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Thread: The recession is over but the depression has just begun (article)

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    Default The recession is over but the depression has just begun (article)

    (an article/blogpost I thought you all would find interesting)

    http://www.nakedcapitalism.com/2009/...ust-begun.html

    Submitted by Edward Harrison of Credit Writedowns
    This is a post I wrote earlier to day at Credit Writedowns. I just noticed that Albert Edwards and David Rosenberg are saying similar things. See the FT Alphaville post on their comments here.

    As for me, for the last few months, I have been casting around looking for bullish data points as counterfactuals to my more bearish long-term outlook. I have found some, but not enough. If you recall, early this year, I stated that we are in depression, making the case for the ongoing downturn as a depression with a small ‘d.’ Nevertheless, I was quite optimistic about the ability of policymakers to engineer a fake recovery predicated on stimulus and asset price reflation and I certainly saw this as bullish for financial shares if not the broader stock market. But, I saw these events as temporary salves for a deeper structural problem.

    As a result, I have been on a quest to find data which disproves my original thesis – signs that the green shoots that everyone keeps talking about (and a term I had banned from my site) are part of a sustainable economic recovery. Unfortunately, I have concluded that they are not. This post will discuss why we are in a depression, not a recession and what this means about likely future economic and investing paths. I will try to pull together a number of threads from previous posts, add some context via Wikipedia links and draw in some good discussion via recent posts by Prieur du Plessis on balance sheet recessions and Marshall Auerback on the sector financial balances model of economics which completed the picture for me.

    This post is very long and I have had to shorten it in order to pull all of the ideas into one post. Please do read the linked posts for background as I left out some of the detail in order to create this narrative.
    Let’s start here then with the crux of the issue: debt.

    Deep recession rooted in structural issues
    Back in my very first post in March of 2008, I said that the U.S. was already in a recession, the only question being how deep and how long – a question I answered in the next post saying “we are definitely in recession. And according to Gary Shilling, this recession is going to be a big one. Worse than 2001, 1990-91 or the double dip recession of 1980-82.” This has certainly turned out to be true. The issue was and still is overconsumption i.e. levels of consumption supported only by increase in debt levels and not by future earnings. This is the core of our problem – debt.

    I see the debt problem as an outgrowth of pro-growth, anti-recession macroeconomic policy which developed as a reaction to the trauma of the lost decade in the U.S. and the U.K.. This was a period of low growth, high inflation and poor market returns, in which the U.K. became the sick man of Europe and labor strife brought that economy to its knees. It is a period that saw the resignation of an American President and the humiliation of the Iran Hostage Crisis.

    In essence, after the inflationary outcome that many saw as an outgrowth of the Samuelson-Keynesianism of the 1960s and 1970s, the Reagan-Thatcher era of the 1990s ushered in a more ‘free-market’ orientation in macroeconomic policy. The key issue was government intervention. Policy makers following Samuelson (more so than Keynes himself) have stressed the positive effect of government intervention, pointing to the Great Depression as animus, and the New Deal, and World War II as proof. Other economists (notably Milton Friedman, and later Robert Lucas) have stressed the primacy of markets, pointing to the end of Bretton Woods, the Nixon Shock and stagflation as counterfactuals. They point to the Great Moderation and secular bull market of 1982-2000 as proof. This is a divisive and extremely political issue, in which the two sides have been labelled Freshwater and Saltwater economists (see my post “Freshwater versus saltwater circa 1988”).

    However, just as the policy of the 1950s to the 1970s was not really Keynesian (read Keynes’ General Theory as Richard Posner did and you will see why), the 1980s-2000 was not really an era of true ‘free markets.’ I call it deregulation as crony capitalism. What this has meant in practice is that the well-connected, particularly in the financial services industry, have won out over the middle classes (a view I take up in “A populist interpretation of the latest boom-bust cycle”). In fact, hourly earnings peaked over 35 years ago in the United States when adjusting for inflation.

