I have not made a formal tally of Roubini’s various lists of why the economy is going (and will continue to go) to hell in a handbasket, but recent sightings suggest his typical list is eight to twelve reasons.
However, in his latest missive, on the subject of why the consumer is toast, Roubini outdoes himself and comes up with twenty reasons. Oh, sorry, AT LEAST twenty reasons. I also don’t think I’ve ever read Roubini say his tally of woes was less than comprehensive.
In case you are new to this line of discussion, “falling consumption” in the absence of big time government countermeasures, equals “memorably bad downturn.”
Is there some secret significance to this development? Numerologists and technical analysts are encouraged to weigh in. Personally, I think his list does boil down to a dozen or so reasons, but be sure to read down to his last point, where he draws his bottom line, a peak to trough fall in GDP of 10%. He needed 20 reasons to steel readers for his conclusion.
And I am really not making fun of Roubini. It is merely that because his messages are so consistently grim and have so far proven correct, one needs to find comic relief where one can.
From RGE Monitor:
One can count at least 20 separate or complementary causes that will sharply reduce consumption in the next several years:
· The US consumer is shopped-out having spent for the last few years well above its means.
· The US consumer is saving-less as the already low household savings rate at the beginning of this decade went to zero/negative by 2006 and has now to raise to more sustainable levels.
Yves here. I hate to be a pedant, but one and two are more or less the same reason.
· The US consumer is debt burdened with the debt to disposable income having increased from 70% in the early 1990s to 100% in 2000 and to 140% in 2008.
· Not only debt ratios are high and rising but debt servicing ratios are also high and rising having gone from 11% in 2000 to almost 15% now as the interest rate on mortgages and consumer debt is resetting at higher levels.
· The value of housing wealth is now sharply falling by over $6 trillion as home price depreciation will soon be 30% and reach a cumulative fall of over 40% by 2010. Recent estimates of this wealth effect suggest that the effect may be closer to 12-14% rather than the historical 5-7%….
· Mortgage equity withdrawal (MEW) is collapsing from $700 billion annualized in 2005 to less than $20 in Q2 of this year. Thus, with falling housing wealth and collapsing MEH US households cannot use their homes anymore as ATM machines borrowing against them.
· The value of the equity wealth of US households has fallen by almost 50%, another ugly wealth effect on consumption.
· The credit crunch is becoming more severe as the recent Q2 flow of funds data and the Fed Loan Officers’ Survey suggests: it is spreading from sub-prime to near prime to prime mortgages and home equity loans; and from mortgages to credit cards, auto loans and student loans. Both the price and the quantity of credit are sharply tightening.
· Consumer confidence is down to levels not seen since the 1973-75 and 1980-82 recessions.
· Real wage growth and real income growth has been stagnant in the last few years as income and wealth inequality has been rising. And now with GDP and real incomes falling real consumption will fall sharply.
· The Fed is reaching the zero-bound on interest rates as the economy gets close to deflation given the slack in goods, labor and commodity markets. Deflation means that consumers will postpone consumption as future prices are lower than current prices, as real rates are positive and rising and as debt deflation increases the real value of the households nominal debts
· Employment has been falling for 10 months in a row and the rate of job losses is now accelerating… In this cycle job losses have been so far “only” slightly over 1 million while labor market conditions are severely worsening based on all forward looking indicators…Massive job losses and concerns about job losses will further dampen current and expected income and further contract consumption.
· Tax rebates of over $100 billion failed to stimulate real consumption earlier in 2008. Only 25% of the tax rebate was spent as US consumers are worried about jobs and need to use funds to pay their credit card and mortgage….another general tax rebate would be as ineffective as the first one in boosting consumption.
· The 1990-91 and 2001 recessions were not global; this time around the IMF is forecasting a global recession for 2009.
· The recent rise in inflation – that is only now slowing down – reduced real incomes even further for lower income households who spend more than the average households on gas, transportation, energy and food. The recent sharp fall in gasoline and energy prices will increase real incomes by a modest amount (about $150 billion) but the losses of real disposable income and thus falling consumption from other sources (wealth, income, debt servicing ratios) are much larger and more significant.
· The trade weighted fall in the value of the U.S. dollar since 2002 has worsened the terms of trade of the US and reduced further real disposable income and the purchasing power of US consumers over foreign goods.
· With consumption being over 71% of GDP a sharp and persistent contraction of consumption all the way through at least Q4 of 2009 implies a more severe recession than otherwise. Consumption did not fall even a single quarter in the 2001 recession and one has to go back to 1990-91 to see a single quarter of negative consumption growth…
· Monetary easing will not stimulate durable consumption and demand for residential housing as demand for such capital goods becomes interest rate insensitive when there is a glut of capital goods; monetary policy becomes like pushing on a string. In the previous recession the Fed cut the Fed Funds rate from 6.5% to 1% and long rates fell by 200bps. In spite of that capex spending of the corporate sector fell by 4% of GDP between 2000 and 2004 as there was a glut of tech capital goods and it took years to work out such a glut. Today there is a glut of housing, consumer durables and autos/motor vehicles; so it will take years to work out this glut…
· While policy rates are sharply falling the nominal and real rates faced by households are rising rather than falling…. together with less availability of credit are severely dampening the ability of households to borrow and spend.
