Kevin Drum’s ten reasons to be pessimistic about the economy

I'm just glad he didn't decide to list twenty:

  1. This is a balance sheet recession, not a Fed-induced recession. Paul Volcker caused the 1981 recession by jacking up interest rates and he ended it by lowering them. That's not going to happen this time.
  2. In fact, there won't be any further stimulus from lower interest rates. They're already at zero, and Ben Bernanke has made it clear that he doesn't plan to effectively lower them further by setting a higher inflation target.
  3. Consumer debt is still way too high. There's more deleveraging on the horizon, and that's going to make consumer-led growth difficult.
  4. The financial sector remains fragile and there could still be another serious shock somewhere in the world.
  5. There are strong political pressures to reduce the budget deficit. That makes further fiscal stimulus unlikely.
  6. Housing prices are still too high. They're bound to fall further, especially given rising interest rates combined with the end of government support programs.
  7. Our current account balance remains pretty far out of whack. Fixing this in the short term will hinder growth, while leaving it to the long term just kicks the can down the road.
  8. The Fed still has to unwind its balance sheet. That has the potential to stall growth.
  9. Oil prices are rising. This not only causes problems of its own, but also makes #7 worse.
  10. Unemployment and long-term unemployment continue to look terrible. Yes, these are lagging indicators, but still.


Maybe Tyler would like to post 10 reasons to be optimistic?

1. just because it's a balance sheet induced recession doesn't mean that interest rate policy doesn't help. Expansionary monetary policy explicitly helps bank balance sheets. See, e.g., the entire literature on the bank lending channel of monetary policy (kashyap and stein; bernanke and gertler; gertler and kiyotaki, etc.)

2. The fed has levers other than the short term rate. for example, it can buy other securities -- corporate or long term gov't bonds. this is precisely what it has done.

3. point 1 said bank balance sheets are messed up. but if consumers really want to save, won't that help balance sheets?

4. there always could be another shock. it's impossible to disprove this point.

5. if it's a balance sheet recession then we don't need fiscal stimulus. i'm not convinced we need more stimulus anyway. more stimulus isn't always a good thing.

6. house prices do not reflect a change in real wealth. perhaps people consumed more because prices went up (though that's not really been shown), but that doesn't mean prices have to affect consumption at all on the way down. furthermore, if people already know prices are going down further then their consumption likely already takes this into account (people are pretty good at smoothing).

7. i don't know what this one means...

8. if he means that they'll buy assets back, which leads to a shrinking money supply, i agree this is a problem. i pointed this out back when they first started buying securities. there's no reason they couldn't just trade their corporate stuff for long term government debt, though.

9. Jim Hamilton has argued this doesn't matter. I'm in favor of high oil prices. There's a huge negative externality that needs to be priced. If we can't tax it, then monopoly rents are a second best.

10. a jobless recovery sounds awesome to me. the economy "recovers" -- incomes rise -- but we all work less. i'm in favor. i hope we see 10 percent growth and 20 percent unemployment.

We will be deleveraging household private debt to GDP for some time; don't look to consumer spending to pull you out.

Household (private) debt to GDP was 66% in 1999, and 102% in 2008. As this burden of private household debt unwinds, there is little other sources of aggregate demand, particularly if, as is correct, there will be little other stimulus.
Here are some pretty good statistics and charts on personal and governmental debt over this last cycle:

Look for a long grind.

Here are some additional comments on deleveraging from the report quoted above:

Most investors believe the bailouts, stimulus plans, and quantitative easing will lead to inflation. In fact, almost all of the bearish prognosticators are negative because of the fear that interest rates will rise once the inflation starts to work its way into the economy. They point to the doubling of the monetary base which they believe will soon lead to rising prices as more dollars are created chasing the same amount of goods. We, on the other hand, are not as concerned about the doubling of the monetary base because we believe the excess money will need the money multiplier and increases in velocity in order to increase aggregate demand and eventually inflation. As long as velocity (turnover of money) is stagnant we expect the increases in the monetary base and all the quantitative easing will lead to a stagnant economy and deflation until the consumer goes into the same borrowing and spending patterns that was characteristic of the 1990s through 2007.

