The United States in 2020

Discussion in 'Archive: The Senate Floor' started by Jabbadabbado, Oct 12, 2010.

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  1. Jabbadabbado Manager Emeritus

    Member Since:
    Mar 19, 1999
    star 7
    I guess the more charitable view of the Tea Party would be the dying white working middle class whining its way into oblivion, supporting policies that will only aid in its demise and which in its bitterness and fear will cause as much collateral damage to the social structure as possible on its way out the door of political relevance.

    There are important social and economic problems here. Rural America has been marginalized economically, and the middle class is rapidly eroding. The Tea Party's response is to support a political ideology that will accelerate that marginalization and erosion, complete the job started by the Reagan revolution as quickly as possible. In ten years the U.S. will be closer to the point at which our society is more cleanly divided into those driving Volvo SUVs, second class citizens living on food stamps and working at Walmart, and the unemployable/untouchables/incarcerated ethnic and racial minorities filling in the bottom.

    We're really almost there. Just a little bit more effort from the Tea Party is all its gonna take.
  2. New_York_Jedi Force Ghost

    Member Since:
    Mar 16, 2002
    star 6
    It depends on why you think there is persistent high unemployment. If you think we're going through a structural change, you're right, monetary policy is less useful. However, if high unemployment is caused by an Aggregate Demand (AD) shortfall, monetary expansion (read: Inflation) can help.

    For one, inflation lowers the real burden of consumer debts. Sucks for the credit card companies and banks (and the Chinese), but for the average joe this is great. It speeds up the deleveraging process. Second, it lowers real rates. If the real cost of capital is cheap enough, companies will start expanding again, slowly at first, but it will grow on itself. Also, as I said, I strongly support eliminating interest on excess reserves kept at the Fed. Between higher inflation and not making any money on reserves, a significant portion of that $1 Trillion in ER will be sent back into the economy. Finally, boosting the inflation rate in the States will either A) weak our currency improving exports or B) cause other nations to weaken their currency to keep relative rates unchanged. Since B) involves inflation, they'll get the same AD stimulus the States is getting, which will improve our export position anyways since our trade partners will have higher demand for goods.

    Now, there are downsides. It won't be great for people on fixed incomes. And if the central banks don't coordinate monetary expansion, forex markets will face some instability. Furthermore, its really really important Bernanke is super clear about what they are doing as not to lose credibility. IE, he needs to say "We're pushing inflation up to 2.5% a year, and will continue to use whatever options necessary for as long as it takes to get it there, but we won't let it drift above 3%." He can't just announce QE in November without explaining what their specific goals are.

    Finally, I don't think monetary policy can bring unemployment down to 4.5% or whatever the previous NAIRU was. Its quite possible structural factors account for something like 2% of current unemployment, and the new NAIRU is 6.5%. But thats still hell of a lot better than 10%, and monetary policy can bring us back down towards that level.
  3. Jabbadabbado Manager Emeritus

    Member Since:
    Mar 19, 1999
    star 7
    Speeding up consumer debt deleveraging seems critical to me. I don't see any real rebound in consumer spending before that happens. But I think there are structural issues at stake despite what Bernanke says. One is the aging boomers approaching retirement. They are going to impose a tremendous amount of austerity on the system as they try to compensate for ravaged 401(k)s and zero percent interest rates. At the same time, their kids are graduating from college, and record numbers, 85% of them, are moving back into their parents' home because of diminished employment prospects. So boomer parents are taking another financial hit there.

    State employee boomers have to be worried too about what bankrupt state governments are going to do about their pensions - maybe as much as $3 trillion in underfunded/unfunded pension liability.

    Soon, the Federal government is going to have to decide whether to attempt a bailout of state pension systems. Without it, there will be endless rounds of state government tax increases and service downsizing that is going to cause further deflationary pressure over the next 5-10 years.

    For all the goods with elastic demand, modest inflationary expectations are not going to make people buy those goods sooner. Where demand is inelastic, e.g. food and gas prices, the Fed's debt monetizing may cause inflation that only hurts the economy.

