Recession Is Over; Depression Has Just Begun

For the last few months I have been casting around looking for bullish data points as counterfactuals to my more bearish long-term outlook. I have found some, but not enough. If you recall, early this year, I stated that we are in depression, making the case for the ongoing downturn as a depression with a small ‘d.’ Nevertheless, I was quite optimistic about the ability of policymakers to engineer a fake recovery predicated on stimulus and asset price reflation and I certainly saw this as bullish for financial shares if not the broader stock market. But, I saw these events as temporary salves for a deeper structural problem.

As a result, I have been on a quest to find data which disproves my original thesis – signs that the green shoots that everyone keeps talking about (and a term I had banned from my site) are part of a sustainable economic recovery. Unfortunately, I have concluded that they are not. This post will discuss why we are in a depression, not a recession and what this means about likely future economic and investing paths. I will try to pull together a number of threads from previous posts, add some context via Wikipedia links and draw in some good discussion via recent posts by Prieur du Plessis on balance sheet recessions and Marshall Auerback on the sector financial balances model of economics which completed the picture for me.

This post is very long and I have had to shorten it in order to pull all of the ideas into one post. Please do read the linked posts for background as I left out some of the detail in order to create this narrative.

Let’s start here then with the crux of the issue: debt.

Deep recession rooted in structural issues

Back in my very first post in March of 2008, I said that the U.S. was already in a recession, the only question being how deep and how long – a question I answered in the next post saying “we are definitely in recession. And according to Gary Shilling, this recession is going to be a big one. Worse than 2001, 1990-91 or the double dip recession of 1980-82.” This has certainly turned out to be true. The issue was and still is overconsumption i.e. levels of consumption supported only by increase in debt levels and not by future earnings. This is the core of our problem – debt.

I see the debt problem as an outgrowth of pro-growth, anti-recession macroeconomic policy which developed as a reaction to the trauma of the lost decade in the U.S. and the U.K.. This was a period of low growth, high inflation and poor market returns, in which the U.K. became the sick man of Europe and labor strife brought that economy to its knees. It is a period that saw the resignation of an American President and the humiliation of the Iran Hostage Crisis.

In essence, after the inflationary outcome that many saw as an outgrowth of the Samuelson-Keynesianism of the 1960s and 1970s, the Reagan-Thatcher era of the 1990s ushered in a more ‘free-market’ orientation in macroeconomic policy. The key issue was government intervention. Policy makers following Samuelson (more so than Keynes himself) have stressed the positive effect of government intervention, pointing to the Great Depression as animus, and the New Deal, and World War II as proof. Other economists (notably Milton Friedman, and later Robert Lucas) have stressed the primacy of markets, pointing to the end of Bretton Woods, the Nixon Shock and stagflation as counterfactuals. They point to the Great Moderation and secular bull market of 1982-2000 as proof. This is a divisive and extremely political issue, in which the two sides have been labelled Freshwater and Saltwater economists (see my post “Freshwater versus saltwater circa 1988”).

However, just as the policy of the 1950s to the 1970s was not really Keynesian (read Keynes’ General Theory as Richard Posner did and you will see why), the 1980s-2000 was not really an era of true ‘free markets.’ I call it deregulation as crony capitalism. What this has meant in practice is that the well-connected, particularly in the financial services industry, have won out over the middle classes (a view I take up in “A populist interpretation of the latest boom-bust cycle”). In fact, hourly earnings peaked over 35 years ago in the United States when adjusting for inflation.

Remember, the 1970s was a difficult period in which the U.K. and the U.S. saw jobs vanish in key industrial sectors. To stop the rot and effectively mask the lack of income growth by average workers, a new engine of growth had to be found. Enter the financial sector. The financialization of the American and British economies began in the 1980s, greatly increasing the size and impact of the financial sector (see Kevin Phillips’ book “Bad Money”). The result was an enormous increase in debt, especially in the financial sector.

This debt problem was made manifest repeatedly during financial crises of the era. Not all of these crises were American – most were abroad and merely facilitated by an increase in credit, liquidity, and international capital movement. In March 2008, I wrote in my third post on the US economy in 2008:

From the very beginning, the excess liquidity created by the U.S. Federal Reserve created an excess supply of money, which repeatedly found its way through hot money flows to a mis-allocation of investment capital and an asset bubble somewhere in the global economy. In my opinion, the global economy continued to grow above trend through to the new millennium because these hot money flows created bubbles only in less central parts of the global economy (Mexico in 1994-95, Thailand and southeast Asia in 1997, Russia and Brazil in 1998, and Argentina, Uruguay, and Brazil in 2001-03). But, this growth was unsustainable as the global imbalances mounted.

Eventually, the debt burdens became too large and resulted in the housing meltdown and the concomitant collapse of the financial sector, a looming problem that our policymakers should have seen. This is why my blog is named Credit Writedowns. But, make no mistake, the housing and writedown problems are only symptoms. The real problem is the debt – specifically an overly indebted private sector (note the phrase ‘private sector’ as I will return to this topic).

This is a depression, not a recession

When debt is the real issue underlying an economic downturn, the result is a period of stagnation and short business cycles as we have seen in Japan over the last two decades. This is what a modern-day depression looks like – a series of W’s where uneven economic growth is punctuated by fits of recession. A recession is merely a period of recalibration after businesses get ahead of themselves by overestimating consumption demand and are then forced to cut back by making staff redundant, paring back inventories and cutting capacity. Recessions can be overcome with the help of automatic stabilzers like unemployment insurance to cushion the blow. Depression is another event entirely. Back in February, I highlighted a blurb from David Rosenberg which summed up the differences between recession and depression quite well.

Depressions marked by balance sheet compression
Recessions are typically characterized by inventory cycles – 80% of the decline in GDP is typically due to the de-stocking in the manufacturing sector. Traditional policy stimulus almost always works to absorb the excess by stimulating domestic demand. Depressions often are marked by balance sheet compression and deleveraging: debt elimination, asset liquidation and rising savings rates. When the credit expansion reaches bubble proportions, the distance to the mean is longer and deeper. Unfortunately, as our former investment strategist Bob Farrell’s Rule #3 points out, excesses in one direction lead to excesses in the opposite direction.

The next day, I highlighted Ray Dalio’s version of this story because it takes a historical view and rightly emphasizes the debtor instead of the lender as the crux of the problem. Notice the part about printing money and devaluing the currency if the debt is in your own currency.

… economies go through a long-term debt cycle — a dynamic that is self-reinforcing, in which people finance their spending by borrowing and debts rise relative to incomes and, more accurately, debt-service payments rise relative to incomes. At cycle peaks, assets are bought on leverage at high-enough prices that the cash flows they produce aren’t adequate to service the debt. The incomes aren’t adequate to service the debt. Then begins the reversal process, and that becomes self-reinforcing, too. In the simplest sense, the country reaches the point when it needs a debt restructuring…

This has happened in Latin America regularly. Emerging countries default, and then restructure. It is an essential process to get them economically healthy.

We will go through a giant debt-restructuring, because we either have to bring debt-service payments down so they are low relative to incomes — the cash flows that are being produced to service them — or we are going to have to raise incomes by printing a lot of money.

Commence the fake recovery

So where are we, then? We have left the fake recovery and are entering a new era of growth that could last as long as three or four years or could peter out very quickly in a double dip recession. By now, you have seen my post on the fake recovery, so I won’t cover that ground here. However, I do want to highlight how I came to believe in the fake recovery and how asset prices have played into this period (the S&L crisis played out nearly the same way). I see writedowns as core to the transmission mechanism of debt and credit problems to the real economy via reduced supply and demand for credit. Again, this is why my site is called Credit Writedowns.

In March, at the depths of the downturn I wrote:

The problem is the writedowns. You see, if you get $30 billion in capital from the government, but lose another $40 billion because of credit writedowns and loan losses, you aren’t going to be lending any money. To me, that says the downturn will only end when the massive writedowns end, not before.

The U.S. government has finally realized this and is now moving to stem the tide. Their efforts point in four directions:

Increase asset prices. If the assets on the balance sheets of banks are falling, then why not buy them at higher prices and stop the bloodletting? This is the purpose of the TALF, Obama’s mortgage relief program and the original purpose of the TARP.

Increase asset prices. If assets on the balance sheet are falling, why not eliminate the accounting rules that are making them fall? Get rid of marking-to-market. This is the purpose of the newly proposed FASB accounting rule change.

Increase asset prices. If asset prices on the balance sheet are falling, why not reduce interest rates so that the debt payments which are crushing debtors ability to finance those assets are reduced? This is why short-term interest rates are near zero.

Increase asset prices. If asset prices on the balance sheet are falling, why not create Public-Private partnerships to buy up those assets at prices which reflect their longer-term value? This is what Geithner’s Capital Assistance Program is designed to do.

So I lied, there is only one direction the government is headed: increase asset prices (or, at least keep them from falling). Read White House Economic Advisor Larry Summers’ recent prepared remarks to see what I mean. (Summers on How to Deal With a ‘Rarer Kind of Recession’ – WSJ)

I was more on target in my thinking here than I could have known. Within two weeks, the mark-to-market model was dead and mark-to-make believe had begun. It was then that I knew a recovery was likely to take hold. And it was going to be bullish for bank stocks and the broader market. What you should realize is that, despite the remaining problems in credit cards, commercial real estate or high yield loans, limiting credit growth, the changes instituted by government definitely have meant 1. that banks will earn a shed load of money and 2. that house price declines have stalled, underpinning the asset base of lenders. This necessarily means an end to massive writedowns, a firming of banks’ capital base, and a reduction in private sector deleveraging.

As an aside, I should mention that this dynamic called the asset-based economy, where economic well-being is dependent on asset prices, is far more pronounced in Anglo-Saxon countries like the U.S. and the U.K. (and Australia, Ireland, and Canada to a degree). While the free market ideal has gained sway globally, it is viewed with much more skepticism elsewhere. In Germany, for example, the term Anglo-Saxon is often bandied about as an epithet for political demagoguery to represent free market ideology. These cultural differences are something I explored in my post “Cultural attitudes on work, leisure and wealth in Europe and America.”

As for the recent asset-based economic reflation, be under no illusion that these measures ‘solve’ the problem. The toxic assets are still impaired and banks are still under-capitalized. But the increased asset value and the end of huge writedowns has underpinned the banks and led to a rise in the broader market in a feedback loop that has been far greater than I could have imagined at this stage in the economic cycle.

The double dip or the economic boom?

So what’s next? A lot of the economic cycle is self-reinforcing (the change in inventories is one example). So it is not completely out of the question that we see a multi-year economic boom. Higher asset prices, lower inventories, fewer writedowns all lead to higher lending capacity, higher cyclical output, more employment opportunities and greater business and consumer confidence. If employment turns up appreciably before these cyclical agents lose steam, you have the makings of a multi-year recovery. This is how every economic cycle develops. This one is no different in this regard.

However, longer-term things depend entirely on government because we are in a balance sheet recession. Ray Dalio and David Rosenberg make this case well in the previous quotes I supplied, but it was a recent post about Richard Koo from Prieur du Plessis which got me to write this post. His post, “Koo: Government fulfilling necessary function” reads as follows:

According to Koo, American consumers are suffering from a balance sheet problem and will not increase consumption until their personal finances are back in order. The banks are not lending mainly because nobody wants to borrow and, furthermore, the banks want to build their own balance sheets (raise cash) and get rid of toxic garbage…

Again, when asked what would happen if the government cuts back on its fiscal stimulus, Koo replies: “Until the private sector is finished repairing its balance sheets, if the government tries to cut its spending, we’re going to fall into the same trap Franklin Roosevelt fell into in 1937 (a crushing bear market) and Prime Minister Hashimoto fell into in 1997, exactly 70 years later.

“The economy will collapse again and the second collapse is usually far worse than the first. And the reason is that, after the first collapse, people tend to blame themselves. They say, ‘I shouldn’t have played the bubble. I shouldn’t have borrowed money to invest – to speculate on these things.’

This view of a second, more serious downturn mirrors the one I wrote of when I wrote about high structural unemployment last week. And, again, it is predicated on what government does. I wrote last November that if government stops the support, recession is going to happen.

The U.S. economy cannot possibly work itself out of the greatest financial crisis in some 70-odd years in a mere 4 years and then expect to raise taxes on the middle class without a major recessionary relapse.

So, when you hear policy makers talking about reducing the deficit as soon as possible, what you should think is 1938 and continued depression.

Right now, if you listen to what President Obama is likely to do when we see more economic growth, you know that the government prop for the economy is going to be taken away. Koo again:

So the fact that Larry Summers was talking about ‘temporary’ fiscal stimulus had me very, very worried. That whole Larry Summers idea that one big injection of fiscal stimulus will get the US out of the recession, and everything will be fine thereafter, probably led to President Obama’s saying he’s going to cut his budget deficit in half in four years."

Get ready because the second dip will occur. It will be nasty: unemployment will be higher and stocks will go lower than in 2009. I am convinced that it is politically unacceptable to have the government propping up the economy as Koo suggests it should. The question now is one of timing: when will the government stop propping up the economy? The more robust the recovery, the quicker the prop ends and the sooner we get a second leg down.

So to recap:

1. A depression was borne out of high levels of private sector debt, the unsustainability of which became apparent after a financial crisis.
2. The effects of this depression have been lessened by economic stimulus and government support.
3. Government intervention led to a reduction in asset price declines, which led to stock market increases, which led to asset price stabilization and more stock market increases and eventually to asset price increases. This has led to a false sense that green shoots are leading to a sustainable recovery.
4. In reality, the problems of high debt levels in the private sector and an undercapitalized financial system are still lurking, waiting for the government to withdraw its economic support to become realized
5. Because large scale government deficit spending is politically impossible, expect a second economic dip within three to four years at the latest.

Why is government spending necessary?

The government plays a crucial role here because of the huge private sector indebtedness. In the U.S. and the U.K., the public sector is not nearly as indebted. So while, the private sector rebuilds its savings and reduces debt, the public sector must pick up the slack. Why do I say must? It’s because of an accounting identity which comes from the financial sector balances model. Marshall Auerback says it best in a recent post:

We’ve said it before and we’ll say it again. As a matter of national accounting, the domestic private sector cannot increase savings unless and until foreign or government sectors increase deficits. Call this the tyranny of double entry bookkeeping: the government’s deficit equals by identity the non-government’s surplus.

So, if the US private sector is to rebuild its balance sheet by spending less than its income, the government will have to spend more than its tax revenue. The only other possibility is that the rest of the world stops saving on a massive scale — letting the US run a current account surplus. But that is highly implausible and socially undesirable, since it means we export our economic output, rather than consume it domestically. And if the government deficit does not grow fast enough to meet the saving needs of the private domestic sector, national income will decline, which, given the size of the private sector’s debt problem, will generate a huge debt deflation.

This is the foundation of modern monetary theory. Would that the IMF and the G20 understood these basic facts.

If the private sector is a net saver, the public sector must, I repeat must, run a deficit. That’s the law of double entry book-keeping. The only other way to prevent the government from running a deficit when the private sector is net saving is to run huge current account surpluses by exporting your way out of recession – what Germany and Japan tried in the 1990s and in this decade. But, of course, the G20 and the IMF are all talking about global re-balancing. This cult of zero imbalances is something Marshall first brought forward back in April. And it ignores the accounting identity inherent in the financial sector balances model. I highlighted this model in my post, “Minsky: Turning neoclassical economics on its head.” However, I must admit to having a preternatural disaffection for large deficits and big government which is what Koo and Minsky advise respectively – a recent cartoon shows why. It is this knee-jerk aversion to what is viewed as fiscal profligacy which is at the core of the cult of zero imbalances.

So, what does this mean for the American and global economy?

1. The private sector (particularly households) is overly indebted. The level of debt households now carry cannot be supported by income at the present levels of consumption. The natural tendency, therefore, is toward more saving and less spending in the private sector (although asset price appreciation can attenuate this through the Wealth Effect). That necessarily means the public sector must run a deficit or the import-export sector must run a surplus.
2. Most countries are in a state of economic weakness. That means consumption demand is constrained globally. There is no chance that the U.S. can export its way out of recession without a collapse in the value of the U.S. dollar. That leaves the government as the sole way to pick up the slack.
3. Since state and local governments are constrained by falling tax revenue (see WSJ article) and the inability to print money, only the Federal Government can run large deficits.
4. Deficit spending on this scale is politically unacceptable and will come to an end as soon as the economy shows any signs of life (say 2 to 3% growth for one year). Therefore, at the first sign of economic strength, the Federal Government will raise taxes and/or cut spending. The result will be a deep recession with higher unemployment and lower stock prices.
5. Meanwhile, all countries which issue the vast majority of debt in their own currency (U.S, Eurozone, U.K., Switzerland, Japan) will inflate. They will print as much money as they can reasonably get away with. While the economy is in an upswing, this will create a false boom, predicated on asset price increases. This will be a huge bonus for hard assets like gold, platinum or silver. However, when the prop of government spending is taken away, the global economy will relapse into recession.
6. As a result there will be a Scylla and Charybdis of inflationary and deflationary forces, which will force the hands of central bankers in adding and withdrawing liquidity. Add in the likely volatility in government spending and taxation and you have the makings of a depression shaped like a series of W’s consisting of short and uneven business cycles. The secular force is the D-process and the deleveraging, so I expect deflation to be the resulting secular trend more than inflation.
7. Needless to say, this kind of volatility will induce a wave of populist sentiment, leading to an unpredictable and violent geopolitical climate and the likelihood of more muscular forms of government.
8. From an investing standpoint, consider this a secular bear market for stocks then. Play the rallies, but be cognizant that the secular trend for the time being is down. The Japanese example which we are now tracking is a best case scenario.

Not particularly uplifting, but hopefully well-documented. Your comments are very greatly appreciated.

Comments

[aussiereader4:]

This is an extremely accurate analysis of what has happened. Rather than face the issues of restructuring in the early 1980's, avoidance of the problem resulted. It has taken 30 yrs to unwind.

The answer is to print money and lots of it. There is going to be a realignment in world wealth that has only started.

Oct 02 04:37 AM

[Roger Knights:]

"Deficit spending on this scale is politically unacceptable and will come to an end as soon as the economy shows any signs of life (say 2 to 3% growth for one year)."

