The Great Recession

[IndependentlyPoor]

Wow, I guess it really was bad.

from:
http://jessescrossroadscafe.blogspot.com/2009/08/us-consumer-demand-off-cliff.html

Edited to add:
I should say that I do NOT agree with Jesse's rant on how to fix things. I just thought the chart was important.

 

[bbbamI]

That chart looks like my heartbeat....

 

[audreyh1]

Yes, this recession has been the worst since the Great Depression - the longest, the deepest. Way worse than 1973-74 which seems hard to believe.

Here is a chart from ECRI (Economic Council Research Institute - ECRI | Home). Look at the top line - the monthly leading indicator growth rate, and you see it dropped way lower than in 1974.

Audrey

reference page: http://www.businesscycle.com/resources/

 

[TromboneAl]

That chart looks like my heartbeat....

What are you doing?

 

[bbbamI]

What are you doing?

ahhhh...just learning the fine art of consuming a banana......

 

[Running_Man]

I personally am finding way too much agreement by the general public on the expectation of future inflation when all the major indicators are presaging deflation.

I know most do not believe deflation with this Federal Reserve is possible but we have real wage and salary reductions in the last year approaching 8 percent. Look at many of the positive results of major corporations that occurred becasue cost cutting or selling of lower priced profits have led the way. Not even included in lost salaries and wages is the fringe benefit cuts in pensions and 401K. As a result state and federal receipts are falling by about 18 percent and there is no way to maintain the present level of spending at the govermental level, which is supporting a great swath of wages - hence spending
.

25 percent of mortages in the US today are on houses worth less than the mortgage and a study by Deutsche Bank, shows up to 25 million American homeowners could eventually owe more than their house is worth by 2011. This is a major major problem not easily solved by cash for clunkers. The reduction of spending is compounded by the lack of flexibility of available home equity loans another deflationary point.

Dividends paid by companies have been shrinking at record rates. Indexes such as dividend achievers and international dividend achievers have staged absolute collapses in dividends.

The signs that deflation is still a strong possibility are also showing in the current interest rates issued by the US government. In coming months as the reality of needed taxes begin the cycle of implemention at the state and federal level to just maintain basic services the deflationary forces will become very evident.

In the last month the BDI index has fallen over 25 percent. This to fall again from such a historic collapse last year is showing a lack of pricing pressure. The BDI has been a great leading indicator for a 2-3 month early period throughout this cycle on both the upside and the down side.

 

[Bikerdude]

ahhhh...just learning the fine art of consuming a banana......

TAl. I wouldn't touch that comment with your banana.

 

[LoftyNotions]

ahhhh...just learning the fine art of consuming a banana......

This post is DEFINITELY no good without pictures!

 

[bbbamI]

Here ya go...I'm learning from Mr. Hammi Pants...

 

[LoftyNotions]

Sharp pointy teeth have always scared me.

 

[LoftyNotions]

But so far, never scarred me.

 

[IndependentlyPoor]

Here is another chart for you

from
Calculated Risk: Foreclosures: One Giant Wave, Still Building

 

[clifp]

I personally am finding way too much agreement by the general public on the expectation of future inflation when all the major indicators are presaging deflation.

I know most do not believe deflation with this Federal Reserve is possible but we have real wage and salary reductions in the last year approaching 8 percent. Look at many of the positive results of major corporations that occurred becasue cost cutting or selling of lower priced profits have led the way. Not even included in lost salaries and wages is the fringe benefit cuts in pensions and 401K. As a result state and federal receipts are falling by about 18 percent and there is no way to maintain the present level of spending at the govermental level, which is supporting a great swath of wages - hence spending
.

.

My aren't we a ray sunshine, don't you know happy days are here again.
In all seriousness you raise excellent and sober points, and continued deflation is a real and scary possibility.

But confidence is increasing and the market has risen significantly, increasing the wealth effect. I know I am far less nervous about spending money than I was back last year or March.

I'd also add that with everyone expecting future high inflation, we maybe in a situation of self-fulfilling prophecies. Once people see higher pricing in houses, commodities etc. people may rush in to bid the prices up higher.

Alternatively, I wish Obama would appoint a housing Czar. His first (and hopefully only) act would be to simply decree that starting tomorrow all asking prices/appraisals for houses are 10% higher. Hey it might work LOL.

 

[Midpack]

Alternatively, I wish Obama would appoint a housing Czar. His first (and hopefully only) act would be to simply decree that starting tomorrow all asking prices/appraisals for houses are 10% higher. Hey it might work LOL.

