This page has been archived and commenting is disabled.
The Third Depression?
Jim
Randle reports, G20
Leaders Pledge to Cut Government Deficits:
Leaders
from the world's 20 most important economies set targets to slash
government deficits, haggled over tougher financial regulations and
compromised on a proposal to tax banks. The G20 meeting wrapped up
Sunday in Toronto.G20 leaders say the global economic recovery
is fragile and faces serious challenges, including growing government
deficits.The Greek crisis showed how large deficits can make
lenders worry that they will not be repaid, and keep them from making
the new loans, stalling the economy.Canadian Prime Minister Stephen Harper urged his colleagues in
advanced nations to cut their deficits in half in three years, but also
urged them to make cuts with caution."Here is the tight
rope that we must walk," he said. "To sustain recovery it is
imperative that we follow through on existing stimulus plans those to
which we committed ourselves last year but at the same time advanced
countries must send a clear message that as our stimulus plans expire
we will focus on getting our fiscal houses in order."Mr. Harper's point is that cutting deficits
too little or too slowly hurts investor confidence. But if nations
make the cuts too deeply or too quickly, they risk losing the potential
economic stimulus generated by government spending, something that
critics say could push the global economy back into recession.The
G20's final communiqué, hammered out by leaders behind closed doors,
also offers a compromise on a proposal for a new tax on banks.
Some
economists are worried about the push to slash deficits too early. In
his op-ed piece in the NYT, Paul Krugman goes as far as calling for The
Third Depression:
Recessions are common;
depressions are rare. As far as I can tell, there were only two eras in
economic history that were widely described as “depressions” at the
time: the years of deflation and instability that followed the Panic of
1873 and the years of mass unemployment that followed the financial
crisis of 1929-31.
Neither the Long Depression of the 19th
century nor the Great Depression of the 20th was an era of nonstop
decline — on the contrary, both included periods when the economy
grew. But these episodes of improvement were never enough to undo the
damage from the initial slump, and were followed by relapses.
We are now, I fear, in the early
stages of a third depression. It will probably look more like the Long
Depression than the much more severe Great Depression. But the cost —
to the world economy and, above all, to the millions of lives blighted
by the absence of jobs — will nonetheless be immense.
And this third depression will be
primarily a failure of policy. Around the world — most recently at
last weekend’s deeply discouraging G-20 meeting — governments are
obsessing about inflation when the real threat is deflation, preaching
the need for belt-tightening when the real problem is inadequate
spending.
In 2008 and 2009, it seemed as if we might
have learned from history. Unlike their predecessors, who raised
interest rates in the face of financial crisis, the current leaders of
the Federal Reserve and the European Central Bank slashed rates and
moved to support credit markets. Unlike governments of the past, which
tried to balance budgets in the face of a plunging economy, today’s
governments allowed deficits to rise. And better policies helped the
world avoid complete collapse: the recession brought on by the
financial crisis arguably ended last summer.
But future
historians will tell us that this wasn’t the end of the third
depression, just as the business upturn that began in 1933 wasn’t the
end of the Great Depression. After all, unemployment — especially
long-term unemployment — remains at levels that would have been
considered catastrophic not long ago, and shows no sign of coming down
rapidly. And both the United States and Europe are well on their way
toward Japan-style deflationary traps.
In the face of this grim picture, you might
have expected policy makers to realize that they haven’t yet done
enough to promote recovery. But no: over the last few months there has
been a stunning resurgence of hard-money and balanced-budget orthodoxy.
As far as rhetoric is concerned, the revival of the
old-time religion is most evident in Europe, where officials seem to be
getting their talking points from the collected speeches of Herbert
Hoover, up to and including the claim that raising taxes and cutting
spending will actually expand the economy, by improving business
confidence. As a practical matter, however, America isn’t doing much
better. The Fed seems aware of the deflationary risks — but what it
proposes to do about these risks is, well, nothing. The Obama
administration understands the dangers of premature fiscal austerity —
but because Republicans and conservative Democrats in Congress won’t
authorize additional aid to state governments, that austerity is coming
anyway, in the form of budget cuts at the state and local levels.
Why the wrong turn in policy? The hard-liners often invoke the
troubles facing Greece and other nations around the edges of Europe to
justify their actions. And it’s true that bond investors have turned on
governments with intractable deficits. But there is no evidence that
short-run fiscal austerity in the face of a depressed economy reassures
investors. On the contrary: Greece has agreed to harsh austerity, only
to find its risk spreads growing ever wider; Ireland has imposed savage
cuts in public spending, only to be treated by the markets as a worse
risk than Spain, which has been far more reluctant to take the
hard-liners’ medicine.