But won't QE end sooner, in six months? And what if China and/or Japan stop buying our Treasuries before our economy grows for a year, because they don't like our deficit spending, or because they are no longer able to afford to do so? Julian Robertson said a few days ago that the effect of their doing that would be instant double-digit inflation. (Something's got to give somewhere, because it's all connected. If stress is relieved at one point in the system, it is transfered to another.)

So we may not have the ability to to prop up asset prices for more than more three months--or six at the most. After that, le déluge. Someone's got to take the "hit" for all the debt and absorb the losses. Going forward, I think it will be stockholders, then bondholders, then land-owners.

Speaking of le déluge, the first raindrops are falling already. I think they'll fall even harder today (Friday).

Oct 02 04:46 AM

[Steven Hansen:]

Edward, you have put a lot of accurate thought into this.

if you put me in charge of steering the US economy out of this mess, i would concentrate on jobs and job creation. this is a real problem which structurally destroys any solution to fire up the economy.

as long as economists believe their report card is a rise in GDP, we will remain in a failure mode. a country is not defined by GDP but by the life of its citizens.

the metrics are: employment, earnings, wealth, health, and infrastructure, living conditions.

Oct 02 04:57 AM

[Moon Kil Woong:]

Edward Harrison: Thanks for the complete historic diarama.

At best what we can hope for is a good 20 years of patient austerity and recovery. Most likely, the government will opt for a series of extreme measures which will pull us in and out of tighter and tighter business cycles which are actually carefully orchestrated monetary ploys.

Oct 02 05:07 AM

[Ricard:]

Excellent and exceptionally condensed summary of the current situation. It amazes me at times how complicated it can be to answer a simple question: will markets go up or down?

Oct 02 05:20 AM

[Tom Armistead:]

Very carefully thought out article: I appreciate your willingness to draw investment implications - play the rallies but be careful.

The point about double entry book-keeping, that the private sector surplus must be offset by a government deficit, is a good one. But it is possible to think of a private sector, a government sector, and a financial sector. The system contains excessive debt, which has been migrating from the private and financial sectors onto the government balance sheet, somewhat obfuscated by the use of guarantees rather than actual purchase transactions.

Econoimists interpret the experience of other countries as suggesting a law that when debt in the system becomes excessive, financial institutions come under speculative attack, leaving the government no alternative but to support financial institutions until the currency collapses. Because the US dollar is the world reserve currency that event is unlikely. But discussion of alternative reserve currencies sets the stage for a reckoning.

US financial institutions came under speculative attack during the course of the meltdown, demonstrating that this country is not immune to these facts of life.

Solutions are not easy, I would agree with Steven Hansen, we need jobs to create value.

And finally there is the issue of financialization or financialism, no need to define it, the US and UK have it bad, something has to be done.

Oct 02 06:30 AM

[Pat C:]

Excellent Article - Thanks

Oct 02 07:33 AM

[chap08:]

Good article Edward. In something so wide ranging, everyone will find things to agree and disagree with.

My main point of agreement is your diagnosis of repeated W's as the economy struggles and policy reversals are executed.

My main disagreement is when you say that we are tracking Japan and that this remains a model. I disagree with this because, while the initial conditions are similar, the policy response to date, and likely future response, are totally different. The main difference is the monetary approach.

Japan's problems started at the end of the 80s, but it wasn't until 2001 that they started a policy of QE. Up until that point, what efforts they had made had focused on fiscal stimulus. This just resulted in plenty of mal-investment and deflation took an increasingly strong grip on the country. When they started on QE, things changed. You can argue how much it had to do with QE, but the introduction of the QE policy (2001 - 2006) coincided with the longest expansion in Japan’s post world war two history (2002-2007).

These points are not lost on the Fed. They know about Japan. They know about the mistakes we made in 1937. The one thing that they will not do is repeat these mistakes. It is far more likely that they will err on the other side, with too much accommodation. They will not tolerate deflation in the same way that Japan did. They will want a combination of positive CPI and near negative real interest rates. They'll need to stay active and responsive, but they'll keep stepping in to make sure that's the outcome. As a result, we won't look like Japan. Things won't be easy for us either, but Japan is not the model.

Oct 02 07:36 AM

[CautiousInv...:]

Nice job across the board and I found the following most pertinent:


Depressions marked by balance sheet compression
Recessions are typically characterized by inventory cycles – 80% of the decline in GDP is typically due to the de-stocking in the manufacturing sector. Traditional policy stimulus almost always works to absorb the excess by stimulating domestic demand. Depressions often are marked by balance sheet compression and deleveraging: debt elimination, asset liquidation and rising savings rates. When the credit expansion reaches bubble proportions, the distance to the mean is longer and deeper. Unfortunately, as our former investment strategist Bob Farrell’s Rule #3 points out, excesses in one direction lead to excesses in the opposite direction.

Oct 02 07:36 AM

[Fanatical Y...:]

I've been calling this a Depression since last October. To any such extent as a Recession becomes a Depression ~ as opposed to BackDating the Depression ~ then THAT is when it began.

And of course they'll retroactively say that the Depression started way back in December of 2007, which of course it did, as those of us on the front lines realized in Real Time...and which pundits, 99% of them, realized only about a year or so later.

That divergence notwithstanding, an excellent article, sir.

As usual.

Oct 02 08:23 AM

[markfl:]

Agreed. I wanted to hold off on macroeconomic comments until the BLS report came out. Avg. weekly hours fell again, which means we may have not reached a cyclical bottom. This is awful. While I don't think the situation is severe enough to suggest the economy will contract again (yet), the evidence for disappointing Q4 growth is rising, and there is so much labor force slack (the weekly hours number) that we are easily facing the worst labor market prospects since the Big D. In terms of duration of elevated unemployment we may rival the early 80s. We may not top the peak U3 number, but we may also not have the benefit of a steep decline in the rate in the way that happened in 1983; that year unemployment declined at a brisk 2%. I don't see it this time.

On Oct 02 04:57 AM Steven Hansen wrote:

> Edward, you have put a lot of accurate thought into this.
>
> if you put me in charge of steering the US economy out of this mess,
> i would concentrate on jobs and job creation. this is a real problem
> which structurally destroys any solution to fire up the economy.
>
>
> as long as economists believe their report card is a rise in GDP,
> we will remain in a failure mode. a country is not defined by GDP
> but by the life of its citizens.
>
> the metrics are: employment, earnings, wealth, health, and infrastructure,
> living conditions.

Oct 02 09:07 AM

[Fanatical Y...:]

Addendum.

I might as well say for public consumption, though I've been saying it elsewhere: I believe that the Deluge to come will DWARF The Great Depression.

Oct 02 09:12 AM

[E Nuff Sed:]

You cite the Thatcher-Reagan era in positive terms and yearn to go back. I on the contrary see it as era where controls over the private sector put in place in response to the great depression were lifted. This led to a philosophy of market fundamentalism and leverage which peaked under the Ayn Rand disciple Greenspan. Sure we had the roaring 90's and lot of chest thumping of the status of America as a hyper power and "end of history" where capitalism was supposed to reign supreme.

Well the moment to pay the piper has arrived. We are now in a classic Minsky moment surrounded by ponzi borrowers who threaten the very survival of our system and way of life.

Oct 02 10:05 AM

[Leftfield:]

I would like to point out a greater need to compare apples to apples. Government spending does not equal sustainable, wealth-increasing private-sector jobs. The double-entry accounting (identity) you explain as necessary; that private saving must be balanced by public debt, deserves a deeper look.
We have been developing a crippled Main St. whose jobs pay less for two earners than for one 40 years ago vs. cost of living. This has been masked by excessive debt and asset inflation. So has the rise of government, which is an inefficiency and cost overall to an economy. The total is grossly unsupportable and in need of more than "balance" from one side to another. It is unsustainable in size now, and in the foreseeable future.
If we don't make better choices than we have, towards productive rather than crony uses of money. we can expect failure to continue with ever-more outlandish "solutions" causing greater Main St. pauperization and bondage.

Oct 02 10:36 AM

[bob adamson:]

Thank you for the excellent article Mr. Harrison. You put the role of debt in its proper perspective; the real culprit being the massive debt bubble created in the consumer and financial markets prior to 2008 and not the subsequent growth of national government debt associated with stimulus measures. For too many years prior to 2008, the stagnation in the creation of productive capacity in the traditional ‘First World’ economies was masked by overstimulation of the consumer debt and the focus of finance away from capital formation and into secularized debt and derivative pyramid creation and manipulation. Now that the resulting debt bubble threatens to implode, government stimulus is needed to stabilize the financial system and the larger economy to give national governments the time and capacity to begin to address the underlying structural problems in the economy. Addressing these underlying problems will be an extended, many staged and difficult process and not the simple return to growth through pump priming, on the one hand, or a short and sharp bout of creative destruction and recovery, on the other, as envisaged by too many otherwise perceptive observers on the centre left and centre right respectively.

Your description of the usual recession as being a temporary imbalance of an essentially sound economy – an imbalance that the recession itself will correct or that can be corrected by short term adjustments by central banks and governments – properly focuses our attention on the fact that the current crisis is deeper and will require more profound restructuring over an extended period. You are also right to trace the root causes of the crisis to the 1970s.

Oct 02 11:06 AM

[Howard_T:]

Thank you, Mr. Harrison, for this excellent analysis. Until I read it, I would have been one screaming for an end to profligate federal spending that would only lead us on the road to rapid inflation. I am now convinced that government must spend in order to temporarily provide the means to get the economy moving forward once again.

More government spending comes with one huge stipulation: the spending must be targeted, intelligently planned, and diligently regulated. Any unnecessary spending must be curtailed. As a start, forget any ideas of health care reform or energy cap-and-trade taxes. These can be left for later, although immediate action to begin work toward reducing the cost of health care (that is, how much it costs to see the doctor, not how much you pay for insurance) can start immediately.

Targeting of spending means putting the money directly into the hands of those who can use it to develop the economy and create jobs. Propping up state and local governments, while not an entirely bad idea, does little to create jobs and can be left for later. In the meantime, the states should be allowed to operate at a deficit, issuing bonds to keep them going, and make up the debt with increased income and fiscal austerity once tax revenues have come back. The money needs to be placed in the hands of small and medium-size businesses, in the form of grants or low-interest loans, to allow these businesses to expand, innovate, develop new products, and put people to work. Bailing out an already sick industry is not the answer. We see now that Chrysler will not be able to introduce new models based on Fiat products for several years. We also see that GM has not been successful in selling the Saturn brand, and will now abandon it. Despite the bailouts, the ship continues to the bottom. Spending does not have to be in the form of cash or credit. One of the most effective things that could be done is to revise the federal tax code to ease the burden on business, stop penalizing the re-investment of profits, and make it more attractive to keep one's manufacturing operations in the US.

Regulation simply means forcing those who benefit from federal spending to give an honest and accurate accounting of where it goes. Here I'm looking directly at the financial industry. It's too late to stop the creation of the mega-banks that has happened over the last few decades, and was accelerated by the government-assisted mergers of the last 2 years. What can be done is to force these large institutions, and indeed all financial institutions, to separate their banking, financial services, and brokerage operations. Ownership of such operations can continue under the existing corporate heads, but tall and stout firewalls would need to be put in place to prevent abuses such as the the banking operation placing depositors money into questionable financial products sold by the brokerage arm. Restoration of Glass-Steagle, perhaps with some updates to account for technology, would be the obvious start.

I am not an economist, nor am I involved with the financial industry in any way other than as a customer. I am a retired engineer living on my wife's small income, a pension, social security, and savings. In the meantime, I'm putting a kid through college. My debt load is low; if I were forced into it, I could pay it off tomorrow without real hardship. What little I know about finance I learned from my father, who worked for many years at the Federal Reserve Bank of Boston. I write the above as one who thinks that common sense has been abandoned in the corridors of government, greed and insensitivity have become the watchwords of the financial elites, and despair is increasing among those of us who are at their mercy. So please, Mr. Harrison, keep your ideas flowing, but please temper them with common sense.

Oct 02 11:28 AM

[totheabovej...:]

to have something you just mentioned would take some catastrophic event to pull the trigger. A nuke somewhere, 'the big one' hitting cali, kayne west putting george soros in a bad mood..

there is going to be some serious debt relief to balance this out. It it doesn't come sooner, then it comes later where assets are so low people can buy back in and screw the holders twice


On Oct 02 09:12 AM Fanatical Yankee wrote:

> Addendum.
>
> I might as well say for public consumption, though I've been saying
> it elsewhere: I believe that the Deluge to come will DWARF The Great
> Depression.

Oct 02 12:33 PM

[Edward Harr...:]

I think you confuse my neutral tone with an endorsement of the Reagan-Thatcher era. I am not a fan. However, I have tried to take the politics out of this post. Apparently, I succeeded!


On Oct 02 10:05 AM E Nuff Sed wrote:

> You cite the Thatcher-Reagan era in positive terms and yearn to go
> back. I on the contrary see it as era where controls over the private
> sector put in place in response to the great depression were lifted.
> This led to a philosophy of market fundamentalism and leverage which
> peaked under the Ayn Rand disciple Greenspan. Sure we had the roaring
> 90's and lot of chest thumping of the status of America as a hyper
> power and "end of history" where capitalism was supposed to reign
> supreme.
>
> Well the moment to pay the piper has arrived. We are now in a classic
> Minsky moment surrounded by ponzi borrowers who threaten the very
> survival of our system and way of life.

Oct 02 12:36 PM

[Donald Ingram:]

Agree. This economic global beast has just barely begun to rampage. This period in history will be described as the start of the Great Re-ordering. I pray this may be accomplished without geopolitical military conflict, however I do not hold out any hope.
Edward - Very good post. One point I would make is that there is NO WAY that government spending can replace the amount of credit destruction that has taken place by non-spending/deleveraging by the consumer citizens. Although the government is trying hard, all they are accomplishing is the destruction of the dollar.


On Oct 02 09:12 AM Fanatical Yankee wrote:

> Addendum.
>
> I might as well say for public consumption, though I've been saying
> it elsewhere: I believe that the Deluge to come will DWARF The Great
> Depression.

Oct 02 01:05 PM

[Michael Clark:]

Great article, Edward. I think history will decide that the Great Depression of this era began in 2001. If you look at the NDX chart your will see very clearly that this is where the Bear Market began.

Greenspan's battle with the depression (his bubble sequences) were an attempt to re-inflate a dying credit expansion cycle. We had credit expansion of the high variety from 1983-2001, 18 years. 2001 is when we should have begun raising rates slowly, chocking the inflation out of the system (inflation which has been horrific in fact, EXCEPT in salaries....this is the gimmick that allowed the government to proclaim a lack of inflation).

We now face 18 years of deflation, 2001-2019, during which time we will attempt to unwind our debt and should also make an attempt to stabilize our currency.

The idea that we can fight deflation by back-handed currency devaluation is irresponsible and immoral. The middle class, the working poor, and the poor in America CANNOT afford an ever-inflationary model because high prices bankrupt them over and over again.

Discipline is needed. 18 years of expanded credit (yes, I supported Reagan's expansion of credit in 1983); followed by 18 years of credit contraction. Painful? Yes. Pain is involved. Discipline brings stability. Currency re-valuation has to follow currency de-valuation. Expansion is NOT an eternal condition. The fact that Bernanke does not get this shows that his philosophy of life is incomplete. He is terrified of the shadow side of life. Understandably. But we cannot endure as a nation pretending that life is made of only days and no nights, of only wealth and no poverty, of only victories and no defeats, of only hubris and no punishment for hubris.

The higher your mountain of debt expansion, the lower your valley of debt deflation. It is a law as explicit as the laws of physics.

Oct 02 01:37 PM

[Michael Clark:]

You are right, Donald. The global beast will be turning up its roaring quite a few notches at this point. In my system of describing this phenomena, the point of absolute expansion was 2001. This is where contraction BEGAN. It was High Noon, when the world system reached its moment of perfection...and popped. The Spirit of Deflation (if I can speak of it this way) was tiny, a little seed, overwhelmed by the Spirit of Inflation. But from this point Deflation began to grow and Inflation began to get weaker. Greenspan-Bernanke represent this Spirit of Inflation....but they have been losing strength ever since.

Noon is 2001. Dusk is 2010. At Dusk the Spirit of Inflation and the Spirit of Deflation will be at equal strength (as the light and the shadow are of equal strength at Dusk, the days and nights are of equal strength, the Night is rising, the Light is falling)....but 2010 indicates the triumph of the Spirit of Deflation. The Darkness rises and is in power and will remain in power from 2010 through 2028, until the Dawn returns. But the real power of Deflation will run from 2010 to 2019. 2019 will be the apex of the Forces of Deflation in the same way that 2001 was the apex of the Forces of Expansion. The Spirit of Inflation will appear as a seed in 2019 and will begin climbing the mountain again, weak at first, but gaining strength until 2028, when the Dawn will return, and the future will again become light and hopeful.

Spring is the Golden Age, during which time everything seems to work.

The credit expansion (1983-2001; 2019-2038) represents a 'filling up'; the debt contraction (1965-1983; 2001-2019) represents an 'emptying out'.

The darkest period will be 2010-2019.


On Oct 02 01:05 PM Donald Ingram wrote:

> Agree. This economic global beast has just barely begun to rampage.
> This period in history will be described as the start of the Great
> Re-ordering. I pray this may be accomplished without geopolitical
> military conflict, however I do not hold out any hope.
> Edward - Very good post. One point I would make is that there is
> NO WAY that government spending can replace the amount of credit
> destruction that has taken place by non-spending/deleveraging by
> the consumer citizens. Although the government is trying hard, all
> they are accomplishing is the destruction of the dollar.

Oct 02 02:09 PM

[Mike Morin:]

I choose socialism, an economic democracy.

We have turned the corner during the week of September 20, 2009. The "Financial Fools" of the dying Capitalist economy met in Pittsburgh to trivialize and tread water before going under. Meanwhile, the emerging socialist economies met in Venezuela and formed a Latin American Bolivarian/Union of African States socialist economic coalition and announced the formation of an alternative "fair trade" Equity Union which will grow as the Maoist tradition being championed by Chavez spreads to the OPEC Nations and the Peoples Republic of China and to a world unity and cooperation majority that favors peace, meeting the needs of the workers and the poor, inclusion, humanity, equity, rational planning, ecological economic democracy, village/neighborhood sovereignty, inter-community and inter-regional unity and cooperation, quality of life, environmental/public health and wellness, and sustainability.

