tag:blogger.com,1999:blog-4923505780935445004.post2651161348454268037..comments2023-09-04T02:21:54.263-07:00Comments on ndk's notepad: Negative Equilibrium Real Interest Rates and Youndkhttp://www.blogger.com/profile/03422548769889947053noreply@blogger.comBlogger12125tag:blogger.com,1999:blog-4923505780935445004.post-51630993617485423762009-03-01T00:21:00.000-08:002009-03-01T00:21:00.000-08:00ndk,I'd like to expand on the idea of overcapacity...ndk,<BR/><BR/>I'd like to expand on the idea of overcapacity which is central to your explanations and policy prescriptions.<BR/><BR/>Yes, there's over capacity but at what prices. There's overcapacity of cars at 30 thousand dollars, electronics costing thousands, and apartments in the 100's of thousands. But half that price and there's a dearth of all these items.<BR/><BR/>Say's law is incomplete in that sense. Supply will create it's own demand in general, but if the price of the created items is too high in dollar terms, demand won't be forthcoming.<BR/><BR/>Financial system was able to fool the world into thinking it's much bigger than it actually is. China has built the productive capacity to serve the world that was a giant, but in reality he's turning out to be a short person. <BR/><BR/>Worthless pieces of paper were exchanged for real tangible items.<BR/><BR/>Destruction of overcapacity is inevitable if the dollar retains it's value in real terms. It's simply unprofitable to build an aforementioned car if it's price is now $15 thou. But that's all the world can afford once the illusion of credit bubble has been dispelled. Hence the factory will be shut.hkhttps://www.blogger.com/profile/09934831376701421832noreply@blogger.comtag:blogger.com,1999:blog-4923505780935445004.post-52150852683909660652009-02-19T13:21:00.000-08:002009-02-19T13:21:00.000-08:00interesting, a couple things come to mind. i can&...interesting, a couple things come to mind. i can't remember my google password, this is babar ganesh, i have posted before.<BR/><BR/>> is the IT boom circa 2000 evidence for your #3...<BR/><BR/>i think in 2000 many people would have said that we would have a better system for electronic cash and that this would enable "productive" i.e. "gdp-enhancing" activities over the "internet". we aren't there foreseeably, however. i don't see the true potential of networked technology coming through until we are. of course we will end up with interdependencies and structures that will knock us down again, probably into a luddite hell.<BR/><BR/>> ... total level of debt in the system<BR/><BR/>the measure of total level of debt still seems very crude to me but the image in my head is of a network of debt (ie nodes and edges, with a net value at each node), with a time dimension as well. it would be interesting to model this directly as a network. in any case, if you take this picture as an intuition, in order to decrease debt in the system you will want to disentangle loops and you will want to give cash to leaf nodes. the strategy toward banks is that we have given money to nodes in the middle in order to keep them from going below zero; this has done nothing but alleviate pressure. (predictably.) does my mental picture make any sense?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4923505780935445004.post-76361395726147685282009-02-16T15:38:00.000-08:002009-02-16T15:38:00.000-08:00apologies, did not read the next post whcih speaks...apologies, did not read the next post whcih speaks to the point!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4923505780935445004.post-20131601575693281492009-02-16T15:35:00.000-08:002009-02-16T15:35:00.000-08:00I agree with you on #3. Clearly technology has bee...I agree with you on #3. Clearly technology has been a productivity accelerator, but in doing so (coupled with wage arbitrage) creates a numerator and denominator issue as in 4Q - http://www.bls.gov/news.release/pdf/prod2.pdf)<BR/><BR/>Bernanke back in 2005 speaks to the ratehr dismal performance of US productivity since the 70s. Whether or not this supports the peak oil thesis of the 70s? <BR/> (http://www.federalreserve.gov/BoardDocs/Speeches/2005/20050119/default.htm).<BR/><BR/>Finally, I am struck by the idea of modeling or targeting an unknowable. An unsophisticate might call this hocus pocus. The exercise while interesting seems a lot like the stuff about okun's law and GDP gap analysis. It makes sense only in that it is torn from the Krugman cloth. <BR/><BR/>It would seem to me the absolute level of debt is a key consideration in any analysis. Accomidative policy itself must have a natural bound, rates notwithstanding, and whether that is 100% of debt/GDP, 200% or something else is an open question (the problem being compicated by the self reinforcing distortion of more debt yielding expanding GDP and the need for ever lower rates to maintian debt service ratios).<BR/><BR/><BR/><BR/>Perhaps it is peak debt that is the proximate cause? Constant stimulation is an unnatural act. Even more so when there is no reliable growth opportunities. This makes The old Europe comment even more ironic.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4923505780935445004.post-50501250693483778662009-02-16T14:19:00.000-08:002009-02-16T14:19:00.000-08:00Interesting post and comments. Here is what I gle...Interesting post and comments. Here is what I glean from all this:<BR/><BR/>> There is overcapacity and a lack of investment opportunities in the U.S.