Friday, December 19, 2008

5 Reasons Why Today is Not Great Depression II

From Fidelity (11/25/2008), see chart above (click to enlarge) of the 5 reasons; here's the summary:

The challenges faced today by the global economy and financial system are staggering. For the United States, all economic indicators point to an economic downturn that will at least rival any in the post-war period. However, all historical analogies are imperfect. The world changes too much over periods of decades, particularly economies powered by constantly changing technologies, to find a precise fit for any historical parallel. While there are admittedly some similarities between today’s environment and the 1930s, those similarities do not mandate that the world is predestined to follow a path into a decade-long depression.

The dramatic response by central banks and governments around the world faces challenges and potential ill side-effects of its own. But this response underscores that we are living today in very different times than the world experienced 80 years ago, and it may serve investors well to take those differences into account.

13 Comments:

At 12/19/2008 3:36 PM, Anonymous Anonymous said...

You are truly today's Irving Fisher

 
At 12/19/2008 3:55 PM, Blogger bobble said...

yes, TODAY, is not the great depression.

and, yes, it's always "different this time" (ref the dot bomb crash for latest example).

you showed us GDP to prove things were great. you showed us retail sales (initially not adjusted for inflation, i might add). these are COINCIDENT at best.

you might have saved your readers some 401K anguish had you published more LEADING INDICATORS.

in that spirit, heres's a leading indicator for the next COWPIE the economy is about to step into. this leads commercial real estate by 6 months to a year.

 
At 12/19/2008 4:31 PM, Blogger Michael Smith said...

No, it's not a Depression yet, and yes, the response has been different this time in many regards, especially on the part of the Fed.

However, Obama -- assuming he carries through on his campaign promises -- is set to repeat virtually every major mistake made first by Hoover and then by Roosevelt:

1) Income tax increases.
2) Business tax increases.
3) Protectionist trade legislation.
4) Massive increases in union power to keep wages up.
5) Massive new increases in business regulations
6) Massive spending increases for public works.
7) Huge increase in minimum wage.

That combination didn't work for Hoover or Roosevelt and it won't work now, either.


What's more, Obama plans to do something that neither Hoover or Roosevelt did and which promises to be absolutely deadly to the economy: so-called "cap and trade" legislation that will drastically increase the cost of electricity and make the addition of new generating capacity virtually impossible -- and that's Obama's own description of the likely effects of the program.

So there is every reason to believe that government is about to make things much, much worse over the next few years.

 
At 12/19/2008 4:37 PM, Blogger bix1951 said...

Today would be a fantastic day to open a NEW BANK.
Unencumbered by the bad debts but able to take advantage of the super stimulus.
WHERE ARE THE NEW BANKS?
"BANK OF NO SOLVENCY PROBLEMS"

 
At 12/19/2008 5:36 PM, Anonymous Mark said...

Comparing the worst of the depression with today is not very fair. No one would argue we've reached the bottom.

In the depression it took 4 years for unemployment to peak.

Beggar thy neighbour is definitely what China and Germany, the world's largest surplus states, seem to be up to. They both appear to be trying to stimulate exports rather than increasing domestic demand.

I don't see how we can do more than skip to the next crisis unless the global trade imbalances are addressed.

 
At 12/20/2008 11:28 AM, Anonymous Anonymous said...

Yes, we are not entering into the Great Depression of '29 - but check out this article about the REAL Great Depression of the 1870's...This reads very much like our situation today...
http://chronicle.com/temp/reprint.php?id=477k3d8mh2wmtpc4b6h07p4hy9z83x18

 
At 12/20/2008 11:31 AM, Anonymous Anonymous said...

the REAL Great Depression Link gets cut off...google the Real Great Depression by Scott Reynolds Nelson

 
At 12/20/2008 12:39 PM, Blogger the buggy professor said...

"Beggar thy neighbour is definitely what China and Germany, the world's largest surplus states, seem to be up to. They both appear to be trying to stimulate exports rather than increasing domestic demand.

"I don't see how we can do more than skip to the next crisis unless the global trade imbalances are addressed"
--- Mark

....
1) That's generally well-put Mark, especially the second paragraph about global imbalances in large trade surpluses and deficits --- China, Japan, and Germany all large countries (1.4 billion people, 120 million, and 80 million), and the latter two very prosperous ones to boot.

..

2) Note, though, that persistently large trade surpluses reflect, for complex accounting reasons in GDP analysis, low household consumption-rates and high savings-rates in the surplus countries just mentioned compared to the averages among industrial countries. Oppositely, high persistent trade deficits in goods and services --- current account --- reflect relatively high rates of household consumption and low-rates of household savings . . . aggravated in the US case by net chronic dis-saving in the Federal deficits since 2001.

..

3) For instance, Japan and Germany --- dependent in no small measure on export-led growth as you indicate for the latter country --- persistently maintain low relative consumption-rates below 60% of GDP. In the case of Japan, around 55-56% of GDP and Germany's around 58%.

