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Triple Threat

What’s the right thing to do to help the economy?  Clearly, Congress has no idea, making bizzy with games designed to impress their constituents.  Major economists don’t agree, either, with at least three different views on what is going on and the appropriate remedies. How can it be so chaotic and disorganized?

It’s always been Barataria’s creed that if you complain about how things are you have to stick your neck out and offer a better solution.  Our answer has always been that there is a totally new economy forming around us as we work through the Managed Depression, and that there is a dire need for public and private leadership to help us create that new world dynamically.  That’s a bit too hard to define , but we can offer is a different way of looking at the situation we’re in.  It doesn’t directly point to courses of action, but it suggests things that should be tried.

Here is a description of the Triple Threat to the US Economy – Business Cycles, Globalism, and Demographics – and how they are working together to make this a once in a lifetime change.

Nikolai Kondratieff, the Father of modern business cycle theory - and co-architect of Lenin's first 5-Year Plan

Nikolai Kondratieff, the Father of modern business cycle theory – and co-architect of Lenin’s first 5-Year Plan

The first force acting on the economy is the ordinary business cycle, or K-Wave.  There is little doubt that we have been in a “secular bear market” since about 2001, which is to say a cyclical downturn based on debt, technology improvements, and general attitudes.  There is no good reason for business cycles to persist as they do, but the grander cycle of four “seasons” described by Russian economist Nikolai Kondratieff, the father of business cycle theory, lasts about one human lifetime.   It seems inevitable that once we forget what our grandparents were trying to teach us we have to learn the lessons the hard way.  Given that this “Winter” should last about as long as the “Autumn” harvest that preceded it, we can expect this phase of the cycle to end about 2017.

The second force, globalism, is more constant and linear.  Depressions or economic “Winters” have always followed great advances in communication and transportation for one simple reason – when a big market is made out of many smaller ones, the excess capacity that is naturally in place in a smaller market becomes completely redundant.  This is what caused the Long Depression of the 1880s, which occurred after railroads untied this nation and made many smaller city markets into one big one.  We are experiencing a similar problem now as yesterday’s “productivity gains” are today’s “unemployment.”  One world market has wrung a lot of excess capacity out of the system worldwide.

The children of Endless Summer aren't doing so well in an Economic Winter

The children of Endless Summer aren’t doing so well in an Economic Winter

The last force is demographic.  When Baby Boomers entered the workforce, the 1970s expanded about as well as it could to absorb them all.  When their participation rate ballooned as women worked like never before the result was a turbulent end to what was then an economic “Summer” phase.  Income inequality has grown since 1968 largely because of downward pressure on wages – caused by so many in the workforce.  The median Boomer will hit 65 in 2018, putting a lot of pressure on public infrastructure but opening up a lot of jobs.

Naturally, these forces work together in many ways.  The logical response to a Depression is to “prime the pump” with deficit spending and low interest rates – exactly what we have been doing since 2001.  The system has largely worked.  But in a global market, the stimulus applied didn’t just go into a national economy.  The “carry trade” or borrowing money in US Dollars at zero interest and loaning it out in (Yuan, Reals, Rubles, Rupees, etc) fueled the Great Convergence between developing nations and the struggling developed ones.  It didn’t go as smoothly as it was supposed to.  That’s why Barataria has called for more than just deficit spending but specifically spending on infrastructure – things that can’t be carried away to another part of the globe.

Keep in mind that while capital can fly around the earth at the speed of light, labor is still tied to a local market.  The disadvantage that labor has is greatly exaggerated in this situation.  That we tax labor more heavily, mostly to fund social security, only exaggerates that disadvantage further.

Get back to work, kids

Get back to work, kids

But the real answer is demographics.  The reason Barataria is hopeful for the end of this economic cycle is that jobs will be opened up right on schedule for a gorgeous spring.  The problem, of course, is managing the public cost of an aging population – something that will fall to the government one way or the other in the next 5 years.  Just as Winter doesn’t last forever, neither does a Baby Boomer’s working lifetime.  There will be openings for the kids eventually.

These three forces that make up the Triple Threat are all running on their own clock and make things more difficult for us right now in different ways.  It takes a lot of understanding to think through how they converge and then diverge given enough time.  But it should be obvious that with all of these changes taking place there are no simple answers and that what worked yesterday won’t necessarily work today.

