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Thursday, August 02, 2012

Too soon

It is very slowly becoming apparent to everyone but the mainstream economists that the USA has been in a depression since 2008:
The Great Depression that Federal Reserve Chairman Ben Bernanke claims to have averted has been part of the background radiation of our economy since at least 2008.

It’s just that like radiation — it’s invisible.

We’ve called it the recovery, the jobless recovery, the slogging recovery and more recently the fading recovery. We’ve measured modest growth in our nation’s gross domestic product to record that our so-called Great Recession ended in June 2009. And now we are saying that if this disappointing growth suddenly disappears, as currently feared, we will be in a new recession.

There is nothing more depressing than hearing about a new recession when you haven’t fully recovered from the last one. I take heart in suspecting that in a still-distant future, historians will look back with clarity and call this whole rotten period a depression.
Which, of course, is very close to what I have been repeatedly saying since early 2009, as The Return of the Great Depression was published on October 29, 2009, the 70th anniversary of the Black Tuesday crash on Wall Street. And some of you may recall the following failed economic prediction for 2011, which is looking at least partially correct for 2012.

One U.S. state and at least three major cities (100k population plus) will attempt to file for bankruptcy or federal bailout. (It's unclear if states can file for bankruptcy and public employee unions will oppose the city filings.)
- December 31, 2010

"San Bernardino [pop. 210,000] on Wednesday became the third California city to declare insolvency, joining Stockton [pop. 291,707] and Mammoth Lakes [pop. 8,234] after officials say they filed an emergency petition for Chapter 9 bankruptcy."
- August 1, 2012

Now, you are certainly welcome to dismiss my economic predictions due to my inability to pinpoint the precise timing with which these events will occur. But even in light of my temporal inaccuracy, I think it is worthwhile pointing out that these predictions are completely contrary to those made by the vast majority of economists and economic observers, many of whom are still talking about the ongoing recovery in the fourth year of the Great Depression 2.0. This failure to note the readily apparent is not unprecedented, as Megan McCardle noted in 2009.
I don't want to push the Great Depression analogy too far, but what's surprising when you go back to primary sources from 1930 is the optimism. I don't mean to imply that everyone thinks things are just swell. But while you know that they are facing the worst economic decade of the twentieth century, they don't. They're expecting something more like the recession that followed World War I.
What was the big difference between the recovery from the 1920-21 recession and the non-recovery from the 1929-30 depression? Then, as now, the federal government decided to fight the economic contraction with economic stimulus. The reason that the Great Depression 2.0 will be much bigger and last much longer than its predecessor is because the debt overhang is larger and the stimulus attempts have not only been larger, but are global in their scope.

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56 Comments:

Anonymous VryeDenker August 02, 2012 5:28 AM  

Expect the media to be full of people proclaiming "no one could have predicted it".

Anonymous DT August 02, 2012 5:43 AM  

The reason that the Great Depression 2.0 will be much bigger and last much longer than its predecessor is because the debt overhang is larger and the stimulus attempts have not only been larger, but are global in their scope.

That, and the idiots in charge honestly believe that if at first government intervention doesn't succeed, try, try again.

Expect more "stimulus" and more government make work programs. Right up until the point that they can't borrow or print any more money. Like a moth to a flame, they literally cannot stop themselves.

Anonymous Dr. Idle Spectator, Ethiopean Economist August 02, 2012 5:48 AM  

Cool econostory, bro.

You should write a book on it or something.

Anonymous Dr. Idle Spectator, Ethiopean Economist August 02, 2012 6:19 AM  

Personally, I am all about studying rice prices right now.

The economic implications of illegal arms trafficking and it's effect on the negative population density of some Eritrean bast..consumers is probably next on the agenda.

Anonymous Roundtine August 02, 2012 7:27 AM  

The doomsayers are almost always wrong in their timing, even with subprime/housing bubble, most calls were for a 2006 recession. I remember my mom reading The Great Depression of 1990 way back when. Whoops. Prechter missed as well, as did a lot of others using cycles. Even now, with social mood working in favor of the bears, the government can still levitate things.

