Governments Powerless to Prevent Another Recession

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Governments Powerless to Prevent Another Recession

Posted by Jeff Rubin on September 28th, 2011 under SmallerWorldTags: Greece, recession, u.s. federal reserve board • 16 Comments

The more you hear about the extraordinary efforts that governments around the world are taking to promote economic growth, the less confident you can be in the result.

With the clock ticking on a Greek default, members of the European Monetary Union are considering sweetening their bail out pot for a second time since the summer.

The problem, however, is a bigger bail out pot in Europe is not going to save Greece, whose economy is expected to contract at about 5% for a second consecutive year. It is just going to make the write offs that much bigger for German taxpayers and French banks when the inevitable default finally occurs.

Nor is the U.S. Federal Reserve Board’s latest policy gimmick, ‘the twist’, likely to prove any more effective in breathing new life into a stagnating economy than the measures to prevent a Greek default.

The move, a throwback to an earlier attempt in 1961, has the Federal Reserve Board selling short-term securities to buy ones with longer dates up the yield curve. The goal, much like that of the Fed’s earlier tranches of quantitative easing, is aimed at bringing down long-term interest rates to resuscitate a moribund housing market.

But with long dated Treasury yields already near record lows, it is not the cost of mortgages but the lack of jobs that stands in the way of Americans buying more homes. Without jobs, U.S. households are no more likely to buy homes than Greek households are to pay taxes.

Other than potentially weakening the U.S. dollar, it is a classic case of a central bank trying to push on a string. And in this particular case, the greenback perversely strengthened, most notably against gold, leaving the Federal Reserve Board with nothing for its efforts.

With government deficits at record highs and interest rates already held to record lows, it is becoming increasingly obvious that European or North American governments have run out of policy options to sustain growth. Our economies appear to be heading inexorably into another recession, and there doesn’t seem to be anything our governments can do anymore to prevent it.

Unc

10-4 on that one Jeff, but at least they can all say they tried,now for them all to get re-elected,they will all come up with a solution to the problems at hand and by an amazing coincidence and it will be a burp in the system that will show some substance for a short while,kinda like the dentist giving a person with a tooth-ache a prescription for pain killers in order to alleiviate the torture of an hour-ed out tooth, when he well knows that you will be back for the finalley-yard out the shitty tooth and look towards fixing the cause. Ressesions are the shits, but they do get the teeth fixed up and processing food properley. Unc fsj Can.
whipstock

I think that the “Twist” was for a different purpose than to lower mortgages. http://danielamerman.com/articles/2011/twistC.html
Marekrocz

“Without jobs, US households…” I am sick to my stomach when politicians say that “they are
working hard on creating jobs”. However, why not to try to work on modifying
gradually and carefully created previously conditions that made so
appealing exporting so many jobs to other jurisdictions. Jeff, you are saying
that the US politicians are out of policy options, so how about adding to
promotion of “buy American” such measures as for example: increasing required
made in US content to legally attach “Made in the US” sticker, or to protect better the
public by introducing more stringent quality and safety control of imported
products payed for by importers and so on. In other words, instead of “creating
jobs” why politicians couldn’t work on modifying conditions allowing private
sector domestic jobs mount a competition on total cost with imports from low income jurisdictions?
Rojelio

Good idea for about 10 years ago. Too late now. At this point, we’re just waiting for China to take away our credit card and for global supply chains to collapse. Then we make stuff and buy local.
Johnstrachan01

As Jeff has said before, the US economy (and perhaps to a lesser extent European ones) don’t grow with triple digit oil prices. The Great Depression tells us that protectionism (e.g. Buy American) doesn’t work. Monetory and fiscal stimulus can only help in the short-term but don’t solve the long-term problem of an economy designed around cheap $20 a barrel oil. America needs to skill-up and do more to differentiate itself from the rest of world. Low skilled jobs will always be outsourced to cheap parts of the world. Without fundamental change America could lose it’s economic sovereignity, like Greece, and have to bow to the demands of its creditors.
Dhouston

Oil has the potential to fall back to it’s 200 month moving average (like it did in 2009) of 47 dollars. It looks like the wild spikes in oil prices are coming to an end. The blowoff spike in 2008 was like a major earthwquake and now the aftershocks will be smaller and smaller. The China story is settling down a bit which will also calm commodity prices. I Think we will see a much more gradual increase in prices now in the next 10 to 20 years with prices averaging about 65 dollars per barrel for the nest 10 years or more.
Dhouston

