Thanks to Nicole in Kingston ON.
-------------------------------------------
I agree with this. But there are other problems: resource (incl energy)
bottlenecks globally, and infrastructure problems in many 'mature'
economies. (US is prime example)
Steve
/*The Economic Realism of Edward Harrison */
A Small "d" Depression
By MIKE WHITNEY
The Fed's extraordinary intervention into the financial markets makes
another Lehman-type meltdown extremely unlikely. But while the financial
system has been stabilized with a government blank check and rivers of
liquidity, the real economy continues to languish.
On its current trajectory, GDP will fluctuate erratically for a decade
or more while the economy seesaws between positive and negative growth.
That means persistent high unemployment, flagging demand, and falling
living standards. Where the economy finally lands, will depend more on
government policies than on market dynamics. Political changes, like the
upcoming midterm elections and Blue-dog resistance to additional
stimulus, only add to the uncertainty. That's bad news for anyone who's
looking for job security or who wants to see speedy end to the two
year-long crisis.
There's little chance that the financial system will suddenly implode or
that the country will be overtaken by Zimbabwe-type hyperinflation. But
the economy will undergo a low-grade depression, a period of
sluggishness and retrenchment that drags on for, what seems like, an
eternity. This is what typically happens when crises are extended by
keeping terminally-ill banks on life-support instead of putting them out
of their misery. Capital that could have been used for jobs and
productive activity, ends up vanishing down a rathole.
Regrettably, the post-Lehman economy can't be explained simply in terms
of the extremes. Neither "robust recovery" nor "economic Armageddon"
accurately describe present conditions. The truth lies somewhere in
between, in that vast gray-area where economic indicators conflict with
each other and where the best compass is an analyst who knows how to
interpret the data.
Edward Harrison is a banking and finance specialist who runs the Credit
Writedowns website. He posts articles daily and has a solid grip on some
very difficult topics. Here's a recent entry on consumer credit which,
paradoxically, appears to be expanding and shrinking at the same time.
Harrison sums it up:
"Nonrevolving credit is now increasing along with GDP.... On the
other hand, revolving credit is getting crushed....Bottom line: "In
Q3, banks are lending again (think cash for clunkers) because
nonrevolving debt is up. That’s also why GDP is up. But, revolving
credit lines (credit card lines) are being cut.."
See how subtle distinctions can make a big difference? In this case, it
looks like government programs (cash for clunkers) have actually helped
to keep credit flowing into the economy even though the banks are still
cutting back in other areas. That means that Obama's stimulus has helped
to slow the pace of household deleveraging making a crash in personal
consumption less likely. Although some will argue that this merely kicks
the can down the road--since households will eventually have to reduce
their red ink by either paying off their debts or defaulting--it does
make a short-term recovery more probable, which is the objective.
Whether that's enough to keep the economy from tipping back into
recession, is left to be seen.
In another article, "The Recession is over, but the Depression has just
begun", Harrison demonstrates his talent as a capable and insightful
analyst. He focuses on the root of our economic problem (debt) and
presents a likely scenario of how things will play out. Here's an
excerpt: "The issue was and still is overconsumption i.e. levels of
consumption supported only by increase in debt levels and not by future
earnings. This is the core of our problem--debt.... specifically an
overly indebted private sector….When debt is the real issue underlying
an economic downturn, the result is a period of stagnation and short
business cycles as we have seen in Japan over the last two decades. This
is what a modern-day depression looks like – a series of Ws where uneven
economic growth is punctuated by fits of recession. A recession is
merely a period of recalibration after businesses get ahead of
themselves by overestimating consumption demand and are then forced to
cut back by making staff redundant, paring back inventories and cutting
capacity. Recessions can be overcome with the help of automatic
stabilizers like unemployment insurance to cushion the blow. Depression
is another event entirely."
Harrison describes an economy that is set to bounce along the bottom for
years to come. He cites Gluskin Sheff's David Rosenberg, who adds that
"Depressions are marked by balance sheet compression" whereas
"Recessions are typically characterized by inventory cycles." And,
since, "Depressions often are marked by...debt elimination, asset
liquidation and rising savings rates" stimulus is not as effective.”
As Harrison points out, the Fed has already revealed how it plans to
fight deflation, by opening up the liquidity faucet and pumping up asset
prices. This is the rationale behind Bernanke's zero-percent interest
rates, multi-trillion dollar lending facilities, and quantitative easing
(QE) programs. Increase asset prices; that's the whole ball-o-wax.
Edward Harrison again:
"As for the recent asset-based economic reflation, be under no
illusion that these measures ‘solve’ the problem. The toxic assets
are still impaired and banks are still under-capitalized. But the
increased asset value and the end of huge writedowns has underpinned
the banks and led to a rise in the broader market in a feedback loop
that has been far greater than I could have imagined at this stage
in the economic cycle."
Okay, so what's next?
This is where Harrison separates himself from the pack and shows his
ability to grasp the complexity of the economy/policy dynamic. His
prediction is less-satisfying, but more realistic than many others:
"A lot of the economic cycle is self-reinforcing .... So it is not
completely out of the question that we see a multi-year economic
boom. Higher asset prices, lower inventories, fewer writedowns all
lead to higher lending capacity, higher cyclical output, more
employment opportunities and greater business and consumer
confidence. If employment turns up appreciably before these cyclical
agents lose steam, you have the makings of a multi-year recovery.
This is how every economic cycle develops. This one is no different
in this regard."
So, could a momentum-shift and boatloads of liquidity produce a
"multi-year recovery" in spite of nagging structural problems and the
massive build-up of personal debt?
Yes. But even though a rebound is economically feasible, Harrison does
not think it is probable. He believes that "the government prop for the
economy" is going to be removed. In other words, the Congress will not
approve a second round of stimulus; the opposition to deficit-spending
is just too great. Without more stimulus to maintain the current level
of activity, the economy will slide back into recession.
So, get ready for the next leg down; rising unemployment, soaring
foreclosures, tumbling stock markets, and growing political unrest.
Liquidate, liquidate, liquidate. The Bluedogs and Republican
obstructionists are determined to drag the economy back into depression.
Onward!
*Mike Whitney* lives in Washington state. He can be reached at
[email protected] <mailto:[email protected]>
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