Alan Sullivan: “When [investors] realize the V could really be a W, they will panic again.”
He’s talking about a V-shaped or W-shaped recession, of course. On the bright side, at least we’d know which president to blame for a “W”-shaped recession. Heh. (We’d better hope we don’t get an “O”-shaped recession, since that would involve the economy actually going back in time, and getting worse in the process!)
But seriously… I, too, am very concerned about the W-shaped, or “double-dip,” recession, that Nouriel Roubini (among others) has been warning about. We were able to avoid Great Depression II last fall because we were blessed to have the expertise of policymakers who had studied the mistakes the government made in the 1920s and 1930s, and knew exactly how to avoid those same mistakes. But now, precisely because of their success, we’re in a totally unprecedented situation, in which those same policymakers must somehow thread the needle between triggering very bad inflation by leaving stimulative fiscal and monetary policy in place too long, and triggering a very bad follow-up recession by cutting off those policies too soon.
Last fall, although the crisis had many historically unique elements, we at least had a history book to generally guide us — even if by “guide us” I mean “push us in the exact opposite direction of the one we historically followed.” This time, there’s no historical precedent at all, because the measures taken to prevent Great Depression II had never been tried before (at anything approaching that scale, anyway), so the steps necessary to walk back from the inflationary brink, while keeping the recovery going, are likewise unprecedented. As such, how the hell can anyone possibly know how to thread that needle? Maybe I’m wrong, and someone with more expertise in these matters can correct me, but it strikes me that this isn’t merely difficult — it seems, to my layman’s understanding, like it’s actually pretty damn close to impossible.
And the “panic” problem is a real one: one false move, in either direction, and either the inflation hawks will PANIC!!!!!! or the double-dip worry-worts will PANIC!!!!!! Or possibly both at the same time, if Group A’s panic triggers Group B’s fears of a reactionary wrong move to appease the initial panickers. Panic always feeds on itself, but this could be a particularly acute case of that, methinks. And severe panic alone could sink the economy again, all by itself, even if our flying-blind policymakers are doing a pretty good, but inevitably not perfect, job.
I’m the first to admit I don’t know much about economics or finance, but I really feel like the mass media and the public at large are far too sanguine about the economic and financial situation. For all the talk of “green shoots” and whatnot, it seems to me that everything still hangs by a pretty thin thread. The global financial system and the global real economy are, of course, mutually dependent, and both are still extraordinarily fragile. Policymakers are giving the economy the equivalent of a massive overdose of adrenaline, and yet the economy’s heart is only just barely starting to beat again. But too much more adrenaline will kill the patient, and so will cutting off the adrenaline too soon. And the longer the patient remains in limbo, the more vulnerable he is to new shocks making things even worse. And yet the media is already planning the homecoming from the hospital. Seems like it’s waaay too early for that. In fact, we might want to keep the funeral home on speed dial, just in case.
Pingback: A serious post about panic. (PANIC!) « Freeze Frames
Is there talk of “green shoots”? Granted, I watch more Fox News than anything else, but people seem pretty certain about this economy right now, at best. Even the dode’s that normally get all excited and shout about buying this stock or that mutual fund say that unless you have money to burn don’t risk your money right now.
More importantly, what’s going on in Afghanistan. Why are we there, and why are we sending more troops, and what do we hope to accomplish? I really don’t get it. There’s something very wrong about this entire fools erand in the middle east (Iraq/Afghanistan).
Maybe I’m wrong in thinking that people are overly optimistic/sanguine. Admittedly I don’t want much cable news. But the overall sense I get, from, I dunno, listening to NPR, I guess, and reading the stuff Drudge links, and looking at random assorted blogs now and then, is that people think the acute stage of the crisis is over, and now it’s just a question of how fast/slow the recovery will be, when jobs will start to come back, etc. It’s like they’re having a debate about whether things will get better in fall of this year or spring of next year, or, horror of horrors, the fall of next year. And meanwhile I’m still sort of wondering if I should be stocking up on canned goods and buying gold.
Well, don’t buy gold, it is significantly over valued at this point. If you were going to move to gold you should have done that at least a year or so ago.
I am nervous that the billions spent on stimulus, to the extent it created jobs at all (itself a dubious prospect), created jobs effectively similar to those in this famous scene from the Holy Grail .
A simple comparison of stimulus 2008-9 vs. stimulus 1930s: in stimulus 1930s (and later, 40s/50s), the government was sponsoring the development of the infrastructure that facilitated the modern economy. To use a convenient example: if there are no modern superhighways, and the government borrows money to build them, those borrowings should pay out in vastly increased commerce that result from such new infrastructure.
In 2008-9, if the government borrows massive amounts of money to repair aging highways, will any additional trucks use those shiny new roads? Will any entreprenuers go into business because I-95 is no longer quite as rough on the shocks of an 18-wheeler? I doubt very much new economic activity results from improved roads – or any other stimulus spending.
The reason to fear a W-shaped recession is that a country as powerful as ours can borrow its way out of any economic difficulty by paying the masses to do jobs conceptually similar to those of the English peasants in the Holy Grail. Once the government stops subsidizing peasants whacking the grass, no transformed economy is left behind, only giant debt.
I fear the US has not transformed its economy as a result of this spending, but rather paid its way out of trouble, which is a giant cost to kick the can down the road.
Of course, no one knows for sure, and I wouldn’t go out on a limb and say disaster is inevitable, but it seems likely enough that anyone with a job and dependents etc ought to be at least be paying a bit of attention to taking proactive steps to prepare, in case the worst plays out.
