The Gaming Den

Uh... what? No, a weakening dollar is good for the US economy right now. China is spending billions of dollars to make the dollar more valuable in order to hurt us.

If the US Dollar loses value, that really means that the Euro and the Peso and the Yen and Renminbi gained value. That means that when an American goes to the store, goods produced in France or China or Mexico or Japan cost more, but goods produced in the US cost the same. This encourages people to buy American in the US, and while quality of life falls somewhat for people who have disposable income, more people have disposable income. But the effects on consumers in Germany and Japan are even more interesting, because while their domestically produced goods stay the same price, American goods become cheaper. This increases their quality of life and also drives up American exports.

Since our big problem is unemployment caused by excess productive capacity, lowering the value of the US dollar is overall good for the economy. It's bad for me personally, because I have US Dollar denominated student loans and I need to buy food and tuition in Czech crowns - but American firms will sell more of their stuff and utilize more of their capacity and employ more people.

Obviously it's an inherently limited plan, because once you achieve full employment, further currency devaluation drives down quality of life through reduced aggregate consumer purchasing power and accomplishes nothing. But for the limited situation of having demand shocks and 9.6% unemployment, it is a reasonable growth-centered policy.

-Username17

Here's the thing though: Things will get worst before they get better. And they may not get better at all.

You cannot just make American factories start producing again with the wave of a wand. It will take some months (if not years) before you can restart domestic consumer goods production that you've outsourced to China. And that assumes you can restart your raw material production - because if you're importing the raw materials from elsewhere they'll be more expensive too.

Until then, Americans will have to pay higher prices for everything, hence you'll have high inflation on top of unemployment.

It's a recipe for a repeat of Japan's economic clusterfuck. A view shared by several other top experts:

http://money.cnn.com/2010/10/29/news/ec ... /index.htm

Koo's doubts about the effectiveness have been echoed in recent days by a number of top economists and analysts, including Nobel Prize winning economist Joseph Stiglitz and Bill Gross, manager of the world's largest bond fund at PIMCO.

Gross wrote in his most recent outlook that the economy is now in a "liquidity trap" -- in which lower interest rates no longer have any impact on spurring borrowing or spending.

"Escaping from a liquidity trap may be impossible, much like light trapped in a black hole," Gross wrote. "Just ask Japan."

So no, devaluing the dollar just to encourage more lending is a terrible, terrible idea. It's almost the same thing that Japan did just before their bubble burst.

America has unused production capacity. Period. Some things have been permanently or semi-permanently closed or moved to foreign countries. That is true. But an awful lot of productive capacity is right there in the US sitting idle and can be ramped up at any time. Industrial capacity utilization could increase by a third within a couple of days if the demand was there.

The fact that some factories are actually gone has a huge emotional impact, but it doesn't change the fact that our industrial capacity utilization of what we currently have is at less than 75%.

-Username17

First of all, you *can't* restart all of that production in a couple of days. It takes weeks if not months at the minimum to restart lines that have largely been idle. Again, the most optimistic estimate based on actual history is that it will take a year to get everything up to speed again. Some industries will be faster than others, I'll grant you that.

However, even if you manage to bring the factories back online the raw material problem still isn't gonna be resolved overnight.

The energy and transportation sector in particular will suffer. A lot. America is importing something like 70% of its oil demand. If the value of the dollar goes down dramatically, then the prices of oil will go up dramatically. It'll be the 70s all over again.

If you can't buy oil, you can't even power the factories or transport the raw materials you need for the factories to get working. And no, hybrid tech won't solve this problem. It's still expensive, and it's designed to replace cars, not ten-wheeler trucks.

Moreover, read the article: The problem with the Fed's move is that even though the Fed wants to print more money, nobody actually wants it anymore.

Americans don't want it. They aren't borrowing despite very low interest rates.

The rest of the world doesn't want it. They already have too much American debt.

And that's exactly the same situation Japan found itself in when their economic bubble popped. That led to a ten-year stagnation that they haven't even gotten out of yet.

