29 January 2009

The thing about Depressions is; there depressing...

A colleague contributes...

"Sorry guys, gotta forgive me for the following lenghtly diatribe. While we’re experiencing some disruption in the normal flow that’s typical of BearChat, I thought it might be a good opportunity to share some discussion that I otherwise would not have bothered posting. Keen’s piece is the longest, and I culled that material from a discussion thread with over 150 messages.

I begin with a discussion from Steve Keen’s Debtdeflation blog and, from there, throw in a few other items, all of which have bearing on where we are today and what might be likely scenarios going forward.

I particularly liked the quote from a clinical psychologist in Chicago who said, ”This is really unprecedented. I’ve been practicing for 20 years, and I’m seeing just an unprecedented amount of anxiety, as are most my colleagues”. They call it collateral damage from the economy, a phenomenon that latter generations of Americans seem ill-prepared to cope. An extreme example is the case of the man who killed his wife and children after being fired from a job.

Keen says that, Ultimately, the only way out of this crisis is a still painful route of debt reduction via either inflation (which he doesn’t believe our economic managers know how to create) or legislative debt writedowns. That’s the “bottom line” and makes perfect sense to me. The only thing else that matters is how this “thing” actually plays out.

Keen thinks that attempts to bailout the economy financially have to be given time to fail before more serious measures will finally be considered. Thus, if you buy his arguement, it would indeed appear that we’re in the early innings of what looks like an unfolding painful scenario. Won’t be the end of the world, but for some it will definitely feel like it.

Ballmer Gets “It”, by Steve Keen


Ordinarily I’d simply post a link to a media report in either my Gems or Brickbats page. But this quote from Microsoft CEO Steve Ballmer shows that he really understands what is going on now, in a way that no other person in authority seems to have done as yet.

Ballmer’s perceptive analysis of what is going on is:

“We’re certainly in the midst of a once-in-a-lifetime set of economic conditions. The perspective I would bring is not one of recession. Rather, the economy is resetting to lower level of business and consumer spending based largely on the reduced leverage in economy.”

For consumers, that may mean less discretionary income to spend on....(name your poison - Ballmer was talking 2nd or third computers).

That is precisely what is happening. It is also why, though government action might slow down the decline, ultimately it can’t prevent a serious decline in economic activity. That can happen only gradually as we slowly replace debt-generated spending capacity with income-generated capacity. What the government can do is remove the logjam standing in the way of that process, which is the crippling mountain of debt accumulated by the Ponzi financing behaviour of the last 4 decades (and in particular the last one). But that will require much more drastic action than simply bailouts: given the scale of debt accumulated, either the debt has to be devalued by inflation, or written down via government decree.

We’re still a long way from any government official or politician realising that. But the fact that someone as influential as Ballmer has put his finger on the problem implies that maybe that day of realisation is approaching.

Keen says that, given the scale of the debt we’ve accumulated, and our dependence on growing debt for aggregate demand, that he thinks we’re in for a serious Depression no matter what, and it will be prolonged for as long as governments continue trying to help the private sector validate debt that should never have been issued in the first place.

I expect we’re in for currency collapses galore , and I expect deflation rather than inflation overall. Government’s can’t create inflation simply by increasing fiat money in a debt-encumbered credit-based economy–unless they’re willing to “print” a factor of ten more dollars than they’ve yet done, which I doubt. (When the deleveraging gets up a head of steam, even a deliberate 1% reduction in debt levels would take (multiple) times as much money out of the economy as the...injection pumped into it.)

So he expects we’ll see international finance collapse and debt defaults galore, with cross-border interest rates becoming prohibitive, but domestic nominal rates heading for zero amid collapsing prices and incomes. And, ultimately, the only way out of this crisis is a still painful route of debt reduction via either inflation (which I don’t believe our economic managers know how to create) or legislative debt writedowns. Keen thinks attempts to bailout the economy financially like at present have to be given time to fail before more serious measures will finally be considered.

"I expect the US dollar would plummet. As for its effect on inflation, it might simply wipe out a section of US consumption rather than drive its price all that much higher. Sales of Asian-manufactured consumer goods have already plummeted, even though the US dollar has appreciated largely so far, thus making these goods notionally cheaper. If the dollar’s oil prop were removed and its currency depreciated, sales of these items might evaporate even more. There might be some domestic stimulus in that, but don’t forget that debt dynamics dominate here. Revival via domestic consumption is still a long way off."

