The Party's Over
"We tried every trick in the book".
The Fiat CEO believes we are heading toward a world with as few as 6 automakers. Right now the 3-month treasuries are trading at negative interest as everyone, including most likely the TARP recipients, flee to a safe harbor. Congress needs to seriously reconsider its planned holiday recess. After all, this kind of global economic earthquake doesn't occur very often.
Despite all that gloom, there are a dwindling minority of us optimists who still believe we are going to recover sooner than not. But the world in one year may look a little like the end-state floating tree in Hayao Miyazaki's Castle in the Sky, denuded of an awful lot of commercial accretions. And if the experimental economics lab results are right, we will just wind up creating another bubble to follow this one. It seems to be in our nature.
So this party is over, but it won't be long before we start putting together the next one.
To link within a post, Lux, just highlight whatever words you want to link, then click the "link" icon above where you're typing. And past the url into the box that opens up when you click the "link" icon. (you can go back and fix that now by clicking on "blog now" and looking for "manage entries." Just click on this very blog and a box will open up just like the "blog now box.") Hope that makes sense!
Also, any clue as to where the next bubble will be? I'm tired of losing "money" - or whatever you call the stuff that shows up in one's accounts anymore.
December 9, 2008 8:03 PM | Reply | Permalink
It worked.. It WORKED!
Thanks a million TheraP! I never could have figured that out!
As far as the recovery goes, just keep googling the phrase "missed the bottom?" When you see that showing up a lot, it means that things are on the way back up!
Greed v Fear mediated by ADD in the institutional memory department. We will recover, sooner than people expect. Unlike the thirties, there is a lot of money sloshing around the system still.
But we will crater again too most likely. :-)
But that's another year.
December 9, 2008 9:14 PM | Reply | Permalink
I read this five times & I still cannot figure this out. And I had college calculus.
December 9, 2008 11:46 PM | Reply | Permalink
Maybe it's that I never took calculus.... ;)
See my blog on helpful hints for the new system. Click my name. (one part is wrong... what Dijamo taught me... that has changed) Maybe I explained it better there.
December 10, 2008 10:18 AM | Reply | Permalink
Rec'd. I think the next bubble depends on how good the Obama administration is on financial reregulation. In the 1930s a lot of protections were put in that restricted speculation, which contributes mightily to bubbles. These mostly got tossed in the past decade, and here we are. The political struggle will be between the 'party hearty' financial types and the 'everything in moderation' policy wonkish types. I know who I'm rooting for.
December 9, 2008 8:58 PM | Reply | Permalink
Lux, my eternally optimistic friend... I'm with you on the fact that we're already growing the next recovery, the next economy, and that it may not look much like this one.
But I think you're dancing around the pain to come. So far, it's mostly been melting money. But my sense is that in the real economy, we're just getting started. Even if finance stabilizes - there's no motor, Lux. And the stimulus is just aimed at keeping us from sinking further. I just don't see an engine, not in housing or cars or commodities or manufacturing or the FIRE sector or... you get the picture. So as the weeks pass, and corporate & household reserves get drawn down, more pink slips go out, and the neighbors tighten their belts in turn, and so on.
At best, if we avoid a Depression or a 90's Japan, we get an 80-82 repeat. But if so, we're in its early stages. WE're not yet into the rise and then long plateau'ing of the long-term unemployed. And average length of time til employment returns to its previous peak? 6 years, Lux.
Maybe we build our new economy faster. Or maybe the world saves our ass. But in economies, the end of the party tends not to mean a simple return to business as usual on Monday AM. Here's Krugman, a few days back -
“I’ve been ruminating over our economic prospects for next year, and I’m getting scared. Two points: 1. The economy is falling fast… And, 2. Infrastructure spending will take time… much more than a year to get going…. So it may be hard for stimulus to get much traction until late 2009…. So here’s what I’m wondering: will it even be possible to pull the economy out of its nosedive before unemployment goes into double digits? I’m starting to wonder.”
Call me Doc Gloom, I guess, but I think we're early in this story. And to see $120 billion lined up today, to buy T-Bills at 0%... surely, this isn't a great sign?
December 9, 2008 11:29 PM | Reply | Permalink
Even if finance stabilizes - there's no motor...
Saw something like that in today's NYTimes, a quote from somebody from the world bank or some such. Scary!
