G-20 Posturing
A one day summit of the 20 nations that make up 80% of the world's economy is really nothing more than a posturing exercise for roosters like Sarkozy of France and Hu Jintao of China to show their home market that they matter. Last week the Chinese suggested that the dollar be replaced with a new "world reserve currency". Good luck with that.
The dollar is the world's reserve currency because it is the largest and most liquid government bond market. Our T-bill market alone is (ex-Japan) bigger by a factor of two-to-one than the next five government debt markets. China may not like owning so much US paper, but the market for US treasuries is three times the size of the Euro zone debt market.
Despite all the doomsayers on these pages, I am of the opinion that the worst of the economic crisis in the U.S. has passed. That is not to say that unemployment won't continue to worsen for the next six months, but the notion that we are headed into a second great depression is way oversold. If you want to see what a depression looks like, check out these charts from yesterday's Wall Street Journal.
So President Obama's task for the next few days will be that of the Zen Master. Let Merkel, Sarkozy and Hu posture for their domestic audiences, do some serious listening and avoid the temptation to instruct them how to fix their own domestic economies.
Did you get all your stats from Vince Farrell's Soleil Securities note to clients? Because he said exactly the same thing this morning. Just wondering.
March 31, 2009 12:13 PM | Reply | Permalink
I hope you're right that the worst has passed in this... downturn. But the graphs you've posted indicate that in the Great Depression of 80 years ago the worst of everything occurred about two years after the initial meltdown. Every chart except employment shows bumps along a steady, relentless slide downwards. How do we know we're not still on the southbound?
March 31, 2009 12:21 PM | Reply | Permalink
Good question. According to those graphs, right now we're only slightly better off on all three indicators than we were in 1930-31. I'm not sure I want to picture that nice black line going forward ...
March 31, 2009 1:01 PM | Reply | Permalink
I'll take a hack at that one:
1) No Hoover around to make things exponentially worse by cutting gov't spending/raising taxes in a disastrous effort to balance the budget. Remember, Hoover was still president (and stillm making things worse) three and a half full years into the Great Depression.
Thank your lucky stars it did not implode in early 2005, just after Bush won a 2nd term. Think how much worse off we would be!
2) Social safety net which did not exist prior to the Depression.
3) Keynesian economics (stimulate the economy)
4) Gov't regulation (what remains after ~30 years of GOP voodoo economics) of markets
5) Federal insurance of bank deposits. Think about how much worse things would be if everybody everywhere was scared to death that their bank or credit union would fold, taking their life savings with them.
6) Remember that in addition to the crash of markets, there was also an incredible farming crisis, both a collapse of farm commodity prices as well as devastation of the soil itself thanks to crappy farming practices. The Dust Bowl etc. While some would dispute whether current corporate agricultural farming practices represent wise soil policies, it's clear that we know how to manage soil much better plus we actively manage farm commodity prices. Again, some would dispute whether that is done wisely, but it's clear that, say, corn prices will never be allowed to plunge to such a low level that everybody who farms corn will go bust because the market price is way below the cost of production.
I'm sure an economist and/or historian could think of other differences between today's economy and conditions 80 years ago which would help explain why we won't plunge into a depression. Basically we did a lot of stupid shit to get to this point, but we won't (hopefully) compound those errors with precisely the wrong policies.
March 31, 2009 1:02 PM | Reply | Permalink
Excellent points. Well done.
March 31, 2009 1:42 PM | Reply | Permalink
What remains of regulation after 30 years of GOP voodoo economics is... all but nothing. We've had three decades of deregulation, the last eight of which we descended into bust-out non-regulation. Obama is in the uneviable spot of restoring regulation while repairing the ecomomy. And as far as the FDIC is concerned, there's no guarantee of government solvency to back up those imperiled deposits; here in California, we're already accustomed to deadbeat dominion - getting IOUs in the mail instead of tax refunds. And how many of those corporate farms are wrapped up in the shaky, freebase financing, credit and investments that have crippled so much of American industry.
The fact remains that we have a line of credit with the Chinese - growing slimmer day by day - that's keeping us out of free-fall. Without it, you can kiss the social safety net goodbye, and say hello to a newspaper bed in New Hooverville.
