What if a Slowdown Is a Never-Ending Story?

The New York Times ^ | November 21, 2008 | Ben Stein

[dano1]

I AM endlessly charmed by chatter about when this slowdown/recession will end. (snip)

But this does not look like a typical recession. A typical recession is brought on by Federal Reserve tightening in the face of excessive demand and rising prices. The economy still functions normally, but purposeful credit tightening slows activity. When the Fed loosens up and money starts flowing, demand increases and growth returns. This, at least, is the pattern of the large recessions we have had since the Great Depression, which was a special case, as we shall see.

Smaller recessions have been brought on simply by the inventory-business cycle, but they, too, were amenable to Fed stimulus.

That was because normal credit mechanisms were working.

This time it’s different. Or, because that is a dangerous phrase, let me say that maybe this time it’s different.

The problem now, as in 1929 to 1940, is that the economy is not functioning normally. It is shot through and through with fear, even terror. Worse yet, and unlike the situation in the Depression, government miscues have been only a part of the problem. This fear is so pervasive that it has brought the credit sector to a virtual shutdown, even to borrowers with good credit. At this point, the lending sector is so panicked —largely from the government’s inconsistent behavior and failure to rescue Lehman Brothers — that it is frozen. Not totally, but way too much for ease of lending and maybe even for the survival of a robust economy. And if a colossal worldwide deleveraging spreads to Treasury debt owned by foreigners, the situation will be deadly serious.

The unemployment rate is rising. Housing is in collapse. Manufacturing is weak. The unionized auto sector is dying before our eyes. Commodities are falling hard and fast.

[archy]

What followed the last great cloud of (hyper)inflation in Weimar Germany?

A spell-binding orator promising hope and change.

And I'm sure you know how that worked out.

Yeah, but he was a veteran, and many or most of his fellow Great War vets rallied around him. Even some of those same sorts in other countries that had fought against Germany during the First World War admired the new Reichschancellor, and thought that teamed with von Hindenburg, Germany's future in the remainder of the first half of the XX Century was assured.

And so it was.

[Jacquerie]

Enlighten yourself. Try Robert Heilbroner's The Wordly Philosophers, 1953.

[archy]

I don’t agree with a lot of his conclusions, but his waypoints on the road to perdition are priceless.

Do you happen to recall the economic conditions predicted for the end of 2008 in Molon Labe! by Ken Royce, AKA, "Boston T. Party?*

First published in Jan 2004, he predicted a Dow of 4309 by the end of 2008, which we may yet see, depending on the *progress* of the Detroit auto builder bailout and/or the bankrupcy of GM and Chrysler.

Around mid '04 after a very good pal of mine sent me a copy of that novel, I described some of the financial/economic condition forecasts in it [2004-2020] to a banker pal of mine [who was the first guy to explain to me what a *NINJA* loan was.] He got a good chuckle, and told me all sorts of *coming financial collapse* books have been around for years.

About 3 weeks back, he called me up and asked me the name of *that book that had the Dow at 4300 by the end of '08* and where he could get a copy. I told him, and he ought to have it in hand and on his desk by now. It's about time for me to call and ask what he thought of it, but I think I'll wait until after Thanksgiving.

[archy]

During the GM/F/C testimony in DC they said if the Big 3 fail that 3 million jobs will disappear. This seems like a stretch. What would a reasonable number be?

Depends. My back-of-the-envelope guess is that Ford would possibly survive, while GM could either reorganize and divest, or could disappear...and that Chrysler is the moist likely to go the way of Studebaker and De Soto. But go here for a 2005 study of U.S. Automotive Industry Employment Trends that should give you a pretty good idea. [It's a .pdf]

But it's not just the auto makers themselves, but the other industries that feed them *just in time* parts shipments, subcontract parts [everything from electrical systems to wheels] and steel and rubber suppliers and machinery and systems suppliers.

I don't think three million is at all impossible, just that it probably won't be 3 mil at once, but a cascading and worsening black hole of disappearing industries and jobs from which there may be no return.

I know three guys who are a lot sharper about these things than I am [one is an editor at WSJ who has a professional interest and the other is an analyst at CBOT] and I want to pick their brains a bit before I begin to yell that the sky is falling. But it wouldn't surprise me if it does, and the conditions are right for it...and other things.

[RightWhale]

I am skeptical about the number 3 million since most of those are in other than car/truck direct manufacture. Suppliers can supply whoever is building cars. They might also include Mike the gas station owner who can fuel and fix any piece of rolling junk no matter who built it.

[Travis McGee]

Have a secure job and cash money on hand for deflation. But be prepared for both, most likely is deflation first for months to years, followed by inflation leading to hyperinflation, leading to the end of the USA and the dollar.

[Travis McGee]

We’re in for a wild ride, that’s for sure!

[Travis McGee]

That's a sea change, when the permaoptimists like Stein, ardent believers in “American exceptional ism” as the magic elixir that cures all ills, comes over to the G&D side.

[archy]

I am skeptical about the number 3 million since most of those are in other than car/truck direct manufacture. Suppliers can supply whoever is building cars. They might also include Mike the gas station owner who can fuel and fix any piece of rolling junk no matter who built it.

Well, I hadn't thought about it, but we now find that Tiger Woods is among the Three Million, since Buick has let him go as their spokesman.

Interestingly, the old crab of an editor who used to employ me, who cut his teeth at WSJ and a couple of other financial/business oriented newspapers, tells me that he includes several airlines, up to twenty that are on shaky financial ground, that will go under in the vortex that follows a Detroit automaker collapse. Interestingly, both industries are heavily unionized....

[archy]

More happy news: three more US banks failed, and the three had a combined total of more then 214 branches....

How low can the Dow go? [19 Nov; Marketoracle UK]

Worst of Financial Crisis to Come [Breitbart]

A near-riot and parliament besieged: Iceland boiling mad at credit crunch

[Iceland; 24 Nov]

5 injured during protest in Iceland over economic meltdown [More Iceland; 22 November 2008]

Germany facing worst slump since 1949 [24 Nov]