I'm not clear on how any of this will lead to a recession. Why will high Debt-to-GDP or government spending send the economy into a recession?
Q1 GDP numbers were clearly affected by dismal weather (although still bad), but labor markets are improving markedly, and there are reasons for optimism. I don't see this as a very convincing bear case.
For the bull case, see this post, from a guy who's been right about everything since the mid-2000s.
Further, there's little evidence that Debt-to-GDP over 100% (despite "feeling" meaningful, because, 100%!) has any kind of predictive value for the long term direction of an economy, particularly one that has unusually low interest rates. If Debt-to-GDP were a problem for the US, you'd expect higher interest rates, not lower ones, as investors would be demanding higher returns on US debt.
The fact that interest rates on Treasury bonds remain so low, despite our debt levels and despite certain political figures repeatedly attempting to force the US Government to default on that debt, is prima facie refutation of the idea that no one in the market actually thinks US debt levels pose a major macroeconomic problem in the short to medium term.
The thing that worries me about our debt is that it's not like the rates are locked-in for 1000 years. After bonds mature, we need to issue new bonds to pay for them. And if the interest rates are higher at the time, the new debt will have a higher interest rate (I guess, technically, the bonds will sell for a lower price, which has the same effect).
Paying our current level of interest on our debt is not crushing. But it's not hard to imagine the rates tripling (or more) considering how close to zero the rates are now. Then we are over $1 trillion/yr in debt service (if my calculations are correct).
Combined with what seems like a structural deficit, I don't see any good way we'd get out of that.
In other words, we're not falling off a cliff now, but it seems like fragile situation.
My guidance to others, when they ask about US debt, I suggest they watch Japan. When Japan's interest rates rise, even just a little, their debt will become unserviceable. Once that happens, it will be time to think hard about US debt. The plan is clearly to inflate out of it. Survivable for the wealthy, devastating for everyone else.
The blog post raises some fair points, but the author does a pretty poor job at getting any point across. The most concerning things right now are: low interest rates on very high risk debt, continued and dramatic growth of derivatives (you fail, I fail, we all fail), and China's decision to push the 2008 correction in to the future finally running out of steam. The geo-political issues in the Middle East, North Africa, and Asia are a whole other cause for concern.
I think the risks now are still fairly benign compared to what was faced during the Cold War (though we still build new nuclear weapons and delivery vehicles, Russia fell short of its recent goal of 300 and instead has built 30 so far.)
There is probably 10% slack right now before you even get to mild inflation. What's concerning to me is geopolitical instability while the economy is teetering on deflation. This state is strongly correlated with big wars.
2013
A = Debt is around: $17.5 trillion
B = Debt Service: $416 billion
C = Average Rate: 2.38% ($416 billion / $17.5 trillion)
D = U.S. Tax Revenue: +/- $2.8 Trillion
Things won't get interesting until B approaches D.
So one way of looking at is if everything remained constant (which it won't) you'd need 15% interest rates on the current debt for debt service to approach tax revenue. If interest rates stay the same you could increase the debt to $128 trillion.
"Things won't get interesting until B approaches D."
I'd say things would get pretty interesting well before that point. B=D is just the point at which a default is inevitable (unless much higher tax revenue is achievable without causing other problems).
But the problem is that the interest rates are so low now that large increases are not outlandish. 7 years ago, the rate was more than double what it is now. Looking at the graph in the article, in the 80's it was over 10%, more than 4X the current rate (which would imply 1.6 trillion in debt service).
It seems like we're making a big bet that interest rates are down permanently. That may be true, but it seems like a fragile assumption to me.
There is no reason for the government to default when B=D. (If you disagree, please take a deep breath and think through the mechanics of exactly how the US federal government could be forced into default.)
In reality, B=D is likely to balance itself out again. This becomes apparent once you think through where the interest payments go.
If they are reinvested in government bonds, nothing happens. If they are reinvested in other financial assets, the general interest rate decreases, which will also pull down the interest rate on government bonds (reducing B). And if the interest payments end up with people who spend them on goods, well, that grows the economy, which increases D.
I agree that it will happen before B equals D but no one knows the tipping point ratio. In theory, a government can always argue right up to that point that, "we'll grow our way out of this."
There is a reason why they are at historic lows-- it is the decision of market participants. Your concern is essentially that market participants will somehow do a complete 180, for no stated reason.
"Your concern is essentially that market participants will somehow do a complete 180, for no stated reason."
If market participants demand a higher interest rate, I wouldn't call that a "complete 180".
Regardless, change is the only constant, as they say. Markets move. Behavior changes in response to the environment. If we really are supposed to be a risk-free place to loan money, then I would think we'd be a little more resilient to rising interest rates, which happen fairly often historically.
However, it is hard to imagine that interest rates would increase without a serious uptick in economic performance. Such an uptick would automatically go hand in hand with increased tax revenues and lower spending (because social safety net spending would shrink automatically).
Basically, any scenario in which interest rates grow are scenarios in which automatic stabilizers will reduce the government deficit in other places. It's a healthy system in which the feedback mechanism go in the right (i.e. stabilizing) direction.