Remember, over the past decade (when we believe the secular bear market started) the total debt in the U.S. doubled from $26 trillion in 2000 to just over $52 trillion presently (peaking a few months ago at $54 trillion). This consists of $14 trillion of gross Federal, State and Local Government debt and $38 trillion of private debt. We expect the private debt to continue declining in the future as the deleveraging of America unfolds, while the government debt will very likely explode to the upside as the government tries to keep the economy afloat as the private deleveraging weights it down.

Very inspiring stuff.It is said that if you are pessimistic then for sure you will not arrive at your destination. You must have the right attitude first before you begin your methods.But this stuff is well mentioned and explains very clearly the reasons for being pessimistic..

just be optimistic

Yes, bad old developed countries looking for ways (like exports) to soften the blow, and pressing countries with high savings and low consumption to import more. What a terrible, stupid thing for the bad old developed countries to do to the poor high savers, like the poor, put-upon Chinese.

Regarding 10 reasons to be optimistic:

Not referencing any list, but Perry is always posting reasons for optimism.

That said, I'm pretty pessimistic.

I will note that according to the Case-Shiller index, the housing price to rent ratio is back to its long term historical average. Housing prices are not too high.

Related to that, the Fed has unwound its support for the MBS market as of late March, with only small increases in relevant interest rates. It also unwound some time ago its most dramatic move, if not widely reported, the $600 billion bailout of the ECB through currency swaps. All gone now.

And as for the current account balance, well, we've been running a deficit on it for decades, through good times and bad. Why is it suddenly some bigger problem than it was before?

Oh, and as for the "jobless recovery," it appears that we have finally hit bottom on employment, with it growing last month, finally. Yes, it has a long way to get back to where it was, but it is growing again. "Jobless recovery" is now fantasy.

I'll give you a reason for optimism:

There's another election in 6 months.

Another major reason to be pessimistic:

The growth of entitlements is going to destroy the U.S. budget, or lead to major tax hikes. The *increase in the cost of entitlements in the decade after this one will be larger than the entire U.S. military budget today in terms of GDP. I've seen numbers which indicate that to maintain solvency of these programs, the top marginal tax rate would have to increase to 92%, and the 35% tax bracket would have to become 66%.

Either that, or a 10-15% VAT will have to be established to pay for it all. These solutions could wind up reducing GDP growth by 1 to 1.5 percent per year.

Another reason to be pessimistic: The demographic collapse of Europe and Japan. Japan is facing a population crash and a worker-to-retiree ratio of 1.5 by 2050. Europe isn't in much better shape. This is going to cause their own entitlements to explode at the same time as their tax bases collapse, and this will have profound effects on world trade.

All of these demographic/entitlement problems worldwide really start to ramp up in 2020. Because these are known problems, they will affect current decision making more and more as this decade progresses.


That is correct. But the point is that a few months ago a lot of people were worrying that when
the Fed stopped buying them, there would be nobody to step and do so, and mortgage rates would
soar, and the housing market would collapse again. Hasn't happened. Yes, they probably will sit
on the MBSs they have for some time. However, they really have gotten rid of all that eurojunk
they had in swaps, which was the really scary stuff and which they did not wish to talk about much.

Ted Craig,

I agree that one month is not yet a solid trend. Employment growth could still stall or slow
down or even reverse, although with GDP growing at a pretty good clip pretty much globally now,
the latter seems unlikely, at least as a trend, although we might get a negative month here or


People do not pay $xxx,000 for a house.
They pay $xxxx a month, which is very dependent on the interest rates. When interest rates do go up, the price for each monthly payments go up, which will be reflected in the selling price.

shorter tshaw

reasons to be pessimistic: my guys arent in power.

except when they were in power they gave us this mess.

The economy is screwed, as is America. It's a combination of too many people, too many conflicts of interest in the system, and a failure of capitalism in that the biggest/wealthiest businesses buy laws to give them advantages over their competitors. True capitalism - and thus real competition - is the LAST thing American business wants.

I was wondering why the health insurance companies were allowed to collude with each other and price set, against the age-old antitrust laws, as merely enforcing those laws against the health insurance companies - forcing them to actually COMPETE with each other - would solve the entire healthcare crisis. Then I learned that the health insurance companies bought an exemption from the antitrust laws many years ago. That's the precise moment that I gave up on America. Goodbye and good riddance.

Re: 15. WMD attack

Are you posting from a parallel universe or did I miss a big news story?

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