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:
- 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
Tigerhawk points to a related, if more fanciful, Financial Times piece: “An imaginary retrospective of 2009“, Niall Ferguson, Finanical Times, 27 December 2008.
Hindsight looks awfully good, in your case, FM. I can’t find a single point to argue with in your predictions for 2009 and 2010. The American consumer is, to use a metaphor, like a great beast that has been wounded and retreats to its cave. Four to five years is probably a reasonable time frame for bringing this beast back to (modest) health again.
A financial writer observed recently that the major events of 2009 would not be economic but political. It now looks as if our “grand game” in the middle east is not control of Iraqi oil, but of the Caspian basin, and the proposed pipeline through Afghanistan and Pakistan to India, cutting out Russia, China and Iran. This will be a major struggle with major foes that could occupy all our attention and most of our resources. In elite circles this battle to maintain our global strategic dominance may me more important than addressing our wounded economy and tattering social and political fabric.
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Fabius Maximus replies: You raise an important point. Looking ahead to 2010 — only dimly visible through the fog — I wonder if the big events in 2010 will be political. Both domestic and international, as the crisis moves into its 4th year with (perhaps) no sign of ending. The regime change about this site has so many articles might begin to manifest itself.
One thing: Many firms relied too much on debt at 2.5-4%, with short term maturities, and were (only barely) viable at that. EG, the profile of Sirius-XM in the Times.
Now relying on low interest rate debt is fine if it has long maturities is OK. But Sirius-XM has $1B of debt coming due in 2009 ($7B total), which needs to be refinanced, in a company with GROSS revenue of $1B/year or so.
Thus if they can only get money at Warren Buffets or related terms (eg, 10%+, and to be honest, they are a bigger risk than Goldman/Sachs and GE), they are not viable, as that alone adds $100M+/year cost to a company not making money. But if they can’t get the money, they are not viable because they can’t pay their debts.
Sirius-XM may be the most convenient example, but how many other companies are in the same position: lots of debt, short term, and counting on low interest rates?
Combined with the “Wal*Mart” factor as well, which has, even in the GOOD times, pushed everybody’s (manufacturer, distributor, retailer)’s profit margin down to the low single-digits, ANYBODY with debt which will need to be rolled over is in deep trouble.
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Fabius Maximus replies: I don’t want to get to deep into analysis of this, but I agree. Remember: two years ago the optimists told us that the US was strong because:
* households balance sheets were strong (high and growing net worth) and liquid (lots of cash).
* the financial sector was in excellent condition, well positioned to withstand a recession.
Both of these were grossly false. Now we are told that non-financial corporations are in great shape, with strong balance sheets. There are some indications that this is also false.
* As you mention, short maturity debt can prove lethal if it cannot be rolled over.
* Too many companies have too much debt, risking collapse during a long recession. This is disguished in the aggregate totals by a large companies with no debt (esp technology).
* Balance sheets are vulnerable to deterioration in the income statements. A severe downturn can push a company into violation of its loan covenants — esp on bank loans (providing working capital). Unless lenders rapidly renotiate terms, this can trigger immediate technical default on all of the company’s loans.
The Sirius/XM profile in the Times: “Satellite Radio Still Reaches for the Payday“, NY Times, 26 December 2008.
Frankly, the description of that company says the ONLY thing which can save it is a Chapter 11 restructuring.
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Fabius Maximus replies: This is a typical consequence of recessions, forcing weak companies to restructure or die — esp in new fields like satellite radio. More serious — with little precedent since the 1930’s — will be numerous failures of established firms. That can spark positive feedback, accellerating economic decline, unless arrested by bold and large-scale government action.
The primary theme of this downturn has been the unexpected breaking of “links” — components of our economic system.
Expand on this point.
What does this mean? Are links “good?” Is there any way to benefit from links breaking down? How do we forge new links? Should we?
( E.g., if this means that Washington insiders wind up sucking their thumbs, is this not a benefit? What if the Old Boy Network is replaced by the Young Turks? How do I get to be a Young Turk? Does this mean new guys get into Skull & Bones or does it mean belonging to Skull & Bones – or even going to Yale – will not longer matter? And so forth. )
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Fabius Maximus replies: “Links” are just components in the economic machinery, snapping as the appartus is torqued by external forces. Its a metaphor.
