The Hopefully Not So Great Next Depression 34 comments
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The knives are falling all around us and all of the economic indicators -- home prices, employment, industrial production, corporate earnings, etc. -- are in a freefall. These are truly exceptional times, with many indicators at their worst levels ever, frustrating the comparison of this downturn with other recessions. And at the same time, the Fed and other central banks have abandoned long-held principles of their lender-of-last-resort function and have blown up their balance sheets many times. We are truly in uncharted waters.
Although it sounds melodramatic to say so, we are in the midst of the dreaded “downward spiral”. A downward spiral is really a technical concept referring to falling economic growth that is itself caused by declines in the economy that occurred earlier. In this case, the drop in home prices that began in 2007and the fall in stock prices that occurred mostly in 2008 caused a significant reduction in the wealth of most U. S. households. This reduction in wealth led to a decline in consumption (the “wealth effect) and declining consumption has led to declining production and layoffs. The layoffs, in turn, will trigger further contraction and keep the downward spiral going for at least another round.
No one really knows how long this will last and I certainly don’t so I won’t waste everyone’s time putting any projections out there. Rather I make some observations and indicate some things to look for so that you can draw your own conclusions.
Happily, these things don’t last forever. But they can last a long time. A key to watch for in this case is whether the efforts that governments all over the world are making to spend themselves (ourselves!) out of the recession will trigger a sharp increase in inflation and, consequently, in interest rates. Except for a deep-pocketed very few, most governments are paying for increased spending by issuing bonds.
Since we are in a deflationary period (which incidentally, almost never happens and is itself an indication of how bad things are) interest rates on government debt are at an all-time low. The Fed Funds target includes the number zero! And the policy rate in the U.K. is at the lowest level since Arthur was king. These low rates make it tempting to try to spend ourselves out of the problem since the cost to the governments of all this spending is, now at least, low.
However, this cannot go on forever. Bonds trade in markets that are subject to the laws of supply and demand. If the supply of bonds grows too much, the governments will have to lower the prices of these bonds in order to sell them. This is just another way of saying that they will have to pay a higher rate of interest on them. The higher rates go the more it costs the government, and ultimately the taxpayer, to finance this attempt to get economic growth back on track.
If interest rates become too high -- specifically, if the interest rate on government debt is significantly higher than the rate of inflation, then we enter another spiral with the government having to issue more bonds or raise taxes to pay the interest and principal on maturing bonds. The governments are by then chasing their tails rather than stimulating the economy and we will no longer be saying that we are all Keynesians now. If that happens, we are in for a long and ugly super-recession.
While this is a danger, and such things have happened many times before, particularly in Latin American countries during the 1980s, such a bad outcome is not inevitable. An alternative end game could come about, for example, if we were to find that the banks were not going to collapse after all, and that a withdrawal from Iraq enabled the U.S. to reduce military spending or through some other equally felicitous combination of events that meant that things were not as bad as we thought they were. This could lead to a recovery in the stock market and a realization that the cost of the bailouts plus spendouts was not going to be as high as some of the worse estimates. In such a scenario, it is possible to see a bottoming out of the housing market and a lower rate of bond issuance that could keep interest rates stable while economic growth slowly recovers.
Key in this optimistic scenario is inflationary expectations, for it is expectations more than anything else that determine asset prices, the rate of inflation and interest rates. If the public loses faith in their governments to lead them out of the recession, then real interest rates could increase significantly and all bets are off.
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There is one ominous possibility however, which is that the punters who have previously in history bought in eagerly on the first signs of the "green shoots of recovery" just maybe are getting wiser this time. The next financial "Gotcha" will be that the other side of the market i.e. those betting against the equity bulls, will have plenty of scope to short Treasuries and buy commodities, like there was no tomorrow, which could scare the pants off the central bankers and agencies responsible for selling gargantuan amounts of government debt.
On Feb 01 09:24 AM Ferdinand E. Banks wrote:
> Interesting and informative, except for the use of the word "depression".
>
> There isn't going to be any depression. I tell people that I am the
> leading academic energy economist in the world, which I probably
> am, but I once taught a lot of macro too. I quit teaching it though
> because I thought that most of it was useless - useless and pretentious
> - but even so I think that I learned enough to know that if the high
> and mighty keep their wits about them, they can get us out of this
> thing.
>
> Keeping their wits about them begins with getting out of Irak and
> Afghanistan. Wasn't it enough to win both of those wars? What's the
> point in continuing to fight a war that was won. Where's the payoff?
