Expect the Economic Crisis to Continue

Data to October. Unemployment is assumed to climb to 11.1 percent in a year and then decline. I still expect “animal spirits” to climb up to about zero in 2012. The last couple of times they rose to zero from depressed levels in a presidential election year were 1972, followed by Nixon’s resignation, and 1976, followed by the electorate’s rejection of the Republicans. President Obama faces an ugly national mood.

Confidence will stagger upward till 2012 even if unemployment rises to 13 percent over coming quarters according to the “animal spirits” model.

The recession forecasting model, which forecast the last two recessions a year or more ahead in real time, well ahead of the consensus, sees no NBER-defined “recession” in the coming year. Output and demand aggregates can be expected to grow, although I think the collapse of consumption (November 2009 commentary) due to increased saving will crimp growth.

This economic situation is unfortunate in that a majority of people will retain their jobs and houses and will have very little incentive to adopt changes that appear risky or expensive to them. The process of marginalization of the lower strata that has been so evident over the post-Reagan years will become pronounced. I think any American can understand how this can happen. Most of us have little job security, much to lose, and there is no safety net to speak of. Congress’s recent extension of unemployment benefits only highlights this sad fact. Most of us have friends who have lost their jobs and are dealing with losing their houses and their family’s way of life in short order if adequate employment is not found. And of course our politicians will do nothing fundamental until events force their hand, in which case they are likely to serve the hand that feeds them.

This is what the late stages of failure of the social contract might look like. As regular readers know, I subscribe to the thesis of Strauss and Howe’s The Fourth Turning in this regard. It is a couple of economists’ melding of economic long wave theory with a theory of generational archetypes. Anglo-American history has been punctuated by crises about every saeculum, the length of a long human lifetime, or about 80 years, in a sequence like this: 1688, 1776, 1860, 1940,…2020?

The crisis will unfold with bankruptcies of the federal government, states, pensions, banks, and anything else that is insolvent and resistant to the Fed’s ministrations of reflation. Will Hank Paulson’s threat to impose martial law come true? Will the unemployed cease to pay taxes on whatever pick-up work they can get? Will a barter economy emerge? Will we all be living hand to mouth? Certainly there is another hard leg down coming—for most people, maybe not so much for the rich. One way to look at the past thirty years is to note that to counter a slowing economy the rich have simply increased their share of income and lowered the tax rates they pay on it. The fact the share of taxes paid by the rich has gone up only shows that inequality has increased faster than tax rates have gone down.

It is not necessary to comment on the obscene remarks by the head of Goldman Sachs alleging that he is “doing God’s work.”

See Robert Samuelson’s article on the IMF’s view of world fiscal policy. Note that even a sustained 6 percent inflation won’t solve our problem, even if it didn’t damage our currency.

I still expect the next debt-deflationary collapse to come in 2013 or 2014. There doesn’t seem to be much danger of inflation before then.

Comments

[Carlos Lam:]

"There doesn’t seem to be much danger of inflation before then."

You may be correct if you subscribe to Mike Shedlock's theory that in our economy one must "count" credit as part of the money supply to determine if the money supply truly is growing at an inflationary rate. That theory has its merits.

There is another reason as to why we may experience price shocks: a run on the dollar. There are a few factors that point to a future run on the dollar:

* China's repeated warnings about their concern for the value of their reserves

* Indian and Sri Lankan purchases of gold reserves and jettisoning of their dollar reserves

* Foreign gov'ts reducing the share of dollars as reserves (only 37% of new reserves versus 63% a decade ago)

* Gold making repeated new highs

* China moving to shorter term maturity Treasuries

* The near-vertical rise in the monetary base (per the St. Louis Fed)

* The rise in oil prices

In sum, there is A LOT of paper being issued by the Fed, and individuals and foreign central banks and governments are willingly exchanging their dollars for non-dollar assets. At some point, MANY individuals and central banks/governments will decide that the dollar is too troubled, and a less-than-orderly decline will ensue.

Nov 10 06:30 AM

[Davewmart:]

The IEA has consistently lied about oil supplies:
www.guardian.co.uk/env...
This alone is enough to cause a crash, in addition to the factors correctly identified in this article.
All the pressures on the IEA have been to exaggerate reserves, from the US and also from the oil producers, as they get a bigger say in OPEC according to reserve estimates.
So according to their own unaudited figures Saudi has acheived the remarkable fear of exporting many billions of gallons of oil, whilst it's reserves remain constant!
In addition to the politics of OPEC, they also do not want to forecast shortages as serious efforts might then be made to reduce oil dependence.
Governments like the UK have hidden behind IEA forecasts, as they did not want to take the painful measures that would be required by oil shortages.
The situation is actually far worse than simply going into a gradual decline, as you have a whipsaw effect, with high oil prices killing the economy, and the reduced demand for oil then killing oil prices so it is uneconomic to develop expensive new oil fields.
In addition the demand for oil from the producers is rapidly rising, leaving ever less for export.
This is crash territory, not decline.
The IEA has lied to us, and lied again and again

Nov 10 07:50 AM

[Leftfield:]

Continuation of long-standing trends of marginalization of more Americans, interspersed with painful discontinuous events such as davewmart comments about, looks like the likeliest outcome for now. And, while events are deflationary in nature, as the article concludes, it still seems the jury is out as to whether that could take place in a stagflationary environment.
Regardless, the "magical" sectors of the economy deserve mention in our decline. To make America economically successful again requires a reduction in the vast web of useless, counterproductive rules, steps, laws, procedures and wasted government spending that has, as much as the financial industry, failed to give the rest of us either prosperity or safety. There has to be a good environment to do business again to regain prosperity. The dominant politics has been about dividing spoils and the pie has shrunk dramatically.

Nov 10 09:39 AM

[Gregman2:]

Thanks for this Dickensian ray of sunshine.

Nov 10 12:55 PM