* Mortgage brokers, now almost all gone, were links. They began snapping in Dec 2006.
* Morgage banks, such as Countrywide Financial and Washington Mutual, were important links and now gone.
* The subprime mortgage market, now defunct, was a link. It snapped in early 2007.
* The “alt-A” mortgage market, now defunct, was a link. It snapped in late 2007.
* The government-sponsored enterprises were very important links, now snapped and operating as government agencies.
* The global investment banks were important links, now operating in greatly reduced fashion after bailouts — now gone as independent entities (either thru mergers, restructuring as bank holding companies, or other forms of government intervention).
* Various mechanisms of corporate financing have snapped: asset banked commercial paper and auction rate securities providing the most spectacular explosions.
* AIG was a major link, snapping and now a de facto government enterprise.
You can discuss the importance of these links, and whether we are better off without them. Like the appendix. Whatever your feelings about it, you ignore appendicitis at your peril.
Too many companies have too much debt, risking collapse during a long recession. This is disguished in the aggregate totals by a large companies with no debt (esp technology).
I think the same has occured on the household level as well. You have some people (eg, me, based on the lesson of my parents, of >20%, and similar for my Girlfriend). Yet the average (mean) household savings rate is 2% of DISPOSABLE income, and has been for the past few years (see this post at Calculated Risk for more about this.)
This is going to be UGLY.
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Fabius Maximus replies: Agreed. As I have said, (like here) excess household debt is the core of the problem. Bringing the savings rate from near-zero back to its post-WWII average means a large, painful, and unavoidable decrease in US consumption.
There is too much debt to be paid off by far too many people, companies, regional states, even whole countries. At some point it is going to have to be cancelled by fiat, or at least a large part of it. The lenders will take a bath, but that is when the hard choices come in, rescue and recapitalise the essentials (in a network sense) of the lenders, let the rest go to the wall.
Savings will be wiped out for individuals, corporations and even whole countries. Loans will become incredibly hard to obtain for a considerable time after then (maybe decades). An ugly and agonising option, with only one thing to recommend it:
“It sure beats the alternative”. Which is huge swathes of populations burdened under unpayable debt for .. decades? Banks incapable of lending to even each other, companies struggling to pay off debt in depressed markets. Whole countries going insolvent and unable to even feed themselves? Absudities such as empty decaying houses with people living in tents. Farmers going broke while people starve? Countries defaulting.
No social/political system will survive those sort of strains for long. The agony will be at a geo-political level as well, wiping out Japanese, Chinese, Middle Eastern and Russian savings will require some horrible quid pro quos by the US in military and ‘strategic’ terms.
But, like many things, the faster the process is started the quicker rebuilding can start. And, in one sense, it is going to happen anyway, in a slow agonising way as company after company goes under, countries default, etc … or a, still extremely painful, quick and calculated way.
Basically amputation vs gangrene.
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Fabius Maximus replies: This is far too simplistic. As I describe here, there are 4 methods to deal with excess debt — pathways out of the hole. Nor are they mutually exclusive. Some are more painful than the others; all have different mixes of short and long-term consequences.
Most important, we may not get to choose between them. Our creditors have a say, as does Fate.
I tend to think the prevalence of 5yr-ARMs that are going to start adjusting upward in the near future will play a major role. It creates guarunteed waves of foreclosures until most of the population of these toxic mortgages have adjusted and done their worst.
In essence, each year’s tranch(sp?) of mortgages adjusts about 2% a year until they reach their max. At each adjustment, a certain population of the mortgage-holders that can’t refi out of them into fixed-rate deals then defaults. Assuming it takes each tranch about 4 years to finish adjusting and hence killing off a new swath of home-owners, you get a steady wave of negative returns.
So, if 2006 was the last major year in which junk was popular, you start getting failures in 2011 and get them through 2015, which results in an equivalent 4 year volume of foreclosures over that period. So, without having government legally violate the sanctity of contract on these mortgages, is there a path out of the woods, so to speak, prior to 2015?