>
>
> Of course I recognize that for many people in this forum, a failure
> by Obama is wish fulfillment. After all, if he and his team turn
> the economy around in a couple of years, the democrats might be looking
> at 16 years in the White House. Anybody want to tell me the odds
> on a turnaround?
Unfortunately, there is no easy answer to this problem. Consumers must spend within their means, corporations and small businesses alike must lower their earnings expectations and the Wall Street chicanery of the last 12 or so years must be brought under control by smart regulations and a swift and decisive legal action taken against those that so artfully played with investor's money to their own benefit.
Trust is the bedrock of our financial system but it has been ruined. The heads of financial institutions must be held accountable for their actions that led to these problems. When the heads of giant organizations like Lehmans claim they didn't understand the true nature of the CDOs and other financial instruments they were pawning off on investors then somebody's lying. This isn't about being incompetent, this is about shading the truth from the government and investors in order to be paid tens of millions of dollars a year. In any language, it is theft.
America must reassess how it will spend the money it has and how it will invest in the immediate future. Bailouts were just fine when Bush was president but now Republicans are suddenly against additional bailout money. It appears to be politics as usual in D.C. when we can least afford it. Bailouts are not the answer but rather part of a much larger solution that must be put into action immediately.
1) Cut middle class taxes buy a significant amount. A $1,200 tax break to someone earning $50,000 a year is not going to change their lot in life. Cut them by $5,000 or help companies pay their people more money by lowering their tax burden IF they raise the pay of their rank and file. By floating the boats of the middle class, the economy will right itself far more quickly.
2) Continue to lower the dependence of oil as the major stream of energy for the nation. Give dramatic tax breaks to companies developing cost effective alternative energy sources, especially for those that involve transportation of people or goods.
3) Draw down our military's presence around the world and save on those significant costs. We should not withdraw from the world stage but rather not spend when we don't NEED to spend. There are no imminent threats facing our nation right now. A terrorist attack will not topple our nation and we should not be throwing our military might at a buzzing fly. Appropriate responses to issues will save us money and help restore America's image across the world.
4) Pay down our national debt while investing in infrastructure. This can be done at the same time. They are not mutually exclusive.
5) Restore confidence in the financial system by instituting regulations that make honesty and transparency non-negotiable requirements.
All your name calling is totally uncalled for and brings into question where you are coming from. Possibly you are the Parrot.
On Jan 31 09:41 PM sether wrote:
> PrudentMan, obviously no one is saying we don't need a Military.
> Don't be an idiot. Maybe we don't need the war in Iraq though. Maybe
> we don't need to spend more than all the other nations on earth COMBINED
> on our military (all deficit spending, BTW).
> You are one of those people who has a 'support our troops' sticker
> on your car (or SUV). What you really mean is "SUPPORT OUR WAR" and
> don't think about it! I support our troops, like everyone else, and
> I would like no more of them to be killed in a bogus 'war' over obsolete
> resources. What are we doing there, at this point? Besides refereeing
> a 1000 year old grudge match which we re-started there, and politically
> handing the country to Iran? Do you know the difference between a
> Sunni and Shiite? OK, neither do I, but I do know the importance
> of the difference, and that it shapes the politics of the entire
> region. I don't think your buddy Bush realized that. Yes Saddam was
> a nut-case, but he stabilized the region. He also wasn't religious.
> And if you beleive that a paranoid, megalomaniacal, secular dictator
> would let a destabilizing, religion-based radical organization like
> Al-Qaeda into Iraq for even a minute, I have a bridge to sell you.
>
> Sorry for the rant, it's just that nothing we have been told for
> the last 8 years holds up to even the barest scrutiny, and douchebags
> like this are still parroting the propaganda.
> And white wine and brie. What a dumb C0CK. WTF. OK I'm done.
>
> On Jan 31 07:16 PM PrudentMan, CFA wrote:
On Feb 01 09:24 AM Ferdinand E. Banks wrote:
> Interesting and informative, except for the use of the word "depression".
>
> There isn't going to be any depression. I tell people that I am the
> leading academic energy economist in the world, which I probably
> am, but I once taught a lot of macro too. I quit teaching it though
> because I thought that most of it was useless - useless and pretentious
> - but even so I think that I learned enough to know that if the high
> and mighty keep their wits about them, they can get us out of this
> thing.
>
> Keeping their wits about them begins with getting out of Irak and
> Afghanistan. Wasn't it enough to win both of those wars? What's the
> point in continuing to fight a war that was won. Where's the payoff?