"However, it is hard to imagine that interest rates would increase without a serious uptick in economic performance."
It's not that hard to imagine; what you describe is essentially Stagflation. You may consider it unlikely, but there are some known potential causes[1].
As I understand it, Stagflation happens when increased demand is less able to stimulate increased supply than one might expect.
As mentioned in [1], an oil supply shock could be a cause. That is not outlandish given the current instability in the middle east and our tense relationship with other oil producers (Russia and Venezuela). The US and Canada do produce a lot of oil, which may offer insulation, but I don't think that's necessarily a defense.
Another cause listed is tough regulatory atmosphere. For instance, if the EPA decides to strongly curb CO2 emissions, or misguided labor laws come into effect, or the healthcare system in the US gets even worse. Again, not outlandish.
Ah, right. I still think there are two mitigating factors here to what I said.
First: In the stagflation of the 1970s (which is really the only significant empirical data point we can draw from), increased interest rates were a political choice made by the central bank rather than an economic necessity.
Second, and more importantly: Stagflation is characterized by inflation, which means that nominal GDP grows even while real GDP is stagnating.
Since real GDP is irrelevant to the debt-to-GDP ratio (witness the debt-to-GDP ratio through the 1970s), the conclusions for whether one should worry about the debt-to-GDP ratio remains the same as far as I can tell.
Why is that hard to imagine? If, hypothetically, our economy fell off a Great Depression style cliff, wouldn't that make it harder to pay our debt, expectation of which would force rates up, and be somewhat self-fulfilling?
> The fact that interest rates on Treasury bonds remain so low, despite our debt levels and despite certain political figures repeatedly attempting to force the US Government to default on that debt, is prima facie refutation of the idea that no one in the market actually thinks US debt levels pose a major macroeconomic problem in the short to medium term.
With respect, I don't think it's accurate that the fact that bond rates remain low correlates to evidence that there's no major macroeconomic problem. Just take a look at the Federal Reserve's balance sheet that was relatively stable for many years has quadrupled in 5 years.
>The fact that interest rates on Treasury bonds remain so low, despite our debt levels and despite certain political figures repeatedly attempting to force the US Government to default on that debt, is prima facie refutation of the idea that no one in the market actually thinks US debt levels pose a major macroeconomic problem in the short to medium term.
Not necessarily. If you have to ask yourself what the country had to do to keep those rates from changing. The more a country is in debt (especially to other countries) the more their foreign debtors have leverage over what policies the debted country can enact. For the sake of arguement, let's say that China decided to annex Alaska. If we retorted with a threat of military action, China could come back and say we'll increase your interest rates.
Also high debt to GDP ratio makes printing money as a solution more attractive for a government. Inflation is a theft from everyone.
Foreign debtors have zero leverage over the United States. What would happen if China decided to stop buying US debt? Their currency would appreciate, their exports would collapse, and their economy would go into recession. Our currency would depreciate, our exports would increase, and our economy would get a much desired boost.
You will pay triple for your iPhone, your car, your TV, your laptop, your monitor... If you haven't checked recently anything you buy comes from China or has a significant % of it's BOM from China and is essentially financed by that debt. Your standard of living would collapse.
Obviously both China and the US would take a big hit but I'd argue the US would take a bigger hit. Right now the US benefits from the status of the US$ as the world's reserve currency. If all foreign US bond holders sell their their bonds the US$ will not simply depreciate, it will collapse. The US will be able to import nothing and it's not geared to handle that. It's very comfortable having the cheap manufacturing and the environmental implications somewhere else. Now none of the US debt holders want to see this happen but also no one will want to be the last one holding to debt in a collapsed currency - if someone sneezes.
Given that a lot of US businesses do their business worldwide and keep their money out of the US they won't necessarily be impacted as much but this "run on the bank" scenario is not going to be pretty.
The more a country is in debt (especially to other countries) the more their foreign debtors have leverage over what policies the debted country can enact.
Not necessarily, because national debt (eg bonds, t-bills, etc) can be owned by anyone, not just foreigners. In the case of the US, as it happens, most national debt is overwhelmingly owned by Americans --think your IRA: whatever percentage of bonds you own is government debt to you.
The confusion arises because one particular strategy of hedge funds in the past has been to buy up huge controlling amounts of dollar-denominated bonds/debt from small export-dependent countries so that, if the country's economy slows down and they have to devaluate their currencies to boost exports (and thus growth), they end up unadvertently increasing the amount owed to the hedge funds in dollars. This can easily get way out of hand, thus causing the well-publicized financial crises of the 1990s, Argentina's, Greece[1] etc. But this scenario obviously does not apply for countries that do not issue foreign-currency bonds, like the US.
[1] The case of Greece is even worse because they cannot even devaluate "their" currency to boost exports, so all they can do is intentionally depress or deflate their economy to make everything (salaries, land, inputs) massively cheaper; or refinance their debt with EU-backed loans.
