“Worst Crash Since The Great Depression”

Actually, Mikkel, Japan's deflationary and dull time is the likeliest scenario for us to follow. It's okay to argue that it could be somewhat worse because our economy is larger and has a larger influence on other economies than Japan's, but Japan's experience is the one model we have for a modern nation in modern times and the likely pattern that we'll follow, if things do continue to be bad or get worse. (Detroit's failure is not the end of US industry and the highest job loss counts predicted here in the Detroit area are, as one person familiar with bankruptcy says, "laughable." But it will harm Detroit and other places largely in the industrial Midwest more than in the entire nation overall. More important, I suspect, to the nation overall will be the reaching of limits by individuals to borrowing money -- many have been living on credit cards and continue to do so here in Detroit and elsewhere, to make ordinary and discretionary expenditures -- and if people experience a tendency to save or service debt rather than continue to spend in the future. To the extent that many people, not limited to the Detroit Three automakers, lose jobs, they'll also lose health insurance and that will cause a change in spending patterns and reduction in discretionary spending.)

It's beginning to become amusing again visiting two favorite Web sites of mine that I used to enjoy all the time in 1998 (Asian economic plunge, Long Term Capital Management hedge-fund failure) and from 2000 onward (popping of the stock bubble). I relish these again and recommend them:

http://www.fiendbear.com/

http://www.prudentbear.com/

"HAHAHAHAHAHAHAHA!" -- Bad News Bears

I'm not sure. The thing about Japan was that they have always been BIG savers, both on government surplus and individual level. Other than a very small portion of the populace, most of the individuals weren't in very much debt and actually had years of savings built up. Plus, the 90s was the largest global boom in history so they had an easy time keeping their exports up. And, their debt levels were below ours and relatively well contained within a commercial real estate and stock bubble.

In a macro context I think we are looking at a very large worldwide recession and will have the worst growth since the Great Depression instead of the best in history. From a country perspective, we are obviously hugely in debt both publicly and privately, so I don't think that the same policies will work. In fact, Japan's might not have worked if it weren't for the carry trade, and how will there be a carry trade in the upcoming environment?

The only major economy in fundamentally strong shape is...Japan's. And even Japan is going to have problems due to their terribly old population, almost all of which will have had the majority of their careers and much of their retirement in a ZIRP environment and asset stagnation, meaning savings disappear very quickly.

This is why I think we will be lucky to be like Japan, but see little mechanism for how to actually achieve that goal. To me the overall global context, our currency reserve status and extreme debt levels suggest that we will either see a Great Depression level of deflation or if policy makers decide to go for broke, hyperinflation. I obviously think that hyperinflation is by far the worst outcome.

Oh and about personal saving, I think that debt loads are already unsustainable and there will be massive defaults. In many places you can declare bankruptcy and keep your house as long as your payments are met, and I foresee even many middle class families defaulting on debt and reverting completely to cash and saving. It just makes rational sense to save at all costs if you are scared of losing your job and will still have a place to live otherwise...well if the bankruptcy bill is overturned and credit card debit is discharged.

Also I have to say that due to increased technology and infrastructure, I don't think that even another Great Depression will truly threaten people on a fundamental level. It would be more about cutting out all discretionary spending like you said.

"2050 will be as different from today as 1950 was compared to 1900"

Yes, it will be, Mikkel. The demographics alone and later life cycles of us Baby Boomers will see to that. More broadly, we have yet to experience the development of new technologies and we have yet to learn what will transpire elsewhere in the world and in the USA in the years and decades to come.

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"Also, how bad do you think things will get"

At worst, like Japan or somewhat worse given that our economy is larger and more important than Japan's.

"and how are you preparing?"

Psychologically, mainly. I am not aghast, but intrigued by what is happening -- in the economy as well as in Washington, we're certainly going to see change -- and don't fear deflation or anything like Japan (which will be gloomy) but instead want to see what happens and how well some kinds of predictions and speculations I read compare to what really happens eventually.