· To bring back the household savings rate to the level of a decade ago (about 6% of GDP) consumption will have to fall – relative to current GDP levels – by almost a trillion dollar. If all of this adjustment were to occur in 12 months GDP would contract directly by 7% and indirectly (including the further collapse of residential and corporate capex spending in a severe recession) by 10%, an exemplification of the Keynesian “paradox of thrift”. If such an adjustment were to occur over 24 months rather than 12 months you would still have negative GDP growth of 5% for two years in a row with a cumulative fall in GDP from its peak of 10% (note that in the worst US recession since WWII such cumulative fall in GDP was only 3.7% in 1957-58). One can thus only hope that this adjustment of consumption and savings rates occurs only slowly over time – four years rather than two. Even in that scenario the cumulative fall of GDP could be of the order of 4-5%, i.e. the worst US recession since WWII. Note that the cumulative fall in GDP in the 2001 recession was only 0.4% and in the 1990-9 recession was only 1.3%. So, the current recession may end up being three times as long and at least three times as deep (in terms of output contraction) than the last two and worse than any other post WWII recession.
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This is the punch line:
10% drop in GDP is a direct result of savings rate returning from zero to 6%.
I am way outside my comfort zone here, but this does not feel right.
First, a 6% cut in consumer spending (71% of GDP) is not 10%. Also, what is the role of internaltional trade?
We know that 150B of the $1T in savings will come from lower oil. Consumers also buy other imported products.
Plus there is the public sector. The pigs are snorting up lines of manna, that will work their way back into the GDP too…
Before consumers will be able to save, they will have to reduce their debt ratio. From Clusterstock:
What would it take to get consumer debt back to, say, 75% of GDP? The elimination of about $3 trillion of debt. Getting it back to 50% of GDP would mean eliminating about $6 trillion of debt. That’s a lot of scrimping and saving.
Isn’t a 10-percent drop in GDP a depression? If so, I think this would be the second one in U.S. history (though I don’t know how good our numbers are for 1837). Even 1893 didn’t drop 10 percent.
Let’s all chip in and buy Nouriel a long vacation on a tropical island. He can continue to write his (to date) propetic predictions, but at least at the end he can add, “But the snorkeling is wonderful!”
Uh-oh, we may need to add one, taking the list to 21.
–Despite all of the doom and gloom in the blogosphere, most people are thoroughly unprepared for something like 1980-2. Our memory of recessions has been shaped by the last two (1990-1 and 2001) which were exceedingly mild by historical factors. So there is the additional “shock factor” as panic sets in, probably late Q1/early Q2 of ’09, when people realize how bad things are.
I’m with alexblack.
By the way, while we’re on the number 20, does anybody know of anything the G20 said or did which might help prevent Roubini’s predictions coming true?
bg,
It is switching from a negative savings rate to +6-7% (this implies that the consumer will not overcompensate by working harder than normal to build up savings)
The 10% drop in GDP stems from the multiplier effect, where $1 spent becomes say 2$ in earnings for various corporations as that money is recycled within the recorded period.
There are many imported goods, but their sale typically benefits America-based companies the most — they have the biggest share of the value added pie. On a $10 item, $1 may go to materials, $1 to assembly, $3 to the company who designed it, $5 to the retailer (those are made up numbers for demonstration purposes. value added varies by type of good)
I fear Roubini’s forecasts are converging with the future we do face, short of intervention. America is choosing to intervene in a way that follows in Japan’s footsteps. It will attempt to replace the decline in private credit with public credit from the government’s borrowing. Unfortunately, America faces some additional risks in doing what Japan did and the threat of a currency collapse is a significant limiting factor.
aww, c’mon, how often has the guy found himself right, let him revel in his 15 minutes. besides, everyone’s busy pointing fingers at each other these days, at least this is a break from the usual.
G 20 = blames buyers of poison apples.
It is all the fault of the consumers. They should have known the apples were poison. Government agencies and regulations should not be depended upon to shield the consumers from poison apples.
How can the regulators be asked to take action when it might interfere with their short game? Damn, it’s tough enough to par that 540 yd 5th without the whiners in the peanut gallery! Boys, maybe we should move this week day outing to St Andrews till the whiners quit the ol home course?
The deregulistas said ‘Let the Apple buyers beware’…and boarded their private jets for St Andrews.
@rivers
Yes here we go, back to the industry’s position in all things. Hay we just made it, its not are fault they bought it and it killed them.
Reminds me of a Friend working in China as head of the English department. As a single father with son in tow. He bought son a plastic BB gun for son to play with from the corner shop. After several weeks of ownership, son and father are walking a cross campus, only to be chased down by one of his Chinese counterparts, saying no no no you can not have, its against the law to have such things and will go to jail for possessing firearms. Which is a huge thing over there.
skippy
Thank you for the cut and paste of this Roubini article, Yves! This is the kind of stuff the MSM doesn’t want us to read as it touts the next bottom in this market.
Sheesh, between the Roubini cut and paste, and the London Banker cut and paste (on tade finance worries) and the Bloomberg cut and paste (on the Japanese elderly), it’s been a most depressing morning. But, I guess it’s just because the truth hurts. Thanks again.