It’s
almost as if the financial markets understand what policy makers
seemingly don’t: that while long-term fiscal responsibility is
important, slashing spending in the midst of a depression, which deepens
that depression and paves the way for deflation, is actually
self-defeating.
So I don’t think this is really about
Greece, or indeed about any realistic appreciation of the tradeoffs
between deficits and jobs. It is, instead, the victory of an orthodoxy
that has little to do with rational analysis, whose main tenet is that
imposing suffering on other people is how you show leadership in tough
times.
And who will pay the price for this triumph of
orthodoxy? The answer is, tens of millions of unemployed workers, many
of whom will go jobless for years, and some of whom will never work
again.
I also fear that policymakers are making a
major mistake by moving so aggressively to cut deficits at a time when
the global economy remains fragile. If you go back in history and look
at all the major recessions, they were preceded by major policy
mistakes. Either the Fed started raising rates too aggressively, or
governments slashed spending too aggressively, or both.
I listen to nonsense from some
commentators claiming that if the US is not careful, it will suffer
the same fate of Greece. Total rubbish. The US economy has as much in
common with Greece's economy as Canada's economy has with Romania's
economy. All those who claim "it's time to face reality" and cut
spending "or face the grim reality that Greece is facing" should be
careful for what they wish for. Their myopic focus on austerity could
choke off any consumer demand perking up at this critical juncture.
And while
some commentators fear a double-dip recession or that the "Great
Recession" never ended, I see hopeful signs of recovery. Stéfane
Marion, Chief Economist at the National Bank of Canada had this to say
about today's US consumer spending figures:
A large amount of
economic data will be published this week to help validate/invalidate
the robust earnings growth expectations for Q2 – the bottom-up consensus
is currently calling for a rise of 27% on a year-over-year basis. In
our opinion, we need nominal GDP growth of at least 4% for current
profit assumptions to be realized.After last week’s dismal housing data, it is clear that
residential investment will not be a vector of growth this quarter.
Fortunately, business investment and inventory rebuilding will more than
offset this weakness. However, to get 4% nominal GDP, the consumer
sector cannot retrench. Data released on Monday morning are
constructive. Consumer spending grew 0.2% in nominal terms in May.This
outcome was all the more impressive in that it occurred despite a 1.6%
decline in spending on energy goods. In fact, if we exclude spending
on all the non-discretionary items (housing, gasoline, groceries and
health), personal consumption expenditures were up a robust 0.4% on the
month. As today’s Hot Chart shows (see chart above), spending on
discretionary goods and services is actually set to accelerate to a 6%
annual clip in Q2. This performance,
the best in three years, is not suggestive of disarray in consumer
spending patterns.
While I see signs
of recovery, I also worry that policy blunders and this myopic focus on
austerity to assuage bond vigilantes will kill any recovery going on
right now. Below, please watch Chris Haye's interview with Dean Baker,
one of the few economists who correctly predicted the US housing
meltdown. Listen carefully to Mr. Baker's comments because he's
absolutely right on so many of the key points he raises.
»
- advertisements -
"The Party Line on ZH is Public Spending = Bad, Gold = Good"
Ah, sorry, no, that's Your incorrect/incomplete take.
My interp is that the "Party Line" is that TOO MUCH SPENDING WITOUT ANY CORRESPONDING PRODUCTION (REVENUES) IS BAD, AND THAT A CONTINUANCE OF THIS WILL MAKE ANYTHING WORTH MORE THAN AN ABUSED CURRENCY (just happens that people pick what humans have historically tended to pick as a hedge [reminder to the currency abusers] , and that's gold- really, if it was food would you be badmouthing food?).
The way I see it Leo is this whole economic global thing is a loser for developed nations in the intermediate term no matter which course of action they take. People in the developed nations have become accustomed to and believe they are entitled to a certain standard of iiving. Wages in developed countries must come down in real terms to meet those of the newly developed Asian countries. This will happen in either of the two courses of action.
1- Keep stimulating, and Asia will continue to absorb more money than it spends on developed countries' goods and services as it has been doing. Eventually, currency debasement at a faster rate than wage increases levels the field.
OR
2- Controlled deflation.
As Col Jessup says - Either way, I don't give a damn what you think you are entitled to.
