Situation report: global economy, December 2008

This is a situation report on the global economy.   Speculation, attempting to find order from the confusing and rapidly-changing datastream.

  1. The roots of this crisis lie in the cumulative decisions of us all — collectively — over the past 3 decades.
  2. The problem grew to become major problem as a result of regulatory decisions made over the past decade or so.
  3. We passed the last exit during the 2001 recession, with the government’s decision to supercharge credit expansion instead of allowing a natural recession to rebalance the economy (as Volker did in 1980-82).
  4. The financial crisis ignited in December 2006  with the collapse of the mortgage brokers.
  5. It became a conflagration as a result of the governments ad hoc response, incremental steps taken into the void without a plan.
  6. The financial crisis hit the real world in Fall 2008, a cardiac arrest of global economic activity.
  7. So far “Main Street” has experienced only the fore-quakes, the tremors before the main event.
  8. I suspect it will hit during the next few months.

The defining characteristic of this downturn is the unexpected breaking of links in the economic machinery.  Home prices crash far beyond anything seen since the 1903’s.  Major finanical institutions crash.  Astonishing floods of government money poured onto the fire.  Perhaps this slowed the crash, perhaps it had no effect.  Every step of the way brought new surprises.

Many Americans (most?) are still in denial, believing this will be a recession like the others since WWII.  Like children on the beach looking out to sea.   “Oh, wow — look at the big wave!”

What’s next?

Viewpoints about the crisis have coalesced into three camps. 

  1. The “normal global recession” camp.  Just another cycle, US GDP down perhaps -3% peak to trough.
  2. The “worst recession since the 1930’s” camp.  A bad scene, but the world’s governments are now on the job. Fiscal and monetary policy will do the job, again.  US GDP down 5% or so.  See this example.
  3. The “worse than worst” scenario.  Government policy might not work — or it might work but only with long lags.  Uncertainty rules; the outcome is unknowable.

Those in the first two camps believe that the worst of the crisis has passed in that its course now runs in familiar channels.  The small minority in the third camp believes that the world has changed.  The post-WWII is ending.

What to watch

China.  The world will muddle through if China manages to grow its GDP at 4 – 5% in 2009 – 2010, with global gdp perhaps in the -1% to 1% range (roughly).  If China goes to zero growth — or negative — then the game changes.  Everyone must return to the blackboard to prepare new forecasts.  Forecasts for a deeper and longer downturn.

What is happening in China right now?  Opinions vary widely.  Everything is fine.  It’s on the verge of imploding.  The best answer IMO is that we do not know.

The big picture

The ancien regime lasted a hundred years, from the Treaty of Paris in 1815 ending the Napoleonic Wars to the outbreak of WWI in August 1914.  A hundred years of prosperity and peace (more or less) for much of the world.

All that died in August 1914.  The transitional period was difficult.  Thirty years of megadeaths and economic collapse, with an intermission.

The new world brought another period of peace and prosperity, perhaps the greatest 5 decades the world has ever seen.  Now the two superpowers of that era both have uncertain futures.   The world sinks into a severe recession.  Beyond that new challenges await.  All unknown as to timing,  magnitude, or both.

  1. Peak Oil
  2. Climate change (warming or cooling)
  3. The shift of power from west to east
  4. The second demographic transition, aging populations and perhaps extinction for some major cultures.

Perhaps the new world will be even better than we can dream.  It’s up to us.


