How & when does the recession end?

“Economic collapse” suicides have already started. Mild economic riots of a million or so people in Russia and France took place the past week. This is just the start- much worse is coming and in the US too.

Here in its entirety is my earlier post at: http://www.sciforums.com/showpost.php?p=2097974&postcount=127

“Individually, the psychology is much more likely to result in suicides than murders. It takes a group of hungry people and a few rumors as to where food and guns are to storm the Bastille, killing all who try to stop them. Now days, Americans already have the guns. When many are hungry they will use them as a mob. Some years ago, I even told how they would quickly learn to block roads, especially bridges, with burning cars to delay the police arrivals etc.”

I can’t find the post made “years ago” (referred to in this post 127). One made about a year ago, in its entirety, is:

“If I am right about the economic conditions coming before Oct 2012, there will be much worse things concerning you than a Republican in the white house. Things like keeping some hungry armed mod from looting your house as they think there are cans of food in the basement etc. The coming depression is going to be very ugly.”
( http://www.sciforums.com/showpost.php?p=1750577&postcount=86 )

I still give the same answer to the question: “Where will US unemployed and hungry go (with their guns)?” which is: Into the streets and suburban neighborhoods where they think food is stored in basements.

Probably now, replying posts will only say:
“No way! – It will never happen in the USA.”

But no longer call me “insane” or an “idiot” as Read Only did here:

From his post at: http://www.sciforums.com/showpost.php?p=2097946&postcount=120 and see his at:
http://www.sciforums.com/showpost.php?p=2098033&postcount=134

The immediately preceding post (133) is interesting and a correct prediction in a perverse sense. Here it is in its entirety:

Yes, that was the greatest January bounce DOWN ever for the DOW.

Now that the depression is closer, I can foresee its form more clearly – GDP dropping >10%/year with run-a-way inflation (due to the trillions of printing press dollars that tried to turn the recession around). My “prior to October 2012” and “triggered by a run on the dollar” predictions made some years ago remain unchanged. Again I do not wish for any of this, hope I am wrong, and have tried to offer ways out (but no one is listening as far AFAIK, but while baned for three days, I did send several dozen Congress men copies and have posted these ideas as comments several times in the The Economists, Forbes, letters to Obama, Krugman, etc. so perhaps someone will get the ideas to Obama’s economic team for consideration. Rumor has it that he is going to announce something entirely new this week, now that the bad bank idea seems to be dying as quickly as it was born.)

Prior to Congress voting even the first time on Paulson's TARP I explained why it would fail and suggested a cheaper better and easier to implement plan (does not require setting any value on the toxic assets, etc.). See it at:
http://www.sciforums.com/showpost.php?p=2025940&postcount=1

And three pages of comments & questions with my replies explaining more details.

See my "Red dollar" plan and 21 relies discussing it at:
http://www.sciforums.com/showpost.php?p=2056746&postcount=1

But one of the letters sent to Obama at:
http://www.sciforums.com/showpost.php?p=2095292&postcount=11
Gives it (and its seven advantages) in a quick summary.

 

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For my POV / predictions by someone else (an investment news/advice service) see:

http://www.moneymorning.com/2009/01/28/us-treasury-bubble/
A long, fact*-filled article but these two quotes about sum it up:


"... If it appears as if we’re in a vicious cycle that’s spinning out of control, it’s because we are. Boosting debt even as we print more money will have a devastating effect on the U.S. dollar. ..."

"... Since nothing the Treasury or Fed has done has alleviated the credit crisis in any meaningful way, and the economy is threatening to reprise the Great Depression, the newly installed Barack Obama administration is being forced to formulate another “new” stimulus plan. ..." {I hope the new plan is at least as promissing as mine, listed at the end of the OP.}

------
*Including following facts:

"... According to a Bloomberg analysis incorporating data from the Treasury Department and Federal Deposit Insurance Corp. (FDIC) and interviews with regulatory officials and others:

•$300 billion has been spent on Fannie Mae, Freddie Mac (FRE), American International Group Inc. (AIG) and Bear Stearns Cos. (now part of JP Morgan Chase & Co. (JPM).
•$300 billion on Citigroup.
•$700 billion on TARP - though not on what TARP was intended for.
•$800 billion on Fed-directed asset-backed debt-purchase programs.
•$1.4 trillion on FDIC bank guarantees.
•$2.3 trillion on Fed commercial paper programs.
•And $2.2 trillion on other Fed lending and government commitments.

