2009 May 08 Friday
Taleb Sees Worse Economy Than Great Depression
There's an old Chinese curse about how may you live in interesting times. The times certainly have gotten very interesting. Mr. Black Swan thinks governments so lack control that they can't avoid an economic depression.
May 7 (Bloomberg) -- The current global crisis is “vastly worse” than the 1930s because financial systems and economies worldwide have become more interdependent, “Black Swan” author Nassim Nicholas Taleb said.
But not all doomish prognosticators are as pessimistic. Economist Nouriel Roubini (aka Dr Doom) says we are headed for 3 years of deflation due to excess productive capacity and insufficient demand. But he isn't expecting a downturn as deep as a depression.
“There is already excess capacity in the global economy because of the overinvestment in capacity by China, Asia and other emerging markets,” Roubini said in Singapore today. “Without an increase in global demand, we will have even more excess capacity,” and China “is not building domestic demand,” he said.
Roubini sees the huge US fiscal stimulus as only a short-term fix and says we have to balance trade because the US can't supply all the demand needed to use the world's productive capacity. I agree.
Roubini expects a weak recovery to begin only in 2010. But it looks like we will avoid a depression in his estimation.
Roubini says he doesn’t see much in the way of “glimmers of hope” other economists have noted. Unemployment, capital investment, and exports are all worsening, and while there are a few signs of stability in housing, it’s not much. Overall, he figures, the odds of a prolonged “L-shaped” depression have fallen to less than 20%, from about 30%, thanks largely to the efforts of this administration and, to some extent, the last. He expects global contraction of 2% this year, and expansion of about 0.5% next year, “so small it’s going to feel like a recession still.”
Still, he adds: “I don’t worry as much as six months ago about a near depression.”
Declining prices for 3 years? Or massive monetary expansion by the US Federal Reserve? Do you fear inflation or deflation more? And why?
"Do you fear inflation or deflation more? And why?"
Inflation, for sure. These morons will just print money like crazy. We'll also be fucked with higher taxes.
If the $600 billion annual trade deficit were balanced by creating more employment inside the United States, this would be very helpful for the ordinary citizen. This would be like adding $2,000 to the net worth of every American citizen every year. By symmetry, the current annual trade deficit is impoverishing each American by $2,000 every year.
The morons have already printed the money. Money supply today is substantially higher than it was a year ago, so when things finally start to turn around, we will have Carter-era inflation make a comeback - or worse. That will leave Obama and Bernanke with the choice of runaway inflation (another hallmark of 3rd world banana republics, BTW) or raising interest rates to a very high level to purposely induce another recession to cool things off. If this all takes place during the next 2-1/2 years, Obama's chances for reelection take a huge hit. But not to worry, if that's what happens, his failure to be reelected will be reported by the press as resulting from "racism."
We're not going to have any kind of depression. We are in for a long bout of Japan-like stagnation, however.
Yes, I concur with Kurt, we are in for a Japan-like period of stagnation...because like the Japanese they are not dealing with the underlying issue. The Japanese worked too slow and did not deal with the underlying problem, their banking system and the pathetically uncompetitive companies that were formed and leveraged off of government subsidized (and incestuous bank ownership led) financing. The Japanese are healthier than us in that their people save a lot so they have the potential for a lot more healthy fluidity in their economy, but their were not properly allocating it. Hell, when I lived in Japan interest rates were almost zero, they ran out of room to maneuver. That being said, despite almost 20 years of stagnation, Japan still has the second largest economy in the world, the unemployment is not quite 5%, so by international standards they are still very very well off.
America is another story. America has also leveraged off of bad debt, but in a far worse way than Japan and the underlying problem in America is not even that, it is the massive deficit. America is simply living off a massive amount of credit and our debt is unsustainable. There is a correction and I don't believe this is it, it is just the start. What the government can do, is hopefully manage the adjustment so the economy does not completely crash. My fear, like that of the Chinese, is that is the government will spend so much money to make up the difference in lack of public spending that it will cause serious inflation, I think Bernake is aware of this, but the politicians might not give him a any room to maneuver.
Something for Randall in regard to this post:
I don't understand how we will get inflation. Yes, the government will print money. As a result, prices will go up.
But, what happens to wages? As companies raise prices to compensate for a devalued currency, they don't correspondingly raise wages to make it easier for people to pay for things. Hence, a drop in real wages will lead to demand destruction as people scale back their purchases. Thus, inflation will result in deflation.
I believe history proves this.
Oh no, inflation! Don't throw me in the briar patch, uhh, I mean wipe out my student loans!
I can unequivocally state that there will be no deflation. Bernanke has already promised to fire up the printing presses to make sure that won't happen. The only way we'll have deflation is if we are conquered by ze Germans and they replace our central bankers with theirs.
Here's what the Bernankinator says about deflation:
"Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation."
Stagflation or deflation Kurt?
I would position myself for deflation with speculative capital, although one wants to make bets.
So...perhaps for deflation:
short pound (preferably against yen; dollar too risky because of Bernanke)
(I do not know about CAD or AUD although I think there long term prospects; I do not know if this is priced-in now.)
short US equity indices (the easiest trade if you have patience)
No idea on fixed-income (best sovereign bond long is probably German goverment bonds; I understand both the bullish and bearish arguments for Treasures; I think corporate bonds do not have an attractive risk/reward because of investors switch to fixed income bidding them up thus driving yields lower)
No idea on other commodities although biased on short side for copper.
I think Mish would disagree with you. Domestic politics argue for deflationary policies, although the elites often get their way. In addition, China is a potential deterrent for inflationary policies. The welfare state, contrary to most progressives, will probably not be significantly expanded because of racial diversity.
Kunstler exaggerates. But he does make one important point: our top leaders aren't addressing our biggest problems. I see Obama's team trying to manage the current crisis while pushing pretty standard Democrat policies for bigger government. So financial machinations combined with so-called investment in education and other social programs. Meanwhile icebergs are in sight for those willing to look.