- Albert Edwards, Societe Generale, 2 December 2008.
- Worries about next year“, Paul Krugman, blogging at the New York Times, 4 December 2008.
- FM, today.
1. Albert Edwards of Societe Generale wrote on 2 December 2008:
So now we know. The US economy has officially been in recession for a year. The National Bureau of Economic Research (NBER -link) decided Monday that the economy had been in recession since last December. That will not be a major surprise to readers of these gloomy pages. This is already the third longest recession since The Great Depression. It is likely to be the longest and the deepest since then. Most economists see a second half recovery. But no-one really has the foggiest idea if, or when, a recovery will begin and how powerful it will be – including the idiots holding the monetary fire hoses.
We are now part of The Great Policy Experiment (or is that The Great Ponzi Experiment?) where most of the previous rules have been thrown out of the window. Prior to the Great Depression, 2-3 year recessions were actually quite frequent. I would hazard one tentative prediction. Perhaps this recession will not last quite as long as the 5½ year downturn that occurred in the US between October 1873 and March 1879, but really I cannot be that certain.
2. Worries about next year“, Paul Krugman, blogging at the New York Times, 4 December 2008:
I’ve been ruminating over economic prospects for next year, and I’m getting scared. Two points:
- The economy is falling fast. We’ll see what tomorrow’s employment report says, but we could well be losing jobs at a rate of 450,000 or 500,000 a month.
- Infrastructure spending will take time to get going.
A new Goldman Sachs report suggests that projects that are “shovel-ready” are probably only a few tens of billions worth, and that a larger effort would take much of a year to get going. Meanwhile, it’s very questionable how much effect tax rebates will have on consumer demand. So it may be hard for stimulus to get much traction until late 2009 – and that’s even if Congress goes along, which may be a problem given all the bad analysis and disinformation out there.
So here’s what I’m wondering: will it, in fact, even be possible to pull the economy out of its nosedive before unemployment goes into double digits? I’m starting to wonder.
3. Here is my view of current events, a summary (no analysis or supporting evidence):
- The financial shock (hitting “wall street”) began in December 2006 with the collapse of the mortgage brokers. It is passing. Our major financial institutions proved far more fragile than even pessimists expected.
- The real economic shock (hitting “main street”) hit in September, and will reach full force during the next few months. I suspect (guess) that US households and our major commercial/industrial firms will prove far more fragile than even pessimists expect.
- The government missed its last opportunity to mitigate this shock. The Fed is just now implementing aggressive (unconventional) monetary policy, to be formally announced at their 16 December meeting. Congress missed its opportunity to implement a large fast-acting fiscal stimulus in November; they will do so in February (aprox).
- The last hope for a global soft landing was China. Could they stimulate their economy so that it maintained 5% – 8% growth? Current evidence says no. We have little reliable data about China, but it suggests that China could have zero or negative GDP in 2009 or 2010. If so, global GDP might be -2% instead of the +2% widely expected. This would be the worst since WWII.
- After that comes positive feedback, like dominoes falling — as the ripple of the shock radiates out through the economy, through our society. Through the world.
- The government’s fiscal and monetary programs than have two goals. First, mitigate the downturn: minimize the suffering and avoid serious damage to our economy. Second, help spark the economy to “restart”, for a 2011 recovery. That the government will successfully accomplish any of these things is questionable.
- Both fiscal and monetary programs will take time to gain traction, likely 6 for minor effect – 18 months for full effect. Esp fiscal policy, as no construction happens fast in America.
- The obvious consequences are disturbing. The government’s balance sheet will be devastated. The danger of severe inflation when the economy recovers.
- The unexpected side-effects of such massive government programs will be large beyond imaging.
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To read other articles about these things, see the FM reference page on the right side menu bar. Of esp relevance to this topic:
- about the Financial crisis – what’s happening? how will this end?
- about the End of the post-WWII geopolitical regime
- some Good News about America!
Forecasts on the FM site about causes of the crisis:
- A brief note on the US Dollar. Is this like August 1914?, 8 November 2007 — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
- We have been warned. Death of the post-WWII geopolitical regime, Chapter II, 28 November 2007 — A long list of the warnings we have ignored, from individual experts and major financial institutions.
- Geopolitical implications of the current economic downturn, 24 January 2008 – How will this recession end? With re-balancing of the global economy — and a decline of the US dollar so that the US goods and services are again competitive. No more trade deficit, and we can pay our debts.
- What will America look like after this recession?, 18 March 2008 — The recession will change many things, from the distribution of wealth within the US to the ranking of global powers.
- Another warning from our leaders, which we will ignore, 4 June 2008 — An extraordinarily clear warning from a senior officer of the Federal Reserve.
- When did “Dude” predict a recession? How severe?, 6 June 2008 — Why accurate economic forecasting is difficult, what we know about current conditions, and warnings from a top economist.
- Consequences of a long, deep recession – part I, 18 June 2008
- Consequences of a serious US recession – part II, 19 June 2008
- Consequences of a long, deep recession – part III, 20 June 2008
- A look at one page of what lies ahead in America’s history, 7 August 2008 — Death of an American industry.
- “The Coming US Consumption Bust”, by Nouriel Roubini, 6 September 2008
- The most important news of the month. Perhaps the year., 29 September 2008 — Warnings from our foreign creditors.
- Forecasting the results of this financial crisis – part I, about politics, 13 October 2008
- Forecasting the results of this financial crisis – part II, a new economy for America, 14 October 2008
- Miscelaneous news and thoughts about the financial crisis, 16 October 2008
- The Coming Global Stag-Deflation (Stagnation/Recession plus Deflation), 28 October 2008
- A look at the next phase of the crisis, as it hits the real economy, 31 October 2008
- A look at out future, 2009 – 2010 … and beyond, 9 November 2008
Originally published at Fabius Maximus and reproduced here with the author’s permission.