    The other problem is if we get actual supply shock inflation coming from the other side of the equation - if food and energy prices start rising rapidly because of supply fundamentals, the Fed's experiments with targeted inflation could make the problem worse. The price of natural gas is going to stay suppressed in the short term, but oil is going to continue to rise because of increasing demand in India and China but also as a consequence of the dollar weakening. Oil prices will drive up food prices along with increasing grain exports to China, and any drought or rain-ruined harvest along the way will continue to send mini shocks through a very fragile system.

    Anyway, to make a long story short, structural problems abound.
  4. New_York_Jedi Force Ghost

    Member Since:
    Mar 16, 2002
    star 6
    You misunderstand what an economist means when they say structural unemployment. That is autoworkers being unemployed in Michigan because those jobs are gone, and not coming back. In contrast, my girlfriend's father was unemployed for a year, but he works in insurance, and was able to find a new job; his unemployment was cyclical, since it was a function of the business cycle, and not a permanent change in labor markets.

    Also, the best way to counteract that boomer "austerity" is to use monetary stimulus to help those portfolios build back up. Finally, the unemployment prospects for folks with college degrees is not particularly bleak. The unemployment rate for those 25+ (so not new grads, but I have trouble imaging the picture is totally different) is 4.4%, with the highest participation rates in the labor force of any group. A couple anecdotal points: 1) I have several friends who are working, but their parents let them move back in for a year to save up some money for getting an apartment/paying for work clothes[suits are expensive] etc. Most of them are paying some nominal rent- $100 a month or something. 2) I attended a function with several alumni from my university Friday night. There were 7 alums, and 6 of their companies were hiring. The point about college grads moving home isn't really germane.

    State pension liabilities are an issue, but not at all relevant to deciding about monetary policy. If anything, you're saying they should cause the Fed to embark on monetary expansion.

    Its not simply consumption; its investment. If you eliminate IOR and raise inflation targets, banks will start lending. They aren't going to lose 3% a year to nothing. As money starts to flood back into the economy, it will pick up. Your points about elasticities aren't particularly relevant; yes, a rise in price of relatively inelastic goods would cause demand to shrink somewhat, but that will be more than made up for with rising incomes generated by inflation/economic recovery.

    Furthermore, I've consistently said debt monetization is not only one form of monetary stimulus. Eliminating Interest on Excess Reserves should be step 1. There are also explicit inflation targets, buying other long term debt (not just government!), negative interest on reserves, hell, they could NGDP target. There are other forms of monetary policy other than simply purchasing treasuries.

  5. Jabbadabbado Manager Emeritus

    Member Since:
    Mar 19, 1999
    star 7
    Bernanke even explained structural unemployment is defined in the passage I was referencing. It's been a long, long time since I took labor economics.

    On the other hand, I think my larger point still holds: the boomers may be staging a retreat from the consumer economy, and all the things that affect them and their economic health, including the state pension issue, will have an enduring recessionary effect that will be pushing hard against any monetary policy aimed at priming the economy by pumping inflation. Many of the jobs that supported a consumer economy heavily subsidized by boomer spending will never return, and for economic success, the U.S. is going to have to become an exporting economy like Germany or China. I don't know if that counts as "structural unemployment" or not.

    Re oil prices, Bernanke said:


    The overall PCE price inflation rate, which includes food and energy prices, has been highly volatile in the past few years, in large part because of sharp fluctuations in oil prices. However, so far this year the overall inflation rate has been about the same as the core inflation rate.


    The question for me would be - how should the Fed respond if high volatility returns to oil prices?
  6. Jabbadabbado Manager Emeritus

    Member Since:
    Mar 19, 1999
    star 7
    Sarkozy vs. Obama: A Test for the Dollar

    The French president has been arguing that the dollar?s role as the single global reserve currency doesn?t reflect what he insists is a multipolar world.

    The governor of the People?s Bank of China did indicate in 2009 that he wanted the U.S. dollar?s reserve status transferred to a basket of currencies called Special Drawing Rights that comes under the aegis of the International Monetary Fund.
    Chancellor Angela Merkel will be going to China on his behalf to sound out the latest Chinese stance on the issue.

    Germany would prefer, according to the statement, ?gradual change? through market forces.

    The end of dollar hegemony is inevitable, but it's unlikely to happen before 2020 in my view. 2020 is a reasonable target date. China will be the world's largest economy well before 2020, after which the yuan will be the world's dominant currency. At present, the yuan isn't a suitable reserve currency, however, so the "special drawing rights" will likely become the preferred interim solution to Chinese currency hegemony.

