10 ms·

I'm not clear on how any of this will lead to a recession. Why will high Debt-to-GDP or government spending send the economy into a recession? Q1 GDP numbers

• TheCowboy 12y ago
  I think the responses you're getting are ignoring the key question: How will high debt-to-GDP or government spending send the economy into a recession? Many have been forecasting complete collapse and hyperinflation for these reasons, and it hasn't materialized. It seems there is something flawed with the models people are trying to use to make their economic forecasts, or their reasoning doesn't apply to this situation. One reason government spending would be bad is that it is crowding out private investment by driving up rates. But he indirectly recognizes this isn't the case due to rates being low enough that they should be encouraging investment. He doesn't say how government debt should be reduced, and where government spending should be cut. He also glosses over the point that we're at a zero bound. The post is basically a bunch of graphs while expressing concern about government spending and debt. He doesn't really connect these to the GDP and go into detail about the reasons for that quarter. I could go on.
  • adventured 12y ago
    The sole reason the US avoided disaster - temporarily - from occurring due to the massive increase in public debt, is the Fed began buying the radical majority of the government's debt after China let up on its buying. When you have to rely on your central bank to fund your government's debt burdens with magic fiat, you're in a perpetual downward spiral scenario already. These are the good years, the deficit is set to explode dramatically higher again soon, and there will be nobody to buy except the Fed. Who else can eat $500b to $1t per year in junk paper? China can't afford it any longer (having just taken on a mountain of debt the past five years). Japan hasn't been able to afford it for a very long time, they can't even afford their own debt. Now it's merely a question of time. The Fed is pulling its programs because it can't sustain them any longer without running inflation through the roof. They know the US economy is weak, they see the data that led to the -3% GDP print. It's not like we're producing 500,000 full-time jobs and 200,000 manufacturing jobs per month.
• sama 12y ago
  i am a bull. i just think that we should talk about what the problems are. ignoring them is not a good way to fix them.
  • sachinag 12y ago
    Debt to GDP isn't a problem: http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_301-350/WP322.pdf http://www.peri.umass.edu/fileadmin/pdf/working_papers/worki... (very widely circulated paper, given that they lowered the boom on Reinhart/Rogoff)
    • muzz 12y ago
      Yes, Altman's point #2 is essentially the Reinhart-Rogoff fallacy that was widespread a few years ago, before being debunked.
  • joelhaus 12y ago
    You missed the trend of growing inequality. I think this is important because the marginal propensity to spend for someone low on the income scale is much higher than the wealthiest. Otherwise, good points.
  • toomuchtodo 12y ago
    What if growth in the US is being prevented by technology innovation? If I replace 100 jobs with 1, and no further jobs are need for those 99 people, and that's the core of what technology does, growth in the traditional sense isn't possible. I agree that a basic minimum income may be necessary; I don't believe it'll fix the growth problem though.
    • hipcactus 12y ago
      Tech Innovation kills existing jobs by replacing 100 humans with one machine, this is true. If you're a cab driver, you may not be ecstatic about self-driving cars. But those same technological advances invent new goods and services for an ever increasing population. More people are fighting over the same set of resources, which technology allows markets to distribute more efficiently. The new tech creates new demand no one knew was needed (e.g. the mainframe, the internet, mobile web, the blockchain). While it's tough luck for the 99 workers who are not in a position to learn new skills, the bet is that tech advancing will create more economic opportunities for the next generation (while improving the quality of life) and upgrading society like 'aging up' in Age of Empires or Civilization.
• coob 12y ago
  Labour markets/Employment figures tend to lag other indicators.