Concurrently, the militaristic political sham of the UN Security Council was being sufficiently challenged.

There exists a terrible, terrible, opportunity cost relative to the militaristic ways of Capitalist Empire (primarily the USA), the resisting and/or non-subservient nations and popular movements, the patient, but burdened, Communist State (Peoples' Republic of China) and the need to dedicate and allocate resources for life needs (habitat improvement and sustainability) in the face of unprecedented resource constraints (particularly but not limited to the fossil fuel resource), population pressures, and the gap between "rich" and poor.

A legitimized UN General Assembly ( a "house of commons") with a mission to foster and facilitate a cooperative communitarian, mutualist, socialist, peaceful world without divisive borders and banners needs to take center stage in our evolution, in our governance, our transition to a libertarian economic democracy based on the principles previously enunciated.

Meanwhile, the Capitalist Empire must surrender and work out a cooperative economic transition strategy.

Much work is left to be done.


In Peace, Friendship, Community, Cooperation, and Solidarity,

Mike Morin
Eugene, OR, USA

Oct 02 03:04 PM

[Socialism c...:]

I wholeheartedly agree with the conclusion (depression vs. recession), and that too much debt (both personal and governmental) is the factor that will prolong and deepen this situation. However, debt is not the root cause, but a symptom!! It is a symptom of too-large government, and the resulting tweaking of the system to allow for excess debt; the lack of personal responsibility caused by entitlements encourages free spending with the thought that the basics are taken care of in any case; the excessive, onerous, and immoral level (and type/mode) of taxation to pay for such entitlements also deprive the producing segment of their just fruits and encourage a psychology of futility -- the notion that it is futile to be able to wait, save for "it" (whatever "it" is), and buy a bit later on savings, since net income does not allow for that -- too much of the earnings are gone to pay for large bureaucratic government and entitlements.

Hence, the lower class lives off entitlements and spends freely, being unafraid of debt and knowing how to game the system; the middle class says "to hell with it", I'm not gonna save 2 years before getting the big screen, or 10 more years before buying a home; and the upper class, being taxed at massive rates has incentive only to look for loopholes and shelters.

The root cause is government that is *far* too large, and well beyond its just purpose...well beyond what is *good* for free market economics...and well beyond what is allowable by a free people. And the unjust tax scheme(s) that pay for such is costing us both our present AND our future!!

There are no shortcuts to prosperity: personal responsibility and real freedom beget prosperity...the lessening of them lessen the opportunity to do so. Take back control of YOUR income and property rights:

fairtax.org

Oct 02 03:50 PM

[Socialism c...:]

Idiocy!! Please tell us when, in world history, socialism has EVER been democratic? It's always been a tool of totalitarianism, working AGAINST freedom and democracy. The essence of socialism is control by a small cabal who steal from a producing group to give to others, whose support is then gained. There is no equality -- those producing have to work ever harder to make up for the unjust garnishing...those on the receiving end lose their dignity and honesty...and those running the show live like noone else.

So please...show us real, working, sustainable examples. Don't cite the economic surge in China -- they are moving slowly towards capitalism -- at the moment still centrally controlled, but a gradual increase in the correlation between individual effort/ingenuity and rewards received still yields a net positive, vs. the gradual decrease here in the U.S. -- of which we are now reaping the rewards!

It is not capitalism that has failed -- it is Big Government and socialism that have failed in America!!!


On Oct 02 03:04 PM Mike Morin wrote:

> I choose socialism, an economic democracy.

Oct 02 04:04 PM

[YaddaMinski:]

From 2000 on was a fiction. So we have been in the doldrums for almost 10 years already. Outside the banking industry, balance sheet compression is already happening (economy is shrinking). However, this world is not 1930's. We have much more trade and richer societies. Capital allocation by the private sector is much more efficient. So as long as the government doesn't take over the economy, the private debt issue can be dealt with over the next few years. Plus, we will not be able to predict what technology will hit. Just look around and marvel at the technology that makes living life more efficient. I am still an optimist as long as Congress is thrown out in 2010. Congress IS the PROBLEM.

Oct 02 05:52 PM

[YaddaMinski:]

Mr. Morin, are you familiar with non-linear systems? The economy is a non-linear system: aF(x) <> F(ax) & F(a) + F(b) <> F(a + b). This means that adding something here (Obama stimulus) will usually add something there (employment). The economic system is far too complex for top-down economic planning ala the USSR (why didn't the USSR prosper?). The best that can be done is to do back to the USA's founding principles of individual liberty, small government (respecting the three branches), and transparent law to settle disputes. Incentives must be put in place to encourage individuals to contribute in an optimistic way. What the USA used to be before the grand socialism experiment began in the early 1900's with the Northern European Model.


On Oct 02 03:04 PM Mike Morin wrote:

> I choose socialism, an economic democracy.
>
> We have turned the corner during the week of September 20, 2009.
> The "Financial Fools" of the dying Capitalist economy met in Pittsburgh
> to trivialize and tread water before going under. Meanwhile, the
> emerging socialist economies met in Venezuela and formed a Latin
> American Bolivarian/Union of African States socialist economic coalition
> and announced the formation of an alternative "fair trade" Equity
> Union which will grow as the Maoist tradition being championed by
> Chavez spreads to the OPEC Nations and the Peoples Republic of China
> and to a world unity and cooperation majority that favors peace,
> meeting the needs of the workers and the poor, inclusion, humanity,
> equity, rational planning, ecological economic democracy, village/neighborhood
> sovereignty, inter-community and inter-regional unity and cooperation,
> quality of life, environmental/public health and wellness, and sustainability.
>
>
> Concurrently, the militaristic political sham of the UN Security
> Council was being sufficiently challenged.
>
> There exists a terrible, terrible, opportunity cost relative to the
> militaristic ways of Capitalist Empire (primarily the USA), the resisting
> and/or non-subservient nations and popular movements, the patient,
> but burdened, Communist State (Peoples' Republic of China) and the
> need to dedicate and allocate resources for life needs (habitat improvement
> and sustainability) in the face of unprecedented resource constraints
> (particularly but not limited to the fossil fuel resource), population
> pressures, and the gap between "rich" and poor.
>
> A legitimized UN General Assembly ( a "house of commons") with a
> mission to foster and facilitate a cooperative communitarian, mutualist,
> socialist, peaceful world without divisive borders and banners needs
> to take center stage in our evolution, in our governance, our transition
> to a libertarian economic democracy based on the principles previously
> enunciated.
>
> Meanwhile, the Capitalist Empire must surrender and work out a cooperative
> economic transition strategy.
>
> Much work is left to be done.
>
>
> In Peace, Friendship, Community, Cooperation, and Solidarity,
>
> Mike Morin
> Eugene, OR, USA

Oct 02 06:02 PM

[WillTrade:]

Mr. Harrison, thank you for your work on this. There are very few analysts willing to declare a position that we have entered a depression, but you have substantiated your assertion and you will be affirmed as events unfold.

Oct 02 06:16 PM

[E Nuff Sed:]

I reread you article carefully again and now I get it. It is an excellent article. I apologize for earlier hasty remarks.
My analysis shows that the deeper a bear market - the longer the recovery. My guess is that this secular bear market which began in 2000 will last another 5 to 10 years before all the excesses from the past 25 years are flushed out.
www.scribd.com/doc/180...

Oct 02 07:48 PM

[gordsav:]

ITS A GREAT ARTICLE.
There is only one escape that I can see and that is (as some others have stated here) a prolonged period of truly daunting austerity.America is going to have to take down its consumption by , say 20 percent of GNP , and devote the difference to debt repayment.And do it for ten to 20 years.I PUT A VERY LOW PROBABILITY ON THIS.
This calls for something America has lost, its called character.Discipline, sacrifice. Toughness. The American people of 2009 are simply a comedy compared to the generation of the 30s.The operative aphorism is "shirtsleeves to shirtsleeves in three generations" and here we are.I do not think this society has the fortitude to make the necessary sacrifice. I think , in fact ,it breaks under the strain. Hard words, sorry about that.
As a canadian, i have a question for you people in passing... namely, since when and why is a mortgage deductible in America.Whose brilliant idea was that. My understanding of a mortgage when I had one was to look at that boxcar number I owed with sheer terror.The idea that you would incentivize people with a DEDUCTION, that is just utter madness.And nobody even mentions it.However, to then proceed to compound THIS FATAL POLICY ERROR, BY ENCOURAGING PEOPLE TO BORROW MORE...........well, no further comment. A mortgage is for paying off , god forbid, its not for extending and the interest is certainly not rendered deductible, thats just witless moral hazard, that number goes one direction only, Down, as quickly and efficiently as possible. Eliminate mortgage deductibility. What a tragedy.

Oct 02 07:51 PM

[dollar bull...:]

Great article...in regards to Howard_T's comment about rapid inflation...should he do a little research-he would find that this spending will lead us on a road to much worse than rapid inflation. It's called HYPERINFLATION, which is caused by a lack of confidence in a currency. Check it on on wikipedia.

Japan could have massive amounts of cash in market as their consumers save a majority of earnings. US consumers are just beginning to save...not a good formula.

Anybody think we can have a hyperinflationary depression?

Oct 02 08:49 PM

[TinyTim:]

Great read.
Apparently from your quotes and cites, you have a lot more confidence in macroeconomic theory than I do.
It's worse than politics now. Just another forum for professors to debate and have heated arguments about their hedged speculations.
They should continue to try to push forward the frontiers of their science.
However, this particular science gets a lot more media and attention than it deserves because it's about money (and ego).

I'm going to keep trying to piece it together from historical analogs.

Oct 02 11:17 PM

[Kalpa:]

Great article! thanks!

Oct 02 11:34 PM

[HA65MPH:]

GORDSAV,...yes i believe this generation of over indulged 'children 21-40 , do not totally understand what is GOING ON !..And they will be dead before they hit the ground . GREAT POST BY THIS WISE AUTHOR !..EDWARD . ..The whorehouse (house of rep.)..and THE ''OTHER whore house (senate)..COULD CARE LESS ABOUT THE AMERICAN PEOPLE !!!..I doubt they even step foot into a grocery store...The main ''Madam'' poloski is a old #$%^** ...and b.hussein nobanmma , is AN ACORN NUT JOB !...JMHO ...

Oct 03 01:13 AM

[samlaunch:]

Taking a line from Martin Armstrong: "Stock Market corrections are measured in months, while, Depressions are measured in years (23-26-years)." Taking the low end of 23-years we can add that to 2009 to say that we will emerge from this current Depression in the year 2032. Adding in the subtracted birth/death model numbers to U6 unemployment gives us a current real unemployment rate of 21.4-percent in the United States. The current lie of 9.8-percent is a joke and misrepresentation of the facts. One more thing, there is no Global Warming. Sun Spot activity is decreasing and the planet is entering a mini-Ice Age. Notice the polar ice caps growing at a rate of 200,000 square miles a year since 2007. We have one lie after another from the Federal Reserve. Just the facts maam! Anyway, great article. One of the best. Better that Roubini that's for sure.

Oct 03 02:59 AM

[Michael Clark:]

I don't agree with the 23-26 years. 18 years. 2001-2019. But I fully agree with the Global Warming myth. Now, if we want to be honest and talk about clean air and clean water, then I'm all for it. But we don't need this Global Warming scam discussion. Global warming is just another strategy to confiscate tax money for personal treasuries. No wonder Goldman Sachs is excited about the Carbon Trade buisness. If GS is FOR something, I'm against it, out of principle.


On Oct 03 02:59 AM samlaunch wrote:

> Taking a line from Martin Armstrong: "Stock Market corrections are
> measured in months, while, Depressions are measured in years (23-26-years)."
> Taking the low end of 23-years we can add that to 2009 to say that
> we will emerge from this current Depression in the year 2032. Adding
> in the subtracted birth/death model numbers to U6 unemployment gives
> us a current real unemployment rate of 21.4-percent in the United
> States. The current lie of 9.8-percent is a joke and misrepresentation
> of the facts. One more thing, there is no Global Warming. Sun Spot
> activity is decreasing and the planet is entering a mini-Ice Age.
> Notice the polar ice caps growing at a rate of 200,000 square miles
> a year since 2007. We have one lie after another from the Federal
> Reserve. Just the facts maam! Anyway, great article. One of the best.
> Better that Roubini that's for sure.

Oct 03 03:14 AM

[vman650:]

I recently visited the portrait gallery in Washington DC and viewed a portrait of Carl Sandburg. Tears welled up in my eyes as I recalled some of his poems which I read many years ago while I was a student in High School. Yes debt has caused all of this but it is not really the root of the problem. The American people, including myself, are not what we use to be. I no longer hear America singing. For the most part, the work ethic is dead. We pretty much want it all and we wish to pay for none of it. This is reflected in the attitude of our political parties. The rich do not wish to pay taxes and the poor want a handout. In your excellent article, you state that we cannot export out way out of the problem. You are correct but for the wrong reason. We have become incapable of manufacturing anything of value that anyone would want to buy. In my very humble opinion, we will come out of this mess when we once again fulfill the words of Carl Sandburg written so many years ago about a country which exists still but in name only. It is ironic, but another depression is the only thing which can save us.

Oct 03 09:07 AM

[GoodLife:]

This sounds to me like the reasoning that brought us to where we're at--'if gov't would just get out of the way all will be good'. So we deregulated and working people everywhere got shafted by rich scammers.

It's not that I think your ideas are all wrong, just that you take some good ideas to unreasonable extremes, what has been called by some 'Free Market Fundamentalism'. I've never heard anyone argue that football would be better if there were no rules, that the invisible hand would guide it.

A 'free market' is not the end-all, be-all; it's a useful tool, as long as it's maintained in a healthy state. Laissez-faire excess and socialist excess can both destroy that healthy state.

Big gov't, small gov't, the scammers will always look for a way to exploit the rest of us, it's a neverending battle. Thus the need for eternal vigilance. Ideologies are obstacles, insofar as they replace critical though and frequent re-assessment of the situation.

Mr. Morin - There are plenty of good ideas in your post, but 'If you go carryin' pictures of Chairman Mao, ain't gonna make with no one anyhow.'

BTW, a currency itself is a social construct. Socialism?


On Oct 02 04:04 PM Socialism cannot compete! wrote:

> Idiocy!! Please tell us when, in world history, socialism has EVER
> been democratic? It's always been a tool of totalitarianism, working
> AGAINST freedom and democracy. The essence of socialism is control
> by a small cabal who steal from a producing group to give to others,
> whose support is then gained. There is no equality -- those producing
> have to work ever harder to make up for the unjust garnishing...those
> on the receiving end lose their dignity and honesty...and those running
> the show live like noone else.
>
> So please...show us real, working, sustainable examples. Don't cite
> the economic surge in China -- they are moving slowly towards capitalism
> -- at the moment still centrally controlled, but a gradual increase
> in the correlation between individual effort/ingenuity and rewards
> received still yields a net positive, vs. the gradual decrease here
> in the U.S. -- of which we are now reaping the rewards!
>
> It is not capitalism that has failed -- it is Big Government and
> socialism that have failed in America!!!

Oct 03 10:51 AM

[paxjds:]

When all is said and done, it would have been most prudent to let the respective banks, wall street firms, and insurance companies to go belly up. Government will now have to devalue the $ or start with a new currency to get out of this Fed debt mess they have put us in. We are in for a long, long period of minimal growth and reduced government services and/or massive and long term inflation.

Only long term hope is returning to We the People in lieu of US the Special Interest and Greed by those in Power, both in and out of Government.

Can the Republic survive this onslaught of total Mis-Management ,
Corruption, and Greed in High Places?

Oct 03 11:46 AM

[billder:]

Edward,

Terrific, insightful article followed by excellent feedback from (mostly) thinking people. I am especially struck by the general tone of the responses to your essay. There are people responding from all ends of the political spectrum, and yet the tone remains thoughtful.

It seems everyone, regardless of politics, understands we have entered a period of time when things are fundamentally changing in America and the world. I only wish the national political discourse would follow the rational discourse of the commenters above, and then maybe there would be some chance of arriving at less painful solutions to the Great Unwinding.

American politics, and apparantly worldwide politics, has become a big Scorched Earth Game. There is little consideration of the big, long term issues... only the short term game of "win by destroying your opponent". This goes for all political persuations, left, right and center. Truth telling and reasoned debate have gone the way of the Model-T. The rules of the day for all politicians are (1) Finger Pointing, (2) Blame Laying, and (3) Avoidance of Responsibility. The only real concern of politicians is fund raising and staying in power and more fund raising.

I fear America has become too big, too complex, too divided to have any real hope of fixing her problems under Democratic means. I fear the problems of the years to come will be far worse than economic privation, and may lead to the destruction of the liberty we hold most dear.

There are a total of only a few people who control all of our destinies. Add up Congress, the Senate, the Executive, and the Judicial and it is less than 600 people controlling the destinies of over 300M US citizens, and by virtue of US economic and military might, the destinies of the rest of the world as well... over 7 billion humans directly or indirectly, whether they realize it or not, are tied to the success or failure of the USA.

These 600 people who control the destiny of humankind are in-turn controlled by monied special interests who fund thier re-elections, and who care about nothing other than showing an increase in EPS in the next quarter. Ethics and rules be damned, get what you can get and screw the rest. Cap it all with the constant effort of all politicians to influence the media-message though growingly hysterical actions and words.

Solutions? When you add all of this on top of the cumulative economic woes you so aptly describe, I don't see any. Even "throwing the bums out" would only result in a new batch of bums. The next 20 years of our lives are likely to see changes more drastic than any envisioned above, and I am not optimistic about a good outcome.

