- Demand drop of 1% of GDP began over a year ago when home buying by subprime borrowers ceased..
- And exports picked up the slack.
And with housing as low as it is, further reductions, if any, will have minimal macro effects.
- Losses not that large so far, only about $100 billion in write offs have been announced and with at least some prospects of recovery.
Far less than the 1998 (inflation adjusted) losses, for example, when $100 billion was lost in just the first day when Russia defaulted August 17 with no prospects of recovery.
- Financial sector looses are not direct reductions of aggregate demand, just the ‘rearranging of financial assets.’
- Falling demand due to supply side credit issues and capital constraints are primarily fixed exchange rate phenomena and are rare and brief with floating exchange rate policy and a non convertible currency.
Even in Japan with a floating exchange rate, when most bank capital was lost, credit expansion was a function of demand, while with fixed exchange rates, supply side issues dominated – Argentina, Russia, Mexico, the US in the 30s (gold standard), and the panic of 1907 Governor Mishkin referenced in his speech.
- Government spending has been ‘moved forward’ from 2007 to 2008. Friday reported up over 8% year over year (NOTE: graph not updated for this last data point.)
- Alt minimum tax capped helps demand some in 2008.
- Personal income and spending not falling.
- No econometric evidence of a significant ‘wealth effect’ from asset prices on the way up or on the way down. Income is better correlated.
- Government employees and pensioners got GPI pay increases. This ‘half’ of the demand side keeps growing at 5% + nominal rates so to go into recession, the other half has to go down more than that.
- Government tax receipts still rising.
- Jobless claims remain too low for a recession.
- Labor force participation rate climbing even as demographics suggest natural drift lower.
- World and domestic demand is strong enough to support elevating prices of food, energy, and rising US imports and export prices.