• jwgur 12y ago
  The financial press often defines recession as a technical term, meaning any two sequential quarters of negative GDP growth. NBER has a slightly different definition [1]. [1]: http://www.nber.org/cycles/recessions_faq.html http://www.nber.org/cycles/recessions_faq.html
• deleted 12y ago
  [deleted]
• yahelc 12y ago
  Agreed. Further, there's little evidence that Debt-to-GDP over 100% (despite "feeling" meaningful, because, 100%!) has any kind of predictive value for the long term direction of an economy, particularly one that has unusually low interest rates. If Debt-to-GDP were a problem for the US, you'd expect higher interest rates, not lower ones, as investors would be demanding higher returns on US debt. The fact that interest rates on Treasury bonds remain so low, despite our debt levels and despite certain political figures repeatedly attempting to force the US Government to default on that debt, is prima facie refutation of the idea that no one in the market actually thinks US debt levels pose a major macroeconomic problem in the short to medium term.
  • jeffdavis 12y ago
    The thing that worries me about our debt is that it's not like the rates are locked-in for 1000 years. After bonds mature, we need to issue new bonds to pay for them. And if the interest rates are higher at the time, the new debt will have a higher interest rate (I guess, technically, the bonds will sell for a lower price, which has the same effect). Paying our current level of interest on our debt is not crushing. But it's not hard to imagine the rates tripling (or more) considering how close to zero the rates are now. Then we are over $1 trillion/yr in debt service (if my calculations are correct). Combined with what seems like a structural deficit, I don't see any good way we'd get out of that. In other words, we're not falling off a cliff now, but it seems like fragile situation.
    • pingburg 12y ago
      Not being sarcastic here. 2013 A = Debt is around: $17.5 trillion B = Debt Service: $416 billion C = Average Rate: 2.38% ($416 billion / $17.5 trillion) D = U.S. Tax Revenue: +/- $2.8 Trillion Things won't get interesting until B approaches D. So one way of looking at is if everything remained constant (which it won't) you'd need 15% interest rates on the current debt for debt service to approach tax revenue. If interest rates stay the same you could increase the debt to $128 trillion. Reference: Debt: http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm Debt Service: http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm http://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm Tax Revenue: http://www.usgovernmentrevenue.com/ http://www.usgovernmentrevenue.com/
• richcollins 12y ago
  Why will high Debt-to-GDP or government spending send the economy into a recession? Do you agree that it is a problem at some point? If so then why not at current levels?
  • epicureanideal 12y ago
    If you think about this in a more general context it's easier to see that "Debt-to-GDP" ratio alone isn't enough to determine that there is a problem. You need a combination of debt level and interest rate. For example, I personally could have $100 Trillion in debt but with an infinitesimally small interest rate and an infinitely long repayment period, I would not be concerned. What matters is Debt-Payment-to-GDP ratio. There is certainly some level of that ratio at which I would be concerned.
    • nhaehnle 12y ago
      Still, there hasn't actually been any argument as to why a high debt-whatever-to-GDP ratio would cause a recession. I would actually argue the opposite: If debt payments suddenly increased, this would infuse cash into the economy which would likely boost GDP.
• 001sky 12y ago
  "Why will high Debt-to-GDP or government spending send the economy into a recession?" You're confusing the short run and the long run. In the long run there are more degrees of freedom. In that context, this quote simply seems to show a lack of imagination. Entities that extremely indebted lack strategic operating flexibility (countries and businesses alike).
• MarioSpeedwagon 12y ago
  Even though you qualified it, the weather is not worth mentioning when we are talking about an incredible and unacceptably low rate like -3%. It takes a whole mountain of suck to create that type of suck sandwich.
• Humjob 12y ago
  If government debt grows high enough then an increasingly large percentage of federal spending will be devoted to paying interest on that debt rather than on arguably more useful areas which create future prosperity, such as education and scientific research. After a certain point this becomes unsustainable and bad things start to happen, ranging from total political & economic collapse (Germany in the 1920s) to hyperinflation (Zimbabwe) to, in the best of the worst case scenarios, a large default/restructuring and subsequent downgrading of a country's debt to junk status (Argentina in the 2000s). As F.A. Hayek, Milton Friedman and numerous other economists have written, government spending tends to be more inefficient than the free market because the government isn't constrained by profits and losses, which are society's way of indicating whether a company is producing goods and services that are valuable and desired. Of course, there are some goods and services that only the government can provide well, and the current left-right political divide is largely a debate over the point at which government taxation and spending becomes undesirable and inefficient. However, it's undeniable that at a certain level (almost certainly a level below our current level of spending in my opinion) each marginal dollar the government sucks out of the economy is used less efficiently than it would have been used if it remained in private hands.
