The Great Depression, part VI?

POSTED BY: SignyM
UPDATED: Thursday, September 14, 2023 07:15
VIEWED: 2078
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SIGNYM

Wednesday, April 22, 2009 4:20 PM

From the Financial Times (of London)

Is the worst behind us? In a word, No. The rate of economic decline is decelerating. But it is too soon even to be sure of a turnround, let alone of a return to rapid growth. Yet more remote is elimination of excess capacity. Most remote of all is an end to deleveraging. Complacency is perilous. These are still early days.

As the Organisation for Economic Co-operation and Development noted in its recent Interim Economic Outlook, “the world economy is in the midst of its deepest and most synchronised recession in our lifetimes, caused by a global financial crisis and deepened by a collapse in world trade”. In the OECD area as a whole, output is forecast to contract by 4.3 per cent this year and 0.1 per cent in 2010, with unemployment rising to 9.9 per cent of the labour force next year. By the end of 2010, the “output gap” – a measure of excess capacity – is forecast to be 8 per cent, twice as large as in the recession of the early 1980s.

In the US, the rate of decline of manufactured output compares with that of the Great Depression. Japan’s output of manufactures has already fallen by almost as much as in the US during the 1930s (see chart). The disintegration of the financial system is, arguably, worse than it was then.

If the world experiences a “Great Recession”, rather than a Great Depression, the scale of policy support will be the explanation. Three of the world’s most important central banks – the Federal Reserve, the Bank of Japan and the Bank of England – have official rates close to zero and have adopted unconventional policies. The real OECD-wide fiscal deficit is forecast at 8.7 per cent of gross domestic product next year, with a structural deficit of 5.2 per cent. In the US, the corresponding figures are 11.9 and 8.2 per cent. Governments of wealthy countries have also put their healthy credit ratings at the disposal of their misbehaving financial systems in the most far-reaching socialisation of market risk in world history.

It would be impossible for such activism to have had no effect. We can indeed see partial normalisation of financial markets, with a marked reduction in spreads between riskier and less risky assets (see charts). The FTSE All-World index has jumped by 24 per cent and the S&P 500 by 23 per cent since March 9 2009. Purchasing managers’ indices are picking up (see chart). More broadly, the chances of a manufacturing turnround are high: big falls in demand generate inventory build-ups and collapses in output. The latter are sure to reverse. China’s growth is also rebounding.

We can say with some confidence that the financial system is stabilising and the rate of decline in demand is slowing. But this global recession is different from any other since the second world war. Its salient characteristic is uncertainty.

Consider obvious perils: given huge excess capacity, a risk of deflation remains, with potentially dire results for overindebted borrowers; given the rising unemployment and huge losses in wealth, indebted households in low-saving countries may raise their savings rates to exceptional levels; given the collapse in demand and profits, cutbacks in investment may be exceptionally prolonged and severe; given massive and persistent fiscal deficits and soaring debt, risk aversion may lead to higher interest rates on government borrowing; and given the flight from riskier borrowers, a number of emerging economies may find themselves in a vicious downward spiral of weakening capital inflow, falling output and reductions in the quality of assets.

In short, as Stephen King and Stuart Green of HSBC note in a recent report, the exceptional dynamics of this crisis suggest a healthy scepticism about the timing and speed of recovery. What is most disturbing, moreover, is the scale of the policy action required to halt this downward spiral. This raises the big question: how and when might the world return to normality, with sustainable fiscal positions, strongly positive short-term official interest rates and solvent financial

ERIC

Wednesday, April 22, 2009 4:28 PM

Dammit, don't say that, I just bought five grand in stock and mutual funds!

SIGNYM

Wednesday, April 22, 2009 7:47 PM

best guess?

Quote:
Given this outlook for the real economy and financial institutions, the latest rally in US and global stock markets has to be interpreted as a bear-market rally. Economists usually joke that the stock market has predicted 12 out of the last nine recessions, as markets often fall sharply without an ensuing recession. But, in the last two years, the stock market has predicted six out of the last zero economic recoveries -- that is, six bear market rallies that eventually fizzled and led to new lows.

The stock market's latest 'dead cat bounce' may last a while longer, but three factors will, in due course, lead it to turn south again. First, macroeconomic indicators will be worse than expected, with growth failing to recover as fast as the consensus expects. Second, the profits and earnings of corporations and financial institutions will not rebound as fast as the consensus predicts, as weak economic growth, deflationary pressures and surging defaults on corporate bonds will limit firms' pricing power and keep profit margins low. Third, financial shocks will be worse than expected.

At some point, investors will realise that bank losses are massive, and that some banks are insolvent. Deleveraging by highly leveraged firms -- such as hedge funds -- will lead them to sell illiquid assets in illiquid markets. And some emerging market economies -- despite massive IMF support -- will experience a severe financial crisis with contagious effects on other economies. So, while this latest bear-market rally may continue for a bit longer, renewed downward pressure on stocks and other risk assets is inevitable.

Just FYI.
www.rgemonitor.com/blog/roubini/256485/end_of_economic_gloom_-
not_as_early_as_you_wish__roubinis_latest_article_for_project_syndicate

link hyphenated for formatting
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It's the end of the world as we know it, and I feel fine.

YINYANG

Wednesday, April 22, 2009 7:57 PM

TinyUrl's your friend:

http://tinyurl.com/sixforzero

And link for the OP:

http://www.ft.com/cms/s/0/1ed88b70-2ea9-11de-b7d3-00144feabdc0.html

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"Brawndo's got what plants crave. It's got electrolytes."

KIRKULES

Wednesday, April 22, 2009 10:09 PM

There is no question in my mind that the current stock market rally is just a Bear Market rally and will be short lived. That being said, I do believe we have seen the lows for the stock market for at least the next couple of years. We will probably go lower from here but I doubt we will retest the old lows. When all of the trillions in Government spending start to kick in toward the end of the year we will begin to see a sustained rally in the stock market, but that too will fail within a year or so as the Government money runs out. Thanks the the incredibly naive policies of the Obama administration were looking at a double dip recession that we probably won't see the end to for another three years. In spite of all that I am still buying stock for the long term because of my belief we have already seen the generational lows in the market.

JAYNEZTOWN

Thursday, September 14, 2023 7:15 AM

Not there yet

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