What Happened To The World Economy?

pakalasa

At the offset, let me just say I'm no Economist, but I do have some grasp of economics. I'm probably one of the few people that expected the bubble to burst in ireland. I lived in other countries where they had simular bubbles, so I experienced them first hand. Ireland I get....Joining the Euro, loss of control over Interest Rates, political denial (Bertie wanting his second term etc)..... but what happened to the world economy.

Was it the real estate bubble in California, similar to our own.....
The ever increasimg trade deficit in the US.....
China / India simply expanding too quickly.....
Clash of cultures, personal borrowing too high in the west, the east saving too much (Japan)....
....Or was it something more fundamental. A lot of people now saying that the financial markets are simply too free, they need greater regulation. We all go about our lives with well defined boundries on what we can and cannot do. Seems like the financial world needs the same.
I once read an autobiography on Alan Greenspan and how he continually obsessed over the interpretation of the different data. He believed that it took 6 months for a change in interest rates to kick in. If he was still at the Fed today, would we be in this mess?

silverharp

there will be a generation of books and naval gazing at this. One of the fundamental reasons was the Asian strategy of building up dollar reserves and investing those reserves back into US bonds. It suited their aims of keeping their currencies low although if someone is earning a 20th of your competitor , what difference does it make? the flip side is that there was a wall of money keeping interest rates lower then the should have been, which helped foster a boom in the US. Throw in the baby boomers that were in the process of trying up build up financial assets and you have some of the ingrediants for the pot.

eamonnm79

silverharp wrote: »

there will be a generation of books and naval gazing at this. One of the fundamental reasons was the Asian strategy of building up dollar reserves and investing those reserves back into US bonds. It suited their aims of keeping their currencies low although if someone is earning a 20th of your competitor , what difference does it make? the flip side is that there was a wall of money keeping interest rates lower then the should have been, which helped foster a boom in the US. Throw in the baby boomers that were in the process of trying up build up financial assets and you have some of the ingrediants for the pot.

One big problem chris martenson of Chris martenson.com sees down the road is When the Boomers decide to retire or start dying off.
What happens is that you will get a huge glut of over supply in Shares, Bonds Realestate everything. He recons it wil have a very negative effect.

Time Magazine

eamonnm79 wrote: »

chris martenson of Chris martenson.com

Lol, I like how the first line of his website says "My name is Chris Martenson. I'm not an economist."

OP, I think you might enjoy this paper. It's only 10 pages long (double-spaced) and isn't hard to read.

Would we be in this mess had Greenspan stayed in the Fed? Almost certainly.

mike65

Greenspan aided the bubble he talked about irrational exuberance but did feck all to supress it.

I look at it like this - the world got fat and now its on a crash diet. In 20 years it'll happen again.

RGE must read this forum!
http://www.rgemonitor.com/euro-monitor/257255/a__historical_recession_the__green_shoots_

Flamed Diving

mike65 wrote: »

Greenspan aided the bubble he talked about irrational exuberance but did feck all to supress it.

I look at it like this - the world got fat and now its on a crash diet. In 20 years it'll happen again.

Economic crashes are not destined to happen like that. If they tightened up regulation, like they had between 1945-73, then there would be less volatility and less bubbles, like 1945-73. Stupid OPEC...

Time Magazine

Flamed Diving wrote: »

Economic crashes are not destined to happen like that. If they tightened up regulation, like they had between 1945-73, then there would be less volatility and less bubbles, like 1945-73. Stupid OPEC...

But less growth, ex ante?

(Yes, I know there was greater growth between 45-73 than between 73-08 but when you account for Solow convergence, you would expect [latex]\frac{\partial}{\partial T} TFP[/latex] to be greater as the "regulation constraint" is less binding.)

Flamed Diving

Well, there is a clear trade-off between efficiency and stability, therefore if you want stability through greater regulation, you must sacrifice growth through efficiency of capital flows. But isn't smooth, stable growth (not maniacal booms and busts) the aim of every economist?

Time Magazine

Flamed Diving wrote: »

Well, there is a clear trade-off between efficiency and stability, therefore if you want stability through greater regulation, you must sacrifice growth through efficiency of capital flows. But isn't smooth, stable growth (not maniacal booms and busts) the aim of every economist?

The option isn't on or off. Spectra ftw.

Actually, I think a serious question here is the inter-temporal trade-off between our utility and our children's.

Although [latex]\frac{\partial}{\partial T} TFP = 0[/latex] probably requires regulation to be very low, that's probably sub-optimal in terms of social welfare due to our loss aversion. That's fine, and I agree it's a very strong, behaviourally-founded argument for "smooth, stable growth."

But what about our children, and our children's children? (Personally I think our children are too young to be having children, but how and ever.) It seems to me that the greatest gift we could pass onto them, obviously other than an inheritable earth, is as much TFP as we can. Had the internet been invented in 1950 rather than 1970, our communication systems would be twenty years more advanced. When I look at iPhones compared to those Nokia 3210s everyone had a decade ago, I get excited by the prospect of technology twenty years hence.

