Krugman Should Have Read EJ's "The Next Bubble"

[kelton56]

Krugman Frets Over Unlikelihood of New Investment Bubble

http://www.nytimes.com/2008/12/22/op...gman.html?_r=1

Life Without Bubbles
By PAUL KRUGMAN
Published: December 22, 2008
Whatever the new administration does, we’re in for months, perhaps even a year, of economic hell. After that, things should get better, as President Obama’s stimulus plan — O.K., I’m told that the politically correct term is now “economic recovery plan” — begins to gain traction. Late next year the economy should begin to stabilize, and I’m fairly optimistic about 2010.

The prosperity of a few years ago, such as it was — profits were terrific, wages not so much — depended on a huge bubble in housing, which replaced an earlier huge bubble in stocks. And since the housing bubble isn’t coming back, the spending that sustained the economy in the pre-crisis years isn’t coming back either.

So what will support the economy if cautious consumers and humbled homebuilders aren’t up to the job?

A few months ago a headline in the satirical newspaper The Onion, on point as always, offered one possible answer: “Recession-Plagued Nation Demands New Bubble to Invest In.” (Very Funny.)

Something new could come along to fuel private demand, perhaps by generating a boom in business investment.

But this boom would have to be enormous, raising business investment to a historically unprecedented percentage of G.D.P., to fill the hole left by the consumer and housing pullback. While that could happen, it doesn’t seem like something to count on. (Emphasis Mine.)

Well...how about $20 trillion, or so in infrastructure and alternative energy, as EJ suggested in his February 2008 Harper's commentary?

[GRG55]

Re: Krugman Should Have Read EJ's "The Next Bubble"

Krugman Frets Over Unlikelihood of New Investment Bubble

http://www.nytimes.com/2008/12/22/op...gman.html?_r=1

Life Without Bubbles
By PAUL KRUGMAN
Published: December 22, 2008
Whatever the new administration does, we’re in for months, perhaps even a year, of economic hell. After that, things should get better, as President Obama’s stimulus plan — O.K., I’m told that the politically correct term is now “economic recovery plan” — begins to gain traction. Late next year the economy should begin to stabilize, and I’m fairly optimistic about 2010.

The prosperity of a few years ago, such as it was — profits were terrific, wages not so much — depended on a huge bubble in housing, which replaced an earlier huge bubble in stocks. And since the housing bubble isn’t coming back, the spending that sustained the economy in the pre-crisis years isn’t coming back either.

So what will support the economy if cautious consumers and humbled homebuilders aren’t up to the job?

A few months ago a headline in the satirical newspaper The Onion, on point as always, offered one possible answer: “Recession-Plagued Nation Demands New Bubble to Invest In.” (Very Funny.)

Something new could come along to fuel private demand, perhaps by generating a boom in business investment.

But this boom would have to be enormous, raising business investment to a historically unprecedented percentage of G.D.P., to fill the hole left by the consumer and housing pullback. While that could happen, it doesn’t seem like something to count on. (Emphasis Mine.)

Well...how about $20 trillion, or so in infrastructure and alternative energy, as EJ suggested in his February 2008 Harper's commentary?

How about the FIRE economy is over, done, kaput, dead, finished...therefore, no "next bubble"?

There is no amount of infrastructure spending that could possibly replace the global real estate bubble that governments, Central Bankers and the private financial sector created this decade. How are US consumers going to borrow against their newly rebuilt bridges, highways, alternate energy "infrastructure", as they did with residential housing ATMs?

The only way I can see an "infrastructure" bubble really develops is if the government [Treasury] and the Fed concoct a way to support the creation [by Wall Street] of multi-level levered paper backed by alleged "infrastructure", and successfully flog it to European banks and communities in Norway north of the Arctic Circle or in the Aussie outback, on the basis that "infrastructure never goes down" :rolleyes:

[This scenario is not entirely theoretical either; but if it is allowed to happen I suspect the majority of the paper will be written against the existing publicly owned infrastructure as it is sold off, and US citizens will be looking in vain for all the new roads and waterworks their tax dollars were supposed to provide. The final insult will be that US taxpayers, that enabled the pillaging, will see their cost of service from the PPPs keep going up.]

EJ wrote in that Harper's article that the only thing worse than another bubble would be no "next bubble". That's were we are headed. It is going to be a long, slow, painful process to dig out of this one. And, given the desperation governments everywhere are showing to bring back the glory years of the FIRE economy by deluging the banking system with taxpayer bailout money, the oxygen has been cut off from every other productive sector of the economy that might have helped reduce the pain of transition.

