US Industrial Decline in Progress - Recession Possible

There has been a long term deterioration in US Industrial production, as shown in the INDPRO index.

While monthly decreases happen all the time, a long-term decline in yearly production averages has been in place since September 2015.

When the yearly averages are placed on a graph and compared with US recessions since 1960, there is a clear correlation between long term industrial decline and recessions.

A decline in the yearly average can occur before a recession, or during a recession, as the graph below shows.

Note that I define a recession different to the NBER, but there is an overlap.

Here is how it appears on my spreadsheet:


Long-term over-investment

In theory, investment should multiply growth. But it's not. Not since the early 1980s.

The US Sharemarket has outperformed Gross Domestic Product for way too long. The result has been slower growth.


Is it time for American Conservatives to embrace a different voting system?

This is actually a very good time for American Conservatives to debate the issue of proportional representation and voting systems like "Instant Runoff Voting" (IRV). A "First Past the post" voting system ends up either forcing a two-person presidential election or the complete disenfranchising of a third candidate.

The classic example of this is the 1992 Presidential election in which Clinton and George H.W. Bush were joined by independent candidate Ross Perot. Despite gaining nearly 20% of the vote, Perot won none of the electoral votes. Moreover the people who voted for Perot were probably likely to have voted for Bush, which means that Clinton won the election because the opposition vote was divided. This is a natural result of a "first past the post" electoral system, which is not very democratic.

Had IRV been the voting system in 1992, the chances are that Perot's votes would have ended up being given to George Bush (since Perot voters would have nominated Bush instead of Clinton as their second choice), and Bush would have won.

Another election that would've changed is the 2000 election - it could be argued that votes for Ralph Nader would have gone to Gore (since Nader voters would've nominated Gore over Bush as their second choice).

In the current climate, IRV would create a viable alternative to Trump, so that conservative voters who hate Trump won't have to vote Democrat or choose not vote at all. One of the reasons why Trump presents a crisis to conservatives at the moment is because of the First past the post electroal system./

In short, the Instant Runoff Voting system is a far more democratic voting system than the one currently used. Both parties would have benefited from it in the past had certain elections been under IRV, which means that both parties could choose to get behind the system and nominate its use in presidential elections with a constitutional amendment.


Random thoughts on energy, debt and economic growth

There has always been a direct correlation between economic growth and the cost of energy: The cheaper the cost of energy, the greater the economic growth. While it is true that low oil prices will negatively affect companies that deal directly in them, the opposite is true for the rest of the economy. If the price of oil remains low for the next few years, there will inevitably be an increase in economic growth throughout the world. This is because there is a "ripple" effect whereby lower oil prices translate into cheaper goods and services - cheaper transport costs a) allow producers to sell their goods at a higher profit margin, and b) allow consumers to have more disposable income left after purchasing them. In short, cheap energy (which means plentiful energy in reality), is a win-win for the entire economy.

As for the "debt supercycle", I am getting more and more convinced that the economy is actually about goods and services that people and businesses produce and consume. Debt and money are simply numbers which affect how much a person/business/government can purchase or produce something. If there is cheap and plentiful energy available to an economy, the numbers involving debt and money will tend to balance each other out more quickly. Prior to the 1980s and the birth of neoliberalism, sharemarkets and debt markets grew at the same pace as, if not lower than, economic performance. This changed from 1981 onwards, as nations began cutting taxes on high income earners and businesses in the hope that this would spur investment. It did spur some investment, but over the long term all it did was create a huge bubble of debt existing alongside skyrocketing sharemarket indices (like the Dow Jones). Flush with massive amounts of cash, the rich and the corporations made money and profit simply through a debt/sharemarket/property balloon. Unlike previous generations, in which what went up went back down, monetary policy (interest rates) was able to simultaneously stop any crash and keep the bubble expanding. Instead of popping, the investment balloon remained and still remains very big. What has changed is that the economy has slowed down. A pre-1981 economic system, in which taxes on the rich and corporations remain high and significant economic resources are transferred to ordinary people, will result in higher economic growth (alongside lower debt levels, lower property prices and lower share market indices).

The Energy part of the equation here is important because obviously a market economy that is dependent upon fossil fuels is more likely to experience peaks and troughs as oil levels move from plentiful to scarce. If the world economy was a game, and if global warming did not exist, it would be far better to pump out oil continually at a pace beyond demand, ensuring that a large reservoir of ready-to-refine oil exists above ground rather than below it, and by doing so keep energy flowing into the economy at a stable pace. But because energy is in the hands of market forces, this doesn't happen.


Recession Looming?

With a lot of focus on the potential for another recession, I thought I'd post some thoughts, as well as some graphs from various spreadsheets that I have kept going during my current absence.

Yield Curves on Inflation adjusted Bonds.

Since interest rates have been so low for so long, one standard method of recession prediction - an inversion of the yield curve - has become problematic. As a result I decided a while back to keep tabs on inflation-indexed securities (since these incorporate negative interest rates). When you compare the curve between 5-year, 7-year, 10-year and 20-year inflation indexed securities, the current situation is:

(I would've put this in chart form, but only the 2015-12 data would be shown).