    Remember, the 1970s was a difficult period in which the U.K. and the U.S. saw jobs vanish in key industrial sectors. To stop the rot and effectively mask the lack of income growth by average workers, a new engine of growth had to be found. Enter the financial sector. The financialization of the American and British economies began in the 1980s, greatly increasing the size and impact of the financial sector (see Kevin Phillips’ book “Bad Money”). The result was an enormous increase in debt, especially in the financial sector.

    This debt problem was made manifest repeatedly during financial crises of the era. Not all of these crises were American – most were abroad and merely facilitated by an increase in credit, liquidity, and international capital movement. In March 2008, I wrote in my third post on the US economy in 2008:

    (read the rest at link - comments are interesting too)
    Grinding is for coffee and meat.
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    Default Re: The recession is over but the depression has just begun (article)

    Certain aspects of your post I totally agree with, but certain other aspects I question.

    Important points ...

    - your author's claim of a 'fake recovery' are absolutely true ... as is being proven by precipitous drops in post 'cash for clunkers' auto sales, precipitous drops in post 'new home buyer incentive' new housing contracts, etc. It would appear that gov't 'stimulus' spending hasn't really stimulated anything - other than an increasing reluctance on the part of both businesses and consumers to avoid cranking up their activities and instead wait for another fresh injection of stimulus money to be 'given away' by the gov't.

    ... your author's point about the 'apparrent' standard of living in the US and UK having been sustained by the accumulation of enormous levels of additional debt is also undeniably true. What your author doesn't come right out and say, however, is that many people in the US and UK have no means of ever paying back this debt ... and arguably neither do the US or UK gov'ts have any means of every paying back gov't debts !

    ... while you didn't 'snip' your author's point about inflating asset values / devaluing the currency as the only means of ending the economic downturn, this is arguably true as well.

    (snip)"The U.S. government has finally realized this and is now moving to stem the tide. Their efforts point in four directions:

    1.Increase asset prices. If the assets on the balance sheets of banks are falling, then why not buy them at higher prices and stop the bloodletting? This is the purpose of the TALF, Obama’s mortgage relief program and the original purpose of the TARP.

    2.Increase asset prices. If assets on the balance sheet are falling, why not eliminate the accounting rules that are making them fall? Get rid of marking-to-market. This is the purpose of the newly proposed FASB accounting rule change.

    3.Increase asset prices. If asset prices on the balance sheet are falling, why not reduce interest rates so that the debt payments which are crushing debtors ability to finance those assets are reduced? This is why short-term interest rates are near zero.

    4.Increase asset prices. If asset prices on the balance sheet are falling, why not create Public-Private partnerships to buy up those assets at prices which reflect their longer-term value? This is what Geithner’s Capital Assistance Program is designed to do.

    So I lied, there is only one direction the government is headed: increase asset prices (or, at least keep them from falling). "(snip)


    One of your author's points that I do NOT agree with is the call for a W shaped recovery, or an ongoing series of spurts and pullbacks. In the absence of continuous gov't spending on 'stimulus' measures ( which are clearly unsustainable as well as ineffective ) there is a much higher probability of an L shaped recovery. Most define an L shaped recovery as 'things never going back to where they were before' !

    ~
    Last edited by Melonie; 10-03-2009 at 05:59 AM.

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    Default Re: The recession is over but the depression has just begun (article)

    Quote Originally Posted by Melonie View Post
    One of your author's points that I do NOT agree with is the call for a W shaped recovery, or an ongoing series of spurts and pullbacks. In the absence of continuous gov't spending on 'stimulus' measures ( which are clearly unsustainable as well as ineffective ) there is a much higher probability of an L shaped recovery. Most define an L shaped recovery as 'things never going back to where they were before' !

    ~
    That is certainly consistent with your perma-bear view of economics. However, it ignores the reality of the business cycle. We are in a deep recession. However, goods are still being produced and sold. There are a multitude of problems going on at once. The recovery, which is not nearly as robust as the Obama/Brown/Merkle/Sarkozy administrations would have us believe, it is not nearly as non-existent as you would claim either.