Inflation is from those with assets denominated in dollars (if they are not inflation adjusted). It is to those with liabilities denominated in dollars (if they are not inflation adjusted) and to the people introducing the new dollars into circulation. In the case of the government printing money, that's the government (obviously) and it's fairly reasonable to consider it a tax like any other. A somewhat regressive tax, since the more wealthy usually have more flexibility about how they store their wealth, but I don't know how it compares to sales taxes.
"For the sake of arguement, let's say that China decided to annex Alaska. If we retorted with a threat of military action, China could come back and say we'll increase your interest rates."
Our debt is not callable. China can say "we won't buy from you except at a higher interest rate" as new loans come due, but anyone else in the market could come in and undercut them (and might be likely to, if they knew China was backing off because of politics and not worry about the soundness of our debt) - heck, it could even be patriotic Americans - BUY WAR BONDS!
That doesn't really seem to follow, to me. The worst a single creditor could do is not bid, or bid for higher rates in future treasury auctions. The terms of existing debt are fixed. The impact of this wouldn't be large unless other creditors followed suit - there are many parties interested in buying up US debt.
Furthermore, if a holder of US debt declared war on the US, I wonder if that wouldn't be viewed as a credible reason to default on that outstanding debt - certainly doesn't make much sense to be sending interest coupon payments to someone invading your country.
The creditor could dump the bonds on the open market, and depending on the level of pain they were willing to feel, could crush the us bond markets. The fed can only stand in and defend for so long until we have to go inflationary to defend the dollar. Its actually a good thing that china controls a large chunk of US bonds, they can't dump without taking a huge hit themselves, MAD (for you cold war buffs). The countries you need to worry about dumping are ones with large amounts of hydrocarbons, Russia. They could theoretically dump, and then they have the hard asset to trade (oil) if they truly wanted to cause pain, however doing so to the US would send the entire world in to a free fall and they would probably end up worse than before, however everyone would be worse than before. It would be a large global reset.
Exactly. If China dumps their bonds rates are going to go to the sky and the US currency will depreciate. No one wants to do this but no one will want to sit on the sidelines holding billions of US bonds if this starts happening. It's not that different than a run on a bank that does not have enough reserves. (well, it's a little bit different, a bank can't print money)
What everyone is trying to do is figure out a way to unwind this slowly and/or grow out of it. I think a lot of past growth was fuelled by population growth and "free" resources (oil, coal, etc.). Population isn't growing as fast and resources aren't as free any more.
The US is already in a recession. The two quarters of negative growth is not a good means of showing the shape of the economy.
You could have two quarters of -0.5% growth, and that would mean recession. Or one quarter of -3% growth, and that doesn't mean recession, despite being worse than the two quarters. It's a silly way to calculate the state of the economy. Besides that, inflation is intentionally understated, GDP is contracting at a worse rate than stated in the headlines. 2% GDP growth is a recession in this environment of intentional central bank inflation schemes.
Not once post WW2, has the US economy shrank by more than 1.5% in a single quarter and then not entered a recession (or already been in one).
Housing has begun to tip over, as the Fed pulls its asset inflation program. Corporate earnings growth is anemic at best, most blue chips are struggling to grow at all (MCD, KO, IBM, WMT, etc). The vast majority of growth in the stock market has come from multiple expansion, not from earnings growth. Full time jobs are still far under where they were in 2007, while simultaneously welfare benefits are dramatically higher, including labor problem indicators such as SS disability (and of course labor force participation is at 35 year lows).
This all with 0% interest rates. If you can't grow an economy with 0% interest rates, you're in for a very, very bad time.
Stocks tend to hit new record highs just before a recession begins. This happened with both of prior Fed asset inflation parties, in the late 1990s (2000 peak) and early 2000s (2007 peak). They repeated the same inflation recipe, trying to fake a wealth effect, and turned it up several notches. The same result will occur again on the backside, for obvious reasons.
I don't think the writer ever said that a high Debt-to-GDP / government spending will send the economy into a recession. it means the government's ability to fight a recession if one comes will be extremely constrained; furthermore, having high debt prior to a recession makes the pains of having the high debt extremely painful as revenues will decline significantly.
This. Especially when some economists recommend recession spending as a way to fight it. We've already spent the money, maxed out the "credit cards" and currently interest rates are poised to go up.
If another recession does take hold, it will be a nasty fight.
This is the saddest part of it. Wars have economic benefit because of the giant injection of spending and incentives for investment. One could have the same benefit using much less destructive and even beneficial projects such as colonizing the oceans or space or building gigantic solar power plants to solve all our energy problems.
Alas, there seems to be always at least one party that is opposed to any kind of visionary project.
The US federal government budget is not like a household or the budget of a firm. Households and firms are USD users, which means that they can only make payments in USD if they first obtain those USD (whether as income or by loan).
The US federal government, on the other hand, is the issuer of USD. If it wants to make a payment in USD, then nothing can stop it.
This means that the debt-to-GDP ratio is an entirely meaningless measure as far as the government's ability to fight a recession is concerned. (It may have play a role in other consideration, such as questions about equity and distribution of wealth, but that's a digression.)
