Some guesses about the economy in 2009

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.

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:

FM posts discussing solutions to the financial crisis:

  1. A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
  2. A solution to our financial crisis, 25 September 2008
  3. A quick guide to the “Emergency Economic Stabilization Act of 2008″, 29 September 2008
  4. The last opportunity for effective action before disaster strikes, 3 October 2008
  5. Prof Roubini prescribes first aid for America’s economy, 4 October 2008
  6. Effective treatment for this crisis will come with “The Master Settlement of 2009″, 5 October 2008
  7. Dr. Bush, stabilize the economy – stat!, 7 October 2008
  8. The new President will need new solutions for the economic crisis, 9 October 2008
  9. A brief note about our financial system: Intermediation, disintermediation, and soon re-intermediation, 16 October 2008
  10. New recommendations to solve our financial crisis (and I admit that I was wrong), 23 October 2008
  11. A look ahead to the end of this financial crisis, 30 October 2008
  12. Expect little or nothing from meetings like the G20 – or the Obama Administration, 18 November 2008

48 thoughts on “Some guesses about the economy in 2009”

  1. If your theory of monetary policy is correct – that the government can increase the quantity of money (above the rate of goods production) without affecting the value of savings then how do you explain Zimbabwe.

    If the money supply must be increased in tandem with production to prevent inflation aren’t you then calling for a supply side fix to our problems? If you want to get producers to increase output when banks aren’t lending then it has to come out of retained profits. And how can government do that? Lower business taxes.

    This has the added effect of directing the most capital to the places in the economy with the most profits. i.e. a productivity boost.
    .
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    Fabius Maximus replies: The demand for money goes up during deflation, which the government can meet without inflation. The excess liquidity must be extracted when the economy recovers to avoid inflation. This is not “my” theory of money. While I appreciate this praise, I cannot take credit for Economics 101 (or 201?) theory. Some supporting material is at the end of this comment).

    How can the Fed extract this liquidity when the recovery starts? That’s probably why the Fed has requested the ability to issue its own bonds. They might not own sufficient treasury bonds to sell (draining cash from the system). So they will issue thier own bonds, to the same effect. If this downturn lasts for than a few years (3?), only God knows how they will manage this transition. But if it lasts more than a few years there we will have far more serious problems to worry about.

    “how do you explain Zimbabwe.”

    They created hyperinflation; we are suffering from debt deflation. The dynamics are opposite. We are a rich, developed nation. They are a third world failed state. What’s the similarity?

    Citations: I could give many supporting quotes, but will just use 4 from economist David Rosenberg.

    17 October 2008:

    And the manufacturing CAPU {capacity utilization} rate slipped to a five-year low of 74.5% from 76.6% in August, and while this too may have largely reflected the hurricanes and strike, the economy is still moving further and further away from full employment which means that deflation is a present-day risk notwithstanding all the concerns over future price trends stemming from all the government debt creation (which is only an antidote to the debt contraction in the private sector).

    24 October 2008:

    We expect tremendous fiscal stimulus of a New Deal variety, with the Fed buying Treasuries and expanding its balance sheet — in other words, “printing money” (those who think the Treasury will flood the system with bonds may be in for a surprise). It is fashionable to believe that “printing money” is inflationary in and of itself. However, that is only the case if the economy is operating at full employment, which it clearly is not.

    If the Fed expands its balance sheet further to reflate a deflating economy, it would be embarking on Rinban-type bond purchases at the auctions the way the Bank of Japan did in the late 1990s. What happened then? The 10-year JB yield eventually broke below 1%, and it took a decade for the Japanese economy to actually inflate {FM: mildly inflate}.

    7 November 2008:

    Because we estimate that the unemployment rate in the United States at full employment is around 4%, a 6.5% jobless rate today is the same as the 10% rate was back in the early 1980s. Having the economy move further and further away from full employment is intensely deflationary.

    21 November 2008:

    From a top-down perspective, what drives inflation are the shapes and the interaction of two different curves – the economy’s aggregate supply curve and the aggregate demand curve. The movements of these curves indicate where the “output gap” is at a particular time – the difference between the level at which the economy is actually operating and the level at which it would be operating if it were running flat-out at full employment. In other words, the gap measures the degree of slack in the labor and product markets.