[we_are_toast]

Re: Krugman Should Have Read EJ's "The Next Bubble"

How about the FIRE economy is over, done, kaput, dead, finished...therefore, no "next bubble"?

There is no amount of infrastructure spending that could possibly replace the global real estate bubble that governments, Central Bankers and the private financial sector created this decade. How are US consumers going to borrow against their newly rebuilt bridges, highways, alternate energy "infrastructure", as they did with residential housing ATMs?

I won't disagree, but rather offer an alternative possibility.

I believe we are approaching Peak (I don't want to sell you anything because your currency is crap) Oil. When that happens, the U.S. will have no choice but to approach the Alt-E problem like they approached producing military equipment in WWII. The majority of GDP will be dedicated to finding sources of energy other than oil. Just as in WWII there will be shortages, and rationing as the goal of the U.S. economy will be to find enough energy to survive into the future. This will go beyond the economy, beyond national security, it will be a matter of survival for our nation.

Do not underestimate our ability to create the mother of all bubbles.

[don]

Re: Krugman Should Have Read EJ's "The Next Bubble"

[This scenario is not entirely theoretical either; but if it is allowed to happen I suspect the majority of the paper will be written against the existing publicly owned infrastructure as it is sold off, and US citizens will be looking in vain for all the new roads and waterworks their tax dollars were supposed to provide. The final insult will be that US taxpayers, that enabled the pillaging, will see their cost of service from the PPPs keep going up.]

Not only not entirely theoretical but the more likely of the scenarios presented. The "infrastructure stimulus" will attempt to re-float the banks. As window dressing, expect an inaugural emergency infusion to fund the states' suspended infrastructure works already on the books. The word is getting out on this maneuver. More states are suspending their roads and bridges projects as an emergency budget fix.

[Glenn Black]

Re: Krugman Should Have Read EJ's "The Next Bubble"

Energy?

Take a look at this for natural gas supplies, as an example:

http://itulip.com/forums/showthread....67879#poststop

[BadJuju]

Re: Krugman Should Have Read EJ's "The Next Bubble"

Peak oil, at least as it pertains to the theory that demand will continue to rise as supplies diminish, is an irrational scenario. As we have seen from 2003 and up, alternative energy measures have experienced a boom because of rising energy costs. This has had an effect of moderation on petroleum prices. As petroleum supplies continue to wane, the market will shift further and further away into the alternative energy market. Likewise, it does not factor in conservation. As we have already seen with this recession, there has been a precipitous decline in demand. Also, let us not forget that the nations that need oil the most are those that are going to suffer the deepest recession of all. America, as we all realize, consumes 1/4th of the world's petroleum despite comprising only about 5% of the world's population. Only China, which consumes 1/3rd of the amount of petroleum that America consumes, comes anywhere close. Finally, it does not take into account specific reserves. In all likelihood, we will see an undulating plateau as market forces dictate instead of the major decline outlined in peak oil.

[don]

Re: Krugman Should Have Read EJ's "The Next Bubble"

"The American Association of State Highway and Transportation Officials has identified 5,000 transportation projects nationwide that lack the dollars to proceed; many of them, like the $730 million project here to add 10 miles of high-occupancy-vehicle lanes to the 405 Freeway — Mr. Schwarzenegger’s backdrop on Monday — have been stopped midstream.


“They just haven’t been able to find the resources,” Tony Dorsey, the spokesman for the association, said of the halted projects.


More than 40 states are struggling with revenue shortfalls, and lawmakers across the country are cutting, taxing and pleading their way toward solvency. Fixing bridges, expanding highways and other infrastructure projects have faced the same fate as government entitlement programs, state jobs and other items.



Jeffrey Caldwell, a spokesman for the Virginia Department of Transportation, said, “Projects not currently under construction or significantly far in the development process were either delayed or completely removed from plans for future construction.”

http://www.nytimes.com/2008/12/23/us...ml?_r=1&ref=us

Serendipity? :rolleyes:;)

[Brooks Gracie]

Re: Krugman Should Have Read EJ's "The Next Bubble"

If we throw money at roads and bridges, we will be wasting our final supply of capital on a dying enterprise--suburbia and auto transportation. If we wisely use these funds to build things that actually have some benefit to us, such as libraries, telecommunication improvement, alternative energy, college tuition and grad school subsidies and scolarshipts, investment in human (rather than physical) capital or assets, basic scientific research, or other long-term beneficial items, then we may actually be able to recover from the collapse of the FIRE economy.