Saludos,
Bill Doyle
Loreto, BCS, Mexico (the new economic frontier, among people far tougher than todays average US citizen)

Oct 03 11:52 AM

[silverslut:]

Edward, This article is the first of yours that I have read. You covered many bases and managed to tie many things together. Even so, you failed to touch on the prime factor beneath all the problems. That would be the corruption which underlies it all. What has been going on here, in what is considered to be the bastion of the free world, is rampant corruption. The money power, which was stolen by the fed's hidden owners in 1913, has been used to screw not only americans, but the whole world. When money goes bad, it begins to take general attitudes with it. Things have gotten so bad and the whole money idea has gotten so corrupt, that crime is just ignored, since everyone is doing it. All the problems that you write about, stem from the corrupting of the money power. That is the root. You can trim up the blooms, until the cows come home, but if you leave the roots, it will all come back just like Oregon Blackberries. The best solution to our current problems would be to take Greenspan, Bernake & Geitner and hang them in public. Wait, burning at the stake would play better on TV. Then backtrack them and start in on the banksters that are on their call lists. Keep this process up until the whole world is clear on the whole concept of fiduciary responsibility. What about the rule of law? Well, these guys have been killing elders and children and it has been tradition in this courntry, to bypass the courts and just hang the bastards. In just a few months you could turn the whole ship and get it headed towards port.

Oct 03 12:46 PM

[ebworthen:]

Excellent analysis and article - thank you.

It is ironic how we now seem dependent upon government debt spending to prevent complete collapse; since the government has indebted future generations to address the abuses of private entities and individuals. Ouroboros - the snake eating it's own tail.

The pendulum has swung from socialism of the new deal and new society, to immoral capitalism of 30-1 leverage on the backs of responsible citizens.

Both of these ends of the pendulum have depended upon punishing the responsible, either via overtaxation or utilizing the capital of individuals for privitized gains and socialized losses - or both.

In the past 100 years we have moved from an agrarian society of savers to a consumption society of debtors.

At the same time our retirement model from one of land, savings, and pensions to one of no land, no savings, bankrupt or exorbitant pensions and 401K's subject to the cream skimming and manipulations and whims of financial oligarchs and politicians.

On a societal level, in the U.S. and golbally, it will be very difficult for us to navigate the immorality of our market and economic conditions without armed conflict on a large scale.

The saddest realization from your article is that neither political side has gotten it right, and that both have addressed problems with solutions that are immoral and unethical band-aids that punish the responible and reward the irresponsible for the sake of expediency.

Oct 03 01:27 PM

[Aki Izayoi:]

"Please tell us when, in world history, socialism has EVER been democratic? It's always been a tool of totalitarianism, working AGAINST freedom and democracy. "

Sweden, Germany, Denmark, Norway , and Finland... Why? I suppose in the 20th and 21st centuries, they were democratic. Perhaps, those countries do not embody "socialism," but their policies are way to the left of your conveyed political preferenced.

Oct 03 02:09 PM

[Mad Hedge F...:]

nht For the last six months there has been a great big whopping contradiction in the markets. The stock market has been discounting a return to the “Roaring Twenties,” while the bond market has been anticipating the return of the “Great Depression.” After yesterday’s publication of the Labor Dept.’s September nonfarm payroll number showing the loss of another 263,000 jobs, it looks like the bond market now has the upper hand. The really disturbing aspect of this number is that 57,000 teachers were fired, as states chop budgets to the bone. This is really eating our seed corn by the handfull. Stocks have dropped 5% from last week’s peak, as the bond market soared, the ten year yield reaching nosebleed territory of 3.05%. My call to buy the TBT, a leveraged bet that US Treasury bonds would fall, is starting to look a little green about the gills. The dollar still maintains its flight to safety status, which to me, is one of the great ironies of all time. It’s like that reprobate, alcoholic uncle with the bad teeth, who, when your car breaks down in the middle of a downpour in a bad neighborhood, will always let you crash on his sofa. Let’s call him your Uncle Sam. You have to hand it to PIMCO’s inveterate card counter, Bill Gross, who says this is all about transitioning to a “new” normal of 1%-2% real GDP growth. That’s why he was loading the boat with bond yields at 4%, a ballsey move at the time, which now smells like roses. I guess that’s why they call him the “Bond King.” As for me, I’m never wrong, just early. Sometimes way early.

Oct 03 02:12 PM

[William M. ...:]

No question this will be the biggest and longest recession of most peoples lifetimes but I'm not seeing any massive soup lines or Marches on Washington DC for jobs like in the great depression (yet).

The best part of this article for me was your summary of the Economic enviornment from the 50's throught today. Samuelson-Keynesianism macro-economics was required reading in American Universities in the 70's. Do not recall hearing of Milton Friedman until the 80's when Reagan adopted his thinking to fit into his Reaganomics. But your right Reagan was about deregulation. He got elected on the notion he would reduce government and government spending but at the end of his two terms government, spending and debt was greater than before his election. Still, we loved Ronnie.

Oct 03 03:02 PM

[sixpackistan:]

Brilliant. Thank you.

Oct 03 03:08 PM

[rosey99:]

Interesting, and for its length, very succinct. While I have been trying hard to imagine a way out of the scenario you describe, or something very close, I have been unable to.

I seem to recall reading in another of your posts that your background is in foreign policy. If I am indeed correct, it would be interesting to get your views on what you mean by "muscular government." More precisely, I see grave risks ahead for what we have come to call the "global economy." IMO, complex transnational supply chains are taken for granted, and many do not see just how fragile such systems are, and that specific and benevolent conditions are required. By this I don't necessarily mean old fashioned protectionism (though we're seeing more of that) but rather perceived changes in national interests, as previous relationships based on commerce give way to different domestic priorities. The period leading up to WW1 leaps to mind, lots of social and political changes were contributing to an overall lack of stability in international relations, a big change was in store but people did not see it coming. So there was a war and the map changed a great deal, as did the relationships. There was a lot of speculation then too I am sure, but in the end it was something totally unexpected - the assassination of Franz-Ferdinand. Fragility is a funny thing, sometimes you don't see it until it is too late.

Thanks again for the piece.

Oct 03 06:40 PM

[Dion134:]

Okay, nothing left to do but prop up the economy with government spending. But, that keeps the phony baloney scheme going. I like how you stick to the facts, but it would be nice to mention that the propping of the economy would be completely immoral. That is, of course, if you believe in free markets! Overall, good article!

Oct 03 10:24 PM

[buddhabill:]

Oy, if all you have are Obama/Osama, acorn and 'commie' references, I guess you really didn't read the article. The real damage was done under the prior administration by not addressing the debt-bubble in 2001. Actually they did address it, with greenspan's assistance by radically increasing it!

It doesn't matter who got elected, the market was already crashing, remember? And yes, repeatedly jabbing a patient in anaphalactic shock with an EPI pen will eventually kill him, the alternative is to watch him die in front of you.

The nature of politics is to preserve the status quo, not to lead to new frontiers. A Revolution does that. Decision-makers in Washington will keep reflating the debt bubble until it bursts beyond all repair. Medicare obligations will finish the job if prime mortgage defaults and state bankruptcies in California and other state via a crashing tax base through persistent unemployment doesn't get it done in the next 2-3 years.

So yes, you will have B-Hussein-O as a scapegoat. Damn him and his non-existent birth certificate! If only Palin were in charge, she would, er, so what is it again that she would do differently?


On Oct 03 01:13 AM HA65MPH wrote:

> GORDSAV,...yes i believe this generation of over indulged 'children
> 21-40 , do not totally understand what is GOING ON !..And they will
> be dead before they hit the ground . GREAT POST BY THIS WISE AUTHOR
> !..EDWARD . ..The whorehouse (house of rep.)..and THE ''OTHER whore
> house (senate)..COULD CARE LESS ABOUT THE AMERICAN PEOPLE !!!..I
> doubt they even step foot into a grocery store...The main ''Madam''
> poloski is a old #$%^** ...and b.hussein nobanmma , is AN ACORN NUT
> JOB !...JMHO ...

Oct 04 02:42 AM

[punk_ash:]

No we will not get the same depression of the 1930s, at least I hope not. We will get a bunch of W W W W and followed by L.

Oct 04 05:41 AM

[alajac:]

Since drops work through quicker than rallies, I think your time frame on the nightside is too drawn out.

I have plan that will "get us through the night" as soon as it is implemented. See my other comments or the profile page of "alan jacquemotte" on classmates.com for details..


On Oct 02 02:09 PM Michael Clark wrote:

> You are right, Donald. The global beast will be turning up its roaring
> quite a few notches at this point. In my system of describing this
> phenomena, the point of absolute expansion was 2001. This is where
> contraction BEGAN. It was High Noon, when the world system reached
> its moment of perfection...and popped. The Spirit of Deflation (if
> I can speak of it this way) was tiny, a little seed, overwhelmed
> by the Spirit of Inflation. But from this point Deflation began to
> grow and Inflation began to get weaker. Greenspan-Bernanke represent
> this Spirit of Inflation....but they have been losing strength ever
> since.
>
> Noon is 2001. Dusk is 2010. At Dusk the Spirit of Inflation and the
> Spirit of Deflation will be at equal strength (as the light and the
> shadow are of equal strength at Dusk, the days and nights are of
> equal strength, the Night is rising, the Light is falling)....but
> 2010 indicates the triumph of the Spirit of Deflation. The Darkness
> rises and is in power and will remain in power from 2010 through
> 2028, until the Dawn returns. But the real power of Deflation will
> run from 2010 to 2019. 2019 will be the apex of the Forces of Deflation
> in the same way that 2001 was the apex of the Forces of Expansion.
> The Spirit of Inflation will appear as a seed in 2019 and will begin
> climbing the mountain again, weak at first, but gaining strength
> until 2028, when the Dawn will return, and the future will again
> become light and hopeful.
>
> Spring is the Golden Age, during which time everything seems to work.
>
>
> The credit expansion (1983-2001; 2019-2038) represents a 'filling
> up'; the debt contraction (1965-1983; 2001-2019) represents an 'emptying
> out'.
>
> The darkest period will be 2010-2019.

Oct 04 09:19 AM

[alajac:]

Since drops work through quicker than rallies, I think your time frame on the nightside is too drawn out.

I have plan that will "get us through the night" as soon as it is implemented. See my other comments or the profile page of "alan jacquemotte" on classmates.com for details..


On Oct 02 02:09 PM Michael Clark wrote:

> You are right, Donald. The global beast will be turning up its roaring
> quite a few notches at this point. In my system of describing this
> phenomena, the point of absolute expansion was 2001. This is where
> contraction BEGAN. It was High Noon, when the world system reached
> its moment of perfection...and popped. The Spirit of Deflation (if
> I can speak of it this way) was tiny, a little seed, overwhelmed
> by the Spirit of Inflation. But from this point Deflation began to
> grow and Inflation began to get weaker. Greenspan-Bernanke represent
> this Spirit of Inflation....but they have been losing strength ever
> since.
>
> Noon is 2001. Dusk is 2010. At Dusk the Spirit of Inflation and the
> Spirit of Deflation will be at equal strength (as the light and the
> shadow are of equal strength at Dusk, the days and nights are of
> equal strength, the Night is rising, the Light is falling)....but
> 2010 indicates the triumph of the Spirit of Deflation. The Darkness
> rises and is in power and will remain in power from 2010 through
> 2028, until the Dawn returns. But the real power of Deflation will
> run from 2010 to 2019. 2019 will be the apex of the Forces of Deflation
> in the same way that 2001 was the apex of the Forces of Expansion.
> The Spirit of Inflation will appear as a seed in 2019 and will begin
> climbing the mountain again, weak at first, but gaining strength
> until 2028, when the Dawn will return, and the future will again
> become light and hopeful.
>
> Spring is the Golden Age, during which time everything seems to work.
>
>
> The credit expansion (1983-2001; 2019-2038) represents a 'filling
> up'; the debt contraction (1965-1983; 2001-2019) represents an 'emptying
> out'.
>
> The darkest period will be 2010-2019.

Oct 04 09:25 AM

[Dr.Jackpot:]

with all this thinking and study, why does no one mention the simple core problem that caused all this? That is the policy of Alan Greenspan to take from savers (no interest paid) and give to spenders.

Oct 04 09:34 AM

[alajac:]

Sweetie Pie, The banks took over this country in 1789 and gave us a virtual monarchy for a government (even though the faces change and the words all spound good, the result is that the govenment - just like a king - can do whatever it likes to and with its subjects: like make them pay taxes or fight in a war they find unjustified, just like a king can do) and a "Constitution" that would only be interpreted by people who had been appointed by bank stooges (that is, by the bank-funded political parties, figureheaded by the President) to say whatever the banks wanted it to say (like "corporations have the same rights as people" and "the commerce clause lets the government regulate EVERYTHING" and "the general welfare clause lets the government do ANYTHING it wants") and above all to get their hands on a monopoly on our money (which finally would be only created by the creation of a loan on which the banks would charge us interest FOREVER), etc.

THE ACTUAL TRUTH IS: governments are the de facto owner of everything within their domain (all other ownership is "de jure": that is, created by the actual owner, the government) and never need to borrow anything to create money (though they may need to get rid of some in order to keep prices somewhat stable).

THE ACTUAL TRUTH IS: the jobs have been being destroyed for the last 200 years by the destructive technology of the Industrial Revolution, and the Cybernetic Revolution has just about ended the need for amounts of human labor large enough to use "jobs" as the basis of economic resource distribution. The Greatest Depression will continue until a new scheme is implemented (or until the swine/bird/human flu the bastards glommed together in their labs wipes outr enough of the population to get wages up to where the real disease can be hidden again).

THE ACTUAL TRUTH IS: that the real disease is that governments create private property and take away everyone's right to free access to the land without paying compensation for that impairment, a malady that Tom Paine diagnosed in 1797 (see "Agrarian Justice" on Wiki). Today we have the technology to easily pay everyone such compensation and, by so doing, complete the Revolution started in 1776, and end the Greatest Depression at the same time. Until such a plan is implemented, the direction is down.

See my other comments on SA or the profile page of "alan jacquemotte" on classmates.com for details.


On Oct 03 01:27 PM ebworthen wrote:

> Excellent analysis and article - thank you.
>
> It is ironic how we now seem dependent upon government debt spending
> to prevent complete collapse; since the government has indebted future
> generations to address the abuses of private entities and individuals.
> Ouroboros - the snake eating it's own tail.
>
> The pendulum has swung from socialism of the new deal and new society,
> to immoral capitalism of 30-1 leverage on the backs of responsible
> citizens.
>
> Both of these ends of the pendulum have depended upon punishing the
> responsible, either via overtaxation or utilizing the capital of
> individuals for privitized gains and socialized losses - or both.
>
>
> In the past 100 years we have moved from an agrarian society of savers
> to a consumption society of debtors.
>
> At the same time our retirement model from one of land, savings,
> and pensions to one of no land, no savings, bankrupt or exorbitant
> pensions and 401K's subject to the cream skimming and manipulations
> and whims of financial oligarchs and politicians.
>
> On a societal level, in the U.S. and golbally, it will be very difficult
> for us to navigate the immorality of our market and economic conditions
> without armed conflict on a large scale.
>
> The saddest realization from your article is that neither political
> side has gotten it right, and that both have addressed problems with
> solutions that are immoral and unethical band-aids that punish the
> responible and reward the irresponsible for the sake of expediency.

Oct 04 10:18 AM

[bluesky123:]

"Koo replies: Until the private sector is finished repairing its balance sheets, if the government tries to cut its spending, we’re going to fall into the same trap Franklin Roosevelt fell into in 1937 (a crushing bear market)."

What does it mean "until the private sector is finished repairing its balance sheets"? Where is the line in the sand? Bloomberg said recently US household debt dropped from 132% of household income to 127%. When are we "finished" repairing our balance sheets - when US household debt is 100%, 80%, 60%, no debt at all? The answer to this question indicates if deleveraging will take years or decades. The government can't keep stimulus going for another 10+ years.

Oct 04 11:08 AM

[alajac:]

Due to the fact that there will never again be enough jobs to use them as the basis for distributing economic resources (thanks to the ongoing Industrial/Cybernetic Revolution), continual and significant (at least $1000/mo) stimulus directly into accounts established for every legal resident is EXACTLY what EVERY government will have to do from now on. And not just 10+ years but for as long as we want to keep the show going.


On Oct 04 11:08 AM bluesky123 wrote:

> "Koo replies: Until the private sector is finished repairing its
> balance sheets, if the government tries to cut its spending, we’re
> going to fall into the same trap Franklin Roosevelt fell into in
> 1937 (a crushing bear market)."
>
> What does it mean "until the private sector is finished repairing
> its balance sheets"? Where is the line in the sand? Bloomberg said
> recently US household debt dropped from 132% of household income
> to 127%. When are we "finished" repairing our balance sheets - when
> US household debt is 100%, 80%, 60%, no debt at all? The answer to
> this question indicates if deleveraging will take years or decades.
> The government can't keep stimulus going for another 10+ years.

Oct 04 11:55 AM

[ranfin:]

Yes, we can. Look at Germany after World War I.


On Oct 02 08:49 PM dollar bull**** wrote:

> Great article...in regards to Howard_T's comment about rapid inflation...should
> he do a little research-he would find that this spending will lead
> us on a road to much worse than rapid inflation. It's called HYPERINFLATION,
> which is caused by a lack of confidence in a currency. Check it on
> on wikipedia.
>
> Japan could have massive amounts of cash in market as their consumers
> save a majority of earnings. US consumers are just beginning to save...not
> a good formula.
>
> Anybody think we can have a hyperinflationary depression?

Oct 04 12:16 PM

[ranfin:]

I really enjoyed your article, but if I understand your conclusion as to the way forward, I disagree. A continued rate of very high government deficit spending solves nothing. The problem is our trade deficit. I do not see how that can continue indefinitely, which I believe you are suggesting. If something cannot continue forever, it won't. We need to think about just how that will end and what we can do to make the ending as painless as possible. Everything else is just wasting time and money.


On Oct 04 12:16 PM ranfin wrote:

> Yes, we can. Look at Germany after World War I.

Oct 04 12:29 PM

[ECHealthIns...:]

What a fantastic article and great commentary by the alpha reader, I think all of your points are valid and wish I could look into the future not for my own financial gain, but just to peek at the name the journalists come up with for this depression. I vote for the Great Deleverage (which I admittedly though of on the spot and sounded better in my head than on paper).
I believe this particular period, due to the government intervention and financial tweaking that is likely by an utterly confused Fed will make us yearn for the good ole' days of the 1930's. My current investment ideas boil down to physically owning gold and silver at my house. Perhaps I will start get my cavities filled with gold so that I can effectively insulate myself from a massive pandemonium that could ensue a'la Hurricane Katrina should there be another disaster be it from nature or financial disaster. I believe I am going to start studying the art of self dentistry in order remove my gold teeth inconspicuously. Shhh don't tell anyone.