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:

Previous situation reports about the crisis on the FM site:

  1. The US economy at Defcon 2, 11 March 2008 — Where are we in the downcycle?  What might the world look like when it ends?
  2. The most important story in this week’s newspapers, 22 May 2008 — How solvent is the US government?
  3. Another warning from our leaders, which we will ignore, 4 June 2008 — An extraordinarily clear warning from a senior officer of the Federal Reserve.
  4. High priority report: a geopolitical sitrep on the financial crisis, 15 September 2008
  5. A new sitrep, as we move into phase 3 of the financial crisis, 19 September 2008
  6. A sitrep on the financial crisis: why has the treatment been so slow, so small?, 8 October 2008
  7. Status report on the financial crisis: we’re at a critical point in time, 10 October 2008

41 thoughts on “Situation report: global economy, December 2008”

  1. “The roots of this crisis lie in the cumulative decisions of us all — collectively — over the past 3 decades.” Given that you are reporting on the state of global economy I find it a highly questionable statement. Not everyone succumbed to cheap credit and went on a shopping spree. This includes a number of fiscally prudent Americans, some of which I know personally…

    Ask yourself:
    – if true, why is it that US Government are making all the wrong decisions?

  2. A timely and useful summary! I don’t agree with two points: 1) “It became a conflagration as a result of the governments ad hoc response, incremental steps taken into the void without a plan.” Your own many forecasts of the crisis, and explanation of its roots, show that it was unavoidable. No government actions could have reversed it. The US government admittedly wasted a lot of money in trying, but the amounts are trivial compared to the total economy’s loss of wealth.
    2)”We” are not all responsible. We didnt created hedge funds and credit default swaps. Let’s place the blame where it belongs, on a primitive economic order where private profit was the only motive, forced by a surplus of capital to make more and more risky and speculative investments, and by a political class that acted as its agent and allowed it.

  3. World Development

    The economic problem as such is solved. The markets will get fooled by the dec quarterly numbers and crash itself down sometime early jan. There’s a technical correction on in the USD exchange rate, which is a sign that the credit crunch is easing. {snip — post your so-brilliant investment ideas elsewhere}.

  4. From “The Credit Rally…and an update on the credit rally“, David Goldman, 19 December 2008

    Goldman seems to have his finger on one key pulse, still mainly under the radar. The Big Boys have been buying into all this of late. What we might be seeing is a further consolidation (takeover?) by the banking elites who have been recently given oodles of cash from the TARP and are in position to buy things up at deep fear-induced discounts.

    Yes, the real economy may well tank and millions of ordinary people enter a realm of chaos, confusion and pain not seen in generations. But that doesn’t really matter to these Boys.

    I think your big picture here, FM, is reasonable. But the effects of deeply entrenched systemic corruption tend to be ignored. This is indeed the responsibility of all of us because we too have worshipped the God of Mammon these past many decades. This God, however, doesn’t care much for the little guy, snickering as they pray to him daily, taking in their little contributions and banking them gleefully with the Big Boys yet again!
    Fabius Maximus replies: This is aggressively stupid. One story about alleged buying of one narrow type of security by one firm and you draw broad conclusions about “the big boys.” That’s just dumb, unless you have more evidence than given here. Who were the folks that sold the bonds? Orphans… or other “big boys”?

    The Fed’s H8 report shows slight increases in securities held buy large banks over the past few months, mostly treasury/agency securities. “Other securities” have also increased, perhaps as a result of their off-balance sheet entities being brought back onboard.

  5. But I have feelings of all 3 viewpoints, depending on gov’t action now:
    if ‘enough’ cash is loaned out to consumers at very low interest rates, I believe it’s still possible to get a -2, -3% recession, with pickup before next Christmas.
    I expect Obama & Dems to do enough fiscal stimulus to have a #2 -5% (two years) worst recession since the Great Depression.

    I fear that bailouts for the rich, rather than more spreading of the bailout printed money cash, will lead to #3 -6 (?8) % or more.

    Some $60 tr is gone. Who will get new gov’t cash first? They will be the ‘relative winners’ in terms of net losing least.
    I claim it should be the BigBanks who self-selected dealing with CDS and other ‘financial instruments of mass destruction’.