  • AJ007 12y ago
    Something to consider is the difference between debt denominated in a countries' own currency verse that of another country. In 2010 Germany finally repaid debt it had raised to pay its World War I reparations. The reparations never were paid in full but you damn bet the US dollar denominated debt was. If a country borrows money in a foreign currency they may have bills due for an incredibly long time unless the creditors says "ok, you can pay less than you owe us." The EU members are in this position because the bills they owe are not in their own currency. Generally this seems to have the biggest impact on tiny countries. One of the most interesting opinions I've heard recently is from James Rickards who was a negotiator for the Long Term Capital Management bailout in 1998. His opinion is the risks in the banking system have increased, not decreased, and when the next failure happens the US government will not be capable of a bailout largely due to the Federal Reserve's balance sheet leverage (which puts Lehman's leverage to shame) and a lack of political will to write a multi-trillion dollar check. What will happen is debt issued and denominated by the IMF, the only bank in the world left with a good balance sheet.
• phkahler 12y ago
  >> I'm not clear on how any of this will lead to a recession. Here are some reasons: 1) if government spending is half of GDP that means any increase in non-government economic activity will only have half the effect it otherwise could (with zero govt contribution) this works both ways though, but more importantly it means government spending is critical to the economy. 2) Debt is high, so there is a LOT of pressure to reduce govt spending, which would directly (negatively) affect GDP in the short term - see 1, gov spending is 0.5 of GDP. 3) Any rise in interest rates will result in 2 (the alternative is to just increase the debt). To spend more in interest, you have to spend less elsewhere. 4) If we get inflation (and they're trying really hard) they'll want to keep it low by raising interest rates, resulting in 2 (see 3).
• Paul_Dessert 12y ago
  Two consecutive months of negative "growth" define a recession. The "dismal weather" argument has been used to death. We've had very cold winters before, it's nothing new. Labor markets are not improving as you might think. Most of the job growth is in low wage positions. Regarding the link, the argument is that by 2020 (6 years from now) more people will be working. and more specifically, the paragraph below, is flat out wrong. "But that is medium term - in the near term, the reasons for a pickup in economic growth are still intact:1) the housing recovery should continue, 2) household balance sheets are in much better shape. This means less deleveraging, and probably a little more borrowing, 3) State and local government austerity is over (in the aggregate),4) there will be less Federal austerity this year, 5) commercial real estate (CRE) investment will probably make a small positive contribution this year.
• autokad 12y ago
  I don't think the writer ever said that a high Debt-to-GDP / government spending will send the economy into a recession. it means the government's ability to fight a recession if one comes will be extremely constrained; furthermore, having high debt prior to a recession makes the pains of having the high debt extremely painful as revenues will decline significantly.
  • rplst8 12y ago
    This. Especially when some economists recommend recession spending as a way to fight it. We've already spent the money, maxed out the "credit cards" and currently interest rates are poised to go up. If another recession does take hold, it will be a nasty fight.
    • jqm 12y ago
      "it will be a nasty fight" Yes, possibly literally. Major wars are often the ultimate solution to this kind of problem. When the dust settles a new order exists. I detest war. I detest human suffering. But it appears sometimes war has amazing cleansing power. Hopefully this isn't always the case.
      • nhaehnle 12y ago
        This is the saddest part of it. Wars have economic benefit because of the giant injection of spending and incentives for investment. One could have the same benefit using much less destructive and even beneficial projects such as colonizing the oceans or space or building gigantic solar power plants to solve all our energy problems. Alas, there seems to be always at least one party that is opposed to any kind of visionary project.
    • 100timesthis 12y ago
      This.