Oct 04 01:55 PM

[SeeTheLight:]

Excellent article. An extremely well written piece that mirrors exactly what I feel has occurred and will occur.

The fact is, when faced with a serious debt problem (denominated in its own currency), there are only a few ways for a government with the issue, namely:

1. Pay down the debt (via spending cuts / tax increases)
2. Monetize the debt (print your way out)
3. Default (you didn't really think we'd pay you back, did you?)
4. Positive Balance of Trade (Want to buy a CDO?)
5. Economic Growth (but only real growth - what is that?)

Obviously 5 is the most palatable option, with 4 being a reasonably good alternative. The problem is most of America's growth was not in manufacturing but instead financial based. One can not reasonably expect any non-bubble growth in financials, and without major unexpected innovations one can not expect strong growth in manufacturing.

Achieving a positive balance of trade would require such a devaluation of the US dollar to make it unacceptable. Plus since this is a global depression, there is hardly any other economies eager to run a balance of trade deficit.

Which leaves the other 3 options. None of which are pretty. Printing = dollar devaluation and hyper-inflation. Spending cuts / tax increases are politically impossible currently. And Default - need I discuss the ramifications of that?

This is what makes a depression almost inevitable, whether the decision any of the three of the above, someone is going to lose a lot of wealth regardless of what is decided, and undoubtedly that will create a fearful, hunker down mentality that is truly deflationary.

Good Luck all

Oct 04 03:33 PM

[reveigel@ms...:]

Right title, wrong approach to recovery. Just another incompetent idiot spouting old tried and failed programs. Spend and spend by government and soon we will be in perfect health. If true we should be enjoying the most vibrant and super economy ever. Guess those in government will never wake-up and admit how wrong they have been for years and years and years. That would be a miracle beyond belief.

Oct 04 03:44 PM

[stockartist:]

Enjoyed your take on what really happened after the fall-"the fake recovery". I hope readers listen to your warning and take it to heart. It's never easy being the bearer of bad news, but someone has to do it.

Oct 04 07:16 PM

[bobbybutte:]

If you would have written this one year ago >i would be taking what you said more serious

But the major banks all got secondary offerings which does dilute them but they are much more liquid then they were

The massive delevearging has already been going on almost a year now

I agree the economy is not improving but where else would any sane person who is tired of 1% going to put their money?

Of course the high dividend safe multinational large caps will draw the money

Depressions are caused when the banks dont have any cash

The fed is making sure there is massive liquidity

No depression is on the horizon

Oct 04 07:41 PM

[Big Bubbette:]

No worries. Al Gore and Boxer will pass Crap on Trade, sorry Cap and Trade, oops the Pollution Reduction and Investment Act and all will be well.

Oct 04 09:21 PM

[Nik Kondrat...:]

Let's see where we are in 5 years---with piles of debt, no jobs, declining productivity, declining asset prices, increasing defaults, idle capital, overcapacity and a massive federal deficit and weakened revenues--we're all but guaranteed a Depression. Ed's right. Massive changes need to happen before we can get out of this mess.


On Oct 04 07:41 PM bobbybutte wrote:

> If you would have written this one year ago >i would be taking what
> you said more serious
>
> But the major banks all got secondary offerings which does dilute
> them but they are much more liquid then they were
>
> The massive delevearging has already been going on almost a year
> now
>
> I agree the economy is not improving but where else would any sane
> person who is tired of 1% going to put their money?
>
> Of course the high dividend safe multinational large caps will draw
> the money
>
> Depressions are caused when the banks dont have any cash
>
> The fed is making sure there is massive liquidity
>
> No depression is on the horizon

Oct 04 09:27 PM

[User 357705:]

Denmark. Finland. Sweden. Norway. All are examples of socialism that is successful. There are of course more though I hesitate to suggest them as one may become deeply upset.

As for stealing from the productive that is what Duhmerica now has. The unproductive bankster leeches have stolen from the workers futures and those of their yet unborn grandchildren.

Look, I understand its upsetting when one's religion, in this case the religion of FU Capitalism, is proven to be a sham beyond a reasonable doubt. The more fervent acolytes are the most upset because they have so much emotion invested in their belief system.

Lastly, the Horatio Algers lie is the most pernicious.

Good luck! How's that short order cook job working out? Waffle House wasn't it?

On Oct 02 04:04 PM Socialism cannot compete! wrote:

> Idiocy!! Please tell us when, in world history, socialism has EVER
> been democratic? It's always been a tool of totalitarianism, working
> AGAINST freedom and democracy. The essence of socialism is control
> by a small cabal who steal from a producing group to give to others,
> whose support is then gained. There is no equality -- those producing
> have to work ever harder to make up for the unjust garnishing...those
> on the receiving end lose their dignity and honesty...and those running
> the show live like noone else.
>
> So please...show us real, working, sustainable examples. Don't cite
> the economic surge in China -- they are moving slowly towards capitalism
> -- at the moment still centrally controlled, but a gradual increase
> in the correlation between individual effort/ingenuity and rewards
> received still yields a net positive, vs. the gradual decrease here
> in the U.S. -- of which we are now reaping the rewards!
>
> It is not capitalism that has failed -- it is Big Government and
> socialism that have failed in America!!!

Oct 05 12:24 AM

[User 357705:]

USSR failed because it was a setup from the start. The banksters forwarded the idea so they could gain control over literally all of the money, wealth and production of one country they could make fail so as to manufacture both a fake 'enemy' and the failure so they could manipulate others into spending billions on wars both cold and hot which are very lucrative for banksters and arms dealing nations.


On Oct 02 06:02 PM YaddaMinski wrote:

> Mr. Morin, are you familiar with non-linear systems? The economy
> is a non-linear system: aF(x) <> F(ax) &amp; F(a) + F(b) <> F(a +
> b). This means that adding something here (Obama stimulus) will
> usually add something there (employment). The economic system is
> far too complex for top-down economic planning ala the USSR (why
> didn't the USSR prosper?). The best that can be done is to do back
> to the USA's founding principles of individual liberty, small government
> (respecting the three branches), and transparent law to settle disputes.
> Incentives must be put in place to encourage individuals to contribute
> in an optimistic way. What the USA used to be before the grand socialism
> experiment began in the early 1900's with the Northern European Model.
>

Oct 05 12:32 AM

[User 357705:]

Happily you have realized that both 'sides' haven't gotten it right. Perhaps it will be helpful to realize that the two 'sides' are merely warring factions within the larger BIZ party who's fealty is to the oligarchs.


On Oct 03 01:27 PM ebworthen wrote:

.
>
> The saddest realization from your article is that neither political
> side has gotten it right, and that both have addressed problems with
> solutions that are immoral and unethical band-aids that punish the
> responible and reward the irresponsible for the sake of expediency.

Oct 05 12:44 AM

[User 357705:]

A year ago those that were writing like this were pilloried for the temerity to speak the truth.


On Oct 04 07:41 PM bobbybutte wrote:

> If you would have written this one year ago >i would be taking what
> you said more serious
>
> But the major banks all got secondary offerings which does dilute
> them but they are much more liquid then they were
>
> The massive delevearging has already been going on almost a year
> now
>
> I agree the economy is not improving but where else would any sane
> person who is tired of 1% going to put their money?
>
> Of course the high dividend safe multinational large caps will draw
> the money
>
> Depressions are caused when the banks dont have any cash
>
> The fed is making sure there is massive liquidity
>
> No depression is on the horizon

Oct 05 12:54 AM

[Joe Duggins:]

Let's examine a serious question. Is an economic depression impossible in 21st century America? Some famous people are saying we will not have a depression.

"Enough with the hysteria," Cramer said during Tuesday's Mad Money, "we're not going to suffer another Great Depression. "

Is he right? After all the US government can print money and has shown a willingness to do so. We have a Congress that loves to bail companies out in order to increase the power and scope of the federal government.

In addition, we have a Federal Reserve that has shown they are willing to add trillions of dollars to their balance sheet to fight a serious economic downturn. I'm reminded hawkers who yell, "Hurry, hurry, hurry.... step right up folks and see the wonders of the universe for only 25 cents!".

But in this case the Federal Government is yelling, "Who needs a bailout? Get em while they're hot. Come one, come all, bailouts of any size for any reason." Oh sure, they will have some drama over the automakers to get on television, but in the end the outcome is pretty certain. They are going to throw tons of money at this problem and hope it goes away.

But printing money has consequences too. In time this may result in runaway inflation. If it goes to hyper inflation the economy is destroyed as people with savings in paper money are simply wiped out financially.

Will we have a depression or hyper inflation down the road after the deflation we are now experiencing runs its course? Nobody knows.

But I do have one serious question.

For all those who are sure that with the smart people and printing presses we have now that a depression is not possible, my question is how did we get into this mess to start with if we have all this figured out and under control?
----------------------...
Money without intelligence is like a car without a road.
www.intelligentinvesti...

Oct 05 05:46 AM

[SmBlkBob:]

IMHO,
WAY too much referring to the past including blaming everyone who's had anything to do with the economy in either party.

Too little being done to actually manage the problem with a long term perspective.
Government, in general, is solving the problems based solely on the next election cycle NOT what should actually be done.

Excellent article and one of the reasons I'll remain overweight in Gold for the time being.

You don't have to be an economist to see what's happening right in your neighborhood. A popular book, which I hate to admit I can't remember the title to, stated that to know where to invest you only have to monitor the stores etc that you frequent and base your strategies on what you observe. What store/company do you frequent that you would invest in right now?
Other than perhaps Wal Mart, traffic is down everywhere I go.
(Which is a statement in and of itself)
I've even turned down my addiction to Dunkin Donuts.
But we still have to eat and I still see people buying gas although in much older cars.
For now, it would seem, commodities are the only sure thing but at what price?
The next few months will not be pretty.

Bob

Oct 05 06:21 AM

[Vuke:]

A superb article, as perceptive as it is comprehensive. One small point I'd like to add; historically, the economic decline of a great power has been slow and measured, marred and accelerated by military expansion and intermittent conflict.

This is not a model most would like to follow. "Muscular government" is to be feared, instead intelligent vision and cooperative effort will lead the way out of this mess. We are blessed with a legal/social system and government that works (most of the time) which, added to the resources and resourcefulness of the country and people can be tweaked to a sound and solidly growing economy. Present and future leadership, at all levels, not greed, is the key.

It'soften said, but never more appropriate than now, we get the government we deserve.

Oct 05 07:16 AM

[User 495594:]

I had a chance to review the article and on the surface it appears to make sense but I will have to read it several times to determine if the solution is palatable. I for some reason appear to be struggling with the whole spending idea and by what seems to be everyones acceptance of this behavior by an entity that may have actually caused the entire mess we are in today....on purpose. Not sure any economic professor would pass any class or test based on this latest bubble creation. When I have time I guess I'll have to take a quick look at the links and then try to learn and understand basic economics. Debt is bad for the private sector..yet it is good for the government? This is a hard pill to swallow and looks like a gamble that needs not be made....since it appears the whole ponzi scheme of economics is a trip to the casino where the house always wins. When I know more I'll be able to comment on the potentials and the solutions. Great comments by all...
Obewan

Oct 05 07:20 AM

[buyitcheap:]

You are ruining my Monday, man. But I do appreciate the great mythological allusions. The massive amounts of debt will be a tremendous brake on the economy and keep things flat to deflationary to be sure.

If one assumes that in a depression or a double dip, asset class correlations go to 1.0 where do you put your money? gold? silver? I think a restructuring of the US debt is absolutely going to happen in the next 10 years, so short treasuries and all markets? who will be left to make good on the trade?

Keep the articles coming, though, given the tenor of them, I may go long alcoholic beverage makers, and read these over the weekend. :-)

Oct 05 07:49 AM

[Barking:]

Great article and good summation of who, what, when, where & why. I feel that the next 20-30 years are going to be VERY different then the last 20-30. Our children and theirs will have far simpler lives than we have had. The house flipping, rolex wearing, BMW driving yuppies and their like....are DEAD.
The excesses of the last 30 years will slowly go away as we witness a global redistribution of wealth. The USA currently has 5% of the worlds population but consumes 25-30% of its goods. THATS about to slowly change over time. When its all done we wont have much of a middle class left...only the very wealthy and the poor and the standard of living in this country will be much lower. Sad but true....

Oct 05 10:23 AM

[bobbobwhite:]

Since the 1970's, America has pushed forward only the style of everything socioeconomic, while purposely suppressing the substance. It started in the social/educational/ent... arena but soon was enthusiastically endorsed by gov't and big business, as these entities quickly saw the pure power of influencing people to falsely believe that nonsensical fluff is "actually" the truth. And that's where we still are today and even more so......cloud-headedly thinking that style is really substance when it could not be farther from the truth as the two words are, by definition, polarized. We will not improve nor, far less likely, correct what ails America until we can restore the accurate perception of reality that is unencumbered and unaffected by the fairytale burden of anything emotionally based that we instead seem to dependently need to believe is the actual truth. Our problem demanding immediate correction is this needy dependence we have recently developed which might be called the value we want it to have instead of its mark-to-market actual value. Constant reality checks should serve to keep us seeing life as it is, rocks and sticks and all, and not only what we want to believe it is, but no one seems to care about reality checks these days. This new, emotionally needy America that has developed in these past 40 years has to go for any chance at true socioeconomic recovery as a nation, and I'm not only referring to the present crisis.

Where we ever became a moronic society that truly believes that opposing and polarized thought, behavior and definitions are really the same thing or not much different proves that Barnum was as dead on as Einstein was, in his own way. Further proof is that, contrary to the savvy readers on this board, most modern Americans would read this post and say, "huh?"

Oct 05 11:07 AM

[Dialectical...:]

I love the phrase "more muscular forms of government." I can feel the sand being kicked in my face already.

Oct 05 11:09 AM

[Boxed Merlot:]

On Oct 05 07:16 AM Vuke wrote:

> A superb article, as perceptive as it is comprehensive. One small
> point I'd like to add; historically, the economic decline of a great
> power has been slow and measured, marred and accelerated by military
> expansion and intermittent conflict.
>
> This is not a model most would like to follow. "Muscular government"
> is to be feared, instead intelligent vision and cooperative effort
> will lead the way out of this mess. We are blessed with a legal/social
> system and government that works (most of the time) which, added
> to the resources and resourcefulness of the country and people can
> be tweaked to a sound and solidly growing economy. Present and future
> leadership, at all levels, not greed, is the key.
>
> It'soften said, but never more appropriate than now, we get the government
> we deserve.

I appreciate your sentiments and whole heartily agree. We (the US), will continue to devolve however until we return to allowing ourselves to access our natural resources in a more rational fashion. The knee jerk environmental fanaticism being taught to our children in government educational institutions is hobbling our ability to utilize our national wealth by pitting a religious fervor for “natural” do-nothingness vs. a productive, responsible, and healthy cultivation and utilization of our physical environment. I wish I could share a more positive sentiment regarding our current generation’s future but I sense this next one may need to be flushed out too before the plague of greed, (covetousness), is properly dealt with in our educational efforts. imo

Oct 05 11:23 AM

[RobFromGa:]

This is an excellent essay showing where we are and how we got here. I think that the only sustainable long term solution for the US is to get the government back to a much smaller spending model.

How to do this with the massive entitlements already promised and the interest on the enormous debt poised to explode when interest rates take off is the problem.

Every person needs to prepare for the possibility of a financial collapse leading to shortages and the potential problems that will cause with millions of unprepared city dwellers getting hungry and thirsty.

Seize the Day,
Rob
Emergency Preparedness For the 21st Century Family

Oct 05 11:49 AM

[Cramer #1:]

Roubini Sees Stock Declines as Soros Warns on Economy


By Shamim Adam and Francine Lacqua

Oct. 5 (Bloomberg) -- New York University Professor Nouriel Roubini said stock markets may drop and billionaire George Soros warned the “bankrupt” U.S. banking system will hamper its economy, highlighting doubts about the sustainability of the global recovery.

“Markets have gone up too much, too soon, too fast,” Roubini, who accurately predicted the financial crisis, said in an interview in Istanbul on Oct. 3. U.S. stocks may suffer a “major decline” after climbing to the highest levels in almost a year two weeks ago, according to technical analyst Robert Prechter, founder of Elliott Wave International Inc.

Stocks have surged around the world in the past six months as evidence mounts that the economy is emerging from its deepest recession since the 1930s. The Standard & Poor’s 500 Index has soared 51 percent from a 12-year low in March while Europe’s Dow Jones Stoxx 600 is up 48 percent. The euphoria contrasts with warnings from policy makers and investors like Soros, who said today that the U.S. economic recovery will be “very slow.”

U.S. consumers are “overdebted” and the country’s banking system has been “basically bankrupt,” Soros said in Istanbul today. “The United States has a long way to go.”

Group of Seven finance ministers and central bankers also struck a cautious tone after meeting on the shores of the Bosporus over the weekend, saying the prospects for growth “remain fragile.”

‘Barely Recovering’

“The real economy is barely recovering while markets are going this way,” Roubini said. “I see the risk of a correction, especially when the markets now realize that the recovery is not rapid and V-shaped, but more like U-shaped. That might be in the fourth quarter or the first quarter of next year.”

U.S. and European stocks gained today after reports showed service industries expanded on both sides of the Atlantic.

“Stocks are very overvalued,” Prechter, who advised betting against U.S. equities three months before the market peaked in October 2007, said in an Oct. 1 telephone interview. “Stocks peaked in September and are back in a bear market.”

The S&P 500 will probably fall “substantially below” 676.53, the 12-year low reached on March 9, he said. His projection implies a drop of more than 34 percent from last week’s close of 1025.21. It rose to 1031.77 at 10:05 a.m. in New York.

Valuations

Gains in the index have pushed valuations to more than 19 times reported operating profits from the past year, data compiled by Bloomberg show. That’s near the most expensive level since 2004.

U.S. stocks fell last week after manufacturing expanded less than anticipated and unemployment climbed to a 26-year high of 9.8 percent. In the 16-nation euro region, the jobless rate is at 9.6 percent, the highest in more than a decade.

HSBC Holdings Plc Chief Executive Officer Michael Geoghegan fears there will be a second global economic slump, the Financial Times reported today, citing an interview. Geoghegan forecast a W-shaped recovery and said the “reality is that profits will be quite reduced,” the newspaper reported.