March 31, 2009 2:18 PM | Reply | Permalink
Keep in mind also that many people have pointed out that unemployment statistics, while misleading in several ways (including their non-recognition of contractors/"project workers"), are generally a trailing rather than leading indicator of the state of the economy.
And they are also a pointer as to the overall health of the society that economy underpins. When activity picks up, as it is beginning to, we'll have some work to do to make this a healthier society.
March 31, 2009 1:18 PM | Reply | Permalink
Yes please, console me, show me pretty pictures, don't let me read this
March 31, 2009 1:34 PM | Reply | Permalink
The problem is that ordinary monetary and fiscal policy actions can go only so far in dealing with fundamental issues. Krugman is concerned that the fundamentals are the downward driver here rather than say in the early 80s when Volcker caused a recession "on purpose" by raising rates.
But that said, I still don't know why negative Fed Funds rates are not possible. Krugman takes it as an article of faith. But I've shown how it could work, in outline form. Borrowing Trouble, Jan 19.
I believe the economy must undergo a real/fundamental contraction on the order of 8-15%. This is because it has been propped up by unsound borrowing. The "stimulus package" is both not enough and also itself uses unsound borrowing (though not as bad in the short run as what happened from about 1998-2007). That is, in my world, GDP would drop from about $14T to about $12T. That's a pretty heft belt-tightening and goes entirely against the "growth is necessary" version of economic capitalism.
March 31, 2009 3:24 PM | Reply | Permalink
"The dollar is the world's reserve currency because it is the largest and most liquid government bond market. [...] the market for US treasuries is three times the size of the Euro zone debt market."
Huh, are we supposed to be proud to have accumulated so much debt? By other measures (currency reserves, bond market), the dollar is nowhere near as dominant as it once was.
"So President Obama's task for the next few days will be that of the Zen Master. Let Merkel, Sarkozy and Hu posture for their domestic audiences, do some serious listening"
So Mr. Taplin assumes that pretty much every world leader at the G20 will be posturing and spouting propaganda. What is then Obama supposed to "seriously" listen to? And could it be that the POTUS will also try to do some political posturing for his own home audience, or cater to his Wall Street base?
Not in Mr. Taplin's world.
March 31, 2009 1:55 PM | Reply | Permalink
If anyone wishes to compare charts between then and now, check out the "Four Bad Bears".
http://dshort.com/articles/2009/four-bad-bears-alternate-real.html
(Calculated Risk has a more recent chart from short)
Check it out, it is a fun comparison. But Jonathan is correct, nobody really knows what is going to happen. It is like predicting the stock market; thee are always three possiblities - up, down or sideways.
March 31, 2009 1:57 PM | Reply | Permalink
This WSJ Graph is ridiculous. Seen from Europe, this post is the epitome of Abnormal American Arrogance. (AAA, ring a bell?)
You have the most corrupt political system in the world but nothing wrong can happen. You have litterally screwed everybody around the world. The solution to too much debt is evidently more debt to you. You're like addicts in denial, thinking you need more drugs where you really need to go to rehab.
I don't want to sound too harsh for most American readers but this guy's post is so out of place...
March 31, 2009 2:16 PM | Reply | Permalink
"Seen from Europe..."
Why exactly would it matter where it was seen from? Ideas are true or false on their merit. What you are peddling is political correctness and groupthink, and that specialty of Europe -- it's own preening moralizing arrogance.
How did the US screwed European banks that bought CDS and MBS? They took their risks themselves, and we have failures like Irish and Scottish and Iceland banks to show for it.
Europe is acting as petulant as ever. They say "no" more than John Boehner. And would rather point fingers than solve problems. Sound a lot like the Republicans in fact (no coincidence that many "center right" free market fanatics are in charge -- Angela Merkel, and that clown in the Czech Republic) China is a more reponsible international partner than preachy, yet stingy and selfish, Europe.
March 31, 2009 11:15 PM | Reply | Permalink
The worst has passed? I think that's a very foolish statement. And then you use measurements of GDP, unemployment and consumer prices ... all measurements that have been significantly rejiggered by the US Gov't from that time ... to justify your beliefs ... unbelievable.