      • 100timesthis 12y ago
        I'm sorry I know I shouldn't but I'm so sick of people writhing "this." that I couldn't stop myself.
• mathattack 12y ago
  The issues of debt relate to a Minsky Moment. http://en.wikipedia.org/wiki/Minsky_moment http://en.wikipedia.org/wiki/Minsky_moment It happens when the assets can't pay their interest payments any more. For now interest rates are low, so the government can pay it's billed. Unfortunately, we hold a lot of short denominated debt. We should lock in these rates while the going is good. If interest rates spike up, the government will have to cut programs, borrow a lot more money, or increase taxes. It's a very negative spiral. The reality is that nobody has been in our exact situation, so there is more speculation. Are we becoming more like Japan? Or Europe? And how might aggressive immigration help us?
  • danielweber 12y ago
    The US can't just "lock in" rates by deciding to do so. Most of the world treats debt very different than the US consumer is used to on credit-card and mortgage loans. The US issues debt and the market bids on what it will pay, nearly always charging higher rates for longer terms. And the US can't pay it down early; it has those rates for the entire term of the loan. If I read http://www.bankrate.com/rates/interest-rates/treasury.aspx?ec_id=m1104742&s_kwcid=AL!1325!3!41196775328!e!!g!!us%20bond%20rates&ef_id=UjC6swAAAQBsbuvm:20140630194922:s http://www.bankrate.com/rates/interest-rates/treasury.aspx?e... right, the US can borrow for 3 months at 0.025%, but for 10 years at 2.63%. One reason the US does so much short-term borrowing, among other reasons, is that it's so cheap to do so.
    • mathattack 12y ago
      Right. In my view it's better to lock in relatively low 10 year (or better yet 30 year) rates rather than roll the dice on interest rates rising. Rates can easily rise to long term norms of 5%. The market is anticipating that rates will rise, hence the nature of the yield curve. If the government's assets are long term, shouldn't the liabilities match it?
• deleted 12y ago
  [deleted]
• adventured 12y ago
  The US is already in a recession. The two quarters of negative growth is not a good means of showing the shape of the economy. You could have two quarters of -0.5% growth, and that would mean recession. Or one quarter of -3% growth, and that doesn't mean recession, despite being worse than the two quarters. It's a silly way to calculate the state of the economy. Besides that, inflation is intentionally understated, GDP is contracting at a worse rate than stated in the headlines. 2% GDP growth is a recession in this environment of intentional central bank inflation schemes. Not once post WW2, has the US economy shrank by more than 1.5% in a single quarter and then not entered a recession (or already been in one). Housing has begun to tip over, as the Fed pulls its asset inflation program. Corporate earnings growth is anemic at best, most blue chips are struggling to grow at all (MCD, KO, IBM, WMT, etc). The vast majority of growth in the stock market has come from multiple expansion, not from earnings growth. Full time jobs are still far under where they were in 2007, while simultaneously welfare benefits are dramatically higher, including labor problem indicators such as SS disability (and of course labor force participation is at 35 year lows). This all with 0% interest rates. If you can't grow an economy with 0% interest rates, you're in for a very, very bad time. Stocks tend to hit new record highs just before a recession begins. This happened with both of prior Fed asset inflation parties, in the late 1990s (2000 peak) and early 2000s (2007 peak). They repeated the same inflation recipe, trying to fake a wealth effect, and turned it up several notches. The same result will occur again on the backside, for obvious reasons.
• argumentum 12y ago
  A recession is two consecutive quarters of negative gdp growth. So if the economy shrinks this quarter we are, by definition, in a recession.
  • dragonwriter 12y ago
    > A recession is two consecutive quarters of negative gdp growth. That's a common rule of thumb, and apparently (per Wikipedia) the official definition in all states in the EU. But the US is not the EU, and the closest thing to an official definition in the US is that a recession exists whenever the Business Cycle Dating Committee of the National Bureau of Economics Research decides that a recession exists.