Thanks for your wonderful comments here and elsewhere, quinn! (seems to me, as an aside, that the most interesting bloggers here are able to juggle humor, deadly serious solid blogs and comments, and a certain amount of self-revelation) You're one! So is Lux! (not to leave others out here - just responding to your comment on Lux's thread)
December 10, 2008 10:23 AM | Reply | Permalink
Cheers, Thera. As you may have noticed, I've got some grump in me these past two days, not sure where from, or where it's headed... but there you go. Life.
I'd say Lux is the more-balanced, but he'd read that, and get all puffed up the way he does, and then go off and start ruining other people's threads, as is his wont. Can't have that.
December 10, 2008 11:27 AM | Reply | Permalink
As Tena would say: You so funny, quinn!
December 10, 2008 12:23 PM | Reply | Permalink
"ruining other people's threads"
Pot meet kettle!
--poor innocent victim Lux
December 10, 2008 1:05 PM | Reply | Permalink
Hi Quinn,
Well Krugman all along has been very responsible and not giving vent to his worst fears most likely. He had to know all along that 600 billion dollars was not going to amount to anything and that if it were applied to the central banks, it would just disappear in a liquidity trap anyway. But he kept silent. He also had to know that real unemployment was already close to double digits and by now is probably at 9% +/- a point or two. Best guesstimate I can make at the Lux Quant and Pastry Shop is we are losing about 25,000 jobs a week and it is accelerating, more the pity.
If you were posting from England, I would have nothing good to say: they are further down the road than we are here in the States and their landing is going to be a bit harder. In fact, if we Yanks play our hand right perhaps we can use England and EU to cushion our own landing somewhat. I suppose that's why Obama chose someone as bloody minded as Summers, he's just the sort to practice a kind of tough-minded dodge involving letting England take it in the shorts while the USA takes it in the socks.
I don't think this crash is like anything that came before. It is sui generis and I'm going to stop referring to 1938 and so forth. I think it is steep, deep, and short-bottomed. I would expect the real economy will be stagnant in some sectors for years to come, but there is plenty of growth potential in other areas and a lot of energy in innovation abounding crying out for venture capital.
Unemployment is vexsome, but we just have to adjust to looking at a structural unemployment of maybe 8-9 percent as normal. The malls will still throng with customers, the consumer demand will stay up there, and inventories will come down. The big automakers will stay open thanks to congress and we will see a huge decline in new model roll outs and maybe some tax incentives for buying domestic. Maybe a consortium will form and the Big Three will settle on a common platform!
Consumer demand will slip slightly but rebound in Q2 and we will start to see some positive earnings reports by then also. Money will start flowing out of treasuries and back into the market at about the same time. The CDO market will be a dead horse by then, and the write-downs be about 30 percent completed by Q3 and the counterparty solvency worries a thing of the past. In other words the finance sector will rebound slightly ahead of the real economy, but the real economy won't lag all that far behind. We will be looking back at the numbers we are seeing now, and just wonder how we could ever have lived through such times.
Thats me at my most positive.
You don't want to hear my most negative!
December 10, 2008 12:55 AM | Reply | Permalink
Unemployment first. * Even the BLS says - on its wider measures of unemployment - that we've rung up 12.5%, and that's without some of the smudging of the figures that Phillips and others have pointed out. * As for job loss, 25,000/week - is this how much you assume it's risen? Because we've lost 1.2 million in the past 12 weeks, on the official numbers, so....
Agreed, the UK is well & truly screwed, for letting finance basically eat London, and drive property prices to insane levels across the region. Not even REd Ken dared take them on (ok, he bought in, whole hog), and maaaan, they are gonna suffer - agreed. And yes, I also suspect Summers and co have partially been brought in to be nationalistic meat-eaters, to be the "faster rats" in the game, and thus, provide relative help. But. I'm not convinced Asia is too to keen to take another hosing. So we could lose some tricks there as well.
Steep, deep, and long-bottomed - I'm afraid that's my read. The real economy was in crap shape beforehand, and I see no way to rapidly write off a significant chunk of $49+ trillion in debt - across corporates, govts and households - without a lot of real-world bloodletting. They're gonna cannibalize each other Lux, last man standing and all that. Waves of eating the next little guy up, draining them of life, then getting drained yourself. My problem is that I see no dynamic, no force, which is active or even bloody nascent now, able to halt that. Right now Govt is trying to save finance, housing, automotive... but how many more can it hold up? When consumer debt starts melting, what then? Retail's gonna bite, segment by segment; furnishings, clothes, jewellry, appliances - I just see no reason for it to stop.
