The Economic Unwind: Speed Kills

While today's jobs number shouldn't come as a huge surprise -- we have been outside consensus repeatedly, and I have been writing here that double-digital unemployment is in our near future -- the speed with which it is happening should give people pause. Granted, a 535,000 person reduction in payroll today is different than a similar number twenty years ago, a point too many commentators gloss, but there is no question this unwinding is happening faster and more savagely than any in memory.

Note: I'm not saying faster than any since WWII, or since the Depression, or whatever. I'm saying that this unwinding of the U.S. [sic.] and global economy is happening faster than any since glaciers covered the NYSE.

Think about how long it took in the Depression to get from the market crash to marked global economic shrinkage –- four years –- and how long it is taking today -- three months. The speed with which carnage slices through this tightly-linked economic system of ours, both globally and locally, is remarkable and unprecedented.

Optimists will say that this means we can get through this faster than any previous downturn, especially any of this consequence. After all, if you compress three years of economic damage into three months, that does cut out a lot of time for screwing around. Mr. Market is saying, You're forecasting double-digit unemployment and a 5% GDP contraction? Why wait twelve months -- let's do it this quarter.

On the other hand (and this is closer to my view), the optimists are akin to saying that one high-speed highway collision is better than a bunch of low-speed ones. Hey, you got it over with quickly! The trouble is, of course, a few low-speed dings are not only survivable, but may turn out to be merely cosmetic –- while one high-speed crash tends to destroy the vehicle and its occupants.

Comments

[Jason Rines...:]

Those are some decent points Mr.Kedrosky and if we were having coffee it would be quite a discussion of time compression in our economy vs. 1930's. Your last point is salient in pointing toward a long recovery time then late 2009 as the pundits predicted (although now are pushing back to 2010):

"while one high-speed crash tends to destroy the vehicle and its occupants."

My forecast is sustainable recovery and bull market in 2013. A four year recovery period and we had best hope no major terror attacks or major international military misadventure. Four years also coincidentally is how long it takes for the cititenship to have a voter revolution. Perhaps the speed of technology and spread of information online might shorten this horizen to the corrupt in Washington beginning to be thrown out in the 2010 elections.

2008 Dec 05 02:00 PM

[User 313740:]

The speed with which information spreads through the system is exponentially faster than it was even ten years ago. With that, it makes sense that the faster information spreads, the faster prices should react. Additionally, conditions deteriorate much faster than conditions improve. Couple those two ideas and it is certainly plausible that we are repricing in three months what we once repriced in three years and that when conditions do improve and the economy gets moving again it will be a grind up because improvement is a gradual process.

2008 Dec 05 02:18 PM

[L Moore:]

The auto bailout should consist of an order for 30 million cars from detroit, 10 mil from each manufacturer. Then the gov could have a lottery for taxpayers to get their free car (tax free too). The gov could make them all hybrids and off we go into the next green energy wave. But, I really want a free car for my taxes.

2008 Dec 05 03:44 PM

[Robert Nabloid:]

While I see your point and think it would be better than just handing our money to the banks (and it would also serve to help decrease dependence on foreign oil too), perhaps we shouldn't agree to any bailouts for anyone. What happened to this great independent "we can do it" country? Now the new slogan is, "government, save us, please!"? What happened?


On Dec 05 03:44 PM L Moore wrote:

> The auto bailout should consist of an order for 30 million cars from
> detroit, 10 mil from each manufacturer. Then the gov could have a
> lottery for taxpayers to get their free car (tax free too). The gov
> could make them all hybrids and off we go into the next green energy
> wave. But, I really want a free car for my taxes.

2008 Dec 05 05:02 PM

[Bruce Pile:]

What's going on is mainly the debt cycle, not expansion/recession. In all the post war recessions, you had conventional economic cycles at work . Now you have a massive global debt unwind finally taking hold after many decades of build. Debt unwinds, even of relatively small magnitude like the stock market margin debt unwind of the '00-'03 bear, tend to overtake every other normal factor in stock or commodity pricing. This time around, we have an even more massive market margin unwind than the previous one with the big difference being that this time every other area of Debt World is imploding as well. And it's all been chained together into an incredibly unstable and complex, beyond balance sheet comprehension, house of cards. The relatively miniscule debt/recession problem we had back in '02 driving down stocks so visciously was with the rest of the Debt World infrastructure still in expansion mode - the housing boom was just getting started for Pete's sake. Yet you hear as the conventional wisdom that we've had such and such % move, valuation change, technical condition, or whatever that's similar to the other bear markets, so we must be going to do thus and so like they did! Well excuse me, but this is slightly different!

2008 Dec 05 05:38 PM

[L Moore:]

Nabloid: My comment is ironic. I'm not realy in favor of bailouts.

But the folks in DC do have to act as if they are doing something and so they will give away money that is printed with ease. America does need a public works program; but we can also kick start maunfactoring with a large order of autos. And we tell Detroit what to make. Let GSA figure out how to deliver them to taxpayers. Deflation today; hyperinflation circa 2010.

2008 Dec 05 06:00 PM

[JasonC:]

Idiotic article. 25% unemployment and a 41% fall in disposable income is not 6.7% unemployment and a mere 4% rise in disposable income, when you were used to 5 and 7 respectively.