We emphatically do not need "make-work" governmental spending as a repeat of the 1930's. The spending then was on roads, bridges, the TVA, the national highway system, and that spending permitted us a better future growth rate during the Great Depression, as those projects were fundamentally economically worthwhile given the physical infrastructure available for businesses to exploit at the time. Now our challenge is to better the information technology revolution, the intellectual property environment, human knowledge, and scientific advances, so that we can build a non-FIRE economy.

[Uno]

Re: Krugman Should Have Read EJ's "The Next Bubble"

I agree, America will attempt to create a new boom and here is why,

Milton Friedman / the Chicago School is dead - anyone that ever took economics and did not drink the kool aid should know this. Accetance of the Chicago School of Economics provided the basis for Structured Finance pyramid models and "de-regulation" and "free markets".

Back into the vacum jumps Keynes / Galbraith and "conventional wisdom" from which we will see government spending and regulation.

The problem many have is that they equate "Infrastructure boom" with old century infrastructre (highways and dams) but it actaully means releasing a new technology boom as there exists a MASSIVE amount of PROVEN TECHNOLOGY and IDEAS just sitting there, waiting for the correct conditions to promote implemention on a wide scale.

Infrastructure can mean: financial systems, transport systems, political systems, legal systems, patent and copywrite systems, health systems, real estate systems (commercial and residential) ect... all of which most Americans agree needs to change.

So this new boom will not just be some empty make work effort, it will do that but the ideas and technology are there to re-build America from the ground up.

Old century firms like GE, Ford, GM, ... the established business leaders stand to lose everything unless they can position themselves to become players in this new century boom. This battle of control for when / who / how is taking place now.

We all have been trained to "hate" government spending but if America does not then others will and Americans will be left behind. Lucky for us China has tried to copy America's industrial boom rather then jumping past up too much with new century infrastruture, so we have not fallen behind at all - China has simply caught up 200 years to almost even.

It really is just paper fiat currency, always has been, it is just a matter of who gets to control the spending / lending of it.

[hoodoo]

Re: Krugman Should Have Read EJ's "The Next Bubble"

I'm very curious on this point. In his recent speech to the National Press Club, Krugman makes the case that the situation is so serious that we just need to spend - doesn't matter on what, doesn't really matter whether it is tied to any kind of productivity - we just need to spend and have some oversight so the whole party isn't completely debauched.

Check the video at 34:30

http://npc.press.org/video/player.cf...lunch&id=16709

I think EJ would find this kind of thinking quite sloppy but I'm not sure...

Hoo

If we throw money at roads and bridges, we will be wasting our final supply of capital on a dying enterprise--suburbia and auto transportation. If we wisely use these funds to build things that actually have some benefit to us, such as libraries, telecommunication improvement, alternative energy, college tuition and grad school subsidies and scolarshipts, investment in human (rather than physical) capital or assets, basic scientific research, or other long-term beneficial items, then we may actually be able to recover from the collapse of the FIRE economy.

We emphatically do not need "make-work" governmental spending as a repeat of the 1930's. The spending then was on roads, bridges, the TVA, the national highway system, and that spending permitted us a better future growth rate during the Great Depression, as those projects were fundamentally economically worthwhile given the physical infrastructure available for businesses to exploit at the time. Now our challenge is to better the information technology revolution, the intellectual property environment, human knowledge, and scientific advances, so that we can build a non-FIRE economy.

[Sharky]

Re: Krugman Should Have Read EJ's "The Next Bubble"

Why is it that none of the "solutions" to the financial crisis that are mentioned in the press, by the incoming Obama Administration or even in this thread, address a long-term cure? It's impossible to spend your way to wealth. Wealth comes from production, not consumption. Inflation destroys real wealth because it steals from the producers.

Yet no one talks about how to improve production in the US. Instead, it's devolving into a battle of what to spend other people's money on. No one mentions the real source of that money. The long-term impact of plans like that can only be disaster: a deeper and longer depression than anyone expects. 90% of American production capacity is already gone; the remaining 10% can't be far behind.

[kingcopper]

Re: Krugman Should Have Read EJ's "The Next Bubble"

We should build a cross country, ultra high speed super rail system from Virginia to California. It should be so large that 10-12 eighteen wheelers can drive on each car.

We need a nuclear powered rail system to rid ourselves of continental flights. Commercial air traffic should encompass only international routes and ultra expensive cross-country routes; only. Save the oil based fuels dammit.

I can just imagine this line with radial cities such as:


Richmond Virginia Line: From New England down the east coast to Miami.

Louisville Kentucky Line: From Chicago down the midwest to Houston.
From Detroit and Cleveland down the midwest to
New Orleans.
Phoenix Arizona Line: From the Upper Plains to Southwest Texas.
From the Canadian Border through Denver to San
Diego.
Los Angeles Cali Line: From Seattle to San Diego.