You don't know what capacity utilization is, do you? If you close a factory in Arlington and there are several hundred people who are unemployed, but who have the skills needed to do production, and there's a building that has already been retrofitted to be a factory, but is currently empty, that's not unused capacity. That's certainly an opportunity for someone to invest on the cheap because there is a bunch of capital that you can grab without waiting for construction/training times, but it's not underused capacity.

Underused capacity is seriously just when your factory is running 4 hour shifts instead of 6 hour shifts because there is no point in making as much as your currently operational capital is capable of making. The only reason ramping up production would take days instead of hours is that you'd have to order more raw materials, which would have to be physically shipped from wherever they are stored.

Normally, American Business likes to run at 80% capacity because it leaves things squarely in the profitable pile while still leaving the ability to ramp up production in response to spike orders. If capacity runs consistently above 80% utilization, they like to build more plants and expand plants they have, to get back to 80% utilization. If they consistently run below 80%, they like to downsize capital and workers that they have so that they aren't paying overhead on too much unused stuff. But they still could ramp up to 100% capacity with the plants they have, that's what capacity utilization means.

Actually, they can usually ramp production past 100% by adding extra shifts and paying overtime. It's generally a bad plan to run at greater than 100% capacity for long, but it's still possible. Running the country at less than 75% capacity is bad, because it runs the very real risk that factories will get all the way shut down. In fact, some of that has actually happened - capacity today isn't the same as capacity two years ago. But that doesn't magically mean that the <75% capacity we are actually at somehow implies that we couldn't go to 100% just by deciding to do so.

-Username17

FrankTrollman wrote:You don't know what capacity utilization is, do you?

Don't be condescending. I know what it means. And you're still wrong about how easy it is to increase production.

You're correct about how under-utilized factories operate. However, you're wrong about the ease of getting raw materials - it's not just a few days for most American factories.

Factories producing simple goods can probably get raw materials fairly easily. That's why I conceded that some industries can do it easily. If you're a factory that makes copper fixtures and you're sitting a couple of miles away from a copper mine, sure you could ramp up production easily.

However, most American factories are actually producing highly complex goods - America's leading manufactured goods are actually airplanes for instance. And other leading goods include complex stuff like cars and computers.

In these kinds of factories, you can't just order more raw materials and expect the demand to be filled in a couple of days. Because these factories actually order semi-finished components from a large number of sub-contractors.

For instance, a car company like Ford doesn't order tons of steel and rubber and turns them into cars. They actually order tires from a much smaller company that specializes in producing tires. They then order windshields from another supplier. And bumpers from a third. The factory just assembles everything into a complete car.

In short, the supply chain of an American factory is usually very long. So even if your car plant hires more people and increases working hours, there's no guarantee that the subcontractors can meet the demand. Often, these subcontractors take a while to expand their operations, or (more often) new ones emerge to pick up the slack. Worse, if just one of these subcontractors fail to meet the demand, then everyone has to wait. It makes no sense to assemble cars if you can only give two tires to each one of them.

To top it all off, many of these sub contractors aren't even in America anymore. Motor vehicle parts for instance are now one of the top American imports.

And again, all this is tangential to the fact that America is heading down the road of Japan because it's still essentially trying to print money that no one wants.

I am going to condescend to you as long as you continue to treat unused capacity as if it was lost capacity. Because those are two different things. I linked to the fucking Federal Reserve's measurement of Industrial Capacity Utilization. That is the measure of how much we are making compared to how much we could be making right now simply by making bigger work orders and not sending people home early. That's what the measurement is.

Yes, in the big scheme of things there are all kinds of things that impede increasing industrial production. New workers have to be trained, new factories have to be built, new sources of power have to be exploited. But none of that shit matters when we're just talking about unused capacity, because that is a measurement of how much industrial production could be ramped up without doing any of that shit.

You know what? Fuck it. Zinegata, you go back on ignore. I don't have time for this kind of bullshit willful ignorance.

-Username17

*yawn* Yes, yes. Cry like a baby and run to your Ignore button. That's what happens when condescending bullies meets people who aren't easily intimidated.