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Fabius Maximus replies: I doubt this will even be a factor. The government will probably socialize the mortgage market, as done in the 1930’s through the Home Owners Loan Corp (HOLC) — but on a far larger scale. This is one of the easier measures to take, converting all these to 30 year fixed mortgages.
While effective in mitigating the crisis, the recession is no longer a housing or mortgage event. That was just the spark; the fire has spread very widely by now.
The government will probably socialize the mortgage market, as done in the 1930’s through the Home Owners Loan Corp (HOLC) — but on a far larger scale. This is one of the easier measures to take, converting all these to 30 year fixed mortgages.
It would be far easier if the bonds in which they were invested were held by only Americans. A lot of foreign banks and sovereign wealth funds hold USD-denominated MBS, based on real estate deals done in the US. This makes the US government a de facto nationalization of a foreign asset holder’s property.
That would hurt our credibility, and the willingness of foreign savers to continue to invest in the US for decades to come. To comprehend this better, imagine how US investors felt when Venezualian President Hugo Chavez started nationalizing firms they held ADRs from…
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Fabius Maximus replies: I doubt it.
The foreign creditors we care about are foreign central banks, and the only mortgage-related securities they own in significant amounts are guaranteed by the government-sponsored-entities — and hence unaffected by such measures.
Foreigners hold risk assets like mortgages, defaults are a known risk of these securities — and this is obviously an alternative to widespread default on these loans.
The data on sovereign wealth funds (SWF) is limited, so their exposure to non-GSE mortgages debt is unknown at this time. Since several SWFs have lost a bundle on US stocks — and will lose more on corporate bond defaults — reduced payments on mortgage-backed securities seems unlike to make a difference.
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I know you know Instapundit has oft mentioned the over-generous pensions. One that really caught me is the out & out curruption of our culture as demo’d in Florida. They retire & hire back to double dip insane $s from the treasury.
I’m not proposing anything here, I would just like to add a 2009 prediction: violence against the public mooches will be an ugly side of our crashing culture.
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Fabius Maximus replies: I agree that the public pension system is broken at all levels, and that the path to fixing this will be long and difficult. Pension benefits of many State and local agencies are not only far greater than most (almost all) private plans, but far exceed what these entities can actually pay. The day of reckoning nears due to a combination of long-term underfunding (“elect now, pay later”), boomers starting to retire, and a long & deep financial crisis.
Some of the articles recently mentioned by the Instapundit:
* “Massive Surge In Municipal Bankruptcies Coming“, posted at Mish’s Global Economic Trend Analysis, 28 Devember 2008 — an excellent survey of recent articles.
* “Santa Ana’s pension spike now bearing bitter fruit“, posted at Orange Juice Blog, 27 December 2008.
* “CITY PENSION NIGHTMARE“, New York Post, 28 December 2008
* “Double dipping rises despite outrage“, St. Petersburg Times, 28 December 2008 — The article mentioned by DJR. This is a must-read IMO.
I have a question that I have been unable to find an answer for in all of my readings about this subject:
I own my home outright. I own three automobiles outright. I have savings invested diversely that I regularly contribute to for my retirement. I’ve never earned much more annually than $100K, usually less. I’ve worked hard and shunned debt all of my life and for now my job is secure. With all the gloom and doom, I wonder how long that will last.
My question is; what with these dire outlooks for the economy overall what happens to people like me? People who are middle class that has done what they’re supposed to? When will ‘they’ come for my land and savings to ‘bail out’ those that didn’t? Isn’t it people like me that will have to pay for all this crap?
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Fabius Maximus replies: Probably yes. The rich have the power; the poor have little to take. That leaves the middle. Since this is Republic, these things happen only with our acquiescence.
“If God didn’t want them sheared, he would not have made them sheep.”
…….Calvera, bandit leader in the movie “The Magnificent Seven” (1960)
The big surprise in the coming year {snip — this site is about geopolitics; there are thousands of other sites on which to post your investment predictions}
The type of “Big Government/Big Jobs Programs” ideas being floated by the Obama camp were tried during the 1930s by FDR. Among other things they failed miserably to end the Depression and some historians have argued these actually deepened and extended it.
