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One Data Point To Rule Them All
I found this column arguing that the current recession isn’t as bad as the ones in the 70s-80s to be hilarious. People that are making this argument based on current data don’t understand the difference between a recession caused by an external shock (such as the oil crisis) or government attempts to curb inflation (the sharp 81/82 recessions) and one caused by over leveraged debt, where the interest rate is 0% and things are still getting worse due to deflation. But even discounting a long argument about the dynamics, there is a clear data point that should be everyone pause.
The last quarter will see the first collective loss across the S&P 500, even excluding financials. That didn’t occur even during the Great Depression.
Now there is a caveat. I’m not saying that the environment is already worse than the Great Depression — that’d just be stupid — as the losses are coming from massive asset write downs across all industries instead of current negative cash flow. What this means however, is that much of our “wealth” was (still is) completely illusionary and based on debt inflation. Our current problems are simply a result of a wholescale deleveraging process back to historical norms. In fact we still have to fall another 20-30% across most asset classes just to get back to normal. This is why I’m so skeptical of the bailouts/stimulus packages/whatever…until the system is flushed back to at least normal levels, it’ll be impossible to use the money productively. This is why I really wish the government would throw in the towel and use our limited resources to help set up programs that anticipate 25% unemployment etc. and then use the bullets we’ve saved for when the system is flushed out and needs a real Keynesian reboot.
Right now we are in the eye of the storm where people are arguing about whether we are in an ahistorical time or just overreacting. My bet is on ahistorical time and the problems we have are massive in a way that still very few people in power appreciate. I fear that when the reality can no longer be denied, there will be panic. I’ve basically just come to accept Churchill was right, “The Americans will always do the right thing… after they’ve exhausted all the alternatives.”
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12 Responses to “One Data Point To Rule Them All”
I think there is probably a great deal of truth to the idea that we still have a way to go in this mess, for the reasons you cite. And while there has been some over-selling of the stimulus package's ability to make everything right by Pelosi et al, I don't think the Administration has promoted that idea. Obama has been selling it not as the answer to our financial ills, but more as a way to soften a hard landing over the next couple of years, while investing in the future.
While economists seem to disagree widely on what exactly is necessary to facilitate that softer landing, both ideologically and school of thought, the majority seem to believe doing nothing is not really an option. A complete global meltdown is a really frightening situation, with the implications of war and poverty and starvation at levels unseen since WWII. And today we're far more interconnected.
It is precisely the last two sentences I'm most worried about. We have far more resources than we need to keep everyone fed, sheltered and clothed. If governments were honest with the people about the global troubles and the need for a severe 5-10 year reduction in standard of living, and then used the same amount of resources that they've already expended to set up a new mini-financial system, basic needs distribution, global aid, etc. then I think the global problems would be greatly lessened.
I think the ratcheting down of the leveraged standard of living is the inevitable “cure”, but explain to me why, if things have been heading down since November '07, why haven't we seen your desolation, riots and other signs of apocalypse. Weren't retail sales just reported as up?
It's a long process. It took three years for the Depression to fully take hold, and 1930 was actually relatively good as asset prices started to recover and people thought things were going to rebound, then 1931 was when it became more obvious that there were systemic problems. Also if you think there isn't already wipespread desolation and riots across the world, I encourage you to read some of the British and Asian papers that talk about how bad it is in Eastern Europe and the Asian exporters.
As for the retail sales, we're going to need to get pricing and inventory data. There is concern that it is a result of massive price deflation so we'll know in a few weeks how it fits in.
I agree that the delveraging process still has some time to go before it is complete. With this, many companies will go bankrupt, more people will lose their homes due to foreclosure and unemployment will rise. Though this is a horrible proposition, I believe that it is necessary and it is the way that the market works. Although, once that process has been completed, the market will work again to bring life back into the economy. Prices will have fallen to such a low level that demand will begin to increase, new businesses will open and employment will rise. I am skeptical of the stimulus because I believe that it is intended to prevent the natural business cycle. The shallow recessions that we've had recently, especially 2001, are prime examples of why the government should not intervene against market forces. The mechanisms that allowed for the shallowness of the previous recession, have compounded the pain of this current recession. It would be best if government did nothing and left the market to sort things out.
I watched the video you linked.