My preoccupations right now are more short-term. I'm in a "bridge job" in Detroit (between a job I used to have and another job, in another location eventually) and look to move whenever it makes sense. I'm not working for the Big Three here or in association with them and so don't have to worry about the Big Three failing; but I've been reassigned at my job onto a military project that is begging for reduction or termination as soon as next year, and while others don't care, I and some others are concerned. So I'm preparing a move, pre-emptively, if possible. One prep task I did was to get my truck's leaf springs reconditioned and an extra pair of springs added. It's ready for the next move more than ever now.

Your personal situation sounds almost exactly like mine. I can't help but wonder how I would feel if I wasn't so sure about my value that I knew I could get a job almost any place, or at the absolute worst, merely have to move somewhere that isn't perfectly ideal. Not feeling any attachment to a particular region or even industry perverts my outlook about things a lot I'd say. Amongst my friends it seems that there is a direct correlation in how worried they are with how much they feel like being rooted to their current life.

Hey, Mikkel,

"To me the overall global context, our currency reserve status and extreme debt levels suggest that we will either see a Great Depression level of deflation or if policy makers decide to go for broke, hyperinflation."

Yes -- before he died, Milton Friedman had said this was his concern. I suspect there will be an inflation in the future as part of facing the costs we have with our retirement-related assistance programs. (This is without any likely expansion that we'll see under Obama's and subsequent administrations, and I've been on record before as wondering openly about retiring Boomer demands for higher Social Security benefit payments, the more people end up old or disabled without any other means of income. That and we may see "elder support" additional levies on adult children of the elderly Boomers, as was discussed on another thread.) Adding to this is the aging of the population and larger dependency ratios in the future: they don't just mean increased expenses on the taxpayers, but if we omit changes in productivity, it means more consumers and less producers (even counting imports and exports, for global aging is world-wide). So inflation is indeed likely.

I also thought about this when hearing comments about Theresa Ghirladucci's (sp?) concept of a federally managed forced-savings plan, which would use government bonds paying maybe three per cent. The concern I have here is what was discussed in a related matter in a book by Roger Bootle that I have recommended to Rudi (who asked specifically about it), in which government pensions could be drastically revised in a years-long deflationary economy. Then once this was done, the pensioners would suffer hugely if subsequently, there was inflation. It would be as bad or worse than what people experienced notably in the 1970s when they were on fixed incomes during a time of substantial inflation. Ouch!

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"defaulting on debt "

That is a major concern for the banks and credit card companies right now. Related to that is the following: if the federal funds rate rises, don't bank interest rates often rise promptly? But there is no such promptness when the federal funds rate and rates paid to account holders, say, fall. The credit card interest rates are typically still quite high. While it is something to be frowned on, one thing the federal government may do eventually is limit or restrict credit card interest rates or their "spread" above the federal funds rate. That will hurt the banks but help the card holders. I'm surprised I haven't heard something like that from the same Congress that wants to restrict home foreclosures.

(Note that Fannie and Freddie have now apparently chosen to postpone or defer foreclosures into next year. Not all of us face foreclosures and such, but no matter what each individual's situation is and his or her own culpability, there is no ignoring the number of people who could be so affected.)

I'm not sure of my value any more than you are, Mikkel, and every time I look to move I have to learn what others currently think and what their needs are when I happen to be looking. And this will be affected in no small part by the current state of the economy (not only what jobs are there but what the pay may be). A booming economy (if rational) is preferable to a gloomy economy! If the Detroit Three fail (which they likely will), so much of it is located here in and around Detroit and it'll amount to some of the worst exaggeration of what the rest of the nation will nevertheless experience (to a smaller extent) if we go into deflation. The other model I use is a long-term exaggeration, namely the area of Upstate New York where I was situated for two years. It lost population since World War II and was dingy, depressed, shabby, or as my friend in DC put it, "dreary." And "gloomy" is how I would describe a Japanese-style deflation in this country.

Note that the classic way to get out of deflation is inflation that people come to expect, as long as it's not hyperinflation and rapidly destructive. The current subject I read with most interest is what to do now to try to prevent deflation. The typical argument is reversion to Keynesianism and to blast the economy with government spending and tax reductions financed by borrowing (GOP = Keynes?)

