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mises
Joined: 05 Nov 2007
Location: retired
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 Posted: Tue Dec 23, 2008 7:21 pm Post subject: IMF warns of Great Depression |
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http://news.yahoo.com/s/afp/20081223/wl_afp/financeeconomyworld
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WASHINGTON (AFP) � The US economy shrank in the third quarter, official data confirmed Tuesday, as the IMF's top economist warned of a second Great Depression offering no respite from relentless gloom ahead of Christmas.
The abrupt 0.5-percent contraction of gross domestic product (GDP) in the world's largest economy was seen as marking the start of a steep downturn for the United States after GPD growth of 2.8 percent in the second quarter.
Stocks on Wall Street rose in early trading however as the contraction had been expected and was unrevised from a previous estimate. The Dow Jones Industrial Average was up 0.54 percent and the Nasdaq rose 0.60 percent.
"This report is largely old news," said John Ryding at RDQ Economics, who forecast fourth-quarter data out next month would be far bleaker.
"Given signs that the recession has deepened in the current quarter, we look for around a 6.0 percent drop in real GDP," he said.
Britain's economy also shrank by 0.6 percent in the three months to September compared to the previous quarter, against a previous estimate of 0.5-percent contraction, the Office for National Statistics said.
Britain and the United States will be in recession if their economies contract again in the fourth quarter, according to the traditional definition of a recession as two consecutive quarters of negative economic growth.
The IMF's top economist, Olivier Blanchard, maintained that governments around the world should boost domestic demand in order to avoid another Great Depression similar to the global downturn that shook the world in the 1930s.
"Consumer and business confidence indexes have never fallen so far since they began. The coming months will be very bad," Blanchard said in an interview with the French newspaper Le Monde.
"It is imperative to stifle this loss of confidence, to restart household consumption, if we want to prevent this recession developing into a Great Depression," he added.
New data out in France offered some relief, showing that household consumption of manufactured goods -- a key growth indicator -- rallied 0.3 percent last month after slumping in October.
"It is a first small Christmas present for the French economy," said Alexander Law, an economist at the Xerfi research centre in Paris.
The European Central Bank also issued some heartening pre-Christmas data showing that the eurozone's current account deficit had narrowed to 6.4 billion euros (9.0 billion dollars) in October from 8.8 billion euros in September.
But elsewhere in Europe the news was more downbeat. Retail sales in Italy went down 0.3 percent in October, Denmark's economy contracted 0.4 percent in the third quarter and the Dutch economy had zero growth, official data showed.
Finland's unemployment rate rose to 6.0 percent in November from 5.8 percent in October and the Polish central bank cut its key lending rate by 75 basis points to 5.00 percent in a bid to fend off a recession.
In Ukraine, thousands of people took to the streets for a union-led protest to demand higher wages and more social protection in the former Soviet republic, which has been hit hard by the global economic crisis.
News of weakening growth also sent the British pound sliding under 1.0550 euros, nearing a record low of 1.0463 reached last week, as dealers bet on more interest rate cuts from the Bank of England and forecast parity with the euro.
The dollar exchange rate also drifted lower against the euro and the yen.
European stocks rose in early afternoon trading after the announcement of US GDP figures, with the FTSE 100 index in London up 0.85 percent, the Frankfurt Dax up 0.73 percent and the CAC 40 in Paris up 0.92 percent.
Asian stocks closed mostly down, with the Hong Kong stock market shedding 2.8 percent and Shanghai sinking 4.55 percent as a smaller-than-expected Chinese interest rate cut failed to boost market sentiment.
Oil prices went up slightly in New York, rising above 40 dollars per barrel.
Energy analysts were also keeping a close eye on a meeting of key world natural gas exporters in Moscow amid fears of a "gas OPEC" similar to the Vienna-based oil cartel that could raise gas prices for Western consumers.
