More Bad News is Coming. This Time it's (Not) Different.
In his Forbes column Street Talk, Robert Lenzer talks about the book "This Time it's Different" by Carmen Reinhart and Kenneth Rogoff. It's a depressing -- though convincing -- piece of writing:
You found out what happens when a global financial crisis hits asset markets and creates a recession. But you probably didn't comprehend how the pattern of spillovers would play out from what Reinhart and Rogoff call "the second great contraction."
Beware! "Highly indebted governments, banks or corporations can seem to be merrily rolling along for an extended period, when--bang!--confidence collapses, lenders disappear and a crisis hits," write Reinhart and Rogoff.
So what's new? I direct your attention to Chapters 13 through 16, about 70 pages including many charts and tables that you can skip. You learn quickly to anticipate that booms are very often followed by busts. Did you ever think it possible that a severe crisis would wreck all asset prices and affect the depth, breadth and duration of the economic slowdown?
The bottom line is that the aftermath of the second great contraction is a protracted affair, not reversible by throwing trillions and the kitchen sink at it.
A "Second Great Contraction." A "protracted affair." Those are real downer phrases, don't you think? So if that's what's on the way, what on earth can we do about it? Cut taxes, sure. Slash spending, of course. But it really seems like we're on the path, as a country and an economy, to a bunch of rough years, even if we end up doing all of those things.
Are we prepared for this? Are our children? And from the 50,000 foot perspective, might this Great Contraction end up being a good thing?
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Jun '10
Re: More Bad News is Coming. This Time it's (Not) Different.
According to one economist I heard, American productivity is way up because employers are squeezing every ounce out of a leaner work force. That can't go on forever. So, we're kind of at a decision point. If growth keeps edging up, employers will need to go on a hiring spree. They won't have any choice. Then, we would finally see the recovery we're looking for. But, to see that happen, government has to send the right signals, and one of the best signals they could send is extending the Bush tax cuts. Democrats may hate doing it, for political reasons, but it may be the magic trigger to recovery. Business is looking for a positive signal or two, and that would be a big one.
Re: More Bad News is Coming. This Time it's (Not) Different.
Rob Long: A "Second Great Contraction." A "protracted affair." Those are real downer phrases, don't you think? So if that's what's on the way, what on earth can we do about it? Cut taxes, sure. Slash spending, of course. But it really seems like we're on the path, as a country and an economy, to a bunch of rough years, even if we end up doing all of those things.
Are we prepared for this? Are our children? And from the 50,000 foot perspective, might this Great Contraction end up being a good thing?
This was my view from the 5 foot perspective, a week or so after the Great Contraction began. I'd say more than a few things differently, but it's an interesting time capsule.
Jun '10
Re: More Bad News is Coming. This Time it's (Not) Different.
My cynical side tells me that a title like "This Time it's Different" was chosen by the publisher's marketing department. Apocalyptic prognostication has become a literary genre: The Population Bomb! The Coming Anarchy! Financial Meltdown! My other side, no less cynical, says be prepared for the worst. I have only a layman's understanding of economics, but I also have a layman's intuition about the relationship between assets and debt. Assets good <grunt>, you speak Yang worship word. Debt bad <growl> like thieving Kohns. E Pleb Nista . . .
Jul '10
Re: More Bad News is Coming. This Time it's (Not) Different.
I've asked this before and have not gotten a satisfactory answer, probably because there isn't one. What happens when a country, indeed goes bankrupt? According to some economists, the SS 'trust fund" is due in 2017, give or take. What happens when the government economy becomes unstable? Wheelbarrows of cash for a gallon of milk?
I do think this needs to be enunciated (Paul Ryan, are you reading this?) by someone on the conservative side. I know it's a doom and gloom scenario that the left is so fond of (HT: Paules) but it's worth declaring that the U.S. is slouching towards Gomorrah in the economic sense.
Aug '10
Re: More Bad News is Coming. This Time it's (Not) Different.
Michael Tee: What happens when a country, indeed goes bankrupt?
That's an interesting question. I Googled "countries that have gone bankrupt" for historical examples, and there are quite a few fairly recent examples in pretty developed countries, including Iceland, Great Britain, France, Argentina, and New Zealand. Here is one "top ten list" and here's a Der Spiegel article about it.
Historical examples don't give the general procedure for a bankrupt government, but they're a good place to start looking.
Re: More Bad News is Coming. This Time it's (Not) Different.
