Moon of Alabama Brecht quote
December 03, 2007

Global Downturn Musings

What will the global outcome of the current economic downturn be?

First we have to imagine how severe this one may be. Paul Krugman today:

How bad is it? Well, I’ve never seen financial insiders this spooked — not even during the Asian crisis of 1997-98, when economic dominoes seemed to be falling all around the world.

The blow-up of the credit bubble will severly effect financial markets. But that is certain bleed into the real economy. It is unlikely that the effects can be contained locally. The crisis will be global. The consequences in the political dimensions can be enourmous too.

The Economist muses about the political outcome in Great Britain.

As its graph shows, British GDP growth in the last ten years was solely based on the financial industry:

[T]he impact over the next year or so will be painful, not only for those who work in the City but also for the economy and the public finances. As the shockwaves ripple out from London's financial district, they could undermine the regional foundations of Labour's long electoral hegemony.

Labour as the ruling party not only allowed this mess to happen, but promoted it. It will certainly take a severe hit. The UK housing bubble has yet to really deflate and the Pound is likely to take a severe beating too. The political problem in Great Britain might be, that the other parties than Labour are likely even worse for its people.

Unless there is a hot war on Iran or a reheated war on Iraq, the U.S. voters mind in 2008 will be fixated on economic issues.

The Republicans have little chance to escape their responsibility for what is happening now. All their candidates but Ron Paul offer only the same neoliberal recipes that led to the desaster.

The Democratic candidates would do well to emphazise help for the lower class and solutions for the economic problems (there ain't any easy ones, but that doesn't matter much on the campaign trail).

Her dependency on the financial industry could cost Hillary Clinton lots of voter credit. It was also her husband that repealed the depression era Glass-Steagall Act which had separated commercial banking from investment banking. A big part of what we see now is a result of that Rubin/Clinton repeal. On economic issues, her Democratic opponents certainly have lots of ammunition against her. Will they use it?

What is not going to work in this campaign is further promotion of globalization, neo-liberal tax cuts for the rich and arguments for more deregulation. I believe the voters are too smart and too hurt to fall for more of the same. This could be the chance for an independent candidate if s/he uses some New Deal rhetorics or isolationist populism.

The Euro area will feel a lesser but still severe downturn. It may become more isolationistic and increase tariffs on Asian imports. But overall, I believe, its economy to be more stable and resiliant than the U.S. or UK ones.

Politically, bad economic times should induce a move to the left. But the pseudo left Labour and the Social Democrats in Germany are discredited after they had turned to the neo-lib right in the 1990s. This leaves room for parties on the real left. But if things get really bad, a move to some far right populism is possible too.

So far the European Central Bank has refrained from lowering interest rates. Like Wolfgang Munchau in today's FT I'd argue that Rate cutting will not get us out of this mess:

Look at it in terms of insurance. Lower interest rates insure us against the risk of a slowdown, but we are paying a price by accepting new risks. Among the biggest are moral hazard and higher inflation in the future.
...
On balance, the benefits of a loose monetary policy are not nearly as one-sided as its advocates claim. A bias towards low interest rates got us into this mess. Low interest rates will not get us out of it. Central banks should keep their cool.

The inflation numbers are already increasing. In the U.S. the real inflation, as felt by the consumer, is some 5+%. In the Euro area it is a bit lower, thanks to a stonger currency. In China it is some 10+%. Overall it is increasing everywhere.

Central Banks should now push interest rates higher and stop the inflation trend before it gets out of control. To lower rates now will only feed another bubble, possibly in commodities, and lead to more pain and an even bigger bust later on.

China has a huge problem. Not only are stock markets there in bubble territory, but its growth is much too dependent on exports. If the U.S. and Europe push up tariff barriers, its growth will falter.

China needs to reorientate to more internal consumption. The personal saving rate there is at some insane 50%. By introducing social security systems, the need for such high savings could be deminished and consumption increased. China will also have to decouple from the U.S. Dollar. Other Asian economies will have to the same. Overall Asia has the biggest chance to decouple form the 'western' downturn by integrating itself.

Any economic crisis in China could either lead to severe internal turmoils, or the people could turn to leaders who argue for outside wars. (Because of its former 'one child policy' China has an "excess" young male population of some ten-plus millions. Historically such 'excess' is often 'cut' by war.)

The commodity based economies, Canada, Australia, oil producers, have the best chance to go through this downturn without much trouble. The 'third world' should follow the success story in Malawi, shun any IMF and World Bank 'advice' and protect themselves from outside influences. 

