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Akvod on 13 August 2010
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HappySqurriel said:
Akvod said:

Errr, I'm thinking that a deflationary cycle is more likely. And I don't think that the recession was caused by "inefficient" workers. Your belief is that somehow the efficient workers will remain, and they will spend money. And therefore that'll serve to eventually increase the economy. But the thing is, aren't they spending right now as well? I mean, they're confident that they're going to keep their jobs right? So given that their spending right now, why are we still going through a recession? Are you just saying that the recession is a cutting of jobs?

No, it's FIRST a cutting of spending. Because there's a cutting of spending, firms don't need to invest and don't need to produce as much, if at all. That leads to cutting their capital, which includes labor. It's not that firms decide to cut labor FIRST, and then spending falls.

So this is my line of thinking:

1) Government spendings/ or gives money to spend

2) Firms begin to invest in order to meet that government created demand

3) The money the firms spent as investment goes to other people, consumers, who spend that money

4) That leads to even more increases in GDP

5) Companies, seeing that the GDP is going up, begin to invest even more and begin to hire eventually, thinking that this growth is permanent and not temporary (like we think now, with the threat of a double dip recessions. You are right in a sense, Obama and congress did prolong the recession. But for COMPLTELY OPPOSITE reasons. I say not enough, you say too much).

6) Consumers/Workers seeing that the GDP is going up, and firms hiring, also think that the recovery is permanent

7) Consumers spend more

8) On and on

 

You think

1) Firms shed inefficient workers, and inefficient firms fail

2) Mass unemployment, and all that bad stuff

3) But on the good flip side, the best and brightest remain

4) They begin to spend more money and produce goods

5) Therefore they begin to hire again, and the inefficient people spend money again

6) Slow but sure recovery

 

The problem I see, is that how the fuck are there even going to be the best and brightest firms and workers left, when they are going to sell less goods. Why would the "brightest" people spend, if they, being so bright, know their purchasing power will increase due to deflation.

Look if the firms have nobody to buy their goods, then they fail. No matter how innovative or good their products, if people simply don't buy them, they won't make them.

===========================

As for the car bailout, I'm not too sure about that, really dubious and really sorta shaky. I would prefer stimuluses, since then the consumers decide what to buy, and they'll buy what they think are the best according to supply and demand free market.


If government spending can spur a recovery, why has Japan's economy taken so long to recover from their similar financial crisis?

 

The downturn will continue as long as banks refuse to lend money, foreclosures remain high, and as long as individuals refuse to spend. It may be counter-intuitive, by bailing out the large banks ensured that this recession will last (long) past Obama's presidency. While they have been labeled "Toxic Assets" the mortgage backed securities (which are the core of the problem) are not value-less; the problem is that their real value is far less than their book value. Had the collapse been allowed to happen these assets' book values would have been down-graded to their real value, and they would have been purchased by better run banks; and since it would result in the value of these assets going up, many of these banks would aggressively look to restructure these mortgages in a way that the home owner could afford them.

Basically, when large banks failed smaller banks would have bought their assets up at $0.01 $0.10 for every dollar of their book value because of the expectations of defaults and how little money could be recovered from the sale of their home. This bank could then discount the principle on their mortgage by 25% to 50% and have them refinance at the current rates and return defaults to more normal levels; and therefore increase the value of their assets to 50% or 75% of the previous book value.

The zombie banks that exist today can not make these kinds of deals because it would result in their book value falling far enough to bankrupt the bank.

Japan is in a liquidity trap, where the interest rate is 0.1% and the government can't use monetary policy to stimulate the economy. Japan got out of its recesison, but only by a surge of exports. Germany right now is trying to play that game and looks like it's succeeding. However, this strategy cannot work for all the countries at the same time, in a global recession.