@evil,
All this intervention by the govt indicates a lack of faith in the economy, the system that is both flawed and broken, that the economy can’t get through this without the govt propping up the flawed and broken system.
Govt intervention only instills more fear in me. Every policy measure implemented and lending facility created to date have been designed to prop up the flawed financial system as if that is what matters most. And I am further stymied by the threat of the unknown and unanticipated policies yet to come to remedy the ills and challenges our society faces.
Business ought to be terrified of the mistakes are policymakers are making and what mistakes they will make in the futures.
It is forgotten that the economy is larger than the financial system. Said another way, the financial system is not the economy. The economy will eventually survive the credit crisis, the debt-delevering and deflation. But the operative word here is ‘eventually.’ What Japan did in the 1990’s we did first in the 1930’s.
Japan is well into two full lost decades, and after this last shock, are doomed to be lost for a third decade. That is striking out growth in three decades. In bowling, we call three strikes a turkey.
The Great Depression lasted 13 years. Why do these events take so long to unwind? Why are they so epochal?
In the long run, the key to a sustainable economic recovery will be the private sector. The US Treasury’s bid (think Paulson here) for unlimited authority and power to remedy our ills is precisely what can make this recession/depression turn into an epochal event. Govt bids for unlimited powers can suppress the private sector for decades or generations if need be.
The Great Depression suffered from a major power struggle between FDR and the private sector. Part of FDR’s New Deal was to seek “unimagined powers” as he put it in his 1936 inaugural address. There were many destructive elements brought about by FDR’s New Deals and experimentation. Even Keynes had to write FDR in 1938 to quit bullying the utilities: either “nationalize the utilities or leave them alone.” The FDR administration was oftentimes little more than a bully pulpit.
And what we have in the makings today is a govt acting as little more than a fear-mongering bully pulpit.
Paulson, Frank, et al on the hill are shaking every last dollar out of us, the taxpayers, on the premise that if we don’t cough up, the consequences will be far worse.
We must, as taxpayers and citizens, push back on these bullies. If we don’t the private sector and thus the economy is doomed for an epochal power struggle that will certainly wind us in a no-growth depression.
We may have to invoke/exact a modern day Magna Carta out of our govt, to both limit their powers and bind them to abide by laws that protect we the citizens from our own govt.
-7%, so what? Russia got through worse when its totalitarian regime collapsed. That is what it costs to fix the damage done by soft credit and systemic graft. A bargain at the price.
Reason #22
Americans are flocking in droves to RGE Monitor from Nouriel’s MSM blitz creating a positive feedback loop while their subscription $ is going directly into Roubini’s Swiss bank account.
In all discussions of the US savings rate, I have seen no consideration of the skewed income/wealth levels of the US. Indeed, much of any discussion of aggregate US behavior never considers the extraordinary resources of the top percentile, that their behavior (spending habits and investment patterns) may affect in a meaningful way national measurements (sort of the case of Bill Gates walks into a room and everyone in that room, on average, is now a millionaire). To counter my suspicions in this regard is the fact that median income levels have stagnated for a generation.
That being said, there is no disputing that even the US will feel the consequences of losing tens of trillions of dollars of perceived wealth.
To me, how we deal with this mess is a political question. The lesson of Katrina was that everybody in their times of trouble were on their own. I am hoping that the new administration will make sure they deliver a different message along with the bad news.
Interesting, I just posted a comment on Mish’s website (globaleconomicanalysis.blogspot.com) before reading this post. Here is my comment:
US consumer spending is 70% of the economy. Savings rate of the US consumer is close to zero or negative. So, if the consumer cuts spending by 5%, we have a 3.5% contraction in GDP. That is a major recession, ala 1981 where GDP contracted by 2%. Now if the consumer savings rate goes up to 10%, which was the approximate figure from 1950’s to early 1970s, we get a 7% contraction in GDP. Now that is close to a depression. GDP contracted by the following during the 1930s.
1932: -13.0%
1930: -8.6%
1931: -6.4%
1938: -3.4%
So, if the consumer were to revert to historic savings rate (10%), then we are going to encounter a contraction in GDP close to 1930.
Now I can understand why the Congress and Paulson are forcing banks to keep lending to consumers. I believe soon this will be enforced by executive fiat. Automakers WILL be bailed out. They represent 1 million jobs, which if cut could act as a brake on consumption.
Anyway I see it, the bailouts will continue. The math is quite simple, no MBA in structured finance needed here. So, the message to consumers is, be patriotic and go out and spend. Do not worry about a zero savings rate! If you do not spend, a Depression is guaranteed!
The US Govt will try to counteract the reduction in consumer spending, and the resulting contraction in GDP by kickstarting infrastructure spending. But will that be enough to account for more than 7% of GDP? 7% of 2007 GDP is approximately $1 Trillion. So look for a massive infrastructure spending bill to be passed soon.
So, someone with real risk-tolerance would start buying shares of Caterpillar, GE, Alcoa, Bechtel, Siemens, and other infrastructure related companies now, if they are sure that consumer spending is going to drop by 10%.
Yves, I wish to thank you for an _*outstanding*_ blog.
