.

PLUS the Fed keeping Wall Street happy, filling that canyon with cash.

We don't see too much to change.  The expansion or contraction, boom or bust, in credit is the wild card.  Otherwise:
  • The impulse from the election and the political business cycle is gone
  • Gridlock remains
  • Austerity is the policy of the day
Let's call it the madness of austerity. We need balanced growth:  consumers, government, private investment. Growing together.  And that is consumer incomes, as in labor incomes, not personal debt.

A recent study from the Levy Institute (Papadimitriou, Hannsgen and Nikiforos, Is the Link between Output and Jobs Broken, March 2013) confirmed that quote "private investment has acted as a net reducer of economic growth for the United States, partly because of a tremendous post-crisis slump in the housing industry and related activities, but also because of subdued animal spirits.  The business sector has been stockpiling huge net cash holdings instead of purchasing new capital goods....  In terms of moving averages, this sector's contribution to overall growth is still stuck below zero, while those of net exports and government spending have been falling and that of personal consumption expenditures has turned only slightly upward."

Later we see, as in Steve Keen's recent chart, that consumer credit has returned to pre-crisis growth.  An increase of $152.8 billion for calendar year 2012.  Securitized debt remains low, compared to pre-crisis, but other areas, including student loans, have been increasing rapidly.  We suspect auto loans is in this category as well.

Debt is for investment. Incomes are for consumption.  Government invests.  Businesses invest.  We need this investment to create incomes for consumers to consume and ratify this investment and have the whole rise together in a balanced manner.  We cannot have consumers borrowing, businesses sitting on their hands and government bailing out.  It is just not going to work.
  • Monetary policy favors housing and bubbles
  • Zero interest rates
  • And no meaningful spending, not infrastructure, not education, not climate change 
  • No social insurance cuts yet.

So in lieu of a change in our call, we'll put up a series of provocative charts on the REMacroBaseline.com site. 

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