While you are correct economically, many of the U.S. government's decisions are made politically. And a high debt-to-GDP ratio definitely affects politics.
I remember when TARP was up for debate. It was obviously needed, and it was the right idea (as proven out by its success). It still failed in the first vote in the House, because it was politically unpopular with enough people.
i completely disagree. its not just politics as mentioned bellow, which is a very key point. The us government couldn't just keep printing money to pay for all of its deficit. the money would become worthless, and at a point it would be like breathing in a bag, but that doesn't matter as it would have collapsed before that ever happened.
the dept to GDP ratio (as well as printing money) has a huge effect on a countries ability to issue bonds, just ask the PIIGS. interests rates on bonds would rise very quickly making the annual deficit larger and since all interest rates in the country are based off the US treasury interest rate (the risk free rate), they would rise too, even if the US' interest rate was at 0. that'd make any recession get out of control as credit froze up.
it'd be the fed's worst nightmare. they would loose control of interest rates during a recession while the central government would loose its ability to borrow money.
I'm afraid that saying "just ask the PIIGS" is to miss the crucial point. Those countries are members of the Eurozone, and therefore their governments are currency users rather than issuers. Therefore, an analysis that draws upon your everyday household experience carries at least some water, even though it is entirely inapplicable to a monetarily sovereign government such as the US government.
Other than that, I can only recommend that you try to consider all the relevant dynamic effects in the macroeconomy. For example, if money would indeed become worthless, this would not happen overnight due to the immense inertia of an economy as large as the US economy. It would be a drawn out process.
Throughout that process, as a consequence of money losing value, the nominal GDP would increase, and therefore the debt-to-GDP ratio would decrease, which means that the system has a very strong self-stabilizing tendency.
It happens when the assets can't pay their interest payments any more.
For now interest rates are low, so the government can pay it's billed. Unfortunately, we hold a lot of short denominated debt. We should lock in these rates while the going is good. If interest rates spike up, the government will have to cut programs, borrow a lot more money, or increase taxes. It's a very negative spiral.
The reality is that nobody has been in our exact situation, so there is more speculation. Are we becoming more like Japan? Or Europe? And how might aggressive immigration help us?
The US can't just "lock in" rates by deciding to do so. Most of the world treats debt very different than the US consumer is used to on credit-card and mortgage loans.
The US issues debt and the market bids on what it will pay, nearly always charging higher rates for longer terms. And the US can't pay it down early; it has those rates for the entire term of the loan.
Right. In my view it's better to lock in relatively low 10 year (or better yet 30 year) rates rather than roll the dice on interest rates rising. Rates can easily rise to long term norms of 5%.
The market is anticipating that rates will rise, hence the nature of the yield curve.
If the government's assets are long term, shouldn't the liabilities match it?
I think the responses you're getting are ignoring the key question: How will high debt-to-GDP or government spending send the economy into a recession?
Many have been forecasting complete collapse and hyperinflation for these reasons, and it hasn't materialized. It seems there is something flawed with the models people are trying to use to make their economic forecasts, or their reasoning doesn't apply to this situation.
One reason government spending would be bad is that it is crowding out private investment by driving up rates. But he indirectly recognizes this isn't the case due to rates being low enough that they should be encouraging investment.
He doesn't say how government debt should be reduced, and where government spending should be cut. He also glosses over the point that we're at a zero bound. The post is basically a bunch of graphs while expressing concern about government spending and debt. He doesn't really connect these to the GDP and go into detail about the reasons for that quarter. I could go on.
The sole reason the US avoided disaster - temporarily - from occurring due to the massive increase in public debt, is the Fed began buying the radical majority of the government's debt after China let up on its buying.
When you have to rely on your central bank to fund your government's debt burdens with magic fiat, you're in a perpetual downward spiral scenario already. These are the good years, the deficit is set to explode dramatically higher again soon, and there will be nobody to buy except the Fed.
Who else can eat $500b to $1t per year in junk paper? China can't afford it any longer (having just taken on a mountain of debt the past five years). Japan hasn't been able to afford it for a very long time, they can't even afford their own debt.
Now it's merely a question of time. The Fed is pulling its programs because it can't sustain them any longer without running inflation through the roof. They know the US economy is weak, they see the data that led to the -3% GDP print. It's not like we're producing 500,000 full-time jobs and 200,000 manufacturing jobs per month.
Two consecutive months of negative "growth" define a recession. The "dismal weather" argument has been used to death. We've had very cold winters before, it's nothing new. Labor markets are not improving as you might think. Most of the job growth is in low wage positions.
Regarding the link, the argument is that by 2020 (6 years from now) more people will be working. and more specifically, the paragraph below, is flat out wrong.
"But that is medium term - in the near term, the reasons for a pickup in economic growth are still intact:1) the housing recovery should continue, 2) household balance sheets are in much better shape. This means less deleveraging, and probably a little more borrowing, 3) State and local government austerity is over (in the aggregate),4) there will be less Federal austerity this year, 5) commercial real estate (CRE) investment will probably make a small positive contribution this year.