That totals a little bit more than $8.5 trillion. ..."
{But is somewhat distored as "guarantees," loans etc. are not spent, total loss, money, yet}

 

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With the US following the Japanese model of the 1990's I dont see any end in sight.

Sooner or later politicians must realize they either have to dismantle the global military empire or print their way out.

Just like the British empire winding down from the heights of Victorian power.

 

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I gotta admit - I'd rather "work for food"(real value), than this worthless paper money(and it will all be worthless).

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http://www.kitco.com/ind/Gerbino/jan272009.html

I want everyone to relax. You are being bombarded with numerous facts and figures that look pretty bad, but the facts are being interpreted with emotion and hype and hysteria. The predictive value of mis-emotion is usually chaos. There will be no Great Depression.

First, let’s review what happened in the last few years in simple terms:

1. The Federal Reserve manipulated interest rates below the real market rate for over a decade, creating dislocations in the normal markets.

2. Low interest rates forced retirees and savers to abandon safe investments and buy into all sorts of higher risk investments, including the stock market. (As a grandmother of one of my employees said many years ago, “I can’t afford to live on 3% interest when I use to get 6%”…a sad but true story).

3. Easy money created speculation and an artificial business expansion as the good times rolled.

4. The dot.com bubble was the first sign of trouble from the recent easy money regime. The solution: more easy money to bail out Wall Street and avert further panic.

5. Commercial banks are allowed to become investment banks as Glass-Steagall is repealed. Commercial banks can now invest and speculate globally outside of their normal areas of expertise.

6. Real estate booms, as new and creative ways to lend money appeared. Lending became a no brainer as loan packages could be sold away to another institution covered by a new insurance scheme (Credit Default Swaps). Therefore credit worthiness of customers became less important. Lenders became undisciplined. Who cared if the loan defaulted if the loan was “insured?”

7. Other exotic derivatives were concocted by the investment banks and commercial banks to make more fees and profits. Tried and true centuries old banking policies 101 were thrown out the window

8. The government pressured financial institutions to lend money for homes to millions of borrowers who were not only unqualified but high credit risks.

9. The excessive and low interest rate loans for homes fueled an even more over-heated and extended housing boom and housing price inflation – creating a housing bubble.

10. The over-the-counter derivative market went beyond $300 trillion and no one cared. $400 trillion – no problem. $500 trillion – no big deal.

11. Wall Street and the establishment press and authorities did not pay attention to the hard money newsletter writers who were screaming bloody murder about derivatives: Schultz, Skousen, Dines, Wood, Daughty, Sinclair, Russell, Mauldin, Casey, Katz, Turk, Taylor, Adens, Coffins, Lundin, Morgan, Ruff, Roulston, Grandich, Nadler, Bonner, Day and others.

12. Complacency was everywhere. The Dow was over 14,000. Wall Street and Main Street thought the economy was “fine,” paper money was “working” and debt levels were high but no big deal, the Fed was in control. So far so good.

13. The banking industry usually gets hit hard when the economy gets hit hard. But this time the major commercial banks were also speculating along with the investment banks.

14. Huge losses from leveraging and speculating in stock and bond markets as well as derivatives start showing up at the largest commercial and investment banks in the U.S. and abroad.

15. A national nightmare now is confronting Washington.

16. Global stock markets collapse and credit markets seize up everywhere. Many foreign countries are as bad off as the U.S.

The financial pyramid was brought on by easy money. We are now faced with global investment losses and economic numbers that are at dangerous levels, and foretell a drastic future.

But the future will be the exact opposite to what Wall Street and Main Street think will happen.

Why There Will be No Depression

* The Fed, U.S. Treasury and foreign central banks will print their way out of the problem. A bad solution to a bad problem.

* The U.S. is in a recession. This is the natural reaction following the huge economic paper money binge that has taken place the last 15 years. The major banks, insurance companies and investment houses are in real trouble. The pain is too much and the government will print the money to bail these institutions out.

