reply to post by SLAYER69
Ya know I love ya bud but....
Over the past year the global economy has experienced a massive contraction, the deepest since the Great Depression of the 1930s. But this spring,
economists started talking of “green shoots” of recovery and that optimistic assessment quickly spread to Wall Street. More recently, on the
anniversary of the Lehman Brothers crash, Ben Bernanke, Federal Reserve chairman, officially blessed this consensus by declaring the recession is
“very likely over”.
The future is fundamentally uncertain, which always makes prediction a rash enterprise. That said there is a good chance the new consensus is wrong.
Instead, there are solid grounds for believing the US economy will experience a second dip followed by extended stagnation that will qualify as the
second Great Depression. Some indications to this effect are already rolling in with unexpectedly large US job losses in September and the crash in US
automobile sales following the end of the “cash-for-clunkers” programme.
That rosy scenario thinking has returned to Wall Street should be no surprise. Wall Street profits from rising asset prices on which it charges a
management fee, from deal-making on which it earns advisory fees, and from encouraging retail investors to buy stock, which boosts transaction fees.
Such earnings are far larger when stock markets are rising, which explains Wall Street’s genetic propensity to pump the economy.
As for mainstream economists, their theoretical models were blind-sided by the crisis and only predict recovery because of the assumptions in the
models. According to mainstream theory, it is assumed that full employment is a gravity point to which the economy is pulled back.
Empirical econometric models are equally questionable. They too predict gradual recovery but that is driven by patterns of reversion to trends found
in past data. The problem, as investment professionals say, is that “past performance is no guide to future performance”. The economic crisis
represents the implosion of the economic paradigm that has ruled US and global growth for the past thirty years. That paradigm was based on
consumption fuelled by indebtedness and asset price inflation, and it is done.
There is a simple logic to why the economy will experience a second dip. That logic rests on the economics of deleveraging which inevitably produces a
two-step correction. The first step has been worked through, and it triggered a financial crisis that caused the worst recession since the Great
Depression. The second step has only just begun.
Deleveraging can be understood through a metaphor in which a car symbolises the economy. Borrowing is like stepping on the gas and accelerates
economic activity. When borrowing stops, the foot comes off the pedal and the car slows down. However, the car’s trunk is now weighed down by
accumulated debt so economic activity slows below its initial level.
With deleveraging, households increase saving and re-pay debt. This is the second step and it is like stepping on the brake, which causes the economy
to slow further, in a motion akin to a double dip. Rapid deleveraging, as is happening now, is the equivalent of hitting the brakes hard. The only
positive is it reduces debt, which is like removing weight from the trunk. That helps stabilise activity at a new lower level, but it does not speed
up the car, as economists claim.
Unfortunately, the car metaphor only partially captures current conditions as it assumes the braking process is smooth. Yet, there has already been a
financial crisis and the real economy is now infected by a multiplier process causing lower spending, massive job loss, and business failures. That
plus deleveraging creates the possibility of a downward spiral, which would constitute a depression.
Such a spiral is captured by the metaphor of the Titanic, which was thought to be unsinkable owing to its sequentially structured bulkheads. However,
those bulkheads had no ceilings, and when the Titanic hit an iceberg that gashed its side, the front bulkheads filled with water and pulled down the
bow. Water then rippled into the aft bulkheads, causing the ship to sink.
The US economy has hit a debt iceberg. The resulting gash threatens to flood the economy’s stabilising mechanisms, which the economist Hyman Minsky
termed “thwarting institutions”.
Unemployment insurance is not up to the scale of the problem and is expiring for many workers. That promises to further reduce spending and aggravate
the foreclosure problem.
States are bound by balanced budget requirements and they are cutting spending and jobs. Consequently, the public sector is joining the private sector
The destruction of household wealth means many households have near-zero or even negative net worth. That increases pressure to save and blocks access
to borrowing that might jump-start a recovery. Moreover, both the household and business sector face extensive bankruptcies that amplify the downward
multiplier shock and also limit future economic activity by destroying credit histories and access to credit.
Lastly, the US continues to bleed through the triple haemorrhage of the trade deficit that drains spending via imports, off-shoring of jobs, and
off-shoring of new investment. This haemorrhage was evident in the cash-for-clunkers program in which eight of the top ten vehicles sold had foreign
brands. Consequently, even enormous fiscal stimulus will be of diminished effect.
The financial crisis created an adverse feedback loop in financial markets. Unparalleled deleveraging and the multiplier process have created an
adverse feedback loop in the real economy. That is a loop which is far harder to reverse, which is why a second Great Depression remains a real