  6. You had me going, then you started in the with “Peak Oil” and climate change nonsense.

    Funny how the “global warming” people shifted the bar to “climate change.” When has the climate been static?
    Fabius Maximus replies: The climate has never been static, but the changes have often been bad news. Like the little ice age. I suggest you study that period, as there are tentative indications we may be entering another cooling cycle. Not necessarily as long or cold, but even a few years of cold would be unpleasant with world grain inventories (per capita, or days demand) at 50-year lows.

    * For more about the Solar Cycle, see the FM reference page about Science, Nature, and Geopolitics.
    * For more about global food inventories, see the FM reference page on Food – articles about this global crisis.
    * For more about Peak Oil see the FM reference pages about Peak Oil and Energy – my articles and Peak oil and energy – studies and reports.

  7. Basic premise flawed – we got where we are because, over the last bunch of decades, the financial system’s relative appearance of stability fooled folks into thinking that reserves were a luxury.

    The gun was loaded by the Barney Franks of the world, letting FNMA et al hold or insure 50% of the US mortgage debt on 3% reserves, and all the financial creativity that derived from government-backed insurance of pyramid schemes. A side effect of all this was a substantial runup in real estate prices driven in many areas by people who probably shouldn’t have been able to get loans.

    The finger on the trigger was the big runup in energy prices, which squeezed the middle and lower-middle-class buyers (who were the ones chasing those mortgages.)

    And it was pulled by the Fed seeing that energy-price runup as ‘inflation’ and jacking up interest rates, finally pushing those borrowers over the edge.

    There’s a lot of other ingredients in the gunpowder: a prolonged weak-dollar policy, a herd mentality on Wall Street that led supposedly-smart bankers down a road riskier than it seemed, etc. But those are the three immediate factors as I see them. Without the energy-price runup AND the relatively sudden interest-rate squeeze the bubble would not have popped as explosively as it did.

  8. The current crisis is one of confidence – nobody knows how to value derivatives, and everyone including consumers are pulling back out of fear. The rapid decline is a result of a panic – a different phenom from a recession, and usually shorter lived. The question is: will the hundreds of trillions of derivates cancel out, or will there be blood all over the place.

  9. Things are grim in Silicon valley. Spending has dried up; house prices are in a freefall, and the mood is of serious anger. The very rich are unaffected except at the margin; after the disaster of 2002 the smart money has stocked up on municipal bonds. Those in the middle and upper middle classes are the hardest hit. To a large extent they fueled the real estate mania. It was said in 2006 that over half of the new mortgages in this county (population 1.6 million)were interest only. Still, those with prudence, foresight, and remaining resources will do very well by cherry picking prime assets.

  10. Update

    The comments posted here so far support my observation in the post that:

    Many Americans (most?) are still in denial, believing this will be a recession like the others since WWII. Like children on the beach looking out to sea. “Oh, wow — look at the big wave!”

    Two years into a crisis with deep roots in the structure of our economy, now visible as becoming the worst global recession since the 1930’s (WWII was not a recession) … and these people still do not get it.

    However these severe downturns produce a peculiar kind of clarity, even in those with little knowledge of economics and history. Time is the greatest educator.

  11. I don’t know if a ’30s era depression is possible today in the US. In the ’30s, one out of three US banks abruptly failed, taking one third of the money supply with them. As they swirled around the bowl, they called all of their loans, which resulted in many businesses and farms folding in foreclosure—even though they were otherwise healthy enterprises who paid their bills and their workers and their loan payments on time—and casting their workers into the streets. It was the business failure and the enormous unemployment that made the Great Depression “great.”

    The Fed knows this. And even though their tools are constrained in their ability to halt a recession, the Fed can and does keep banks from going under, which makes a ’30s-style contraction pretty remote.
    Fabius Maximus replies: Is there some relevance of this comment to the post? The post does not discuss the possibility of a “1930’s era depression”.

    Also — Given how the world has changed in the past 75 years, why would anyone expect such a thing? It seems absurd, like predicting a “1914-18 era war.”

