My guess, looking through the fog that surrounds us, is that the global economy is on the edge of a major event. In other words, we are right now starting a waterfall-like decline. Chaotic, tumultuous, steep. As we go over the brink let’s admire the view. Here are my forecasts for the new year.
The past two years were phase one of the downturn: a financial crisis affecting “Wall Street”, banks and brokers. The next two years will be phase two: a crisis affecting “Main Street” — industry, commerce, retail, governments, etc.
January will start the first quarter with a bang.
(1) A hail of pink slips. The unusual number of layoff announcements during the December holidays foreshadowed the main event, as most businesses seek to reduce headcount by 5% – 10% — and seriously affected businesses do much more. Like retail, as they close their marginal stores.
(2) Retail bankruptcies. The extraordinary number of retail bankruptcies during the Christmas shopping season foreshadows the tsunami hitting in the first few months of 2009. See “Retailers Brace for Major Change“, Wall Street Journal, 27 December 2008.
The big stories for 2009
The primary theme of this downturn has been the unexpected breaking of “links” — components of our economic system. One such, the opening act of the crisis, was the mass failure of mortgage brokers starting in December 2006. The a long series of banks, investment banks, insurance companies, and the government-sponsored- enterprises followed them into collapse — or forced marriages, or life-support on the government’s teat.
So what will be the surprises for 2009?
(1) Many non-financial firms will collapse (meaning that their functioning is seriously disrupted due to financial problems). Some of this is expected: in the auto, retail, and construction industries. Most will be unexpected, big and small. Some will result from banks cutting off their loans (anecdotal reports suggest this is happening now to small firms). Some will result from revenue declines. This will drive many small and medium banks over the edge, following their larger cousins. There will be lots of bankruptcies as 2009 runs and even more in 2010.
(2) Many local governments and agencies will collapse, perhaps even some states (e.g., Michigan?, California?). Many bankruptcies, although this might be a 2010 story — and will be strongly mitigated by Federal aid.
(3) The recession will spread from the developed nations (most now in recession) to the emerging nations.
(a) Watch China, as most experts expecting GDP growth of 4% – 8%. Outright decline is possible, and would force everyone (optimists and pessimists alike) back to the chalkboards to revise their calculations.
(b) Watch the oil exporting nations, many of which will run large fiscal deficits. Iran needs $90 oil to balance its budget, Algeria $56, Saudi Arabia $50. Mexico has forward sold much of its 2009 production; after that the deluge if oil prices have not recovered. And top of the list: Russia! (see “Russia braced for unrest“, Financial Times, 26 December 2008)
What about the government?
The primary implication of the above guesses is that the Obama Administration starts behind the curve. The major factor will be when (or if) they update their OODA (observation-orientation-decision-action) loops to run as rapidly as events — responding to current events instead of (like Bernanke and Paulson) the situation as it was 3 months ago. I am confident that this will happen at some point in the downturn. Perhaps they might eventually understand the overall processes at work and act preemptively.
In the next few weeks I will sketch out why government policy will not help much during 2009 (fiscal policy might be the big story for the US economy in 2010). In brief, the window for Congress to act was November and December. Bold action could have buffered (not prevented) the shock, as described here on 7 October. That window has closed. The recommendations remain valid; if implemented during the next few months they will help in late 2009 and (on a large scale) in 2010.
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!
FM posts discussing solutions to the financial crisis:
- A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
- A solution to our financial crisis, 25 September 2008
- A quick guide to the “Emergency Economic Stabilization Act of 2008″, 29 September 2008
- The last opportunity for effective action before disaster strikes, 3 October 2008
- Prof Roubini prescribes first aid for America’s economy, 4 October 2008
- Effective treatment for this crisis will come with “The Master Settlement of 2009″, 5 October 2008
- Dr. Bush, stabilize the economy – stat!, 7 October 2008
- The new President will need new solutions for the economic crisis, 9 October 2008
- A brief note about our financial system: Intermediation, disintermediation, and soon re-intermediation, 16 October 2008
- New recommendations to solve our financial crisis (and I admit that I was wrong), 23 October 2008
- A look ahead to the end of this financial crisis, 30 October 2008
- Expect little or nothing from meetings like the G20 – or the Obama Administration, 18 November 2008