How can we tell that someone understands our economic situation? If they show panic. This post provides three brief views of our economy, the first two by major experts.
- Albert Edwards, Societe Generale, 2 December 2008.
- Worries about next year“, Paul Krugman, blogging at the New York Times, 4 December 2008.
- FM, today.
1. Albert Edwards of Societe Generale wrote on 2 December 2008:
So now we know. The US economy has officially been in recession for a year. The National Bureau of Economic Research (NBER -link) decided Monday that the economy had been in recession since last December. That will not be a major surprise to readers of these gloomy pages. This is already the third longest recession since The Great Depression. It is likely to be the longest and the deepest since then. Most economists see a second half recovery. But no-one really has the foggiest idea if, or when, a recovery will begin and how powerful it will be – including the idiots holding the monetary fire hoses.
We are now part of The Great Policy Experiment (or is that The Great Ponzi Experiment?) where most of the previous rules have been thrown out of the window. Prior to the Great Depression, 2-3 year recessions were actually quite frequent. I would hazard one tentative prediction. Perhaps this recession will not last quite as long as the 5½ year downturn that occurred in the US between October 1873 and March 1879, but really I cannot be that certain.
2. Worries about next year“, Paul Krugman, blogging at the New York Times, 4 December 2008:
I’ve been ruminating over economic prospects for next year, and I’m getting scared. Two points:
- The economy is falling fast. We’ll see what tomorrow’s employment report says, but we could well be losing jobs at a rate of 450,000 or 500,000 a month.
- Infrastructure spending will take time to get going.
A new Goldman Sachs report suggests that projects that are “shovel-ready” are probably only a few tens of billions worth, and that a larger effort would take much of a year to get going. Meanwhile, it’s very questionable how much effect tax rebates will have on consumer demand. So it may be hard for stimulus to get much traction until late 2009 – and that’s even if Congress goes along, which may be a problem given all the bad analysis and disinformation out there.
So here’s what I’m wondering: will it, in fact, even be possible to pull the economy out of its nosedive before unemployment goes into double digits? I’m starting to wonder.
3. Here is my view of current events, a summary (no analysis or supporting evidence):
- The financial shock (hitting “wall street”) began in December 2006 with the collapse of the mortgage brokers. It is passing. Our major financial institutions proved far more fragile than even pessimists expected.
- The real economic shock (hitting “main street”) hit in September, and will reach full force during the next few months. I suspect (guess) that US households and our major commercial/industrial firms will prove far more fragile than even pessimists expect.
- The government missed its last opportunity to mitigate this shock. The Fed is just now implementing aggressive (unconventional) monetary policy, to be formally announced at their 16 December meeting. Congress missed its opportunity to implement a large fast-acting fiscal stimulus in November; they will do so in February (aprox).
- The last hope for a global soft landing was China. Could they stimulate their economy so that it maintained 5% – 8% growth? Current evidence says no. We have little reliable data about China, but it suggests that China could have zero or negative GDP in 2009 or 2010. If so, global GDP might be -2% instead of the +2% widely expected. This would be the worst since WWII.
- After that comes positive feedback, like dominoes falling — as the ripple of the shock radiates out through the economy, through our society. Through the world.
- The government’s fiscal and monetary programs than have two goals. First, mitigate the downturn: minimize the suffering and avoid serious damage to our economy. Second, help spark the economy to “restart”, for a 2011 recovery. That the government will successfully accomplish any of these things is questionable.
- Both fiscal and monetary programs will take time to gain traction, likely 6 for minor effect — 18 months for full effect. Esp fiscal policy, as no construction happens fast in America.
- The obvious consequences are disturbing. The government’s balance sheet will be devastated. The danger of severe inflation when the economy recovers.
- The unexpected side-effects of such massive government programs will be large beyond imaging.
Afterword
If you are new to this site, please glance at the archives below. You may find answers to your questions in these.
Please share your comments by posting below. Per the FM site’s Comment Policy, please make them brief (250 words max), civil, and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).
For more information from the FM site
To read other articles about these things, see the FM reference page on the right side menu bar. Of esp relevance to this topic:
- about the Financial crisis – what’s happening? how will this end?
- about the End of the post-WWII geopolitical regime
- some Good News about America!