The African countries should only allow imports, via tariffs politics, of stuff they can not produce themselves. While the big economic bullies are destracted with home grown problems, they may even have a chance to get away with it and develop themselves.

Overall we have to get back to really make real things. Real economic development and growth is impossible to achieve through selling and buying derivatives of derivatives of some paper of dubious value.

There are enough needs in this world that demand good real products. A trillion invested in development of environment neutral energy production is better for everyone on this planet than trillions of pseudo wealth pumped again and again through finance industry computers.

That is, so far, my insight on this. It certainly lacks depth and has its flaws. Please correct it and add to it in the comments.

Posted by b on December 3, 2007 at 12:24 PM | Permalink

Comments

I spoke the other day with a fund manager about diversifying - out of traditional market dependent funds and into something a bit more aggressive, particularly European (euro) simply because I see that currency holding value better than the dollar can. (Duh)

His resulting recommendations projected a return of around 9% annually, and when I brought up inflation he offered that it was around 2 to 3%. I said no, 10%, so I'm looking at a negative return here.

The point is, managers make money whether the account gains or loses, and one remains a client if HE can convince that you have done as well or better than average. Downturn may bring a loss; oh well next year will make up for it.

My favorite is another young (stocks, bonds, commodities; not funds) manager who day trades and can make gains of 50% in a few days on certain trades. He's still conservative though, risking only smaller bets on longer shots. I only pay this guy a fee after he has increased my net worth by 6% in any year, so we are (so far) at least keeping up with inflation at no charge.

I am still a bit leery of his technique though, as he seems to be so involved with playing the market that I wonder if he sees the bigger picture: massive devaluation or whatever is coming. Go ahead, call me a doomsayer if you like. I am one of those in favor of stocking up on land, basic tools, solar panels just in case.

Posted by: rapt | Dec 3, 2007 2:13:37 PM | 1

Now for a comment on your post b.

All well and good so long as in the event of a serious downturn, the rules continue to be followed, institutions remain intact to keep everyone on the straight & narrow path.

In USA at this time, PTB are NOT following the rules, and institutions are being gutted, remodeled to the liking of a predatory few. Right now. So why should I remain positive and trusting? I got my own rules to break. The more I look, the more I see professionals, in education, in economics, government etc., who are in massive denial. Massive means, if one refuses to agree with our institutional ideology he is out on his ear.

In other words Bernhard, there is no normal to return to; believing so intensifies the current crisis. Or -
We tried that and it didn't work; now what?

Posted by: rapt | Dec 3, 2007 2:30:10 PM | 2

"Overall we have to get back to really make things."

All the time I mourned the loss of manufacturing jobs from my home-state (Michigan) and tried to get a clear sense of where we were going--and failed, I figured it was ME: that I didn't know enough somehow to 'get' the way things worked in the new flat-earth global era.

And that's probably still true--at least to some extent.

But while it doesn't solve anything, it's quite a relief to hear/read the bit about 'making things'. That you take in raw materials and make them into a useful product and sell the product, that I can 'get'. That we've been handing over the 'making' of things to others, and now pay them for the useful items with borrowed money has never made sense.

to 'rapt'--I'm with you on the solar panels, etc., but that's a worrisome prospect. Just how many bags of dried beans can you stash away?

And to get really grim, there's the 'defending your stash of dried beans' issue--though, frankly, having tried to go vegan for a year and given up, I'm not sure how hard I'd fight over a mound of beans.

rapt, maybe the answer to your investment dilemma is: buy up the dry bean futures and dehydrated food plants?

Posted by: PepsifiedThinker | Dec 3, 2007 3:27:12 PM | 3

Sometimes things look like they repeat.

The story of Sunshine Charlie is interesting.

Posted by: Carter Glass | Dec 3, 2007 4:00:57 PM | 4

re: manufacturing. The first step is to make babies. The growth of babies into men fixes the effort of the parents and renders them fruitful. They have, the parents, to save. They force society to objectivize its efforts not into raising the prices of things but into an actual increase of the possibilities of society. There can be no value where there are no people. The second consideration is that profit is impossible. The belief on the possibility of profit is so ingrained that to state the obvious, that profit is impossible, appears perfectly silly. Now we have a clear example of the impossibility of profit. What were called profits by the banks and "the City" were nothing more than the apportioning of phantasm quantities. Once someone wanted to touch those quantities the quantities evaporated because they actually never existed. Now that all the ancient verities have been called into question: sex, religion, patriotism, profit, capitalism we can consider that we are in a momentous transition towards a new system of world relations; doesn't that sound grand? Even humble Venezuela has shown that it will not be manhandled, that it will not want a savior for ever. If you have two hours free for meditation read the latest encyclical of Benedict XVI. There is lot of reflection there about the present world.