There's also a great desire for it to go well. Hardly anyone owned stocks in America back in the 1920s. Today, everyone is reliant on the stock market, even people with government pensions that aren't invested in the market (since a crash would kill revenues and lead to pension cuts). Most people I know may not be buying, but they haven't dumped their stocks. Add government and central banks and that's a lot of people and power fighting to prop up the market.

Blogger Galt-in-Da-Box August 02, 2012 7:47 AM  

You could very well expect that, Vox.
If Paul or COMM-ney gets elected, the Jew bankstaz will start kiking the Prime again, & the economy will tank.
It's a matter of track record.

Anonymous LES August 02, 2012 8:03 AM  

At the Conference to Honor Milton Friedman, November 8, 2002,
Governor Ben S. Bernanke said,

“Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again.”

Didn’t he say the Fed caused the Great Depession through contracting the money supply?

Same speech: “As everyone here knows, in their Monetary History Friedman and Schwartz made the case that the economic collapse of 1929-33 was the product of the nation's monetary mechanism gone wrong. Contradicting the received wisdom at the time that they wrote, which held that money was a passive player in the events of the 1930s, Friedman and Schwartz argued that "the contraction is in fact a tragic testimonial to the importance of monetary forces.”

Blogger Joshua_D August 02, 2012 8:17 AM  

Time. Why do people have such difficulty factoring time into their thought processes? Of course it's difficult to pinpoint the timing of something in a complex system. We've know this, of course, since we've know that it takes around nine months for a baby to develop. AROUND nine months. Complicate the already complex system by 7 billion people and surely we can be graceful enough to allow some give and take on the whole "timing" issue.

Anyway, I think most of your predictions will be correct in time.

Anonymous Rantor August 02, 2012 8:17 AM  

If you look at Shadowstats.com and John Williams GDP numbers, you'll see that by his calculation we have only had one or two quarters of GDP growth since 2001.

Part of why Prechter says we are in a depression. The market is being propped up by the government and the unemployed supported by massive increases in welfare expenditures.

So have we had 10 years of Japan-like inflation to hide the decline? Can we maintain 10 more or is the collapse coming soon?

Anonymous RedJack August 02, 2012 8:28 AM  

We have had 30 years of inflation if you look at wages and buying power.

The only question is if we will recover before total collapse.

Anonymous Rollory August 02, 2012 8:30 AM  

I really would like to be there when it gets pounded through George W. Bush's incredibly thick skull that no, he did not avert a depression, and no, he has nothing to pat himself on the back about in this regard.

Anonymous Salt August 02, 2012 8:46 AM  

It's Russian Roulette, banker style, with each cylinder slowly being occupied with a live round. Eventually all cylinders shall be filled and then it gets really fun as they pass it around till one is either forced to actually pull the trigger or does so by simple error.

Blogger Hood August 02, 2012 8:47 AM  

how does the current depression compare to the 1929 depression in magnitude?

Anonymous Ricard Fineman August 02, 2012 8:51 AM  

Good Lord! You mean there are still people who believe that Bush thought he was averting a depression?

Rollory, have you ever wondered why Bush set up the new bankruptcy laws in 2005?

He knew exactly what he was doing. He was averting a disaster for the banks, not the economy.

Blogger The Anti-Gnostic August 02, 2012 9:11 AM  

He was averting a disaster for the banks, not the economy.

Yes. There are two economies, the "real" economy and the "bubble" economy.

The real economy draws down real savings for production and sells for consumption. If you save up money, borrow from family and friends, and buy a Subway franchise, you're participating in the real economy.

The bubble economy depends on fake savings--units of account out of thin air. If you're a government contractor, or a welfare recipient, and you cash one of the government's checks, the government is overdrawn to the tune of $1T a year. But instead of handing you the check back stamped NSF, the banks send it off to the Fed and enters a credit of pure magic-money. The Fed's banking and open market operations are more complex but at bottom it's the same thing: the Fed just credits an account and the new money enters the economy.

