Sweet Orange

We may have reached the bottom but there will not be a leveraged world in the future….Growth in the old model probably will not be reasonable growth in the new model.
–Bill Gross  (Mary Ann Milbourn, “Boom times behind us, says Pimco bond king,” The Orange County Register)

According to Bill Gross, Managing Director of Newport Beach’s Pimco (the world’s largest bond fund), the fundamentals of our economy are changing, and we should not compare the dynamics of this recession to past recessions. Because of these changes, Gross sees the following as part of our economic future:

• The 3 percent to 4 percent growth that we got use to during the last 20 years is a thing of the past; instead, expect 1 percent to 2 percent growth for the next 5 to 10 years.
• Consumers will save more and spend less.
• Business will take less risk.
• Government regulation of business will be more prominent than it was during the last 20 years, and this increased regulation will to be the case for the next 20 years.
• Governments will enact new trade limits.
  

Meanwhile, Federal Reserve officials are predicting upcoming growth of 2.2 percent to 3.3 percent. And Fed Reserve Chief Ben Bernanke told the House Financial Services Committee that analysts expect growth in 2010, but even at 3 percent growth, unemployment will most likely still be above 9 percent. (”Bernanke says jobless rate may stay over 9%,” Bloomberg News)

Economist Alan Beaulieu, president of the Institute for Trend Research, had some opinions that are similar to those of Gross:

If you’re holding your breath waiting for 2007 to return, you die. We’re not going back there. We need strategies for a new climate of diminished growth.

He also states:

We don’t think the U.S. returns to sustained growth until after 2013.

Even then, in some cases, Beaulieu does not expect to see 2007 prices for 15 years, and housing might take even longer.

In other words, the old rules are gone; the dynamics of our economy are in for some new rules.

Chris Thornberg, a principal with Beacon Economics, had some comments on what the leading and lagging indicators of market recovery will be for this recession (AirTalk, Larry Mantle, August 7, 2009). (By the way, Tim Quinlan, a Wells Fargo analyst, says that the recession ended in June. Michael Murphy of New World Investor also says the recession is over. Maybe I’ll write more about that later.)

According to Thornberg, the following sectors of the economy are leading us to recovery:

• professional services
• export services

In addition, Thornberg states that, although the manufacturing sector is not growing, this sector  is “firming up.”

Before I go on to state what Thornberg sees as the sectors that will be the lagging indicators in this recovery, here is what Joel Kotkin, a fellow with the New America Foundation, says about the professional services sector:

Media coverage of America’s best jobs usually focuses on blue-collar sectors, like manufacturing, or elite ones, such as finance or technology. But if you’re seeking high-wage employment, your best bet lies in the massive “business and professional services” sector.

This unsung division of the economy is basically a mirror of any and all productive industry. It includes everything from human resources and administration to technical and scientific positions, as well as accounting, legal and architectural posts.–Joel Kotkin, “Best and Worst Cities for High Paying Jobs,” Forbes

Unfortunately for those of us who live in southern California, Forbes ranks Los Angeles-Long Beach-Glendale as the fourth worst area to find these jobs and the Irvine-Santa Ana-Anaheim area as the seventh worst.

Now for the lagging economic indicators: According to Thornberg, improvement in the following sectors of the economy will not show considerable improvement until sometime after the recovery has begun:

• construction
• finance
• retail

Thornberg, as well as most other economists, sees employment (which is a factor of all of the above mentioned economic sectors) as another lagging indicator. He also states that recovery in each sector will vary from region to region.

Note: For Beacon’s economic forecast, see Beaconomics.

GRAPH COURTESY BEACON ECONOMICS

Part Three of a three-part series: A Little Story About Our Economy
Part One: The Depression, Keynes, and Manipulating the Money Supply
Part Two: More on Manipulating the Money Supply
Part Three: Solutions?

In yesterday’s post, we saw that standard methods of both the right and left for dealing with an economic crisis have their limits. So what is the answer to our current economic difficulties?

Sticking with the money supply manipulation model and hoping that it will eventually work? Many say: Been there, done that. Didn’t work. These critics also say that the Fed’s attempt to control the money supply leads to economic bubbles and inflation.

Maybe the answer is a return to Keynes, as some say that the current stimulus plan is. However, many criticize this spend-your-way-out-of-the-problem approach as leading to inflation and a huge debt for future generations.

This group that is critical of the Keynes model often calls for tax cuts as the way out. However, criticism of this tactic also exists. For example, the critics of the tax cut model state that George W. Bush cut taxes, but we still had an economic tsunami under his watch.

So what is the answer to our current economic difficulties? As award-winning author and New York Times columnist Tom Friedman suggests, is something entirely new needed?

Let’s today step out of the normal boundaries of analysis of our economic crisis and ask a radical question: What if the crisis of 2008 represents something much more fundamental than a deep recession? What if it’s telling us that the whole growth model we created over the last 50 years is simply unsustainable economically and ecologically and that 2008 was when we hit the wall - when Mother Nature and the market both said: “No more.”—Tom Friedman, “The Inflection Is Near?“

Questions to ponder, posts to write at another time.

Part Two of a three-part series: A Little Story About Our Economy
Part One: The Depression, Keynes, and Manipulating the Money Supply
Part Two: More on Manipulating the Money Supply
Part Three: Solutions?

According to the money supply manipulation theory, the Fed can change the amount of money that is in circulation by various means, for example, lowering or increasing the interest rate on money. More money in circulation would mean more money for businesses to invest and, therefore, an upswing in the economy. Good news for businesses and employees. Many people were happy with this system. Even Bill Clinton incorporated aspects of this Reagan-era economic model into his economic plan when he was president.

That brings us to our very recent past. At the end of last year, the Fed cut the interest rate to zero. Can’t get lower than that. However, while some are saying that the economy is starting to recover and we should stay the course, others are saying that it is not. Now some are questioning the viability of the money supply manipulation model as an answer to our economic ups and downs, and it too is becoming passé.

So what is the answer to our economic dilemma? More thoughts on that tomorrow.

GRAPH COURTESY WIKIPEDIA

Once upon a time, in the 1930s (and part of the 1940s to be more exact), we had a depression. In fact, it was so bad that it wasn’t just called a depression; it was called “The Depression.” Along came this guy named Keynes who said I can fix that: Just have the government spend a lot of money; this will create jobs. With more jobs, people will once again have money to spend. The economy will recover.

Then enters President Franklin Roosevelt who said something along the line: Sounds good to me. So the government spent lots of money, but not as much as Keynes had thought was enough to solve the problem. Then along comes World War II, and the US government spent even more money. And, in fact, The Depression was no more. The Keynes spend-your-way-out-of-the-problem solution seemed to work!

So some thought this is a handy tool for preventing ups and downs in the market. When times are bad we can just spend a bit to tweak the economy back up. When times are good, we can cut back on spending (easier said than done).

This worked more or less until the 1970s when this thing called stagflation happened. Usually when employment is high, inflation is high and vice-versa. Not so with stagflation where we get the worst of both worlds. In the 1970s, the government spent, but unemployment and inflation both keep going up—an unusual and unpleasant combination.

The Keynesian model for handling a down economy didn’t seem to work anymore. This decades-old, preferred model for handling economic downturns became passé, and a  model that involves manipulating the money supply emerged. This model, in a modified form, came into full bloom during the Reagan administration and was the new preferred economic model for about three decades.

Tomorrow: more on manipulation of the money supply

This is Part One of a three-part series: A Little Story about our Economy
Part One: The Depression, Keynes, and Manipulating the Money Supply
Part Two: More on Manipulating the Money Supply
Part Three: Solutions?