What if growth in the US is being prevented by technology innovation? If I replace 100 jobs with 1, and no further jobs are need for those 99 people, and that's the core of what technology does, growth in the traditional sense isn't possible.
I agree that a basic minimum income may be necessary; I don't believe it'll fix the growth problem though.
Tech Innovation kills existing jobs by replacing 100 humans with one machine, this is true. If you're a cab driver, you may not be ecstatic about self-driving cars.
But those same technological advances invent new goods and services for an ever increasing population. More people are fighting over the same set of resources, which technology allows markets to distribute more efficiently. The new tech creates new demand no one knew was needed (e.g. the mainframe, the internet, mobile web, the blockchain).
While it's tough luck for the 99 workers who are not in a position to learn new skills, the bet is that tech advancing will create more economic opportunities for the next generation (while improving the quality of life) and upgrading society like 'aging up' in Age of Empires or Civilization.
>While it's tough luck for the 99 workers who are not in a position to learn new skills, the bet is that tech advancing will create more economic opportunities for the next generation (while improving the quality of life)
Sure. Personally, long-term, I think that will be true. The thing you have to understand, though, is that in the short-term, this hasn't been happening, for whatever reason, and the short-term, if it goes on for long enough, becomes the long-term. This is a problem that needs human effort before it will be solved.
Now, some people argue that it's a macro thing; Corporations are sitting on a bunch of cash right now, and not hiring. Some of those people say that we need some inflation so that those corporations are incented to do something (which usually means hiring people) with that money.
Personally, I don't understand macro. I understand Micro, though, and on the Micro level, I don't see a lot of entrepreneurs putting a lot of effort into figuring out how to create at-least-minimum-wage jobs for the less than awesomely skilled. I do see some effort being put into commoditizing third-world labor, you know, fiver and mturk, which you could argue is probably good on the global scale, but if you are focused on America, is decidedly counterproductive.
I think solving this problem using market-based tools would be an awesome project. I think it would be a possible project, especially if we are okay with another "service sector revolution" type deal where unemployment is low, but most of the jobs are kinda shitty. (which would certainly be better than the current case.)
Do you have an idea for a business that scales that could pay relatively unskilled folks better than minimum wage?
The thing I do see is that many companies seem to be cutting customer service more than I think makes sense; Most of the time, I'd pay another 10% if I could get good customer service rather than a bad robot. Of course, I'm one of those nerds who would prefer a robot to a human, for most service, assuming the robot was good enough... but the robot usually isn't good enough, and I think most people would prefer a human, if the human and robot were equally good at solving the problem at hand.
I think the problem, though, is good customer service isn't a low-skill job. If you can do customer service all day, every day, if you can do so without developing a deep hatred for humanity, you are a better person than I am.
> Do you have an idea for a business that scales that could pay relatively unskilled folks better than minimum wage?
The problem with this lies in the nature of most service sector jobs - they require physical proximity to those people being served. Contrast this with manufacturing jobs, where a factory can be set up in a remote town (or on the other side of the world, which is precisely why they no longer exist in America in large numbers) and the products shipped en masse to consumers.
Unfortunately, in America, our zoning laws/NIMBYism and poor public transit have made it extremely difficult for service sector workers to cheaply and efficiently serve the burgeoning upper middle class. Nowhere is this more apparent than in SF. If the Bay Area public transit system were better and if housing were much denser, then more unskilled workers could afford rent in/near the city and have short commutes to service jobs.
Rather than raising minimum wages, we should be working to lower the cost of living for those not as well off. Our cities are currently so inefficient that you could squeeze a great amount of sheer waste out of them.
>The problem with this lies in the nature of most service sector jobs - they require physical proximity to those people being served. Contrast this with manufacturing jobs, where a factory can be set up in a remote town (or on the other side of the world, which is precisely why they no longer exist in America in large numbers) and the products shipped en masse to consumers.
The service sector jobs I have experience with; technical support, can often be done from anywhere.
Of course, having done tech support both in person and over the phone/email, I can tell you that the experience is vastly better for all involved when you are there physically. Besides the fact that it's quite often technically easier to solve the actual problem, the customer is way less likely to get crazy abusive to someone who is physically there and obviously, you know, a human being.
So... okay, point taken. I hadn't thought about that, but having remote tech support is often one of those choices where you optimize for price at the cost of good service. I guess that's the idea behind apple's "tech support in the store" model.
I remember during the first dot-com, shortly after I was promoted out of phone support, hearing the boss talk about how he wanted to do a startup for 'high end tech support' that would send people out in person to set up your internet, rather than making you talk on the phone with us.
>Unfortunately, in America, our zoning laws/NIMBYism and poor public transit have made it extremely difficult for service sector workers to cheaply and efficiently serve the burgeoning upper middle class.
I think we have a negative feedback loop here. The rich don't want public transit near them because they don't want the poor near them, because they aren't used to in-person service jobs. Now, I think most of this is the fact that most middle-class Americans are super weird about class. I mean, that's not to say that the British aren't super weird about class, but they are weird about class that allows the middle/upper classes to acknowledge the existence of the lower classes. The American middle and upper classes want to pretend that the lower classes don't exist, and plan their cities accordingly.
