Support NeoGAF

[Zen]

I'm sorry, but when it hurts to breathe and my eyes freeze while walking a block and a half to my car in the morning for a month, I'm calling BS on this. You also need to consider that communities that aren't prepared for -40 degree F+ windchill are not going to react the same as communities that are. It's no different than an inch of snow shutting down the city in Texas.

Call BS on what, that I am right? The bolded is the heart of it and something I already said. Humans are perfectly capable of surviving functionally in places when ~when it hurts to breathe and my eyes freeze while walking a block and a half to my car in the morning for a month~. Your complaints, the degree to which you emphasize them, are a little histrionic when people have lived in climates with weather matching and exceeding the ranges of the area you described. I am not saying that sudden shifts in temperature do not have effects on the economy.

 

[KevinRo]

Does this mean I should start taking Chinese lessons?

No. It means you should start taking wildlife survival lessons.

 

[MrCat]

I don't think some of you guys understand how much the polar vortex impacted spending in the US.

There were many days in Madison, WI, and Minneapolis where you COULDN'T go outside, it was so cold. -40 degrees below 0 F with windchill +.

Weather had an effect, but 5 years of free money going into unproductive assets have not only lead to our current GLOBAL instability, but a recession has been in the making since late last year (prior to winter). Wages went down for about 7 months before this latest uptick (only to catch up to food, healthcare, energy inflation), and the labor force is nowhere near where it was prior to the crisis. Less consumers spending money (but they are borrowing for cars and school), only leads to one thing. Real Q2 GDP will also disappoint, unless the consumer magically decides to load up on credit card debt for frivolous spending. A more nervous stock market, world economies contracting, stores closing down everywhere, QE-induced inequality coming to the forefront, etc... won't likely inspire much confidence in your average Joe.

The economic fragility in the world today can be traced to the fruitless (for the bottom 99.9% anyways) money printing experiment by US, Japan, China, and the ECB. Rising stock markets and bond prices have not augmented the "confidence" of the average consumer struggling with a lower real wage today than before (thanks to that inflation). By October of last year, the average American was priced out of buying a good home because cheap borrowed money (thanks QE) was buying those very same empty homes that banks would trickle into the market. Hence, there is no surprise home sales are down, and many markets are declining already.

We are closer to that moment when the first domino will fall. Which country and which irresponsible central bank will sneeze first?... that is anyone's guess.

 

[commedieu]

Welp.. time to start learning Chinese.

 

[Lagspike_exe]

Weather had an effect, but 5 years of free money going into unproductive assets have not only lead to our current GLOBAL instability, but a recession has been in the making since late last year (prior to winter). Wages went down for about 7 months before this latest uptick (only to catch up to food, healthcare, energy inflation), and the labor force is nowhere near where it was prior to the crisis. Less consumers spending money (but they are borrowing for cars and school), only leads to one thing. Real Q2 GDP will also disappoint, unless the consumer magically decides to load up on credit card debt for frivolous spending. A more nervous stock market, world economies contracting, stores closing down everywhere, QE-induced inequality coming to the forefront, etc... won't likely inspire much confidence in your average Joe.

The economic fragility in the world today can be traced to the fruitless (for the bottom 99.9% anyways) money printing experiment by US, Japan, China, and the ECB. Rising stock markets and bond prices have not augmented the "confidence" of the average consumer struggling with a lower real wage today than before (thanks to that inflation). By October of last year, the average American was priced out of buying a good home because cheap borrowed money (thanks QE) was buying those very same empty homes that banks would trickle into the market. Hence, there is no surprise home sales are down, and many markets are declining already.

We are closer to that moment when the first domino will fall. Which country and which irresponsible central bank will sneeze first?... that is anyone's guess.

Banks bought houses to lend them out. QE primarly influenced the stock market and not much less since the transmission mechanism doesn't really work. Aggregate demand doesn't get a boost from it. The only thing it moved was equity valuations since the banks had to pour all those excess reserves into something.

 

[MrCat]

Banks bought houses to lend them out. QE primarly influenced the stock market and not much less since the transmission mechanism doesn't really work. Aggregate demand doesn't get a boost from it. The only thing it moved was equity valuations since the banks had to pour all those excess reserves into something.

The QE transmission mechanism works to trickle down debt (from banks and other institutions borrowing cheap) and equity capital (from rising asset prices) into the market - all over the world. The true big buyers of all those foreclosed houses were the REITs, private equity funds, hedge funds, etc. They likely borrowed cheap to buy all those houses, and any % return over the borrowing cost is good in their eyes at this point (since most everything is over-priced). The average American could not compete.

Bernanke and his banking buddies didn't really worry to much about aggregate demand (cheap money can only influence consumer behavior so much if they are not over-burdened by debt in the first place). An unemployment target and hoping for a wealth effect was the "most palatable" bullshit excuse they could find to prevent the bankers from losing their shirts in 2008 and on.

 

[-Plasma Reus-]

1Q does not a recession make.

 

[ronito]

Don't worry guys, I just found a rich person and gave them all my credit card. Crisis Averted.

 

[MrCat]

1Q does not a recession make.

The danger is that we are at the end of an extremely mediocre five year "recovery" cycle, where most markets are over-leveraged to a tilt. Debt is the number one enemy of economies, and when rosy future projections for growth don't pan out (like for Q1)... paying for all that debt starts to hurt bad.

 

[TheLaughingStock]

Like, how tapped out do you have to be to think the US has had an austerity initiative since 2008?