What relative values are we to assign to smooth, stable growth vs our children's TFP?

eamonnm79

The Economist wrote: »

Lol, I like how the first line of his website says "My name is Chris Martenson. I'm not an economist."

I know its like the simpsons episode!
But his crash course is brilliant.

pakalasa

The Economist wrote: »

The option isn't on or off. Spectra ftw.

Actually, I think a serious question here is the inter-temporal trade-off between our utility and our children's.

Although [latex]\frac{\partial}{\partial T} TFP = 0[/latex] probably requires regulation to be very low, that's probably sub-optimal in terms of social welfare due to our loss aversion.

......now I know I'm not an Economist.......I don't think Bertie got this stuff either.....:D

Anonymous1987

An excellent overview of the credit crisis was provided by the St. Louis Fed back in 08. It suggests that economic stability, low interest rates and a savings boom in developing countries laid the groundwork for financial innovation and a housing bubble leading to todays mess. It suggests greater regulation in the finance industry particulary with regard to off-balance sheet vehicles.

With regard to what The Economist says about the "inter-temporal trade-off between our utility and our children's". This is certainly true. In fact the current bubble is most likely a continuation of the excessive investment from the dot com bubble buyed by low interest rates and facilitated by lax regulation. The financial bubble itself did not produce anything except overlevereged investment. Who can say that the innovation in financial products has improved their lives? I guess you could argue that in Ireland the housing boom gave us a large stock of relatively high quality housing that we were in dire need of but its a pretty steep price to pay. Grudgingly I admit David McWilliams was on to something in "The Generation Game".

Time Magazine

pakalasa wrote: »

......now I know I'm not an Economist.......I don't think Bertie got this stuff either.....:D

Sorry . TFP, which stands for Total Factor Productivity, basically means "technology". Specifically it means how productive we are, so as well as technology it also includes stuff like governance and financial innovation and all that stuff. TFP is what really drives economic growth over the long run. My point is that you would probably expect TFP to grow the most in a world with little regulation, but little regulation means we'll have a more volatile ride with more busts and booms. Flamed Diving thinks it'd be best to have a nice smooth ride. I think I agree, but I think it'd be fun to tease out whether it would be better for future generations if we focus on getting TFP as high as possible rather than smoothing out the ride.

Anonymous1987 wrote: »

The financial bubble itself did not produce anything except overlevereged investment. Who can say that the innovation in financial products has improved their lives?

Agreed with everything you say. The financial bubble produced nothing useful, or at least it so seems as of July 2009. But that's not my point. Simply because it didn't produce anything between, say, 1990-2008, doesn't mean it wouldn't have produced anything between 2008-2025. Regulation would have helped over the past two decades, but perhaps the regulation that would have been prudent over the past two decades will inhibit welfare-increasing innovation over the next two.

Flamed Diving

The Economist wrote: »

The option isn't on or off. Spectra ftw.

Actually, I think a serious question here is the inter-temporal trade-off between our utility and our children's.

Although [latex]\frac{\partial}{\partial T} TFP = 0[/latex] probably requires regulation to be very low, that's probably sub-optimal in terms of social welfare due to our loss aversion. That's fine, and I agree it's a very strong, behaviourally-founded argument for "smooth, stable growth."

But what about our children, and our children's children? (Personally I think our children are too young to be having children, but how and ever.) It seems to me that the greatest gift we could pass onto them, obviously other than an inheritable earth, is as much TFP as we can. Had the internet been invented in 1950 rather than 1970, our communication systems would be twenty years more advanced. When I look at iPhones compared to those Nokia 3210s everyone had a decade ago, I get excited by the prospect of technology twenty years hence.

What relative values are we to assign to smooth, stable growth vs our children's TFP?

Ok, but to reach a steady-state of [latex]\frac{\partial}{\partial T} TFP = 0[/latex], when the economy is sliding all over the place? I don't see how that is possible. When you accept the volatility of the business cycle, aren't you accepting that the kids of t2 may benefit, but the crash for the kids of t3 might be hard luck, but sure t4 and maybe t5 will get a nice boom again. I dont see who ultimately benefits in the end from all this, as it never really ends. So why not smooth things out, so everyone gets a moderate benefit?

Time Magazine

Flamed Diving wrote: »

Ok, but to reach a steady-state of [latex]\frac{\partial}{\partial T} TFP = 0[/latex], when the economy is sliding all over the place? I don't see how that is possible. When you accept the volatility of the business cycle, aren't you accepting that the kids of t2 may benefit, but the crash for the kids of t3 might be hard luck, but sure t4 and maybe t5 will get a nice boom again. I dont see who ultimately benefits in the end from all this, as it never really ends. So why not smooth things out, so everyone gets a moderate benefit?

