LQD: Roubini predicts the worst financial crisis

European Tribune ^ | July 15, 2005 | Nouriel Roubini

[bruinbirdman]

"The only tax cut that paid for itself ...."

Flawed logic to start with. Tax cuts don't pay for anything. They are a negative. A tax cut is just that.

Taxes were cut. For whatever reason federal revenue went up.

yitbos

[ladyjane]

There is nothing you can do, preparing is futile,

Baloney. If you don't already have a place way out in the country then find a friend who does.

[bruinbirdman]

are you sayind that we just can’t possibly know since we have nothing like this to compare to....

You are perceptive. I disagree with his conclusions. We are in uncharted territory. I don't like it. I am glad you are sounding an alarm. More people should pay attention to finances. I am not as pessimistic as most anonymous agitators on these economic threads.

The United States of America hasn't done too bad for herself these last 232 years.

yitbos

[arthurus]

The FED is not trying to inflate. It is inflating very industriously. Reagan commenced a mild deflation that lasted until Bush II and corresponded with boomtimes.One sign of that was the near disappearance of industrial strikes. Wages did not rise much in nominal terms but there was a perception that things were a tad easier from year to year. Bush deliberately commenced to inflate and announced it, calling it "devaluation." Moderate inflation and deflation are both not incompatible with prosperity and expansion but neither helps. The deflation of the Depression did not cause hard times, though things would have been easier with steady money. The depression was actually a series of panic and several recessions caused by massive government intervention and misdirection of resources. That is what is occurring "even as we speak" starting with Bear Stearns and being greatly enhanced with mortgage bailouts and Fannie Mae etc. These measures will be paid for with inflation. The inflation causes other problems because, besides it being used to surreptitiously raise real taxes, it makes economic calculation much more difficult because it tends to accelerate and thus causes actors in the market to misallocate resources as they try to predict future prices. Tremendous amounts of resources are inefficiently used because of all this or, more plainly speaking, are wasted. Alas If Bush is succeeded by Hussein the combination will be FDR all over again and long term hard times. The Depression didn't really end until Eisenhower and deregulation added to millions of vets going to work.All that full employment in the war was not prosperity because everything was still rationed and folks did not have it economically better than in the thirties. They just had jobs that paid very little. The slogans were the same in the 30s and the 40s- Use it up! Mend it! Wear it out!

[arthurus]

No doubt they have crushed the dollar so some inflation has occurred but it seems to be offset at least by deflation in areas other than food and energy. "Crushing the Dollar"= devaluation which is a politically more acceptable word for INFLATION. You use the word "inflation" but you are talking about price increases. Inflation is the increase of the ratio of the stock of money- the number of dollars- to the supply of goods.

The average of prices tends to rise in an inflation but that is not, itself, inflation. It is a result of inflation and is not uniform. Some prices even fall as buying patterns change. There is high inflation in the economy and has been for 6 years.

Oil has soaked up quite a bit of it but it is not reflected in the official CPI numbers because it is not "counted" due to it having an identifiable "cause." If there were no inflation, the rising price of oil must cause the average of all other prices to fall because the ratio of dollars to available goods would not have changed. That is not what has happened.

The average of all prices is rising inexorably. Those prices that had been falling steadily due to advances in materials and production are holding steady in nominal dollars or even going up. Of major components only housing is falling and in an inflation some prices do fall but the average rises. The FED is complicating it and making it worse and much more difficult to cope by keeping interest rates artificially low- below the rate of inflation so that the real interest is often negative.

[ThePythonicCow]

I’m not talking Great Depression II, but more 1990s like Japanese deflation

Why so optimistic? Japan had a fairly healthy economy, with only a few decades of excess built into it, with a hard working, frugal saving, well educated, populace and much local industry.

It has been sometime since the 1930's since the United States has had a serious economic house cleaning. Since then, we have had wave upon wave, bubble upon bubble, where the worst we saw caused five or ten years of muddling through with any collapses confined to one or a few sectors of the economy. We are coming off one of the most stunning asset bubbles in human history.