* 3 million people are losing their homes. They should never have bought the homes in the first place. These people will go back to being renters. The homes are still there, they have economic value.

* Investment bankers that busted Lehman, Bear Stearns and Merrill and lost their jobs will form hedge funds and buy many of these homes for 30 cents on the dollar. Then they will sell them in a few years for 50 cents on the dollar to people and other funds. Some people will move into a home and get a good bargain. Funds that buy these 50 cents on the dollar homes will sell them in 2-3 years for 70 cents on the dollar. Life goes on.

* Banks and investment houses that lost money on these homes are already being bailed out. The losses are being covered by the printing press or debt from Washington

* Unemployment: This is bad. In the U.S. we are at 7.2% and going higher. We are not at 10.8% (’82 recession) or 9% (‘74-’75 recession) and may not even get to these levels. Sophisticated investors say, “Unemployment is being low-balled by the government, it’s much higher”. I agree. But check out Shadow Government Statistics’ website run by brilliant economist John Williams (who should be a White House Adviser). This shows that the “shadow or real” unemployment number could actually be 17%. Sounds like a disaster. But back in 1994, the “shadow” unemployment number was 15%. So what happened in 1994? GDP was up 6.2%. The S&P 500 the following year was up 34%. There was no Depression from this horrendous unemployment. Official U.S. unemployment hit an 8-year high in 1992 at 7.8%. The solution to this was a 14% increase in the money supply (M1) and the stock market went up 6%. Do not panic because of unemployment.

* There are still 144 million people getting paychecks. This means the economy is not dead yet. They will either spend the money or save some of it. When they save it, sooner or later the banks will lend to someone to buy or build or invest in something.

* The average wage earner in the U.S. makes $47,000 a year. Multiply this by a possible 12% official unemployment rate which would be considered a disaster in this country, and you have the following: 18 million people out of work. Using $47,000 per person, this would equal about $850 billion a year of lost income and GDP. That would be a huge hit to the economy.

* But wait a minute. Unemployment insurance for a $47,000 worker is about $400 a week. That reduces the $850 billion considerably. Also, the Government will simply print more money to handle this. They could print half the amount of the possible lost GDP - $425 billion. Using Washington logic, this would effectively handle half the consequences of 18 million unemployed people. Then it would be like there were only 6% unemployed. Printing or borrowing $425 billion would not be difficult compared to what they are already doing.

* The great recessions of 1974-5 and 1981-82 resulted in the following: GDP increasing on average 15% within 36 months, the stock market booming the following year, and unemployment going down dramatically the following two years. Why? Because they increased the money supply and “bailed out” everyone with paper money.

* The 74-75 recession had an 85% (that is eighty five % and not a typo) decrease in the price of the average NYSE stock from the previous high in 1973 and the Dow was down 41%. In 1982, the Dow Jones dropped 34% from its previous high. Both these market wipe outs were handled by the money supply being increased by 12.6% in 18 months in 74-75 and 14% in the 81-82 period.

* The money supply increases in 2009 and 2010 could reach 50%!

* So far, with bailouts, guarantees, the stimulus packages, $2-3 trillion of new money is already a foregone conclusion. This will equal a 25-35% increase in the money supply. The U.S. government will print as much money as is needed. They have panicked and are now going overboard. It is obvious that whatever happened in the past is going to happen again.

* This means that we are not going to have a Depression but a huge paper money induced boom. It will be artificial and inflationary. It is all in the works right now.

* Finally, if we were going to have a so-called Depression, why is copper above $1.50? Copper for delivery in December of 2009 and 2010 is above $1.60! You have heard the expression Dr. Copper. It is because as this commodity goes – goes the industrial world. It has always been a great economic indicator. Copper prices would be at 60 cents if a Depression was coming. Copper above $1.50 is saying, despite all the horrendous layoffs and headlines, that there is a lot of life left in the global economic patient.

The financial system will be temporarily “saved” by paper money but working people and savers will be eventually crushed by this currency depreciation. Capitalism and free enterprise will get another bad rap when inflation rips through the system. Honest capitalism and classic free enterprise does not include paper money….the cause of all modern day economic problems.

What to Do

* Expect Inflation not a Depression.
* Expect a boom to start sooner than later.
* Know the past and respect logic, not headlines.