Actually the current volatility provides, at least in part, a great opportunity for someone who has a new idea. We have a lot of cheap labour, cheap (though hard-found) capital, etc.

Things are more volatile for t3 and t5, but at a higher level than otherwise.

Flamed Diving

The Economist wrote: »

Actually the current volatility provides, at least in part, a great opportunity for someone who has a new idea. We have a lot of cheap labour, cheap (though hard-found) capital, etc.

Things are more volatile for t3 and t5, but at a higher level than otherwise.

I hear what you are saying, but for the period that is in recession you will have unemployment. Theoretically, you could have full employment for all periods, with smooth consumption.

Anonymous1987

The Economist wrote: »

Agreed with everything you say. The financial bubble produced nothing useful, or at least it so seems as of July 2009. But that's not my point. Simply because it didn't produce anything between, say, 1990-2008, doesn't mean it wouldn't have produced anything between 2008-2025. Regulation would have helped over the past two decades, but perhaps the regulation that would have been prudent over the past two decades will inhibit welfare-increasing innovation over the next two.

Correct me if I'm wrong but what you seem to suggest is that supposing the same sequence of events occured in 2008-2025 however this time investment is channeled into something positive and productive like green technology, this innovation might not occur as soon if regulation is enforced in the aftermath of the 08 bubble.

What I would argue is that regulation if carefully drafted to treat the specific failings of the financial system i.e. excessive leverage will help direct investment towards productive sectors of the economy such as technology.

The fact is that technological innovation did not occur at the height of the financial bubble in 08 and now our productive capacity is actually shrinking and our human capital is not achieving the potential that it might have given a smoother business cycle. I guess you could argue that the most spectacular innovations might not be possible with regualtions on the banking sector but in the long run we will be better off for it.

Basically what Flamed said

pakalasa

The Economist wrote: »

Sorry . TFP, which stands for Total Factor Productivity, basically means "technology". Specifically it means how productive we are, so as well as technology it also includes stuff like governance and financial innovation and all that stuff. TFP is what really drives economic growth over the long run.

Ok , I think I know what you mean. Basically you are saying that real surges in productivity, such as software (Microsoft's contribution... reduced administrative costs in companies etc), while increasing real wealth does tend to produce financial bubbles. The Dot.com an abvious example, share prices going 'tru the roof', while internet commerce increasing at a much smaller but steady rate in the background.

And ..... you could but on your 'cynical hat' and say that there is also a lot of basic dishonesty at work here also. Compare the commentaries from the economists in the Irish Banks with that of the Irish media over the last few years.:mad:
There doesn't seem to be a willingness on part of Governements or regulators to dampen down these bubbles. There are usually big winners and big loosers after they implode. It's like there is a whole industry at work here. California, for example, they made their money from overselling the dot.com and then moved on to the real estate market.

eamonnm79

Arent you people forgettin something rather important? THE PLANET.

There seems to be a very high causal correnlation between increased consumption and growth with messing up the planet.
I think our kids and grand kids or t2, t3, t4 and t5 as you like to call them would prefer to have a planet that is livable.
The fact that th G8 are moving to vague targets (2% increase in planet temp) is worrying.

We can only hope the fossil fuels run out before the damage is irreversable.
Some scientist recon we are already reaching this point.
I think the first page of this discussion show the madness you start getting out of sane peolpe if you allow them to opperate in a vacuum. (an economic one in this case) It reminds me of the gold bars V planet slide from an inconvenient truth.

Flamed Diving

Firstly, if I was to discuss GW, Al Gore and his 'Inconvenient Truth' would be the very last point I would start. But that's not a discussion for here.

https://www.youtube.com/watch?v=N2B34sO7HPM

Secondly, I believe there are economic growth models out there that incorporate environmental damage into the already established variables of K and L. Anyone know of one?

Anonymous1987

Flamed Diving, the ESRI are attempting to construct a sustainable development model for Ireland (attached) that includes a set of complementary national accounts however they fall short of calculating a green net national product but are aiming to achieve this in the future.

Flamed Diving

Here is one:

Pricing the Limits to Growth from Minerals Depletion

Martin L. Weitzman
Harvard University

This paper evaluates the loss of global welfare from exhaustion of nonrenewable resources, such as oil. The underlying methodology represents an empirical application of some recent developments in the theory of green accounting and sustainability. The paper estimates that the world loses the equivalent of about 1 percent of final consumption per year from finiteness of the earth's resources, compared with a counterfactual trajectory where global extraction of minerals is allowed to remain forever constant at today's flow rates and extraction costs.

http://www.mitpressjournals.org/doi/abs/10.1162/003355399556025?cookieSet=1&journalCode=qjec

I've seen a couple of Y=F(KLE) models, where output depends on the envoironment but they were very 'assumption heavy' models.