The economy is dynamic and fluid, so figuring out which is "real" and which is "bubble" can be difficult. Sometimes it's obvious: student loans, McMansions.

What happened in 2008 was the "bubble" economy became unmarketable. People figured out prices had become so detached from underlying value, so all those people trying to pass off that bundle of MBS's to the greater fool suddenly found themselves holding the bag. That's how the bubble economy works: everything's great, until it isn't.

So long as there's a store of human capital and raw materials, people won't starve. That's why you don't see Icelanders dying in the streets. The only crisis is that bankers and other net consumers are no longer rich.

Anonymous Josh August 02, 2012 9:12 AM  

how does the current depression compare to the 1929 depression in magnitude

Long answer: read the book

Sorry answer: because the duration and magnitude of the current credit boom were larger, the current depression will be larger

Blogger Nate August 02, 2012 9:13 AM  

A solid point that needs to be driven home as often as possible... in 1931... people didn't think they were in a Great Depression either.

in 1934... they still didn't think they were in a Great Depression.

Blogger Nate August 02, 2012 9:14 AM  

"Sorry answer: because the duration and magnitude of the current credit boom were larger, the current depression will be larger"

Also... because the stimulus spending that exacerbated the 1930s depression was smaller... this depression will be even larger because the additional effects of the massive mal-investment.

Anonymous JartStar August 02, 2012 9:24 AM  

As I’ve said before, if we turn into Japan for the next 10-20 years I’ll consider it good news at this point. But now that the Ilk know we are in a depression, and majority have taken care of the basics, there’s not much to do unless you want to turn into a prepper.

Anonymous dh August 02, 2012 9:30 AM  

What are the practical implications of a total default of all US sovereign debt?

Debt service is such a large part of the budget that that the budget would be close to being balanced, along with spending cuts, defense cuts and entitlement changes.

Anonymous Josh August 02, 2012 9:32 AM  

I've read newspaper archives from 1928 to 1936. For most ofthat time, people continued to believe that the next six months was going to have economic growth. They didn't want to face reality.

Anonymous JartStar August 02, 2012 9:48 AM  

I know this is like fingernails on a chalk board to the Ilk, to dream of putting money in US treasuries, (or any investment but MREs, gold, and ammo) but the Fed’s pledge to keep interest rates low until late 2014 means 30 year treasuries funds can be an awesome money makers until then. Take a look at VUSTX

Anonymous The other skeptic August 02, 2012 9:52 AM  

(or any investment but MREs, gold, and ammo)

Isn't the order of importance: Ammo, MREs, [gold]? Oh, and dispensing devices (for the bullets, that is.)

Blogger Nate August 02, 2012 9:58 AM  

"or any investment but MREs, gold, and ammo"

Booze.

Booze is an awesome investment.

Blogger IM2L844 August 02, 2012 10:05 AM  

When it comes to trying to get a handle on the current state of the economy, I regularly check on a small handful of financial bloggers who are generally pragmatic and shy away from any sort of sensational predictions especially long term ones. That is not, in any way, intended as a reflection on this blog or Vox. That would be like comparing apples to...something completely unrelated to apples.

One of my favorites posts a short analysis of various data every day or two and has historically been pragmatically optimistic, but over time I have noticed that her posts have developed an increasingly pessimistic tone. This seems to be a trend across the financial blogosphere and that is what worries me. When various people, who look at the data every day and have traditionally always tried to find the silver lining, simultaneously begin to express comparatively bleak outlooks, it's time to start seriously considering you own personal state of financial preparedness. You don't need to be an economist to figure that one out.

It's not looking good.

Anonymous Vidad August 02, 2012 10:13 AM  

@Nate

Yep. And the ability to make booze brings you minor deity status.