Am I telling you all is OK? No. I am telling you things are as bad as you think. But the authorities are using this crisis to bail out the system with paper money and because of that, the economy will once again go into a so-called boom that will be very inflationary. If you think a Depression is coming you will have your assets in the wrong place at the wrong time.

What Happens Next

* The economy stagnates for another 9-12 months then turns around.
* Unemployment goes down with the induced economic upturn.
* The stock market rallies but never gets above its old highs.
* Inflation comes back with a vengeance.
* Commodities resume their bull market and turn the deflationistas into inflation believers.
* Interest rates will go up with inflation and probably to much higher levels.
* The stock market will go down when interest rates start going up.
* Long term bonds will become the worst investment in the world.
* The dollar will go down but so will other currencies as many world governments print their way out of their economic woes as well.
* Gold will go to new highs.
* Housing and real estate will recover but higher interest rates will slow this sector down considerably in the future.
* The gold and silver mining stocks will become the best performing sector on Wall Street for many years.
* The price of oil will go up due to inflation and global production declines of 5-8% per year from most of the largest oil fields in the world.
* The U.S. “recovery” will help the world recover and almost all countries will have another artificial economic expansion from all the paper money they have printed as well.
* China and India will create more shortages of basic materials and commodities by the sheer size of the populations and their economic and industrial progress.
* The U.S. will have even more economic dislocations from all the new paper money and debt taken on by Washington.
* The country gets set up for the next horrible recession some time in about 3-4 years.

A Depression is impossible in the old sense of the word. If one describes a depression as the loss of purchasing power of the wage earner (a correct definition), then we have been in one for the past 50 years since wages have not kept up with the cost of living. But since everyone is thinking breadlines and the 1930’s, I will stay with that picture for our definition.
It is not going to happen.

 

Whatever, Every pyramid scheme ends sometime. Just hope we can have something better after.

 

{Billy T insert comments inside these curly brackets}

{Almost all still basically true, including parts not reproduced, BUT this approximately true part is missleading:

"...buy many of these homes for 30 cents on the dollar. Then they will sell them in a few years for 50 cents on the dollar to people and other funds. Some people will move into a home and get a good bargain. Funds that buy these 50 cents on the dollar homes will sell them in 2-3 years for 70 cents on the dollar. ..."

I.e. "a few years" + "2-3 years" = about 5 or 6 years. What do you think 70 cents on the dollar will be worth (purchasing power) in 5 or 6 years when 1 to 2 trillion new printing press dollar have come into existance during EACH of those 5 or 6 years AND China and the oil exporters have dumped about 10 trillion of Treasury bonds in a run to get out of dollars?

Answer, in purchasing power terms: That original 30 cents, now a nominal 70 cents will be worth abpout 3 cents in purchasing power. Recall in nominal terms, there was a "boom" in defeated, post-war, very-depressed, Germany (A wheel barrel of Marks to buy a pack of cigarettees.)

SUMMARY: Large nominal gains and huge loss of purchasing power will not prevent depression. (But that may make the IRS happy about the "capital gains" taxes you will pay.)

... that is enough - you get my point without me continuing to add comments to your list.

--------------
*I prefer GDP dropping by at least 10% annually as definition of depression.

 

Ok, but even here your same critique applies, in that the nominal GDP numbers will rise with the devaluation of the dollar...as with stock prices. You know very well the government's official inflation figures are distorted at best.

I also disagree with gold merely holding its buying power during hyperinflation.
This is not what happened during the last big inflationary period of the late 70s, when gold soared in real value.

 

Recessions and depressions end when they become boring. People won't postpone plans for growing their businesses and personal spending forever.

For a decade I was expecting a depression sometime between 2008 and 2028 but I expected a collapse in the dollar to be the first phase. Because it did not happen like that I failed to short the market as I always planned to do.

I am happy about the way this recession/depression is unfolding because it gives the world some time to work on some less important financial problems like bubble formation, lack of regulation, bad corporate management and incentives towards short term thinking prior to the world facing the larger problem unsustainable currency exchange rates and unsustainable global trading patterns.