Mish just called out Leo, BIGTIME.
http://globaleconomicanalysis.blogspot.com/
"Greek pensioners on average live on 96 percent of the salary they had when they worked, more than twice the proportion of earnings as Germans, according to the Organization for Economic Cooperation and Development. The Paris-based group called the system a “fiscal time bomb.”
Companies are prevented from dismissing any more than 2 percent of their workforce in any given month, just as the Greek economy is mired in its first recession since 1993."
http://www.bloomberg.com/news/2010-06-28/greeks-stage-national-strike-to...
There you go Leo, more good news.
Did I miss the </sarcasm> at the end of Leo's "article"?
Sadly, no.
I still keep lookinng for the label "May be harmful or fatal if swallowed."
The answer to every Fed, politican and bankster woe is "consumption" and/or "consumers."
That is all I need to hear to know the debauched position one starts from.
Leo's playing devils advocate ... he must be.
No one can be this wrong intentionally.
Or just playing the Devil.
Well, he is from Canadia after all --- we must make allowances for our even more statist-indoctrinated northern cousins. American economists may mostly grudgingly believe in Keynes, but (apparently) for some Canadian economic commentators, he is almost a figure of devotion, if not literally a religious icon. Must be some form of queen envy at work.
And Canadians love to over-pay (everything there retails a good 20% more than in the US, and that's NOT including taxes), a perfect example would be their willingness to hand out over 1 billion dollars to "host" the G-20.
I'm not Canadian, only recently having regular vists there, but I have to believe that they haven't always been this fucked up.
Sometime during 1758:
"How shall we name this land?"
"C, eh?"
"N, eh?"
"D, eh?
LOL
Oh wait!
I get it.
Value of housing is expected to go up and the banks will re-install the ATM machines by the front door of each house.
Easy deal.
We just have to supply tax credits and 'buyer incentives' to get the price back up. Then we......uh......well.....we.....uh.....sorry we are out of time. Please come back and rephrase your question later.
Thank you for your support.
The management.
Speaking of housing prices:
Home Prices Could Drop 50% As The Great Recession Resumes "In my opinion the Recession that was time-stamped by the Economic Bureau of Economic Research (NBER) to have begun in December 2007 has not ended and continues today. How can the NBER declare an end to this Recession with unemployment at 9.7% when the Recession began with unemployment at 4.6%?""Home prices will decline again with risk of another 50% down to get house prices back to levels of 1999 / 2000. Community banks can’t lend as they continue to choke on C&D and CRE Loans written in 2004 through 2006. These are nearly uncollectible. Financial regulations just might shift the burden to the “too big to fail” banks who will need to raise capital while reducing their main source of income, proprietary trading.
There is no double-dip, just a continuation of the Great Recession. I have been calling this “The Great Credit Crunch”. On April 26th predicted the beginning of the second leg of the multi-year bear market which is again led by housing and financials."
http://blogs.forbes.com/investor/2010/06/28/home-prices-could-drop-50-as...
"the consumer is not retrenching" ... "the recovery is gaining traction"
Officials in the Hoover administration made similar statements in 1930. Pushing a rope didn't work then, and it won't work today.
Uh....uuuuuhhhh........,
People are spending much less on 'non descretionary' items (food, energy in particular) ?
We are 'restocking' inventory (but not really increasing manufacturing in the U.S.)
And 'business investments' are up. What businesses are being invested in? Are these U.S. businesses (paying into our tax base)? Does this include banks buying stocks and doing trading instead of lending?
This just does not add up.
I can see some reason to the argument of not slashing too fast. The market can handle a lot of change as long as it is done slowly. Cut too fast or 'stimulate' too fast and you are going to have a circus.
But I don't understand where the consumer base is coming from that will sustain any sort of long term improvement.
People have lost a lot of money. Jobs (when you can find them) are paying less. And Harry Dent had a valid argument about crash due to demographics (the aging population) So where is the consumer support?
Non-descretionary spending is up. Could this be the money from the stimulus is working it's way through the system?
People are eating less, traveling less and giving up their place to live but they are spending more on stuff they don't need?
I really really don't get it.
Here's the solution.
Let all the baby boomers retire early. Then, the people that they screwed for years can move up and take their jobs. You can even raise taxes on my generation to pay for the mess that they made, as well as their early retirement.
We're just that selfless.
I think Mish says it well
"The Keynesian clown hit parade just keeps on rolling. Leo Kolivakis at Pension Pulse is the latest to put on the clown hat for The Third Depression?"
http://globaleconomicanalysis.blogspot.com/
C'mon, what else would you punks be doing if Leo wasn't here to talk trash to?
