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.

Afterword

If you are new to this site, please glance at the archives below.  You may find answers to your questions in these.

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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!

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