Respone to JGUS's "Could the 'Great Discounting Machine' be wrong again??? I think so!!!"
In response to your blog post:
Your blog post has lot of interesting facts, and its a great blog post. I however disagree on some of your conclusions. I am not suggesting your are wrong, but I do disagree.
First of all I agree that stock market is not a great predictor of what’s next to come. I feel even if there was an economic recovery imminent in 2009 or early 2010, stocks have overreacted on the upside in very short time.
Back to your post and why I disagree.
GDP = You mentioned consumer is 70% of our GDP. You are right, and you have mostly repeated what we all hear in the media. But that’s only half truth.
GDP = consumer spending + net exports + govt. spending
Think about it for a second. Sure 70% comes from consumer spending. But remember, we usually run a trade deficit in the United States. You have captured the negative impact of reduced consumer spending on our GDP, but have not added back the reduced deficit the US economy will experience due to the recession. We will import lesser electronics, drive less so import lesser new Japense/Korean/German cars, consume less oil, eat less, waste less, import fewer clothes and shoes, furniture, etc. Yes, $60B of income loss is a lot and will translate into $720B deduction in our over $14T national GDP, but what about the reduced imports, which will actually boost our GDP. Did you consider that? Also, don't forget govt. spending. Sure you are right, consumer saving and boosting their personal balance sheet is a bad thing, doesn't that mean they will have more left over towards investment. Sorry, I purposely left the Gross Investment portion out from GDP calculation. In reality,
GDP = consumer spending + net exports + govt. spending + Gross Investment
So, individual savings translate into investments or funds available to finance corporate bonds or municipal bonds or IPOs. Even if it means more money in the bank, what do you think banks do? They loan it out which ultimately translates into Gross Investments.
Bottom line: Banks freezing credit lines will shore up bank balance sheets. You have already seen JPMorgan's results this morning. WFC previously announced they anticipate great earnings. GS is eager to payoff their TARP money. Citi isn't doing all that bad either. What do you think they will do once their balance sheets make them feel healthy and fresh again? They will help boost the economy.
Similarly, consumers once feel they are saving enough, will spend the surplus. But as I explained, spending is not always good, as that is got a negative impact on our GDP in terms of imports. Ideally, you want our country to produce more, and export more. Like the way Chinese do. Even India for that matter. You think India's GDP consists of 70% consumer spending? Theirs is exports. Consuming more and producing less will boost the GDP is a fallacy.
Similarly, weakening currency to boost exports is also fallacy. Weak currency just makes imports more expensive. What good is that? If you have to import goods that have inelastic demand, you will have to import them no matter how weak your currency.