No Frank, again, it doesn't take days to ramp up a car plant's production, even if then car plant has unused production. The supply chain is too long for an easy restart.

You were wrong. Because you picked the wrong subject to nitpick.

Stop being such a baby.

And it's still tangential to the overall point the article was making. Which is that America is heading down the road of Japan.

K wrote:I wonder if people will ever figure out that we don't actually need everyone employed. I mean, food production takes up less than 10% of our work force...

People need food, shelter, and entertainment. That's all we need to keep society running, and we could literally give all that away for free and still advance technologically and socially.

For the moment it's going quite the other way ... the question of what is technically possible with the available true resources isn't even being asked, the question doesn't exist at all in public discourse.

The only question being asked what is possible with available capital. The answer is, less and less because the global economy has a deflationary bias for various reasons.

We have mass unemployment and plenty of goods and food and somehow it's still reasonable to say that social security is unsustainable because of monetary costs ... the world has gone batshit crazy.

Zinegata wrote:The current status quo is bad for the US

US/Japan/EU defaulting on sovereign debt is the eventual result of the status quo ... that's going to be bad for everyone.

What you can do however, is to implement some incremental changes to reverse the trend. Moving away from the service-based economy idea, relaxing the environmental protection laws, and giving incentives to open manufacturing jobs would be a start.

This is not the status quo, this is the austerity option ... a race to the bottom which will kick off a global deflationary spiral. There is not enough money available to consumers (not in the US, not in China, not anywhere). As long as this is true there can be no sustainable growth. Putting more people to work in factories at non-gainful wages won't change anything. A sovereign country can create wage inflation to get out of this trap ... a country which has to compete globally in a WTO sense can't.

This option is going to be bad for most everyone ... the countries with relatively self contained economies will do best (this does not include China).

I think what the world needs is to be shown what a well run economy (ie. not one purely run by financiers, which is what globalism without a world government entails) can achieve. Prosperity without compromising on basic human decency, it is perfectly possible. A world full of ghettos with a couple of gated communities of super-rich is what we will get if we keep going down the path of WTO style free trade without global governance.

PS. scratch that, a world full of gated ghettos with nature reserves full of super rich is what we will get.

K wrote:I wonder if people will ever figure out that we don't actually need everyone employed. I mean, food production takes up less than 10% of our work force...

People need food, shelter, and entertainment. That's all we need to keep society running, and we could literally give all that away for free and still advance technologically and socially.

I wonder about this myself sometimes. When everything we need can be produced by a tiny fraction of the population, and everything we want can be produced by a fractional group too, then what the hell is everyone else supposed to do if they "have" to work?

Zinegata wrote:Keynesian economics isn't just about construction however. It's about making people dig up and fill in holes just so they have money to buy goods.

...

However, you *can't* rely on government construction projects forever. Because while roads help facilitate the transport of goods, they don't actually produce goods themselves.

A 21st century electrical grid, a massive-scale renewable-energy project, a preponderance of light rail and heavy rail investment, and simple infrastructure (sewer, road, and bridge) maintenance can easily tally up to $3T in the US, and that's not some sunk cost: they are true, real competitive advantages that reduce the cost of business.

Undirected construction is just another bubble, but investing in systemic advantages is what gets you past the current dip. This latest (rough) dip in the business cycle is only a dip, and it will change - its up to business and the private sector to take it past that.

You can do things to address that - large grants to research, for example - but the point of Keynesian spending is to mitigate against cyclical downturns rather than propel an economy in perpetuity.

Honestly, you say a lot of unfocused stuff here. You say that Keynesian spending doesn't work - when it did, and does, and serves a purpose. You say that it won't help on the other end of the business cycle because it doesn't produce goods - when its entire raison d'etre is to simply get through the down part of the cycle, not superfuel the up side.