The "TIIPS Yield Curve" column in yellow is just the average difference between the 5 & 7, 7 & 10 and 10 &20. Since Inflation adjusted bonds have only recently been added to Fred at St Louis Fed, there isn't much history to go on. The history does, fortunately, encompass pre-2008 data:

This data shows an inverted yield curve occurring in late 2006, which indicated the recession on the way.

In short, the current yield curve data does not show any oncoming recession... yet.

Net Monetary Base vs. NSA Inflation (yearly spread)

A few years ago I created the idea of a "Net Monetary Base", by which the Excess Reserves are taken away from the Monetary Base. The idea being that excess reserves have the same function as money taken out of circulation (and are thus deflationary). This was recognised back during the Depression as part of the 1933 Banking Act, one of the policies being an enforced reduction in commercial bank excess reserves. After the passing of this act, prices began rising after being in decline since 1929. Post-2008, no comparable law was passed, allowing banks to hold excess reserves and probably prolonging the "long recession" (which I think is what it is being called now).

Anyway, one way to determine recessions is to compare the net monetary base to inflation. One of the discoveries I found a few years ago was that every recession was accompanied (both before and during) by a negative result. (A "negative result" is when the rate of increase of the net monetary base is lower than the rate of increase in inflation). ALL recessions for which data is available show a clear association with a negative result.

(Of course I have not done any major statistical analysis of this data. I'll leave that for the statistical experts who can prove me right or wrong later on).

So what of this data? What is it showing? Here is a screenshot of my spreadsheet:

It is the far left column that is important. If it is negative, it indicates an oncoming recession. At the moment it isn't. Compare this to 2005, which showed a recession was coming:

Or maybe the 2001 recession:

Put all my data into a graph, and it looks like this:

In short, the data does not suggest a recession yet.


Cost of oil consumption to US GDP

Look at that recent drop. US Consumption hasn't dropped off dramatically. The Bond market has been going haywire recently and I'm sure that the yield curve is getting closer to negative. But is this drop in oil prices going to boost the economy? Or is it indicative of an economy about to go into recession. Stay tuned.

World Food Production

No Malthusian collapse in the offing yet.


Chronic Pain and reflections on this blog

My contributions to this blog have obviously decreased substantially since the glory days of the Global Financial Crisis and its immediate aftermath.

The reason is health. I now suffer from chronic pain and I can longer work. The pain means I have to take painkillers which, in turn, blunt my intellect and make it harder for me to find the intellectual power to write the posts I used to write. I spend a lot of time in bed. I rarely make it out of home. My wife works to support our family, and we receive some government welfare to make ends meet.

Once the next recession hits I'll probably take up the blogging cudgel once again. Nevertheless I'm wary about making predictions since a little too many of mine have fallen by the wayside, and, unlike others who tend to make predictions of doom and get it wrong, I tend to get a bit embarrassed and annoyed that mine do not come to pass - although it does force me into working out WHY I was wrong in the first place, which is a great way to learn.

I'm a little concerned that all the work I have done here has been for nought. I know that many in the economics community had read my blog but I have no idea if any of my thoughts or ideas impacted anyone or helped changed some sort of way of thinking. I'm always concerned that my status as "self-taught economist" can sometimes result in being judged more like a crank than as someone who has something very valuable to share with the world of economics and policy.

I've always believed that my role on planet earth was to make things better for all. This came through my own Evangelical Christian beliefs, but also with my desire to change societal systems to produce better outcomes. Economics was a hobby from about 1995 onwards, and I learned enough to come up with my own ideas which, in many cases, ended up being previously thought up by others. But the fact that I had come up with ideas that had been thought up by others gave me the impetus to keep going.

A recent trend in economic policy seems to be "macro-prudential" - the idea that steps can be taken to reduce asset-price bubbles without having to rely upon interest rate rises. I did propose a form of targeted monetary policy a while back, but I don't know if this was thought up independently to the macro-prud movement (which is currently working in New Zealand and which is now being worked on in Australia).

America continues to be a mess. The political framework erected by the US Constitution is way out of date. While the US Constitution should be rightly praised for its broad principles, the actual political framework is a relic of pre-modern 18th century thinking. It won't be changed anytime soon.

The right to free speech has been corrupted by the powerful, who tell lies and misrepresent the truth. The whole Iraq has WMDs of the early 2000s and the Obama is a secret Muslim born in Indonesia of recent years is a result of this. All I want the media to do is to report facts and disseminate opinions based upon these facts. Is that so hard? Apparently yes. The result is the belief by many conservatives in the US that the country is in the midst of a crisis brought about by socialism and an evil/ineffectual president. Should rights also be balanced by responsibilities?

Anyway I am rambling. It would be nice to know if my work on this blog has had some benefit. Please contact me if it has. Thanks.

I will continue blogging. One day. Watch this space.

Edit: I have updated the Angry Bear link. If you're wondering how popular I used to be, click here.