    … Barring a further large dose of monetary easing and major fiscal stimulus, our models predict that the output gap is going to widen to 8% by the end of 2009. That’s a magnitude that we have not entered before. The extent to which the inevitable deflation will be sustained beyond 2010 is likely to hinge critically on the government’s ability to bolster aggregate demand growth. We sincerely wish the Fed and our fiscal policymakers good luck in dealing with this state of affairs. Deflation is a pernicious development insofar as it raises the real cost of debt and debt-service and, as a result, frustrates the private sector’s moves toward balance sheet improvement.

  2. And yes. Wonderful neo-con beat down. We shall soon see if it works in practice.

    I’m betting on Nixon/Ford/Carter/stagflation. I’m looking forward to the reappearance of WIN buttons.

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  4. How long is it going to be before someone figures out, “Hey, we beat the last Depression with a war, why wait around for seven years? Let’s have our war now, a big one that reshuffles all the cards. No nukes allowed, just masses of troops – they’re unemployed anyway.” And no “nation-building”. The next war will be about establishing a lasting worldwide hegemony. After a few depression years, no one will care what the ideology is. And liberal democracy will look just like Weimar Germany in 1933.
    .
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    Fabius Maximus replies: It could be a long time, because that is not what happened in the 1930’s. Germany’s war did not result from stress of the depression. Hitler’s unknowning adoption of Keynesian economics (before Keynes published in 1936) made Germany the star performer of Europe. Hence the admiration of their policies in the US, among both Left and Right.

    As tangible evidence of this, German soldiers were taller and in better health than those of Britain — who too-often had signs of childhood malnutrition. Something to think about today when hearing folks advocate Andrew Mellon’s policies (also followed by the UK in the early 1930’s) — a gold standard for the dollar and a balanced budget during a recession.

    For more on this see Government policy errors as a cause of the Great Depession, 1 November 2008.

  5. Government Bureaucracy OODA: Observe Overreact Destroy Apologize

    Observe: Trouble with the economy
    Overreact: ‘Buttress institutions’ with the largest heist in US history
    Destroy: The US economy by poor policy
    Apologize: ‘We’re sorry, but we’re going to stay in power, and do more of the same when you’ve forgotten about this screw-up’

  6. >Hey, we beat the last Depression with a war,

    Don’t we already have some kind of ‘war thingy’ going on? If only bin Ladin had tanks, then we could put GM back in business.

  7. To comment # 8 Knight of the Mind:

    You note ‘sanctity of the contract’. This has been briefly discussed in the Kucinich Congressional hearings on foreclosures. One of the panelists noted that he was not concerened about the ‘sanctity of the contract’, and noted that Congress would have no difficulty in changing/amending the sanctity of contracts as they have already done that with the Bankruptcy reform act of 2005, among others.

  8. FM:

    This includes a large fraction of America’s population. You must be a hit at parties, calling most of the people there “drones.” After all, you sound like a stand-up guy, and certainly don’t hesitate to express this … interesting viewpoint … to their faces.

    I esp like your empathy for unemployed middle-aged professionals, with no potential for employment in their fields — in the middle of a severe recession, with families … and bills to pay. Perhaps you might one day find yourself in such a situation; it might broaden your perspective on life.

    Oh so you are so not Boyd .. must tell DInet that … “Boyd was wrong says FM, because so many Drones will lose their jobs and it is so sad. FM argues against Bill Lind because . sob.. it is ok that some some fighter pilots might die .. some army people might die .. but according to FM it is more important for a Drone to live and prosper than well .. well a soldier or a pilot dies because a Drone gives them rubbish equipment”. Hey take up that argument with Bill (and see how far it gets you).

    Been there done that, grew up in poverty, old now, fired so many times you cannot believe. Been to the wall so many times. Nearly lost my house several time, still have a mortage.. let me lecture you on toughness.

    Plus let me lecture on empathy .. did I get any when I saved an organisation $600M, no I was hated. .. did I get any when I tried to save an organisation (I failed) $1,400M … none.

    And all the Drones sided against me. Sympathy for me? Zero. Oh no I was was given the advice ‘leave the country because no one will touch you’, from a so called friend (my weakness loyalty .. not a weakness other people seem to have).

    Drones are Drones .. like the Brog. Talk and parrot the same things. “what is the current Bu**s**t”, corporate doublespeak, Communism, Fascim. Translated, what is the ‘big boy saying”, “can I torture some children for you sir .. or would you prefer to eat them .. how can I cook them sir”.

    Means nothing for them they are drones.

    Payback is a bitch isn’t it .. except unlike them I care about people, so I am (really) trying to save some ‘management bitches’ who have wasted their talents.

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