My solution would be to drop the capital gains tax, institute a 3% national sales tax (superceding all state attempts to collect sales or “use” taxes on interstate commerce) to replace the lost revenue and replace the income tax code with a flat 18% tax. Would cause about as much disruption as a major recession but lead in the right direction, anyway. The problem is not in the private sector per se but heavy-handed government influence via the tax code. As long as you have heavy-handed government influence on business decisions via the tax code you’re going to have these bubbles and their economic aftermaths.
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Fabius Maximus replies: These are myths, with little basis in fact.
(1) Fiscal policy can mitigate the downturn — limit the damage while the economy recovers. It’s treatment, not a cure. That makes is useful, but not a panacea.
(2) The fiscal stimulus during the 1930’s was far larger than anything previous in US history, but (we know now) far too small to end the Great Depression. Worse, due to fears about inflation and large deficits, it was curtailed too soon — hence the 1937 – 1938 slowdown. Note Keynes gentle criticism of FDR’s economic othodoxy in this 1 February 1938 letter.
(3) “some historians have argued these actually deepened and extended it.”
I know of no mainstream economics who believe that FDR’s fiscal stimulus (the subject of this discussion) deepened or extended the Great Depression. The usual study cited for such claims is the following, which says nothing of the kind:
“New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis“, Harold L. Cole and Lee E. Ohanian, Journal of Political Economy (Vol. 112, No. 4, 2004, pp. 779-816) — Abstract:
There were many components of the New Deal in addition to fiscal stimulus. Many of these other policies we now know were counterproductive. Raising taxes, cartels, over-regulation of business — it’s a long list. With hindsight — 70 years experience and evolution of economic theory — we can judge how FDR dealt with an unprecedented crisis.
Orion, moves by the gov to indicate that they’re turning directions – favoring freedom – would be quite welcome by all of us. I kind of think tax-cuts w/o slashing the size/scope of government is problematic, if not just kicking the can down the road. I would at least like to see Sarbanes-Oxley turned off. But, I think there’s just no way we’ll be seeing any of this. Good luck though. Maybe there are enough rational people like you (and me) out there.
GTL: “Isn’t it people like me that will have to pay for all this crap?”
And me. Yes. Payment can only come from those who HAVE net worth and/or income. We’re the suckers in this scam. And we’re seriously outnumbered.
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Fabius Maximus replies: I doubt that we’re outnumbered; we’re just lazy. It’s not as we have seriously tried to make the government work better. We do, however, excel at making excuses for our predictament!
I discuss this at some length in the posts about “America – how can we reform it?“
GTL: This is why people like you should own guns.
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Fabius Maximus replies: Another advocate of the “America should become just like a third world nation.” See the wonderful things social turmoil has done for South America since WWII — from being among the world’s richest nations to povery in only a few generations!
“My, my, my! Such a lot of guns around town and so few brains.”
Private Detective Philip Marlowe in the movie “The Big Sleep” (1946)
What happens to Iceland over the next six months will foreshadow what happens to the rest of the world.
You are going to see great disparity between the regions of the United States. I believe you will see a mass exodus of skilled talent from the Northeast and California. A reverse okie.
People’s expectations are going to drop substantially. Maybe everybody should get on board with Dave Ramsey…consumer credit fueled a lot of growth and now it’s taking it away.
I would like to add a prediction for 2009. That is we will begin to see accelerating pressures on certain service sector industries to restructure and become lower cost providers.
Certainly health care is an area that has gotten a lot of attention. That will intensify.
I predict that in 2009, there will be substantial pressures on private colleges to become more efficient. Like the automakers, these institutions have huge legacy costs (tenure and contracts with faculty/staff unions). There are pressures to cut costs from parents and students fed up with high tuition bills, shriveled endowments, and the increasing availability of for-profit alternatives. So look for pink slips to start coming from higher education–a sector that has often been thought of as recession proof.
Fab Max 14.3 – I do: Peter Schiff, Yaron Brook, George Reisman, Walter Williams, Thomas Sowell. Many Austrians.
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Fabius Maximus replies: Do you have any links or citations? This does not tell me much.
Also — I said “mainstream economists”, which excludes those in the Austrian school. While a major current of economics, the kenesians are the dominant paradigm at this time. That does not mean that they are wrong, just that economists in the many “schools” of Kenesian theory control the machinery.
