The 2022-23 Economic Crisis Megathread

[Admiral Yi]

Joan, is government expenditure left out of these value added calculations?

Value added is not something I've seen a lot in the denominator.

[The Minsky Moment]

Joan, is government expenditure left out of these value added calculations?

Yes it's let out.  The table is from the BEA data set
Table 1.15. Price, Costs, and Profit Per Unit of Real Gross Value Added of Nonfinancial Domestic Corporate Business

[Tamas]

Brits are returning to spending same way Americans are. I guess the question is whether this will remain moderated enough to keep inflation slowing down. My guess that it won't.

Retail sales across Great Britain were stronger than expected in January, as consumers kept spending despite the cost of living crisis.

But, people kept cutting back on buying food, due to the surge in costs.

The Office for National Statistics has reported this morning that retail sales volumes rose by 0.5% in January 2023, as shopping picked up after a 1.2% drop the previous month.

But on an annual basis, retail sales volumes were down by 5.7% in the three months to January 2023, as the cost of living crisis meant people could afford to buy less.

conomists had expected a 0.3% drop in retail sales volumes in January, as shoppers were hit by higher prices and surging bills, as well as concerns over the economy.

The ONS, though, reports that sales volumes at non-store retailers such as online shops jumped by 2% in January 2023, with "some feedback that January sales promotions supported the rise".

Sales of petrol and diesel also rose in January, by 1.7%, as the recent drop on the forecourts encouraged motorists to drive more.

[Valmy]

Economics makes no sense intuitively. One would think people going out there and spending money would be good for the economy but no, inflation threatens all.

[Tamas]

Economics makes no sense intuitively. One would think people going out there and spending money would be good for the economy but no, inflation threatens all.

Well when the jinni is out of the bottle it makes sense to me that it can become a self-reinforcing cycle of ever higher inflation, that needs demand destruction to reverse.

[Valmy]

Economics makes no sense intuitively. One would think people going out there and spending money would be good for the economy but no, inflation threatens all.

Well when the jinni is out of the bottle it makes sense to me that it can become a self-reinforcing cycle of ever higher inflation, that needs demand destruction to reverse.

Exactly. The economy needs people to not want goods and services. What the hell? Very strange.

[Gups]

Economics makes no sense intuitively. One would think people going out there and spending money would be good for the economy but no, inflation threatens all.

Well when the jinni is out of the bottle it makes sense to me that it can become a self-reinforcing cycle of ever higher inflation, that needs demand destruction to reverse.

Or more supply.

[grumbler]

Economics makes no sense intuitively. One would think people going out there and spending money would be good for the economy but no, inflation threatens all.

Well when the jinni is out of the bottle it makes sense to me that it can become a self-reinforcing cycle of ever higher inflation, that needs demand destruction to reverse.

Or more supply.

Dunno why people seem to always forget this.

[The Minsky Moment]

In the last year container shipping rates fell from about $9500 to $1900.  In part because changing demand composition; in part because more ship deliveries have been coming on line.  That's an extreme example from a volatile market but it illustrates a general point about variability and response lags in supply and demand conditions.

Since early 2020 there have been two enormously impactful and unanticipated events that played havoc with supply and demand across all economic sectors - COVID and the post COVID "re-opening".  These events occurred in the context of what had become a highly integrated economy where "just-in-time" manufacturing and logistics left little margin for error.  In macro-speak, these are events that knock economies off an equilibrium path.

We are still coping with the aftershocks of these events.  It is going to take some more time for the world economy to reach a new equilibrium and with government policies also evolving, the new path is likely going to look somewhat different from the old path.

In thinking about this evolution, it is important to keep in mind that the low inflation environment of the early 21st century was not historically typical.  Moderate inflation was the norm throughout the postwar 20th century.  Long periods of low inflation and interest rates have been historically associated with periods of continuously increasing trade liberalization and global integration.  As policy moves in a different direction, we probably should not expect a return to early 21st century norms.

[DGuller]

I wonder if there is an argument for a policy that deliberately makes things less brittle, even at the expense of some economic efficiency.  Free market forces seem ill-equipped to properly manage extreme tail risks or contagion risks.  If all your competitors get their stuff made in China, it would be hard to stay in business if you don't follow suit, but then the entire sector's fortunes hang on the trade routes functioning as intended.

[Sheilbh]

I agree with all of that.

And what I'd add is that in my view we are entering a period that is structurally likely to have risks of that type. We know about the pandemic - there will be another. We are back to great power competition globally and obviously in Europe and Asia there are expansionist powers making moves. Also I think the situation with the climate is that we have already baked in more regular and more severe climate events that will impact supply chains - we see it with fruit and veg right now, we saw it with floods in Shanxi's wider impact on the Chinese and global economy. In addition to that the way we're hoping to get out of that through energy transition which I think in itself is going to be bumpy and susceptible to shocks.

The other factor of periods of low inflation and interest rates, trade liberalisation, global integration etc is that they tend to have a relatively stable global order. I think that's going if not gone - and climate change is the massive other external factor that I think needs to be at the heart of talking about what the economy looks like/is going to look like.

So I agree we need to make things less brittle even if they are more inefficient. I think my other query would be whether the old ways of dealing with inflation as a wage-price issue work when inflation is a function of supply chain shocks? Or whether that in itself is wrong and (possibly) could contribute more to the other risks?

[Tamas]

Well, one problem a few people have been mentioning is that with all the QE etc since 2008, economic growth have been.. kind of meagre? I think the UK has managed what 1% or so? If that's true, how are things will look if we end the era of free money?

[Josquius]

It is interesting all this reporting on veg shortages (definitely seeing it in local shops) talks about bad weather in southern Europe...Zero mention of the B word though I'm told the continent isn't facing such issues and its not like this is the first time we've had bad weather in Spain

[Sheilbh]

It is interesting all this reporting on veg shortages (definitely seeing it in local shops) talks about bad weather in southern Europe...Zero mention of the B word though I'm told the continent isn't facing such issues and its not like this is the first time we've had bad weather in Spain

We should move it to the other thread - but the reason is because it's not to do with Brexit.

[Tamas]

It is interesting all this reporting on veg shortages (definitely seeing it in local shops) talks about bad weather in southern Europe...Zero mention of the B word though I'm told the continent isn't facing such issues and its not like this is the first time we've had bad weather in Spain

We should move it to the other thread - but the reason is because it's not to do with Brexit.

  Nothing ever does. Most inconsequential decision in history.