We have no savings, we have little of our previous manufacturing capability left, we are deeper in debt than any nation in human history by a factor of a hundred, deeper in debt and toxic paper than we were even a decade ago by a factor of ten, we have a populace that majority of which is ruined by public education and leftist media, we have a government (legislature, courts, bureaucracy and if Obama wins, the White House) that is corrupt beyond recall with leftist lies and greed, the money center banks own us (and they're in deep yogurt), we have a media that will soon be working overtime to take down Rush, Mark Levin and the Free Republic, ...

That Great Depression is starting to look pretty good to me.

[arthurus]

And don’t pay attention to the government and MSM “economists.” Kudlow and Williams and Sowel know what they are talking about. Krugman and Bernanke and Paulson may but they are in the business of politics, not economics and what they may know is irrelevant to their prescriptions. Samuelson, like Bush, himself, is a “conservative” Keynesian. That means he desires more or less conservative ends but believes that government oversight and action are necessary to achieve economic ends. The methods are incompatible with the ends.

[ThePythonicCow]

It (the FED) is inflating very industriously.

And failing massively. They have about as much chance as the Captain of the Hindenburgh would have had keeping that derigible up by huffing and puffing. The Fed's assets are a tiny fraction of all the toxic paper going up in smoke.

The dislocation of assets from high risk investments and non-essential goods to basic essentials like food and energy is putting up a nice little smoke screen (though it looks like the oil price bubble just broke this week.) But the total value of assets in this country (ask each person and corporation "what are you worth" and add it up) is collapsing massively.

Prices even for essential commodities are now beginning to fall, reflecting this. Wages for many jobs have gone world wide; I compete with equally capable computer programmers from other countries who are paid a fifth or a tenth of what I'm paid. That inequality will not last much longer. I expect soon to be living on a fifth or a tenth of what I had been living on.

Only later in this crash, much later, when the total economy is a small fraction of what it is now, will the Fed have the ability to seriously inflate our monetary supply.

I expect the falling prices of real estate and stocks to ripple through the rest of the economy, with low interest rates on Treasuries, for the next year or two. Perhaps then we will see seriously rising prices and interest rates.

[Freedom_Is_Not_Free]

I wish I was not so pessimistic on the economy. I just don’t know how this will come out.

Sometimes I fear the worst. I thought Y2K was going to be bad and it turned out I completely over reacted. No, I didn’t go find a bomb shelter to occupy, but I pulled out lots of cash, stocked up on food and water and sat tight on New Years Eve. Turned out it was nothing. I was badly fooled and I over reacted.

Maybe I’m badly fooled with the economy. Maybe I’m over reacting. I just don’t know. No, I don’t expect a depression but at age 49, I expect to see a deeper and longer recession with more personal suffering from economic tightening than anything I’ve seen in my lifetime. I guess the 70s were the worst I’ve seen so far, although I graduated college in 1982 and I remember how hard it was to find a job. A grad from the University of California at Davis, in an industry with a shortage of workers, and it still took me 2 years to find a job. Two years. Over one hundred job applications. Over 30 job interviews. I expect this downturn to be worse.

I wish I wasn’t so pessimistic, but I’ve never seen a situation in my lifetime where debt was at such an all time high in every sector and where there was such distrust and outright fear among bankers.

I’ll be glad when this is over and it’s just a mild recession and I can get out and play again. I just want all this over with.

[Freedom_Is_Not_Free]

It remains to be seen if we can inflate. It is very obvious we are under inflation pressures from huge debt and a weak dollar. I’m not blind. But can it continue?

Can US inflation continue without wage inflation? I see no signs of wage inflation. Wages are stagnant. What I see is a leap of short term inflation that could be strangled without wage inflation. People aren’t going to have more dollars to chase these same goods, they are just going to redirect discretionary dollars to necessary goods. We may have inflation in staples offset by deflation in luxuries.

I am rapidly coming around to the deflation camp, and thinking inflation is going to be short term, snuffed out by a suddenly weakened economy.

I keep hearing people claim that inflation is the obvious end game but I’m far from convinced. I don’t see where it will come from without wage inflation and with deflation coming on so quickly from collapsed housing prices and deflated corporate earnings.