You never had it so good. Financial markets, that isn't true, certainly, but much of it was funny money let's pretend to begin with. Real economy, incomes in other words, there is not much damage out there. Asset values can fly all over creation without real incomes moving much at all. Hint, that means asset values present trading opportunities but shouldn't be taken too seriously.

2008 Dec 05 07:46 PM

[Smarty_Pants:]

"Real economy, incomes in other words, there is not much damage out there" - JasonC

Spoken by someone who probably never relied on his own business to pay the bills.

When sales drop by anything much more than 10% in a small business you can pretty much be assured that the owner has lost at least half his 'usual' income. And for many business owners today having only a 10% drop in sales would be a big improvement.

That's a lot closer to "damage" than it is to "pretend". Just because you don't take it seriously doesn't mean it isn't serious to a lot of others out there who are wondering not just whether they will have any income this month, but if they will even be able to keep the doors open for business.

2008 Dec 05 09:07 PM

[Robert Nabloid:]

The funny part is I thought it might be ironic - and yet it makes more sense than some of the other bailouts they propose. Bailouts are nasty to begin with.

I agree, politicians have to look busy and "do something". I also agree deflation today, inflation tomorrow.


On Dec 05 06:00 PM L Moore wrote:

> Nabloid: My comment is ironic. I'm not realy in favor of bailouts.

>
>
> But the folks in DC do have to act as if they are doing something
> and so they will give away money that is printed with ease. America
> does need a public works program; but we can also kick start maunfactoring
> with a large order of autos. And we tell Detroit what to make. Let
> GSA figure out how to deliver them to taxpayers. Deflation today;
> hyperinflation circa 2010.

2008 Dec 06 12:29 AM

[icandoitdon:]

On Dec 05 07:46 PM JasonC wrote:


> You never had it so good. Financial markets, that isn't true, certainly,
> but much of it was funny money let's pretend to begin with. Real
> economy, incomes in other words, there is not much damage out there.
> Asset values can fly all over creation without real incomes moving
> much at all. Hint, that means asset values present trading opportunities
> but shouldn't be taken too seriously.

2008 Dec 06 10:34 AM

[icandoitdon:]

oops...

jason comes from the larry kudlow school of economics. he looks for "mustard seeds" everywhere. unemployment at 10% and rising? don't sweat it folks...that can only mean better days are coming. gotta love those deaf, dumb and happy optimists, even when their portfolios are down 40%.




On Dec 05 07:46 PM JasonC wrote:


> You never had it so good. Financial markets, that isn't true, certainly,
> but much of it was funny money let's pretend to begin with. Real
> economy, incomes in other words, there is not much damage out there.
> Asset values can fly all over creation without real incomes moving
> much at all. Hint, that means asset values present trading opportunities
> but shouldn't be taken too seriously.

2008 Dec 06 10:39 AM

[Elaine Supkis:]

The Great Unwinding of the ZIRP [Zero Interest Rate Program] Japanese Carry Trade continues!

The first time in history, a major, the #2 economic power on earth decided to create a 0% interest banking system. They clung to this despite inflation in Japan rising to nearly 3%. This is the ultimate source of much of the GLOBAL lending we saw this last decade.

The US used this fake, cheap lending to overspend. We allowed our government to go far over budget, doubling our national debt. We also personally and corporately went deep into debt because the payments of interest were ridiculously low.

Now, the entire manufacturing parts of the planet are going ZIRP. This is total insanity. People talk about how we are 'saving money' now. But this is obviously FALSE.

We are PAYING OFF DEBTS. Not saving any money. Most discretionary incomes as well as manufacturing profits and asset value rises are gone. There are none of these happening. We see dropping incomes, dropping profits and dropping assets all over the place.

And the only debts that are now rising are GOVERNMENT. So the great unwinding has barely begun. All negative forces are now at work and will continue. Within my own family, people with good, high paying, productive jobs are now being laid off due to frantic businesses ditching everything overboard, hoping to stay afloat and pay off crushing debts that are not supported by profits anymore.

And as everyone ditches their workers, incomes fall, the ability to even pay mortgages and credit debts collapse and everything gets only worse and worse causing businesses to drop more workers. This is the vicious debt-reduction/depress... cycle we saw in 1873, 1892, 1930, 1972 and today.

Regards,
Elaine Supkis emsnews.wordpress.com

2008 Dec 06 09:02 PM

[skopros:]

great comment elaine!

Americans are so addicted to spending, only an economic tragedy such as these DC and Wall Street fraudmeisters have visited upon the gutted taxpayers. As many keep saying, this isn't the beginning of the end but the beginning of the beginning.

L Moore: great idea! Thanks to both.

2008 Dec 06 10:25 PM

[John Lounsbury:]

Elaine - - -

Not to be a nit-picker, but here is a nit: you left out 1907.

John Lounsbury

2008 Dec 07 12:14 AM

[Elaine Supkis:]

1907 was an interesting bank panic. It may have paved the way for WWI. Thanks for reminding me, John.

And of course, it caused the creation of the Federal Reserve. Which was supposed to stop bank crashes. What a great track record that organization has! Every 20 years, off the economic cliff! And the complete devaluation of our currency, the end of our gold based reserves, everything.

Great job of is, eh?

2008 Dec 07 08:31 AM

[User317156:]

Watchout if you go to this persons blog (Supkis). She censors the comments.

2008 Dec 10 09:34 PM