<BR/>> Globalization is a big reason for the above. High U.S. wages and decreased communication costs (Internet) have eroded U.S. earning power.<BR/>> U.S. consumption finally collapsed under the weight of too much debt as a percentage of disposable income.<BR/>> Europe and Japan are experiencing similar problems to the U.S. Developing economies are suffering from the other side.<BR/>> Globalization is the root cause of our problems, in combination with the fact that our financial rules and regulations are not globally oriented.<BR/>> Free trade vs protectionism is a false choice. Trade and international finance need to be more effectively regulated. "Protectionism" has a lot of negative connotations, but we do need to regulate commerce and finance in ways that may be considered protectionist if viewed narrowly.<BR/>> A broader vision will emerge as countries and the international community sort through the mess. War may be involved (hot or cold).Detroit Danhttps://www.blogger.com/profile/03718490473585220856noreply@blogger.comtag:blogger.com,1999:blog-4923505780935445004.post-30607634602991694442009-02-16T10:19:00.000-08:002009-02-16T10:19:00.000-08:00Major question: are #2 (debt-deflation) and #3 (no...<I>Major question: are #2 (debt-deflation) and #3 (no good business opportunities) mutually exclusive? Can't both be true?</I><BR/><BR/>They're certainly not mutually exclusive, jult52, and you're wise to point that out. They might both be true in our current situation, though I remain skeptical about #2 given the Fed's largesse.<BR/><BR/>But any presence of #3 is of major importance when looking at ramifications of policy actions for investments and the economy.<BR/><BR/>Disposing of the dead banks and assets in that scenario becomes a necessary but insufficient measure: it needs to be done, but would yield no coupons in lending or growth. It might prevent more violent shocks, but there would be no higher level equilibrium to flip the economy back to.<BR/><BR/>If #3 is true, then regardless of other conditions, the ultimate solution is time, realignment, and a wrenching disposal of excess capacity.<BR/><BR/><I>Another thought: is the IT boom circa 2000 evidence for your #3? Here we have a genuinely innovative and transformational development. The paucity of alternatives to IT leads investors to bid equity prices to ridiculous levels.</I><BR/><BR/>I think it's plausible. It led to an enormous spurt of growth and overcapacity that hasn't come close to dissipating even today(see LVLT, for example, or any subset of the chip industry).<BR/><BR/>Not only that, but the equal access to markets and free information the Internet engendered absolutely crushed a ton of business models and margins, and they aren't coming back. We wallpapered, floorboarded, and tranched that fact for awhile, but now the true redundancy is shining through.<BR/><BR/>I think investment will be depressed for a long, long, long time, and when it comes back, America won't be the focus point.<BR/><BR/><I>Glad you're back with more incisive writing. I've always thought road trips were a perfect time to do heavy-duty thinking, so I think you may find the time is conducive to updating your blog.</I><BR/><BR/>I'm always worried it's a little too archaic for most readers, no matter how important I think it is. Searching for the right balance of meat, bone, and fat still, even though potato chips are apparently the most popular food out there. Oh well.ndkhttps://www.blogger.com/profile/03422548769889947053noreply@blogger.comtag:blogger.com,1999:blog-4923505780935445004.post-67871548177778121012009-02-16T06:52:00.000-08:002009-02-16T06:52:00.000-08:00Another thought: is the IT boom circa 2000 evidenc...Another thought: is the IT boom circa 2000 evidence for your #3? Here we have a genuinely innovative and transformational development. The paucity of alternatives to IT leads investors to bid equity prices to ridiculous levels. <BR/><BR/>jult52Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4923505780935445004.post-61681065421104716382009-02-16T06:48:00.000-08:002009-02-16T06:48:00.000-08:00Major question: are #2 (debt-deflation) and #3 (no...Major question: are #2 (debt-deflation) and #3 (no good business opportunities) mutually exclusive? Can't both be true?<BR/><BR/>Minor nit: In marshalling your support for #3, be careful about the influence of the utterly distorted financial services net income and share repurcashes. You might want to limit the datapoint abotu stock repurchases to nonfinancial companies. This doesn't invalidate your point, of course.<BR/><BR/>Glad you're back with more incisive writing. I've always thought road trips were a perfect time to do heavy-duty thinking, so I think you may find the time is conducive to updating your blog.<BR/><BR/>jult52Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4923505780935445004.post-34352272681290819742009-02-14T23:07:00.000-08:002009-02-14T23:07:00.000-08:00This is such an important and neglected point: we ...<I>This is such an important and neglected point: we WERE heading toward deflation in 2002, despite the fact that almost everyone in the mainstream scoffed at the very idea.</I><BR/><BR/>The Fed unequivocally got it. I happen to agree the medicine prescribed was mercury with ground up leeches in it, but they got one diagnosis right.