Anonymous Frederick303 August 02, 2012 10:14 AM  

I know about that lady through a relative. She is very discrete about her background I note and so I wont' blow the whistle. In any case her background is in banking, the programming and compliance side. She supposedly really knows her stuff. Good blog worth reading.

Anonymous Josh August 02, 2012 10:15 AM  

Booze is an awesome investment

Except when you drink all of it...

Anonymous Stilicho August 02, 2012 10:16 AM  

Clearly the only possible solution is eine Währung, eine Bank, ein Reich.

Anonymous Stilicho August 02, 2012 10:18 AM  

The reality becomes perfectly clear if you simply subtract the Federal Government's deficit spending from the GDP calculation since 2008.

Anonymous JartStar August 02, 2012 10:26 AM  

As it slowly gets worse I suspect we will see a major war break out. I doubt the US will be engaged from the start as we seem fixated on exhausting ourselves on extended minor conflicts.

Blogger Joshua_D August 02, 2012 10:38 AM  

Josh August 02, 2012 10:15 AM
Booze is an awesome investment

Except when you drink all of it...


That's called capital consumption. You never want to consume all your capital!

Anonymous Orion August 02, 2012 11:14 AM  

On the plus side, there are rumblings that the Fed may intervene to fix things. Fix it real good. So the sheeple are selling off gold and keeping it below $1600. A bargain if you have your debt paid off and funds available.

Anonymous Vidad August 02, 2012 11:38 AM  

@Joshua_D

I've certainly consumed some capital liquors in my day.

Anonymous Vidad August 02, 2012 11:40 AM  

@Vox

Still long gold? I've got a feeling the central bank buying from saver nations is just getting started.

It's hard to figure some of these things out in the strange mish-mash of deflation and inflation that's currently cooking, but I certainly don't trust the rigged stock markets anymore. Just a few daytraders, a bunch of robots and some nervous Boomers in there, so far as I can tell.

Anonymous Joe Doakes August 02, 2012 11:41 AM  

The market crash in 1929 did not cause politicians to admit there was a depression. Prosperity was right around the corner.

It wasn't until 1932 that Roosevelt finally admitted it was a depression.

80 years later, we're right on schedule. History DOES repeat itself. Especially for those who didn't learn from it the first time.
.

Anonymous Rantor August 02, 2012 11:55 AM  

@Vidad,

In Prechter's description of the Deflationary Depression, all stocks, commodities, real estate prices, etc. are forced down against the dollar.

Inflationists say the creation of dollars by Bernanke will force up prices. Deflationists believe that with multiple trillions of debt dragging the system down, you can't simply print enough currency.

We have seen the Bernank prop up the market for 10 years, but the giant sucking sound of debt is only growing and will eventually pull down the house of cards.

@ Hood, how bad is it? Stop lookng at the BLS made up numbers and go to Shadowstats.com... john williams numbers on unemployment (over 20%) and GDP (hasn't grown in years) are closer to the truth than the government bilge.

Anonymous Stilicho August 02, 2012 12:15 PM  

In Prechter's description of the Deflationary Depression, all stocks, commodities, real estate prices, etc. are forced down against the dollar.

Inflationists say the creation of dollars by Bernanke will force up prices. Deflationists believe that with multiple trillions of debt dragging the system down, you can't simply print enough currency.


What Prechter and most deflationists (aside from Mish and Vox) fail to account for is the fact that the dollar can appreciate against other fiat currencies as well as stocks, bonds, etc. in a deflationary collapse and still depreciate against gold. It does not have to happen that way, but I think it likely because if that level of collapse occurs, few will trust the chronically mismanaged and inflated dollar as anything other than a very temporary safe haven. Prechter's had a good run with his Treasury bonds since he published his book. Owners of gold have had a better run and Prechter's bonds are rapidly approaching zero (or even negative) nominal yields.

Anonymous dB August 02, 2012 12:17 PM  

@ IM2L844

i would be curious as to what other blogs you read for econ/financial news? while i read here and ticker guy, more choices is not a bad thing.