All the developed nations have overly inflated currencies and all the underdeveloped nations have under-priced currencies. This is because of risk avoidance. Nobody has confidence in the stability of underdeveloped nations. But these exchange rates make outsourcing by developed nations correct business decisions. Only inefficiency by businesses has prevented the jobs from leaving the developed world at a much faster rate than they have.

Trading debt for consumer goods on global trade level is no more sustainable than it is on the personal level.

The developed nations might as well replace taxes with money creation until the exchange rates no longer make it profitable for people with university degrees to leave the developing world to become a taxi drivers in the USA.

I don't think this is the beginning of the larger depression. I think we bounce out of this in 2 years only to face the larger depression about 10 years from now if nothing is done about the problem with exchange rates. The great powers should back a UN currency pegged to a group of commodities, gold, oil, international labor rates, and a group of currencies. The dollar should be about 15% of the basis for the UN currency. OPEC should price in this new currency. As confidence grows in the new currency the developed world currencies would slowly come down to sustainable levels against developing world currencies. The great powers, allied financial institutions and the UN should manipulate the currency markets to insure a smooth and slow decent of developed world currencies to their sustainable levels.

 

That's about $23@hr.

The median wage is well under $20@hr.

Methinks you are talking about household income. One of the big differences now is the norm of a two-job household - or more. That makes a lot of differences in the reaction to unemployment, say - on the one hand, less starvation and no mobs. On the other hand, a higher percentage of households directly affected.

There are other differences between now and the past of similar circumstances.

There are large urban areas with basically no public transportation, these days.

Another difference is the loss of manufacturing capability in the US - that will take time, years, to reverse. Things like shoes could get really expensive for a while, when the dollar drops.

And a third is health care, which in the US is directly tied to one's job, and difficult to obtain otherwise. That includes things like eyeglasses.

 

I do not think there is even anything one could call "nominal GDP." AFAIK, the GDP is ALWAYS already inflation adusted - trying to measure the production and services of a country not the nominal currency amounts paid for them. Anyway that was what I was speaking of in my definition of deflation. >10% less cars made, les haircuts given etc. Nothing to do with the price of them, which could be rapidly increasing. I agree that the CPI etc. is not valid for all persons of companies and that there are a lot of adjustments in it that are qualitative judgments. For example, the price of a tire for a car may be 20 times more now than when Henry Ford was putting them on a model T, but they last 30 times longer and do not go flat every few months. Thus even though they cost 20 more each now adds less to the GDP than back in Henry's time as they "quality adjustment" more than cancels out he price increase. Computers also how this extreme domination of the quality correction adjustment.

Not only is the quality changing but the mix of products that we buy is also and that provides opportunity for "judgment calls" This is true not only for the nation of consumers but even more so for each consumer. What I buy now that I older is quite different that what I spent my money on when younger (women and drinks etc.) Thus it is impossible for the CPI to reflect your individual inflation experience. Despite all this, I think it is about as good as one can do in trying -I.e. I do not think the government intentionally under states it to save on the social security payments etc. as many do. (They may later when things get really rough - it is always a possibility, but we old timers are increasing in numbers and vote more than the young do (at least pre-Obama)

I agree that gold may at times have big increase in purchasing power, but it also has big drops in purchasing power. It is very volatile as not much real industrial demand. Silver would be more constant in purchasing power, and base metals more so on average, but even they can double or be cut in half in their purchasing power in less than a year - Iron ore nearly did both recently and you don't get more "base metal" than that.

I own some gold mining stocks*, but never touch gold as it is just too subject to fear and greed fluctuation for me to make good guesses as to what its price will do. Also there is so much Au already above ground that even holding stock in hedged producers is quite risky:** When "push comes to shove" some of the hard pressed governments (perhaps the USA) will ignore the agree limits on how much they can sell on the open market. I hope to sell my gold producer stocks before that happens. It may seem crazy to say now, but I believe gold could sell for $100/oz (in inflation corrected terms) if governments do dump their hoards.

---------
*Many of them have hedged away much of the risk associated with price of gold variations.