On the other side of the business cycle, you simply... sell shit. The US is still very good at that. For example, US industrial production? It's fine. Despite what folks seem to believe, we're hustling along, closely following GDP. You'd have a hard case to say that US financial supremacy isn't the cause of the gap you see here:



There's this meme that the US industrial production is falling away and that we're irrelevant, when in reality the only thing people are detecting is that the rest of the world has been developing over the past two decades. We're all selling to each other, but you get currency account deficits because the US is a rich nation and we like to buy shit. We want to sell MORE of our shit, but who doesn't?

The fact is that the US has a strong service economy is not unto itself proof that the US is dying, anymore than someone personally having a strong arm is proof that their legs are weak and they have cancer.


Also, Africa's problems are in governance. I don't think making the case that African nations failing to capitalize on infrastructure developments proves Keynesian infrastructure development is pointless for mitigating against business cycles does much more than draw an extremely tenuous conclusion.

mean_liar wrote:investing in systemic advantages is what gets you past the current dip.

Three decades of government debt vs. GDP and private debt vs. income going only one way ... this was not just a dip. The pre-crisis situation was fundamentally unstable.

I think you would have a hard time showing that the pre-crisis bubble wasn't a stalling of the business cycle and that the current situation is somehow permanent.

The pre-crisis bubble was just the latest in a long line of bubbles ... the economic prosperity for 3 decades could only be funded through increasing debt vs income levels, a fundamentally unsustainable path.

Much as I hate capitalism and wish to see it torn down by the proletarian masses, the fact remains that capitalism has a lot of life left in it.

The basic structural problem where all economic transactions and growth are dependent upon spending, and spending equals income, but the ultimate goal of capitalists is to gain enough income that they don't have to spend it is well known and understood. At least, by people who aren't part of the Dark Ages of Economics, which we of course are in. You know, with how people have somehow figured out how to resurrect the Treasury View despite that having been thoroughly discredited through empiric analysis. But growth can still happen as long as money (or effective analogs to money) keeps getting injected into the system.

Yes, it's unstable, but it does "work". At least as far as it keeps the system from actually collapsing. And if people keep moving the shells fast enough, the fact that more and more of the money is sequestered unmoving in the cash reserves of billionaires won't actually stop investment from happening or people having jobs or money being in the hands of actual consumers to provoke investment to happen to fight over those consumer dollars (and in so doing, put dollars into the hands of different consumers).

It's not really until the giant cash reserve holders decide to cash out that things fall apart. But they won't do that in the foreseeable future, because the system not falling apart keeps them in Mercedes full of Cheerleaders.

I understand that it is on the face of it totally laughable that we have simultaneously a labor surplus and a food surplus and a genuine inability to figure out how to "pay" for the retirement of the current generation. That is fucking absurd, because the actual wealth required to get the retirements working and the next generation educated and conditioned to take care of us when we get old is obviously fucking sitting there. But unfortunately, while we have fiat money we haven't figured out how to get people to accept fiat government expenses, even though that's the same fucking thing.

-Username17

FrankTrollman wrote:But growth can still happen as long as money (or effective analogs to money) keeps getting injected into the system.

It's not happening at the moment, consumer debt isn't bringing it ... government debt through stimulus isn't either any more. QE might go on, but is highly ineffective in comparison (it doesn't ever get to consumers, it just fuels leveraged plays and sits in massive excess reserves).

Enough QE will work once it pushes past the bank resistances and they really start believing inflation is inevitable ... the problem is the number of trillions of excess reserves they have build up before that happens. It's a dangerous bulge of money ready to cause a complete clusterfuck if it enters the market all at once looking for investment opportunities (bubbles, bubbles everywhere).

The advantage of stimulus is that it can be guided a little better ... in the end though I prefer bubbles over a deflationary global depression. So bring on the QE, the more the merrier. Lets all devalue, that's how we got out of the mess last time too ...

mean_liar wrote:Undirected construction is just another bubble, but investing in systemic advantages is what gets you past the current dip.

Correct, directed construction and investing in systemic advantages gets you out of the dip. That's they key word: Directed.

However, as we both agreed in this thread, that big stimulus plan the US government passed did not actually fit the bill. As were most of the spending programs in Africa.

