US GDP contraction slows to 1%

[mawilson 2,133]

China, Korea, and Singapore have all emerged from the recession. Each had quite strong stimulatory policies.

Q2 grown in South Korea was almost 10%, Singapore soared by 20%, and while China doesn't published quarterly figures, economists think its GDP jumped by an annualised 15-17%. The source is the August 1st issue of The Economist

Short-term illusory gains, my friend. Let's see what their Q3 and Q4 figures look like before jumping to conclusions.

If the answer to a fiscal crisis was to print up more money to "stimulate" the economy, then Zimbabwe

would be #1 in the world right now.

[mendeleev 68]

China, Korea, and Singapore have all emerged from the recession. Each had quite strong stimulatory policies.

Q2 grown in South Korea was almost 10%, Singapore soared by 20%, and while China doesn't published quarterly figures, economists think its GDP jumped by an annualised 15-17%. The source is the August 1st issue of The Economist

Short-term illusory gains, my friend. Let's see what their Q3 and Q4 figures look like before jumping to conclusions.

As said earlier, we are running a really interesting experiment. Q3 and Q4 figures will be quite interesting (save for China, where economists have to infer what is going on since detailed economic data aren't published). And it'll be interesting to see whether the monetary authorities can unwind the massive liquidity stimulus in time to prevent inflation a few years down the road.

But the current, preliminary results of the experiment strongly suggest that the speed of recovery is highly correlated with the size of central government stimulus.

[peejay 327]

And the Chinese are flush with cash from their exports.

Are you kidding? Their exports are down 30% year on year.

The only reason they claim to be "up 6-8%" is the injection of a huge amount of

liquidity into the financial system - in effect, repeating Greenspan's mistakes

after the dot-com crash.

No, I'm not kidding. Yes, their imports are down now. But who is lending money to who right now? And who is the debtor nation? That is all I was trying to state.

[mendeleev 68]

Peejay is right, seems to me, in noting that the Chinese have it easier when it comes to funding their big stimulus.

Growth in the Chinese economy has been different, in lots of ways, from growth in the USA and Europe. Theirs is driven by massive business investment.

Business, here in the USA, has largely been on strike for many years, displaying in many sectors insufficient imagination needed to find ways to invest productively in businesses here. And, although it is a very poor country, China has an incredibly high savings rates that help generate the cash needed to fuel that investment.

Here, growth is driven by consumers who, too often, were spending money they didn't really have. It is a good thing that people here who still have jobs are saving more and spending less. Better yet would be if it stayed that way as the recovery proceeds. If people in a country as poor as China can save, why can't Americans, almost all of whom are relatively rich? Too many Americans fit the stereotype of "fat, dumb, and lazy".

But, with less consumer spending, someone is going to have to step up with productive spending in the US economy. Business here needs to do its job. In this country, we need real investment that generates real economic activity. For too long, our financial sector was more interested in virtual investments (what is a Credit Default Swap if not a virtual investment) that yielded society virtually nothing except pain when it all unwound.

Edited August 2, 2009 by novotul

[mawilson 2,133]

No, I'm not kidding. Yes, their imports are down now. But who is lending money to who right now? And who is the debtor nation? That is all I was trying to state.

China doesn't "lend" us as much as you think - only about 25% of our debt is held by China, 20% by Japan

(another debtor nation) and the remaining 55% - by the rest of the world (as of May 2009.) A year ago

(May 2008), China held 19.5% of our debt and Japan - 22%.

[mRx 16]

My question is this, what will happen when the effects of all the deficit spending kicks in? Inflation would seem to be the logical outcome.

So far we haven't seen any significant inflation because the banks have not had any extra money to lend.

All that bailout cash (which was not cash at all, but government debt) went straight into their balance sheets.

Here's the currect adjusted monetary base, published by the St. Louis Fed:

You can clearly see that the money has been printed, and lent to the banks.

But, the money has not been added to their reserves. If it had, the money would greatly increase their reserves, which would then be expanded further through fractional reserve banking, and circulated through the economy, creating unprecented inflation.

Here's the current M1 Money Multiplier data (AKA velocity) as published by the St. Louis Fed also:

The money is not being deposited as reserves, and expanded through fractional reserve banking, as evident by the severe drop in velocity, but it's being deposited right back into the federal reserve, at less than 1%, I believe. You can see this for yourself here under Table 1. Look at the non-seasonally adjusted (NSA) reserves. Currently $728 billion. There's your stimulus.

The banks are terrified to lend it, and who could blame them?

God help us if the banks are somehow compelled to lend this. We'll get inflation + economic stagnation, which I believe is what happened to Japan throughout the '90s.

[mRx 16]

Well, I thought the graphs were interesting--and ominous.

[mawilson 2,133]

Well, I thought the graphs were interesting--and ominous.

I've seen these graphs before and yes, it's shocking.