The thing is that we now have this purposely useless public transit infrastructure, which makes it really difficult to rehabilitate the idea of more in-person service jobs.
> The service sector jobs I have experience with; technical support, can often be done from anywhere.
The problem with this type of service sector job (remote technical support) is that, since it can be done from anywhere, it is just as amenable to outsourcing as manufacturing. Think about it this way - if a job can be "outsourced" to the Midwest, whether it be manufacturing or service sector (i.e., tech support over the phone), it can be outsourced to China or India.
So to be clearer, when I said service sector jobs, I meant those that require physical proximity. After all, the basic problem we're facing here is that a lot of American workers simply have no competitive advantage over foreign workers (after factoring in the lower wages paid abroad). Therefore, those workers need to be in an industry where they can exploit an unassailable advantage of theirs - they can be physically proximate to the people they're serving in a way that no one in another country can.
But such an industry doesn't exist right now (at least not at the size necessary to support all those unemployed people), because of our housing and public transit policies. If those policies were changed, allowing for cheaper and better services to reach the upper middle class, you would see the rapid growth of a new market, one that would really help funnel money from the upper middle class down to the lower classes.
Of course, in the long run, using physical proximity as the sole competitive advantage is not a good social policy, since it will lead to social stratification. Therefore, we also need to quickly reform our education system to ensure that the next generation of workers is broadly competitive with foreign workers, rather than only the top 20-30% of American workers doing jobs that could be outsourced but aren't, because the American workers are truly better at it than their foreign counterparts. But in the short run, we can't reeducate all those people in their 20s, 30s, and 40s, who still have decades of work ahead of them, but have long since exited the educational system. They need jobs, and they need them now, if you don't want mass social unrest and economic collapse.
> The American middle and upper classes want to pretend that the lower classes don't exist, and plan their cities accordingly.
I think a lot of this has to do with white flight and high levels of lead in gasoline coupled with high rates of driving, which led to very high crime rates in cities in the mid-20th century. But crime rates have been dropping in urban locales all across America for the last couple of decades, and affluent youth are more willing to live in (and even raise their own kids in) urban environments than their parents or grandparents were.
For example, this article[0] was posted on HN just a day or two ago. If this trend spreads across the nation (which would still require a concerted and extended effort), we could see a dramatic paradigm shift that allows both the upper middle class and the lower class to coexist in urban environments.
>Of course, in the long run, using physical proximity as the sole competitive advantage is not a good social policy
I believe that in the long run, standards of living will somewhat equalize. I mean, there will be differences, but I hope those differences will be like the difference between San Francisco and Denver, not the differences between San Francisco and rural Vietnam.
[on transit]
>If this trend spreads across the nation (which would still require a concerted and extended effort), we could see a dramatic paradigm shift that allows both the upper middle class and the lower class to coexist in urban environments.
What I was trying to say is that I believe the problem isn't technical; we have the money and ability to create good transit systems. We need the will to create good transit systems. We need a reason for the politically powerful classes to want public transit in their backyards.
> I believe that in the long run, standards of living will somewhat equalize.
I think that it will depend on whether or not we reform the education system so that we don't create a permanent "servant underclass." Just as we once established an education system that effectively prepared the citizenry for manufacturing jobs, we have to now establish a system that prepares the citizenry for a knowledge economy. The last thing we want is a postmodern Downton Abbey-style society.
> We need a reason for the politically powerful classes to want public transit in their backyards.
I agree with that - the problem is not, and has never been, a technical one. But I think the social obstacles are falling away with the younger generation, because they didn't grow up in a world where urban areas were seen as blighted and crime/poverty-ridden as they were 2 or 3 decades ago.
>I think that it will depend on whether or not we reform the education system so that we don't create a permanent "servant underclass.
I find it really difficult to argue against good state-subsidized education; some people really do learn useful stuff in school.
But... I don't think good education is going to make the problem go away all by itself.
I really hope that what I am about to say is wrong.
I don't believe that education has as much to do with success as people say. Education correlates with high income, yes, but education also correlates with having high income parents. I think having the sorts of parents who encourage and help you to get an education also correlates with both getting an education and with getting a successful career.
Nearly everyone in my family has a degree of some sort, many have advanced degrees. I have no degree, and no significant time spent at college, and am the highest earner of my siblings. Hell, almost all of my siblings have worked for me at some point.
From what I've seen? My life (and my income) is more like that of my "class brothers" than of those I went to high school with who have my level of "educational attainment" - The conclusion I am drawing from this is that having parents like mine was important to my success; most people with parents like mine are going to go to college, sure, but the college itself is less important than those parents.
> But those same technological advances invent new goods and services for an ever increasing population.
While I'd agree this has been the case historically, I'd argue this is no longer the case.
> While it's tough luck for the 99 workers who are not in a position to learn new skills, the bet is that tech advancing will create more economic opportunities for the next generation (while improving the quality of life) and upgrading society like 'aging up' in Age of Empires or Civilization.
