Our financial system is crumbling this week.

[Freed Roger]

I'm ambivalent about all this. I don't see the United States adjusting well to its decline in economic and military preeminence, which is a shame, because the country doesn't have to be the largest economy to be an exceptionally successful and influential economy. For instance, it's not clear if countries such as China will be able to build institutions (such as a higher education system) that will be comparable to those in the U.S. That's their challenge.

I really think that the belief in American exceptionalism (which was conceived as a double-edged sword--a calling, not merely a just dessert) has become a profound curse--a source of arrogance rather than a challenge for self-reflection. The last ten years may turn out to be a painful missed opportunity to adjust to a world in which the U.S. isn't so central.

Well said.

[TimeForGuinness]

Who is going to take the US's place? China? I think you're giving them too much credit. A lot of things have to go right for China and a lot of things have to go wrong for the US.

We might be on a downward trend, but it IS fixable. We just have to fight for it, which is something most of us aren't accustomed to.

The debt ceiling battle is a farce, there is no way that many politicians, lobbyists, and corporations are going to sacrifice their money and power over a debt ceiling. Won't happen. If the US defaults, it's a global depression. The powers at hand won't let that happen...because they'll all be tracked down and gutted.

[Socnorb11]

Who is going to take the US's place? China? I think you're giving them too much credit. A lot of things have to go right for China and a lot of things have to go wrong for the US.

We might be on a downward trend, but it IS fixable. We just have to fight for it, which is something most of us aren't accustomed to.

The debt ceiling battle is a farce, there is no way that many politicians, lobbyists, and corporations are going to sacrifice their money and power over a debt ceiling. Won't happen. If the US defaults, it's a global depression. The powers at hand won't let that happen...because they'll all be tracked down and gutted.

Ha. I like the way you think, TFG!

[longhornbaseball]

That's really odd the growth of mortgage debt was almost completely linear until 1999. You would think it would bounce around with the economy in the 80's and early 2000's. I'm rather skeptical of its authenticity. It's like that blue line is a complete fabrication and shouldn't even be there and the actual mortgage line should be superimposed behind the trend lines. And 2008 trend line to WHAT? When was that graph made? You're talking about a fourteen year sample (and why fourteen years, why not more?) vs. a one to two year sample, completely ignoring 1998 through 2007. If that blue line is real then there should be a trendline for '98-'07 added to the graph with a much greater positive slope than the '82-'97 line. Why isn't it there? I'm not sure what real conclusions should be drawn from that chart.

That graph is from Richard Koo who is the chief economist at the Nomura Research Institute in Japan (I'll post a Fed graph below). His thesis from the beginning of the crisis is that the US is suffering from a similar kind of "balance sheet" recession that Japan suffered from when their asset bubble burst in the early 90's. A balance sheet recession is when people are primarily using their incomes (or cash flows as was the case with over indebted Japanese corporations) to deleverage instead of consume (invest). This drives down aggregate demand and results in economic stagnation until private balance sheets are repaired.

We are suffering from a debt crisis in this country, but not the one that's on CNN everyday. There is no public debt crisis in the US (unless the politicians want one, which they apparently do), because we are a sovereign issuer of our own currency with a floating exchange rate. The US is not revenue constrained and can spend money whenever it wants. Households cannot. When households take on too much debt (as was the case during the financial crisis) they must deleverage before they can start spending again. They are doing this, but as that chart showed (and the chart posted below shows) this is a going to take a long time.

So what is the solution? When the private sector is not spending, we need the public sector to step in to increase aggregate demand. This means more fiscal stimulus by way of deficit spending and tax cuts for everyone (primarily the middle class). The last thing we need to do is impose austerity measure that contracts government spending. If the private ain't buying, the government ain't buying, and foreigners ain't buying, what do you get? You get another recession.

[SHOW]

[/youtube]

[sighyoung]

Who is going to take the US's place? China? I think you're giving them too much credit. A lot of things have to go right for China and a lot of things have to go wrong for the US.

We might be on a downward trend, but it IS fixable. We just have to fight for it, which is something most of us aren't accustomed to.

The debt ceiling battle is a farce, there is no way that many politicians, lobbyists, and corporations are going to sacrifice their money and power over a debt ceiling. Won't happen. If the US defaults, it's a global depression. The powers at hand won't let that happen...because they'll all be tracked down and gutted.

Mind you, it depends upon what you are talking about--world's largest economy, or world's preeminent economy.

China, inevitably, will have a larger economy in a few years, simply because of sheer population. A few countries are enjoying considerable economic growth and, with far larger populations, will have larger economies than the U.S. in the future. That's good for the world as a whole, but it also means that the U.S. will not have as much of an economic say in the world as before.

That doesn't mean that the United States, per capita, will be a poorer country than China, India, Indonesia . . . you name it. Similarly, the U.S. enjoys several institutional advantages, and will likely maintain those for a long time. As you say, China, as one example, still has a lot of work to do a lot has to go right for China. The U.S. isn't going to go poof!

