Roubini: The Worst Is Not Behind Us (15)
Posted on 13 November 2008 by Jack
Beware of those who say we’ve hit the bottom.
It is useful, at this juncture, to stand back and survey the economic landscape–both as it is now, and as it has been in recent months. So here is a summary of many of the points that I have made for the last few months on the outlook for the U.S. and global economy, as well as for financial markets:
–The U.S. will experience its most severe recession since World War II, much worse and longer and deeper than even the 1974-1975 and 1980-1982 recessions. The recession will continue until at least the end of 2009 for a cumulative gross domestic product drop of over 4%; the unemployment rate will likely reach 9%. The U.S. consumer is shopped-out, saving less and debt-burdened: This will be the worst consumer recession in decades.
–The prospect of a short and shallow six- to eight-month V-shaped recession is out of the window; a U-shaped 18- to 24-month recession is now a certainty, and the probability of a worse, multi-year L-shaped recession (as in Japan in the 1990s) is still small but rising. Even if the economy were to exit a recession by the end of 2009, the recovery could be so weak because of the impairment of the financial system and the credit mechanism that it may feel like a recession even if the economy is technically out of the recession.
–Obama will inherit an economic and financial mess worse than anything the U.S. has faced in decades: the most severe recession in 50 years; the worst financial and banking crisis since the Great Depression; a ballooning fiscal deficit that may be as high as a trillion dollars in 2009 and 2010; a huge current account deficit; a financial system that is in a severe crisis and where deleveraging is still occurring at a very rapid pace, thus causing a worsening of the credit crunch; a household sector where millions of households are insolvent, into negative equity territory and on the verge of losing their homes; a serious risk of deflation as the slack in goods, labor and commodity markets becomes deeper; the risk that we will end in a deflationary liquidity trap as the Fed is fast approaching the zero-bound constraint for the Fed funds rate; the risk of a severe debt deflation as the real value of nominal liabilities will rise, given price deflation, while the value of financial assets is still plunging.
Update: Banks get help, but will GM?
Update: Corcoran: Rescuers pulling market under
Update: Watson: Don’t bail out the car companies
Update: Saporito: Is General Motors Worth Saving?
Update: Maynard: G.M.’s Troubles Stir Question of Bankruptcy vs. a Bailout
Update: Ivison: Taxpayers already on the hook
Update: Germain: Forget the IMF
Update: Developed world economies in recession: OECD
Update: Jobless claims highest since Sept. 11 attacks
Update: 85,000 homes lost to foreclosure in October
Update: Banks must start lending
Note: I’ve been watching CNN and their analysts are really wound up about the “old switcheroo” that Paulson pulled yesterday. Keep your eye on the channel if you have time.
Update: Bailout Lacks Oversight Despite Billions Pledged
Update: Mayor Daley: Prepare For Mass Layoffs
Note: 6:09 pm and gone.
Goodnight.
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November 13th, 2008 at 12:56 pm
Given the all out effort that our banks and governments have made lately to keep the currency printing presses churning out new cash, the only way we see the appreciable deflation in asset prices that our governments seem to be counting on is if the housing price crash continues and spreads everywhere, countering the effects of rising prices due to inflation everywhere else, much like what happened in Japan in the 1990s. Under those circumstances, how responsible is it of our governments to use low interest rate policies and even direct manipulation of our banking systems to try and convince us to overspend even more than we already have, especially at this point in time?
The situation with the auto industry is far from cut and dry because developed nations have increasingly fewer wealth producing endeavors to depend on. In the US the new housing construction industry is probably done for a generation taking forestry with it, companies cannot invest very much in tech sector offerings during a downturn, and Obama has designs on healthcare that will probably have a negative affect on the medical equipment and pharmaceutical industries which are some of the US’s most lucrative. Other than to go ever deeper into debt, how exactly is the US ever going to pay for anything if it lets what remains of its wealth producing manufacturing sector die?
The situation in Canada is slightly different but also far from cut and dry because we have no real local auto industry, we only host branch plants for foreign companies to assemble cars that have been designed and developed elsewhere, and any profits that the auto companies make here leave the country for Japan, Europe, or the US anyway. Any corporate taxes that we can occasionally squeeze out of auto manufacturer’s profits are probably more than offset by the incentives we give all such companies to stay here and provide Canada’s only real benefit to hosting them, which is decent wealth producing jobs. Lets face it, if these companies offered us only low paying, non-wealth producing, McDonalds or Wal-Mart type jobs, nobody would care if they went under and our governments would not lift a finger to help them. Therefore as egregious as it sounds, as long as the automakers remain viable and their products competitively priced, the more money that Canadian auto workers make the better it is for our economy because at least that money stays in Canada and our federal and provincial governments can always tax the earnings of those auto workers even when the auto companies are making no taxable profits. Canada sees far more benefit from having branch plants for the big 3 American auto companies than it does for hosting similar Japanese or European companies precisely because the jobs pay better and therefore create more local wealth. Further, since US auto companies use a far higher percentage of locally manufactured parts they create far more decent wealth producing jobs to our benefit.
November 13th, 2008 at 2:44 pm
Mr. Roubini, we should also beware of geniuses like you who say we haven’t hit the bottom… because you don’t know. There are too many variables in a global economy for anyone to figure out where this capital transformation is going. That’s the whole point of capitalism versus a central plan … there is no centrally planned answer that works, no guarantees.
All we can do is demand that our central planning governments that have intervened in our lives and the marketplace to an ever increasing extent over the last few decades give us an honest accounting of where we stand. Stop the Enron like accounting that takes place at all 3 levels of government. The global markets are warning us that the same re-pricing of assets and liabilities taking place on our stock exchanges also needs to take place in the Byzantine accounting records of our governments.
All the machinations of moral hazards that Brian S mentions with GM are also taking place under the surface of this financial chaos with government redistribution of earned money to those that didn’t earn it. The market will sort itself out eventually; what we really need to beware of Mr. Roubini is government equalization programs, making the true cost of those transparent to the taxpayer is going to be a shock.