And around all this, we have massive ONGOING trade deficits lying alongside massive amounts of money TEMPORARILY parked in T-Bills. Maybe these things stay in a happy relationship, but what's the odds we see no sudden moves, from anyone, driven by their own corporate or national needs?
And you really think derivative world will be stabilized by Q2? My, you ARE a happy guy! What bugs me is the uneven nature of how and where the losses are gonna land. The bets are already placed, and what we DO know going in is that the movements in just about anything being bet on have been huge. What happens if some of the big losers turn out to be people whose fall happens to be the equivalent of that old elm, the one that hung just over your house?
I think our rebuild is gonna happen (truth is, it's mostly what I think about), but I suspect it's only really gonna kick in once the landscape has not only been fairly well flattened, but people have stopped believing it can be rebuilt, back to what it was. Because that, above all, is what everyone - everyone - is hoping for. They hear infrastructure and stimulus and financial bailout, and hear that it's big change time... but they THINK this is all just gonna take us back to where we were. Not just a point in time, but a trajectory. And no way Krugman or the others are ready to start saying, "Ummmm.... that's probably not on." And that mindset can take a lonnnnng time to shift. Just think of managements you've known and loved, Lux. How many industries continued to battle on, hoping against hope, for decades....
There. That's me. At my most positive. Whoo-hoo, happy days in the Dismal Science! ;-)
December 10, 2008 1:48 AM | Reply | Permalink
I like to think of the crash and the economy as a Pacific NW ice-storm and the Pacific NW forest respectively. After the ice storm, the ground is covered with broken off branches and some trees have even come down. But come spring, the leaves come out and by summer you have to look hard through the foliage to see the white wood of the broken limbs and the split trunks. The forest survives and so shall the economy.
So that's the ice-storm model and it is optimistic.
The fire-storm model is the one I don't like to think about....
December 10, 2008 1:01 AM | Reply | Permalink
Interesting metaphor. Ever see what happened after the Quebec Ice Storm a decade or so ago, or the hurricane that rolled into Halifax? About what happens after a forest fire in a forest where fires have been suppressed. i.e. They basically lay down flat. the whole THING. Because the big stuff that's stayed up too long takes down the lower stuff, healthy or not. It's ugly. The way a fire catches hold of too much underbrush, and then burns too hot, and takes forests out in ways traditional fires wouldn't. So sure, you get lots of regrowth. But the damage - when the metaphor flips back to human beings and their incomes and jobs - could be pretty awful.
Care to further extend your metaphor to our economy? ;-)
December 10, 2008 1:23 AM | Reply | Permalink
Boy, I've seen those flattened forests!
I just love you two guys! Thanks for being here.
December 10, 2008 10:33 AM | Reply | Permalink
We can model toy-sized economies over short terms, but the world is changing so fast those are not predictive. History is not cyclic, and both more severe economic disruption and faster recovery are possible, I'd say. Surely will take a few years, though, in either case.
December 10, 2008 9:43 AM | Reply | Permalink
Holy cow, I meant to comment but hit the recommend button! I NEVER recommend my own blogs! At least not in recent times.... But its done.
Anyway, the comment was to Quinn. I know the numbers are bad, very bad. From what I can see there are only a few glimmers of light in my dark ice-wrecked forest. A few positive signs but I can't argue your points they are all sound.
Just call it a gut sense from watching the markets for a while. Irrational exuberance leads to irrational despondency which bounces back to cautious optimism and then bubble formation. The great depression with its long downside can't happen anymore, we have speeded up the cycle for better or worse. Plus instead of two major engines we now have four. There is some redundancy that wasn't there in 1932.
So goes my gut feeling.
But the ur-problem the world economy faces is manufacturing over-capacity and chronic structural unemployment. We have to sort that out and maybe the upcoming April summit will start to address the hard choices necessary.
December 10, 2008 10:43 AM | Reply | Permalink
How much of a factor is chronic structural underemployment? Is this not a trend that has contributed greatly to our present troubles?
