Mar 12
Economic Depression?
Posted by Kristjan Velbri | Posted in Economy | Posted on 12-03-2009
The months following the collapse of the credit markets have brought us further confirmation that we are headed for a depression. GDP, retail sales, commodity prices and market sentiment all point to a depression. The situation we are in is much more than an average recession, because we are in the process of deleveraging (a situation where more debt is payed back than is taken out).
Having been revised from a previous -3.8%, US GDP fell 6.2% in the fourth quarter. 3.0 million jobs were lost in 2008 and around 4 million have been lost since the beginning of the recession. According to the Labor Department, the United States is 5 million jobs away from full employment. Although the commonly cited jobless rate, the U-3 is at 8.1%, the situation is much more dire when one takes a look at U-6, the total unemployment rate. Currently, the U-6 is over 14%!
As consumer confidence has been falling, the savings rate has been increasing. At least this one is a positive sign for the United States, whose savings rate dropped below zero for a few quarters just a while back. But the numbers for consumer spending and car sales are not great. In fact, it’s actually a good thing that the consumer has realized the situation the country is in and has decided to cut back on spending. It’s the only way to go and the government should do the same. The United States has been running a fiscal and trade deficit for years and the total debt of the US government now exceeds $50 trillion (social security, Medicare, Medicaid, miccelanous).
Of course, China and Japan, who are the biggest foreign creditors of the United States aren’t going to stop funding the United States anytime soon as they both are interested in the well-being of their trade partner. Matters are worse as they stand, as you can see from the graph above, no need to make it worse by dumping American debt. A further slowdown in exports would really damage the Japanese economy as it has already shrunk a mind-blowing 12.7% in Q4 (I have a feeling that the revised number is going to be even worse).
But things are not only bad in the United States, they are also bad in Europe, which lacks a central government on fiscal and monetary policy. This makes solving the crisis much more difficult. The European Central Bank, when making a decision as whether to increase or decrease interest rates has to balance the various statistics that are fed to it across the eurozone, which now consists of 15 member states. Because the local central banks still have a say in the policy, it is much more difficult for the ECB to make a decision that fits each and every one of the countries affected.
As most of us know by now, the main reason behind this credit crisis was a real estate boom and the securitization (in a less than mildly regulated environment) that followed. Because the bank managers only thought about money in their pocket before the crisis had arrived, they lent out money to Eastern European banks en masse, asking very little interest in return. ECB rates were down and the large commercial banks of West and Central Europe had to compete with each other to give away their money. Of course, now they have realized the problems they created. And, as usual, now is a bit too late to start thinking about reserves and possible risks of devaluation, since a large number of Eastern Europe’s currencies have already been devaluated. Although some American economists and financial experts like John Mauldin have been talking about panic and bank runs in Eastern Europe, the reality looks a lot different. Anyone who is interested in Eastern European economies should read European business authors.
The last three days we have had a really on the stock markets and all the major indeces are off their lows. But beware as this is not a really of investors parking their money, this is trader money (fast money), it’s out of the market as soon as the market dips down again. We are headed for new lows. The time is not right to start investing just jet, at least not on a broad base (but there are always some companies that outshine others, even during a time of crisis).
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