>
>
> Of course I recognize that for many people in this forum, a failure
> by Obama is wish fulfillment. After all, if he and his team turn
> the economy around in a couple of years, the democrats might be looking
> at 16 years in the White House. Anybody want to tell me the odds
> on a turnaround?
Given the factors involved and the lack of good information (total information is impossible) the outcome of the present world crisis cannot be determined precisely. A conceptual understanding helps in making decisions but it cannot of itself ensure the best outcome.
A few hundred years ago people worked to live (mainly on the land). The industrial revolution allowed us to produce more than we consumed and we were therefore able to build up valuable assets (some of which allowed us to be even more efficient). Also some of these assets could be used to support ‘non-productive’ activities (retirement, unemployment, military, etc.). However very recently we have consumed more than we have created (by using value in homes for consumer expenditure, by increasing numbers of people making money out of dealing in money, by direct borrowing on credit i.e. not directly productive or even totally unproductive, etc.). This means that in one way or the other we have destroyed assets.
The destruction of assets to support the consumer economies has led to serious debt problems that we have now to pay for. Paying off this debt or at least a very high proportion of it is a prerequisite for getting out of this recession/depression.
Government actions seem to be designed to minimize the immediate impact of this large debt (politically at least this may be unavoidable or even the best way out now) by pumping very large amounts of liquidity into the system. This will mean that the end of this crisis will take much longer than in most previous recessions (as evidenced by Japan) because they are increasing the total debt
Unemployment is still increasing. It is a lag indicator and therefore when it is no longer increasing we can say that there are signs that the recession is coming to an end. However before it can truly come to an end confidence has to return. It is likely that this will not return quickly.
Relevant actions can be judged by whether they act for or against this process. If Governments have the capability (and money) to resolve this crisis then their actions may be too little or too late. If they get their timing wrong then stagnation or hyperinflation may be the result. The judgments on the efficacy of the relevant actions are ours and everyone will have their own opinion.
Modesto? Is that Modesto California. Hmm, I was fired from Hughes in LA, and not too long after, was 'boarded out' of Infantry Leadership school at Fort Ord, although I was first in the class. Incidentally, before that I was expelled from engineering school in Chicago for poor scholarship. For those achievements the leading academic energy economist rates himself as +100. -1.
Anyway, thanks for the criticism. I've got a paper on the oil futures market almost finished. Any tips about where I can get it published, since the peer reviewed journals don't seem impressed with my work. And before I forget, I'm easily one of the best economics teachers in the world. How many minus point do I get awarded for that? Sorry, that was a rhetorical question. I award myself -1000.
I am reading that Chinese stocks are going up and so is GLD. Maybe I'll invest (?).
Aren't you happy? Maybe the Chinese stimulus will work? Ours? Already we've got Gridlock from the Rethugian leadership and melquetoast from the Democans. So we'd better hope the Chinese get their house in order so we can borrow more from them.
Otherwise you should stock up on stored foods in the bsmt and have a good garden going this Spring. Practice a trade like computer repair, plumbing or farming for practical survival bartering. Can you sew?
While many of us are conservative we dreadfully don't won't to see Mr. Obama fail. If the ebullient psychosis that he has cast upon the American voting public fails, then we are all screwed. I need him to succeed, and if that means 16 more years of Dems, than so be it. I'll take mind control, standard of living, and monetary wealth over free thinking and poverty. If I had my way we'd have Ron Paul in, but that's not going to happen in my lifetime.
Oh, by the way, I place the odds at 25 for / 75 against.
On Feb 01 09:24 AM Ferdinand E. Banks wrote
>
>
> Of course I recognize that for many people in this forum, a failure
> by Obama is wish fulfillment. After all, if he and his team turn
> the economy around in a couple of years, the democrats might be lookin at 16 years in the White House. Anybody want to tell me the odds
> on a turnaround?
iraq is winding down and so will the spending. it will not cure the economy problem. energy independence will contribute many times more to solve that problem than saving on defense spending.
to win the war against perceived enemies, russia, venezuela, bolivia, iran, the mideast et al, the usa should strive to never ever import any gas or oil. just see what happened as oil went from $140 to $40. the armed fist wasn't necessary. the usa dollar is turning out to be a better place than the swiss franc.
money diverted to energy independence will pay off. if things are bad now, just factor in gasoline at 4 or 5 dollars a gallon.
lastly, afghanistan is almost like a continuation of iraq except that the afghans have been extremely brutal to women and minorities. abandoned dogs live better. should we just forget them?