Seems like a pretty big bet to take.
Where are ~4 million drivers going to go when self-driving cars roll out? Bus boys? Service jobs? Technology is going to saturate the labor market with surplus labor (that labor having been automated away). History has shown us this does not end well.
i think the only point in here that represents a potential risk to startup investing is #1 - declining GDP. Basically, if we run into a recession, the risk is that asset values decline based on negative projected growth. when asset values decline, startup values decline even harder, since they are a risky/"high beta" asset.
The rest of these charts are basically the background on the decline-and-fall of america, and I would say only tangentially relate to the startup ecosystem.
the most important chart that you left out was the stock price of Facebook, which is riding/causing a wave of investor (and corporate) enthusiasm for all things social, which in turn benefits the startup eco system because they buy lots of companies, and drive the hype that a given company could be the "next" facebook or sell to them.
Facebook (more so than google) seems appropriate for ecosystem barometer because:
* they do the most audacious acquisitions, with due diligence that consists of weekend meetings eating strawberries - $17bn for whatsapp, etc.
* Facebook is valued at $170 billion dollars, based on selling ads which I've never seen (because i use adblock+) and peddling to brands i also never engage with (because i only use FB to keep up with friends). that seems unsustainable IMHO.
You missed the trend of growing inequality. I think this is important because the marginal propensity to spend for someone low on the income scale is much higher than the wealthiest.
A much better thing to look at is how much GDP growth do you get for each additional dollar/currency of debt?
If we borrow $1 and get $2 of GDP growth, great. If we borrow $1 and get 10 cents of GDP growth, big fucking problems ahead. Considering that the debt is going cost more than we borrowed, that benefit red line is pretty far ahead of $1.
Demographics are another trend to look at. Shrinking population generally means the GDP is going to end up going the same direction. On a micro-level we could examine Detroit, on a macro-level Japan. Both are returning developed land to farmland; quite a paradigm shift for someone who grew up watching fields turn in to suburbs. A country, or city, with a rapidly growing population needs to borrow money to build infrastructure. One that is shrinking may face a crises even with a much smaller debt load.
Thinking about recessions or perhaps even depressions is a bit simplistic. Both are bumps in the road. A more valuable idea is to look at the multi-decade trends where countries fall in and out of power or even cease to exist.
Quite. It's entirely rational for the government o maximize borrowing when interest rates are low, because treasuries are fixed-income securities, whose coupon (regular payment of interest to bondholders) does not fluctuate with the interest rate. Now if rates go up and borrowing does not fall, that would be a huge problem. But when rates are historically low it's completely rational to load up with as much debt as you can carry if the economic gain > the interest payment. My main beef with governance (by both the parties rather than one alone) of the last few years is that we didn't borrow enough and what we did borrow was mostly spent on transfer payments, instead of a massive (and necessary) overhaul of our infrastructure that would have created more employment and arguably had a greater money multiplier effect even at sub-optimal levels of economic efficiency.
>> I'm not clear on how any of this will lead to a recession.
Here are some reasons:
1) if government spending is half of GDP that means any increase in non-government economic activity will only have half the effect it otherwise could (with zero govt contribution) this works both ways though, but more importantly it means government spending is critical to the economy.
2) Debt is high, so there is a LOT of pressure to reduce govt spending, which would directly (negatively) affect GDP in the short term - see 1, gov spending is 0.5 of GDP.
3) Any rise in interest rates will result in 2 (the alternative is to just increase the debt). To spend more in interest, you have to spend less elsewhere.
4) If we get inflation (and they're trying really hard) they'll want to keep it low by raising interest rates, resulting in 2 (see 3).
"Why will high Debt-to-GDP or government spending send the economy into a recession?"
You're confusing the short run and the long run. In the long run there are more degrees of freedom. In that context, this quote simply seems to show a lack of imagination. Entities that extremely indebted lack strategic operating flexibility (countries and businesses alike).
The financial press often defines recession as a technical term, meaning any two sequential quarters of negative GDP growth. NBER has a slightly different definition [1].
If you think about this in a more general context it's easier to see that "Debt-to-GDP" ratio alone isn't enough to determine that there is a problem. You need a combination of debt level and interest rate.
For example, I personally could have $100 Trillion in debt but with an infinitesimally small interest rate and an infinitely long repayment period, I would not be concerned.
What matters is Debt-Payment-to-GDP ratio. There is certainly some level of that ratio at which I would be concerned.
> A recession is two consecutive quarters of negative gdp growth.
That's a common rule of thumb, and apparently (per Wikipedia) the official definition in all states in the EU. But the US is not the EU, and the closest thing to an official definition in the US is that a recession exists whenever the Business Cycle Dating Committee of the National Bureau of Economics Research decides that a recession exists.
Ask not how you can avoid recession, ask what you can do for the rest of the country to emerge from recession that they are still suffering from.
Look at that GDP "Growth Rate" and of course you can clearly see as a derivative it's a "Shrink Rate of Growth Rate" and the trend line itself is more meaningful than you would think, especially the greater number of decades you have experienced to correlate with the patterns.
