Is the current economic downturn just a painful recession, or is it something more?
At the risk of sounding apocalyptic (I’ve been doing that a lot lately), it seems that the conventional wisdom (that this is just a severe recession which will correct itself within 1-2 years) is increasingly naive.
Several essays I would recommend to you for your consideration.
♦ Ray Dalio: Recession? No, It’s a D-process, and It Will Be Long
When I first started seeing the D-process and describing it, it was before it actually started to play out this way. But now you can ask yourself, OK, when was the last time bank stocks went down so much? When was the last time the balance sheet of the Federal Reserve, or any central bank, exploded like it has? When was the last time interest rates went to zero, essentially, making monetary policy as we know it ineffective? When was the last time we had deflation?
The answers to those questions all point to times other than the U.S. post-World War II experience. This was the dynamic that occurred in Japan in the ’90s, that occurred in Latin America in the ’80s, and that occurred in the Great Depression in the ’30s.
Basically what happens is that after a period of time, economies go through a long-term debt cycle — a dynamic that is self-reinforcing, in which people finance their spending by borrowing and debts rise relative to incomes and, more accurately, debt-service payments rise relative to incomes. At cycle peaks, assets are bought on leverage at high-enough prices that the cash flows they produce aren’t adequate to service the debt. The incomes aren’t adequate to service the debt. Then begins the reversal process, and that becomes self-reinforcing, too. In the simplest sense, the country reaches the point when it needs a debt restructuring. General Motors is a metaphor for the United States.
Dalio’s interview is essential, IMO, to understanding where we are, and cutting through the haze and maze of a million pundits talking about a “recession.” His tone is particularly noteworthy, lacking in histrionics or talk of “catastrophe” — thus making him all the more credible.
♦ Jaque Attali, Wall Street Journal Europe: We’re Heading Toward a Global Weimar:
This growth of public debt, on top of private debt, can only lead to catastrophe: the bankruptcy of households, banks, even countries. What has happened to Iceland can happen to larger countries as well, if panic seizes creditors. Anything is now possible, including the collapse of the global banking system, whose losses would have grown beyond reach of rescue.
This panic could be set off by the realization of the insolvency of the system. It could also be set off by political or terrorist movements: A number of determined groups, with even limited means, could organize speculative attacks on banks, leading to their collapse.
Then we could arrive at a global depression. It could even be followed by hyperinflation, provoked by the immensity of the monetary means created since the start of the crisis; the depression would allow the debt to be reduced to nothing, to the benefit of the borrowers. The world would then be experiencing a depression ready for inflation, a global Weimar.
His proposed solution, however, should set off a few alarms:
… the world’s institutions should be reorganized. We can’t have a globalization of the market without a globalization of the rule of law…
… it’s quite obvious what should be done: Merge the G-8 with the U.N. Security Council, allowing the chief Southern powers, such as India, Brazil or Nigeria, to join in. Place international financial institutions under the protection of this restructured Security Council, and put it in charge of setting up real global regulation, to control financial institutions; to modify the Basel Accords, by suppressing “mark to market” models; and to organize the revival of the production of public goods (water, clean air, freedom) world-wide.
In the long run, the world will be organized around a new coalition of nations, sharing the burden of these challenges, not around a single country, as is the case today.
Can you say, “New World Order”, boys and girls?
♦ Donald Sensing: America is, in fact, bankrupt
Much moaning and groaning has been going on about how the $800 billion “stimulus” bill will saddle future generations with mountains of debt. And it will, though that’s not my main complaint … future generations were already saddled with not a mountain of debt, but a Himalaya range of debt. In fact, using Generally Accept Accounting Practices, a formal set of accounting procedures abbreviated as GAAP and the kind used to audit corporations, the total American federal debt actually is greater than the economic output of the entire world.
♦ Fortunately, Europe will save us — or not: High-risk, high volume lending to ex-Soviet block Eastern Europe is not working out so well: Eastern European currencies crumble as fears of debt crisis grow:
Hungary \'s forint fell to an all-time low on Monday, and Poland \'s zloty slumped to the lowest in five years on plunging industrial output. Half of all loans to the private sector in Poland are in foreign currencies so borrowers face a severe debt shock after the 40% fall of the zloty against the euro since August.
â€œWe \'re nearing the level were things could get out of hand,â€ said Hans Redeker, currency chief strategist at BNP Paribas.
♦ But at least you have your pension to fall back on: Maybe it’s time to cash out, buy gold, and keep it under your mattress. Pension Tsunami:
That approaching wave of pension debt is bigger than it looks. The purpose of this site is to provide an overview of the multiple pension crises that are about to drown America’s taxpayers.
♦ Richard Fernandez hopes we can, but doesn’t sound very confident: Avoiding the End of The World
One of the reasons government has a hard time managing complex systems is that politics treats events largely like linear systems. Politics interprets events in the context of its mythology. But if politics is in the best of times the art of lying to ourselves in the broad day, politics in crisis is the vice of lying to ourselves while we are falling off a cliff. And when fables meet a changing environment disaster is often the result. The second difficulty is that government is a ponderous, elephantine beast. Bureaucracies are nearly always behind the curve. Part of the requirement is to get ahead of the problem and cut out those parts of governance which contributed to the problem. But what to do when government is already part of the equation; when only government has the legitimacy to do some of things which need doing? It \'s like hoping a patient who shot himself can successfully self operate to remove the bullet.
♦ When all else fails, learn from the Soviet Union: Dmitry Orlov is an interesting guy, who immigrated from the Soviet Union at age 12 and traveled back many times during its disintegration and subsequent social collapse. He finds a lot of parallels between the Soviet social collapse and our current economic disintegration. He is decidedly a pessimist on where things are headed, but has some interesting and entertaining insights on how societies function (or don’t) after social or economic meltdown: Social Collapse Best Practices:
I was very well positioned to have this realization because I grew up straddling the two worlds â€“ the USSR and the US. I grew up in Russia, and moved to the US when I was twelve, and so I am fluent in Russian, and I understand Russian history and Russian culture the way only a native Russian can. But I went through high school and university in the US. I had careers in several industries here, I traveled widely around the country, and so I also have a very good understanding of the US with all of its quirks and idiosyncrasies. I traveled back to Russia in 1989, when things there still seemed more or less in line with the Soviet norm, and again in 1990, when the economy was at a standstill, and big changes were clearly on the way. I went back there 3 more times in the 1990s, and observed the various stages of Soviet collapse first-hand…
Here is the key insight: you might think that when collapse happens, nothing works. That \'s just not the case. The old ways of doing things don \'t work any more, the old assumptions are all invalidated, conventional goals and measures of success become irrelevant. But a different set of goals, techniques, and measures of success can be brought to bear immediately, and the sooner the better.
♦ And finally, proof that the world really is coming to an end: Playboy‘s going broke: The magazine has fallen on hard times, with flaccid sales and lack of market penetration. It’ll be a shame to see the Playboy Center fold … I guess no one reads it “just for the articles” anymore. Playboy, Posting Loss, Says It Would Consider Sale
None of these essays really consider another factor: the black swan — the unexpected and unpredictable occurrence which renders all prior assumptions invalid. Think: a major Middle East war, with shutdown of oil supplies; a large-scale mass-casualty terrorist attack or nuclear terrorism; a massive natural disaster, such as an earthquake which levels, say, San Francisco. With the world in its current economic state of instability, the effects of such an event would be amplified many times over.
These are, as they say, interesting times. They are a time for prayer, not panic; a time to reassess priorities; a time to prepare for future difficulties and uncertainty.
And a time, above all, for faith.