On the other hand, Roubini’s list sounds like a rant, sophistic at times. The number does not add to the quality in this case.
Arguing each of his 20 points would be a waste of time.
John Bougearel said: “In the long run, the key to a sustainable economic recovery will be the private sector.”
Actually, war was the key to a sustainable recovery after the first Great Depression. I fear there is only sparse evidence that the private sector can get us out of this kind of hole.
If China (and others in a similar situation) come through relatively unscathed, they may be able to restart the process of credit and real economy expansion. However unfortunately, China may be destined to play an altogether different role this time round.
John,
“Paulson, Frank, et al on the hill are shaking every last dollar out of us, the taxpayers, on the premise that if we don’t cough up, the consequences will be far worse.”
The amount of tax dollars is nil, the ones being shaken are the foreigners who are buying our treasuries in the dollar reserve currency world. The G20 is in a similar position as OPEC find itself, they would all be better off sticking a fork in the US and demand an end to the US dollar privilege just like OPEC would be better off cutting production to the bone and driving prices higher. The dollar as the worlds reserve currency is largely what has allowed the world to get to this point in history. The governments of every nation are the ones responsible for the mess we are in at the expense of impoverishment of their own citizens.
This isn’t gonna have a happy ending. WWIII anyone?
Not quite Henry Kaufman status yet but getting there. The new Dr. Doom even has an accent to go with it!
Nouriel has been ahead of the curve for many years and it not brain surgery to understand that our GDP will shrink as consumer spending falls along with State and local gov’t spending cuts. The U.S. will have a significantly smaller GDP with a large consumer debt overhang based on 20 years of easy credit.
Yet the U.S. inflated ego lumbers about as citizens hold on to the belief that Nouriel must be talking about someplace else, surely not America.
Indian,
Ah..Bechtel is private, or I would have bought shares in them long ago, seeing as how tightly enmeshed they are in government projects.
Yeti Fleas
@mft,
The prep is already in the works for china.
RUSH: Moscow announced yesterday, Bill, that Raul Castro will visit Moscow in January or February, early next year. There’s no word on whether Raul will stop in Washington and pick up Barack Obama for the trip. But it’s deja vu here. We’ve got the KGB back running Russia; we got ’em making deals now trying to form a new alliance with Cuba. We got the Drive-By Media salivating over the fact that Camelot is back, which means that civil rights leaders, black civil rights leaders will be wiretapped, we just don’t know who. What are we to make, seriously, of the effort by Russia and China to form another alliance?
GERTZ: Oh, this is part of an anti-US alliance that’s emerging. China is basically the leader of it.
Full artical@http://www.rushlimbaugh.com/home/daily/site_111208/content/01125108.guest.html
You gotta lov Rushie.
Skippy
…THE WORST DEPRESSION IN OUR NATION’S HISTORY HAS BEGUN! There. I said it. Now for the reactions; A) It’s not true, B) It’s exaggerated, C) It “might” happen, D) There’s a good likelihood it “could” happen, and E) The symptoms say it WILL happen.
If you think A, B, or C, is the correct answer, you don’t really take any precautions that matter. If you think D or E could be the answer, you prepare.
If it happens, and you HAVEN’T prepared, someone in your immediate family will die from you having not been prepared. The immense grief over the next ten years will be far worse than any of us realize. No one will come to your rescue, the various branches of the government will fail and the money they have been spending will cease, or they will start printing more and more until it becomes worthless.
If you prepare? Seems like there is NO downside to being prepared. Contribute to the economy – Buy long shelf-life food. Buy a generator. Buy a handgun. Keep gas in your cars. Keep stuff around that can be traded for essentials.
Good luck.
I think Rubeenie is a mole. His masters will scarf @ the bottom. Peak oil didn’t die, they’re just hiding it. 7-14 was the new 9-11.
Great blog. Thanks
“Is there some secret significance to this development? Numerologists and technical analysts are encouraged to weigh in.”
I’m no expert in Gematria, but I think that it means we should have stored seven years worth of grain, or something like that.
Don the libertarian Democrat
OK, we got the picture. What is Roubini’s prescription for a cure.
1930 is worth considering of course. At that time, it wasn’t yet a “depression”. That would come from the progressively stronger psychology of deflationary spiral (cut back on consumption in fear, lose job as a consequence).
This could happen now of course. If it does, we’ll be arguing FDR’s programs plenty more.
While many correctly question FDR’s programs during the depression, there is a deeper issue that overwhelms even the critical questions of government vs private investment and jobs.
Because we have a fully leveraged *economy* (not just mortgages and financial stuff, but every aspect, everywhere), there is no escape from the deflationary spiral effect except for significant stimulus of some sort.
In other words, while it’s far better to have a short sharp pain, letting bad businesses fail instead of being bailed out, the bigger issue is the general setup of how our economy is structured.
While some obvious types of stimulus like infrastructure projects and a national power grid to move towards more secure energy in time make sense, one underappreciated type of stimlus is the tax “rebate” such as we already had.
It’s simple: even when saved it is potent: when you have less credit card debt (for instance), then you don’t cut your consumption *as much as you would otherwise*. Families go out to eat a time or 3 more in a month than they would have, and the effect continues the next month and longer.