Russian Prime Minister Vladimir Putin said at the forum that the "era of cheap gas" was coming to an end and Venezuelan Energy Minister Rafael Ramirez argued that gas exporters' group should be based on the "same principles" as OPEC. |
Unfortunately, governments can't "stimulate" an economy into growth. It isn't a dick. 8-10 years of terrible investments need to be cleaned out.
My prediction is a 15% contraction in the US economy over the next 2 years (from today). The UK will suffer significantly worse, and Canada not so much. Here's why:
http://market-ticker.denninger.net/uploads/usdebt.serendipityThumb.jpg
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There has been no actual GDP growth for more than ten years; claiming �growth� from increased debt is exactly identical to my going out and borrowing $200,000 on my credit cards, then claiming to be $200,000 richer. I am in fact poorer than when I started since I must not only repay the $200,000 but must also pay interest on it!
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We have replaced productive output (building cars, computers, TV sets, washing machines, etc) with non-productive output (shuffling paper, creating �financial innovation�, etc)
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�Financial innovation� is in fact equity-stripping; if there is 300 basis points of profit available in a bundle of mortgages over the reference rate (e.g. 10 year swaps), that�s all there is. You can allocate who gets the 300 basis points but you cannot increase the amount of actual profit available. Financial �innovation� is in fact a fraud as the only means by which you can obtain more than originally existed is through lying; this is typically accomplished through obfuscation and opacity (e.g. CDOs with 100,000 pages of underlying documentation which are flatly impossible to read due to volume before the purchase decision is made.)
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The fiscal and monetary policies of the previous ten years and more have been insanely inflationist, causing the prices of necessary goods and services, such as homes, education and health care, to skyrocket, while global wage arbitrage has caused real standards of living to decline for 90% of Americans. We must stop this now if we are to have a working middle class in this nation going forward. |
http://market-ticker.denninger.net/archives/684-Den-Of-Liars.html
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In 2000 our GDP was approximately $10 trillion. At 270% of GDP that would place total debt at $27 trillion dollars.
The reported GDP in 2007 was $14 trillion (again, give or take one.) At 360% of GDP this places total debt at approximately $50 trillion dollars.
Assuming a linear appreciation over that seven year period we have a total GDP expansion from 2000-2007 of approximately $2 trillion annually over seven years, or $14 trillion in total of "salutary" GDP expansion over that seven year period.
But - total debt went from $27 trillion to $50 trillion, or an expansion of $23 trillion dollars.
Of course the debt taken on is spent on something, which means it shows up in GDP.
Has the light bulb come on yet?
Let me explain this in very simple terms - again, assuming more-or-less linear expansion of the debt (which is in fact not true since claimed GDP expanded, so the growth in debt rate is actual a derivative function) there was actually a $9 trillion dollar contraction in GDP over the previous eight years, since taken-on-debt that is spent is not actual output expansion any more than I am "improving my wealth" if I go borrow $200,000! In fact I am damaging it because I must not only pay the $200,000 back I must pay interest as well!
That's right folks - we haven't had an expansion in GDP over the last eight years. Congress and its organs of reporting economic "facts" have lied. We have in fact actually seen about a 10% contraction in real GDP from 2000 levels; all of the so-called "expansion" of the Bush Administration has been a lie intended to prevent recognition and working through of the recession that should have happened in 2000.
If you as an American are wondering why it seems you've been taking it in both holes for the last decade, with your real purchasing power decreasing, and have felt "forced" to take out home equity in order to maintain your standard of living (not to mention charging up your plastic until it smokes) now you know the truth. In fact your purchasing power has been destroyed; you have had a real 10% or more deficit in actual buying power .vs. where you were in 2000.
None of this is an accident.
The worse news is that we have taken a 10% contraction in GDP, which was necessary and could not be prevented in 2000, and through the "magic" of debt and compound interest turned it into something far worse. In order to recover equilibrium we will now have to shrink GDP by close to 30%, and if our government doesn't quit dicking around and trying to prevent this contraction from taking place it will be far worse.