They'd be going:
"gold to 3000." "No, gold to 5000." "Gold to 10000."
"When gold hits 25000, let's have a ZeroHedge company picnic!"
"Ahhh shit, gold to 50000 bitchez!"
"No, no, no, it'll be a bajillion next week!"
Leo da la basura mucho mas, y mucho mejor, que el la recibe. Pero creo que le guste hacer los dos.
Along with Paul Krugman going apeshit over Europe's lack of appetite for kool aid. The New York Times is running a story on Ireland's fiscal austerity and the effects it's having... pix too! Telling the kids spooky bedtime stories to scare them into line indeed...
The only way this economy can possibly turn around is when decent paying jobs come back.
People need to have solid jobs that give security.
People need security to plan for their future. You know, plan education, plan a career, plan to get married, plan to start a family, plan to buy or build a house, plan for their retirement.
All those things are important. Much more important than the stupid discussions about deflation, stagflation, hyper inflation, Keynes this or that, Gold standard, currency manipulations, sovereign debt defaults, CDO, CDS and so on.
The people need JOBS.
There are few elites in this world which hold billions in various "asset" classes. Their wealth is a drain on the global economy, it produces nothing.
How many billions does a man need to be happy?
How many private jets does a man need to be happy?
How many mansions with how many garages that can hold how many exotic sports cars or limousines?
Here's the thing. There's is lots of money in the system but the money is doing sweet fuck all.
The money needs to be put back into the economy, needs to start companies that will hire and pay decent wages so the people can work, can spend and make plans.
Before that happens, nothing will work.
Taxation is not the answer. What the fuck is government doing with money? Sweet fuck all. Just rewarding those that are not productive or overspend on public budgets.
JOBS JOBS JOBS.
We need them. We need them NOW.
I don't care what industry, what sector, what vision. There's got to be something to untie the knot, to bring about a flood of capital inflows and investments into something sustainable that will promise long lasting careers and job creation.
So, put your thinking caps on and start your idea engines.
And don't anybody suggest "we need a war to destroy so we can rebuild" or I'll shoot you in the head motherfucker.
War is a game for the rich and powerful to expand their power and wealth. Don't play into their hands.
The premise of my post is to make the wealthy understand that they have to part with their billions in order to make a name for themselves, for their families. The mega rich can build legacies here.
The vision needs to be presented to them.
I agree with everything that you said, except that average people plan.
If people had any fucking sense there wouldn't have been a housing bubble in the first place, or a dot com bubble, or an oil bubble, or, the next bubble that is coming.
Yeah, we do need jobs though.
I don't see it happening. The guy who laid off half the people at my company needs to spend 30000 gambling four times a year, go to a beachhouse another three times, drive that new M5, and live in a major league all star's old house...
The rise in data which indicates recovery could just be price inflation showing up. What is Electricity demand like?
AC not productivity..
In my opinion you either bite the bullet soon or it's going to take out all your teeth and half your jaw.
Just opining.
Leo, you say:
I also fear that policymakers are making a major mistake by moving so aggressively to cut deficits at a time when the global economy remains fragile.
WTF? Maybe you missed Tyler a couple of weeks ago showing that in May, the Feds spent almost $2 for every $1 they took in. And now Team Dems don't want to bother even getting a budget for next year.
This is what you call moving aggressively to cut the deficit?
The amount of nonsense posted in some comments really disturbs me. I feel like I am responding to a bunch dumb traders who don't know their heads from their asses. Read my comment carefully and listen to Dean Baker - he puts all of you, including Mish, to shame.
I can only agree with Crisismode. Dont know how a brilliant mind like TD lets such a guy post his bs on ZH. Not only he doesnt understand the current crisis (OK, he's not alone), but due to his pension fund duties and chinese solar stock positions, he must write what his so called investors want to hear.
@ TYLER: please, please remove this guy from posting on ZH. thanks !
I 100% disagree with you. I disagree with virtually 99.999% of everything Leo has to say. BUT, if you don't like his shit, or the fallout that ensues, there is one very simple remedy: Don't read it.
People who read ZH are smart enough to decide for themselves whether or not Leo is on track. They can choose to click or not.
(OK, I'll play along and pretend that "Leo" is real:)
Oh, widdew Weo is distuwbed! How sad fow him!
Weo is gonna cwy 'cuz none of de boys wiw pway Keynesian baww wid him!
Sowwy, Weo, but youw baww is aww defwated, and just won't bounce any wongew.