The International Monetary Fund predicts the global economy will expand 3.1 percent in 2010, led by growth in Asia, after a 1.1 percent contraction this year. That is still “anemic” and “very weak,” Roubini said.

If growth doesn’t rebound rapidly, “eventually markets are going to flatten out and correct to valuations that are justified,” he said. “I see a growing gap between what markets are doing and the weaker real economic activities.”

Creating Bubbles

Stocks will continue to advance, according to Byron Wien, vice chairman of Blackstone Group LP. The S&P 500 is poised for its biggest fourth-quarter rally in a decade as the economy recovers and earnings exceed analysts’ forecasts, Wien said in an interview on Sept. 28.

The global equity rally has added about $20.1 trillion to the value of stocks worldwide since this year’s low on March 9. Governments have poured about $2 trillion of stimulus into the global economy while central banks have cut interest rates to close to zero in efforts to revive growth.

“In the short run we need monetary and fiscal stimulus to avoid another tipping point and to avoid deflation, but now this easy money has already started to create asset bubbles in equities, commodities, credit and emerging markets,” Roubini said. “For the sake of achieving growth stability again and avoiding deflation, we may be planting the seeds of the next cycle of financial instability.”

To contact the reporters on this story: Shamim Adam in Istanbul at [e-mail]; Francine Lacqua in Istanbul at [e-mail]

Last Updated: October 5, 2009 10:27 EDT

Oct 05 12:33 PM

[demosthenes:]

I believe that the author you are referring to is, "Peter Lynch." In his book "One Up On Wall Street" or "Beating the Street" he mentions monitoring the stores around you for investment advice.


On Oct 05 06:21 AM SmBlkBob wrote:

> IMHO,
> WAY too much referring to the past including blaming everyone who's
> had anything to do with the economy in either party.
>
> Too little being done to actually manage the problem with a long
> term perspective.
> Government, in general, is solving the problems based solely on the
> next election cycle NOT what should actually be done.
>
> Excellent article and one of the reasons I'll remain overweight in
> Gold for the time being.
>
> You don't have to be an economist to see what's happening right in
> your neighborhood. A popular book, which I hate to admit I can't
> remember the title to, stated that to know where to invest you only
> have to monitor the stores etc that you frequent and base your strategies
> on what you observe. What store/company do you frequent that you
> would invest in right now?
> Other than perhaps Wal Mart, traffic is down everywhere I go.
> (Which is a statement in and of itself)
> I've even turned down my addiction to Dunkin Donuts.
> But we still have to eat and I still see people buying gas although
> in much older cars.
> For now, it would seem, commodities are the only sure thing but at
> what price?
> The next few months will not be pretty.
>
> Bob

Oct 05 12:33 PM

[mkttrdr:]

Edward,
Agreed with analysis of Recession Vs.. Depression.

The result may end the way civilized man lives and conducts business going forward. Maybe the Mayan culture and calendars were right about 2012. It's not the earth or the universe that causes the fall of man and the end to civilization on Earth, but the actions of man in it self-causing a financial collapse; in turn causing man to react irrationally without addressing the real problems with the right solutions.

It is now up to the emerging markets/countries to start consuming to offset the conservation that Americans must endure. It is not man vs. man; it should be man helping man.

There is not one solution. It will be the combination of many actions put together that will help this unwind slowly.

Oct 05 12:44 PM

[Madagascar:]

You are truly an idiot if you think Chavez et al are not militaristic, imperialistic, and abusive in every way. The people of Venezuela are poorer than ever before while he spends billions on useless armaments, something which never happened before in Venezuelan history, and for what? Perhaps you are worse than an idiot: you too are bloodthirsty and wish to impose tyranny on the face of the earth.


On Oct 02 03:04 PM Mike Morin wrote:

> I choose socialism, an economic democracy.
>
> We have turned the corner during the week of September 20, 2009.
> The "Financial Fools" of the dying Capitalist economy met in Pittsburgh
> to trivialize and tread water before going under. Meanwhile, the
> emerging socialist economies met in Venezuela and formed a Latin
> American Bolivarian/Union of African States socialist economic coalition
> and announced the formation of an alternative "fair trade" Equity
> Union which will grow as the Maoist tradition being championed by
> Chavez spreads to the OPEC Nations and the Peoples Republic of China
> and to a world unity and cooperation majority that favors peace,
> meeting the needs of the workers and the poor, inclusion, humanity,
> equity, rational planning, ecological economic democracy, village/neighborhood
> sovereignty, inter-community and inter-regional unity and cooperation,
> quality of life, environmental/public health and wellness, and sustainability.
>
>
> Concurrently, the militaristic political sham of the UN Security
> Council was being sufficiently challenged.
>
> There exists a terrible, terrible, opportunity cost relative to the
> militaristic ways of Capitalist Empire (primarily the USA), the resisting
> and/or non-subservient nations and popular movements, the patient,
> but burdened, Communist State (Peoples' Republic of China) and the
> need to dedicate and allocate resources for life needs (habitat improvement
> and sustainability) in the face of unprecedented resource constraints
> (particularly but not limited to the fossil fuel resource), population
> pressures, and the gap between "rich" and poor.
>
> A legitimized UN General Assembly ( a "house of commons") with a
> mission to foster and facilitate a cooperative communitarian, mutualist,
> socialist, peaceful world without divisive borders and banners needs
> to take center stage in our evolution, in our governance, our transition
> to a libertarian economic democracy based on the principles previously
> enunciated.
>
> Meanwhile, the Capitalist Empire must surrender and work out a cooperative
> economic transition strategy.
>
> Much work is left to be done.
>
>
> In Peace, Friendship, Community, Cooperation, and Solidarity,
>
> Mike Morin
> Eugene, OR, USA

Oct 05 01:26 PM

[Darwinist:]

Behind closed doors, Fed, PPT, and Wall Street gangs will giggle to death if people are convinced the recovery is here to stay. They pat each other on the back and congratulate themselves for successfully instigated a "confidence game" with American people. After all, Stock market gains are tantamount to a government-manufacture... so you feel less angry and agree with what they are doing. Running a deficit to save a nation by government is fine. But running it thru TALF,TARP, and bailouts, forced out like BofA deal. No. Send a $100,000 check to 98% of the tax-paying households(excludes top 2%) to run a deficit is democracy. Let "too-big-to-fail" banks/frauds fail and "systemic risk to crooks" realize. This country will be fine. When government cherry-picking and subjectively decide the groups they subsidize. That's what I called tyranny in modern times without wars. Adam Smith actually plants the seeds for self-destruction by advocating people to be extremely selfish. Anglosphere's economic fates will all be challenged in this crisis. Great Recession? Some bears have converted. Great Deception(by our government)? I wish I know the answer.

Oct 05 01:40 PM

[cpaman:]

Ah yes. Utopia. What always amazes is how can you be for socialism when it has not worked anywhere and reducing its citizens prosperity in the process.

For you the pie never grows, it justs gets eaten by the politically connected.


On Oct 02 03:04 PM Mike Morin wrote:

> I choose socialism, an economic democracy.
>
> We have turned the corner during the week of September 20, 2009.
> The "Financial Fools" of the dying Capitalist economy met in Pittsburgh
> to trivialize and tread water before going under. Meanwhile, the
> emerging socialist economies met in Venezuela and formed a Latin
> American Bolivarian/Union of African States socialist economic coalition
> and announced the formation of an alternative "fair trade" Equity
> Union which will grow as the Maoist tradition being championed by
> Chavez spreads to the OPEC Nations and the Peoples Republic of China
> and to a world unity and cooperation majority that favors peace,
> meeting the needs of the workers and the poor, inclusion, humanity,
> equity, rational planning, ecological economic democracy, village/neighborhood
> sovereignty, inter-community and inter-regional unity and cooperation,
> quality of life, environmental/public health and wellness, and sustainability.
>
>
> Concurrently, the militaristic political sham of the UN Security
> Council was being sufficiently challenged.
>
> There exists a terrible, terrible, opportunity cost relative to the
> militaristic ways of Capitalist Empire (primarily the USA), the resisting
> and/or non-subservient nations and popular movements, the patient,
> but burdened, Communist State (Peoples' Republic of China) and the
> need to dedicate and allocate resources for life needs (habitat improvement
> and sustainability) in the face of unprecedented resource constraints
> (particularly but not limited to the fossil fuel resource), population
> pressures, and the gap between "rich" and poor.
>
> A legitimized UN General Assembly ( a "house of commons") with a
> mission to foster and facilitate a cooperative communitarian, mutualist,
> socialist, peaceful world without divisive borders and banners needs
> to take center stage in our evolution, in our governance, our transition
> to a libertarian economic democracy based on the principles previously
> enunciated.
>
> Meanwhile, the Capitalist Empire must surrender and work out a cooperative
> economic transition strategy.
>
> Much work is left to be done.
>
>
> In Peace, Friendship, Community, Cooperation, and Solidarity,
>
> Mike Morin
> Eugene, OR, USA

Oct 05 02:09 PM

[NavyDavey:]

I'd like to see more detail about how the public sector will spend this "increased" debt to get us out of this mess. Not only has (most of) the private sector spent their resources (creating debt) on frivoulous objects, they also ignored impending increases in future obligations such as healthcare, higher energy costs and taxes. The public sector, just like companies, need to spend the money (and make policies) in ways that increases value and produces "returns."

Of course governments play a crucial role accomplishing goals that produce high returns no private sector can (i.e. Space Shuttle, SDI, Hoover Dam, Federal Highway system, War) all were financed in part by public debt that can be characterized as "good debt" that produced long-term sustainable competitive advantage and returns. If I'm not mistaken all those major govt spending initiatives came during times of major recession or depression.

But . . . what is next? What can the govt spend this money on to increase future returns? This is different than the last depression where the country had no energy or transportation infrastructure as it does today. I'm no expert like that which wrote this article, but just renovating current roads and bridges will NOT accomplish an increase in future returns in the long-term and no war will have the necessary returns like Gulf War I that gave us low energy prices. Again, no expert but . . . reducing future obligations for the private sector is a good start. This will allow them to deleverage more than otherwise possible. SO . . here are my suggestions: Govt spending should go toward reducing healthcare costs for the private sector, increase capital expenditures for large renewable energy projects, policies that increase energy efficiency and projects that increase overall productivity such as high speed transit between large cities. Also, a genuine recovery requires a reallocation of spending by the govt away from areas not creating value: stop current wars, retract from overseas bases of secure areas like Europe, decrease defense spending (not to lower R&D), reclassify and reduce levels of foreign aid and encourage other countries pitch in their obligations, take better advantage of e-govt initiatives, monitor and put inplace govt productvity measures. This will have two fold effect, reducing future private expenditures and reducing pressure to raise taxes. Of course, if you believe world stability will collapse without U.S. defense spending then by all means continue. I believe (as a former Navy Lieutenant of the two recent wars) that the world has fundamentally changed while allocations of govt. spending has simply not. We put our govt spending in auto pilot and did not reallocate spending as is the case of govt with no metric to monitor except currency valuations. Last we need to export more, we need to enforce IP overseas more aggressively for U.S. produced goods. China's rise is in part built - on stolen IP (i.e. software copies, med devices exported etc- I know I live in China). Legal enforcement of IP is difficult, complex but of growing importance. Let's hope it's not TOO LATE before a "stop event."

In conclusion, cutting the deficit is not bad if govt spending becomes more efficient and spent on projects that increase long-term sustainable advantage for the U.S. and increases returns. For example, the author's assessment of the govt's position on cutting the deficit is not necessarily correct. He also asserts it's politically unpalatable to continue govt spending - this is not true if the money is spent in areas that make sense, areas that provides returns for the PEOPLE (who also have debt and increasing future obligations). Further, I'd like him to explore more in depth the solutions to our current situation and provide guidance for the public and private sectors. Specifically, solutions that account for investment in large scale R&D projects and stimulus and also increased productivity in both the public and private sectors. One last conclusion, if there are no more public investment opportunities, the only choice is to reduce public and private debt, take the hit, invest everything you have overseas and transfer the wealth were investments are worthwhile. Isn't this what is really happening anyway?

Oct 05 02:13 PM

[bruce685:]

There are numerous systemic problems with the all of the "systems", which limitations are built into their core foundations.
Here are some ideas to remedy these problems.

1. Tax consumption rather than income, savings, investment and business profits. Everyone consumes, everyone pays. It works for nine (9) states with no personal and low business income taxes (TX, FL, NV, TN).

2. Shrink the IRS from over 150,000 employees to 15,000. The IRS employs more people than the 25 largest corporations in America. They just chase money from people who try to avoid paying taxes.

3. Reduce the $10 billion annually needed to operate the IRS,

4. That will also drastically reduce the $250 billion annually it costs to complying with the tax code. Massive amounts of our national wealth are consumed merely by measuring, tracking, sheltering, documenting, and filing our annual income.

5. Instead of the US Gov revenue looking like this:
Individual income taxes: 50.4%
Payroll taxes (FICA): 31.4%
Business income taxes: 14.6%
Excise+ other taxes (tobacco, gas, etc.): 3.6%

It would look like: VAT/sales tax: 99%
All Financial Transactions must be taxed as well.

6. Instead of worrying about where the increased taxes will come from to repay the debt, it will automatically happen when sales and wealth increase; which it will.

Currently from the IRS website here is the breakdown of taxes:
50% of taxpayers pay 96% of all taxes
5% of taxpayers pay 54% of all taxes
1% of taxpayers pay 34% of all taxes

The current system must rely on those top 10% of taxpayers to support and to pay off the debt; and that is a bad bet.

7. Fed Gov (and hopefully the legislature) must make investments and establish policies that have:
a) immediate impact on jobs/products
b) long term future benefits

Some examples might be:
(1) Renewable energy on site: solar panels last 25+ years generating electricity. Current payback is 10+ years, but if manufacturing and R&D were "subsidized", costs could drop just like computer costs.

(2) Provide tax credits and SBA loans for renewable energy product manufacturing. We need to create more jobs in a new industry. We do not need more service jobs, we need product manufacturing jobs.

(3) Until the tax code is fixed, give tax deductions and credits for buying renewable energy products, including electric cars. Make it available to businesses.

(4) Buy renewable energy products for DOD, including building improvements, electric vehicles - train DOD to install, support and service all products. Most of DOD is support, not fighting.

(5) Provide tax credits for all Green Building. Change commercial and residential building codes to require Gold/Platinum Green Building standards. It will increase the cost of the buildings, but reduce our overall consumption of energy and water. It will re-stimulate a new sector of the economy for building. In TX our electric bills can hit over $500/month, so if that were reduced to $100/mo it means real cash savings, less new electrical transmission, less electrical generation, reduce CO2 emissions (less coal, less natural gas).

(6) Require all detention facilities to be self-sustainable (energy, water, food). Use GSA project managers to identify solutions and manage implementations. Use local companies for construction.

(7) Fund building of new reservoirs, and dredging older ones

(8) Increase funding/projects for Public County Health facilities - use "Green Prefab" medical buildings to replace, add-on, or create new facilities. Plan for 50-100% increased patient load.

(9) Fund replacement of pubic transportation to electric vehicles. Smaller, lighter. Provide grants for new public transportation services using electric vehicles.

(10) Convert USPS vehicles to electric power.

The executive branch of the government is the nation's largest employer. It owns and manages the most buildings/facilities. It has the largest fleet of vehicles. Once it mandates "green building" and "electric vehicles" - all purchasing will begin requiring those products, which directly stimulates new business, new products, innovation, more services, etc. The direct benefits are lower cost of ownership, meaning lower operating costs. Let the government be the test case and provide the funding.

I believe these are concrete examples of how the Fed can turn this economy around, and they could begin in 90-days.

It would only take 30-days to produce the executive order letter.

Then people would see hope...

-Bruce Park

On Oct 02 03:50 PM Socialism cannot compete! wrote:

> I wholeheartedly agree with the conclusion (depression vs. recession),
> and that too much debt (both personal and governmental) is the factor
> that will prolong and deepen this situation. However, debt is not
> the root cause, but a symptom!! It is a symptom of too-large government,
> and the resulting tweaking of the system to allow for excess debt;
> the lack of personal responsibility caused by entitlements encourages
> free spending with the thought that the basics are taken care of
> in any case; the excessive, onerous, and immoral level (and type/mode)
> of taxation to pay for such entitlements also deprive the producing
> segment of their just fruits and encourage a psychology of futility
> -- the notion that it is futile to be able to wait, save for "it"
> (whatever "it" is), and buy a bit later on savings, since net income
> does not allow for that -- too much of the earnings are gone to pay
> for large bureaucratic government and entitlements.
>
> Hence, the lower class lives off entitlements and spends freely,
> being unafraid of debt and knowing how to game the system; the middle
> class says "to hell with it", I'm not gonna save 2 years before getting
> the big screen, or 10 more years before buying a home; and the upper
> class, being taxed at massive rates has incentive only to look for
> loopholes and shelters.
>
> The root cause is government that is *far* too large, and well beyond
> its just purpose...well beyond what is *good* for free market economics...and
> well beyond what is allowable by a free people. And the unjust tax
> scheme(s) that pay for such is costing us both our present AND our
> future!!
>
> There are no shortcuts to prosperity: personal responsibility and
> real freedom beget prosperity...the lessening of them lessen the
> opportunity to do so. Take back control of YOUR income and property
> rights:
>
> fairtax.org

Oct 05 03:45 PM

[JasonC:]

The article has followed a few true points in Minsky to a ridiculous conclusion that capitalism inherently self destructs, which is nonsense.

There is nothing remotely incompatible about a positive private savings rate and balanced government and trade budgets. The accounting identity misread comes from ignoring the income side of savings. Savings do not disappear into a black hole, sucking the economy into nothingness after them; nor are they mere transfers to those who borrowed those savings (first order, first year cash flow statement effect). Debt service isn't paid to a black hole in the sky either. Instead, they are intertemporal transfers.

Attempting to understand intertemporal trades by looking at the balanced current income statements of the counterparties only, and then pretending this is a complete picture if repeated through time, is the underlying error. You can't understand any intertemporal credit transaction without using all 3 statements of modern accounting, balance sheet, income, and cash flow.