The seasons change, the world becomes closer, and the people who inhabit it grow old and weary.  Some times are better than others, and this too shall pass.  But pass into what?  That’s the hard part.  But if we understand what’s going on we can make some intelligent guesses and try some things to see how helpful they are.

There are many links to past articles embedded in here if you need more information on a topic.

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24 thoughts on “Triple Threat

  1. This is a very powerful way of looking at it and it does point to specific actions. I know its not popular but if globalism means we have less control over our own destiny than we should be looking at ways of setting up barriers. It is true that capital can move but labor can’t, so why not level the playing field? It doesn’t have to be harsh but taxes on money leaving the country have to be possible. I can’t think of how right now but put that analytical brain to it and see what you come up with. There is no reason we can’t set up a system where we set up an interest rate for investing in America that is lower than money that leaves our borders.

  2. We know from the Asian financial crisis of 1997 that capitalists can lend large amounts of money and then suddenly want it all back for fear of getting nothing back.

    Some of these banking and financial crises occur because all of a sudden everyone gets a whiff that firms are not as productive and valuable as earlier thought. Then it falls like a house of cards.

    Naturally one might want to put up capital controls of some sort.

    A global savings glut entered the US. We know that. We put it into housing, way too much. It was not sustainable because some of those households were not going to be able to refinance after they lost their job. They were marginal households. This capital could have been going into children, science, infrastructure. But no, we consumed too much housing and were overcome by irrational exuberance. Exuberance and depression are both aspects of the human condition, so I do not have a solution for that. What I know is that Greenspan was correct and Bush was wrong for not raising taxes to finance the wars.

    • Yes, the cyclical part is both very mysterious and very understandable. It does seem to be human nature that we get caught up in waves and do things that are stupid – on but the greed and fear ends of the scale. So the waves continue. There’s really no set in stone reason for business cycles, but they are very, very real. It does seem to be nothing more than human nature and it goes against any kind of “rational assumption” or steady-state model.

  3. Yourprediction on demographics is interesting. We’ll see..

    In a previous blog you suggested increased labor force participation increased inequality. I would caution you on saying that. I bet it is more complicated than that. Saying so could derail your nomination for Federal Reserve Chair someday. : )

    • There is much more to it, but I see this coming down to a relative balance between capital and labor. When there are a lot of people in the job market, supply and demand naturally puts them a relative disadvantage. That’s not everything going on, but it’s a good part of it, I think.
      People who focus on inequality tend to move their thinking into tax law quickly. They should look at employment law and market trends just as easily, IMHO.

  4. I saw on the news that the Senate republicans aren’t going along with this at all. I guess you were right that this is just a show. I don’t know if that makes me madder or relieved that they won’t do anything too dumb but I also heard that Wall Street is nervous about something happening even if they don’t really mean to take this to the wall. It is so crazy and irresponsible no matter how you look at it.

  5. Excellent analysis as always. You have hit on something important I think. Keep on it, it’s much more interesting than constantly talking about the managed depression. I always knew there was much more to it than just business cycles even if you do turn out right about 2017.

    • I am going to stay on this ,and I am more convinced that we are going to hit 2017 running than ever. If the growth in jobs picks up over 200k per month we will be very much onto something.

  6. “The influence on Roosevelt of economist John Maynard Keynes, with his emphasis on the utility of budget surpluses and deficits, is doubtlessly overstated. For one thing, much of Keynes’s most influential work was not published until after Roosevelt had already taken action. Roosevelt’s greatest economic miscalculation was probably his over concern with deficit spending (in which the government spends more than its revenue) while the economy still operated far under capacity in the mid-1930s. By striving to reduce the deficit, he contributed to and perhaps unnecessarily caused the recession of 1937 and 1938.”

    • What are you quoting? I do agree with it, all around. And it’s worth noting that the New Deal was done with a deficit that never exceeded 5% of GDP – vs up to 10% in this Managed Depression. We’ve really tried to do everything with monetary policy this time ’round.

  7. Have you ever seen how Ellen Degeneres dances? That’s how the economy and politics is like. Always subject to a bit of interpretation.

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