The right-hand y-intercept is fixed by the present day, but the left hand y-intercept would vary related to what year in the past you choose to begin your data series.
Good choice anyway IMHO to use ~1950 on the left since so many in the USA who have economic experiences before that time are no longer with us, or seriously retired from productive service even though passive incomes for some survivors of earlier times are doing quite well for now.
Remember that this is corporate growth, and so many corporations depend so much on growth that anything which stands in the way will be disposed of, if a situation of zero real economic opportunity becomes significant, then growth (or reduced shrinkage as a last resort) will be extracted from the citizens either by passing on the costs directly or through government lobbying.
So look at area under the curve or in this case area over the curve which I believe are two different things.
Sharp or extended spikes below the trend are devastating to both corporations & citizens, but corporate shareholders are compensated by the eventual return of growth above the trend, since costs are passed on, the consumers do not share in the prosperity like they share in the devastation.
Anyway, experience has shown that a negative spike like the one in about 1981 will devastate maybe 10% of consumers at least, and for them there will be no recovery for about 25 years at least.
Later on in the early '80's a different larger portion of consumers are neutralized. The 1990-91 ruin is still largely with "us" if you were one of the unfortunate ~10% there, otherwise you may not even notice, this is by
design.
Early 2000's there is a little downward noise, lots of dotcoms and their dependents, but 2008-09 were the worst thing since the Nixon Recession, a huge new group whose futures's ruined for decades to come.
Since each significant spike destroys a different block of consumers, this is adding up, estimate totalling up to almost a majority of consumers who are not just compromised but ruined by now.
And that's not all, Nixon was so incompetent that the currency had to be sacrificed too and that does not appear on the chart. This was huge.
Surprises are in store if you have not yet felt the wrath from 5 years ago.
There is nothing more for currency to contribute, loss of property values since then has not extracted its toll proportional to negative area so something else will have to give, and it will have to be big.
If government debt grows high enough then an increasingly large percentage of federal spending will be devoted to paying interest on that debt rather than on arguably more useful areas which create future prosperity, such as education and scientific research.
After a certain point this becomes unsustainable and bad things start to happen, ranging from total political & economic collapse (Germany in the 1920s) to hyperinflation (Zimbabwe) to, in the best of the worst case scenarios, a large default/restructuring and subsequent downgrading of a country's debt to junk status (Argentina in the 2000s).
As F.A. Hayek, Milton Friedman and numerous other economists have written, government spending tends to be more inefficient than the free market because the government isn't constrained by profits and losses, which are society's way of indicating whether a company is producing goods and services that are valuable and desired. Of course, there are some goods and services that only the government can provide well, and the current left-right political divide is largely a debate over the point at which government taxation and spending becomes undesirable and inefficient. However, it's undeniable that at a certain level (almost certainly a level below our current level of spending in my opinion) each marginal dollar the government sucks out of the economy is used less efficiently than it would have been used if it remained in private hands.
Something to consider is the difference between debt denominated in a countries' own currency verse that of another country.
In 2010 Germany finally repaid debt it had raised to pay its World War I reparations. The reparations never were paid in full but you damn bet the US dollar denominated debt was.
If a country borrows money in a foreign currency they may have bills due for an incredibly long time unless the creditors says "ok, you can pay less than you owe us." The EU members are in this position because the bills they owe are not in their own currency.
Generally this seems to have the biggest impact on tiny countries. One of the most interesting opinions I've heard recently is from James Rickards who was a negotiator for the Long Term Capital Management bailout in 1998. His opinion is the risks in the banking system have increased, not decreased, and when the next failure happens the US government will not be capable of a bailout largely due to the Federal Reserve's balance sheet leverage (which puts Lehman's leverage to shame) and a lack of political will to write a multi-trillion dollar check. What will happen is debt issued and denominated by the IMF, the only bank in the world left with a good balance sheet.
Next time what should be done (but probably won't) is to take over the insolvent banks, prosecute the fraudsters, and allow mortgage debt to be reduced in bankruptcies, perhaps converted to equity. The US federal government assets are certainly an order of magnitude (possibly two) bigger than the Fed balance sheet, so to talk of leverage is laughable.
> the current left-right political divide is largely a debate over the point at which government taxation and spending becomes undesirable and inefficient.
Its often presented that way -- almost exclusively by people on the right, however -- but as I see it the left/right debate is less about fact questions (even somewhat fuzzy ones like the efficiency question you propose) and more about the ethical/moral/value issue of what is the purpose of government.
"the current left-right political divide is largely a debate over the point at which government taxation and spending becomes undesirable and inefficient"
I disagree. It's more about a notion of "fairness": whether you think that the government can improve fairness, in what situations, and at what cost of efficiency.
Q1 GDP numbers were clearly affected by dismal weather (although still bad), but labor markets are improving markedly, and there are reasons for optimism. I don't see this as a very convincing bear case.
For the bull case, see this post, from a guy who's been right about everything since the mid-2000s.
http://www.calculatedriskblog.com/2014/06/the-future-is-stil...