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no doubt. the storm is coming. unemployment is gonna explode.
Liquidity trap. The Fed is now powerless to do anything to stop the fall into extended depression.
Americans have no savings, massive debt, vanishing credit, monetary policy is already at the end of its rope, and we haven't even started the worst part yet.
The only thing left to try is good ol' Keynesian government fiscal stimulus on a massive scale, and just hope the U.S. can borrow enough money to do it.
You probably look around you and think, "What is ES babbling about? Things don't look so bad around here."
By March you will understand.
no doubt. the storm is coming. unemployment is gonna explode.
don't underestimate people's resiliance to survive. No matter how much people make, they always find a way to survive. Prices will come down to reflect such a change. Massive deleveraging is what we need as a country. Painful though.
weimar republic?
I guess the question will be whether the average person's earnings drop more or less than the cost of the unnecessary crap he pays for.
True. People who live in the favelas in Brazil figure out a way to survive and Americans will too.
Been ready for this years ago.
debt.
Things look bad and worse. Anyone with even a loose grasp on the economy can see that things are going DOWNHILL, not that the storm has passed and we'll improve from here on out.
This is what happens when you have a combination of material greed and companies who are willing to openly take advantage of and exploit the middle-class person. CEOs make billions of dollars per year, sit on federally approved company board with the executive power to make it's own policies, including giving failed board members who don't do their jobs millions of dollars in severance. And then the company goes bankrupt. Shocker!
There is absolutely nothing positive that you can gather from this, except perhaps in the end it will change American business for the better. It's going to be a long, painful economic struggle. And people aren't going to realize how deep it goes until they line up outside their local Safeway/Jewel/Trader Joe's/Aldi's to buy food and find the doors locked. It sounds ridiculous until you look at the last time this happened, and then realize that we are much more dependent upon store bought goods and services now than ever before.
Growing up in this generation, I thought the events that I would tell my kids about would be first, 9/11. Then, the Indian-Ocean Earthquake and Tsunami of 2004. And maybe Katrina. I'm sure those will have mention, but they have the potential to be overshadowed, at least in America, by the coming economic devastation. And we're right on the brink as it is. And I'm hoping that this situation isn't overtaken by the events in Iran and Pakistan. Scary.
I read an article that govt stimulus after WWII went into real stuff, infrastructure, etc, investments that paid back for decades.
Now govt stimulus is going into paper, contracts, debts, propping up financial sector which is mostly a house of cards. iow, little or no payback for the $Ts being spent.
I read the estimate for next year's stimulus should be $1T or more, just to get the economy out of contraction and back to zero, not to get growth.
The problem is that if the financial system is really just a house of cards that can't be fixed, then trying to drive the rest of the economy to recovery is like trying to drive a car with a blown engine.
The problem with the Keynesian fiscal stimulus is that there is no guarantee that it will even make a dent. During the 1990s, after their asset-price bubble collapsed, Japan tried 10 fiscal stimulus packages totaling more than 100 trillion yen. These didn't have any effect for a whole decade - the economy finally started recovering in 2003 after trying what Paul Krugman calls "quan ative easing" (where the central bank buys more government bonds than would be required to set the interest rate to zero).
Of course, this put the Japanese government in a deep debt hole, with public debt adding up to 170% of the GDP.
It'll be interesting to see what the new administration wants to do with this mess.
Bingo. Stimulating the economy through financial ins utions is like trying to fill a bottomless hole. If at all a stimulus is needed, it has to be into infrastructure and other government programs.
Of course, there is a school of thought which argues that the boom-bust cycle is unavoidable, and that any government intervention will just delay or prolong the severity of bust. The bust, per this theory, is a process of cleaning house and dissolving all the bad assets that the boom had created.
I'm going to dump my 401k and buy lottery tickets. I'll be sure to take the cash option so that when the lottery comission goes bankrupt I'll already have the money.
After that, I'm pretty much just going to sit back and be pissed at the new administration for taking so much extra taxes out of my winnings and then work part time at a golf course so I can get free rounds.
ES, not trying to pick a fight. But why March? Would you attempt
to explain why things are going to in a hand basket?
Like you say, I look around and I haven't really seen what all the
hype is about. I know the market is in a nose dive again today, but
it recovered some last week. People are spending.