I think you are also way. way oversold on the presumption that the rest of the world is just going to allow us to continue to run the king fiat currency after we've just about blown up the world economy with our reckless abuse of that privilege. Things have changed significantly, from the depression over 80 years ago when we were on the gold standard and later when at least settlements between countries were on the gold standard to the blizzard of paper and credit our economy now runs on.
The worse is almost certainly not over and a depression is very possible IMO.
Z
March 31, 2009 2:35 PM | Reply | Permalink
I don't think so. The most dire prediction is for an L-shaped recovery, like Japan.
There is certainly more pain to come, as jobs are a lagging indicator. That means you could have unemployment 9 months after the recession ends.
2009 is going to be painful. Hopefully 2010 we climb out of the hole, but it may be a slow recovery.
But I am thankful that we are likely NOT heading into a great depression II. Enormous government intervention has averted that. It has been far from perfect, but totally necessary. (And it will be irritating to hear people claim it wasn't a factor and that fears of a depression were overblown -- they weren't! We could have easily gone down that path in Oct 2008)
March 31, 2009 11:22 PM | Reply | Permalink
I am of the opinion that the worst of the economic crisis in the U.S. has passed. Jon Taplin
Depends on what you mean by "worst."
"Summer of Sam", anyone?*
* That's 1966-1982 and for you folks who missed out on Plato's Retreat, Deerhunter's got your back.
March 31, 2009 2:39 PM | Reply | Permalink
Ellen, How did you get three links to work? Has TPM changed the rules?
April 1, 2009 1:01 AM | Reply | Permalink
This is a huge credit bubble with acelerants to the downside via derivatives ... it is not an apples to apples comparison to the Depression in terms of size nor ingredients.
Z
March 31, 2009 2:39 PM | Reply | Permalink
I am afraid that Taplin is in that school of economic thought where if every one simply announced "I believe, I believe" in (recovery? tinker bell? whatever) then it would come to pass. Often times economic crises are nothing more than crises in confidence, but this time it feels different.
Namely, there is too much debt with not enough income to service that debt. Giving banks more money to loan in order to create more debt does not solve that underlying problem; in fact one would think it would make it worse.
Since our government is trying to solve this problem primarily through increasing the debt load, I think we have not reached bottom yet.
March 31, 2009 3:20 PM | Reply | Permalink
Syvanen-I might remind you that 14 Months ago, I was warning of a crisis, so please don't assume you know what I'm thinking.
http://jontaplin.com/2008/01/02/entering-financial-hell/
The basic assumption of so many blogging heads is that we are now headed for financial hell, when in fact that warning should have come 14 months ago.
March 31, 2009 5:22 PM | Reply | Permalink
Jon, are you suggesting that we're in financial hell now? So there's nowhere to go from here but up?
I think it's possible we're just looking at the gates of hell. Ugly, yes. But it could be worse inside...
-- ARG
March 31, 2009 6:31 PM | Reply | Permalink
I understand that you have had a better track record than most economist on this downturn. But recently I have a feeling you are maybe becoming a little too partisan in your outlook. Maybe, you want Obama to succeed so much you have joined the wishing line. I too love my president, but if he looks like he's doing something wrong I believe he should be called out.
March 31, 2009 7:04 PM | Reply | Permalink
Your point is well taken, but I am equally concerned that there is a crowd of "I told you so Democrats" including Krugman, who opposed Obama from the get go and will never admit they were wrong. They have been hectoring me at my private email address every time I say something slightly supportive of our President, in the most foul language imaginable.
March 31, 2009 9:57 PM | Reply | Permalink
Then you were six months late since the credit crisis started in the summer of 2007.
March 31, 2009 9:52 PM | Reply | Permalink
I only started blogging in late December of 2007.
March 31, 2009 9:59 PM | Reply | Permalink
I don't know....looking at those graphs, it seems to me we are right on track. (for a major depression)
C
March 31, 2009 3:26 PM | Reply | Permalink
BUT,but, but....
Eurozone's debt market is growing faster than the US one. Let's get all the info in there. And, although it has plenty of loopholes, the EU's deficit standards make it more enticing in some ways. Also, let's not forget that China has some silent backers using it as a stalking horse... especially Russia, which will look stronger when oil prices go back up.
Also, per other commenters, remember Dems had their share in disabling regulatory controls.