Off-topic comment: I have found much of Sowell’s writings both valuable and interesting. But this evaporated my respect for him:
From “Don’t Get Weak – Random thoughts on the passing scene.“, National Review Online, 1 May 2007.
Heh, maybe. My prediction is that we’ll see the marginal cities in the northeast and mid-west completely collapse into ghost towns with accelerated emigration.
With increased government role in the economy, it’s about time for Washington DC to make a turnaround. In the new economy that’s going to be where the jobs are, and the trickle down is going to trickle from DC and not NYC. Also look for pockets of immigration near military bases, as the military becomes a bigger factor in the economy. Here in California that would be San Diego.
California, maybe a mixed bag, I think emigration away from rural California, and back towards Hollywood and Google and a few other pockets where business continues. Wishful thinking and human spirit will take people to those places with a tiny chance of scoring a decent job.
The reverse Okies will be running from cities and states with high costs to start entrepreneurial businesses, and towards states like Texas, where cities welcome new businesses rather than looking at them as milk cows to be squeezed for every drop.
Scoring a decent job requires somebody to be hiring. Who is going to do hiring in locations where onerous regulations, immensely high taxation, and innumerable hurdles to success exist? Dropping the corporate tax rate might be one way to start rehiring; dropping hurdles to small business success might be another.
The problem will indeed be the search for a “decent” job. There is no sector that will be safe in this economy. You may own most of your stuff right now, but when that layoff slip comes, you will find that you can only live for so long on your savings. Which means you’ll be employed right up until the day you die, still gasping out a greeting at WalMart or whever you can find a minimum wage job.
I am one of those people. I saved furiously, but lost my job when oil hit $140+ a barrel back in July. I send out 4-6 resumes a day, work in technology, and have nothing to look forward to at this point. I have enough savings for 3 years, and that’s eating rice and 2-for-1 items I can pick up at the market. I’m fortunate to be single, but we aren’t talking much about families and what this will do for future generations. The only thing I can think of is the notion that hiring MBA’s will become extinct again, because there will be hordes of non-graduates out there because no one can afford college.
The vicious cycle must be stopped, and that means jobs and some job security. Otherwise, geopolitically speaking, there WILL be a 10-million person march on Washington, there will be pitchforks and torches blazing, there will be tarring, feathering, and pitchcapping of politicians and corporate executives, and vast zones of America will be turned into slums.
What does America do with 500,000 new unemployed each month, with no place for them to go?
Civilizations fail when productivity can no longer support the usual levels of graft and corruption. Detroit is a prime example. The cities of California are another. As is the state of California.
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Fabius Maximus replies: That’s a powerful point. A parasite cannot grow too large without endangering the health of the host!
A main reason to support mild inflation is the known economic fact of “wage stickiness downward”. Once folk make a certain amount of money for work, it’s really hard to make them do that work for less.
Pink slips often sort of do this — they do some other work, often for less.
Yes, more pink slips coming. In almost every industry. This is the frightening thing for future optimists, the future growth areas (w/o gov’t) are so unclear. Of course, if the gov’t pushes solar, or wind, or hybrid fuel, or whatever, the gov’t can use policy to create some jobs. If they guess right, it can even help.
I hope there are fewer pink slips, but fear there will be far more.
I predict the Reps will be pushing more in tax cuts / tax refunds so that people make more decisions about the winners, not the gov’t.
I also hope this policy is more done, as I think it will more likely lead towards the US economy starting to grow again.
I think you missed the biggest one of all for 2009.
China, facing unrest, will spend lavishly on infrastructure, social safety netting, what have you. They are still a dictatorship and dictators love stability. No price is to high to keep it.
China will get that money by first, slowing and then stopping it’s purchase of US Treasuries, followed by selling them.
That’s the End of the World for Obama. From there on out, he has to print his money and then all bets are off for the dollar. The trillion dollar stimulus will be a catastrophe.
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Fabius Maximus replies: No, I said China one of the major flash points. Consensus forecasts for 2009 range from 4% to 8% growth. Zero will make them desperate. However, selling USD will increase the value of the RMB and hence the price of their exports — the damage might outweigh the gains for China. This downturn means difficult choices for everybody. Forecasts in such times must be made with great humility.