How much worse?
Government has already added another $2 trillion to the debt tab which means that they have added more than 10% to the amount of contraction necessary in nine months time, and they are still adding to the bill!
This lunacy must stop. If it does not by mid 2009 we will be so far underwater that we could literally see GDP cut in half, which would be a depression far worse than the 1930s.
To put this in stock market terms - if this lunacy does not stop here and now the S&P 500 will trade at TWO HUNDRED and the DOW will trade under TWO THOUSAND, with the damage lasting for more than a decade. Unemployment will reach TWENTY PERCENT on U-6 (and well north of 11-12% on the government's "claimed" number.) |
Ignore his all-caps style. While excitable, the dude is correct. |
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Hater Depot
Joined: 29 Mar 2005
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| Posted: Tue Dec 23, 2008 8:59 pm Post subject: |
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| Even historic stimulus spending can't prevent economic pain, but it can probably prevent economic hell. Our only other option is to be Japan in 1992, try to ride it out with middling measures and spend a decade or more at low or zero growth assuming nearly the entire world doesn't fall into a depression. No thank you. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Tue Dec 23, 2008 9:01 pm Post subject: |
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| Hater Depot wrote: |
| Even historic stimulus spending can't prevent economic pain, but it can probably prevent economic hell. Our only other option is to be Japan in 1992, try to ride it out with middling measures and spend a decade or more at low or zero growth assuming nearly the entire world doesn't fall into a depression. No thank you. |
We've already lost a decade. Check the S&P. The Japanese experience of steady deflation would be bad, but we're looking at much worse. |
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supernick
Joined: 24 Jan 2003
Location: Seoul
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| Posted: Wed Dec 24, 2008 4:01 am Post subject: |
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| There�s one difference with Japan; it has a cash reserves that can withstand a recession without borrowing and Japan hasn�t all those mortgages that the U.S. has. Then there is all the other consumer debt that Britain, Canada and the U.S. amassed in the so called boom years. Japan doesn�t have this problem as it has recovered from the property market crash of the 90�s and the Japanese people have managed to save cash over the last decade or so whereas other countries were out spending on credit. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Wed Dec 24, 2008 8:21 am Post subject: |
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I generally agree with your position. But not this:
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| Japan doesn�t have this problem as it has recovered from the property market crash of the 90�s |
The housing market there is still deflating. Prices dropped last year, the year prior and so on.
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| and the Japanese people have managed to save cash over the last decade or so whereas other countries were out spending on credit. |
This is largely true. |
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Bigfeet
Joined: 29 May 2008
Location: Grrrrr.....
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| Posted: Wed Dec 24, 2008 10:18 am Post subject: |
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| That Denninger web site is interesting. I'll have to read more of their writings. |
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mises
Joined: 05 Nov 2007
Location: retired
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| Posted: Wed Dec 24, 2008 10:32 am Post subject: |
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| Bigfeet wrote: |
| That Denninger web site is interesting. I'll have to read more of their writings. |
Yeah, I just found it. He is a tad shrill, but solid. He reminds me a great deal of one of my econ profs in grad school. We need to more appropriately understand debt. It is future consumption consumed now. This can be good if put to productive use. But we blew it on plasma tv's. |
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supernick
Joined: 24 Jan 2003
Location: Seoul
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| Posted: Wed Dec 24, 2008 8:09 pm Post subject: |
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| Prices falling are not the problem; the problem is when you owe more than what the property is worth and don't have any other assets. From what I've seen so far, most Japanese are in a pretty good position and can weather the storm. Even in Korea, most home owners have about 50% equity in their homes and are not faced with the same problems, though the construction and development companies are in for a big shake up. A 5 or 10% drop in the U.S. home prices can throw the market into turmoil but in many other countries can withstand a fall in property values. What I'm saying is that home prices are not the determining factor here. One has to look at the underlying conditions, which are for the most part very very different. |
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