Forecasts on the FM site about causes of the crisis:
- A brief note on the US Dollar. Is this like August 1914?, 8 November 2007 — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
- We have been warned. Death of the post-WWII geopolitical regime, Chapter II, 28 November 2007 — A long list of the warnings we have ignored, from individual experts and major financial institutions.
- Geopolitical implications of the current economic downturn, 24 January 2008 – How will this recession end? With re-balancing of the global economy — and a decline of the US dollar so that the US goods and services are again competitive. No more trade deficit, and we can pay our debts.
- What will America look like after this recession?, 18 March 2008 — The recession will change many things, from the distribution of wealth within the US to the ranking of global powers.
- Another warning from our leaders, which we will ignore, 4 June 2008 — An extraordinarily clear warning from a senior officer of the Federal Reserve.
- When did “Dude” predict a recession? How severe?, 6 June 2008 — Why accurate economic forecasting is difficult, what we know about current conditions, and warnings from a top economist.
- Consequences of a long, deep recession – part I, 18 June 2008
- Consequences of a serious US recession – part II, 19 June 2008
- Consequences of a long, deep recession – part III, 20 June 2008
- A look at one page of what lies ahead in America’s history, 7 August 2008 — Death of an American industry.
- “The Coming US Consumption Bust”, by Nouriel Roubini, 6 September 2008
- The most important news of the month. Perhaps the year., 29 September 2008 — Warnings from our foreign creditors.
- Forecasting the results of this financial crisis – part I, about politics, 13 October 2008
- Forecasting the results of this financial crisis – part II, a new economy for America, 14 October 2008
- Miscelaneous news and thoughts about the financial crisis, 16 October 2008
- The Coming Global Stag-Deflation (Stagnation/Recession plus Deflation), 28 October 2008
- A look at the next phase of the crisis, as it hits the real economy, 31 October 2008
- A look at out future, 2009 – 2010 … and beyond, 9 November 2008
Well stated, particularly points 8 and 9 of the third point of view.
It was the experience of Germany after WW1 that the hyper inflation that followed was much more destructive to society than the War that preceded it. Since run away inflation destroyed the social position of those with the greatest stake in the new regime. Hyper inflation destroyed moderation.
The US isn’t Germany, but it bears thinking about. I sincerely hope the Fed knows how to find the off button on the printing presses.
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Fabius Maximus replies: A few comments. Esp, do you have any citations to support these statements about Germany?
(1) “It was the experience of Germany after WW1 that the hyper inflation that followed was much more destructive to society than the War that preceded it.”
This seems unlikely, considered the mega-deaths and suffering Germany endured during WWI. Also, the inflation was a consequence of the WWI.
(2) ” Hyper inflation destroyed moderation.”
The hyperinflation of the Weimer Republic ended in 1924. While it almost certainly weakened the regime, Hitler came to power in 1932 — largely as a result of the Depression, which hit Germany harder than most nations. See Wikipedia for a brief history; also see the IMF’s 2002 World Economic Outlook, Chapter 3, box 3.2 on The Great Depression.
(3) “I sincerely hope the Fed knows how to find the off button on the printing presses.”
Inflation is not a problem during a deflationary recession (with massive idle workers and plant), but will be a serious problem during the next recovery. Note that Japan has fought deflation for 20 years, with no end in sight. So like FDR during WWII, lets fight the current enemy and worry about the next challenge afterwards.
For more on the FM site about inflation:
* “A giant breaks his chains and again walks the earth: inflation“, 10 June 2008
* “The geopolitics of inflation, an introduction“, 17 June 2008
Hi Fabius, I was looking for an email address to send you this link, hope its not against the rules to link to other blogs, but I thought you might find this guy interesting in his analysis of the current situation, he takes it from a UK POV, but it still has a lot of relevance to the US, IMO.
“Money Printing Economics – US and UK as the New Zimbabwe?“, Cynicus Economicus, 4 December 2008
Keep up the good work.
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Fabius Maximus replies: Relevant references are always welcomed.
How odd that so many people worry about inflation during a spiral into deflation. Inflation will be a problem only after we defeat the current debt deflation. Japan has fought a similar problem for 20 years, with no end in sight — so victory is not assured.
