Friday, March 14, 2008

Did Keynesian Economics Kill the Business Cycle?

Not so long ago, economists resigned themselves to the fact that recession is just a part of the economic cycle. Then came John Maynard Keynes who shattered that dogma and revolutionized the science of economics. Will “Keynesian Economics” save us from the harmful effects of the business cycle?

By: Ringo Bones and Vanessa Uy

Despite the problems affecting our global economy like sub prime mortgage exposure and the worrying trend of economic recession, we often tend to forget the fact that business conditions have always been fluid and dynamic. One year, the markets are booming and bullish with jobs aplenty. Another year, the stock market goes into a free fall, and bankruptcy courts become more crowded than the Tokyo Subway at rush hour. As chronicled in our economic history books: recession, expansion, then recession follows a sequential saga. And in the memory of the bad old days of ruthless capitalism that brought us Black Tuesday – October 29, 1929 – the day the stock market crashed. Tales chronicling the “Great Depression” even mentioned about banks failing by the thousands and a very drastic slowdown of the US economy that weeds started to grow on the materialistic self-complacent provincialism of Main Street.

America’s post-World War II economy which is largely – if not totally – governed by the principles laid out by John Maynard Keynes in the hopes of making the 1929 “Black Tuesday” incident just an ugly footnote of the American economic history. Thus in the United States, pure capitalism has gradually given way to a mixed economy, in which the government shapes the tax and fiscal policies to stabilize the ups and downs of business. “Keynesian Economics” which is viewed by “conservative” Americans with disdain because it tends to undermine the Protestant / Calvinist work ethic that helped built the American nation, which in turn downgrades productivity. Government “over regulation” of industries like the savings and loans has resulted only in disaster. Despite of it’s detractors, the economic policies laid out by John Maynard Keynes gain widespread praise by economists for keeping a full-blown economic depression from ever happening again. But as the Federal Reserve Board acts to control the money supply and counteract the business cycle, can we really conclude that recessions are a thing of the past?

But economists tend to forget that economics – in general – is primarily greed driven. The promise of rich rewards / gains despite atrocious levels of risks is what makes traders take foolhardy decisions at the expense of their representative investors’ funds. And yet we can take real comfort in the fact that economic recessions are milder in the “Keynesian Mixed Economy” environment than they where under the pre - New Deal capitalism. And if they occur, post – World War II economic recessions are also shorter in duration and much rarer in occurrence. Let’s just hope that our current post – sub prime mortgage / credit crunch 2008 will follow this trend. Maybe the “worries” that made our grandparents and great grandparents gray and wrinkled is something that the under 25s will scarcely know.

Monday, March 10, 2008

The Flavors of Recession

As we ring in 2008 with apprehension over the sub prime mortgage crisis and credit crunch that plagued the US economy during the latter half of 2007, the question remains: Is the US economy already in recession?

By: Ringo Bones and Vanessa Uy

One time honored wisdom states that if America sneezes, the rest of the world catches a cold. A colorful phrase used to describe economic recession and the primary reason why the rest of the world lives in fear – especially countries who exports most of their products to the US - every time the US economy heads into a downturn. But come 2008, the question on everyone’s minds still remains: Is the US economy already in recession?

But what is an economic recession? Who decides? For years, the press and the Las Vegas odds-makers had adopted this simple pragmatic definition: When the real Gross National Product (total value of all goods and services, corrected for inflationary price rises) declines for two quarters (6 months) in a row – that is an economic recession. This rough definition is adequate for most purposes, and surely more “refined” than its "blue collar" counterpart which states: When your neighbor looses his job, its only economic slowdown, when you loose your job, it’s a full blown economic recession.

Another definition of economic recession that is formulated by The National Bureau of Economic Research, a prestigious nonprofit organization that has kept the official score on the US economy’s business cycles. The “bureau’s” definition is based on more refined tests and measurements. Yet, for the most part, The National Bureau of Economic Research arrives at the same conclusions as the press and Las Vegas odds-makers did when it applies it’s own definition. Which states: “An economic recession is a recurring period of decline in total output, income, employment, and trade usually lasting six months to a year and marked by widespread fluctuations in the economy.”

As time went on, economist these days had discovered and defined a new species of economic recession called a “mini” or “growth-recession” which the current Bush Administration says best describes on what is happening to the US economy right now. Even though most Americans – especially those under the age of 30 – think that the credit crunch is a new and recent phenomena that only came to life near the end of July 2007. But the credit crunch did happen way before, back in 1966 to 1967, when the American people had to live with a “growth-recession” when a credit crunch curtailed housing starts and shaved 20% off stock prices. A mini or growth-recession is defined as follows: When output and employment grow for half a year or more at significantly less than their average trend rate of growth, an economy is in a “growth-recession”, even if actual growth rates never turn negative.