On Feb 01 12:58 PM Ferdinand E. Banks wrote:
> Auto44 and Sean in Modesto, you are right on the mark. My ratings
> are terrible and everybody is on to me. I wonder why? Can it be my
> constant use of the expression 'the leading academic energy economist
> in the world'. I tell you what, from now on I'll rate myself. For
> instance, where this comment is concerned, what about +1, -100.
>
>
> Modesto? Is that Modesto California. Hmm, I was fired from Hughes
> in LA, and not too long after, was 'boarded out' of Infantry Leadership
> school at Fort Ord, although I was first in the class. Incidentally,
> before that I was expelled from engineering school in Chicago for
> poor scholarship. For those achievements the leading academic energy
> economist rates himself as +100. -1.
>
> Anyway, thanks for the criticism. I've got a paper on the oil futures
> market almost finished. Any tips about where I can get it published,
> since the peer reviewed journals don't seem impressed with my work.
> And before I forget, I'm easily one of the best economics teachers
> in the world. How many minus point do I get awarded for that? Sorry,
> that was a rhetorical question. I award myself -1000.
As far as the upcoming stimulus, I'm afraid it will be heavily laced with pork. Something else that I find curious and somewhat upsetting, is the fact that Obama has come out in favor of Ca. and some 12 other states to impose their own EPA regs, which would be substantially more stringent than current and proposed Federal ones. On the one hand, he says the domestic auto industry must be "saved", in the name of jobs, but one the other, he's making life MUCH more difficult for the "little 3", as well as the transplants currently here.
old trader
I have no idea where you have been hiding but, you are the only one, that is making any amount sense of any thing I have read.
However, why do we all talk strange in print but fail to follow up on idea's
as you suggest. Every person in government should be provided with access to these great thoughts. Perhaps when enough is provided some will of the stuff will be caught.
But your to the point also, there are to many unworthy people , among us, that show their disohonety, ei, the former elected officials who failed to pay taxes, this is only a sample of what this problem actually means to the citizens. On second thought maybe we really shouldn't know.
Anyway Midwest, you have my vote. You make sense!.
On Feb 01 11:03 AM Midwest wrote:
> There is no quick fix to the problems we're facing. It's going to
> be tough and long before things get better and continuing to ignore
> that fact is foolish and will only lead to greater despair as predictions
> of recovery are dashed.
>
> Unfortunately, there is no easy answer to this problem. Consumers
> must spend within their means, corporations and small businesses
> alike must lower their earnings expectations and the Wall Street
> chicanery of the last 12 or so years must be brought under control
> by smart regulations and a swift and decisive legal action taken
> against those that so artfully played with investor's money to their
> own benefit.
>
> Trust is the bedrock of our financial system but it has been ruined.
> The heads of financial institutions must be held accountable for
> their actions that led to these problems. When the heads of giant
> organizations like Lehmans claim they didn't understand the true
> nature of the CDOs and other financial instruments they were pawning
> off on investors then somebody's lying. This isn't about being incompetent,
> this is about shading the truth from the government and investors
> in order to be paid tens of millions of dollars a year. In any language,
> it is theft.
>
> America must reassess how it will spend the money it has and how
> it will invest in the immediate future. Bailouts were just fine when
> Bush was president but now Republicans are suddenly against additional
> bailout money. It appears to be politics as usual in D.C. when we
> can least afford it. Bailouts are not the answer but rather part
> of a much larger solution that must be put into action immediately.
>
>
> 1) Cut middle class taxes buy a significant amount. A $1,200 tax
> break to someone earning $50,000 a year is not going to change their
> lot in life. Cut them by $5,000 or help companies pay their people
> more money by lowering their tax burden IF they raise the pay of
> their rank and file. By floating the boats of the middle class, the
> economy will right itself far more quickly.
>
> 2) Continue to lower the dependence of oil as the major stream of
> energy for the nation. Give dramatic tax breaks to companies developing
> cost effective alternative energy sources, especially for those that
> involve transportation of people or goods.
>
> 3) Draw down our military's presence around the world and save on
> those significant costs. We should not withdraw from the world stage
> but rather not spend when we don't NEED to spend. There are no imminent
> threats facing our nation right now. A terrorist attack will not
> topple our nation and we should not be throwing our military might
> at a buzzing fly. Appropriate responses to issues will save us money
> and help restore America's image across the world.
>
> 4) Pay down our national debt while investing in infrastructure.
> This can be done at the same time. They are not mutually exclusive.
>
>
> 5) Restore confidence in the financial system by instituting regulations
> that make honesty and transparency non-negotiable requirements.