    For the U.S., the inevitable end of dollar hegemony will make it more difficult for us to fund our national debt, putting more pressure on us to balance our federal and state budgets as well as achieve a better balance of trade. U.S. markets will have less influence over global commodity prices, our financial system will slowly lose status as the financial epicenter of the world shifts to Asia. It will also move our nation inexorably toward downsizing our military and our foreign military commitments.

    If the U.S. can block IMF-backed "special drawing rights," it can't block market forces. In 2001, the dollar represented nearly three quarters of world currency reserves. By 2010, the figure was about 65%. By 2020, it will likely be well under 50% as China takes its place as the world's dominant economy.
  7. kingthlayer Force Ghost

    Member Since:
    Jun 7, 2003
    star 4
    *If current economic trends persist.
  8. Jabbadabbado Manager Emeritus

    Member Since:
    Mar 19, 1999
    star 7
    There has to be an almost catastrophic deviation from current trends within the next five years to keep the Chinese economy from becoming larger than the U.S. economy, if that's what you mean. Aside from China's momentum is the 5-10 years it will take for U.S. consumers to return to longer term norms of household debt. Continued U.S. economic sluggishness is I think a near guarantee out to 2020. China may experience a recession, but I'm not sure that will derail the overall trend.
  9. Ghost Chosen One

    Member Since:
    Oct 13, 2003
    star 6
    There is also the overall trend of the aging demographic of the Chinese population, which will begin to slow down their growth in 10-20 years. China's bubble will eventually burst, and while it will be seen as a very powerful country in the world, second to the US... it will still only be second to the US. Even less when you look to wealth per capita. There would need to be a catastrophe to change that trend, and bring the United States down.
  10. kingthlayer Force Ghost

    Member Since:
    Jun 7, 2003
    star 4
    For every year that passes, the odds increase that China's economy will slow. Its economy has boomed since the late 70s, basically a little over three decades. To project rapid growth into the 2020s is to say that their economy will experience uninterrupted growth for a half-century. it is inevitable that they are going to have a recession at some point, one that will exacerbate their other social problems.
  11. Jabbadabbado Manager Emeritus

    Member Since:
    Mar 19, 1999
    star 7
    a 6 or 9 month Chinese recession won't amount to much in the grand scheme of things. But a second major U.S. recession induced by the financial collapse of state governments and U.S. federal government contraction could cause a major shift.

    The Conference Board predicts sluggish U.S. and EU-15 growth through 2020, which aligns closely with my own thinking on the subject:

    Global Economic Outlook 2011.

    If in 2020 China accounts for nearly a quarter of global output as the Global Economic Outlook suggests, the pressure to end dollar hegemony will be overwhelming. Indeed it already will have happened by the time China gets there. Most of the models for Chinese growth I've seen already take into account China's aging population and a resulting slowdown in the economic growth rate.

    I believe the U.S. can become an engine for growth again, but it is going to have to work through a number of structural challenges before that can happen.

    1. Paying down household debt/boosting the U.S. savings rate

    2. Contending with the energy independence that will be thrust upon it within the next 10-15 years.

    3. restoring the fiscal health and sustainable spending of federal and state government.

    4. restoring higher marginal tax rates to the wealthiest Americans in order to promote a more responsible distribution of wealth, a more cohesive society and a comfortable and thriving blue and white color middle class.

    5. producing for export, not domestic consumption

    6. improving quality of and access to education.
  12. chibiangi Force Ghost

    Member Since:
    Jun 16, 2002
    star 4
    2020:

    We'll still be in a recession or recovery will be minimal.
    The middle class will be severely crippled (moreso than today).
    Temporary employment without benefits will slowly become the norm. http://finance.yahoo.com/news/As-Hiring-Falters-More-nytimes-345691543.html?x=0
  13. shanerjedi Jedi Master

    Member Since:
    Mar 17, 2010
    star 4
    2020:

    We will have teams of bounty hunters called Blade Runners that will hunt any trespassing replicant on Earth.

    Oh, oops wrong forum.




    I have no idea what 2020 will bring except nanotech will cure any disease and make a heavy duty sofa weigh less than a pound.
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