    BTW — a national depression is usually defined as a decline of 10% or more in GDP. The 1930’s were so extraordinary, far worse in magnitude and duration than previous depressions, that it is called a “Great Depression” to distinguish it from a depression. Much as one can talk about wars without implying something like WWI.

  12. Mildly interesting until I read #2: ” Climate Change”.
    Fabius Maximus replies: Any guy who believes climates do not change. Did these people skip their history AND science classes in high school?

  13. As others have pointed out, this is a crisis of confidence… that has been triggered by the credit crunch that was triggered by people getting forced out of their mortgages that was triggered by high oil prices that was triggered by greed/world demand/speculators/???/you choose.

    Of course, that so many (individuals, corporations, governments) are so leveraged is what makes them susceptible to this in the first place. Where are you going to sit down when the music stops when you can’t afford a chair?

    The solution to the crisis is simple, if not easy. But I agree with FM that the rich are going to get richer, while the middle class will suffer and the poor will get much poorer.

    As an individual I can’t change what government does, or what people in general do. I can only change what I do. I have significant cash reserves, and so I plan to buy a foreclosed house in a great neighborhood at a great price… and live in it for several years until the economy turns around. Then, I’ll sell it and pocket the appreciation, and the increase will be a hedge against inflation. In the meantime, I have to live somewhere.

    If you have debt, get rid of it before buying more things. I know, that’s not what Washington and the corporations want you to do, but do what’s best for you, not for them. We Americans need to go back to our parents’ views on borrowing… don’t do it unless you absolutely need it and you are sure you can repay the loan, one way or the other. If you want a toy, try to buy it slightly used whether it’s a Rolex watch, jet ski, boat, or car, and let the original owner take the beating on depreciation (I bought a fully-loaded ’91 Corvette convertible in early ’92, paid 30% under sticker, owned it for 14 years, took care of it, and sold it for $16k, effectively paying less than $1k per year to own it). Pay yourself first, put away at least 10% of your paycheck, and invest in lower-yield but safe investments. You won’t get rich quickly, but you won’t take it in the shorts when one of these reversals happens, and they seem to happen every 6 to 8 years over the past several decades. If you want to buy stocks, buy when the upturn becomes obvious, and sell when things seem to start stagnating; don’t try to milk every cent out of the stock market because no one can call the tops and bottoms.

    In short, don’t walk a tighrope financially, because everyone slips sooner or later.

  14. ‘The “worse than worst” scenario’ is timid in my camp (perhaps of one). Your claims of peak oil & climate change make me hopeful that you’re wrong on everything else too. No offense intended, I think these are mere matters of faith; at odds with the data.

  15. We may have a bad climate change, but if the solar minimum guys are right it won’t be warming but cool down.

    We may be having a technological bubble. Moore’s law may have deceived us into believing that productivity due to science and technology was on an ever increasing curve. However there have been troughs between world changing tech, steam engines, steam boats, electrification, railroads, automobiles, aircraft, computers, and the internet.
    There is stuff in the lab but it looks like it won’t be viable until ten years have passed. We may have gotten all the productivity we can out of current tech. No 20 bagger profit ROI until a decade has passed.

    The administration that is coming in is going all retro. Trying to use the same Keynesian techniques that flopped in the ’30s and cost Japan the ’90s decade.

    The Baltic Dry Index for shipping raw material is kind bouncing a bit above the break even point for shippers.

    It looks like a number of countries are going to devalue their currencies to try and get their exports back up.
    Guess they never heard of tit for tat.

  16. I agree that Main Street hasn’t been hit. But I think you should ask, because MS will feel it, what will escape relatively unhurt. My feeling, based on posts by Mish, Kedrosky, Roubini, Denninger and so on, is that everyone and everything is going to feel this one.
    The country to watch is not China. China population is roughly 1.5 billion. 300 million so far have profited, equal to the entire US population. How many of these 300 million Chinese are engineers, financials? How many just factory workers?
    The NYT ran a post on what to call this crisis. I proposed “Disruptive change”. I think the solution for the entire crisis is to aim for disruptive change. In principle you can solve traffic jams / congestion by cable internet and online worlds. It’s the idea that counts. There should be a similar solution for this financial disaster. The solution, so far, is anything but more money, loans or bail-outs.
    Think tanks used to worry about disruptive change some runaway future technology would no doubt cause. They were right to worry. Unfortunately, the change wasn’t caused by technology.

