The "D" word
Nov. 13th, 2008 12:23 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
pyesetz"In total we see the US economy losing between seven and 13 million jobs by the end of 2009 representing a 5% to 10% increase in unemployment. Our forecasts during this crisis have tended to be on the optimistic side; steeper job losses cannot be ruled out, especially if other feedback loops intensify. For example, rising unemployment will lead to a further 20% to 40% decline in real estate prices as households lose access to income to pay mortgage debt. A further tightening of credit as the pool of credit-worthy borrowers contracts means even deeper losses in Wholesale Trade, leading to more unemployment, and so on.
"The proximate cause of the current depression is the sudden disappearance of the purchasing power that was created by the expansion of credit in the US economy since 1980. Since 1980, the US economy went from needing a dollar of new private and public sector borrowing to produce a dollar of GDP growth to dependence on more than five dollars of new debt to generate a dollar of GDP growth by 2007. This credit growth was accomplished by various unsustainable means, including foreign borrowing, financial engineering, and leverage.
"Since net capital inflows slowed to a stop in 2007, launching a financial crisis associated with capital flows and 'sudden Stop' economic effects, first US then international credit markets seized up in 2008. The US government through the Federal Reserve and Treasury Department have attempted to restart the flow of private credit in the US but with only limited success. The inexorable logic of the American political economy dictates that the next phase of economic remediation is direct substitution of government credit for private credit by lending directly to private firms, such as the loans to US auto makers now being discussed. We believe this lending will be broadly expanded throughout the economy in 2009 as the depression deepens, with certain industries and sectors tending to benefit more than others and other unintended consequences drastically changing the structure of the US economy."
...
"The social consequences of the kind of mass unemployment we foresee will, if not addressed by government stimulus, split the nation into competing interest groups by age, income group, and industry that will fight for decades over a shrinking pie that could be growing if all of these groups were working together to achieve a common goal: an efficient, competitive economy based on productivity, savings, and investment. Doing nothing is not an option. On the other hand, the course we are on today of ad hoc bailouts going to the biggest, most vocal, and best politically connected, first in banking and now in the auto industry, will lead to an economy of big corporations and big government, and a decade or more of economic stagnation may follow."
(link)
"The proximate cause of the current depression is the sudden disappearance of the purchasing power that was created by the expansion of credit in the US economy since 1980. Since 1980, the US economy went from needing a dollar of new private and public sector borrowing to produce a dollar of GDP growth to dependence on more than five dollars of new debt to generate a dollar of GDP growth by 2007. This credit growth was accomplished by various unsustainable means, including foreign borrowing, financial engineering, and leverage.
"Since net capital inflows slowed to a stop in 2007, launching a financial crisis associated with capital flows and 'sudden Stop' economic effects, first US then international credit markets seized up in 2008. The US government through the Federal Reserve and Treasury Department have attempted to restart the flow of private credit in the US but with only limited success. The inexorable logic of the American political economy dictates that the next phase of economic remediation is direct substitution of government credit for private credit by lending directly to private firms, such as the loans to US auto makers now being discussed. We believe this lending will be broadly expanded throughout the economy in 2009 as the depression deepens, with certain industries and sectors tending to benefit more than others and other unintended consequences drastically changing the structure of the US economy."
...
"The social consequences of the kind of mass unemployment we foresee will, if not addressed by government stimulus, split the nation into competing interest groups by age, income group, and industry that will fight for decades over a shrinking pie that could be growing if all of these groups were working together to achieve a common goal: an efficient, competitive economy based on productivity, savings, and investment. Doing nothing is not an option. On the other hand, the course we are on today of ad hoc bailouts going to the biggest, most vocal, and best politically connected, first in banking and now in the auto industry, will lead to an economy of big corporations and big government, and a decade or more of economic stagnation may follow."
(link)
![[identity profile]](https://www.dreamwidth.org/img/silk/identity/openid.png){kind=small}
no subject
Date: 2008-11-13 07:33 pm (UTC)no subject
Date: 2008-11-14 01:29 am (UTC)What this historic quote actually means is that panic makes the current problems worse. Mass selling of stocks is what makes the stock market crash. People being afraid they may need their money for a rainy day is what makes retail sales plummet. Corporations trying desperately to support their bottom lines months from now is what makes them fire large number of workers today. Fear of a problem is in this case what creates the problem and what makes it worse.
That, and it was actually the high price of oil that started this recession. The system-wide overexposure to debt was simply the weakness that allowed the high price of oil to tip everything over - the credit market seizure was not the "proximate cause" as I see it.
Also, if you exclude California from the statistics, this housing market downturn was actually no worse than any other housing downturn of the past. California is where the housing bubble hot air went.
But note:
1) The price of oil has now fallen dramatically
2) Libor rates have consistently fallen lately, indicating the credit market is easing (except for today, ironically because people cashed in t-bills to buy stocks)
This does not take GD-2 off the table by itself, but hey, life goes on, and it is no fun to be scared.