Anonymous dB August 02, 2012 12:24 PM  

correction to the above:

"more choices are not a bad thing".

Anonymous Roundtine August 02, 2012 12:28 PM  

This seems to be a trend across the financial blogosphere and that is what worries me. When various people, who look at the data every day and have traditionally always tried to find the silver lining, simultaneously begin to express comparatively bleak outlooks, it's time to start seriously considering you own personal state of financial preparedness.

This is social mood. Nothing factual has changed, they are changing their emotional state and then their opinion to match the herd. What you are seeing is a psychological effect, not an economic one, it is the economics that follows. Your conclusion is still the same, but the difference is important for spotting turns. Importantly, when everyone is negative, you want to be a buyer.

Anonymous Josh August 02, 2012 12:30 PM  

dB,

Zero hedge

Anonymous tungsten August 02, 2012 12:42 PM  

Nate August 02, 2012 9:13 AM A solid point that needs to be driven home as often as possible... in 1931... people didn't think they were in a Great Depression either.

in 1934... they still didn't think they were in a Great Depression.


What year did the average American finally wake up admit they were in a Great Depression? 1936? 1937?

Anonymous Rollory August 02, 2012 1:20 PM  

Mr. Fineman - I tend to take people at their word, rather than going around assuming everyone is lying to me. That mostly also includes politicians. When they are trying to evade articulating a truth, it usually is pretty obvious. When they are straightforwardly saying what they think, that usually is pretty obvious also. I see no reason to believe that Bush is aware of the true consequences of the actions he took.

Anonymous Matt_OKC August 02, 2012 1:43 PM  

Here is a very good summation by David Stockman (Reagan's OMB director) of what our alternatives are and what we can expect from "the Great Margin Call in the Sky."

Anonymous JartStar August 02, 2012 1:44 PM  

This is social mood. Nothing factual has changed, they are changing their emotional state and then their opinion to match the herd. What you are seeing is a psychological effect, not an economic one, it is the economics that follows. Your conclusion is still the same, but the difference is important for spotting turns. Importantly, when everyone is negative, you want to be a buyer.

The herd is manifestly stupid with their money. I know the mantra here is MPAI, but in the case of investments MPAHFI. (Most People Are Huge F*cking Idiots).

DALBAR, a financial services market research firm, recently released the results of their annual Quantitative Analysis of Investor Behavior study. It shows that individual investors have, for much of the past 20 years, significantly trailed market benchmarks, including the S&P 500 index. In 2011, when the S&P 500 had a total return of about 2%, the average equity mutual fund investor lost 5.73%. In 2010, when the S&P 500 rose 9.14%, the average equity investor experienced an annual return of 3.83%. Sometimes, investors have trailed the benchmark by as much as 10%.

The study shows individual investors regularly buy high, sell low, and learn little from their experiences. ...

DALBAR found that investors never stay in the stock market long enough to really qualify as long-term investors. They hold stock mutual funds for an average of 3.27 years. Bond investors and investors who own diversified portfolios are not much steadier. This suggests that individual investors think of themselves as long-term investors, but they actually act like very bad traders.


If you follow your emotions, hunches, timing, investor sentiment, etc., you will lose money.

Blogger Tim August 02, 2012 1:56 PM  

1930s America didn't need to deal with Social Security, Medicare, Medicaid, or Obamacare either.

Blogger Joshua_D August 02, 2012 1:58 PM  

JartStar August 02, 2012 1:44 PM
If you follow your emotions, hunches, timing, investor sentiment, etc., you will lose money.


The "e-trade" or "iTrade" or whatever the latest "You Too Can Be An Investor!" pitch was a scam from the start.

It's like Flip That House or Storage Wars, only we didn't have show about Flip That Dollar back during 80s investment boom. Once everybody is doing it - flipping houses, bidding on storage buildings, or setting up redneck cat-fishing shows - then you're screwed.