  17. SirPatrick, #2 climate change is a highly relevant threat. You are right that global warmism is basically a hoax– but there is a very real risk that the government will impose a carbon crackdown that will further devastate the economy.

    Peter Jackson– The 30’s depression was initiated in large measure by bank failures that are being prevented now. But it lasted fifteen years because of government measures to address the crash– measures putting the Federal Gov’t behind unions, protectionism, stimulus plans, tax increases, every one of which appears likely again. And additional threats from government now include: environmental measures such as cap and trade, nationalization of health care, and other industries (eg automobile).

    See my web page for essays on both these topics.

  18. I am surprised nobody is talking about the China element. “Nobody knows” is an understatement. What their government says and reports is neither reliable or likely. I’m skeptical the Chinese government has a very good understanding of their situation–and why should they, given the dramatic change in their system over the last 10-15 years? My intuition is that their situation is considerably worse than the mild downturn they have reported so far. How long can they hold our national debt, even if they want to?

  19. Using “climate change” as a stand-alone phrase may have confused many of your commenters because of its hijacking by the warming mythologizers. If it happens, global cooling will far more destructive than even the most pessimistic global warming predictions. And there may not be much we can do about it except suffer.

    I’d like to hear more about your thoughts on China. Personally, I’m somewhere between #1 and #2 on the recession scale and I’m unimpressed by peak oil theory (because it fails to take into account how much politics clouds the numbers and how technology will change the playing field anyway). But I believe a Chinese meltdown in the next few decades is close to inevitable and fear how that will play out in the larger world.

  20. Since Fred just beat me to mentioning China, I;’l throw in that I agree with his points. If not propped up by the government, the Chinese banking system would be in far worse shape than nearly anybody else’s right now–and the government probably cannot prop it up indefinitely. As for their economy, I don’t think anybody has any idea–their numbers are pulled directly from some bureaucrat’s bottom. It’s mostly smoke and mirrors.

  21. This entire mess rests on the back of fractional reserve banking, central banking, and fiat money.

    We need a free market in money and to outlaw fractional reserve banking as a form of fraud.

  22. I do not think of our current woes as a ‘crisis of confidence’ as many do, but instead as a ‘crisis of specie’, in part. The real estate balloon represented a massive devaluation, much like a currency collapse.

    Also, I think our government is enacting the wrong measures in part because the institutional memory looks towards the 1930s for parallels but ignores other salient depressions that have occurred and may have better fit.

    While not exact in kind, I believe the Long Depression of the late 1800s is a better parallel. That was an era of increased use of fiat monies, protectionism and govt expansion, collapse of currencies, collapse of outmoded industries, ruin for debtors and wealth for those who still had reserves.

  23. I’ve been screaming for near twelve months. No one wanted to listen. No one wants to listen still. For those who do, catch up on my 400+(!) posts here, in reverse chrono order: Mike Cane. While you still have a chance. While you still can afford an Internet connection.

  24. “Beyond that new challenges await.

    1. Peak Oil
    2. Climate change”

    If those are the top two new challenges, we are in good shape. Peak oil is a fantasy, and climate change may be overstated, non-existent, natural and cyclical, or even beneficial.
    Fabius Maximus replies: It’s fascinating how people can say the most absurd things about climate change.

    “non-existent” — when has the climate not been changing?

    “natural and cyclical” — Here we see people who learn science from Disney movies, as in the “great circle of life”, as if natural climate change has not been among the great scourages in history (e.g., drought and famine).