**I can afford to take big risks, and that makes the game more interesting.

TO NIRKAR:
Many valid, well stated points in your post 10. I hope your last paragraph is correct. I too missed the shorting opportunity for the same reason (expected run on the dollar, not credit freeze, to trigger the collapse. I have never gone short -do not like the open ended loss potential.) I was lucky as did at least get all my main 403b retirement assets 100% into TIAA/CREF's inflation protected bond funds (manily TIPS) about 1.5 years ago - before the price of stocks fell ~50%. I did not foresee that fall coming -only the flood of inflation printing press money would make. (I knew that flood was then only way the US could cope with the doubling of the debt GWB made - no way one can "grow out of it wrt to GDP" when it doubles in terms of one POTUS.)

 

When the country is pure socialist or communist.

 

Good post.

 

This guy's got an interesting take. http://cluborlov.blogspot.com/search?updated-max=2009-01-10T17:15:00-05:00&max-results=7

And he writes entertainingly.

 

I agree and his guest, Brother Frank, posted a new creed that rings true.

Please genuflect, direct your gaze heavenward, (or to a paper dollar if you still have any) and repeat after Brother Frank:

"I believe in worldwide Ponzi schemes and universal gullibility. I believe that reckless lending can be cured by reckless borrowing and that fraudulent borrowing can be healed by fraudulent lending. I believe that a housing bubble fueled by loose credit can be corrected by easing credit. I believe that each trillion of hallucinated dollars that disappears in a puff of Wall Street smoke then always reappears magically from behind a Treasury Department mirror.

I believe in America's almighty financial geniuses and monetary officials, who destroy wealth indiscriminately and indefinitely, and whose kingdom shall have no end. It is divine justice that those who cause financial catastrophes are rewarded with public money, while innocent bystanders are punished in their stead. I believe that central banks can print all the money anyone will ever need. I believe that if one stimulus package does not work, the next one surely will.

I believe in the redeeming power of financial complexity. I believe that hedge funds and sovereign wealth funds are righteous to enter into incomprehensible contracts having convoluted ownership and no inherent value. And I believe that opaque, secretive companies which pretend to insure those investments are offering a valuable service, even if this requires the use of public money. ..."

There was a little more of Brother Frank's creed at:
http://cluborlov.blogspot.com/2009/01/credo-in.html
but I "saw the light" and error of my past "black cloud" beliefs with just this part. All will be well, if all just keep the faith! Amem, Brother Frank.

 

lol

 

"... Feb. 2 Manufacturing in the U.S. shrank again last month and consumer spending recorded an unprecedented sixth monthly decline in December, offering no sign the economy has hit bottom.

The Institute for Supply Management’s factory index was 35.6 in January; readings less than 50 signal a contraction and the measure has been below that level since February 2008. ... Factories are likely to cut back further as the slump in household purchases leaves companies with stockpiles of unsold goods. General Motors Corp. plans to slash production at 15 plants through June in an effort to work off the surplus inventory, and Chrysler LLC, Ford Motor Co. and Toyota Motor Corp. are also cutting back.

“The numbers are still terribly weak,” said James O’Sullivan, senior economist at UBS Securities LLC in Stamford, Connecticut. “Manufacturing is still contracting rapidly” while consumer spending is unlikely to recover “for a while,” he said. ..."

FROM: http://www.bloomberg.com/apps/news?pid=20601087&sid=adkx4ieJk778&refer=home

Clearly economy is in a downward spiral now with more than half a million jobs lost in each of the last three months (and slightly accelerating in that loss in Jan09 > in Dec08 > in Nov08). Unemployment claims are at historic high, etc. Who will buy the surplus of goods already produced? If they are slow to sell, more workers must be laid off etc. - a vicious cycle. Macy's canning 7000 workers today. etc.

 

Even if that happened the gold reserves of the US government is tiny compared to earlier decades.

According to wikipedia Fort Knox holds only 134 billion dollars worth of gold at $913 per ounce. Thats not enough to suppress a run up on gold...as the dollar runs down.

 

That gold is almost entirely owned by US, but there is very much more stored in a deep vault in lower Manhattan Island, which is mainly owned by foreign governments - search again. As I recall US shair of gold there is about the same as at Fort Knox, but most is foreign owned. The amount of AU above ground is enormous, especially if compared to industrial needs. There is also a huge amount in India and China, even if only counting what is worn by ladies in India. (No one knows how much is hidden in many modest amounts in Asian countries.)