See I am actually more optimistic about long term prospects now than I ever have been. This is primarily because we are seeing breakthroughs in solar, geothermal and biofuels (the algae ones) that suggest a sustainable energy supply is possible as long as we increase energy efficiency at the same rate we have been. Other than geothermal, the real breakthroughs have been because of a better understand of physics, chemistry and genetics that are very recent and we kind of got "lucky" that the same basic concepts we'd been working on for 30 years finally had a real breakthrough. Even 2-3 years ago I was dramatically more pessimistic about our long term prospects and it's too bad that new developments haven't entered political discussion yet. All the things could have ended up being like corn based ethanol which I don't think will ever work and yet is about the only politically discussed alternative besides "clean coal."

So although demographic trends are definitely working against us, I think that deflation could actually be a welcome phenomenon as it would free up resources to move on and stop runaway inflation in health care, food and the other basics of our retirement programs. If we can get through the next 10-15 years and act only somewhat wisely, we just have a shot at being able to accommodate the aging population without suffering from a big drop in standard of living and most of the boomers should be OK. If we instead try to avoid the current buildup by inflating, medical and food costs will skyrocket while most assets will lag far behind, and we'll be spending most of our resources on basics instead of the long term development. That to me is the truly frightening spiral as it seems far harder to get out of and why I disagree with 95% of mainstream economists.



I haven't heard about the forced-savings plan...how much are they calling for?

"While it is something to be frowned on, one thing the federal government may do eventually is limit or restrict credit card interest rates or their "spread" above the federal funds rate."

I think this would basically be a death sentence for banks. Ohio recently "banned" payday loans by capping maximum interest at like 28% or something, which isn't enough to allow them to turn a profit once you factor in the default rate. Maybe I am being overly generous but I don't believe that banks keep the interest rates were they are merely because they are greedy, but because they "have" to (the greediness was in lowering of standards and securitization). Also, the last 15-20 years were extremely abnormal in how cheap credit was, and I think that consumer debt spreads are more representative of real risk at the moment, even if the economy were to improve. The only thing I could think that the government could do is limit the spread and offer to cover any resulting shortfall....

Of course restricting foreclosures is so dumb because it is the same principle but more so.

GOP = Keynes?

Yeah except they forgot the part where you run surpluses during boom times.

I really don't get the belief that things can be fixed without hardship. Ultimately it's all about whether you are consuming too much for productivity [or dare I say efficiency, which is more accurate as productivity can be conflated with both resource and labor utilization, and a lot of our recent productivity increases were the latter].....and if you are then it is just logical you have to either raise productivity (which as Greenspan likes to point out is basically impossible to do rapidly) or suffer lower standard of living.

All of this economic voodoo to try to prevent bad things seems pointless from that basic level, and by deciding that deflation is the problem rather than a consequence, all they are going to do is lower our standard through hyperinflation, don't you think? That said, I think that Keynesian policies DO have a time and place, and that's after the deflation has occurred and the excess is out of the system, reinflating will work and government expenditures are crucial.

Quick - name the only Presidential Administration that was debt free.

Time's up. Andrew Jackson.

Well, guess England is going to try it.

Mikkel wrote:

"Maybe I am being overly generous but I don't believe that banks keep the interest rates were they are merely because they are greedy, but because they "have" to (the greediness was in lowering of standards and securitization)."

Yes, you're being Santa Claus in your level of generosity because you aren't even mentioning the fees that those banks pile up on people and little tricks to make certain they collect those fees and other penalties. What's really going on? Here's part of it, according to USA Today.

I see, I didn't know that. I see that the problem is securitization again, which will go down as one of the worst ideas ever. It also explains why nothing is helping. Thanks.

The problem with securitization is that its only reason for existence is to insulate the company closest to the deal from any fallout from the deal not working out. Since it does that while creating a reward for the person making the sale there is no motivation on the part of the salesman to guard against risk. The risk is being pushed far enough down the road that they don't see why they should worry about it. If securitization isn't going to be outlawed then a tracking system needs to be put in place that makes some penalty come back to the person(s) who start the ball rolling.