Still, it's sad that the U.S. has piddled away ten years when it should have been putting its economic house in order. I don't see it investing in those institutions--for instance, state and federal support for higher education has been declining for decades. Its public schools, in many areas, are dreadful, and there's far less class mobility coming out of these schools than in many other countries. The United States has a lot of work to do to maintain its institutional advantages, and I don't see our leaders making difficult or wise choices.

[slide_into_first]

That's really odd the growth of mortgage debt was almost completely linear until 1999. You would think it would bounce around with the economy in the 80's and early 2000's. I'm rather skeptical of its authenticity. It's like that blue line is a complete fabrication and shouldn't even be there and the actual mortgage line should be superimposed behind the trend lines. And 2008 trend line to WHAT? When was that graph made? You're talking about a fourteen year sample (and why fourteen years, why not more?) vs. a one to two year sample, completely ignoring 1998 through 2007. If that blue line is real then there should be a trendline for '98-'07 added to the graph with a much greater positive slope than the '82-'97 line. Why isn't it there? I'm not sure what real conclusions should be drawn from that chart.

That graph is from Richard Koo who is the chief economist at the Nomura Research Institute in Japan (I'll post a Fed graph below). His thesis from the beginning of the crisis is that the US is suffering from a similar kind of "balance sheet" recession that Japan suffered from when their asset bubble burst in the early 90's. A balance sheet recession is when people are primarily using their incomes (or cash flows as was the case with over indebted Japanese corporations) to deleverage instead of consume (invest). This drives down aggregate demand and results in economic stagnation until private balance sheets are repaired.

We are suffering from a debt crisis in this country, but not the one that's on CNN everyday. There is no public debt crisis in the US (unless the politicians want one, which they apparently do), because we are a sovereign issuer of our own currency with a floating exchange rate. The US is not revenue constrained and can spend money whenever it wants. Households cannot. When households take on too much debt (as was the case during the financial crisis) they must deleverage before they can start spending again. They are doing this, but as that chart showed (and the chart posted below shows) this is a going to take a long time.

So what is the solution? When the private sector is not spending, we need the public sector to step in to increase aggregate demand. This means more fiscal stimulus by way of deficit spending and tax cuts for everyone (primarily the middle class). The last thing we need to do is impose austerity measure that contracts government spending. If the private ain't buying, the government ain't buying, and foreigners ain't buying, what do you get? You get another recession.

[SHOW]

[/youtube]

This is absolutely true and emphasizes the forces behind the Republican Party want to destroy this country. The role of the Democrats is to accept bribes to act submissively so the country eventually fails through acquiesence.

[planet planet]

That's really odd the growth of mortgage debt was almost completely linear until 1999. You would think it would bounce around with the economy in the 80's and early 2000's. I'm rather skeptical of its authenticity. It's like that blue line is a complete fabrication and shouldn't even be there and the actual mortgage line should be superimposed behind the trend lines. And 2008 trend line to WHAT? When was that graph made? You're talking about a fourteen year sample (and why fourteen years, why not more?) vs. a one to two year sample, completely ignoring 1998 through 2007. If that blue line is real then there should be a trendline for '98-'07 added to the graph with a much greater positive slope than the '82-'97 line. Why isn't it there? I'm not sure what real conclusions should be drawn from that chart.

That graph is from Richard Koo who is the chief economist at the Nomura Research Institute in Japan (I'll post a Fed graph below). His thesis from the beginning of the crisis is that the US is suffering from a similar kind of "balance sheet" recession that Japan suffered from when their asset bubble burst in the early 90's. A balance sheet recession is when people are primarily using their incomes (or cash flows as was the case with over indebted Japanese corporations) to deleverage instead of consume (invest). This drives down aggregate demand and results in economic stagnation until private balance sheets are repaired.

We are suffering from a debt crisis in this country, but not the one that's on CNN everyday. There is no public debt crisis in the US (unless the politicians want one, which they apparently do), because we are a sovereign issuer of our own currency with a floating exchange rate. The US is not revenue constrained and can spend money whenever it wants. Households cannot. When households take on too much debt (as was the case during the financial crisis) they must deleverage before they can start spending again. They are doing this, but as that chart showed (and the chart posted below shows) this is a going to take a long time.

So what is the solution? When the private sector is not spending, we need the public sector to step in to increase aggregate demand. This means more fiscal stimulus by way of deficit spending and tax cuts for everyone (primarily the middle class). The last thing we need to do is impose austerity measure that contracts government spending. If the private ain't buying, the government ain't buying, and foreigners ain't buying, what do you get? You get another recession.

