The Great Depression II: We’re in a Downward Spiral with No End in Site

The condition of the United States Economy is a global disaster that will have ramifications economically and geopolitically for decades to come.  For all intents and purposes we’re now in the seminal event of our lifetimes and it promises to be every bit as bad as the Great Depression of the 1930’s.  Too many key aspects of the economy are out of control or hanging by a thread.  44 of 50 state governments are getting clobbered by the massive fall off in revenues as the sickening cycle of deflation continues. Everyone, both corporate and individuals are hording cash and to cutting spending to the bone.  The production of Goods and Services is freezing up just like the credit markets did in the recent past. Many TV analyses will tell you that we have a major crisis in confidence but I would contend that we’ve long passed the problems of poor market psychology into a profound crisis of faith in everything from the dollar, to the banks, to the local Target store. We’re only going to rebound when we have some kind of economic spiritual epiphany and that may take a decade or more as it did in Japan. 

To put it in plain English:

·       The government has no idea how to stop the spiral and is indeed making it worse with ill-advised meddling that gets changed every other week as someone in Treasury has a new bright idea and thus institutionalizes “uncertainty”. The Government started out wanting to buy toxic assets from banks but switched within a few weeks to injecting liquidity.  Now the government wants to go back to some version of dealing with toxic assets while doubling or tripling the bailout to try and help “Main Street”.

·       Europe is in worse trouble than we are with their loans to emerging market countries that are now in the toilet much deeper than we are.  This is going to be like Europe’s subprime crisis and its effects will surely resonate in the USA just as our subprime mess resonated in Europe.  This is another shoe that will drop at any time; when it does, its going to increase our trouble by several orders of magnitude.

·       Oil Prices have fallen and there’s a report out today that Merrill Lynch thinks it could drop to an astonishing $25 a barrel from $147 a barrel JUST THIS LAST JULY.  Lots of people take this as good news but the fact is that economic production across the planet has virtually stopped.  It’s as frozen as the credit market was until just recently and with oil, the economic lifeblood of the global economy in absolute free fall; it means that the global economic heart has stopped.  The world had an economic heart attack and we just haven’t realized we’re dead yet. Demand is gone because production is gone because no one is spending on anything they don’t absolutely need.  Did I mention the probability of war in the Middle East between Iran and Israel before the summer? So is unemployment going up? Consider this story from Reuters about unemployment this morning:

·       WASHINGTON (Reuters) – Employers axed payrolls by a shocking 533,000 in November for the weakest performance in 34 years, government data on Friday showed, as the recession inflicted a mounting toll on the U.S. labor market.

·       The Labor Department said the unemployment rate rose to 6.7 percent last month in the highest reading since 1993, compared with 6.5 percent in October, after widespread losses across the country’s major industry sectors.

·       November’s job losses were the steepest since December 1974, when 602,000 jobs were shed, and were much worse than forecast by analysts polled by Reuters who had predicted a reduction of 340,000 jobs.

·       In addition, October’s job losses were revised to show a cut of 320,000, previously reported as a 240,000 loss, while September’s losses were revised to a loss of 403,000 from down 284,00.

·       The length of the workweek slipped to 33.5 hours, the shortest since records began in 1964, a Labor Department official said.

In November alone we lost 602,000 jobs and now have a 6.7% unemployment rate with the potential of the big three automakers either getting a bailout or adding millions to the unemployment statistics.  When?  Reports indicate that General Motors doesn’t have the cash to finish out this month, December of 2008, and without a bailout the December numbers will make the November numbers look like a folk dance. The November 2008 unemployment numbers were the worst in 34 years. These numbers don’t reflect an estimated 422,000 people who simply dropped out of the workforce in November as indicated in a Associated Press article.  Here’s some analysis from that AP article that puts things into perspective rather well:

·       Workers with jobs saw modest wage gains. Average hourly earnings rose to $18.30 in November, a 0.4 percent increase from the previous month. Over the year, wages have grown 3.7 percent, but paychecks haven’t stretched that far because of high prices for energy, food and other items.

·       Worn-out consumers battered by the job losses, shrinking nest eggs and tanking home values have retrenched, throwing the economy into a tailspin. As the unemployment rate continues to move higher, consumers will burrow further, dragging the economy down even more, a vicious cycle that Washington policymakers are trying to break.

·       At 12 months and counting, the recession is longer than the 10-month average length of recessions since World War II. The record for the longest recession in the postwar period is 16 months, which was reached in the 1973-75 and 1981-82 downturns. The current recession might end up matching that or setting a record in terms of duration, analysts say.

·       The 1981-82 recessions was the worst in terms of unemployment since the Great Depression. The jobless rate rose as high as 10.8 percent in late 1982, just as the recession ended, before inching down.

·        Given the current woes, the jobless rate could rise as high as 8.5 percent by the end of next year, some analysts predict. Projections, however, have to be taken with a grain of salt because of all the uncertainties plaguing the economy. Still, the unemployment rate often peaks after a recession has ended. That’s because companies are reluctant to ramp up hiring until they feel certain the recovery has staying power.

The Last bit of cheerful economic news comes from the Peoples Republic of California where the Governor is going to try and pay state vendors with “Warrants” (AKA IOU’s) for the second time since the great depression. Since California is the Eighth largest economy in the world, all by itself, and since you can’t deposit a “warrant” in a bank and you can’t use it to make payroll: what do you think will happen to the work force of the vendor companies?  Unemployment?  You betcha.  The Eighth largest economy in the world, the State of California can’t pay its bills, not unlike the big three automakers, and Lord knows how many of our banks. 

I don’t see how we can avoid double digit unemployment of 12-15% by the summer.  If it goes that high look for major social disruptions in the fabric of our society as a likely consequence.  That’s going to feed the fire and people will borough in even more than before.  Once the riots begin no one will be filled with confidence about their economic future and the crisis of faith will worsen.

It took a while in 1929 for the full effects of the stock market crash to become the Great Depression.  Really it was a matter of years.  Things are vastly accelerated in our times so we won’t have to wait years.  18 months should pretty much tell the story and if the recent economic news is any indication:  WE’RE IN BIG TROUBLE AMERICA! 

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One response to “The Great Depression II: We’re in a Downward Spiral with No End in Site

  1. Nice.

    I think that the effects of the depression are extremely hard to replicate, since the causes were so different; severe demand shocks, ineffective FED policy action due to being constrained by the gold standard.

    I agree that we are not in for a nice ride, as this recession is already the longest in our history – the depression may have lasted longer, but that was due to a glacial recovery.

    Pragmatically speaking, we have to think that long term inflation is unavoidable, while consumer spending will never recover to what it once was (as Nouriel Roubini often says, we can’t use our houses as ATM machines anymore).

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