I would honestly like to know how you come to your conclusion.
I have no idea why he thinks March, but it is the time when quite a few sales drop as people prepare to pay Uncle Sam.
When you say "market" what are you looking at? If you are talking about the Dow Jones, NASDAQ, et al then you are talking about a market indicator, not an economic one. The economy is what we are talking about here. Economic indicators include unemployment, real wage growth, gdp growth, etc. All of these indicators have been bad to VERY bad with even worse predictions in the future. Market indicators only indicate human emotions, Economic indicators indicate facts.
As far as "why March" I would think he just grasped at a month when everyone is able to see all the numbers as far as the holiday season. Or maybe it was just an out and out guess. Though it doesn't seem to be ES's style to just guess, so I will just wait for his explanation.
According to the pointy heads over at the RGE monitor, QE and monetization of debt are already occurring, before any Keynesian stimulus. An L-shaped recession is looking more and more likely. A decade of stagnation a la Japan in the 1990's would be a good result for us IMO.
Our public debt/GDP ratio stands around 360% today. It's gonna get a lot deeper, soon.
Liquidity trap, debt deflation and default. The medicine is all inflationary. Let's hope it works. If the government gets the timing or size of inflation targeting measures wrong, hyperinflation and monetary collapse may be waiting for us on the other end of the recession.
This gets complicated and long.
The U.S. economy technically has been in recession for a year, and unemployment is usually a lagging indicator. That means that people don't start losing their jobs en masse until the economy has been bad for a while.
Usually, recessions are short, and by the time unemployment peaks, the economy has already started recovering.
Not this time.
The United States has been in a bubble economy for six years. There has been essentially no real economic growth under the Bush Presidency. Due to a stagnation and decline in wages for all but the top few percent of Americans, there is not enough income to stimulate real growth. This was made up temporarily by the development of credit, real estate, and financial bubbles.
The credit bubble was simply easy credit with low interest rates that allowed people to borrow large amounts of money to fuel their consumption (think credit cards). The real estate bubble was a credit bubble applied to real estate, that allowed people to secure mortgages for values far exceeding what they could have secured in previous years. The financial bubble was the deregulation of derivatives that basically allowed investors to "bet" on debts like mortgages, so that the money riding on debts was many, many multiples the value of the debt itself.
The reason banks gave these bad loans out is that they convinced themselves real estate prices would never go down again -- they ignored reality.
As home values increased during the bubble, homeowners were allowed to borrow against those increased values, and they poured that money into consumption. But those increased home values were not sustainable, and once the bubble popped and prices fell, their debt was unsecured. Even if they were to lose their homes, the bank still could never get all its money back.
The derivative bubble is really the death blow to the economy. There were hundreds of billions of dollars of bad mortgages given to people who couldn't afford them, but that alone could not kill the economy. There were tens of billions of dollars of bad home equity after the bubble popped. These could not kill the economy. But the derivatives against these loans are in the quadrillions of dollars, i.e. thousands of trillions. This is several hundred times the size of the entire U.S. economy.
How could this be? Well, as these markets became deregulated, Wall Street came up with ever more complex financial instruments for packaging together securities and derivatives. Take the subprime mortgages, for example, which were the bad loans given to bad credit risks where the bank was counting on a foreclosure so it could get the house back after it had appreciated in price (except the price collapsed instead). These are very risky loans, and if you were to assemble a security based upon them, a buyer would demand a very high interest rate on it, since it is a "junk bond," so the issuer of those mortgages would not get paid much for selling off a bunch of bad mortgages. But what these firms did is set up a complex hierarchy of securities based upon these bad mortgages. The first set would be like "preferred stock," that is, if anything happened, whoever held them would be first in line to get paid. Then the second set would pay off, then the third set, and so forth. The trick is that the first set would get a very high bond rating, like AA/AAA, so those firms could package up bad loans, basically launder them into high-grade bonds, and get a very high price for them.
The problem was that once real estate prices fell, all those bonds, regardless of rating, were utterly worthless.
And since they were high-rated bonds, big banks and pension funds had snapped them up, and were left holding the bag.
But even that would not have been enough to kill the economy.