Oh, while I agree that the recession is no longer a mortgage event, the financial system can’t be stable without feelings of confidence, by lenders, about the value of houses. Similarly, since so much household wealth of so many Americans is their house equity, the uncertainty about the housing bottom keeps the economy in an uncertainty-induced crisis.
At minus 10% or minus 30%, or minus 60%, America needs more stable house prices, before there will be major growth.
The problem is that we have wrung all the easy profits out of applying the microprocessor to society and there is nothing in the immediate future poised to take its place. We are in a secular decline.
It won’t last. However, it will last at least 5 years.
The difficulty now is all the political encumbrances added when times were good. We will not see a turn around until the dead weight of political policies are shed. The new administration is not philosophically inclined to do what is necessary. In fact they are prone to act in ways that are exactly counter productive.
And the difficulty is that there are no politicians trained in economics (Reagan) poised to forge a new consensus.
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Fabius Maximus replies: I agree on all points.
We will see these “political encumbrances” at work when the Obama team attempts to start large-scale public works. Lawsuits will rain from the sky, including many from their green allies (whose motto appears to be “no solutions, anywhere, ever”). Projects that would have taken 2 years to complete during WWII now require somewhere between 10 years and infinity.
I’m far from an economics expert, or even very savvy on the personal finances front. So pardon my genuine ignorance here when I say that I read stuff such as the following and fail to understand it, on a very fundamental level:
See, I don’t get this. I have a certain skill. You have a certain skill. Bob has a certain skill. Kate has a certain skill. We each want stuff that the other can provide. I want the stuff that you and your colleagues produce. You, and people at your company, want the stuff that my colleagues and I produce. We both want the stuff that Bob and Kate, etc., produce.
So why would any of that change? What fundamental issue is preventing all of us from just continuing to producing and consuming each others’ goods and services we do now? Why does that have to end? Why would we all wind up “working for minimum wage”? Why would the value of our skills — and the resulting products — be any less than it is now? I’ll have no less interest tomorrow in the stuff produced by Bob. Bob will have no less interest in the stuff produced by me. So why would all that go away?
As I said, pardon what I’m sure is some glaring ignorance here, probably involving fiat money systems or some such. But if someone can explain all this on as basic a level as I’ve just asked it, I would be most appreciative. Thanks…
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Fabius Maximus replies: What if we do not need your skill? Perhaps you build homes, and we already have too many homes. So few homes are built for a few years. Do you have sufficient savings to stay unemployed for a few years? A large fraction of US households are only 3 months away from bankruptcy (a loss of one job in the family and the clock starts).
As the old joke goes, what do you call a (aerospace engineer after the 1970’s space bust, or geologist after the 1980’s commodities bust, or whatever) … “Waiter!”
“What if we do not need your skill? Perhaps you build homes, and we already have too many homes.”
I get that. Changes in supply and demand — sure, those are basic, natural changes over time that will affect people engaged in the relevant endeavors. OK, so we wind up with more homes than others want to buy. People in the houses biz have to find something else to do.
But on the bigger scale, why does human-beings-trading-stuff-with-other-human-beings have to wither down to near-nothing, to the point that life X years from now is nothing like life of today for most of those human beings? We all still want to produce and serve each other in exchange for products and services. Why doesn’t it keep on ticking?
Fabius,
If the money supply stays relatively constant in order to prevent runaway inflation (Friedman monetarists) the only way government can “stimulate” the economy is by taking money out of the economy, accelerating the downward slide except for the politically favored.
Of course the other option is printing money (confiscation of savings) where holding on to tangible property is the wise course.
Now consider: official inflation was about 6% in 2008.
BTW FDRs policies were tried twice – once by FDR and once by Nixon/Ford/Carter – in both cases the economy did not pick up until the productive sector became profitable. FDR had war industries. Reagan lowered taxes on producers – the supply side stuff.
The initial rise out of the situation we are in will not come from bank lending. It will come from retained profits. Unfortunately the incoming guys want to tax the hell out of business and Sarbanes-Oxely is ruining incentives for start ups. They can no longer recruit the best people based on stock options.