Even though American billionaire and now the world’s richest man Warren Buffett and the financial firm Merrill Lynch both said that the US economy is already experiencing recession at the start of 2008. The Bush Administration still insists that the US economy is only undergoing a slow down and can be easily cured with an Economic Stimulus Package. Does the Bush Administration dread the use of the “R” word (recession) because they think it will cause widespread panic? But the US economy is indeed now experiencing full blown recession because 2008 jobless rates are at a five year high, home repossessions are on the rise, Wall Street shaky as world markets watch. Plus the price of crude oil and basic foods now at a record high is not helping matters either.

As the US Federal Reserve Chairman Ben Bernanke slash interest rates further and the Economic Stimulus Package planned to be increased to 200 billion US dollars - the latest ones in the form of "auctions" that could well undermine a financial firm's credit rating, will all of these measures be able to turn around the ailing US economy from sliding further into a deep recession? It’s a bit iffy, because as the US Federal Reserve makes cheaper still the cost of borrowing money, the “financially inept” – sorry to say – will be driven further into debt. This is so because its primarily due to greed driven foolhardy decisions that drove these people to concoct get rich quick schemes that started all this mess in the first place. Unless an epidemic of “financial enlightenment” sweeps across the United States, bankruptcy courts will be standing room only beginning 2008.

Friday, March 7, 2008

Who’s Afraid of Stagflation?

Fast becoming an economic doomsayer’s buzzword in our post sub prime mortgage financial environment, will stagflation rear’s it’s ugly head again this 2008?

By: Ringo Bones and Vanessa Uy

Despite American economist, especially those in the pay of the Bush Administration, saying that the US economy is not yet in recession when we ring in 2008. But in our post - New Deal economic system that’s supposedly designed to keep economic recession a thing of the past, a form of economic malaise is now poised to threaten the on-going recovery process to lessen the impact of the sub prime mortgage crisis – namely stagflation.

Most of us living today – especially those under the age of 25 – has probably many questions to ask about stagflation, like: What is stagflation? Did stagflation happen before? Before we proceed, lets briefly discuss on what is stagflation and it’s primary causes.

When the post – World War II Keynesian Mixed Economy has alleviated the curse of old-fashioned economic depression and recession, it created the economic conditions that engendered the newfangled specter of stagflation. Stagflation is caused by a combination of stagnation in the production and employment sector with the inflation in the cost of living.

In 2008, stagflation now threatens China, Australia, and especially New Zealand whose individual Central Banks choose to raise the cost of borrowing money – i.e. raised interest rates – at a time when crude oil prices and food prices are at an all time high. The Las Vegas odds-makers say it’s a definite certainty that stagflation will definitely return in 2008, but let’s examine the economic conditions that made stagflation happen.

Back in 1979 during the Carter Administration, the economic slowdown of that year was primarily blamed on the artificially induced scarcity of the crude oil supply due to OPEC unable to respond the on-going geopolitical instability of the Middle East. This caused soaring food prices that contributed to the two-digit inflation that plagued America’s economy at the end of the 1970’s.

Then US President Jimmy Carter with the help of then Treasury Secretary G. William Miller, and then Federal Reserve Board Chairman Paul Volcker choose to cure the “inflation” part of stagflation back in 1979 by increasing the cost of borrowing money – i.e. raising interest rates. High interest rates on loans – 15% for large companies, 20% for less credit - worthy borrowers – were intended to combat inflation. The bad news is high interest rates adds to the cost in running a company and thereby leads to inflated prices. Some companies kept costs down by downsizing – i.e. laying off more “expendable” employees to keep their bottom line healthy. The poor and the unskilled members of the American society bore the brunt of the corporate downsizing during the latter days of the Carter Administration.

The fiscal oversight in tackling the 1979 stagflation documented on how President Carter and his financial advisers choose to reign in on the inflation part of stagflation because of their trust on “off the shelf” methods (or was it their trust of prevailing “off the shelf wisdom”) of tackling inflation are already tried and true. But at the expense of economic stagnation that prevailed well into the 1980’s. Let’s just hope that the Bush Administration’s “Economic Stimulus Package” has provisos for preventing the repeat of the 1979 stagflation because of the damage it could inflict on the already ailing global economy. A lot is now riding on the current US Federal Reserve Chairman Ben Bernanke’s decisions because it’s not just the American Economy that is on the line. The export - oriented economies of the Asian Far East will surely be affected.