    What is happening is a very tentative bottoming out of the economy. As Winston Churchill would say, not the beginning of the end, but the end of the beginning. Where we go from here is toward very slow improvement as the overstock of housing is worked through. I expect house prices to remain flat for a couple of years. Loans are still hard to come by, but loan modifications are not. That means the banking system is finally realizing it has to act in its own best financial interests, something it did not for too long. Industrial production is gaining ground faster than construction. Probably helped by a weak dollar and good inventory controls.

    The Bush stimulus was fairly well designed to have an immediate effect. Obama, unfortunately, allowed his stimulus plan to be too back loaded to have much effect at all. The Bush stimulus probably brought a halt to the skid. Now, the business cycle is taking hold and moving us upward, every so slightly. Next year and in 2011 when the biggest part of the Obama money hits the economy, we will see if it does much good, or is just so much added debt. By then, commerce may have the recovery well in hand and we won't need additional government spending.

    The real long term issue is not the recovery, that will happen on its own. No matter what the government does from here on out. The factors in the long term recovery are two fold: regulation and debt. We need more of the former and less of the latter. So far, I am not happy with either the GOP or the Democrats on either issue. We do need to re-regulate the banks, insurance companies and brokerages. We need to break up Bank of America and Citigroup. We also need to introduce a huge dose of transparency into the banking industry. Lastly and probably of least importance, we need to bend the debt curve down rather than up. That means that if there is no universal medicare, then health care reform needs to be shelved until a better plan can be hatched.

    Trying to keep the dollar den real.
    Z

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    Default Re: The recession is over but the depression has just begun (article)

    The real long term issue is not the recovery, that will happen on its own. No matter what the government does from here on out.
    While I'll concede that certain parts of the global economy are showing true signs of recovery, in the absence of hard evidence it is difficult to 'swallow' that any real recovery is happening in the USA.

    Where are employment levels / net earning levels ? -

    Where are corporate earnings levels ? -

    Where are consumer spending levels ? -

    Arguably any positive news in any of these areas is based on US gov't spending of yet more borrowed / freshly printed dollars ... and whatever short term positive news there was immediately disappears as soon as ongoing US gov't spending disappears.

    And what's 'on deck' for US consumers and companies next year ? ... new and higher taxes which will exert even more downward pressure on US employmment levels / corporate earings / consumer spending ! Yet more federal and state gov't borrowing which will make it even more difficult for any successful small businesses to expand and create jobs ! Even higher commodity prices / input costs.

    !~
    Last edited by Melonie; 10-03-2009 at 03:40 PM.

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    Default Re: The recession is over but the depression has just begun (article)

    in fact, here's a more in-depth discussion of why there is a very real possibility of an L shaped recovery ...

    (snip)"In 1935, the Wagner Act was passed allowing for collective bargaining by employees through unions. Previously, this had been prosecuted under antitrust legislation. The National Labor Relations Board was created to mediate negotiations between business and unions. Although it has become popular through photos of sit-ins by the UAW against GM in Flint, among many other examples, to cloak early unions as knights crusading for “fair” wages it was, in essence, a continuation of the NRA administration of wage protection. People were paid more to do less. The result was massive underemployment among the economy at large. Rates touched as high as 30% despite numerous government work programs. The swelled ranks of the unemployed ensured that demand for final products could never recover. Without pricing power and rising costs businesses retrenched and curried favor with politicians rather than creating the conditions for economic recovery.

    This recession has seen wages decline, both real and nominally, the average work week reach record lows, and productivity rise sharply. Companies cut workers quickly as the unemployment rate is now at 17% according to recent U6 statistics. It would stand to reason that our current troubles could never morph into a prolonged depression. Unfortunately that is not the case and, logically, government is the reason why the macroeconomic performance will continue below trend for years to come. The United States government has not just guaranteed losses in money market funds in the past year, it has, through the Federal Reserve, propped up failing financial institutions, doubled the money supply by dumping cash out of its discount window in exchange for evermore questionable collateral, and has bought nearly $300 billion of its own Treasury debt and nearly $1 trillion of agency debt. The government has done everything it can short of ad hoc devaluation of our currency to increase the amount of money in the system and create a resultant increase in asset prices.