[SHOW]

[/youtube]

That's pure Keynesian stuff, right? I understand the demand's got to come from somewhere to avoid another recession, but federal public debt isn't made up and is growing at an unsustainable rate. I agree austerity measures in the short term would be a mistake, but your graph is showing a housing recovery not until 2020. You're suggesting public spending to make up for private spending for that long? I'm trying to figure out a way to reconcile the two and it's tricky.

[slide_into_first]

That's really odd the growth of mortgage debt was almost completely linear until 1999. You would think it would bounce around with the economy in the 80's and early 2000's. I'm rather skeptical of its authenticity. It's like that blue line is a complete fabrication and shouldn't even be there and the actual mortgage line should be superimposed behind the trend lines. And 2008 trend line to WHAT? When was that graph made? You're talking about a fourteen year sample (and why fourteen years, why not more?) vs. a one to two year sample, completely ignoring 1998 through 2007. If that blue line is real then there should be a trendline for '98-'07 added to the graph with a much greater positive slope than the '82-'97 line. Why isn't it there? I'm not sure what real conclusions should be drawn from that chart.

That graph is from Richard Koo who is the chief economist at the Nomura Research Institute in Japan (I'll post a Fed graph below). His thesis from the beginning of the crisis is that the US is suffering from a similar kind of "balance sheet" recession that Japan suffered from when their asset bubble burst in the early 90's. A balance sheet recession is when people are primarily using their incomes (or cash flows as was the case with over indebted Japanese corporations) to deleverage instead of consume (invest). This drives down aggregate demand and results in economic stagnation until private balance sheets are repaired.

We are suffering from a debt crisis in this country, but not the one that's on CNN everyday. There is no public debt crisis in the US (unless the politicians want one, which they apparently do), because we are a sovereign issuer of our own currency with a floating exchange rate. The US is not revenue constrained and can spend money whenever it wants. Households cannot. When households take on too much debt (as was the case during the financial crisis) they must deleverage before they can start spending again. They are doing this, but as that chart showed (and the chart posted below shows) this is a going to take a long time.

So what is the solution? When the private sector is not spending, we need the public sector to step in to increase aggregate demand. This means more fiscal stimulus by way of deficit spending and tax cuts for everyone (primarily the middle class). The last thing we need to do is impose austerity measure that contracts government spending. If the private ain't buying, the government ain't buying, and foreigners ain't buying, what do you get? You get another recession.

[SHOW]

[/youtube]

That's pure Keynesian stuff, right? I understand the demand's got to come from somewhere to avoid another recession, but federal public debt isn't made up and is growing at an unsustainable rate. I agree austerity measures in the short term would be a mistake, but your graph is showing a housing recovery not until 2020. You're suggesting public spending to make up for private spending for that long? I'm trying to figure out a way to reconcile the two and it's tricky.

I'm not sure what you mean by reconcile but I've read other estimates this will take until 2018 and government spending should not be cut until the economy recovers around that time.

[Hungary Jack]

Longhorn,

I do not understand how you can state that there is not a public debt crisis in this country. I understand that our federal and state governments can raise taxes, that our central bank can (continue) to devalue our currency, and that we can continue to borrow even if it means paying significantly higher rates as the credit agencies and Chinese get nervous, but all of these remedies have serious consequences for our economy and standard of living. It is a theoretical argument, and one that fails to recognize that our public fiscal policy is really taxing the limit of our economy and trading partners to finance public consumption.

[longhornbaseball]

I do not understand how you can state that there is not a public debt crisis in this country. I understand that our federal and state governments can raise taxes, that our central bank can (continue) to devalue our currency, and that we can continue to borrow even if it means paying significantly higher rates as the credit agencies and Chinese get nervous, but all of these remedies have serious consequences for our economy and standard of living. It is a theoretical argument, and one that fails to recognize that our public fiscal policy is really taxing the limit of our economy and trading partners to finance public consumption.

A crisis implies that if we don't undertake fiscal tightening soon, there will be dire immediate consequences in the form of higher interest rates and/or a currency collapse, which will lead to hyperinflation. There is currently very little evidence that suggests either scenario is likely to occur in the future, and no evidence that either is occurring right now (which is what the word crisis implies).

The only reason the ratings agencies are discussing a downgrade of US federal debt is due to the BS debt ceiling, which is an outdated relic of the gold standard. If there was no debt ceiling, the ratings agencies would not be discussing a US downgrade. The argument that the Chinese might decrease their demand for US treasuries ignores the fact that the Chinese need to buy US treasuries (or other dollar denominated assets). As long as they keep trading us goods for dollars, they need to do something with those dollars. US treasuries continue to be the safe-haven asset for the entire world, and I don't see that changing anytime soon.

The primary factors that drive US treasury yields are Federal Reserve policy and inflation. Currently the Fed funds rate is around zero and inflation is 3.6%, which is higher than we'd like, but primarily due to the oil shock which began with the Libyan revolution. As long as there is stability in the global energy markets, inflation shouldn't be much of a problem.