    As for Peak Oil, I know of no expert who does not consider this a fact. A basic one, as one field after another becomes exhausted. The debate is about the date — next year, next decade, 2030? The necessary data for accurate forecasts are state secrets of the oil exprting nations.

  25. The necessary data for accurate forecasts are state secrets of the oil exprting nations.

    No, it’s not a state secret of any nation, it’s simply an unknown. It’s like a geopolitical Drake Equation – we know the oil has to run out someday, but we can’t know the value of any of the terms that would tell us when. So Peak Oil may be a technically correct thought, but as a frame of reference it’s a useless tautology. The price of oil products will drift upward as oil gets scarcer and/or more difficult to get. As it does, extant but uneconomic alternatives will become economical. By the time the tap actually runs dry, it won’t cause any hardship for anyone.
    Fabius Maximus replies: You must be kidding, saying that the Gulf states — employing the best of people and technology — have not mapped their oil fields. And that data are state secrets. Matthew Simmon’s book Twilight in the Desert discusses this in detail, and attempts to piece together the fragments we know to guess Saudi oil reserves.

  26. Other than those who think petroleum is not a fossil fuel, how can anyone deny peak oil. It is a mathematical certainty. The questions are: when, and what impact. Given the general inability of mankind to deal with balancing short and long term priorities, the impact is likely to be profound.

    As for climate change, it doesn’t belong on the list. If it wasn’t for the current fad of AGW, I doubt it would have been. It certainly should be way below the other items, and below unmentioned items such as global pandemics and WMD terrorism or war.

    es, the climate is changing. Yes it has always changed. But for it to be highly significant in this context(except in terms of irrational AGW policy actions) is wrong.

  27. Tim Maguire is quite right. When I read ‘climate change’ I rolled my eyes. If you’re talking about global cooling, my advice is to say global cooling. If you’re talking about AGW, well, I’m rolling my eyes.

    Stacy is quite right about a geopolitical Drake Equation. Do you believe that the Arab nations are 1). Not inclined to fatalism as seems an Arabic trait. “It is as Allah wills…” 2) Not heavily affected by corruption and tyranny which means those in charge do not get good data. 3)That we won’t have new technologies of finding oil develop in the next decades ahead which will find new oil?

    I suspect you agree with all these three points. And thus we come back to Stacy being quite right. Yes, at some point oil is gone (unless the abiotics are right).

    However worrying about Peak Oil in the present crisis seems like mixing something that might happen in 2030 or 2050 with something that is happening now.
    Fabius Maximus replies: I am impressed that you can forecast the next climate cycle, when a large fraction of the climate scientists community — on both sides of the debate — emphasis inadequacies of the data and the immature state of climate science theory. Your confident assurances suggest that you should publish your analysis — share the basis for your certainty.

    As Steve McIntyre said (source; one of his countless statements like this):

    “Serious people believe that it {AGW} is an issue. There’s a lot of promotion and hype, but that doesn’t mean that, underneath it all, there isn’t a problem. No one’s shown that it’s not an issue. The hardest part for someone trying to understand the issue from first principles is locating a clear A-to-B exposition of how doubled CO2 produces a problem and I’m afraid that no one’sbeen able to give such a reference to me – the excuse is that such an exposition is too “routine” for climate scientists. That’s the first attitude than has to change.”

  28. Eric Ashley,

    Peak oil can not be seen as a distinct point in time until after it has happened. What we can expect as it nears is an increase in oil price volatility, and we have certainly seen that recently. That doesn’t prove peak oil is the cause, but is suggestive.

    It would be prudent to act as if peak oil is here or near, because it takes years to increase the rate of production when demand reaches supply.

    Drill, baby, drill!

  29. So Peak Oil may be a technically correct thought, but as a frame of reference it’s a useless tautology. The price of oil products will drift upward as oil gets scarcer and/or more difficult to get. As it does, extant but uneconomic alternatives will become economical. By the time the tap actually runs dry, it won’t cause any hardship for anyone.
    Fabius Maximus replies: Faith-based economics! Shouldn’t you say “amen” at the end?