Oh, and, by “proactive steps to prepare”, I am specifically referring to difficult, but effective, old-fashioned networking, which involves becoming more visible in your community, your trade associations, meeting strangers and doing related vital but difficult things.
This is contrasted of course with new-fangled networking, which is really rather easy and also quite useless, you know the type we’re engaged in right this instant. 🙂
One final comment: the dubious stimulus is just one more example of what a tragedy it is that conservative thought in America has been left to the farcical likes of Sean Hannity and Sarah Palin.
You may recall that the right-wing proposed a payroll tax holiday as an alternative to the govt’s stimulus. The gosplanners in the Obama administration pooh-poohed the idea, as the payroll tax holiday wouldn’t obviously immediately create jobs (getting us up to the middle peak of the W-shaped recession).
In the spirit of my fifth comment above, do you more trust the gosplanners in the Obama Administration to spend into the economy of tomorrow, or the suddenly richer entrepreneurs, figuring it out as they go along? Seems pretty clear to me that something like a payroll tax holiday, while arguably slower, would have had a more positive lasting effect on reinventing America.
But the reasons are far too complex for what passes for right-wing “thought” in America today.
So, while it is slightly uncouth to post four times in a row, those last three caused me to consider a truly apocalyptic scenario, which hadn’t previously occured to me, and I didn’t want to suffer in silence.
First: as regards the recession of 2008-9, there are as many expert opinions as there are experts. One school of thought I personally favor claims that the substantial economic growth of the 80s and 90s, unlike previous expansions, was built on deflation. So while the economic boom of the 50s and 60s was built on transforming the economy, the economic boom of the 80s and 90s was built on the same old economy running more efficiently, making the same goods cheaper via outsourcing to Asia, more sophisticated infrastructure, etc.
While a capitalist economy can grow indefinitely via reinvention, efficiency among existing entities has diminishing returns, for which we may be currently paying the price. For the past 20-30 years, increasing efficiency has put deflation at the core of our economy, but said deflation was hidden by inflation elsewhere and then unprecendentedly loose monetary policy the past 10 years or so.
So now we get the Obama stimulus. As an example, I-95 is going to be a less shitty road. This will probably not facilitate a reinvention of the economy, as it won’t really allow entrepreneurs to compete with giants. What will be the effect of a better I-95?
Well, Wal-Mart’s logisitics costs should go down as reflected in fewer broken axles on their trucks and fewer transportation delays bottlenecked behind broken axles on other cars.
What does Wal-Mart do when its costs go down? Lowers prices.
Thus, there’s a possibility that ObamaDebt could be the final stimulus to push our country over the deflationary cliff we have been careening toward for the last 30 years.
Only with a humongous debt anvil tied to our backs.
Good times.
it seems to me that everything still hangs by a pretty thin thread.
Yes. Last year’s crisis was because everyone had “leveraged” — added debt — so much that for a minute we had forgotten whether or not the assets used to acquire such debt had any actual real-world worth. For all the talk about getting out of the economic slump, I don’t see any real active deleveraging going on, whether from banks or other companies or consumers. Or, for that matter, from the government, who has now made debt an institutionalized fiscal plan.
It’s only a matter of time before the whole thing begins to unravel again.
Our primary problem, as a nation, is debt. Both on a macro and micro scale. From the debt of individuals, to the debt of families, to the debt of companies, to the debt of the government. Add to this increases in “fixed” costs in people’s budgets. Natural gas, heating oil, electricity, water are all up. So too are fuel costs. The rising of fixed costs coupled with high debt levels makes escape from those debts… difficult. We also have a lot of people that are “trapped” because of the housing debacle. Carrying loans that are larger than the asset is now worth. Even in cases where people made “responsible” mortgage decisions. They are able to continue to pay the loan but are trapped where they are cannot refinance and cannot sell. This reduces mobility in the economy and is a bit of a time bomb unless the housing market recovers in a meaningful way.
Anyway, back to debt. Massive federal debts are a serious problem for our economy. And congress seems to be in a Mexican stand off in terms of doing anything about it. The democrats want to cut the Republicans sacred cows and vica versa. We also have health care costs that are bankrupting families. Etc. Etc. Etc.
But, there is one thing Jazz is missing on the infrastructure repairs. If we let the infrastructure crumble we will really be up shit creak. In that sense stimulus to fix stuff that is broken is quite a good idea. Otherwise we will be in the situation Russia is now in, where the Soviet era infrastructure is falling down and in the mean time nobody bothered to build new stuff.
In short, we are in a pretty big mess, and are pretty much damned if we do and damned if we don’t on almost everything.
Brendan, tight rope you speak of is more of a range. But more importantly, the road out of this rescission is a lot shallower grade than the descent into it. In that sense, we are looking at a verizon logo shaped recession, no a v shape or a w shape. Lets just hope it’s not a double verizon logo rescission… Which is what happened to Japan when they cut of stimulus too early.
That is the most insightful I’ve seen our partisan posters pretty much ever. I tend to agree that this country has a massive debt problem, and that we’re going to be stuck with this in one form or another for years, if not decades to come. Let me just add a hearty “thank you” to our years of leadership on both sides who have pretty much ignored this problem for years.
(I WAS going to blame the boomers, but that’s passé and doesn’t address the problem – it’s been our leaders, not the boomers as a whole, who have done this.)
C’mon, what’s not to like about a liquidity-driven credit bubble?
Nothing… Until it pops…
Interestingly, among the mistakes that led to the Great Depression may have been Hoover’s pro-labor policies such as propping up wages and encouraging job-sharing.