The Minsky stabilizer point that is sound, is that government deficits deliberately run in a recession do enable private sector actors (households and business) to improve their own balance sheets. The private sector savings rate rising, is recessionary yes, and government decifit spending allows a larger upward move in the private sector savings rate for the same drop in current output.

But only while the savings rate is increasing. At any level of that rate, the accounting is dead-stable with a government budget in balance. There is no need for a perpetually unhinged deficit merely to sustain a non-zero savings rate. The reason the article misses this, is it notices only the savings-allocation income-statement side of the credit transactions, and not the raised-later-income from repayment side of them, that necessarily follows from the improvement the former brings to private balance sheets.

Government deficits run in the recession enable an increase in the private savings rate. Once economic growth resumes, there is no further need for the private savings rate to ratchet endlessly higher to infinity, and this need is over. Sure, the withdrawal of government stimulus should be gradual and moderated to the actual pace of the recovery, and wait for actual voluntary stabilization in the private savings rate. But that is quite completely all that is required.

The next misconception in the article is that the debt service levels of the private sector are horribly high, or that the populace in general is in some deep financial hole. The net worth of the US household sector is positive $53 trillion. It's leverage level is 5 to 4.

Somebody owns every scrap of that debt, you see. It isn't a liability without counterparty, of wealth disappearing into a black pit in the sky. When involuntary debt restructuring occurs, when $2 trillion in debt defaults, yes that draws down asset values - but of course it does so precisely while reducing net indebtedness and future debt service payments. A transfer has occurred from creditors to debtors, and both sides have shrunk their sheets on both the asset and the liability side.

Under ordinary conditions of ongoing growth, debt rises in line with the economy, as a portion of the new asset value being continually created is financed by debt rather than by equity. Debt is not negative net worth. It is merely one form in which assets may be financed. What causes the asset values in the first place is the income stream of real services being thrown off by capital. It is quite irrelevant (for its size) how that stream is divided, between equity and debt financing. The most one can say, following Minsky, is that too high a portion of it being debt financing tends to increase credit-instability.

This is an ordinary feedback. Anything smooth and safe enough will be leveraged until it isn't smooth and safe anymore. Anything showing rocky returns and jumping all over the place, will be carried only by equity and capital will exit that use, which will calm its returns over time. There is no possibility of endlessly sustained calm; calm is itself the inducement or signal that leverage can be added. That traditional point about the inherent instability of credit was reiterated by Minsky, though hardly noticed by him first.

There is no need for continual trillion dollar deficits to avoid economic collapse. There is no need for the private sector to run its savings rates up to 20% or more, let alone increase them continually. Positive private savings rates are not a Keynesian "hording" bete noir consuming entire economies through errors of one-entry accounting.

People can save the portion of their income they like; they will receive income from doing so; they will create real capital that produces real incomes maintain those capital values (with the pie redivided amongst investors based on their individual success forecasting equilibrium rates of return and their associated asset prices, to be sure).

Economics is less dramatic and much less political than pundits of this sort suppose. There are lots of freely choosable alternative places the economy can sustain itself. There is no tendency to necessary inflationary or deflationary doom. There is merely a cycle, and no it isn't any different this time. The long financial cycle is longer than many commentators expect and some of its adjustments more gradual, playing out over multiple GDP cycles. Who cares?

Oct 05 03:50 PM

[Albert Ling:]

Given this macroeconomic outlook, what are the portfolio implications in terms of asset allocation?

If the FED is commited to keeping money cheap, it penalizes traditional "safe havens" such as cash/treasuries...

Is gold a good cash substitute? how about foreign assets?
How about real assets (forestry, oil, commodities)?
Instead of holding USD paper bills that pay zero intrest, why not hold contracts for barrels of oil, wich also pay zero intrest, but represent a claim on a real asset wich you can take delivery.

Oct 05 03:54 PM

[peter02l:]

China and/or Japan have no choice but to buy our debt as long as we keep buying there products.

You provide the reason for that yourself: "the effect of their doing that would be instant double-digit inflation" which will destroy the value of the debt they already hold.


On Oct 02 04:46 AM Roger Knights wrote:

> "Deficit spending on this scale is politically unacceptable and will
> come to an end as soon as the economy shows any signs of life (say
> 2 to 3% growth for one year)."
>
> But won't QE end sooner, in six months? And what if China and/or
> Japan stop buying our Treasuries before our economy grows for a year,
> because they don't like our deficit spending, or because they are
> no longer able to afford to do so? Julian Robertson said a few days
> ago that the effect of their doing that would be instant double-digit
> inflation. (Something's got to give somewhere, because it's all connected.
> If stress is relieved at one point in the system, it is transfered
> to another.)
>
> So we may not have the ability to to prop up asset prices for more
> than more three months--or six at the most. After that, le déluge.
> Someone's got to take the "hit" for all the debt and absorb the losses.
> Going forward, I think it will be stockholders, then bondholders,
> then land-owners.
>
> Speaking of le déluge, the first raindrops are falling already. I
> think they'll fall even harder today (Friday).

Oct 05 05:20 PM

[TraderMark:]

Great piece Ed

Oct 05 05:24 PM

[Alan Young:]

Excellent, thoughtful work all around.

The "more muscular form of government" is an intriguing and especially worrisome aspect of the problem. I say especially worrisome, because while economic problems usually resolve in 10-20 years, political institutions can cast much longer shadows.
The last world depression gave us Communism, Fascism, and the New Deal. Perhaps the kind of Socialism Mr. Morin champions is far from the worst of possible outcomes. But it will take extraordinary effort and political will to forge a better one.

Oct 05 06:02 PM

[bottoms-up:]

Ya! We had another CNBC "rally" today. Oh! But wait! All of the volume was in entities held by... The United States Government... Oh! The total volume was low again...

Better luck next time Ben...

Nobody is fooled by you manipulations.

Oct 05 06:45 PM

[Astroturn:]

Help me someone. Mr. Harrison said in his conclusion:

"The natural tendency, therefore, is toward more saving and less spending in the private sector (although asset price appreciation can attenuate this through the Wealth Effect). That necessarily means the public sector must run a deficit or the import-export sector must run a surplus."

Is he talking about saving in the strict sense? Most of us "save" through investing. Stock prices rise. So when I put $1 into stocks, does that necesarily mean that there must be an offsetting public sector credit because that $1 finds its way into a T-bill eventually? Or does the Wealth Effect eat up that $1?

Oct 05 07:33 PM

[a fat panda:]

"the metrics are: employment, earnings, wealth, health, and infrastructure, living conditions."

The key metric is productivity, everything else follows it. It is getting 1 person to do the work of 2, and efficiently reallocating the excess resources to more important tasks.

On the opposite end of the economic spectrum, is handing billions of capital to managers who want to hold coal until it turns to diamond and are willing to do so because the taxpayer is paying the float.

Oct 05 07:41 PM

[Zmartmoney:]

I am aghast at the solutions I see displayed here. Government has a specific job, described and specified by its people. That is laid out in the Constitution. The fact that our political parties have pillaged our country and our Constitution is why we are where we are. To suggest that they now have the power to fix it is lunacy. The burden they have manufactured to lay on our shoulders is unsustainable. The fact that 70% of Americans PAY NO TAXES, doesn't mean that the RICH pay no taxes. Those who are doing financially well as a result of their labors and their choices in life are being pilloried for doing what this country was founded to do - Life, Liberty, and the Pursuit of Happiness. The fact that we've been hijacked by greedy power-mongers is nothing new - it's just that we've forgotten that they're always around trying to get their way - sort of a little fleshly devil. We can't grasp that freedom has to be bought in every generation - we just wanted to party down and ignore the obvious. We've become a nation of very sick people and the comeuppance is going to be very bad, indeed. I pity the next generation - they have little inkling of what trap we've laid for them. They'll be very fortunate if we haven't laid the path for a New World Order that will be a rerun of the horrors of WWII - just with new characters that tell them "I'm here to help you."

Oct 05 08:11 PM

[James Allen:]

Great Piece. The takeaway for any long term investor not under the guise of being able to time markets would be that the long-term growth trend normally applied to equities is broken, making long-term investing an illogical choice.

However, I think it is always easier to quantify the downside. Are we assuming that no innovation will take place? Are we assuming that budding capitalist will take an answer of no from the bank and end their dreams? Easy credit often means that far to many poor ideas reach the market. Whether it is real estate on the back of easy credit or junk internet companies fueled by IPO's in 2000. I believe that lack of credit protects the markets from the poor ideas, but the really innovative ones survive. It is only through innovation that growth is achieved and we cannot predict future innovation by looking at past economic data. Do you think anyone factored in the internet when we were in the depths of the 1980-82 recession? The failed businesses and real estate deals that line this recession are not a function of terrific business models torn down by economic forces that were beyond their control. Instead they are failed or poor business models laid bare when capital to fund ideas is restricted. Your article is well-researched and I don't doubt that the future has many headwinds, but I also do not discount the thirst for innovation and the ability of one man to create what economic models insist that thousands could not. The only issue I take with the article is that the true architects of a recovery will not be Paulsen, Bernanke, Obama, etc they will be people whose names we do not yet know. As more and more talented people go without work in the traditional system, I think we will see an explosion of mini-entrepreneurs, who believe, perservere and overcome for the betterment of themselves and a the thousands of people they will employee. Pollyanna? Sure. But the spirit of innovation has never been adequately captured in an economic model until long after it has occurred. I know a great many small businessmen who have become millionaires from a small monetary investment and a large amount of sweat equity. I've yet to meet a millionaire economist.

Oct 05 08:13 PM

[tcxmon:]

Edward-

Impressive effort, to be sure. But I think you are trying way too hard.

The market can stay irrational a lot longer than your logic can hold up. Instead I favor plain old trend-following a-la John Henry - owner of Boston Red Sox. Check out Trend Following by Michael Covel. Cheers and get some rest!

Chris

Oct 05 09:32 PM

[User 357705:]

Norway, dare I say it a socialist country, ranked best place to live. Duhmerica didn't make the top ten at 13th. Rah rah rah.......

news.yahoo.com/s/afp/2...

Oct 05 10:00 PM

[Hugh G. Rec...:]

THE SKY IS FALLING!

Oct 06 05:43 AM

[Karl Liesman:]

That was a good article, however, this point is backward looking given the election wins for left leaning governments of the last 2 years,

"Needless to say, this kind of volatility will induce a wave of populist sentiment, leading to an unpredictable and violent geopolitical climate and the likelihood of more muscular forms of government."

I think you're predicting a continuation and it's obvious.

Oct 06 12:33 PM

[DonFurio:]

So when will the author admit that he is wrong? A subdued recovery is very different than a depression, which he claims we are in. If we we're truly in a depression, would people still going to sports games (yea, not as much as before, but largely people are still going)? What about restaurants, bars, etc, people may be spending as much as they were 2 years ago, but they are still eating out and going to bars. Will/have some restaurants closed/have closed, sure but if this truly was a depression no one would buying anything. Yea, there's some people that we're affected during this recession, but most will come out of it just fine, and those that took advantage will have averaged down the cost in their portfolios and maybe have bought a cheap house or two.

Oct 06 02:31 PM

[DonFurio:]

A subdued recovery is very different than a depression, which he claims we are in. If we we're truly in a depression, would people still going to sports games (yea, not as much as before, but largely people are still going)? What about restaurants, bars, etc, people may be spending as much as they were 2 years ago, but they are still eating out and going to bars. Will/have some restaurants closed/have closed, sure but if this truly was a depression no one would buying anything. Yea, there's some people that we're affected during this recession, but most will come out of it just fine, and those that took advantage will have averaged down the cost in their portfolios and maybe have bought a cheap house or two.

Oct 06 02:31 PM

[Dialectical...:]

I think you overstate what a depression is. People still got married, had birthdays, celebrated anniversaries, traveled, and even opened businesses in the Great Depression. Yes they went to watch baseball games too (there would be no "league of there own" if women players weren't required to replace men during WWII (so obviously the men were playing in the 30's). It is just that many people spend a lot less and there is a deflationary cycle. And there is good evidence that this is what we are starting to see now.


On Oct 06 02:31 PM DonFurio wrote:

> So when will the author admit that he is wrong? A subdued recovery
> is very different than a depression, which he claims we are in. If
> we we're truly in a depression, would people still going to sports
> games (yea, not as much as before, but largely people are still going)?
> What about restaurants, bars, etc, people may be spending as much
> as they were 2 years ago, but they are still eating out and going
> to bars. Will/have some restaurants closed/have closed, sure but
> if this truly was a depression no one would buying anything. Yea,
> there's some people that we're affected during this recession, but
> most will come out of it just fine, and those that took advantage
> will have averaged down the cost in their portfolios and maybe have
> bought a cheap house or two.

Oct 06 02:50 PM

[inthisdimen...:]

Come on, Aki. The countries you mention - as well as Japan, Australia, New Zealand, etc., etc. - basically the developed world - rely on American taxpayers to fund their defense. Their social programs would not work if they had to pay the taxes necessary to be able to transport of field a large enough force to be able to defend themselves. The American taxpayers pays that tax burden. If we withdrew that support, if we just unilaterally abrogated defense pacts - as Obama just did with Poland and The Czech republic - those countries would have two choices: Shift their tax revenues to defense spending and away from the huge (and largely failing) social welfare nets.. or disappear. Ask Georgia about disappearing. Ask Yugoslavia about being able to get along with their neighbors.

Socialism has never worked, and the examples to which you point, as well as the countries I mention above, would never be able to afford the welfare they do in the absence of Americans paying their defense bills.

You picture is incomplete unless you consider the entire outlay necessary to keep life comfortable in the countries mentioned, and you cannot do that without including the cost of their defense.

Socialism has never worked and it never can or will. It is only a road to totalitarianism.. like NY Mayor Bloomberg telling New Yorkers that "we can't just let people go wherever they want whenever they want." Totalitarianism - where the Left likes to be.


On Oct 03 02:09 PM Aki Izayoi wrote:

> "Please tell us when, in world history, socialism has EVER been democratic?
> It's always been a tool of totalitarianism, working AGAINST freedom
> and democracy. "
>
> Sweden, Germany, Denmark, Norway , and Finland... Why? I suppose
> in the 20th and 21st centuries, they were democratic. Perhaps, those
> countries do not embody "socialism," but their policies are way to
> the left of your conveyed political preferenced.

Oct 06 05:01 PM

[mallarde:]

Thanks for the wonderful analysis. An aside: maybe we do not see soup lines today like in the Great Depression, in part, because our material wealth -- including food production -- so far outstrips material wealth in the 1930s. Just a thought.

Oct 06 05:02 PM

[FourBrane:]

Good god! Jimmy Carter did all of this to us?
What load of tripe.

Oct 06 06:00 PM

[Alex Filonov:]

My, oh my! If Japanese outcome is the best one, I'm going to hang myself. Nah, I don't think so. Financials are just a part of economy, and there are structural imbalances which are much bigger than debt/savings ratio. I wrote about it already.

Oct 06 06:28 PM

[DonFurio:]

Ok genius, so what's the difference between an extended recession and a depression then? Do you consider the 1970s a depression, most people do not. My point is not that baseball games would not exist, it’s that attendance would be down like 30% if we were in a depression. People wouldn’t be going to Starbucks to get their morning drink, wouldn’t be shopping at the mall, etc. Yea, same store sales are down a little, but nothing compared to a depression. I don’t argue that the recession didn’t hit some areas hard, and if you wanted to call Detroit in a depression, I could see what you are saying, but travel around to the other cities in this country and see that we are not in a depression. And I believe we are not a depression and will not be in a depression despite (in my opinion) very anti-growth policies enacted and scheduled to be enacted by congress.

There are a million reasons why we are different than Japan, but size, and spending habits are really important to recognize. I don’t feel like writing a whole page on why Japan didn’t recover, but search around, tons of people have covered it.

It seems like one of the author’s main points is that debt is too high, well guess what, a lot of that debt is being refinanced. Now is it getting refinanced at higher rates, yes, but it gives someone or the company time to figure out their long term plans.

I need to have very clear predictions of what you think will actually happen in what you predict will be a depression. Actually, the author is claiming we are in a depression, so what concrete will we see and when will we see it? Will you ever admit you’re prediction is wrong? To me if we continue to recover, but have a slowdown in 2013, that would be a new recession, you can’t count it as all one depression. Also, does it really make sense to try to even relate this to the 1930s? Presently, most people could buy enough food to live off of for years, and as long as the power was on, could entertain themselves with everything in their house combined with all of the music, video games, movies, etc they have…


On Oct 06 02:50 PM Dialectical Materialist wrote:

> I think you overstate what a depression is. People still got married,
> had birthdays, celebrated anniversaries, traveled, and even opened
> businesses in the Great Depression. Yes they went to watch baseball
> games too (there would be no "league of there own" if women players
> weren't required to replace men during WWII (so obviously the men
> were playing in the 30's). It is just that many people spend a lot
> less and there is a deflationary cycle. And there is good evidence
> that this is what we are starting to see now.

Oct 06 06:35 PM

[DonFurio:]

So what's the difference between an extended recession and a depression then? Do you consider the 1970s a depression, most people do not. My point is not that baseball games would not exist, it’s that attendance would be down like 30% if we were in a depression. People wouldn’t be going to Starbucks to get their morning drink, wouldn’t be shopping at the mall, etc. Yea, same store sales are down a little, but nothing compared to a depression. I don’t argue that the recession didn’t hit some areas hard, and if you wanted to call Detroit in a depression, I could see what you are saying, but travel around to the other cities in this country and see that we are not in a depression. And I believe we are not a depression and will not be in a depression despite (in my opinion) very anti-growth policies enacted and scheduled to be enacted by congress.

There are a million reasons why we are different than Japan, but size, and spending habits are really important to recognize. I don’t feel like writing a whole page on why Japan didn’t recover, but search around, tons of people have covered it.

It seems like one of the author’s main points is that debt is too high, well guess what, a lot of that debt is being refinanced. Now is it getting refinanced at higher rates, yes, but it gives someone or the company time to figure out their long term plans.

I need to have very clear predictions of what you think will actually happen in what you predict will be a depression. Actually, the author is claiming we are in a depression, To me if we continue to recover, but have a slowdown in 2013, that would be a new recession, you can’t count it as all one depression. Also, does it really make sense to try to even relate this to the 1930s? Presently, most people could buy enough food to live off of for years, and as long as the power was on, could entertain themselves with everything in their house combined with all of the music, video games, movies, etc they have…

Oct 06 06:36 PM

[ebworthen:]

Gold, TIPS, canned food, and gun and ammo manufacturers.