Posted by: jlcg | Dec 3, 2007 4:27:32 PM | 5

Go ahead, call me a doomsayer if you like. I am one of those in favor of stocking up on land, basic tools, solar panels just in case.

I've thought for quite some time that the best 'safety' move is to get a group of like-minded investors together to buy and run a large plot of farmland (say a few thousand acres) in a country with a non-dollar-denominated currency (Brazil, though land prices have risen and there are other problems, is one possibility, not least due to energy self-sufficiency). Short- to mid-term the project could probably generate a reasonable return while helping the investors not to rely on a dollar-backed investment; and longer-term if things got really bad the investors would have a self-sustainable place to go live.

Posted by: mats | Dec 3, 2007 4:43:56 PM | 6

mats

A few thousand acres in...how about Paraguay? Dubya didn't need investors; Babs & Poppy had the cash on hand and...maybe a bit of influence to make the deal work.

I personally know of folks who have done similar deals in Honduras and Peru. All it takes is $$$.

As for protecting my hill of beans - perhaps it would take a tight barricaded community. Think Australian movie: machines cobbled together from odd parts, tunnels, a fort presided over by a megalomaniac...

Posted by: rapt | Dec 3, 2007 7:17:19 PM | 7

The African countries should only allow imports, via tariffs politics, of stuff they can not produce themselves.

this is a sensible policy for any and every country, for any and every township and county, for every household in every township and county and region.

produce everything you can yourself; barter for what you can locally; and resort to the money economy and long haul trade only for three classes of supply: 1) durable high technology like forged metals, electronics, etc (but it has to be *durable*, none of this planned-obsolescence crap), 2) luxuries for special treats, desserts, and holidays, 3) information (books, postal service, connectivity with the rest of the world).

I see no reason why a farmer in Pennsylvania should not own one or two really nice scarves or blouses of Chinese silk to wear to parties. or for that matter a phone (preferably shared somehow with others) or an internet hookup. but I see every reason why Americans should not be buying -- are you sitting down -- 40 tee shirts per household annually.

Currently, Americans buy 40 T-shirts per household annually, 94 percent of them imported. In 2003, four new pairs of shoes were imported for each American.
http://www.alternet.org/environment/69256/>footnote

particularly when most of those Americans have no idea how to make a t-shirt, a shoe, or any other kind of clothing; have no idea how to make cloth; have no local weaving or spinning mills; in other words, are pathetically dependent on the pleasure of far-away corporate barons for the very, er, shirts on their backs, not to mention shoes on their feet.

food, fiber, fuel (and water) are the necessities of human life and comfort. these necessities should -- ideally -- be locally or at least regionally secure. if they are not, then that community is living like occupiers in a restless territory, with long and uncertain supply lines, always at the risk of being cut off or held for ransom.

what that regional security means is living within the limits of productivity of your region instead of colonising remote, unproductive regions and expecting to live the life of Reilly. I know a FOAF who has bought acreage in outback Colorado; it is abused upland country, clearcut, not a woodlot on the property, and the "house" is a trailer. the region does not (any longer) produce enough biomass to keep anyone warm or fed. this person (and her two horses) live or die according to the supply of fossil fuel: she even drives around in her truck with the heater on to get warm before bed.

such a person in such a predicament will be far more likely to vote for whichever politician promises to keep the cheap gasoline flowing... while that vote mau be partly conditioned by arrogance or racism, it is also imho conditioned by blackmail or "having painted oneself into a corner" of abject dependency on the fossil barons.

somewhere there is a happy medium between having to be a cobbler, tailor, brewster, webster, thatcher, wheelwright, carpenter, stonemason, cheesewright, etc etc., all for oneself on one's Jeffersonian estate (and without slaves, if you please).... and the kind of CAFO non-viable lifestyle of the urban slums and the affluent suburbs. that happy medium to me seems to rest somewhere in the synergy of the mid-sized market town and the Amish/Mennonite rural community. others would draw the line elswhere and Jacobs makes a passionate case for the synergy of city neighbourhoods with mixed zoning (D&LGAC).

but the bottom line is that abject dependence on long haul trade and a liquid, fugitive, fungible capital economy is disempowering and frays the social fabric, rendering communities vulnerable to robber barons and economic blackmail...