Many people forget the mental side of making an economy tick. This will be the hardest part to restore. Once the banks got hit they corrected to the other side of the world on extending credit and the debtors became much more conservative. This has started the vicious cycle. Inflation will someday be an issue again but not soon. I watch commodities for a hobby and I can say that we are experiencing deflation that may already be beyond governments ability to control. With credit bubble exploding much of the so called “cash” has dried up. Velocity of money is near zero at this point. All this while the government runs around acting like they care but only think of attempting to take political advantage.
I may be a bit negative but I think all we can look for is the government to establish a base level. Once that happens we start looking to recover and then worry about inflation. Of course this is contigent with the government finding it’s behind with either hand! I think we are beyond the ride to hades at this point and we may find new ways to describe a depression. I hope not.
Stop spending trillions on top-level institutions and instead put them directly into individuals citizens pockets with extended unemployment benefits, higher minimum wages, single payer health care along with mainly public-sector medical industry. Stable personal income will prevent a major societal melt down.
Meanwhile, dismantle the Federal Reserve and come up with a non-usury based currency system related with productivity-based GDP versus finance-based GDP quanta.
Those 9 points are excellent tactics/logistics level overview.
I think your point about showing panic is a good guide for gauging the level of understanding this economic situation. It is something policy makers need to hear (which is something I try to do almost daily regarding infrastructure spending). Unfortunately, most seem to be too busy defending their “turf” to see the big picture. As other have said, keep up the good work.
Update: “‘Too late to panic,’ investors warned“, BBC, 4 December 2008 — Excerpt:
What a pessimist! Of course it is not too late for panic.
On Nov 13 you said the economy must go to Defcon 1. We failed to do so. The dirty financial bomb has detonated without our nation making significant progress to contain the radiation. The economic casualties will be overwhelming. The bomb exploded when, during well publicized hearings for the TARP bailout, Americans were told in no uncertain terms that the economy was going to collapse. Those hearings were the direct precipitant (though certainly not the cause) of the massive collapse of the real economy. This scenario is being repeated with the automaker bailout hearings which are daily blaring to everyday working Americans that critical pillars of our economy are crumbling. With every drawn out public hearing the situation worsens immeasurably.
I do have references, but none I can pull from the internet, well not off hand. Micheal Burleigh goes into the issue in detail in his book “A New history of the Third Reich”.
Hitler came to power 8 years later, but it was during the hyper inflation that the fortunes of many potential supporters of the republic were destroyed, it is hard to over estimate the impact of this on the legitimty of the republic.
It would be wise to remember how concerned central banks were during the summer about inflation, this changed rapidly to put it mildly, there is every chance it will change again, esp if the value of the GB pound and the Dollar are destroyed by printing money. Because there is every chance that the creditor nations will decline further borrowing. That is my worry. Japan was an isolated case, this is a global ressession. This is I believe is a valid fear.
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Fabius Maximus replies: I agree with both of these points, in a limited sense. Beyond that I believe they have little support in theory or fact.
(1) IMO it is absurd to say that the hyperinflation was “much more destructive to society than WW I”. And the depression was clearly the major factor bringing Hitler to power. However, the first of the references I gave above discussed the effect of the 1923-24 inflation on the Weimer Republic, weakening its foundations. In A giant breaks his chains and again walks the earth: inflation I say:
In the “World of Yesterday” Stefan Zweig describes some of the result of this inflation on society:
(2) IMO the key thing to remember about inflation is a future problem, not a current one. People worried about inflation all during the 1930’s, irrationally as we can see today. Both theory and history suggest that the fears of near-term inflation are absurd.
Imagine this was 1939 but Germany behaved itself,and imagine some arguing that what was needed was a staggering debt financed mobilization of our entire economy. Government would buy thousands of planes, boats, tanks, and bullets. There would be relentless pressure to build, test, improve. Faster planes, bigger new types of under water boats, bullets that hit their targets guided by technologies unimaginable, in fact close to magic in 1939. This would obviously require seemingly insane activity. Procurement of each generation of device in great numbers, followed by real world testing and evaluation under real world simulated performance pressures of great magnitude. Relentless improvement generation by generation with ever ascending functional requirements. Sustained application of this regimen would, it would be argued, end the Great Depression hangover, and change the world with technologies unimaginable even to the greatest minds of the era, laying the foundation for a new and expanding world economy. How would this notion have been received then? This is our problem now.