;-)


On Oct 05 07:49 AM buyitcheap wrote:

> You are ruining my Monday, man. But I do appreciate the great mythological
> allusions. The massive amounts of debt will be a tremendous brake
> on the economy and keep things flat to deflationary to be sure.
>
>
> If one assumes that in a depression or a double dip, asset class
> correlations go to 1.0 where do you put your money? gold? silver?
> I think a restructuring of the US debt is absolutely going to happen
> in the next 10 years, so short treasuries and all markets? who will
> be left to make good on the trade?
>
> Keep the articles coming, though, given the tenor of them, I may
> go long alcoholic beverage makers, and read these over the weekend.
> :-)

Oct 06 09:15 PM

[ebworthen:]

We are all living on credit of one kind or another.

On Oct 06 02:31 PM DonFurio wrote:

> So when will the author admit that he is wrong? A subdued recovery
> is very different than a depression, which he claims we are in. If
> we we're truly in a depression, would people still going to sports
> games (yea, not as much as before, but largely people are still going)?
> What about restaurants, bars, etc, people may be spending as much
> as they were 2 years ago, but they are still eating out and going
> to bars. Will/have some restaurants closed/have closed, sure but
> if this truly was a depression no one would buying anything. Yea,
> there's some people that we're affected during this recession, but
> most will come out of it just fine, and those that took advantage
> will have averaged down the cost in their portfolios and maybe have
> bought a cheap house or two.

Oct 06 09:17 PM

[ebworthen:]

Jimmy Carter - the poster child for good person with good intentions doing all the wrong things that simply enabled the players and the enemy.

Stagflation, weak foreign policy, back-lashing Arthur Dimmsdale narcisissm, enabling the lazy and punishing the responsible.

A classic recipe for societal malaise.

Good intentions and work wasted on the greedy and slothfull is a net negative. Reference FDR, Lyndon Johnson, Jimmy Carter, and our new poster child, Barrack Obama.

But remember, politics is the distraction. Bush Senior was railroaded by his party and politics, Bush Junior by Greenspan and wishy-washy conservatism. Only Ronald Reagan, and Bill Clinton (despite his private antics) had it right in reducing taxes and letting the free market operate.

Our latest fiascos of "too big to fail" and Capitalism in collusion with Populism and Pork and equivocating collusion between the Wall Street and Washington truly spell out the doom approaching.

If you can't see it, please put your money into equities and pay your taxes and take out a home equity loan.


On Oct 06 06:00 PM FourBrane wrote:

> Good god! Jimmy Carter did all of this to us?
> What load of tripe.

Oct 06 09:26 PM

[ffrisch1:]

I must be overly naive, but I don't understand why there seems to be virtually no discussion of supply side remedies to this crisis. Before the high sounding government bailout acronyms and the helicopter Ben allusions were thrust upon us, what would have been wrong with the Fed and the politicians trying a meaningful investment tax credit, for example? It might not have saved the economy from all of its ailments, but a properly incentivized private sector would inevitably spur investment, hiring and productivity. As businesses would be spending their own money, one could reasonably assume that the investment itself would be far more productive than anything Barney Frank or Chris Dodd would be likely to whip up. State governments are now racing to increase unemployment taxes and surcharges on businesses and then bemoaning the fact that, partially in response to the tax increases, businesses cut costs (in this case labor) to be able to stay solvent while paying the higher taxes. The point being that investors and business owners will go where the incentives take us. If we're incentivized to reduce employee count, we will. If we're incentivized, through tax policy or otherwise, to increase employment or spending, we'll do that as well. The worst outcome will come from the FDR approach of announcing that government will try X for a while, and if that dopesn't work will try Y. It makes the voters happy, perhaps, but the uncertainty it injects into the world of business causes private sector investment to screech to a halt. I enjoyed Mr (Dr?) Harrison's article and analysis.

Oct 06 10:12 PM

[User 357705:]

No we all are not. I do not. I haven't for more than 25 years. The only thing I can do to fight the banksters and government is to not participate in their silliness.


On Oct 06 09:17 PM ebworthen wrote:

> We are all living on credit of one kind or another.
>
> On Oct 06 02:31 PM DonFurio wrote:

Oct 06 11:09 PM

[ebworthen:]

I agree, but when you are the exception, that spells trouble.

The bailouts were credit on the back of the taxpayer, whether they lived debt free or not, that is the injustice I was pointing to.

On Oct 06 11:09 PM User 357705 wrote:

> No we all are not. I do not. I haven't for more than 25 years. The
> only thing I can do to fight the banksters and government is to not
> participate in their silliness.

Oct 07 12:48 AM

[aarc:]

Yes, is that Great?

Look at what happened in 1932 deep recession as compared to what happened in late 2008 to early 2009 deep recession.

The US economy (also England, France and Germany) went into deep recession by 1932 followed by a onset of depression in 1933.

The Great Depression happened in 1933 to 1935 when more than half the banks went under.

Great Depression did not end in 1935 by some accounts and it continued toward 1938/39 where the unemployment rate got so bad in the US it went up to 25% and far worse in Germany it forced them to start WWII in order to escape a 33% unemployment rate.

Dow Jones went UP from $42 in 1932 to $100 in 1935 during the Great Depression years.

Dow Jones went UP from $100 to $300 from 1935 to 1939 during the massive rise in unemployment rate toward 25%.

What can happen to us now, will the Dow Jones follow history or will it create a new one?

Do we learn from history or do'nt we as far as investing in the stock markets is concerned?

Oct 07 04:09 AM

[tedstr:]

Recession is when your neighbor is out of work. Depression is when you are out of work.

Nice article.

Oct 07 07:26 AM

[Formyx:]

Very good article.
The first item which provokes some thought is the on on the national accounting. Is it possible in an island economy where the government has a Pay-as-you-go model to have positive savings? Even in absence of government and a barter trading economy with labor as the value added people can save part of their production for future consumption and trade the rest. I find the accounting model quite perplexing.

My second observation is that private sector mortgages are non-recourse debts. So home owners can improve their balance-sheets overnight with some damage to their credit record. Therefore they can start saving immediately.

Oct 07 11:10 AM

[gato:]

The comments to your article caught my attention even more than your (good) analysis.
What keeps popping up (for me) was, the blogger were using..."we" and "us"...(we should, or could) as if , they had some control over their own destiny. The status of being a "Serf" under the control of a system that will use what ever force necessary to dominate, both at home and abroad is not a comforting one, even for the delusional "moochers" we've become.
By allowing this to happen to us, we have forfeited the right to forge a solution, now we sit back and allow the Goldman Sacks Cartel etc (GSC) to issue counterfeit "confetti" (sometimes called money/credit) to reflate the equity markets. "Sucker punching" those with some savings, by pushing interest rated..."below".. zero and allowing banks to have interest free loans. Main st. is then forced out of conservative CD's etc into equities, where they will eventually be wiped-out by the MBA's who skipped the ethics lectures at Harvard.

Solution 1: Face the music "now" and let the depression happen wiping the dead wood from the bloated system in a fast difficult time frame, instead of this slow-motion train wreck we are in.
Solution 2: Face the fact that we are a war loving nation, do what come natural..declare war "yet again"...'cause, we may not make many good products any more, but, our (cost plus!) weapons industry is the best that "serf" taxes can buy.
gato

Oct 07 04:15 PM

[twickers/lo...:]

Reading this has been like walking along a cool clear river, what an
intellect/ The finance and political crowd took us all for a ride/ but the
accountants with market to market laid the trap. We should go back
to cost based balance sheets with valuation note...

Oct 07 07:40 PM

[Howard Richman:]

You were incorrect when you wrote, "If the private sector is a net saver, the public sector must, I repeat must, run a deficit." The correct statement would be: "If the private sector is a net saver, the public sector or foreign savings must diminish."

The fact is, that there is a very quick and painless way for the United States to get out of the depression. All we would have to do is balance trade through Warren Buffett's Import Certificates plan:

seekingalpha.com/artic...

Oct 08 08:47 AM

[VirginiaValley:]

A very well written article reflecting a excellent understanding of macro level geo-political-economic issues and the interplay with monetary policy.

Cutting government spending is not always the panacea for all economic woes. Most main stream economic theories state that spending is about the only way to pull an economy out of a depressive economic cycle. If the private sector is not willing or capable of spending, then the public sector must step in to bring the economy back into balance.

Those posters who insist that the solution is always to cut government spending lack a fundamental understanding of monetary policy and macroeconomics. Their theories are based on political philosophies rather than economic facts. Yes, politics has and will continue to effect monetary policy. However, you have to understand the macro-level picture before you can decide what the best micro-level (ie, political) decisions are best.

This article should be a must read for anyone serious about investing and serious about trying to truly understand what drives our economy. Even if you don't agree with the author's conclusions, at least the article will hopefully make you think.

Oct 08 10:19 AM

[wturner145:]

No one in their right mind would have confidence in our elected representatives to do anything other than what they were paid to do by their owners (those who paid up front by "donations").

What drive this economy is other countries buying up what we own.

You bet China will be the country of the 21st Century, and the USA will be their coolies.

As for Obumba pray their will be enough for you to eat on. Forget about higher standard of living and everything else you expected from life. It's gone and will not return!

Oct 08 12:46 PM

[Bob 123:]

Agreed,
the programming of the sheep's brains against the eeeeeevil of so-called communist/socialist systems is deep and pervasive in U.S. culture. It's been going on since before WW II, so it is no surprise that it is practically in the genetic make-up of many Americans, the vast majority of who never question what has been told to them over and over going back generations.

In Norway for example, the fantastic wealth generated by North Sea oil is property of the state, not a handful of 'private' oil-oligarchs. The government has taken this vast sum of money and wisely invested and diversified it, so as to be able to give all of her citizens unheard of cradle-to-grave benefits unimaginable here in the U.S. They claim they can maintain these benefits in perpetuity. The kind of conservative/liberal debates they have go something like this:
" All pregnant women should be forced to quit their jobs, stay at home, raise their kids and receive generous welfare payments"
---- That's the conservative position!
(the liberal position is "they should be allowed to work if they want to")

Would that our liberal/conservative issues were more like that here in the U.S.


On Oct 05 12:24 AM User 357705 wrote:

> Denmark. Finland. Sweden. Norway. All are examples of socialism that
> is successful. There are of course more though I hesitate to suggest
> them as one may become deeply upset.
>
> As for stealing from the productive that is what Duhmerica now has.
> The unproductive bankster leeches have stolen from the workers futures
> and those of their yet unborn grandchildren.
>
> Look, I understand its upsetting when one's religion, in this case
> the religion of FU Capitalism, is proven to be a sham beyond a reasonable
> doubt. The more fervent acolytes are the most upset because they
> have so much emotion invested in their belief system.
>
> Lastly, the Horatio Algers lie is the most pernicious.
>
> Good luck! How's that short order cook job working out? Waffle House
> wasn't it?
>
> On Oct 02 04:04 PM Socialism cannot compete! wrote:

Oct 08 03:27 PM

[Truth teller!:]

My two cents: As usual Seeking Alpha the community of hardcore bears is trying its best to beguile us by showing only negative sides, I don't find a single positive article on this site. Can u guys see market rising and good news about economy ? U guys r bunch of losers who have missed the rally in the hope that market will go down further and then u will buy then but it caught u by surprise by going upwards and hence this hairsplitting abt economy, dollar et al

Oct 08 03:40 PM

[chlai88:]

Which reminds me of the 2000 crash, now it makes more sense, the Clinton admin managed to chalk up a budget surplus bcos it's helped by a virtual boom in the stock market. But that virtual boom proved unsustainable and crashed as well. And the Bush admin needs to pump money back in again and it's not helped by costly wars and high health care costs. In fact, we can conclude that there's really no progress at all the last 10-20 years. Asset price inflation has been fueling "growth" all this while leading to a facade of good times followed by busts when the prop is pulled back. Govts will continue this strategy as it's politically expedient to do so to show "progress" on their watch. How do we break this cycle ? Guess there's no good answer. I guess the only way is to bank on the real economy to grow. Innovations, inventions, manufacturing, energy must become the chief strategy instead of financial plays.

Oct 08 06:23 PM

[storm999:]

I recently blogged on open.salon.com an article called, "why are we afraid to invest in our future?" One outgrowth of the culture war is tremendous negativism. There is a slice of America that hates public schools, libraries, even public roads. It was summed up when people cheered that Chicago didn't win the Olympics. We need to bring back that can do spirit.

If people don't have a work ethic now, it's because they have been robbed for years. When you have productivity real wages falling for years while productivity is rising and CEOs make 100 times what their employees make, people get frustrated, then cynical. Look at Walmart, a company that actually chooses to hire workers part-time so they have to get food stamps and medicaid to survive and you wonder why folks are bitter? Millions have lost their homes, family poverty is skyrocketing more than half our youth are unemployed and the lead news story today was...forgettable. You can't find coverage of the homeless crisis in this country, but they are out there and many more of us will join them.


On Oct 03 09:07 AM vman650 wrote:

> I recently visited the portrait gallery in Washington DC and viewed
> a portrait of Carl Sandburg. Tears welled up in my eyes as I recalled
> some of his poems which I read many years ago while I was a student
> in High School. Yes debt has caused all of this but it is not really
> the root of the problem. The American people, including myself, are
> not what we use to be. I no longer hear America singing. For the
> most part, the work ethic is dead. We pretty much want it all and
> we wish to pay for none of it. This is reflected in the attitude
> of our political parties. The rich do not wish to pay taxes and the
> poor want a handout. In your excellent article, you state that we
> cannot export out way out of the problem. You are correct but for
> the wrong reason. We have become incapable of manufacturing anything
> of value that anyone would want to buy. In my very humble opinion,
> we will come out of this mess when we once again fulfill the words
> of Carl Sandburg written so many years ago about a country which
> exists still but in name only. It is ironic, but another depression
> is the only thing which can save us.

Oct 09 02:58 AM

[storm999:]

I recently blogged on open.salon.com an article called, "why are we afraid to invest in our future?" One outgrowth of the culture war is tremendous negativism. There is a slice of America that hates public schools, libraries, even public roads. It was summed up when people cheered that Chicago didn't win the Olympics. We need to bring back that can do spirit.

If people don't have a work ethic now, it's because they have been robbed for years. When you have productivity real wages falling for years while productivity is rising and CEOs make 100 times what their employees make, people get frustrated, then cynical. Look at Walmart, a company that actually chooses to hire workers part-time so they have to get food stamps and medicaid to survive and you wonder why folks are bitter? Millions have lost their homes, family poverty is skyrocketing more than half our youth are unemployed and the lead news story today was...forgettable. You can't find coverage of the homeless crisis in this country, but they are out there and many more of us will join them.


On Oct 03 09:07 AM vman650 wrote:

> I recently visited the portrait gallery in Washington DC and viewed
> a portrait of Carl Sandburg. Tears welled up in my eyes as I recalled
> some of his poems which I read many years ago while I was a student
> in High School. Yes debt has caused all of this but it is not really
> the root of the problem. The American people, including myself, are
> not what we use to be. I no longer hear America singing. For the
> most part, the work ethic is dead. We pretty much want it all and
> we wish to pay for none of it. This is reflected in the attitude
> of our political parties. The rich do not wish to pay taxes and the
> poor want a handout. In your excellent article, you state that we
> cannot export out way out of the problem. You are correct but for
> the wrong reason. We have become incapable of manufacturing anything
> of value that anyone would want to buy. In my very humble opinion,
> we will come out of this mess when we once again fulfill the words
> of Carl Sandburg written so many years ago about a country which
> exists still but in name only. It is ironic, but another depression
> is the only thing which can save us.

Oct 09 02:58 AM

[Codes:]

Ed, I'm assuming you're the only one who's still reading so here's a few thoughts for you.

1) Debt is not a black hole - for the contra party debt is an asset. Consumer debt being paid down improves both parties. Please take that into further consideration.

2) Jobs and the private sector are key to organic sustained recovery. There's plenty of examples of countries racking up huge debt figures and surviving /thriving but it was growth that led them out of debt. Growth is in the form of real jobs not Gov't employment and transfers. The private sector has demenstrated throughout economic history a much greater capacity, flexibility, and creativity than the gov't sector ever has. Quasi permanent gov't incentives to encourage those willing to risk most everything to self realize their small business dream.

3) Income.

Lastly, you're not political? But you are, and until you become more fiercly independent your economic analysis will suffer with blind spots similar to the flaws in this article .

Cheers!

Oct 09 10:16 AM

[chris coonan:]

another good article. I am amazed at the quality of the writing on Seeking Alpha.

I have been in China for 6 months, leaving California behind, and the midwest, where most of my family lives in Chicago. When I went home for Christmas, just having lost a $200k/yr job in Orange County, a victim of a massive layoff at a major Architecture firm, my father quoted an article that talked about Shanghai, Mumbai, and Dubai as booming places....having a Chinese girlfriend, I decided to try my luck finding work in China...

What I have learned about the Chinese and China, was like getting a PhD to add to my Master's level education. This country and it's people had a pause in activity for 40 years, and they have been catching up in the last 20. China will overtake the US, and it is just a matter of how soon.

If the author is correct, and I think he is, it will be sooner than people think, perhaps, before 2020, China will be a 1st World Economy and Superpower. I don't think that is a bad thing for the world, and I can say that I have been welcomed as a foreigner here, and that the Chinese are very cordial, kind, curious, and display a comradery with all visitors to their country. I am very impressed by the culture here, and think that Americans can actually learn some things about how to live life, conserve, and look out for the common good.

I do think that things will get worse in America before they get better. And, I think that Americans are diverse, smart and innovative people, and eventually they will overcome the bogus financial and political system that has robbed America of it's status, respect and dominance in the World. Americans would be wise to partner with the Chinese, and others, to further the market for American know-how, services, products and culture.

I think that the recession being declared over, was like George Bush declaring the end of the Iraq War, a few years too early....the recession is likely a Depression, and the statistics, which are being manipulated, will prove it out in years to come. We are in an 80 year Greed Cycle, and it is time for the robber barrons, to be brought down, and for the common man to rise.

Oct 26 07:13 AM