Michael Tee:
I know it's a doom and gloom scenario that the left is so fond of (HT: Paules) but it's worth declaring that the U.S. is slouching towards Gomorrah in the economic sense. · Aug 13 at 5:11pm
Not to mention the Laday Gagamorrah which I witnessed last night at the Staples Center. What a pity.
Jun '10
Re: More Bad News is Coming. This Time it's (Not) Different.
If by bankrupt you mean unable to pay its obligations, technically a country can’t go bankrupt, because that country can always print more money. Big, loud alarm bells should now be ringing at this point. When a country prints more money it undermines the its currency’s value, which is to say the country makes its population—those people holding its cash—poorer by the annualized rate of inflation. A bit of inflation 0% to 3% per year is OK, anything above that becomes progressively more dangerous. The big news today is that the US government is monetizing its debt by buying its own paper. This folks is very bad for two reasons: 1) Institutional buyers are sitting on their money because they anticipate that government will be forced to issue even more paper at higher rates, which will cause the price of instruments purchased today to go down; and 2) The money the government is printing to monetize debt is to the market a precursor to inflation. Catch – 22, me thinks, and for a simple reason: ask yourself would you buy a house or car today if you kew the price would fall tomorrow?
Jun '10
Re: More Bad News is Coming. This Time it's (Not) Different.
Joe Escalante
Michael Tee:
I know it's a doom and gloom scenario that the left is so fond of (HT: Paules) but it's worth declaring that the U.S. is slouching towards Gomorrah in the economic sense. · Aug 13 at 5:11pm
Not to mention the Laday Gagamorrah which I witnessed last night at the Staples Center. What a pity. · Aug 13 at 6:03pm
That's pretty harsh, Joe, and I feel for you. A percocet washed down with two glasses of Gewurztraminer should set you to rights by morning. Why ruminate when you can medicate?
Jul '10
Re: More Bad News is Coming. This Time it's (Not) Different.
Institutional buyers are sitting on their money because they anticipate that government will be forced to issue even more paper at higher rates, which will cause the price of instruments purchased today to go down;
Why sit on the money, as many companies are doing now, when the price of that asset is going to go down due to inflation? If I were a F500 company, I'd be transferring dollars into practically any hard asset. Or am I wrong here?
So G. Gordon Liddy is right. I should be buying gold?
Jul '10
Re: More Bad News is Coming. This Time it's (Not) Different.
I've asked this before and have not gotten a satisfactory answer, probably because there isn't one. What happens when a country, indeed goes bankrupt?
Well, given just a few prominent examples: Adolf Hitler; Juan Peron; the sack of Rome.
Jun '10
Re: More Bad News is Coming. This Time it's (Not) Different.
Kenneth, when inflation is running high or in the case of Germany at hyper-rates it is NOT the country that goes broke but its citizens. This is an important distinction and for lack of a better description very unfair.
Jun '10
Re: More Bad News is Coming. This Time it's (Not) Different.
Michael Tee, institutional investors hold paper--stocks, bonds, derivatives--as assets, even when they invest in commodities they do not actually take delivery of a commodity such as gold ingots. In short they are trading in promises. In the bond market interest and price are in an inverse relationship, which means if interest rates go up price must come down. For example, take a $100 long bond that pays a coupon of $5 per annum (5% yield), if interest rates increase to 10% per annum the price of the long bond must fall to $50 to yield 10%. This is a simple example, but the point should be clear, no one buys if they think the price of the paper they buy will go down. This position is further compounded by the fact that the institutional investors see evidence that does not bode well for the future.
Jul '10
Re: More Bad News is Coming. This Time it's (Not) Different.
Quite right. Michael Tee was asking about national bankruptcy, not bouts of hyper-inflation, so my inclusion of Adolf Hitler was misleading. But who can resist playing the Hitler card?
Rome is the better example, as their money - precious metal coinage - was the world's reserve currency. And they brought themselves to ruin by unsustainable central-government spending on a lavish capitol, a corrupt political elite and military adventures. Sound familiar?
Jun '10
Re: More Bad News is Coming. This Time it's (Not) Different.
An added complication is that a prudent investor, institutional or otherwise, who thinks that prices will be moving down will short sell. Shorting is tricky and dependant an SEC and other market rules, but the presence of bears (short sellers) has a dampening effect on prices. Lest any think that this is in some fashion vile conduct, both bulls (long buyers) and bears are vital components in any market as the tension between these forces balances prices. It is when everybody becomes a bull that you get bubles and when everyone in the market is bearish you get crashes. One of the worst things that government interference in such markets does is prolong both the bubbles and the crashes, because no one knows when they are at the top or bottom. In a crash it is vital to know where the bottom is because that's the signal for the bulls to start running. Right now the bulls are still waiting to see what the government will do, and from my seat they don't like what they see.
