Demand Side Economics — Forecast Page economy refrigeration

Demand Side Economics — Forecast Page economy refrigeration

March 18, 2021 Off By Montero Theo

Recession and the GDP Statistic

As noted above, resistance to the recession call is centered on the Real GDP statistic. So long as Real GDP eludes the negative sign in consecutive quarters, there is no recession. This is helpful to politicians and financial actors whose interest the appearance of prosperity serves.

Leaving aside the statistical games that are played to keep Real GDP artificially high, particularly in the undercounting of inflation, there are other reasons this number is not the temperature of economic health.

First and foremost, GDP represents economic activity — good and bad — prisons as well as schools, security as well as health care, war as well as construction. Thus it is a measure of activity around the hive, not the output of honey.

Secondly, Real GDP is directly driven by consumption, and so borrowing from next year’s earnings appears in this year’s GDP. It is not just the official stimulus package, but the entire federal budget deficit and much private borrowing that moves earnings from the future into this years numbers. This has prompted Demand Side to report “Net Real GDP,” a measure which adjusts real GDP for federal borrowing from all sources (including the social insurance funds of Medicare and Social Security). This figure more closely, though far from perfectly, describes the earnings of the nation. This is what the layman might think of as product our output.*

It is our shorthand to use gross federal borrowing as the subtraction from GDP to produce Net GDP, however, and for the reasons cited, we believe this is a seriously conservative methodology.

Thirdly, GDP does not adjust for borrowing by individuals and corporations for consumption, and does not consider the depletion of resources, the degradation of the environment, nor depreciation of assets.

Forecast Comparisons

Our previous forecasts have stood up well against others — notably those of the Federal Reserve, the Administration and the Blue Chip consensus. Our forecasts have been early and accurate primarily because our method was sound, if simple, and secondarily because the shock of the mismanaged credit crunch and financial sector meltdown impacted the economy in the negative direction.

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Simply put, we saw the housing bubble economy clearly. It was based on cheap money and low energy prices that were disappearing. We predicted that the negative wealth effect of the bubble’s collapse and the disappearance of housing sector employment would reveal a stagnant underlying economy, whose real income lagged far behind that needed for fundamental growth. The so-called recovery of George W. Bush was a paper recovery based on borrowing.

* Most federal borrowing goes into current expenditures. It must be admitted, however, that some is invested, albeit a fraction of what ought to be. This invested amount — for roads and bridges and including many so-called earmarks — would more rightly be treated in parallel with private borrowing for investment and thus not subtracted from GDP.

But we did not see the credit crunch as it exists today. Yes, there would be the usual run to the other side of the boat by bankers, but a systemic meltdown? No. Not on our radar. This was partly due to our not seeing the depth of the fraud and fantasy embodied in the term “subprime meltdown,” and being unaware of the phenomenal leverage ratios hidden in opaque financial institutions and accounting gimmicks.

We saw only that households would no longer be able to use their homes as ATMs and surrogate retirement accounts. We did not see that a trillion and a half in capital losses would have to be absorbed.

Another phenomenon that was not included in our November ’07 forecast was the commodities bubble. We did call for strong commodity, equity and bond markets, but did not at first appreciate that a bubble dynamic was forming. This may be forgiven or forgotten by the reader today, since at present still very few acknowledge a commodities bubble. This leads into our next section.

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What are the key questions for the future?

We’ll pose them all, but explore only one — “Where do we put our money? That is, What do we do with our savings and investment capital?”

The other questions:

  • How do we address the financial sector’s dysfunction?
  • What is the engine of growth to get us going again?
  • Will a new president make a difference?
  • Whither inflation and the dollar
  • Can the government help?

But key to understanding the financial markets is the question, “Where do I put my money?” It is not an answer to this question that opens up investor’s behavior and hence the impact of the commodities bubble. It is the question itself and the confused pause that it elicits, the fact that it seeming has no answer.

This expresses the mood of a sea of capital looking for a home. Absent a home, this capital will melt away, the liquidity trap drained by inflation. Given the wrong home, it will create damage — as in the sequence of asset bubbles, from through housing and now into commodities. The damage of the first two is evident. But the commodities bubble — with its huge food inflation, energy inflation and illusion of high market prices for farmers and other commodity producers to tilt at — will be equally damaging. More so for many who are at the margins. Market innovations, such as ETFs, have led to a new kind of hoarding, and one that is no less mistaken, since it has sterilized the possession of tons of metals, boxcars of agricultural commodities, and barrels of oil. And the bubble has no doubt spawned the same predatory behavior from market manipulators intent on extracting their personal gain, no matter what the cost to the society.

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Demand Side has a long and proven history in organizing successful economies. Unlike Supply Side, it is not a fad or political opportunism, but a description of how economies actually work.

The principles of Demand Side arose from the work of John Maynard Keynes and the economists of the New Deal. It was ratified by the experience of the Second World War and practiced during the great expansion of Western industrial economies — including the U.S. — following the War and into the 1970s.

Demand Side was abandoned in the 1970s and 1980s in the context of the oil shocks and because of a long-standing and concerted campaign on behalf of the free market ideology that failed so well in the Great Depression. As Demand Side was abandoned, the long-term growth trend was halved and the incomes of the middle class began the decades of stagnation that continue today.

This first edition of Demand Side Economics: Theory and Evidence outlines the theory and the history behind Demand Side. It displays the evidence that Demand Side has produced higher GDP growth, stronger employment, and even better profitability compared to the Conservative and so-called free market periods that have produced low GDP and employment growth, greater income disparity and mountains of debt, both public and private. The concepts are understandable and the tools useful, even for those who may disagree.

We are witnessing the collapse of an economy which forgot what worked and returned to a failed scheme only to see it fail again. The discussion needs to move quickly to a Demand Side recovery.

Buy the book as a four CD set, download it by chapter, or get the hard copy. Pre-order for mailing on February 20.