Congress is never slow to jump on an idea that will buy them votes (with your kids money) - Cash for Clunkers has worked so well, stay tuned for Funds for Foreclosures. If you have owned your house for at least a year and it's worth less than your loan, Congress will give you $35,000 to $45,000 more than your appraised value if you buy a smaller, more energy efficient home. It doesn't have to be much smaller or much more efficient, just a little bit will be fine. But your old house has to be destroyed. Realtors make money, builders make money, banks loan money, and the next generation pays for it - what's not to like. Of course if you've been responsible and own your home, or your loan is less than the value of the house - you get squat. Wait until Congress comes back from vacation, you heard it here first...

 

[clifp]

LOL. While I actually think that if house prices appreciated 10% tomorrow it would really help the situation. I can easily see Funds for Foreclosures making it out of this Congress.

 

[Zoocat]

What will happen to the housing market when the Fed stops buying agency MBS (mortgage backed securities)? They've been the only buyer this year, adding 20 billion to the fed's balance sheet every week.

Agency Mortgage-Backed Securities Purchase Program - Federal Reserve Bank of New York


What sort of mortgage interest rates would we have to pay in order to gain the interest of outside (non-US government) MBS investors?

Looking at my tea leaves, I see that higher interest rates would be deflationary in the housing market.

 

[missionfinder]

I have to wonder how much auto and home prices skew the overall deflationary numbers?

 

[ziggy29]

I personally am finding way too much agreement by the general public on the expectation of future inflation when all the major indicators are presaging deflation.

In the near term there are certainly deflationary pressures due to declining asset values, deleveraging and demand destruction. None of these are inflationary indicators at this time and I don't see much catalyst for a significant turnaround in those areas.

However, inflation can come from more than just leverage or increased demand. It also comes from a declining dollar in an economy largely dependent on imports. And I see no way that all the government borrowing and money-printing can NOT be inflationary eventually.

Yet again I'll trot out the example I use: If I had a magic printing press that cranked out $100 bills which were indistinguishable from real U.S. currency, the mere act of printing $5 trillion of them would not be inflationary if I stashed it all in my (very big) closet or buried it somewhere. But if I placed it all into commerce in a short period of time, the "velocity of money" suddenly takes a spike upward and then you'd have many more dollars chasing the same basket of goods and services -- inflation.

As long as much of the created "wealth" and printed dollars are not entering commerce -- they are either being saved or used for debt reduction and deleveraging -- the money from the printing presses aren't likely to be inflationary since they aren't increasing the velocity of money. But when it starts entering commerce -- once the destruction of demand starts turning around -- that's when I think you may start seeing inflation.

Besides, the primary "deflation" in today's economy is in discretionary items. There are lower prices for our "wants" but for the most part (and recognizing a few exceptions) the price of our "needs" is rising. The deflation caused by demand destruction obviously hits "wants" harder than "needs."

Realistically even as the economy stabilizes and the destruction of asset values starts to bottom out, it's hard for me to see anything but a stagflationary environment for a few years -- maybe not a technical recession, but one with slow growth, little if any job growth and inflation numbers that are higher than one would expect with that level of economic activity.

 

[NW-Bound]

The deflation caused by demand destruction obviously hits "wants" harder than "needs."

Well put. While we see prices of luxury or discretionary goods and services dropping, the more essential ones are going up in price. Last week, I paid $8.97 at Home Depot for a 20-lb bag of ammonium sulfate. I expected to pay $4 or $5. Perhaps my memory is faulty or it's been several years since I bought the last time, but I got sticker shock. Same with several other items.

Forum members tend to have more room in their budget for discretionary items, and so are more impressed by price drops of luxurious things like hotels, cars, cruises and travels. The more mundane goods are not getting cheaper. In fact, in another thread, it was quoted from a government report that CPI went up a bit in the last 12 months, DESPITE a drop of 25% in energy.

 

[Running_Man]

In the near term there are certainly deflationary pressures due to declining asset values, deleveraging and demand destruction. None of these are inflationary indicators at this time and I don't see much catalyst for a significant turnaround in those areas.

However, inflation can come from more than just leverage or increased demand. It also comes from a declining dollar in an economy largely dependent on imports. And I see no way that all the government borrowing and money-printing can NOT be inflationary eventually.

Yet again I'll trot out the example I use: If I had a magic printing press that cranked out $100 bills which were indistinguishable from real U.S. currency, the mere act of printing $5 trillion of them would not be inflationary if I stashed it all in my (very big) closet or buried it somewhere. But if I placed it all into commerce in a short period of time, the "velocity of money" suddenly takes a spike upward and then you'd have many more dollars chasing the same basket of goods and services -- inflation.