We are screwed.
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Fabius Maximus replies: I disagree on all points, esp that we “are screwed.”
First, fiscal policy is a palliative treatment — not a cure. It was applied on a small (i.e., inadequate) scale during the 1930’s, and mitigated the downturn. See comment #14 above for more about this.
Second, aggressive fiscal policy (aka “printing money”) is not “confiscation of savings”. It reduces the income of savers, as an unavoidable side-effect. But not “confiscation” in any meaningful sense.
Third, what happens after the downturn determines if inflation results. Inflation is not inevitable, as seen in the post-depression, post-WWII era.
Inflation is treatable — while deflation is potentially lethal for a high-debt economy like ours. For more on this see “Debt – the core problem of this financial crisis, which also explains how we got in this mess“, 22 October 2008 — which describes the dynamics of debt deflation.
Most important, as I have said so many times… from many of the comments here (and elsewhere), one would think the US had never before experienced a downturn. A reasonably sound economy — as is ours (this is not Zimbabwe) — recovers on its own. Government action mitigates the suffering and damage inflicted — and might even aid the recovery. Let’s not panic like some paleolithic tribespeople watching a solar eclipse, wondering if the sun will return.
The US has experienced many recessions — and quite a few depressions (and one Great depression) — in addition to 3 major wars. We will survive this as well, no matter how small or large — short or long — it may be.
“So why would any of that change? What fundamental issue is preventing all of us from just continuing to producing and consuming each others’ goods and services we do now? Why does that have to end?”
It is madness, isn’t it? Never stop asking this question!
How about this? We don’t just work for each other, but we also need to anticipate our future needs, and we need to invest to build wealth in the future. The problem is we have too many debts, decreasing prices, and uncertainty about the future. No one’s job is secure, so we don’t want to spend what money we have. Housing prices are collapsing, even oil prices are falling, so why invest in the future? Why not just hold onto the cash and sit tight? Everyone is rushing to cash, investment and spending stops and jobs become even more scarce.
If somehow we could get all deflation out of the system instantly, if real estate hit bottom now then we could start buying and re-investing in those cheaper houses. If you’re sure the bottom now buy property and make some money! But I don’t know. Is this the bottom? Someone tell me.
“Printing money” is monetary policy because it’s a change in the quantity of money — at least that’s my recollection from college econ class a few years back. Government spending and increased national debt is “fiscal policy.”
The value of money is set by what you can buy with dollars. Printing money will not cause inflation if there’s an increase ‘stuff to buy’ to go along with it. So, seems to me, the new money needs to be directed in ways which will lead to the production of new real wealth.
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Fabius Maximus replies: It is a lot more complex than your comment implies. To use a bad analogy, think of medicine — diagnosis and treatment — starting with “blood flows through veins and arteries. It’s a long process from this simple starting point to any useful analysis.
Zimbabwe.
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Fabius Maximus replies: I’m sorry, but your answer must be in the form of a question. In reply to “A nation almost totally unlike the USA” you are supposed to say “What is Zimbabwe?”
Also, this is not the Jeoporady site. But than you for playing.
Sorry FM but most of your comments are just gas.. This may seem trite but the future is simply unknowable. The gov’t spent billions in the 1980s for CIA intelligence and which of those spooks at Foggy Bottom predicted the fall of the Berlin Wall? How many people in July of ’08 expected the collapse of $150 barrel oil? Years ago experts predicted the North American forests were going to be destroyed by acid rain. I can go on but you get the point.
People have been predicting the decline of the US capitalistic system for 200 years. Personally, I would not bet against that moving average.
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Fabius Maximus replies: What a wonderful generic comment, which can be applied to each and every forecast about the world: “the future is simply unknowable.” We bow before your wisdom. And yes, your comment is trite: “unoriginality as a result of being dull and hackneyed.”
Fortunately it is redeemed by the idiocy of your last line, since nothing in the post is “predicting the decline of the US capitalistic system.” Did you read the post?
Many of those ’70s AEs became MEs, technicians, civil servants–but waiters? Proven competence in technical fields can provide some insulation against such a steep drop. Then again, if NHK is to be believed, it seems that joke needs to be updated, at least in NYC:
“What do you call a finance major or MBA?” “Taxi!”