By contrast, the US and UK average consumption rates are much higher --- around 65% of GDP historically since the mid-1980s, and strikingly higher (around 73% for the US) in this decade . . . a reflection of net minus household savings, quite apart from total national dissaving when you can in the Federal deficits.

...

As for China, its consumption level has been far lower still than Japan's or Germany's --- less than 40%! This in a country growing close to 9-10% a year for three decades until recently (which is fully in line with convergence catch-up growth-theory)!

China's strong growth over those years reflects, in short, extremely high levels of national savings and their use for 1) private and public investment (including a big office-building boom) and 2) and to support increasingly large export-sales abroad (about 20% annual rate in the mid-part of this decade) and net trade surpluses.

....

4) Enter now a paradox, especially for Germany and Japan --- two advanced industrial economies with persistently high national savings and high trade surpluses.

Since 1991, both have vied to see which one could rack up the worst economic record in GDP growth since the Great Depression among industrial countries. Neither could jump-start sustained GDP growth --- even of a low sort --- until the middle of this decade (2003-2004 for Japan, 2005-2007 for Germany).

In the same period --- the last 17 years --- the low-savings, high trade-deficit US growth-rate in GDP has averaged around 3.0% a year. As a result, its per capita GDP is now around $45,000 in purchasing power parity terms (PPP), compared to Japan's and Germany's approximate $34,000.

The UK, another country with lower household savings, has also grown faster than the Germans and Japanese, and British per capita income --- which was about 10% lower than Germany's in 1990 --- is now about 10% higher.

.....

5) The paradox gets funnier too.

Because both Germany and Japan have already entered recession . . . Germany, since March of this year (a -0.4% GDP annual rate in the 2nd quarter, a -0.5% in the third).

The causes?

Highly dependent on export-led growth --- export manufacturing and linkages accounting for around 30-40% of domestic production (not GDP) --- Germany and Japan are, like China, essentially at the mercy of economic growth and imports by other countries in the world-economy. And of course the US, the EU, Russia, China, the oil-rich countries in the Middle East, and Latin American countries have all fallen into or are near recession, and consequently domestic consumption and hence the purchase of German-, Japanese-, and Chinese-made imports has and will likely continue to fall off.

....

6) One final comment:"beggar my neighbor" policies.

The term was coined in the 1930s when, in truth, competitive devaluations were attempted by major industrial countries . . . along with the erection of trade barriers (including by the Hoover administration in the early 1930s and reversed by FDR in the mid-1930s).

...

Nowadays, though,


...

4) Enter a paradox though.
"Beggar thy neighbour is definitely what China and Germany, the world's largest surplus states, seem to be up to. They both appear to be trying to stimulate exports rather than increasing domestic demand.

"I don't see how we can do more than skip to the next crisis unless the global trade imbalances are addressed"
--- Mark

.....
1) That's generally well-put Mark, especially the second paragraph about global imbalances in large trade surpluses and deficits --- China, Japan, and Germany all large countries (1.4 billion people, 120 million, and 80 million), and the latter two very prosperous ones to boot.

..

2) Note, though, that persistently large trade surpluses reflect, for complex accounting reasons in GDP analysis, low household consumption-rates and high savings-rates in the surplus countries just mentioned compared to the averages among industrial countries. Oppositely, high persistent trade deficits in goods and services --- current account --- reflect relatively high rates of household consumption and low-rates of household savings . . . aggravated in the US case by net chronic dis-saving in the Federal deficits since 2001.

..

3) For instance, Japan and Germany --- dependent in no small measure on export-led growth as you indicate for the latter country --- persistently maintain low relative consumption-rates below 60% of GDP. In the case of Japan, around 55-56% of GDP and Germany's around 58%.

By contrast, the US and UK average consumption rates are much higher --- around 65% of GDP historically since the mid-1980s, and strikingly higher (around 73% for the US) in this decade . . . a reflection of net minus household savings, quite apart from total national dissaving when you can in the Federal deficits.

...

As for China, its consumption level has been far lower still than Japan's or Germany's --- less than 40%! This in a country growing close to 9-10% a year for three decades until recently (which is fully in line with convergence catch-up growth-theory)!

China's strong growth over those years reflects, in short, extremely high levels of national savings and their use for 1) private and public investment (including a big office-building boom) and 2) and to support increasingly large export-sales abroad (about 20% annual rate in the mid-part of this decade) and net trade surpluses.

....

4) Enter now a paradox, especially for Germany and Japan --- two advanced industrial economies with persistently high national savings and high trade surpluses.

Since 1991, both have vied to see which one could rack up the worst economic record in GDP growth since the Great Depression among industrial countries. Neither could jump-start sustained GDP growth --- even of a low sort --- until the middle of this decade (2003-2004 for Japan, 2005-2007 for Germany).

In the same period --- the last 17 years --- the low-savings, high trade-deficit US growth-rate in GDP has averaged around 3.0% a year. As a result, its per capita GDP is now around $45,000 in purchasing power parity terms (PPP), compared to Japan's and Germany's approximate $34,000.

The UK, another country with lower household savings, has also grown faster than the Germans and Japanese, and British per capita income --- which was about 10% lower than Germany's in 1990 --- is now about 10% higher.