March 31, 2009 4:52 PM | Reply | Permalink
Had their share?? You understate the problem. Summers, Geitner and Rubin were the principle suspects in both the repeal of Glass-Steagle and exempting the CDS market from regulation (Greenspan and Gramm played a role as well).
They built the bomb and gave it to moron Bush to manage.
March 31, 2009 5:04 PM | Reply | Permalink
throw gensler in there as well ... a guy that geithner and summers want to bring on board.
I think greenspan and gramm played a larger role in the repeal of Glass-Steagle than geithner. loyal corporate whore gramm wrote the bill and greenspan allowed citigroup be citigroup for years in violation of the act b4 it was repealed. greenspan also used his considerable influence at the time to promote it.
I can't stand any of these rubinites like rubin, geithner, summer, orszag, gensler, furman, etc., etc. that our latest corporate sell-out president placed into their government, but geithner played a lesser role in that particular Glass-Steagle mess than the other folks you mentioned IMO.
Z
March 31, 2009 8:04 PM | Reply | Permalink
Aren't rumor and smears fun on these Interwebs!
Phil Gramm repealed Glass Siegel.
March 31, 2009 10:41 PM | Reply | Permalink
Rubin and Summner convinced Clinton to support that legislation. This not innuendo nor smear, but verifiable fact (Someone above pointed out, correctly it seems, my inclusion of Geitner here was incorrect).
April 1, 2009 3:44 AM | Reply | Permalink
geithner was involved as well I believe ... he had something to do with treasury at the time I believe ... but just not on the level as the rest of them that were mentioned in that post.
Z
April 1, 2009 5:34 PM | Reply | Permalink
A chart here and a chart there and here again a chart.
March 31, 2009 9:18 PM | Reply | Permalink
Ellen-Touche'
March 31, 2009 10:01 PM | Reply | Permalink
So, is Obama the only world leader who is uniquely exempt from the need to posture for his domestic audience?
Given this post and the latest Simon Johnson post here at TPM Cafe, and Drezner's latest at Foreign Policy, some bloggers are starting to sound like the latest incarnations of Bush and Rumsfeld, disdainfully looking down their nose at every message from abroad they don't like, and smugly assured that all of those messages are merely empty "posturing". Yes, yes ... we can safely disregard all that foreign noise, because all those foreigners merely posture and pose, while only the Great Obama really means what he says.
I suppose it's just "Old Europe" again, making bothersome noise and trouble for the The Amazing Us.
The America Century is gone, and the American Way has just gone bust big-time on the global economic stage. Doesn't anyone think some listening is in order?
April 1, 2009 12:45 AM | Reply | Permalink
"The dollar is the world's reserve currency because it is the largest and most liquid government bond market."
This makes me angry. It's not true. Either you're ignorant or deliberately misinforming. The bond market is the Ponzi RESULT of the US$ being the Global Reserve Currency by mandate. All IMF debt is denominated by decree in dollars. All world oil prices are denominated in dollars. Only Iraq, North Korea and Iran dared challenge this (do they sound familiar? Axis Of Evil, anyone?). And for FOREX, all exchanges of currency regardless of countries involved go through the US$ for conversion (with the US skimming a piece of the action of every single exchange). It is a rigged game where the there exists dollar hegemony. The dollar did not fall because of these facts. And so, like a good scammer America took advantage of the system it instituted at the end of WWII to sell billions of worthless scrip that people globally were required to purchase if they want oil or to exchange money or borrow from the IMF or deal international commodities (also denominated in US$). THEN you arrive at the largest bond market (basically money owed by the US people to the hapless global village.)
You warned of this crisis 14 months ago. Well done. Joseph Stiglitz precisely predicted a US Depression for '09 in September 2006. Sadly, the only place he could get airplay for such a "crazy" idea was Alex Jones' Prison Planet. Many people knew it. Some much earlier than others.
April 1, 2009 6:51 AM | Reply | Permalink
The old joke is that the market has predicted 9 of the last 5 recessions.
People have predicted all kinds of disasters, and the ones that happen to turn out right are hailed as "geniuses".
I think both knowledgable and lucky is more the answer.
April 1, 2009 9:47 AM | Reply | Permalink
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