As long as much of the created "wealth" and printed dollars are not entering commerce -- they are either being saved or used for debt reduction and deleveraging -- the money from the printing presses aren't likely to be inflationary since they aren't increasing the velocity of money. But when it starts entering commerce -- once the destruction of demand starts turning around -- that's when I think you may start seeing inflation.

Besides, the primary "deflation" in today's economy is in discretionary items. There are lower prices for our "wants" but for the most part (and recognizing a few exceptions) the price of our "needs" is rising. The deflation caused by demand destruction obviously hits "wants" harder than "needs."

Realistically even as the economy stabilizes and the destruction of asset values starts to bottom out, it's hard for me to see anything but a stagflationary environment for a few years -- maybe not a technical recession, but one with slow growth, little if any job growth and inflation numbers that are higher than one would expect with that level of economic activity.

TheHill.com - Deficit grew by $181 billion in July

For a macro view of the deflationary situation, the current budget deficit ytd is about 1.2 trillion. 529 billion of that increased is caused by increased government spending, primarily giving Freddie Mac and Fannie May funds to give to the Chinese government to keep the bonds from blowing up. Tax revenues meanwhile fell by 350 billion of which 100 billion is stimulus money from tax reductions. That leaves about 250 billion of tax shortfall from a government assume a 40 percent tax rate and you get a reduction of 600 billion of income, despite the federal goverment spending an additional 529 billion. You can mulitply this problem across 50 states as well.

There simply is no view in sight yet of any inflation, indeed I contend deflation is beginning to accelerate. With the tax cuts that are sure to pass this fall (you can't keep spending more and getting in less forever else the Feds will go belly up as well), you'll see economic activity get crushed. Nothing appears in sight that is going to prevent this catastrophe. The Fed surely sees this problem which are why short term rates are still near zero.

 

[Rustic23]

RunningMan,
Did you mean to say 'tax cuts' that are sure to pass? Seems to me tax increases are sure to pass.

 

[Running_Man]

RunningMan,
Did you mean to say 'tax cuts' that are sure to pass? Seems to me tax increases are sure to pass.

Ooops! Yes in my haste to finish I said cuts, I meant to say tax increases.

 

[Hamlet]

What about the trillions of dollars the Fed is printing and handing out?

I gotta think that those are going to have an effect down the road.

TheHill.com - Deficit grew by $181 billion in July

For a macro view of the deflationary situation, the current budget deficit ytd is about 1.2 trillion. 529 billion of that increased is caused by increased government spending, primarily giving Freddie Mac and Fannie May funds to give to the Chinese government to keep the bonds from blowing up. Tax revenues meanwhile fell by 350 billion of which 100 billion is stimulus money from tax reductions. That leaves about 250 billion of tax shortfall from a government assume a 40 percent tax rate and you get a reduction of 600 billion of income, despite the federal goverment spending an additional 529 billion. You can mulitply this problem across 50 states as well.

There simply is no view in sight yet of any inflation, indeed I contend deflation is beginning to accelerate. With the tax cuts that are sure to pass this fall (you can't keep spending more and getting in less forever else the Feds will go belly up as well), you'll see economic activity get crushed. Nothing appears in sight that is going to prevent this catastrophe. The Fed surely sees this problem which are why short term rates are still near zero.

 

[IndependentlyPoor]

Lost decades (plural)

And then there is deleveraging and its effect on the economy. This from Bloomberg via Barry Ritholtz

The U.S. economy may be just as sluggish during the next 20 years as Japan’s economy was in the last 20, according to Comstock Partners, a money manager founded and run by Charles Minter.

The CHART OF THE DAY shows U.S. total debt and gross domestic product since 1952, along with the ratio between them, based on data compiled by Bloomberg. The ratio rose in the first quarter to 372 percent even as household borrowing dropped for a second straight quarter, an unprecedented streak.
The U.S. is headed for “a deleveraging period” in which the amount of so-called private debt, including consumer borrowing, collapses as government borrowing explodes, Comstock wrote.


​

I just wish that they had taken this chart back to WWII so that we could see how this compares to the war debt.

 

[ziggy29]

I've seen the debt to GDP graph in the WW2 era. Ours is currently only a little higher than it was circa 1945. The differences, though, are that (1) there were far fewer unsustainable entitlements in the first few years after 1945, and (2) the economy grew very robustly for about a quarter century after WW2 ended. Both of these helped the debt to GDP ratio shrink sharply into the 1950s and beyond.

I don't see either of these pulling us out of this morass this time. Recovery and fiscal sanity are likely to be a lot more painful than it was after WW2.