    BTW, I hate to spoil your gospel (“good news”), but the production time-curve is not symmetrical. Decline rates accellerate after peaking. Without adequate preparation, the economic consequences might be severe.

  30. Stacy – applaud your comment. Peak oil is unknowable because the effect of speculators masks rational pricing. Just as the impact of speculators can’t be quantified in the recent steep rise and fall of oil. The “useless tautology” description is right on.

    Despite my comment, FM’s analysis is direct, clear, and very good. It’s a shame that more folks didn’t go on to point #3. Shift from East to West. THAT is worth talking about. The physical danger quotient is high!

  31. I would include myself in the third camp “The “worse than worst” scenario. Government policy might not work — or it might work but only with long lags. Uncertainty rules; the outcome is unknowable.”

    First. Because ceteris paribus cannot apply in doing parallels of the current situation with former, applying some policy and waiting for an outcome similar to the one before 30 years is childish.

    Second. Those effects you mention – peak oil, climate change, shift of power, demographic problems – will not wait for the crisis to end to start happening in some nice and predictable order. I would gather that of all those risk variables, for climate change it is the most likely to play a cruel joke on our plans and smash the chess board.
    Defining problems is a good mind exercise, it is supposed to help to find solutions. But with so many variables and unclear connections between them, it looks like the perfect chaos model.

    I have decided for myself, as a human being, to adapt to every current situation.

  32. I believe in the “price will drift up and we will phase in switchgrass as bio-fuel” theory. Except that our runup to $150/barrel and back down shows that the fuel market is not very elastic.
    It would seem wise to do an “all of the above” energy strategy; wind, nuke, methanol, drill-drill-drill, tar sands, solar, insulate the house, electric car, earth thermal, oil shale, etc. Many of these lower pollution and limit CO2.
    What I am seeing is rather a cutthroat defense against any solution that is not politically correct. And most of the solutions are politically incorrect in some way; wind mills kill birds and spoil Teddy’s view. What we have here is a political problem as much as a technical problem.
    Fabius Maximus replies: Except that switchgrass-as-a-fuel is a theory, nothing more at this point.

  33. “It would seem wise to do an “all of the above” energy strategy; wind, nuke, methanol, drill-drill-drill, tar sands, solar, insulate the house, electric car, earth thermal, oil shale, etc. Many of these lower pollution and limit CO2.”

    The primary factors should be cost effectiveness and national security. Unfortunately, today what gets the most mention are the least effective – “clean (less CO2)” energy meaning intermittent, expensive, low density solar and wind, and (all sorts of problems) biomass.

    The problem with electric cars is that batteries simply are not getting better rapidly. The energy density of the best batteries is less than 3% that of gasoline. Electric cars would be truly wonderful, if we could solve the fuel problem. It isn’t an accident that gasoline and diesel dominate transportation – they are dramatically better (other than “pollution”) than any other solution we can readily forsee.

  34. “Fabius Maximus replies: Is there some relevance of this comment to the post? The post does not discuss the possibility of a “1930’s era depression”.”

    I was responding to this statement in the original post:

    Many Americans (most?) are still in denial, believing this will be a recession like the others since WWII. Like children on the beach looking out to sea. “Oh, wow — look at the big wave!”

    Fabius Maximus replies: And I replied to that as above. There is a 10x gap between the worst US post-WWII recession and the Great Depression, so implying “worse than” the former does not imply the latter. Also, it is absurd to imply — as your comment did — that any major economic downturn must closely resemble a single event 8 decades ago. Do you believe all future wars must resemble WWI?

  35. As to the immediate economic prospect, it is probably grimmer than we think (certainly grimmer than the stock market currently thinks).