White Wine and Brie? Great! But before you speak about the real world try going out and spending at least a half-decade working hard enough to develop real body strength and a lot of calluses with the clear understanding that if you do wrong in any way you will starve for lack of a paycheck and probably end in a jail for just being in a hopeless situation. We need to amend the Constitution to require that anyone elected to office have at least this much history of having had to work really hard in a miserable job.
How long and how deep will this Depression be? Refer to a chart called "Credit Suisse Mortgage Resets" originally published in the fall of 2007. Phase One of this mess started in perhaps August 2007 and ran to about Christmas 2008. The calendar year 2009 is a big Phase Two Bear Trap. There will be a nasty hole on the path in the middle spring, another worse one in the middle fall, but the trend of the year looks manageable just like any other Bear Trap. Phase Three, "Alt-A" and "Agency Resets" will kick in right after New Year 2010. That will look like the worst that happened in 2008, except that it will continue with a slight increase in intensity straight through into late spring 2012. There is not enough money or enough lies on the planet to get us through all that without a lot of serious scars. While the principal causes of the nightmare will be over by summer 2012, rebuilding to the level of an evening of conversation with White Wine and Brie is very likely to take well into the twenty-teens. Maybe longer because of having to clean up the messes left here and there by those incoming warheads.
On Feb 01 05:38 PM Dusty wrote:
> War in Iraq and Afghanistan: Yes, back out now! And THEN KEEP QUIET
> when the extremists from there and North Korea put a Nuke into...,
> Well, their missiles are not going to be too accurate, they will
> only have 4 or 5 warheads, but the Eastern Megalopolis is a big target,
> so they will be trying for Manhattan and the Washington Mall. More
> warheads? Add Chicago, St Louis, maybe Seattle or Los Angeles. Alternatively,
> stay where we are and this time make sure there is a stable sensible
> government in place before we pull our armies out. The current mess
> is because everybody dropped Afghanistan like a hot potato when the
> Russians pulled out and left an enormous power vacuum. Each time
> we do that the consequences will be worse.
>
> White Wine and Brie? Great! But before you speak about the real world
> try going out and spending at least a half-decade working hard enough
> to develop real body strength and a lot of calluses with the clear
> understanding that if you do wrong in any way you will starve for
> lack of a paycheck and probably end in a jail for just being in a
> hopeless situation. We need to amend the Constitution to require
> that anyone elected to office have at least this much history of
> having had to work really hard in a miserable job.
>
> How long and how deep will this Depression be? Refer to a chart called
> "Credit Suisse Mortgage Resets" originally published in the fall
> of 2007. Phase One of this mess started in perhaps August 2007 and
> ran to about Christmas 2008. The calendar year 2009 is a big Phase
> Two Bear Trap. There will be a nasty hole on the path in the middle
> spring, another worse one in the middle fall, but the trend of the
> year looks manageable just like any other Bear Trap. Phase Three,
> "Alt-A" and "Agency Resets" will kick in right after New Year 2010.
> That will look like the worst that happened in 2008, except that
> it will continue with a slight increase in intensity straight through
> into late spring 2012. There is not enough money or enough lies on
> the planet to get us through all that without a lot of serious scars.
> While the principal causes of the nightmare will be over by summer
> 2012, rebuilding to the level of an evening of conversation with
> White Wine and Brie is very likely to take well into the twenty-teens.
> Maybe longer because of having to clean up the messes left here and
> there by those incoming warheads.
Wake up, look at another bottom line. South Korea and North Korea should be one country, and eventually will be. Talk with North Korea, butter up to them, take them seriously, and tell the South Korean government to back off and let nature take its course - by which I mean union between the two countries. When I was stationed in West Germany, East Germany was an authorized member of the 'Evil Empire', with its own army, etc. . Today the two 'countries' are one. As for Iraq and Afghanistan, I'm afraid that I will have to be paid to figure that one out.
And Auto44, since you want the Uncle to stay in Iraq and Afghanistan, why don't you give him some help. I spent 6 years in his army and believe me they were great - the best education a man can get if he chooses the infantry instead of pushing a pencil. Of course I was 'forced' into the artillery for about 15 months, but that wasn't so bad. In fact in retrospect it was wonderful. As for whether he is a her, I wonder how her would have like the military life in those days, doing pushups on concrete or asphalt covered with snot and what we called 'goobers', followed by a 'rifle run'.
Mr 'Beenburnedtwice', I could easily have voted for McCain if he had chosen a business type for his vice president, and dumped the '100 years of war talk', but he didn't and so he was the wrong man, just as George W. was the wrong man.