So a “rebate” acts strongly against the real danger: consumer fear feeding a deflationary spiral.
Less personal debt = less fear.
So its possible we could move into a situation where more rebates may become the only way to prevent a broad economic collapse.
@evil,
All speding has a multiplier, so you must be implying that discretionary spending has a higher multiple than others. Retail, vacations, excessive housing, cars and latte’s have a higher multiple than military, food, rent, education, health care.
It sounds possible, but isn’t obvious to me.
each of these segments also has unique import/export relationships, and I would venture that discretionary spending is more imported than average.
As for government largess, I am cynical enough to fear that uninteded consequences will have unpredictable outcomes.
@mft,
you are right, along with the retrenching consumer, the private sector will be contracting considerably before any recovery begins. Hopefully, it won’t be a war that greases the economic wheels.
Credit expansion in China I am afraid must coincide with the ROW’s import demand. The coupling is too tight, and as we learned here yd, Chinese are more apt to be savers for a rainy day such as when they are ill and need health care services.
@anon, agreed, govt policies to prop up and micro-manage the flawed financial system is quite problematic. Micro-managing the known risks inherent to debt-delevering and deflation is akin to a horse running around the track with blinkers on. The horse can’t see or respond to the whole field, his depth of perception is limited to only that which is directly in front of him. The horse can only manage the risk directly in front of him and since he can’t see the rest of the field, new and unknown risks attacking from his flank or elsewhere unbeknownst to him. The horse can anticipate nothing.
We must develop risk management strategies that “increases our ability to react” to black swans and other risks we do not know yet exists. The housing bubble was only a gray swan at best, hardly an unforeseen risk. The black swan risks are what is hitting us now and will continue to attack our flank for the foreseeable future.
along these lines, Richard Bookstaber proposes adopting the Brazilian Jiu Jitsu model to manage risk. The core of Brazilian Jiu Jitsu BJJ philospny is that the best offense is a great defense – BJJ defensive skills can be taught and practiced without leading to harm.
BJJ encourages free sparring against a live, resisting opponent. This gives practitioners of the defensive art to test their skills and develop them under realistic conditions, with little risk of injury.
In other words we can and ought to develop and stress-test defensive risk management strategies that does not lead us into WW III.
We don’t have go around pretending that we have a Bazooka in our pocket and hoping the markets don’t call our bluff.
i think we may be overlooking an important observation of today’s consumer driven psyche. we worry about consumption drying up in a vicious cycle as people become concerned about jobs, thus cut back spending, resulting in more job losses, decreasing consumption more due to increases worry about job loss, etc.
the problem is that today’s typical american is not nearly as concerned about his/her financial future as those american’s of the depression era. we now have a bunch of monkeys living in this country who cannot even balance a check book, let alone develop a fiscal policy which shows spending constraint in response to future job loss. as you will see, these people will continue to SPEND even on credit up until the day they declare bankruptcy. this major attitude shift in fiscal responsibility makes predicting the future difficult, but the results of the great depression will be different than what we will endure. our suffering will be more severe and faster acting.
Mr. Roubini is not counting the present savings at the gas pump. Do not have precise figures but read somewhere that they were on the order of 300 billion a year, money that now consumers can use to repay debt/spend. How does this compute in his calculations?
lower gas prices is a meritless argument. gas prices were only exceedingly high over the past half year or so. they did not really cause this slowdown, maybe exacerbated it somewhat. but in no way can the recent drop be considered a true benefit, unless gas prices drop below $1.50 a gallon. gas will only be considered a true rebate stimulus if it falls well below its average over the past say 5 years. current prices are NOT a savings on gas.
In the end, we will look at Roubini as an optimist. We are in the beginning stages of the end of growth economics. Peak Oil is the catalyst. For 500 years growth economics was fueled first by the “New World” and slavery, later by fossil fuels and degradation of the environment. Mark your calendar. 2008 is the end of all this. Now this doesn’t mean we won’t try to restart the engine of economic growth. But just as soon is it appears the engine is beginning to hum, we bang up against Peak Oil again. Next time, the gas shortages of Atlanta after Hurricane Ike become permanent and nationwide. How will that affect the remaining value of exurban McMansions? I do not write this as a scare tactic. But it is important that we understand the true nature of our situation. The financial crisis and coming economic meltdown are merely symptoms of resource stringency, climate change, and human ecological overshoot. If we can learn to perceive these problems, then perhaps we can address them in such a way as to preserve the possibility of leaving a reasonable Earth to all the children of future generations. Life without all of the stuff can be even better when connected to Nature and lived with simplicity and dignity. Have you ever noticed how our current system seems to select for undesirable human characteristics? Truly yours Frank from EntropyPawsed
per Indians comments above
Increase consumer saving is likely to be a secondary mechanism.
To give a simplified example:
The Great Depression was initiated by the bursting of the capital investment bubble. The oversupply of capital infrastructure relative to the new demand levels, reduced financing (and thus more savings), and increased manufacturing productivity all helped to keep the economy from climbing out of the pit it had sunk into.
In today’s economy you can substitute (in part) increased manufacturing productivity with increased foreign wage arbitrage.