The problem with trying monetary means to cause inflation–which Bernanke is doing right now–is that in an overindebted credit-money economy, the increase in fiat-generated money is more than offset by a collapse in credit-created money. That is apparent in the US data right now (though there is still a time lag to be taken into account). As a result, the money supply in toto can fall, even though the government is trying desperately to increase it.

In Japan’s case, even in a country with a high personal savings rate, increased fiat money was completely absorbed into private debt reduction. Japan tried a 30% increase in base money one year, only to see the rate of deflation accelerate the year after.

Minding the Deflation Spiral, by Desmond Lachman


The Fed meets this week amid bad news on labor markets, consumer spending, and industrial production

In the six weeks since the last meeting of the Federal Reserve’s Open Market Committee (FOMC), there has been a further material weakening in the U.S. economy and renewed strains on the U.S. financial system. At the same time, there has been an abrupt weakening in labor market conditions and an unprecedented deceleration in inflation that raises anew concerns about a deflationary spiral.

1. Employment conditions continue to deteriorate rapidly.

2. Labor market and output gaps continue to widen, which must be expected to exert considerable downward pressure on wages and prices.

3. Deteriorating labor market conditions and falling asset prices have contributed to a collapse in consumer confidence to its lowest level in 25 years.

4. Consumer spending, which accounts for around 70 percent of GDP by expenditure, is dropping at its fastest rate since World War II.

5. Industrial production is declining at its fastest pace in 30 years.

6. Housing starts have plumbed new lows, while housing permits suggest no sign of stabilization in the housing market.

7. Over the past three months, consumer prices have decelerated at their fastest pace in the post-war period.

In the context of a significant weakening in the U.S. economy, it is likely the FOMC will make clear in its statement that it considers that inflation risks have further receded, while the downside risks to the economy have increased.

Man kills wife, five kids, himself after being fired


The bodies of five children and two adults -- the children's mother and father -- were found Tuesday in a home in the Los Angeles neighborhood of Wilmington. Among the dead, authorities said, were an 8-year-old girl and two sets of twins -- 5-year-old girls and 2-year-old boys.

Ervin Lupoe apparently called 911 and contacted a television station by fax before committing suicide, authorities said.

Kaiser Permanente said Lupoe and his wife, Ana, were both former employees of the medical center. Both had been terminated, Hayes said, with Lupoe's termination coming last week. It appears there were grounds for the termination, and it did not come as a result of layoffs, he said.

In Lupoe's suicide note, he offered a detailed account of his and his wife's work circumstances, calling the family's situation a "tragic story." He ended it by saying, "So after a horrendous ordeal my wife felt it better to end our lives and why leave our children in someone's else's hands."

Therapists seeing more 'collateral damage' from economy


No formal data exist on the number of Americans who are turning to therapy during the recession, but most clinical psychologists say that referrals are up.

"This is really unprecedented," says Nancy Molitor, a clinical psychologist in Chicago, Illinois. "I've been practicing for 20 years, and I'm seeing just an unprecedented amount of anxiety, as are most of my colleagues."

Rick Weinberg, a clinical psychologist in Tampa, Florida, says that in one recent week 80 percent of his patients were discussing the pain inflicted on them in the economy. His patients included a small business owner who was forced to lay off longtime staff, a family of four evicted from their home and moving into a rental, and a family with two teenagers that was down to a one-parent income and experiencing frequent spending arguments and acting out by the teens.

"I have many patients who come in to see me in such crisis, they haven't opened their bills in three months. They haven't opened their statements. They're not functioning," Molitor says. "We need to really address that in a very quick way to begin to help alleviate their anxiety enough so that they start functioning."

"It's gotten worse. It's absolutely gotten worse. Most people are feeling anxious about money right now," says Bradley Klontz, a clinical psychologist in Hawaii. "When you're struggling with money issues and it affects your ability to carry out your various roles -- if it's keeping you up at night -- I'd say that's when you know it's time."

Beyond elevated anxiety levels, there are concerns about depression and suicide."

"We've had people who are so depressed that they are thinking that maybe life isn't worth going on. It's a small number of people but, you know, that is something that we're becoming more concerned about.”

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