Pols & economists talk about the loss of UAW jobs, for example, as being manageable - in some cases even REQUIRED for domestic industry to compete with others in the global economy.
Yet, I look at UAW jobs as being different to most other jobs being created by nature that these are family supporting jobs. We may be able to train everyone to be barristas and maybe even employ all of them. But mortgages will not be paid. Cars will not be bought. And the credit market will remain frozen because none of the consumers make enough $$ to be credit-worthy.
What am I missing here?
December 10, 2008 11:01 AM | Reply | Permalink
To you and SleepinJeezus, on unemployment. Something not mentioned often enough is the unprecedented nature of the global labor force we see rising. And I'm not using unprecedented lightly. The world has simply NEVER faced a situation where capital was global, basic infrastructure and manufacturing could be put in place anywhere, and educated, English-speakers were being added by the tens of millions every single year.
Sit down, and list all the problems of manufacturing and services in India, China, Korea and so on. And then... look at the likely long-term strength of their economies, their currency and trade positions, and a workforce hammering on your door that runs miles deep. Now make your decision - locate your next investment in the US, or elsewhere.
Right now, in a time of real fright, the money's come home to NY. But it's parked. Short-term. What happens if those marginal decisions start to be made, and they go to China, India, Mexico, Brazil, Korea, Malaysia? Lux, the production capacity of plants built there, the ability for them to whip new products out and - through local procurement - get them tested in the marketplace and through the first few generations - just blows me away.
Now, I know there's lots of arguments about why firms will still want to locate here. Or at least, a lot of their functions here. But. We are going to lose more of them than if these competitors didn't exist. And yessssss, maybe those big new markets will pull us out. I'm betting on that, but not sure it'll be as fast as I'd like. But we may not do well in these battles. It's not just like going after Japan in the 80's and 90's. This is Japan with a half-billion deep workforce, hungry for jobs.
These kinds of factors are new, and even if they work out in the long-run, the problem - as always - is the dynamics of change. It's unevenness. We could see this elevator drop a long way before the back-up re-engages.
Oops. Gloom again, eh? Sorry. Nice snowfall today. River ice is just about thick enough to skate on. Not dead yet.
And this always makes me cheery!
December 10, 2008 11:25 AM | Reply | Permalink
And then I look at this unprecedented global workforce rising within a consumer economy and can't help wonder how far we can push it before it becomes wholly unsustainable. Imagine the population in China, India, etc., with a car in every garage and huge flat panel TV's in their McMansions. What resources are there to support this kind of expansion?
December 10, 2008 11:40 AM | Reply | Permalink
Isn't the ur-problem is expensive energy? Manufacturing over-capacity with it's attendant employment and heedless consumption was a function of global supply chains that are only profitable with cheap energy. How long can we afford to ship raw materials 2000 miles to refine them, ship parts another 2000 miles to be assembled and then ship the product another 2000 miles to be sold?
Consider also; the housing and finance bubble burst when it became apparent that real estate could not continue on spiraling upward when the energy inputs required slapped up against a limited supply. Yes, it was a financial ponzi scheme, but it was based on the fantasy that rising housing values would always bail us out. That added value always depended on cheap energy for development.
And also consider that "global warming" is just another way of saying that the externalities of 60 years of cheap energy use are coming back to bite us in the ass. Those costs are just delayed costs, hydrocarbon-based energy has always been fairly expensive but pumping much of those "externalities" into the commons allowed companies to pass the costs onto their children.
So now hydrocarbon energy has become expensive both in terms of supply and in use.
I differ from the "peak oil" doom crowd in two respects 1) humans are adaptive machines, we will adapt faster to changing conditions than what we individually assume that we can. 2) Markets will facilitate that adaptation faster that what we collectivly assume that they can. All of us, right now, are adapting to an expensive energy reality, multiply that by billions of small and large decisions made each day.
The only thing holding us back are the old habits that seemed to serve us so well and provided us a temporary illusion of wealth. It is often easier to continue those habits when it is hard to imagine what a new way of living really means.
December 10, 2008 2:20 PM | Reply | Permalink
Besides low energy costs, part of the answer is: For so long as the manufacturer can continue getting labor at slave-wage rates and avoid any environmental, human rights, child labor, or other regulations and, perhaps most importantly, suffers no tax or tariff consequences for doing so.
December 10, 2008 2:50 PM | Reply | Permalink