Jul '10
Re: More Bad News is Coming. This Time it's (Not) Different.
Cas - I forgot to mention that the Romans did deliberately inflate their currency, in the form of coin-clipping, a government theft so bald-faced that it resulted in mutiny among the Legions.
Jun '10
Re: More Bad News is Coming. This Time it's (Not) Different.
Reinhart and Rogoff have resonated most with the international financial community as there are plausible options based on their outlook. So my non-american buddies look at this as opportunity or threat, but most important for americans is that the world is not in dire straits because we are and as such we have become simply another financial riddle to solve.
We are in the gutter,,,, China and India are not.
I am in taipei today and I have to say the boys from HTC I just had breakfast with are more interested in mobile phones to China and India than parsing some silly regulatory documents from the FTC before they set prices in the USA.
No one likes to be told they don't matter, but frankly we matter less and less. So yes, this time it is different.
Jun '10
Re: More Bad News is Coming. This Time it's (Not) Different.
There is nothing worse a government can do economically to its citizens than devalue their currency. Why this is such an evil is that it destroys savings and as a consequence the independence of the people. Still, people are resourceful, and when inflation starts to bite they respond by moving the economy they live by underground. Basically they flip a well deserved bird to government. It never ceases to amaze me how the left can posit the economic tropes that they do without once pausing to understand the laws that govern "simple" commerce. I put simple in quotes, because although each of use has relatively simple ambitions when we enter the market for whatever good or service we require there is nothing simple about how in aggregate these ambitions mergre to become markets, which in turn move entire societies in generally predictable directions. This is not greed, I know no one that I would class as greedy, this is self interest. I wish just once some jerk leftist would acknowledge that without self-interest we, humans, are nothing. Even our souls are powered by self interest, which comes in the form of redemption.
Jun '10
Re: More Bad News is Coming. This Time it's (Not) Different.
Mr. Simon, I grant that you have an intimate knowledge of the Asian Markets that I do not have, but in general I am not optomistic as to the long term prospects for Asia if the US economy remains in the doldrums. My guess is that the Communist Chinese are living in terror right now given their need to power their economy, which gets most of its impetus from America. The Indians are likely in the same situation as the Chinese, both contries have expanding wealthy urban societies built on a hinterland populated by hundreds of millions of underfed, under-educated, over-worked peasants given to planting, fertilizing, and harvesting their crops by hand. You can say what you want about shiny Shanghai but this does not make for much long term stability. As for Taipei, it is so intimately tied to both China and India that if that elephant rolls, which it is likely to do, the mouse that is Taipei gets squashed. Like it or not the reality is that the economic engine of the world is still America.
May '10
Re: More Bad News is Coming. This Time it's (Not) Different.
Funny Rob, when you said "could this be a good thing" I took that to mean "will there be some great generational lesson learned from this." More than a market collapse I want Americans learning from all of this. I think a solid generational lesson, about all that is wrong on the left, is being learned very rapidly. One minute I worry that we might have to suffer through some major crisis any day. Then I worry that conservatives are going to take over congress and fix enough of the economy that a genuine learning moment isn't apparent, a la Reagan. Maybe it's best President Obama is mired in his own mess until Mitch Daniels or the like come along and demonstrate the sanity, reliability, critical thinking, and economic sense of Conservatism. I don't wish ill on our country for one day, but I want a long term lesson learned before we go off into never ending socialist abyss. Or are we already too far gone, able to only stem growth in a land where "cuts" are really just reductions in growth?
Jun '10
Re: More Bad News is Coming. This Time it's (Not) Different.
Cas, with due respect your wrong.
Do you know what trade flows are? Do you know where they are growing? Trade between China and India is growing nearly 30% per year. Intra-asia trade grew nearly 20% since 2008.
Your argument is based on what you want think.
America was in recession for 2008/2009 and did we note China collapsing, Taipei rolling downhill, South Korea getting hard hit? These are the three Asian nations most dependent on the US based on actual numbers.
We saw none of what you think. What we saw were Asian nations diversify and expand more quickly into new markets, which was already underway.
You have no facts to back you up. What you have a desire to see America as important, and in turn see yourself an American as important. That is not the case.
American is a debtor nation, dependent on foreign oil, foreign cash, and with a government that has become a "rent seeker", elected by people who think they have a right to a lifestyle.
Not the case. Is America important in the world stage, yes. Is it the show stopper it once was. No, not by a long shot.