People used to work hard, save their money and invest that money in something that would hold value through their lives and into their children's lives, such as a house and land, sometimes metals, guns, or maybe a family business, trade or skill, etc. But today, the Boomers still think they can somehow magically earn 8% interest forever without having to do anything, and ... everyone can earn 8%!

Yes, MPAHFI.

Blogger JACIII August 02, 2012 1:59 PM  

This comment has been removed by the author.

Anonymous Athor Pel August 02, 2012 2:05 PM  

"Rollory August 02, 2012 8:30 AM

I really would like to be there when it gets pounded through George W. Bush's incredibly thick skull that no, he did not avert a depression, and no, he has nothing to pat himself on the back about in this regard."



Do you think the men at that level are actually proud of their "public service"? That would be an altruistic motivation. Figure the odds.

Anonymous Ricard Fineman August 02, 2012 3:05 PM  

I see no reason to believe that Bush is aware of the true consequences of the actions he took.

You didn't answer my question. If you had, you might have found that the reason was right under your nose all the time.

Anonymous E. PERLINE August 02, 2012 3:08 PM  

No matter how educated you are, the educational system fails to teach you how to lend money.

If you are a lender and lend money to a friend or relative you should follow three rules. 1. It should be in a strict legal contract. 3. There should be a strict schedule of repayment. 3. Collateral of equal or greater value should be held by you, to be forfeited if payment isn't made. (If the borrower doesn't have the collateral, no deal.)

Never mind the anti-semitic jokes or the accusations of being venal. When you lend money to a friend you have a good chance of losing your money and friend too. You should also charge interest because your loss of interest is real. Tell the borrower that you must obey your "financial advisor."

If you would rather give the money as a gift, that's another matter.

Blogger tz August 02, 2012 7:26 PM  

The difference between the 1920 and 1930 situation is everyone went bust in 1920 - declared bankruptcy and that was it. In 1930, we went into zombie mode, and had a lost decade (or maybe a bit shorter), much like Japan's lost decade (or two) now.

Pretending a bankrupt institution isn't bankrupt simply makes things worse and eventually it will go bust or be merged or something.

The only reason we had a bottom after FDR's "bank holiday" is because when it was over, all the zombie banks were officially dead, and the remaining marginal and good banks were then expected to survive.

With the fraud of fractional reserves, all banks are technically insolvent, so there is a slow, soft, but continuous run on every bank in a country when this kind of debt overhang happens. Watch Europe - you see it there.

Blogger Markku August 02, 2012 11:44 PM  

If you are a lender and lend money to a friend or relative you should follow three rules. 1. It should be in a strict legal contract. 3. There should be a strict schedule of repayment. 3. Collateral of equal or greater value should be held by you, to be forfeited if payment isn't made. (If the borrower doesn't have the collateral, no deal.)

Unless the sum is small enough that the knowledge that he wasn't your friend after all is worth more than the money you lose. Of some people, I would consider that information to be worth a four-figure sum.

Anonymous Zaphot Beetlebrot (semi-distant cousin to the President of the Galaxy) August 03, 2012 6:09 AM  

What we need now, is that magic button, that turns homing missiles into bowls of petunias...

MPaNnI (are NOT necessarily)

MPaFSW (Flying Sperm Whales)

JPMC is insolvent (let the screaming begin)

Probably the ONE page that provides the problem (explanation) and the solution [if one takes the TIME to read]

Anonymous DonReynolds August 04, 2012 9:59 AM  

A depression is simply a series of recessions separated by disappointing recoveries. Instead of the business cycle sine wave of recurring expansion and contraction, economic activity cascades with a fury, separated by landings or plateaus of near-flat activity. The long sweep of this cascade is much deeper than any simple business cycle would venture, magnifying the misery by touching and infecting many people (middle class) more profoundly than any simple business cycle. During a business cycle contraction, the firm may not hire any new people or lay off a few. During a depression, the firm may completely close, leaving all out of work and the investors without their investment.

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