    The government has rationalized that its unprecedented steps have staved off deflation. This is only partly true. It has staved off asset deflation, it has not ended the threat of demand pull deflation. Since the lows of last winter, commodities and financial assets have rallied seemingly without interruption. Oil has doubled from the low thirties to nearly seventy dollars a barrel, copper has doubled in price, silver has recently exploded as high as seventeen dollars, and gold now stands north of one thousand dollars per ounce. The stock market has increased nearly sixty percent with the S&P now around 1,020, a far cry from the ominous intraday low of 666. The Nasdaq has proven even more resistant to sluggish fundamentals and the Dow Jones Average has also yielded healthy six month returns. Equity strength should portend bond weakness but that has not been the case. Bonds also remain highly priced pushing the 30 year yield to below four percent.

    This remarkable equity and commodity performance has come even though the economy at large has shed over 2.5 million new jobs without one month of employment growth. Initial claims remain in the mid-500,000s, continuing claims remain near record highs, and emergency claims continue to set monthly records. Employment is not the only indicator of continued economic weakness. Car sales remain poor except when government finances short term programs such as cash for clunkers. Realtors are already asking for an expansion of the first time home buyer tax credit to keep housing sales from retreating further, pulling prices with them. Popular industries such as video games are even feeling the pinch. Game sales are down several months running and console prices have been slashed. The Sony PlayStation 3 is now less than half of its initial retail price, less than three years after its initial launch. The Nintendo Wii, the best selling of the latest generation consoles, will see a price reduction of 20% for the holiday season. Gasoline prices have decoupled from oil with per gallon prices in the Michigan area now standing at $2.30 and falling. Refiners are one of the worst performing industries as they cannot add margins sufficient to cover costs. Our refinery capacity continues to shrink, down to just 84%. It is expected that natural gas supplies will reach storage capacity by the end of November while the excess is dumped onto the market forcing down spot rates. Because of operation flow orders mandating only 80% capacity as of Labor Day, we saw this phenomenon a month ago driving spot prices below $2 per million cubic feet. Even with expansionary prints, regional surveys, from Dallas to Chicago, Richmond to Kansas City, have shown contractionary readings for prices received. Much like Depression era work programs failed to create permanent employment, short sighted fiscal programs cannot create permanent product demand.

    By now, the problem should be obvious. As pricing power declines, raw materials costs are rising (highlighted by the 65 prices paid number in the August ISM and 63 in September). This should erode margins which were the source of the earnings beats of the 2nd quarter. As prices fall, total revenue will continue to miss expectations. Credit is contracting at historical rates with commercial real estate and option ARM resets looming. Record foreclosures portend future losses and the shutdown of banks at an escalating rate. Credit will not expand soon increasing the likelihood of further price decreases as consumers increase personal savings rates.

    The government reflation experiment has ensured that company costs cannot reach equilibrium with weak final goods markets. This is similar to the Great Depression except that artificial wage inflation has been replaced by artificial commodity inflation to create the disequlibrium. To cut rising costs, the only option is to reduce salaried employees, or shut down completely due to losses in core operations. Rising unemployment will create further weakness in final goods. This portends continued macroeconomic performance below trend for a length of time not seen since the Depression. Asset prices will eventually fall to the market solution, government intervention aimed at avoiding this harsh reality will only delay the inevitable and probably assure a more painful destination in the process."(snip)

    from

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    Default Re: The recession is over but the depression has just begun (article)

    and an 'international' viewpoint along similar lines ...