.....

5) The paradox gets funnier too.

Because both Germany and Japan have already entered recession . . . Germany, since March of this year (a -0.4% GDP annual rate in the 2nd quarter, a -0.5% in the third).

The causes?

Highly dependent on export-led growth --- export manufacturing and linkages accounting for around 30-40% of domestic production (not GDP) --- Germany and Japan are, like China, essentially at the mercy of economic growth and imports by other countries in the world-economy. And of course the US, the EU, Russia, China, the oil-rich countries in the Middle East, and Latin American countries have all fallen into or are near recession, and consequently domestic consumption and hence the purchase of German-, Japanese-, and Chinese-made imports has and will likely continue to fall off.

....

6) One final comment: about "beggar my neighbor" policies.

The term was coined in the 1930s when, in truth, competitive devaluations were attempted by major industrial countries . . . along with the erection of trade barriers (including by the Hoover administration in the early 1930s and reversed by FDR in the mid-1930s).

...

Nowadays, though, that criticism can be leveled only against China. It alone ties itself to a managed-float within somewhat narrow-margins around the $US. (Until 2005, it fixed it to the dollar). And it continues to manage that float, keeping the Yuan (renminbi) from rising quickly against the $US by means of taking the large inflow of dollars --- around $200-250 billion until last year in the middle part of this decade --- by investing them back in US Treasury bills and possibly other US financial assets.

....

By contrast, there is not even a German currency --- only the Euro, used by 15 other EU countries in the Eurozone . . . Britain, Sweden, Denmark, and virtually all the new East European member-states in the EU outside the eurozone.

And the European Central Bank has not managed its currency. In fact, it allowed the new Euro (after 1999) to float downward from the initial $1.18 level to $0.85 for about three years, only to stand by while it soared to $1.57 last July!

And the Japanese Yen --- which did reflect a managed rate in the 1980s and 1990s --- has now been allowed to rise to its highest level ever in the last year or so: around 89 yen/$1 just this week.

....

7) The recessionary trends already in the US --- and the UK and other "profligate" EU countries (to use the pejorative term the Germans like to apply) --- are lowering household consumption and increasing household savings for the first time in a decade.

That's one adjustment going on. Another is that both Germany and Japan --- China too --- have begun to stimulate domestic demand as an alternative to their reliance on their (sinking) trade surpluses.

The longer and deeper the recessions, the more these adjustments will occur. Even a coordinated fiscal and monetary expansion in Japan, China, the EU, and US to try combatting and shortening the length and depths of their recessions might, with a decent likelihood, lead the relatively low-consumption countries to concentrate more on keeping domestic consumption at higher levels (and hence lower trade surpluses and reliance on them for domestic production).

....

8) If, though, the Chinese government seeks --- as it might --- to let the Yuan float downward, expect a protectionist and maybe justified backlash not just in the US, but the EU and possibly elsewhere.

Chinese political stability isn't nearly as solidly rooted as outsiders tend to think. Right now, the 30 year-old Chinese developmental strategy --- which has generated tremendous disparities in income across social-classes and regions, with shoddy residential and office-construction and deadly pollution and health problems (plus huge income) disparities between urban and agricultural sectors --- is now meeting its first giant challenge.

An effort to resort, maybe out of desperation, to a much lower yuan/dollar exchange rate can't be ruled out then. And it won't be easy for China's PC and government to switch towards more domestic-demand for GDP growth, what with the rigidities built into the entire developmental scheme . . . not least employment levels as they've been allocated across production sectors.

......

Michael Gordon, AKA, the buggy professor

 
At 12/20/2008 3:06 PM, Blogger bobble said...

interesting explanation of "beggar thy neighbor", buggy professor.

thanks.

another "difference" of today vs 1930's is that prior to the 30's depression, the US was in the position china is today, ie a huge net exporter.

 
At 12/20/2008 4:37 PM, Blogger the buggy professor said...

I apologize for somehow running together two versions of the same post.

It's not clear how it happened. I banged out the lengthy analysis in Word, checked the spelling, then tried to post it in Mark's thread here. I do recall selecting the posted material . . . mainly because I wanted to add something in the middle; then copied it back into Word and pasted it back into the posting-box.

And though the box was still all selected --- it turns blue --- somehow the second posting didn't replace entirely the initial one that was all selected.

.....

Again, my apologies.

Michael (AKA, the buggy professor)

 
At 12/21/2008 5:39 AM, Anonymous MaxEconomics.com said...

Whether in the 1930s or 2008, Investment bankers always have played the bad guys.

We economists study finance is to understand the process they destroy our financial system, so we can strike back.

MaxEconomics.com

 
At 12/22/2008 4:29 AM, Anonymous Mark said...

Thanks for the detailed explanation buggy professor.

I had never thought of trade balances and consumption in those terms before.

 
At 1/03/2009 8:35 AM, Blogger John said...

Sometimes it matters not what is done. If it is time for economic quietude it will be so. No matter what teams of economists do or how they do it one can expect the slow time. Things heat up and things cool down.

 

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