Something like this would work because the main cross country route is through the center/cheapest land in America. Different radial lines would connect Canada and Mexico with this system and we could avoid having illegal immigrant drivers in each of the three countries because the tractor trailers would be owned by companies with destination drivers.

[mcgurme]

Re: Krugman Should Have Read EJ's "The Next Bubble"

It is true that we are unlikely to just "drop off a cliff" as some of the doomer types in the peak oil crowd predict.

But, at the same time, the "efficiency" and "reduced demand" are not enough to make up for 8% per year declines in major oil fields. Yes, that is right, 8% per year through 2030:

The findings of an unprecedented field-by-field analysis of the historical production trends of 800 oilfields indicate that decline rates are likely to rise significantly in the long term, from an average of 6.7% today to 8.6% in 2030. “Despite all the attention that is given to demand growth, decline rates are actually a far more important determinant of investment needs. Even if oil demand was to remain flat to 2030, 45 mb/d of gross capacity – roughly four times the current capacity of Saudi Arabia – would need to be built by 2030 just to offset the effect of oilfield decline”, Mr. Tanaka added.

from the IEA's website.

There is no way that reduced demand and/or efficiency is going to make up for 8% decline per year. It will take a much more radical change - either new technologies to replace oil, a chance in the way our economy functions, or whatever.

The current "glut" is not a physical event, it is a financial event. Unfortunately, this financial event is hiding the underlying physical reality that oil is going to become an increasingly scarce (i.e. costly) commodity in the very near future.

Peak oil, at least as it pertains to the theory that demand will continue to rise as supplies diminish, is an irrational scenario. As we have seen from 2003 and up, alternative energy measures have experienced a boom because of rising energy costs. This has had an effect of moderation on petroleum prices. As petroleum supplies continue to wane, the market will shift further and further away into the alternative energy market. Likewise, it does not factor in conservation. As we have already seen with this recession, there has been a precipitous decline in demand. Also, let us not forget that the nations that need oil the most are those that are going to suffer the deepest recession of all. America, as we all realize, consumes 1/4th of the world's petroleum despite comprising only about 5% of the world's population. Only China, which consumes 1/3rd of the amount of petroleum that America consumes, comes anywhere close. Finally, it does not take into account specific reserves. In all likelihood, we will see an undulating plateau as market forces dictate instead of the major decline outlined in peak oil.

[raja]

Re: Krugman Should Have Read EJ's "The Next Bubble"

There is no way that reduced demand and/or efficiency is going to make up for 8% decline per year.

Why do you believe this to be so?

[santafe2]

Re: Krugman Should Have Read EJ's "The Next Bubble"

I agree, America will attempt to create a new boom and here is why,

Milton Friedman / the Chicago School is dead - anyone that ever took economics and did not drink the kool aid should know this. Accetance of the Chicago School of Economics provided the basis for Structured Finance pyramid models and "de-regulation" and "free markets".

Back into the vacum jumps Keynes / Galbraith and "conventional wisdom" from which we will see government spending and regulation.

The problem many have is that they equate "Infrastructure boom" with old century infrastructre (highways and dams) but it actaully means releasing a new technology boom as there exists a MASSIVE amount of PROVEN TECHNOLOGY and IDEAS just sitting there, waiting for the correct conditions to promote implemention on a wide scale.

Infrastructure can mean: financial systems, transport systems, political systems, legal systems, patent and copywrite systems, health systems, real estate systems (commercial and residential) ect... all of which most Americans agree needs to change.

So this new boom will not just be some empty make work effort, it will do that but the ideas and technology are there to re-build America from the ground up.

Old century firms like GE, Ford, GM, ... the established business leaders stand to lose everything unless they can position themselves to become players in this new century boom. This battle of control for when / who / how is taking place now.

We all have been trained to "hate" government spending but if America does not then others will and Americans will be left behind. Lucky for us China has tried to copy America's industrial boom rather then jumping past up too much with new century infrastruture, so we have not fallen behind at all - China has simply caught up 200 years to almost even.

It really is just paper fiat currency, always has been, it is just a matter of who gets to control the spending / lending of it.

This is an excellent post. Welcome to iTulip.

Agree, Friedman school of real time, country wide, pure capitalist experiments are a complete failure. Iraq is a current example. It has lead to fascism and economic collapse in most, if not all, cases. See Klein: Shock Doctrine for a rather one-sided but thorough explanation.

The who that will have control of lending are the banks. They reasserted that position a couple of months ago with TARP.