But a bunch of us have this nice golden one that you can play with --- if you promise to be nice ......
Just don't try to blow it up much larger than it is --- it is VERY hard to inflate.
Unless a bunch of retail investors buy every dip like it's their religion.
Then, it's easy to inflate.
Not to 50000 though. It'll only get to 1300.
Leo is a piece of ass-wipe tissue left on the face of a normally clean-shaven ZH.
Pity on you Tyler.
The Fight Club should have knocked a little sense into you.
Wipe that piece of ass-wipe tissue off your face.
Please.
Wow. This is easily the worst fucking thing I have read on this site.
An even bigger monster than that jobs report I'd say!
Mish commented on Leo in his latest post: Yet Another Keynesian Clown Steps Up to the Plate: Leo Kolivakis at Pension Pulse
Mish should stick to analyzing markets; instead, he stoops to new lows with that post.
Mish probably didn't need to stoop half as low as you do, Leo, to keep your lips permanently on Bernanke's ass like you do.
Isn't it kind of crowded there, though? I mean, Paul Krugman, Steve Liesman and John Galbraith must always be trying to push in there ahead of you, yes?
I just stopped by to see how much crap Leo was catching for this one. It's never disappointing!
The term "Bond Vigilantes" annoys me. It implies that actors in the bond market somehow don't have the authority to do what they're doing or even that they shouldn't be doing it.
This is the market, bitch. Behave or pay the price.
Double T,
It's a Krugman fave. If you decide that T-bonds have become a bad deal, then your are a 'vigilante', like some guy in a 50s B-western with a rope for summary execution. You are a Bad Person, like a war criminal or a death-squad operative (non-governmental, of course, the latter are 'heroes'). But unlike them, your crime is refraining from doing something, namely buying bonds on auto-pilot. If you are not 100% invested in USTs, then you're a Bad Person too and pretty soon there will be the police to show you the error of your ways. JM Keynes knew how to deal with those awful cash 'hoarders' (the original use of implied moral opprobrium for rational economic behavior); euthanasia.
The deployment of such a transparent rhetorical device gives one a clue as to the depth of the rest of the argument. Be on the lookout for this device in other establishment ass-kissing journalism; you can stop reading as soon as you spot one.
TEAM OBAMA TO THE RESCUE:
http://williambanzai7.blogspot.com/2010/06/team-obama-to-rescue.html
Come on Leo ... even Krugman is scared shitless at this point in time ...
Or maybe Krugman is being melodramatic because Germany told him to go fuck off !!
Leo,
I won't go so far as to flame you because your posts are intelligent. The need for a contrarian view is always necessary.
However, I'd have to disagree with your points as well. What real evidence do we have of 2010 being the kickstart to the recovery? Is it REALLY about to take off from here with just a little more stimulus? Are you sure that there still aren't TONS of losses that still need to be taken before things can start turning around?
The guy in the video compared Greece to the state of Arkansas in that a small territories failure does not effect the whole. Well to that I suggest you check out the link below.
Sometimes I don't think you actually mean you're viewpoints and are just good at providing contrarian commentary.
http://www.senseoncents.com/2010/06/steady-decline-through-2060/
http://globaleconomicanalysis.blogspot.com/2010/06/yet-another-keynesian...
Yay! It's Republican apologist Mish!
I like Mish, but he's always dumping on Obama and pumping Bush's policies, which obviously failed.
Leo, I like your moxie; but you're chasing windmills in a vacuum. It's time to trade in your wheels and get on a new road.
One of the grave issues we face is that government monetary numbers are worthless. It is clear the privately-owned Federal Reserve spins stats to its benefit and to validate the secular utopian theology of its head deity, the Lord Keynes. Helicopter Ben was clueless about the real state of the economy right up until he was hit by the bus. He only has one hammer with two faces. The one hammer face is interest rates and the other face, his monopoly on counterfeiting certificates of private wealth dilution. Every problem is solved with this hammer.
Or to put it another way, he is like the manager of a dam who is trying to measure the depth of his impoundment from a power boat circling in its own wake. Since he is paid on how well he keeps the power running and the lake full, when he ruturns to shore, his measurements always show that the lake filled to almost overflowing.
Come on, guys, don't you recognize theatre of the absurd when you see it?
"Leo" is not even a real person, just a fictional persona designed to increase controvery here through antagonism, outrage and indignation via "his" intellectually insulting and rabidly pro-establishment posts, and hence traffic and site hits for the advertisers. But I think the ploy is getting stale.