I was a little appalled to see the TV hosts ask Roubini and Taleb for investment tips. Their business-as-usual attitude seems like evidence that they have no idea what's going on.
The idea that nobody knows what they're doing–I guess because it's “ahistorical”, to use your term–is really the most frightening part of this.
There was a link at You Tube to the rest of the interview. Roubini said there was $3.6 trillion in bad debt to work out of the financial system, and only a trillion (only a trillion!!!) has been worked out so far.
There's $2.6 trillion to go.
If he's right.
If he knows what he's talking about.
Yes George, when I watched it I couldn't help but laugh out loud in complete disbelief. It is truly insane how blind some people are…I mean our politicians are a little better but still, they don't seem to appreciate how we're only about 1/3 of the way through under the most realistic “best case” scenario. As noted in my post yesterday, we could potentially be looking at $6-$8 trillion in loses in Europe which makes Roubini look optimistic. I've always thought that he had very good arguments over the past couple years for his concerns but was wildly optimistic about the fallout from it. He's now starting to get more grim about.
PWT believes, like far too many conservatives in the sociopathic libertarian model.
Mikkel: nice article. you might enjoy similar comments from Vox today:
http://www.voxeu.org/index.php?q=node/3065
PWT: while it is true that a new, appropriate equilibrium in line with market fundamentals could be reached, the dynamics of the adjustment process are of concern, and that's in the happy case where are there aren't multiple equilibria, some of which are not so nice. For example if the process of market adjustment involves temporary 20 percent unemployment (i.e. an overcorrection) on its way back to 5 percent, this is not a trivial matter.
“I believe that it is intended to prevent the natural business cycle. The shallow recessions that we've had recently, especially 2001, are prime examples of why the government should not intervene against market forces. The mechanisms that allowed for the shallowness of the previous recession, have compounded the pain of this current recession.”
The problem with this reasoning is that debt has increased by about $5Tr over the past 8 years, and the government continued to run deficits, on average over the business cycle well in excess of the ameliorating effects of productivity growth. In contrast, tax rates under the Clinton administration were set so that the automatic stabilizer effect was working (i.e. the budget moved steadily into surplus, and the debt continued to drop as the late 90's boom progressed). This suggests that competent execution of fiscal policy under the usual conservative rule of being balanced over the business cycle can work, whereas structural deficits do not.
While I agree with you about the government debt part, I have been persuaded to change my mind about the 90s. Not only did the amount of private debt rise considerably even while the government debt was flat, but many of the regulations and culture that allowed this mess formed in the mid-90s. That said, everyone has been insane the last 8 years or so in the amount debt taken on.
Comparison with 1982 is meaningless other than its tangential note that Volcker did well then, and hopefully can do well now.
Comparison with the 1930s is meaningful, but we are not the same as we were in the 1930s. We aren't experiencing (at least, not yet) the kind of unemployment that was the case then. There are other differences. Some of them mean that we could face worse problems now than in the 1930s. Consider home indebtedness. (Not to mention the looming credit card iceberg.) I resent the hype and sensationalism, and try to do my part to avoid a lot of mention of deflation or the deflationary spiral even though I've been interested in deflation for many years, in addition to other topics (including inflation — I don't believe Washington will act soon to use inflation as a weapon or political vote-buying tool).
The best model we have so far is the contemporary one, Japan in the 1990s.
“I mean our politicians are a little better but still, they don't seem to appreciate how we're only about 1/3 of the way through under the most realistic 'best case' scenario.”
Much in this “stimulus” bill is just business as usual and short-term thinking connected in next to no way with stimulating the economy “back to life.” This bill is about establishing other objectives, political precedents. Maybe they'll have learned something before the next big bill. With this “stimulus” bill, Washington has diverged from doing what it professed needed to be done. That's not surprising, but under these circumstances, it's surprising how much divergence there actually was.
mikkel: all true – my point was very narrowly constrained to PWT's argument that the government should not intervene to moderate business cycles. A combination of “modern” interest rating targeting monetary policy plus constant tax rates over a business cycle seems to have moderated the business cycle somewhat. The longer structural factors and regulatory distortions you mention are another matter entirely.
Here is a great historical chart of debt levels from the FT by the way:
http://www.ft.com/cms/s/0/b048d69c-ec90-11dd-a5…