Of course it needs to be remembered that the Europeans came out of the Great Depression much more quickly then the United States. Although Republicans like to blame FDR for that, and Bernanke like to blame mistakes in money supply issues, there were probably a number of tangle reasons for why this occurred.
However, the point could be made that a 10% drop in GDP does not necessarily lead to the great depression. It could lead to something much like one of the very deep, but much shorter 19th century depressions.
“monetary policy becomes like pushing on a string. In the previous recession the Fed cut the Fed Funds rate from 6.5% to 1% and long rates fell by 200bps.”
One thing I don’t understand is that the FED has lowered its rate considerably, but the rate for home loans remains around 6.5%. I imagine some of this “excess” interest rate difference goes to the bank to make up for the losses. But it seems to me the “lowering” has no effect at the consumer, and therefore no one should be surprized at how little effect it has no increasing consumption.
@john & frank — that's great stuff gentleman.
much mo'betta than continuing to dwell on the drama is to offer a way thru the drama.
Prof. Roubini’s “20” reasons sound like a college freshman trying to stretch a paragraph of ideas into a 5-page paper. Don’t get me wrong: I think he’s accurate, but all of his reasons essentially revolve around one point: the american consumer is overextended, and we are now entering a vicious cycle where American’s net worth is declining faster (through wage / job cuts, asset value destruction, and the cyclical input of consumption declines) than his/her ability to save his way out of this mess.
This is the essential paradox of a deflationary spiral, where, as Paul Krugman put it, “virtue becomes vice”: everyone’s attempt to save money contributes to further declines in the economy, which contracts faster than savings can be built up.
So the real question is how to get out of it. I think everyone (who reads this blog at least :-) agrees that Paulson/Bernanke’s monetary approach of recapitalizing banks is not the right solution, for the same reason that the tax rebates didn’t work: the goal was maintaining lending (in the banks) and spending (in the consumer). Instead, the money in both cases was used to shore up internal balance sheets.
The only alternative then is for the government to begin a massive fiscal stimulus, itself doing what it can’t convince banks and the American people to do, namely spend.
As to what to spend money on, I’d assert two primary criteria:
1) The projects are “useful” e.g. they increase the overall competitiveness of the U.S. economy (e.g. infrastructure, education), or they provide a useful social good (e.g. health care, social services).
2) Most of the money should be spent domestically. We don’t want fiscal stimulus being used to fund imports. Even if some of the import money makes its way back to the U.S. in the form of corporate profits, that’s not nearly as effective as spending a dollar on local labor, goods, and profits.
Putting those together, I think the democrats actually have a plan that might work (caveat, I’m a big-time Democrat :-): fiscal stimulus in the form of social services such as unemployment insurance (which tends to be spent rather than saved since many of the unemployed are in dire straits), spending on infrastructure development (improves competitiveness and generates domestic jobs), grants to state governments (which provide essential social services), and spending on healthcare including for the expected increases in the Medicaid and uninsured populations (because it’s a social good, and also because the healthcare industry is almost entirely domestic).
A fiscal stimulus of $1 trillion would have a good chance of breaking the vicious cycle. And to those astonished by that number, recall that we’ve already spent well over that trying the monetary / bail out Wall St. approach without solving anything, with another trillion on the horizon (or do you think Paulson is going to stop after exhausting 350 bil in less than a month?). In other words, in the debate between monetarists and fiscal guys, the amount of money needed isn’t in question, only the question of how it’s spent.
After the last 8 years, it’s understandable that people have forgotten that a government can actually be run by competent, knowledgeable people who know how to implement good policy. While the new administration certainly hasn’t proved itself capable yet, I think they’re starting off on the right track.
http://waste-bin.blogspot.com
Ok, this is basic Taleb:
There are millions of factors at play here, so trying to predict the future is pointless. Economy is NOT a science. Anybody who takes some economic data, and uses it to predict the future with very reasonable and logical chains of causality is bound to fail. If he is using exact figures and percentage points he is bound to look like an idiot.
Perhaps a scientific genius was born in 1980 in central Mongolia and is about to discover a way to trap carbon emissions or to desalinizate seawater; perhaps hundreds of million of Chinese start a consumption frenzy; maybe the avian flue breaks loose; a monkey might bite a king and start a war; a new version of Macarena might put everyone in a good mood…
Who knows?
“Next time, the gas shortages of Atlanta after Hurricane Ike become permanent and nationwide. How will that affect the remaining value of exurban McMansions? I do not write this as a scare tactic. But it is important that we understand the true nature of our situation. The financial crisis and coming economic meltdown are merely symptoms of resource stringency, climate change, and human ecological overshoot. “
Frank,
Forgive me for yawning but Peak Oil has been a recurring theme for over 100 years. It typically surfaces about every 25 years, each time ever more convincing, picking up new Malthusians along the way.
To be blunt about it the world has never been better. Read some Julian Simon and you will sleep better at night. I admit though it will be painful reading as your world view gets turned upside down.
“A fiscal stimulus of $1 trillion would have a good chance of breaking the vicious cycle.”
And where do you propose the “Dems” get this 1 trillion dollar stimulus from? I thought debt was the reason we are in this mess.
Nouriel Roubini or How you know you are a real rube… when you do this for money… roll up, roll up.