[Freedom_Is_Not_Free]

I readily acknowledge GDII as a possibility but I can’t bring myself to accept it. I also tend to over react and don’t want to find myself over reacting and saying a depression is likely and having to back from that prediction. About all I can handle mentally is to acknowledge that the economic slowdown is going to be deep and long. It is going to hit hard and hold fast. Housing is going to take so long to go back up, a LOT of people are going to be singing the old tune that “we will never see another housing boom in our lifetimes”. Well, of course we will. It always cycles.

I can’t bring myself to accept the possibility of a depression, sorry. I just don’t want to believe it.

Now, in my heart of hearts do I think we have a pretty good chance of one? Well, a complete collapse of the US banking system would be a great start along those lines and so far the FED has had to bail out 3 major banks, the failure of any one of which could have collapsed the banking system. So yes, I can’t say a depression is a complete stretch given all the deflationary factors we are seeing at play in the market and economy today. But I figure the government will find some way to make this a long, dragged out stagnation ala Japan, rather than a short, sharp depression.

Now, if we lose the dollar as a reserve currency, then yes, we are in a depression. If foreign interests dump our Treasuries, that’s a depression. If the bond market collapses, maybe depression. If the US dollar collapses for real, then depression. But this deflation could be survivable as a long, stagnant, endless recession. A slow bleed. I don’t think it has to end in depression — but it could.

It terrifies me to even think that it could and I just don’t want to face up to that fact. I’m in denial.

[Freedom_Is_Not_Free]

Way better than I could say it.

[bruinbirdman]

"I wish I wasn’t so pessimistic,"

You need to visit a Veterans' Administration Extended Care Facility and talk to some guys who have known hardship.

yitbos

[LS]

Who knows? All I can do is go by history. In the late 1920s, you were having 2,000 banks a year fail. We haven't seen anything even remotely resembling that. If you go to the 1980s, I distinctly remember the warnings that the "Latin American debt bomb" was going to cause the collapse of Bank of America (now called Bank of Amigo), Chase, and many others. Of course it did no such thing. The S&L disaster was first put at $800 billion. It came in at less than half that, and if the banks and others had just held onto their real estate a little longer, many of them wouldn't have been hurt at all.

Without seeing their balance sheets, you can't know---but history tells us that real estate values always come back, and that if a bank is in trouble because of bad real estate loans, those prop. values will rise again.

Now, as to transparency: I think it's ironically hilarious that people are concerned about what is essentially "outsider lending," i.e., lending based on stuff they don't understand to people they don't know---when historically (until the last 30 or 40 years), banks have traditionally made "insider loans." In fact, that was the whole point of starting a bank in the 1800s----to make loans to your business and the businesses of your friends, i.e., the people you had information about. So here we are complaining that we don't know who is getting the loans, or who holds them. I thought that's what our great regulatory system was designed to do!!?

Finally, surely you know that all value comes down to faith: what will someone else give you for what you have? In good times, people "trust" that things will get better and take more risks. In bad times, they trust that things will be worse and won't loan or take risks.

I still think most of this hinges on energy: that lower energy prices cause rising productivity, rising incomes, which restores confidence, which brings back (some) mortgage values. No, everyone cannot live in CA, and you cannot drive 2 hours each way to work, so that bubble had to burst. It still isn't done flushing, and I think the CA economy pimple still hasn't been effectively squeezed.

[ThePythonicCow]

I readily acknowledge GDII as a possibility but I can’t bring myself to accept it.

We're in unchartered waters ... deep and stormy waters.

Our fate depends in good part on the integrity, competence, and skill of our leaders, and of the integrity, resilience and flexibility of the various financial, political, bureaucratic, and media organizations that have the most influence on our economic health and political freedom.

... oops

[ThePythonicCow]

Yes, we've been through worse, and come out ok.

We've seen worse predictions, and things were not as as bad as some predicted.

That doesn't tell us much one way or the other how this time will turn out. It just tells us that there is a wide range of possible outcomes, and an even wider variety of predictions.

One key ingredient to catastrophic, systemic failure is the belief that such can't happen, so we can take increasingly large and increasingly new risks, confident that we can always recover, somehow.

Pride goeth before destruction, and an haughty spirit before a fall.

[Centurion2000]

bump

[Centurion2000]

bump for later

[LS]

One thing is absolutely certain: if you are confident you cannot recover, you never will.

[Freedom_Is_Not_Free]

Why?