After the Economic Dunkirk

http://www.debtdeflation.com/blogs/2009/03/05/after-our-economic-dunkirk/

Not well. Rudd’s stimulus is a whopping $42 billion–a big number. But our private debt is now over $2 trillion. If the private sector de-levers by as little as 5% of its current debt level, that will withdraw $100 billion from spending. In the new economic Rock vs Scissors game, Deleveraging trumps Government Stimulus every time.

This is why Japan is still mired in a Depression, 19 years after its bubble economy burst. You can’t solve a problem caused by too much debt by going into more debt. Ultimately, the only solution is to reduce debt.

There Australia is in a quandary. We don’t yet have insolvent banks–the USA on the other hand has nothing else. So drastic means of attacking the problem are possible in America, once the Yankees get over their usual pussy-footing about nationalisation. But we can’t follow that path while it still appears that our banks are solvent.

So all we can do is brace ourselves for a massive increase in unemployment, and do what we can to ameliorate the pain. Several policies are obvious there: remove the waiting period for receiving the dole, eliminate (or drastically prune) the requirements that unemployed persons exhaust their savings before they receive the dole, get rid of the punitive job application requirements, and take the stigma away from being a victim of a global financial crisis that is well beyond the control of those whose jobs will be destroyed by it.

That will necessitate a massive increase in the government deficit, but that is justified in making sure that the pain of a Depression is shared more equitably. It is also a far more sensible way of going into deficit than throwing a fistful of money at soon to be unemployed consumers.

We can also change the rules on mortgage defaults, so that a failed borrower becomes a renter from the bank or lender that extended the money, and pays a rent based on a proportion of their income. That might mean a lot less revenue for banks, but it will also mean a lot less mortgagee sales–and there will be a tsunami of those coming our way if the economy continues to shrink by 0.5% or more every quarter.

On that front, the most recent figure was a drop in the bucket compared to what we’ve already seen overseas, and what we are likely to see here as deleveraging reduces debt-financed spending, our terms of trade collapse, and our export voumes plummet. It seems that the days of Kangaroo Economics–”We won’t suffer a recession because we have marsupials”–are over. Bye Bye, Boom Boom.

Global economy grinds to a stop, according to the International Monetary Fund

THE world economy is at a standstill, with the major developed countries in deep recession, according to leaked forecasts prepared by the International Monetary Fund.

The third downward revision to the IMF's forecasts in the last four months comes as layoffs affecting more than 70,000 workers were announced around the world on Monday.

The IMF is due to release new official economic forecasts before the end of the week. However, a well-sourced report carried by Reuters news agency says it expects global growth of just 0.5per cent this year.

The fund has been struggling to keep up with the rapidly deteriorating world economy, having cut its estimate for world growth next year from 3.8 per cent last April to 3 per cent in October and 2.2 per cent in November.

The latest update anticipates sharply slowing growth in China and India.

The US economy is expected to contract by 1.6 per cent, while Europe will shrink by 2 per cent and Japan by 2.6 per cent.

The fund expects the world economy to recover in 2010, with a return to 3 per cent global growth and the major economies recording small positive results.

Wayne Swan said that although he could not comment on the reports of the IMF's forecasts, it was clear the world economy was deteriorating.

"We're now facing the prospect of a deeper and more protracted global recession. This will clearly have an impact on growth and jobs," the Treasurer said.
"There are no quick fixes, but the Government will continue to take whatever action is necessary and responsible to support jobs and growth amid these very difficult global conditions."

The Reserve Bank, which on Tuesday meets for the first time since last month, is expected to respond to the worsening outlook with a large cut in interest rates.

Financial markets are tipping a one percentage point reduction, which would cut the official interest rate to 3.25 per cent and, if passed on in full by the banks, would reduce standard home loan rates to about 5.9 per cent.

The increasing severity of the downturn has been marked by a rapid rise in the number of redundancies being announced as businesses face shrinking sales revenue. A spate of announcements on Monday, including 45,000 job losses in the US, reached a total of 70,000.

Earthmoving equipment company Caterpillar announced 20,000 redundancies, drugs company Pfizer laid off 8000 workers, and Dutch electronics firm Philips made 4000 positions redundant.

In Australia, unions warned yesterday the manufacturing sector was "drowning" and predicted workers would suffer.

The Australian Manufacturing Workers Union said Caterpillar planned to shut down the night shift at its Tullamarine plant in Melbourne. Union organiser Tony Mav said about 30 workers were employed on the shift.

National Australia Bank's latest business survey found there was some recovery in business confidence and sales last month following the federal Government's stimulus package.

However, more companies are shedding labour, with businesses planning to cut their work force outnumbering by 17 per cent those planning an increase.

Additional reporting: Ewin Hannan