What did he learn from Jeffrey Sachs?
How a smart operator can turn shock into cash.
Roll up, roll up…
Don’t miss your chance to pay for the real inside story of the aggregated view of just about everyone including, of all things, the Daily Telegraph! Humph. Quite. Knew that all along.
At least its not derivative.
Shocking, indeed!
“And where do you propose the “Dems” get this 1 trillion dollar stimulus from? I thought debt was the reason we are in this mess.”
same place the BushCo’s got the Wall Street bailout (soon to be a Trillion) and Bush wars (about 2 Trillion).
paul krugman’s estimated need of 600,000,000 is a minimum needed.
Otherwise, the USA will have another Great Depression…but Republicans don’t seem to mind as the “help” will be much cheaper.
Roubini might not be right on US consumers – my experience is that US shoppers have not shopped any less, just moving to lower-priced alternatives. Walmart sounded very confident in their latest earnings, and Ebay is doing excellent business selling clearance goods from chains that went bust. So there is not much chance that the US savings rate will go back up to 6%, it might not go negative further, but certainly most americans will continue to keep spending every cent they can lay their hands on, whether from more handouts from congress, from reduction in gasoline prices or from the unemployment benefits. Banks cannot stop lending forever, because beyond their current once their coarse reaction (quote Rick Bookstaber) reaction to the crisis, they would realise that earth is still rotating everyday and bankers need their bonuses, so they will cook up new ways to lend again.
Roubini might not be right on US consumers – my experience is that US shoppers have not shopped any less, just moving to lower-priced alternatives.
Auto’s durable goods etc certainly don’t fit your idea nor does RE sales. The question is not whether the American consumer stops buying but rather at what pace and are they moving out of the larger ticket items.
Our economy is no longer labor based on manufacturing but consumer driven.
We gave up the pick and shovel years ago so we are stuck with consumer demand and if for whatever reason it slows down then our service economy driven by finance, marketing, sales etc goes down very quickly, sorta like the mortgage companies that went belly up this spring.
Roubini expects people to understand our modern industrial highly efficient manufacturing base needs less and less direct labor so our growth in finance, marketing, sales, insurance etc is the ecomony.
I think Roubini is being a touch optimistic.
Demographics are against a quick recovery. The baby boomers have begun to retire en masse, just as the economy is beginning to nosedive.The 401k’s that the retirees were counting on have taken a beating. The combination of longer lives, higher medical expenses and an ageing voting block that is manifestly self interested means that real taxes are going to have to rise and be spent on non productive health care.
This depression is going to be longer and deeper than most people suspect.
“The baby boomers have begun to retire en masse”
well the boomer with 46 birthdate’s
are just now hitting 62 and the boomer birthdates between 46 and 50
have the same population density as prior generations. Birthdates starting in 50/51 begin the very large population shift.
But you are correct that boomer spending patterns are changing as very large number of boomers are hitting 55, which is the benchmark for lower spending based on lifestyle changes. But we have a few years until the large numbers start to really retire.
15 reasons the US economy will get worse: Link Here
Let’s not take it as a given that the savings rate will move to the historical average.
And let’s remember that for every deflation hawk such as Roubini out there, we hear from inflation doomsdayers as well warning against the Treasury’s printing presses. THEY CAN’T BOTH BE RIGHT. We could see something in the middle. A long-tough muddle-through without a doomsday in either direction.
@ John Bougearel
Any sport or competition will lead to harm (injury) esp. with a clear winner and loser. More so with combat sports. I have taught entry level BJJ and one of the hardest part in retaining students was injury. If a newbie made it past the pride shattering of “tapping a tune” every training session then they eventually have to learn how to live, work and train with a near constant state of injury. Too many guys eventually quit when injuries effect their ability to work.
I won’t bore you with a list of my injuries through the years of training. But I have “broken” my ears seven times. And besides a nightly syringe draining of the fluid build up with each break, they are disfigured for life.
Sorry this is off topic, BJJ dojos do not need another newbie thinking they can learn to fight without getting hurt or losing. It happens.
Competition breeds excellence.
If deflation happens it will be great. In 2009 we would all pay less property taxes, sales taxes, income taxes- and enjoy lower costs for home heating and electricity, food, college, loan-related charges and interest, traffic tickets, union dues, cable TV, lawyers’ fees, medical-home-car insurance, etc. Is this really going to happen? This is what constitutes deflation to me.
But no- we will all be paying as much or more for everything except-houses, stock, gasoline, and diesel. Where is the net deflation or depression?
When the economy contracts, local, state, and Federal government do not cut back to the same extent as private business- if at all. Look for higher taxes and fees from all sides, irrespective of your personal financial pain.
“Forgive me for yawning but Peak Oil has been a recurring theme for over 100 years. It typically surfaces about every 25 years, each time ever more convincing, picking up new Malthusians along the way.”
How long ago did we start to use oil exactly? Not many centuries, right? Kind of…120 years, at most. So, it’s not as if we have a humongous amount of historical experience with an oil economy. If one thinks about it, oil is a blip in historical terms.