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Fabius Maximus replies: Your faith is charming, but in all of these cycles people experienced long periods of unemployment. Things sort themselves out eventurally, which is why downturns end. But the transition (for example) for a 40 year old professional in a highly specialized field to another field is difficult — usually involving unemployment followed by a period of far lower pay.
The most exquisite destruction of neo-con idiotology I have ever read (and nearly the best put down as well).
Thank you FM, I’ll quote this one large and wide.
More seriously though, technically trained people have more options. I think of what I’ve done over the years .. and with some long periods of unemployment. But if you have a good brain, good basic maths/stats/physics/etc skills you will be amazed at what you can turn your hand to. My final backup plan is to become a diesel tuner, since I cannot find one in nearly the whole of Australia, so I’ll learn to do it and make a crust.
If you have some ‘hands on’ on technical skills, then options are there. I’m not in the “we are all to specialised to re-train” school of thought. A car, aerospace, etc, engineer can quite quickly turn to (say) a train engineer.
What is more worrying is the management/marketing/advertising/finance/bureaucrats/etc ‘drones’. What can you do with them? None of them can even change a lightbulb, let alone anything complicated, like change the oil in their car. Too unskilled to do anything useful, to unfit to become even farm labourers.
But we have a solution at last, turning their fat into fuel (several refs available: google them).
I see the fuel station of the future, do you want McDonalds/KFC/or just plain fat converted diesel? “Oh you want that, just wait a moment”, as the liposuction devices suck the fat out if them into a converter and gives me useful fuel.
“Hard to keep them under control” I ask. “Nah, I just keep them going with stratagising meetings and feed them horse manure, they last for ages and keep producing fuel all the time”.
“Expensive to buy” I ask. “Nah mate, dime a dozen, the middle managment ones are the cheapest, few euros per ton, all they want is somewhere to have a meeting. I give them a room and fit the tubes in, endless fat, plus a a bonus sewage output as well which I sell to the farmers, had to adapt the nozzels to fit their mouths rather than the other end, but my son took care of that. The expensive ones are the US Pentagon units, tremendous output of everything fat, sewage, gas and no inputs expect promises of a lot of money on the future, but the market has killed that and the prices have gone through the roof, plus the Americans have woken up and have started hoarding them rather than kicking them out into the sea in old inner tubes.”.
And finally they will make a positive contribution to society.
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Fabius Maximus replies: How nice that you have such fine self-esteem.
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.
OldSkeptic,
While I enjoyed your humour, it was at my expense. Used to have a hard skill, was a coder. I was a good coder, in business languages. Then 2 things happened. I was also good at finding talent, inspiring, and leading people, so my company asked me to go into management. There was also an internet revolution with completely new technologies and subsequent devaluing of U.S. skillsets vis-a-vis outsourcing and H1B.
So I am a well trained manager, who can develop an ROI, convince a stakeholder to fund a project, find a team of engineers, build them, help them with their careers, turn around a product, have it tested and deployed and the support it. In your world, I’m useless. Unless you consumed my product, and maybe you did.
And to Thomas:
In the current economy, I’m like a home. There are lots of homes, some really nice, some dumpy. But actual condition (skill sets) doesn’t matter. There are simply too many homes, and not enough buyers. When you add in shorts and foreclosures (H1B and overseas workers), the problem becomes even more acute. Until demand increases, through job stability, there are just too many people and not enough jobs. I’d work for half my last salary, and survive nicely.
With enough retraining, I can do anything. What is anything in today’s market? The almost insanely humorous part is that the moment you identify anything, and run to it, you’ll find 100-200 people standing there already to compete with. And you thought you had the idea first.
OhBoy, you are not useless at all. You just got sucked into wasting your talents by a stupid system .. but they are still there … you can still cut good code, or do a lot of other things.
Have a think for moment, whats going on locally? I once went around every house and business in my area and gave them a flyer “fix your PC”,”sort out your upgrade”, “teach Excel and Word”, etc. $5 here, $50 here .. yeh soon you are talking about real money. Paid my mortgage for a few months.
Never,ever give up.