We may be in for a long slide. But there are also reasons to think the economy could rebound quickly
The recent economic news has been dismal, and it's now almost universally assumed things will get worse before they get better. Conventional wisdom also dictates that this recession will be longer, deeper and cause more long-term pain than any financial crisis since the Great Depression. Yet, less than two years ago, conventional wisdom dictated that the housing bubble would be painful but that global economic growth would remain stable. That assertion was proved dramatically incorrect. Why then is there so much conviction in today's forecasts of a dire future?
Predictions about the rate of unemployment by the end of 2009 are based on how high that rate went during and after other recessions, and how steep those recessions were compared to today. Forecasts of GDP growth are grounded in the nature of past contractions and how long it took the system to begin expanding again. But none of these past patterns are necessarily a useful guide to the circumstances of today. The way events have unfolded over the past few months simply has no precedent.
It's common to hear comparisons to the Great Depression, when economies around the globe shrank precipitously, or to the 1970s, when an oil shock gave way to steep contraction of GDP growth in the developed world and a concomitant collapse in energy prices. But those occurred over the course of years. What happened since the collapse of Lehman on Sept. 15 was a global, synchronous cessation of all but nondiscretionary economic activity in the wake of the near-collapse of global credit markets. And it happened over the course of weeks, not years. Data from October and November show shrinkage of 10%, 20% and often considerably more in corporate earnings, car sales, home prices, commodities and a host of other areas. But analysts and strategists now take this as the "new normal" and are projecting into 2009 and beyond as if it were.
True, this global halt is the dark side of the information technologies and globalization that have created so much wealth and generated so much activity in the past 20 years. The frictionless, instantaneous flow of capital is possible only because of the Internet and electronic exchanges. The supply chain for industrial metals, from copper to iron ore, has gone from being regional and fragmented to global and unified. Semiconductors have become one global industry with pricing and inventories determined based on aggregate world-wide demand. Few industries are local, and almost everything is linked. In good times, that meant credit expanded and activity magnified geometrically. China for one has undergone more transformation in 20 years than most countries have seen in 100. But when the system was infected with toxic assets, the effects spread everywhere and fast. The collapse of Lehman led to fewer cars being sold in China in a matter of weeks, and the decline of Dubai real-estate prices to boot.
And yet, if things came to a halt more quickly than ever before, they could also restart more quickly than ever before. This is not to say they will, only that the possibility is more than marginal. And there are signs things are not everywhere as bad as conventional wisdom suggests. First, we haven't seen war, revolution, the collapse of states and governments or massive demonstrations sweeping the globe. Crowds have demonstrated in China, Greece and Thailand -- for reasons sometimes related to the economic crunch and sometimes not. Pakistan is teetering for multiple reasons -- of which economics is only one. But major economic crises in the 20th century almost always led to those types of major breaks, especially during the 1930s. While no one can say whether they will come in the months ahead, for the time being we should be remarking on how relatively stable things are in light of what has happened.
Second, consumers in many parts of the world are in relatively good shape. That statement might strike many as absurd, given the mantra of "consumers have been living beyond their means." But it's not just the third of American households that have no mortgage, or the 50% savings rate in China, or the still massive wealth accumulation in the Gulf region, Brazil and Russia. It's that the credit system, even at its most promiscuous, didn't allow consumers to take on the obscene leverage that financial institutions did. Millions of people who shouldn't have been lent money were, either in mortgages or through credit cards. But they couldn't be levered 40-to-1 as investment banks and funds were.
People have also reacted swiftly to the current problems, paying down debt and paring back purchases out of prudence or necessity. That's a short-term drag on economic activity, but it will leave consumer balance sheets in good shape going forward. Low energy prices and zero inflation will boost spending power. Even if unemployment reaches 9% or more, consumer reserves in the U.S. and world-wide are deeper than commentary would suggest. Household net worth in the U.S. is down from its highs but is still about $45 trillion. As the credit system eases, historically low interest rates also augur debt refinancing and constructive access to credit for those with good histories and for small business creation in the year ahead. Entrepreneurs often thrive when the system is cracking.
In addition, corporations generally have very clean balance sheets with little debt and lots of cash, unlike the downturns in 2002 and in the 1980s. And government has more creative ways to spend, which both the current Federal Reserve and the incoming Obama administration intend to do.
The last months of 2008 will go down as one of the most severe economic reversals to date, and on a global scale. But it is foolish to assume that this period provides a viable guide to what lies ahead. The rush to declare the future bleak has obscured the fact that no one knows the outcome of an unprecedented event. No one. The worst course in the face of uncertainty is blind faith in conventional wisdom and past patterns. The best is to stay humble in the face of the unknown, creative and unideological about solutions, and open to the possibility that as quickly as things turned sour they can reverse.