• anigbrowl 12y ago
  Quite. It's entirely rational for the government o maximize borrowing when interest rates are low, because treasuries are fixed-income securities, whose coupon (regular payment of interest to bondholders) does not fluctuate with the interest rate. Now if rates go up and borrowing does not fall, that would be a huge problem. But when rates are historically low it's completely rational to load up with as much debt as you can carry if the economic gain > the interest payment. My main beef with governance (by both the parties rather than one alone) of the last few years is that we didn't borrow enough and what we did borrow was mostly spent on transfer payments, instead of a massive (and necessary) overhaul of our infrastructure that would have created more employment and arguably had a greater money multiplier effect even at sub-optimal levels of economic efficiency.
• AJ007 12y ago
  A much better thing to look at is how much GDP growth do you get for each additional dollar/currency of debt? If we borrow $1 and get $2 of GDP growth, great. If we borrow $1 and get 10 cents of GDP growth, big fucking problems ahead. Considering that the debt is going cost more than we borrowed, that benefit red line is pretty far ahead of $1. Demographics are another trend to look at. Shrinking population generally means the GDP is going to end up going the same direction. On a micro-level we could examine Detroit, on a macro-level Japan. Both are returning developed land to farmland; quite a paradigm shift for someone who grew up watching fields turn in to suburbs. A country, or city, with a rapidly growing population needs to borrow money to build infrastructure. One that is shrinking may face a crises even with a much smaller debt load. Thinking about recessions or perhaps even depressions is a bit simplistic. Both are bumps in the road. A more valuable idea is to look at the multi-decade trends where countries fall in and out of power or even cease to exist.
• lkrubner 12y ago
  I just submitted the Calculated Risk article to Hacker News. That is a very good article.
  • tdees40 12y ago
    It's a fantastic blog. Lots of data, minimal bloviating.
• danelectro 12y ago
  Ask not how you can avoid recession, ask what you can do for the rest of the country to emerge from recession that they are still suffering from. Look at that GDP "Growth Rate" and of course you can clearly see as a derivative it's a "Shrink Rate of Growth Rate" and the trend line itself is more meaningful than you would think, especially the greater number of decades you have experienced to correlate with the patterns. The right-hand y-intercept is fixed by the present day, but the left hand y-intercept would vary related to what year in the past you choose to begin your data series. Good choice anyway IMHO to use ~1950 on the left since so many in the USA who have economic experiences before that time are no longer with us, or seriously retired from productive service even though passive incomes for some survivors of earlier times are doing quite well for now. Remember that this is corporate growth, and so many corporations depend so much on growth that anything which stands in the way will be disposed of, if a situation of zero real economic opportunity becomes significant, then growth (or reduced shrinkage as a last resort) will be extracted from the citizens either by passing on the costs directly or through government lobbying. So look at area under the curve or in this case area over the curve which I believe are two different things. Sharp or extended spikes below the trend are devastating to both corporations & citizens, but corporate shareholders are compensated by the eventual return of growth above the trend, since costs are passed on, the consumers do not share in the prosperity like they share in the devastation. Anyway, experience has shown that a negative spike like the one in about 1981 will devastate maybe 10% of consumers at least, and for them there will be no recovery for about 25 years at least. Later on in the early '80's a different larger portion of consumers are neutralized. The 1990-91 ruin is still largely with "us" if you were one of the unfortunate ~10% there, otherwise you may not even notice, this is by design. Early 2000's there is a little downward noise, lots of dotcoms and their dependents, but 2008-09 were the worst thing since the Nixon Recession, a huge new group whose futures's ruined for decades to come. Since each significant spike destroys a different block of consumers, this is adding up, estimate totalling up to almost a majority of consumers who are not just compromised but ruined by now. And that's not all, Nixon was so incompetent that the currency had to be sacrificed too and that does not appear on the chart. This was huge. Surprises are in store if you have not yet felt the wrath from 5 years ago. There is nothing more for currency to contribute, loss of property values since then has not extracted its toll proportional to negative area so something else will have to give, and it will have to be big.