Tuesday, March 10, 2009

The dynamics of Depression

are settling in.

From Bloomberg.

March 9 (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.

“This is going to scar the collective psyche,” says Mark Zandi, chief economist at Moody’s Economy.com in West Chester, Pennsylvania. “People will become much more conservative in borrowing, lending and investing.”

Debt Deflation is its own spiral, its own negative feedback loop. Breaking it requires restoring confidence which requires prices floating which requires restoring monetary levels, requires massive printing of money or the reset of the financial system. Politicos look completely blindsided. The housing market needs to find its bottom before the cleaning can happen and all the while the economic conditions are snow-balling. I don't expect soup lines. In retrospect stagflation was a blessing, at least they had inflation and that inflated away the problems and avoided a severe depression in the 70's. Japan looks like the bullish outcome (stability of economy, stability of prices). Ojala!


Army No. Va. said...

In the USA, there won't be soup lines...you'll get a debit card, "food stamps", in the mail. This will be a depression, but not as severe as the 1930s in terms of human toll (unless we get in a mode where countries cut off oil shipments to us - then it will be worse than the 1930s).

The 1870s or 1890s still come to mind as the likely most similar depression scenario (which will be pretty tough on a lot of people). One major difference (beyond our oil addiction), we don't have a growing manufacturing base/export economy like we were building then.

The other wildcard is money creation and velocity. If we keep the money "printing" pedal to the metal, at some point it will offset money destruction from foreclosures and set up a nasty inflationary scenario (which we did not have much of in the 19th century except in the Civil War).

Tom said...

Army No. Va. is right about no soup lines... they sure don't want any disturbing photo ops.