    (snip)"Those who do cling to the absurd belief that, absent exponential productivity gains, the economy can expand while workers are being laid off will undergo a massive test of their convictions now that it's clear the employment picture is bleak. Today's weaker-than-expected report on non-farm payrolls revealed that employers shed 263,000 jobs in September. The losses propelled the headline unemployment rate to a 26-year high of 9.8%. U6, the Bureau of Labor Statistics' most complete measure of unemployment, has risen to a dismal 17%. This figure includes those people who want to work full time, but have simply given up looking, or who have accepted part-time work in the interim. As it is similar to the methodology used during the Great Depression, U6 offers better historical perspective on the severity of our current crisis.

    Taken together with yesterday's larger-than-expected pickup in unemployment claims (first time claims rose by 17,000 to 551,000), today's report makes it certain that the job market is still contracting, even while some indicators like GDP and consumer confidence are moving in the opposite direction. (snip)

    (snip)"Americans are once again taking the government's bait by spending money they don't have to buy things they can't afford. Evidence of this trend was contained in data released earlier this week which showed that even while income growth was largely stagnant, U.S. consumers showed the biggest month-over-month increase in personal spending in ten years! With the same report showing a 25% drop in the savings rate, the source of the spending money is clear. But depleting savings and increasing borrowing does not a recovery make.

    To really recuperate, the government must allow market forces to restructure our economy. The government and individuals must rein in their spending; we must replenish our stock of savings, allow interest rates to rise, asset prices to adjust to economic reality, insolvent businesses to fail, and wages to reflect productivity. To accomplish these goals, subsidies that distort market forces must be removed and regulations that undermine our competitiveness must be repealed.

    None of this can be accomplished without a degree of short-term economic pain. However, if we endure it, the payback will be a real recovery with plenty of new jobs that don't rely on government stimulus money. If we refuse to allow the economy to experience a real recession, we will never have the benefit of a real recovery. Instead, we get the "jobless recovery," a veneer of apparently positive indicators that merely obscures the underlying rot.

    Over the last few decades, our industrial job market has atrophied while service- and public-sector jobs have grown unsustainably. We must restore balance. New jobs will have to come from areas that produce goods; bloated service and government sectors must be allowed to shrink. By propping up the sectors that need to contract, and running staggering budget deficits, the government cuts off the capital necessary to fund sectors that need to expand.

    In truth, many of the service-sector jobs that exist today, such as real estate sales, mortgage finance, home improvement, and auto sales, were created in an environment of ever-increasing home equity, rising stock prices, and almost unlimited access to cheap consumer credit. With home equity gone, stock markets flat, and credit depleted, Americans find themselves needing to save rather than spend. But Washington has put through policies that have counteracted our good instincts.

    While we were focusing our economy on consumer spending, much of the rest of the world was saving for the future. As such, we must begin to produce more for export, so that we can sell goods to those who have the savings to pay for them. That is the only way we can repay our debts, replenish our savings, repair our infrastructure, and rebuild our industrial base.

    Another prerequisite to any real economic expansion is the potential for business owners to earn profits. With increased regulation and higher taxes on the way, these incentives are being diminished. In fact, via a phenomenon called "regime uncertainty," our current policy path is actually encouraging businesses to contract in order to prepare for a more hostile business environment.

    Robust economies utilize all spare capacity, or restructure it for better use. Having 17% of our able-bodied population sitting at home or working part-time at Cinnabon indicates that our present policies are weakening the economy – even if GDP is growing. There is no "jobless recovery," only senseless cheerleading."(snip)

    from

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    Default Re: The recession is over but the depression has just begun (article)

    ^^^ You know, virtually every word of the above post could be applied to the UK as well. Almost identical...

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    Default Re: The recession is over but the depression has just begun (article)

    Hi Stuart !

    In point of fact, the UK has a lot more experience with L shaped recoveries than America does, because it has had generous social welfare benefits, generous health care benefits, generous unemployment benefits etc. in place for at least a generation now ... as well as the higher business and personal tax rates needed to fund those benefits. I saw a recent study out of the UK which reportedly showed that each successive generation of UK workers has become less and less inclined to relocate if unemployed, less and less inclined to obtain additional education if unemployed, and more and more inclined to live 'on the dole' as you call your social welfare benefits payments. Have you seen this study ?

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