So again, you *can't* just spend your way out of a depression. You need to focus on specific industries that will allow the money to keep circulating within the country. Like construction.

Otherwise the money actually just goes out of the economy.

There's this meme that the US industrial production is falling away and that we're irrelevant, when in reality the only thing people are detecting is that the rest of the world has been developing over the past two decades. We're all selling to each other, but you get currency account deficits because the US is a rich nation and we like to buy shit. We want to sell MORE of our shit, but who doesn't?

I'm not exactly contesting that US production is declining. As I said way, way before: it's a guess.

However, what isn't a guess is the massive trade deficit. However you cut it, people outside the US are now producing a lot more. And the US is buying a lot more than it is selling. Again, some trade deficit is okay. Hong Kong has a trade deficit for instance.

But a trillon dollars a year?

I'd really like to see an argument how massive deficits and foreign debt is a good thing.

The fact is that the US has a strong service economy is not unto itself proof that the US is dying, anymore than someone personally having a strong arm is proof that their legs are weak and they have cancer.

I'm not saying the service economy is proof that the US is dying. I'm saying it's one of the culprits why your trade deficit is so monstrous.

It is much harder to "export" services. It can be done, but the majority of imports and exports still revolve around goods.

So, really, to summarize:

1) Keynesian Economics only work if you direct the spending properly. Simply spending won't necessarily solve anything.

2) The big issue with the current US economy is that that a lot of its government spending is undirected.

3) Due to #2, a lot of the spending is actually just going out of the country due to outsourcing and the massive trade deficit (which is also caused by this whole back rub economy nonsense). So US government spending is in many ways actually funding China's growth, rather than domestic growth.

4) The massive trade deficit and foreign debt is very, very bad for everyone.

MfA wrote:US/Japan/EU defaulting on sovereign debt is the eventual result of the status quo ... that's going to be bad for everyone.

Yes. Why do you think I'm worried about World War 3?

This is not the status quo, this is the austerity option ... a race to the bottom which will kick off a global deflationary spiral.

I didn't say stop spending. I said spend more to encourage raw mat production and manufacturing to lower the trade deficit .

Because I don't really see a way to lower trade deficits (and by extension foreign debt) except by lowering the amount of stuff America takes in.

Many here are arguing that you can lower the trade deficit by simply devaluing the dollar. Yes, devaluing the dollar will increase import prices and lessen demand. If done gradually, the American economy shouldn't feel the inflation too much, and it *might* work. Or the US could end up like Japan (as described in the article I linked).

However, I'm not even confident that this change can be done gradually with the current climate. All it takes is for one government (or big bank) deciding "screw it, we're not gonna support this sinking currency anymore" to trigger panic selling of the dollar. It could be the Asian Financial crisis again, except it's the dollar getting massively devalued and Americans getting shocked that their gas prices just tripled.

Again though, that's the worst-case scenario. It should be interesting to see what'll happen in the next few weeks as the rest of the world reacts to QE2.

Zinegata wrote:I didn't say stop spending. I said spend more to encourage raw mat production and manufacturing to lower the trade deficit .

That's very hard within the WTO. Explicitly local projects like infrastructure is one thing ... but direct industry subsidies are quite another.

Until the race to the bottom is complete (ie. the US is a shithole with no labour and environmental standards) the comparative advantage the US has is limited. Infrastructure and reduced shipping costs ... that's about it.

Many here are arguing that you can lower the trade deficit by simply devaluing the dollar.

That's not really the point of devaluation, other currencies will devalue as well. The main advantage of devaluation is that it wipes out debt ... it's the same thing which got the world running again after the great depression.

What we do with trade deficits afterwards is an orthogonal matter.

Yes, devaluing the dollar will increase import prices and lessen demand. If done gradually, the American economy shouldn't feel the inflation too much, and it *might* work. Or the US could end up like Japan (as described in the article I linked).

Japan's debt is not a consequence of true devaluation (ie. printing money) it's a consequence of debt funded temporary devaluation (debt funded stimulus, which is just borrowing against the future).