No, the Wall Street guys had to come up with yet another layer of derivatives, called credit default swaps. Once upon a time, these were like insurance against bad debts. You, the creditor, would pay a third party for a CDS, and if your debtor defaulted, the third party would pay you some sum of money. Then they were deregulated early this decade, so that anybody could get a CDS on any loan, regardless of whether they were a party to it. This sparked a free-for-all of investors making bets back and forth on whether a particular debtor would pay back his debts. Then there would be on CDS's on CDS's. This escalated to the point where there are now quadrillions of dollars of outstanding CDS's, and a relatively small default, like on a subprime mortgage, for example, can result in billions of dollars of losses.
And the banks and ins utions are so deeply wrapped up in CDS's, that for any given default, billions of dollars change hands back and forth, and they have no idea who is solvent and who isn't anymore. So, they are deathly afraid to lend to anybody that is even remotely a risk, even fellow banks, much money. Banks that were too heavily tied to bad mortgages and bad credit default swaps quickly went under, and their bankruptcies trigger other defaults that threaten to put other banks under the next day.
In order to have a prayer of surviving, the leftover banks need to increase their cash reserves, and that means they stop lending. But since we've gotten to the point where nobody has any savings anymore, and the whole consumption-based economy was based on shaky credit, it's like Wiley E. Coyote running off the cliff.
Or, it's an eerie reprisal of what happened to the economy in 1929. After the stock market crashed, people didn't end up in soup lines the next day. It was well into 1930 before suffering hit ordinary folks.
So credit is drying up like the Mojave Desert, and we're tumbling headlong towards another Great Depression. The federal government has desperately been trying to stem the tide by throwing hundreds of billions of dollars at banks to buy their bad loans. That didn't work. So they stopped that and instead threw hundreds of billions of dollars to buy stock in the banks so they'd be recapitalized and start lending again. That didn't work. At this point, all they could really do is just take over the banks outright and force them to lend.
With a sharp reduction in lending, far fewer people can get loans to buy cars. So, car buying is down 25% and all 3 U.S. automakers are about to go bankrupt. With a sharp reduction in lending, businesses can't make capital investments and don't create new jobs.
If the economy is the car, the financial sector is the engine, and credit is the gasoline. The upshot of that right now is that inventories are building, and lots of businesses are cutting production. What's coming next is a massive round of layoffs throughout the manufacturing and retail sectors.
Those crises are in full swing, and coming up next is the credit card crisis. People who have no savings and have been living off their credit cards will start losing their jobs and will default on those credit card debts. Those losses are in the billions of dollars, which is still relatively small, but it will kick off a whole new round of derivative losses. Consumer credit is set to dry up by 45% early next year. The mortgage crisis is going to continue for at least another year, and there is probably another 20% left to squeeze out of home values before they hit their floor.
There simply is no place left to turn to keep consumption going at the artificially high levels of the past six years. All credit is tapped out. Consumption will track down towards real income, and real income will be in sharp decline due to job losses. It adds up to a massive reduction in the size of the U.S. economy.
So the job losses will hit just as the economic downturn gets worse, and by worse, I mean the steepest downturn since World War II. It won't look quite like the Great Depression, since there is a social safety net now, but if you're in your seventies, you've probably already lived through the best economic times of your life.
Last edited by Extra Stout; 12-01-2008 at 05:15 PM.
double post due to logout glitch
That is not correct. It is 65%.
I say March because the layoffs will start to hit hot and heavy after the new year, as will the credit pullback, and you'll start to see the effects in your everyday lives.
I can only find one flaw in this analysis. The Quadrillion figure in loses. I know the loses are huge, but know one really knows how huge, no? Where are you getting your estimate, because a Quadrillion dollar hole we can not recover from.
i think unemployment will peak around 13%. (which will be a monster)
There are in fact several quadrillion dollars in outstanding CDS's. Now investors play both sides, so if a trillion dollars of CDS's settle, maybe only $5 billion changes hands. Or maybe $100 billion does. The banks don't know, and that uncertainty freezes them up into total risk aversion.
Oh, there is a small chance that the financial sector's losses due to the credit default derivatives crisis are in fact larger than the GNP of the United States of America, and that we are all in fact bankrupt.
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