<BR/><BR/><I>There has been quite a bit of asset destruction, with stocks cut from 1.5x GDP to .75 x GDP. Real estate has taken a 30%+ haircut. <BR/><BR/>I suppose no one knows what happens when you get into the twilight zone. How do we know that this isn't enough?</I><BR/><BR/>I was once the world's worst trader, cap vandal. I'm not anymore, but only because I stopped trading.<BR/><BR/>But regardless of current prices, the key to remember is that if #3 is correct, the natural path of least resistance for asset valuation is down and it's likely to remain that way for awhile. In your stock valuation, for example, nominal GDP is likely to go down both due to deflation and investment shortfalls.<BR/><BR/>There will almost certainly be further explosions along the way, but the government has done a better job halting -- or postponing -- those than I'd thought likely.<BR/><BR/>The good news is, there's probably very fertile soil on the other side of the valley.<BR/><BR/>Everything changes if significant protectionism arises, as some commentators have asked about. That's a vastly tougher question. It changes so many parameters so violently that the outcome is hard to guess. I can allocate a neuron or two towards it but I don't anticipate having much confidence in my answer.<BR/><BR/><I>Actually I increasingly believe that a lot of post WWII growth was the conversion to a massive petroleum economy and all the massive investments that entailed. I don't think it's a coincidence that US peak oil occurred in the mid-70s and much of our debt explosion was touched off only a few years later.</I><BR/><BR/>It's an interesting idea, Mikkel. I would be sympathetic to the idea that the inflationary episode was touched off by US peak oil slowing growth and dropping equilibrium real interest rates while policy rates were much too low. Debt growth would be another plausible result.<BR/><BR/><I>Computers/the internet did give us some respite but these things still haven't really revolutionized society yet. They are still used as more convenient analogs for older technologies/functions.</I><BR/><BR/>The potential is phenomenal. What that means for economic growth or human society is unknowable, but probably really cool.<BR/><BR/><I>Well that wasn't that long of a hiatus.</I><BR/><BR/>It's yall's fault, and if you'd stop leaving constructive criticism, insight, and leading interesting questions, I'd get more real work done.<BR/><BR/><BR/>I'm glad you folks find the case for #3 compelling too. Well-reasoned dissent is more than welcome here, too. I personally rely far more heavily on the empirical evidence here than the theory, because the set of fundamental factors is still so ill understood. And I think the empirical evidence is quite strong.<BR/><BR/>The first flight's on the 20th, the closest I have to a hard break. If anyone in Tokyo, Kaohsiung, or Long Beach is reading, hide your good food.ndkhttps://www.blogger.com/profile/03422548769889947053noreply@blogger.comtag:blogger.com,1999:blog-4923505780935445004.post-37677787435157320402009-02-14T20:42:00.000-08:002009-02-14T20:42:00.000-08:00Well that wasn't that long of a hiatus.I'm in #3 c...Well that wasn't that long of a hiatus.<BR/><BR/>I'm in #3 camp myself. Actually I increasingly believe that a lot of post WWII growth was the conversion to a massive petroleum economy and all the massive investments that entailed. I don't think it's a coincidence that US peak oil occurred in the mid-70s and much of our debt explosion was touched off only a few years later.<BR/><BR/>Computers/the internet did give us some respite but these things still haven't really revolutionized society yet. They are still used as more convenient analogs for older technologies/functions.<BR/><BR/>The faster we go to new energy sources/distribution and adopt futuristic mindsets the faster we'll be pulled out of this mess.Mikkelhttps://www.blogger.com/profile/00169256264012468618noreply@blogger.comtag:blogger.com,1999:blog-4923505780935445004.post-5255061840104840442009-02-14T19:39:00.000-08:002009-02-14T19:39:00.000-08:00I like reason #3, "The negative equilibrium rate i...I like reason #3, <BR/><BR/>"The negative equilibrium rate is structural; for whatever reason, there aren't enough good investments remaining in the economy."<BR/><BR/>The excesses leading up to the current situation can be explained by something other then the constants of human nature -- greed, dishonesty, etc.<BR/><BR/>The lack of good investments made the growth of the FIRE (finance/insurance/real estate) sector of the economy look like the best thing possible. Toss in some financial innovation, and there you have it.<BR/><BR/>There has been quite a bit of asset destruction, with stocks cut from 1.5x GDP to .75 x GDP. Real estate has taken a 30%+ haircut. <BR/><BR/>I suppose no one knows what happens when you get into the twilight zone. How do we know that this isn't enough?cap vandalhttps://www.blogger.com/profile/17179669039246988631noreply@blogger.comtag:blogger.com,1999:blog-4923505780935445004.post-24806352473516986092009-02-14T18:33:00.000-08:002009-02-14T18:33:00.000-08:00Great, great post NDK. This is such an important a...Great, great post NDK. This is such an important and neglected point: we WERE heading toward deflation in 2002, despite the fact that almost everyone in the mainstream scoffed at the very idea. The "cure" brought us to where we are today.<BR/><BR/>Thanks for your blog.Anonymousnoreply@blogger.com