So, automatic stabilizers alone caused the deficit to shrink from roughly 10% of GDP in FY 2009 to 2.8% (projection) in FY 2014? There have been no discretionary tax increases or spending cuts designed to reduce the deficit?

 

[Zaphod]

The US does not and has never had an austerity program. Like, how tapped out do you have to be to think the US has had an austerity initiative since 2008?

Sequestration?

 

[Sulik2]

And yet corporations are richer than they have ever been in human history. Something ain't right.

 

[Lagspike_exe]

The QE transmission mechanism works to trickle down debt (from banks and other institutions borrowing cheap) and equity capital (from rising asset prices) into the market - all over the world. The true big buyers of all those foreclosed houses were the REITs, private equity funds, hedge funds, etc. They likely borrowed cheap to buy all those houses, and any % return over the borrowing cost is good in their eyes at this point (since most everything is over-priced). The average American could not compete.

Bernanke and his banking buddies didn't really worry to much about aggregate demand (cheap money can only influence consumer behavior so much if they are not over-burdened by debt in the first place). An unemployment target and hoping for a wealth effect was the "most palatable" bullshit excuse they could find to prevent the bankers from losing their shirts in 2008 and on.

Got any data to prove that instituional investors bought real estate en masse?

The transimission mechanism doesn't really work. All QE does is inflate equities. When Fed begins to unwind, the prices will plummet. The issue is that Fed has a fundemental ZLB issue which they didn't manage to resolve with QE, since they couldn't gain traction with it (aggregate demand couldn't get a boost). Also, AD is a function of consumer spending, investment spending and government spending. The point of cheap money is to boost investment spending. But investment spending is also a function of percieved future demand (which is low) or implementation of a new technology (which there isn't any) so investment spending also isn't working for them. The reality is that Fed's policy choices are very limited right now.

The only thing they could try is to start issuing forward policy guidance, but it would have to be combined with a berserk inflation rate (probably over 5%) to actually work.

So, automatic stabilizers alone caused the deficit to shrink from roughly 10% of GDP in FY 2009 to 2.8% (projection) in FY 2014? There have been no discretionary tax increases or spending cuts designed to reduce the deficit?

Not that I disagree, but the deficit is caused by two things. Automatic stablizers are important, but falling tax receipts because of a large output gap are also very important. Tax reciepts rebound after the recovery starts.

 

[ISOM]

Republicans don't care though. They are happy the economy contracted as long as it helps them in the november elections.

 

[MrCat]

Got any data to prove that instituional investors bought real estate en masse?

Blackstone is probably one of the biggest players, but many many funds (and let's not forget foreigners, like the Chinese with their own freshly printed money) were picking up whatever houses they could get their hands on.

Here is one article: Blackstone’s Home Buying Binge Ends as Prices Surge: Mortgages

After investing $8 billion since April 2012 to buy 43,000 homes in 14 cities, the company has narrowed most of its purchasing to Seattle, Atlanta, Miami, Orlando and Tampa.

Another indication that institutions have been swallowing up inventory of homes with cheap money: All-Cash Deals Hit Record 43% of Total Home Sales

These funds have all the borrowed "cash" needed to absorb close to half of the homes being sold out there, which is one of the very ugly effects of QE for the average American.

The transimission mechanism doesn't really work. All QE does is inflate equities. When Fed begins to unwind, the prices will plummet. The issue is that Fed has a fundemental ZLB issue which they didn't manage to resolve with QE, since they couldn't gain traction with it (aggregate demand couldn't get a boost). Also, AD is a function of consumer spending, investment spending and government spending. The point of cheap money is to boost investment spending. But investment spending is also a function of percieved future demand (which is low) or implementation of a new technology (which there isn't any) so investment spending also isn't working for them. The reality is that Fed's policy choices are very limited right now.

I agree with the bolded and most of the rest of the paragraph. Because of tapering, is why we saw first a drop in emerging markets (including full on crisis for places like Thailand), and why the S&P is shaky and buzzing at a much slower pace than in 2013. I refuse to believe that the central bankers were that misguided to think that they could boost aggregate demand, which as you put it, does not drive business CapEx decisions if the consumer is not there ready to spend.

The one transmission mechanism that IS working is what I believe will be the downfall of most major economies: the carry trade. For each country it is slightly different, but thanks to QE, short term rates are low (which are the basis for most institutional lending). A crude example of how the mechanism used by all big central banks at this point works like this: the institutions borrow money in Japan (i.e) at .25% because of the expectation of a declining Yen (less money later to repay the debt). They use that money to buy dollars or euros, and invest money in stocks or bonds in those currencies. The returns of those investments (even as returns have been going down or investors are "chasing yields") will be above borrowing costs (FOR NOW), so it is a brainless exercise to keep borrowing as much as you can and making that % spread thanks to your local friendly central banker.

The game ends when 1) borrowing costs shoot up because the Fed loses control of the bond market (they don't control it, they just became the biggest buyer by necessity) and the carry trades go bust; or 2) asset returns drop below borrowing costs and asset liquidations start to happen en mass, fueling a panic; or 3) lending appetite dries up in the (shadow) banking system as bad debts soar, and companies and funds cannot renew/extend existing debts or leverage up any more. Liquidations and ripple effects start to happen, mass liquidations of assets, and we have another crash.

Unfortunately this is the state of our world, all thanks to QE. The next five years will be historical.