    The greatest risk in the current situation is the potential loss of creditworthiness of the United States, which is financially overexposed and overindebted; for one analysis, see

    As to peak oil, surely this will happen someday, but surely not for decades; it is a matter of politics and economics. The (barely exploited) tar sands of Canada contain as much usable oil as all of Arabia — at an economic price. Iraq may contain a quarter of the world’s total reserves, mostly unexplored and unexploited (see There will be plentiful oil for decades to come; the only question is at what price.

    As to climate change, of course it always changes; but major changes, such as the Maunder Minimum, occur over centuries, and nobody really knows whether the climate is currently warming or cooling. Doubt and skepticism are called for here; see Freeman Dyson’s demolition of the CO2 scare stories at

    But there is reason for hope. Throughout history, technology has often come to the rescue, and there is no reason to think it won’t do so again over the next decade or so. We will find ways to use less oil, create new industries (who in 1994 would have predicted the vast impact of the Internet, for example?), limit any impacts of climate change, and so on. For one example of new technology that could have immense benefit, see

  36. Fabius is absolutely right about climate change. It is going to happen; change that is. Like the sun is either going to rise or fall relative to the horizon. Like the wind is likely to blow this way or that. Like the tides are going to be different from one month to the next.
    Peak oil; an idea who’s time hasn’t come yet. A prediction. Someday it will be right and that has remained true throughout the last 30 years that peak oil predictions have come and went. A waste of bytes.
    As long as governments respond to demands to push real cash into the economy to cover for write downs of monetized debt this train is headed off a cliff. The market is demanding that financial assets be backed by a modicum of real capital. IOW it is rejecting the current level of fractional reserve banking.
    If China bails on its U.S. treasuries to protect it against a hyperinflated worthless dollar by buying our real discounted assets they could be a saving source of recapitalizing the economy. They could be our savior.

  37. Also, it is absurd to imply — as your comment did — that any major economic downturn must closely resemble a single event 8 decades ago. Do you believe all future wars must resemble WWI?

    Well perhaps we’ve both inferred from each other something different than we both had intended to communicate. Certainly the Great Depression isn’t the only depression that was worse than the recessions experienced since WWII. Easily half of the frequent (by modern standards) depressions of the 19th century were worse than any post-WWII recession. But they were tended to be more localized and and at least as brief as modern downturns if not even shorter lived.

    Indeed, my entire point is that whatever we will experience will NOT be like the Great Depression. Now perhaps you can imagine a different economic fate that would be as bad or worse in terms of simple human misery than the GD, but I cannot. The intense privation that resulted from the sudden and widespread unemployment caused by “the Great Contraction” is my standard for economic disaster outside of that which is possible due to the vagaries political dictatorship of course.

    Are you imagining something worse? It’s a difficult question to ask, because if you can, I probably don’t want to know.

  38. Richard in London

    Your post is a very good summary of current opinions on this crisis. Mine is that this now looks clearly like a debt deflation bust , and as a consequence would be dreadful if it were not for Bernanke’s willingness ( soon to be followed here , and later in Euroland )to apply the policies he outlined in his 2002 speech.He is going to print money (as rates are now zero bound there is no other policy worth considering ). Anglo Saxon consumers , unlike their Japanese counterparts,have a propensity to consume rather than save , this should ,over time and some reversion to a more normal savings rate , stabilise aggregate nominal demand.Of course it will produce inflation , and possibly (though not necessarily given $ seigneurship for commodities ) devalue our currencies markedly. Real rather than financial assets will revalue , the real debt burden will be reduced. Your excellent posts and comments on Keynes may have slightly overlooked that his principal concern was the preservation of democracy which he feared was imperilled by the laissez-faire policies of the period , though a great admirer of Hayek one should not lose sight of the fact that he could only write the ” Road to Serfdom ” in London because it was safe here.Inflation , rather than deflation , will keep it so. It may sicken us to see it , but the printing press must roll. Happy Christmas

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