Tuesday, March 10, 2009

Is the US Starting to Lurch Towards Depression?

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One of our most popular posts of 2008 [Fund my Mutual Fund's Most Popular Posts of 2008] was a take on what a modern day Depression would look like [Nov 18, 2008: What Would a 2009 Depression Look Like?] As I re-read many of those line items in that story, it is starting to feel quite eerie.

Via Bloomberg
  • The U.S. economy’s vital signs may not confirm a diagnosis of depression. The symptoms increasingly point to one. As in the Great Depression, world trade is collapsing, wealth is evaporating and the banking system is broken. Deflation is a growing threat as companies slash production, pay and prices. And leaders worldwide are having difficulty making headway in halting the self-perpetuating decline. “We are tracking 1929-1930,” says Barry Eichengreen, a professor of economics and political science at the University of California, Berkeley.
  • The result: This contraction may leave a lasting imprint on the economy and society, just as the Depression did. In the wake of the devastation of the 1930s, Americans swore off stocks, husbanded their own resources and looked to the government for help. Now, another generation might draw some of the same lessons from the deepest economic collapse of their lifetime.
  • No economist forecasts a return to the breadlines and shantytowns of that era. “Though the current recession is unquestionably severe, it pales in comparison with what our parents and grandparents experienced in the 1930s,” White House chief economist Christina Romer said in a speech today in Washington. Still, the economy is getting closer to some of the metrics academics cite as constituting a depression, if not a “great” one.
  • Some industries are already in a depression, led by housing, where the decline accelerated in recent months as the credit crisis intensified. During the last four years, residential investment is down by 37 percent. That compares with an 80 percent drop in spending on home building from 1929 to 1932.
  • In the auto industry, U.S. sales have fallen 55 percent from their July 2005 peak. Production of cars and trucks plunged in January to an annual rate of 3.9 million, the lowest since the Federal Reserve began keeping records in 1967, and 67 percent below the January 2005 level.
  • The financial-services industry has also been decimated. Since the crisis began in the middle of 2007, institutions worldwide have racked up $1.2 trillion in credit losses and writedowns. Announced job cuts have topped 280,000.
  • That disruption is making it hard for Bernanke and his fellow policy makers to get much traction in their efforts to stop the economic decline. Strapped with losses, banks are hoarding capital rather than lending. This type of breakdown happens only two or three times a century and can lead to a “downward vortex” in which weaknesses in the economy and the financial industry feed on each other and are difficult to break, Lawrence Summers, director of the White House’s National Economic Council, said Feb. 26. “It’s the kind of vicious cycle Franklin Roosevelt talked about,” he told a forum in Arlington, Virginia.
  • Summers has also voiced concern about a return of deflation, which wreaked havoc on the economy during the Great Depression. As wages fell back then, workers had a harder time paying their debts, aggravating the banking industry’s woes.
  • There are other echoes. Since hitting a peak in October 2007, the Dow Jones Industrial Average has fallen 54 percent. Over a similar length of time -- from 1929 to 1931 -- the average fell 55 percent. It ultimately dropped 89 percent from its 1929 high before beginning to recover in mid-1932.
  • Like the Great Depression, the current economic decline is global. The International Monetary Fund says this will be the first time since World War II that the U.S. and other industrial nations will suffer a simultaneous decline in their economies.
  • Worldwide trade is falling fast as the credit crunch curbs financing for exporters and importers. The volume of merchandise trade plunged at an annual rate of 22 percent in the fourth quarter from the third, according to the CPB Netherlands Bureau for Economic Policy Analysis. The peak-to-trough decline from 1929 to 1932 was 35 percent, as countries slapped big tariffs on imports.
  • Massachusetts Institute of Technology professor Peter Temin says the trouble is that the economy seems to be collapsing faster than policy makers are reacting. “They’ve only done enough to cushion the downturn,” says Temin, author of the book “Lessons from the Great Depression.”
  • That leaves the U.S. -- and the rest of the world economy -- in danger of being mired in an extended period of little or no growth, much like that which afflicted Japan during the 1990s. Eichengreen says such an outcome would be equivalent to a depression.
But other than that, things are looking up. Hmmm, why is it so dark when I keep my head in the sand? *blink* *blink*

I guess it is not going to just be a Pooring of Americans [Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance?] [Dec 29, 2008: What Happens if America Returns to a Historical Savings Rate?]

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