Re: Re: Re: Bill Tabb is gone: A new direction??

[Jim Devine <jdevine@xxxxxxxxxxxxxxx>]

> >I believe that we are heading into a recession, but the questions are:
> >
> >1.  What kind of recession?  Mild or severe?
>
> There is still a great deal of hope for a "soft landing" for the U.S.
> economy.  A lot depends upon whether or not the Federal Reserve is
> sufficiently adept at pursuing the more expansionary monetary policy that
> would be appropriate under recessed conditions.

It's not just a matter of adeptness: remember that the power of the Fed to
steer the US economy is highly dependent on what kinds of conditions they
face. The recession of 1990 showed that the Fed couldn't fine-tune its way
to prosperity with sufficient speed (or at least not fast enough to get the
Big Bush reelected). Then, corporate debt and banks laden with
non-performing paper blocked the expansionary effect of low interest rates.
People refinanced their mortgages rather than buying new houses. Nowadays
the problem is that of high consumer debt, and to a lesser extent, high
corporate debt. One problem is that January rate cuts may simply encourage
the further accumulation of these imbalances (including the accumulation of
US external debt). Further, they encourage the exit of the "electronic
herd" and a steep fall in the dollar, which encourages an inflationary
shock (the Fed's Fear) as import prices rise and exporters face less
competition. (International coordination of monetary policy seems a minimum
requirement.)

We should also wonder if Alan G. wants a recession. I doubt it, since the
Bushwackers and industrial capital are so in favor of continuing the boom.
But we'll see.

>  And a lot depends upon the effect upon expectations of these gloomy
> forecasts and all these profit warnings corporations are issuing.

Yes, the fall in profitability as capacity use falls is also crucial, as is
profit expectations, as potential barriers to Fed policies.

> As you know, any economic slowdown that takes place will be the first such
> slowdown of the e-trading era. _I_ think the increased ease of trading has
> probably helped increase the volatility of financial markets.  Add to that
> the presence of many relatively inexperienced small investors, the foot
> soldiers of the 1990s stock market upswing, and there is the danger of the
> "nightmare scenario" the financial markets have been having for several
> years--i.e., a "panic" among new investors leading to a massive exit from
> financial markets.  During "corrections" over the last few years, of
> course, these small investors haven't shown an inclination toward panic,
> but things can always change.

it's possible that a stock-market crash (perhaps a slow one) can have a
negative wealth effect and encourage pessimistic expectations. But I think
it's a mistake to emphasize the stock market too much. History -- i.e., the
history of 1929 -- doesn't repeat itself automatically. There are other
triggers besides the stock market. In fact, as a system, capitalism is very
good at generating a series of "exogenous shocks" that disrupt temporary
periods of harmony.

> >What may be the trigger?  When will it come? <
>
> To the extent that evidence of a slowdown already exists, the "trigger"
> has already been pulled.  I have thought for some time (unfortunately not
> in print--darn it!) that the fundaments of the "Goldilocks economy" of the
> 1990s--relatively low interest rates and oil prices--were eroding.  I
> don't know that I ever completely bought the Gospel of the New Economy and
> its apparent view that the business cycle has been repealed.

For the electronic kind of print, see:
http://bellarmine.lmu.edu/~JDevine/depr/nushortdepr.html and
http://bellarmine.lmu.edu/~JDevine/talks/DeprTalk.html and
http://bellarmine.lmu.edu/~JDevine/talks/Goldilocks.html and
http://bellarmine.lmu.edu/~JDevine/talks/nu3bears.html. All comments are
welcome.

Jim Devine jdevine@xxxxxxx & http://bellarmine.lmu.edu/~JDevine
"From the east side of Chicago/ to the down side of L.A.
There's no place that he gods/ We don't bow down to him and pray.
Yeah we follow him to the slaughter / We go through the fire and ash.
Cause he's the doll inside our dollars / Our Lord and Savior Jesus Cash
(chorus): Ah we blow him up -- inflated / and we let him down -- depressed
We play with him forever -- he's our doll / and we love him best."
-- Terry Allen.