Also i don’t hear any analysts discussing the damage our oil spike in 2011 has had on the economy. I think it’s a major cause of this coming recession. It takes a few months for the effect of oil over 100 dollars a barrel to filter through the economy and I think we are seeing the effects of this now. It’s not all due to europe or the incompetent US government and Fed.
Propensity6

The whole problem is that the fed tried to soften the 2008 recession, but its effort will prolong it. Amazing that only on April 13, Jeff man was wondering where the excess capacity was with 120 oil. Well, it was found. What is so complicated here. the Fed meddled and didnt allow the economy to correct in the way it should have. Now, we have problems. DUH
MB

I sure hope you’re right, though petroleum geologists may puncture that economist’s balloon. Would that depleting (and cheap) resources were fully accounted for by the economists. No one with proper bona fides would predict a particular price on an important commodity over such long periods of time especially with such high rates of built-in dependency.
Instincts

Governments have become powerless in preventing things like recessions because all of humanity (not just goverments) has become powerless from preventing the inevitable — that humanity (at least the earliest of the Westernized industrialized societies) has largely reached and surpassed the apex of that deceiving thing known as “growth”. Chindia is not far behind.

Read John A. Livingston’s volume titled ‘One Cosmic Instant’, and if time is limited, at least read the last two chapters. Livingston pegged where humunity was going and has finally arrived – and he did so in the early 1970′s. He told us the hard truth about where we have come to, and in his own way, he pleaded for us to heed his advice.

Like it or not folks, the best way forward is one that recognizes humanity on a more level playing field with the rest of the planet’s ecosystems. Survival of humanity will require nothing short of redefining our core values and all aspects of our daily lives that stem from such values. Our otherwise ‘conquering’ and ‘domination’ of such things could only ever have been temporary in geological/astronomical time. There’s nothing apocalyptic about how this has and continues to happen, but rather it has been a long (relative to our perception of time), drawn-out and agonizing process whereby Westernized civilization as a whole continues to degrade. However, in geologic time, what we’ve done has happened in a mere blink of Earth’s time.

If enough of us who know better are able to collectively steer humanity in the right direction, our future is bound to be brighter. But do enough of us have the courage to break away from the mold to participate? Or are the embedded ‘institutions’ just too powerful and suppressing?

How does humanity overcome the strangle-hold that the Western monetized (and all things associated) system quite apparently has forced us to follow, only to lead us to our own demise?

Any anwsers out there?
http://twitter.com/platinumshore Platinumshore

Jeff good article, even if your more recent work is at odds with your ‘smaller world’ concept – a Western recession is more likely to support globalisation via lower oil prices.

More curious if you have any views on Daniel Yergin’s latest remarks on peak oi ?
Instincts

For those who don’t understand, no explanation is possible.

For those who do understand, no explanation is necessary.
Rojelio

$65 might buy you a potato 10 years from now if you’re lucky.
Rojelio

Hey Jeff, speaking is obviously your forte. Your 45 min talk from 2009 is how I learned about oil. Why not post weekly video blogs or put stuff from any speaking engagements on this website?
Claro DeVeras

The second sentence is true.

The first sentence is false.
Jimmyb189

Its too late to avoid economic collapse, but its not too late to avoid famine and population crash.

How come?

Easy.

Oyster mushrooms grow on virtually any dead organic matter, quickly. Buy a few plastic tubs, get some waste coffee grounds from the local coffee house, throw some spawn in and you will have 50%+ yield of highly healthy food which is very, very robust. If the coffee house shuts down, then use bits of wood, leaves, old clothes, or grow a field of hemp (if it comes to it) and use the leaves from a harvest to feed the mycelium. Proven. robust. Local. sustainable.Try finding a food supply that will deliver large volumes without having to obtain and maintain vast tracts of land.

Water. Copper is a biocide and cleans freshwater. Buy some copper chunks, have some water storage, and ensure you are in walking distance of a freshwater source. Clean water, with no fossil fuel input once you get the copper. A lump of copper will last centuries.

For the sake of a weekend afternoon and a tiny bit of investment, you can secure yourself and your loved ones, whats to lose?

Recent Blog Post

What the leaders need to understand about Canada’s shifting economy

Governments Powerless to Prevent Another Recession