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ELSEWHERE
Hate-filled Leftist dies: "Nobel Prize-winning British playwright Harold Pinter, one of theatre's biggest names for nearly half a century, has died aged 78, his wife Lady Antonia Fraser and agent said Thursday. Pinter , who won the Nobel Prize for Literature in 2005, had been suffering from cancer. Fraser told the Guardian newspaper: "He was a great, and it was a privilege to live with him for over 33 years. He will never be forgotten." Pinter's plays included "The Birthday Party", "The Dumb Waiter" and "The Homecoming". His first play, "The Room," appeared in 1957 and his breakthrough came with "The Caretaker" in 1960. They often featured the slang language of his native east London as well as his trademark menacing pauses. The adjective "Pinteresque", referring to such characteristics, is included in the Oxford English Dictionary.... In Pinter's Nobel acceptance speech, he launched a lengthy and strong attack on US foreign policy, particularly over the Iraq war. "The crimes of the United States have been systematic, constant, vicious, remorseless, but very few people have actually talked about them," he said. [He must have been stone deaf!!] "You have to hand it to America. It has exercised a quite clinical manipulation of power worldwide while masquerading as a force for universal good. It's a brilliant, even witty, highly successful act of hypnosis." [More political background here]
Democrat attack on criticism of government in Oklahoma: "Oklahoma Attorney General Drew Edmondson recently told supporters that he plans to run for Governor in 2010. So voters might be interested in how the AG has treated critics of government while serving as the state's top law enforcer. The case of Paul Jacob is instructive. A veteran political activist, Mr. Jacob is the former head of U.S. Term Limits and the current head of Citizens in Charge. A year ago, he and two fellow grassroots organizers, Rick Carpenter and Susan Johnson, were indicted on criminal conspiracy charges. Mr. Edmondson's office alleges that they attempted to defraud the state by hiring people from out of Oklahoma to gather signatures for a ballot initiative that would impose spending limits on lawmakers. If convicted, the "Oklahoma Three" face 10 years in prison and a $25,000 fine. But a conviction is unlikely given that last week the Tenth U.S. Circuit Court of Appeals struck down as unconstitutional Oklahoma's law that bans nonresidents from circulating petitions. Despite the ruling, Mr. Edmondson has refused to drop the case and says he will appeal... Furthermore, the judges noted that the circulation of ballot petitions is "core political speech" that deserves the highest level of First Amendment protection."
Donor Disclosure Has Its Downsides: "How would you like elections without secret ballots? To most people, this would be absurd. We have secret balloting for obvious reasons. Politics frequently generates hot tempers. People can put up yard signs or wear political buttons if they want. But not everyone feels comfortable making his or her positions public -- many worry that their choice might offend or anger someone else. They fear losing their jobs or facing boycotts of their businesses. And yet the mandatory public disclosure of financial donations to political campaigns in almost every state and at the federal level renders people's fears and vulnerability all too real. Proposition 8 -- California's recently passed constitutional amendment to outlaw gay marriage by ensuring that marriage in that state remains between a man and a woman -- is a dramatic case in point. Its passage has generated retaliation against those who supported it, once their financial support was made public and put online. For example, when it was discovered that Scott Eckern, director of the nonprofit California Musical Theater in Sacramento, had given $1,000 to Yes on 8, the theater was deluged with criticism from prominent artists. Mr. Eckern was forced to resign. Richard Raddon, the director of the L.A. Film Festival, donated $1,500 to Yes on 8. A threatened boycott and picketing of the next festival forced him to resign. Alan Stock, the chief executive of the Cinemark theater chain, gave $9,999. Cinemark is facing a boycott, and so is the gay-friendly Sundance Film Festival because it uses a Cinemark theater to screen some of its films... These are just a few instances that have come to light, and the ramifications are still occurring over a month after the election. The larger point of this spectacle is its implications for the future: to intimidate people who donate to controversial campaigns."
Ford CAN still make good cars -- in England (No UAW there): "Take a bow, the Ford Fiesta – our Car Of The Year. I presented the gong to Ford’s UK boss Roelant De Waard and in an outstanding year for new models it was always going to be an extra-special car that won Sun Motors’ Top Award – and that’s what the new Fiesta is. The Fiesta has become part of the British motoring scene but this version takes small cars to a new level of sophistication. It’s the car that proves great things can come in small packages. Its sensational looks are backed up by an even more dramatic interior, with quality levels and equipment you’d expect on cars a class above. And, best of all, the Fiesta delivers a first-class driving experience, making the Ford a great all-round package. The public clearly agree because more than 11,500 have been sold since the car hit showrooms in October, despite the launch coinciding with the biggest sales slump in 15 years."
For more postings from me, see TONGUE-TIED, EDUCATION WATCH INTERNATIONAL, GREENIE WATCH, POLITICAL CORRECTNESS WATCH, GUN WATCH, SOCIALIZED MEDICINE, FOOD & HEALTH SKEPTIC, AUSTRALIAN POLITICS, IMMIGRATION WATCH INTERNATIONAL, EYE ON BRITAIN and Paralipomena
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The Big Lie of the late 20th century was that Nazism was Rightist. It was in fact typical of the Leftism of its day. It was only to the Right of Stalin's Communism. The very word "Nazi" is a German abbreviation for "National Socialist" (Nationalsozialist) and the full name of Hitler's political party (translated) was "The National Socialist German Workers' Party" (In German: Nationalsozialistische Deutsche Arbeiterpartei)
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