What is known is that peak oil is not a theory, nor an ideology. It is strictly the description of how the output of EVERY oil field ever discovered behave over time, nothing more, nothing less. At first, a good oil field will be an easy mark, with increasing output until it plateau, then start to decrease over time. There is no hocus-pocus here, just a simple fact.
Now, consider the rate consumption of oil over time; see any plateau here?
Nope! And that is the elephant in the room, isn’t it?
How do we keep consuming oil at an ever increasing rate while the discovery rate of new fields is decreasing AND known fields exhibits decreasing outputs at the same time?
Answer is simple: we can’t! The only question that needs an answer is What are we going to do about it?
Apart from a massive investment in alternative energies, (when will the sun and wind be exhausted?) I can’t see any way this conundrum will be resolved without horrendous dislocations, social and economic.
Therefore, it is way past due time to post fixating on our immediate comfort level with the price of oil of the moment as a policy driver, to focus on a long-term plan.
Personally, I want to own the darn energy I consume. I’m sick and tired of sending my money to petro-fuckheads who subsidize extreme versions of religion or regimes that hate the ideals we still stand for. I would gladly spit on speculators and traders who rake in the dinero by pushing prices up and down as they freaking please, like last summer. Who need that crap anyway?
By the same token, I’d like to see my children enjoy a bright and SUSTAINABLE future.
Yves,
Not that there’s any special reason to value my opinion, but I’m sensing from your latest posts that you’re beginning to really look beyond the numbers and shaping of perceptions by the media. Your bullshit detector seems to be twitching away with great effect. The fearmongering is reaching a crescendo again — something like when you get a bunch of people together to push a car out of the mud. Rock it, rock it, then heave. Feels like we’re at the heave stage now. Tinfoil and illuminati aside, this whole thing feels manufactured and reaks of the tactics of organized crime: use their greed then use their fear.
I’ve been thinking this whole time that if we follow the money we can figure out who is behind this. I’ve thought at times, “China,” as have many others who see them as having won the war. They are still a good candidate, I think. Some say they wouldn’t have done this because their own damage is assured as well, but we have seen that they are willing to sacrifice plenty to achieve their ultimate goals. And they have tremendous patience.
But even if they are an ultimate villain, I don’t think they are the “ultimate” ultimate villain. We have had the bubble blogs, and the Roubinis that have been hammering away, and the LaLand and CR and Setser blogs, with their evenhanded approach, delivering daily doses of increased doom.
My hope is that there have been benificent geniuses behind all this, who have merely used the emotions of everyone else to achieve their aim. Wouldn’t it be great if this was all about levelling the playing field worldwide? It’s just too sick to think that it was all a side effect of simple greed.
It is the truth enterprise that suffers when people like Roubini are routinely ridiculed for disagreeing with the status quo.
People like Rubini should be celebrated for their willingness to labor on behalf of the truth rather than be paid by TPTB to put a smiley face on all the issues that effect the real economy (see real human beings).
Roubini’s gloom is easy to mock, but a paper on his site published almost 3 years ago predicted virtually everything that has occurred on housing price front and the collapse in demand. He and a few other blogs like this have saved me quite a bit of money.
Versus the main-stream media and Goldilocks bulls, Roubini’s been on target every step of the way over the last year. Mock on, mock on, Voltaire and Rousseau (and bloggers).
So basically in short, we're talking 450 to 500 basis the S&P…
Am I being optimistic here….?
Best regards,
Econolicious
Readers of the above might also be interested in our transcript of Roubini’s 17-minute talk at AEI (Sept 30).
All the initiatives are targeting to revive consumption. How about stimulus $$ spent on say health care, medicine, infrastructure in other words stuff that we really need instead of things that we don’t? Time to shift away from Mchouses and hummers
“All the initiatives are targeting to revive consumption. How about stimulus $$ spent on say health care, medicine, infrastructure in other words stuff that we really need instead of things that we don’t? Time to shift away from Mchouses and hummers“
most of the stimulus ideas are suggesting ‘infrastructure’ and jobs creation…not just ‘consumption’. Also throwing money down the currently overcompensated health care hole is a diseased form of ‘consumption’. One sector that hasn’t helped our economy is particularly health care and it’s insurance protectors which have been gouging Americans long enough. A dramatic lowering of fees by the ‘professionals’ in health care and medicine could help America regain some balance and profitability…or else most of us will go without health care as a necessity for economic survival.
The deregulistas said ‘Let the Apple buyers beware’…and boarded their private jets for St Andrews.
The world has worked that way since the beginning of time. It’s a nice platitde to think that Big Brother will look out for your best interests, but you can wish in one hand and shit in the other – see which one fills up first. If individuals are too lazy to do their own due diligence, then it is only logical that administrators will be equally lazy because they come from the same pool of individuals.
We’ve had a decade or so of unrealistically low interest rates which created unrealistically high prices for financed items. Principal forbearance along with an increase in interest rates that accurately price risk (with a tax holiday for the borrower getting the one-time forbearance, and a capital loss for the forebearer) makes more sense than anything else, but instead all the proposals and bailouts avoid the problem (playing silly games with interest rates) and in fact only extend the problem to other areas (playing silly games with loan lengths, taxpayer gifts, etc.). But I don’t expect sensible solutions to be enacted because of the pool of individuals.