Posted by: DeAnander | Dec 3, 2007 8:13:35 PM | 8

The housing downturn started way back in 2005, and just like the dot-con fuse that burned for over eighteen months while people were still holding and going long, all the smart money got out of financials long before this summer.

But with the advent of the Philadelphia Currency Exchange (www.phlx.com), unlike the era of the dot-con bomb, the financial terrorists behind the credit-con bomb have a downside strategy. Panic the sheeple. Chaos creates huge currency profits.

So what you're seeing is a thin thread of sophisticated financial reporting, but swamping that a deluge of over the top gloom and doom, trying to pimp you to sell out at a loss. If your neighbor's house in on fire, and some repo gypo screams at your door, saying the whole neighborhood is on fire, do you run naked into the storm?

Look, 50% of Americans work for the government, either directly or on contract. Their paychecks come every two weeks, like clockwork, and their pension kicks in as soon as they finish their second twenty. Their credit outlays are all on auto-pay through their local savings and loan, and nobody is losing their home.

Same for the elite 5% who literally have money to burn. Same for the upper 20% who have double incomes over six figures. A few might have been trapped, but the damage looks like no more than 18% defaults among even the lower tier of mortgage loans, which represents only a few percent of Americans directly affected.

Most Americans are standing pat on this "crisis", safe and toasty warm by the fire.
Yes, the financial vehicle adulterers infected everything, even money markets are holding some radioactive waste, and it will take a long time and a lot of taxpayer supported and inflation debited workthroughs until everything is marked to market.

Until then, help those who can't hold on against the flood. The whole thing is a work-thru. Panic and gloom and doom are freeze-up tactics, get the sheeple to panic, get a good stampede started, and we'll have another Y2K-to-PHLX bloodletting. The real root problem in America is the loss of community. Turn off the TV, turn off the internet, go hand out food, and build new houses to help resettle the evicted.

Posted by: Joshua Slaove | Dec 4, 2007 2:26:09 AM | 9

Geez, DeAnander, you really are an old hippie. There is no refuge in the 60's.

I'm pretty sure that the Native Americans would have met your criterion for a sustainable, eco-friendly economy, but it sure as hell didn't save them from disempowerment or save them from robber barons and economic blackmail...

Posted by: DM | Dec 4, 2007 2:55:02 AM | 10

This stuff is interesting (we are living in interesting times).

I think I originally got the link to this web site from b or uncle$cam - but I am hooked. This is a fascinating drama. What does $500,000,000,000,000.00 look like anyway?

As it is, today. Banks trade with each other and this is now collapsing. And not due to homeowners walking away from outsized mortgages. The numbers are still rather puny. Compared to our trade deficit. And our war expenditures. And our budget deficits. As well as a thing created by bankers and financiers, a thing that dwarfs all other things on earth, the biggest, ugliest thing of them all: $500 TRILLION in derivatives!

Posted by: DM | Dec 4, 2007 7:33:07 AM | 11

Protectionism is starting to rear its head again in Europe: countries are pushing legislation to protect their strategic industries from foreign takeovers.

This will have a further effect of diminishing the value of the Dollar: what will the Chinese do with their masses of US currency assets if they cannot in other countries?

Posted by: ralphieboy | Dec 4, 2007 7:38:41 AM | 12

@DM - much loud talk there - take it with some salt
---
Roubini is in panic mode calling for hard interest rate slashes worldwide.

That would be pushing on a string while inducing even higher inflation. Correct diagnosis, wrong medication. It didn't work in Japan, it won't work elsewhere.

Posted by: b | Dec 4, 2007 3:14:49 PM | 13

Actually DM, I never was a hippie, and I was only in grade school in the 60's...

I'm a software engineer. this gives me a certain learned-the-hard-way respect for high-redundancy distributed systems.

Posted by: DeAnander | Dec 4, 2007 3:27:15 PM | 14

Ms DeAnander

It's been nice to see you back again lately - I missed you, honest I did.

My region, midatlantic inland, was a big producer of shoes and textiles for a long time until the 80s & 90s. The people here are good at it, and have always been ready to work hard for a reasonable (low) wage. These three industries went to the far east. Furniture making is another one that left.

I think the reason is that the margin between original factory cost and retail price is so large that several middle man steps sucked out all the money on the way to market. Then manufacturers had to go to China to remain competitive. The workers found other jobs, more in services than in manufacturing. I'm sure some of them remortgaged their houses.

The point is that nobody seems to be able or even willing to control this money drain. Country folks in this region are quite well able to make do, grow their own food, barter, etc. as they have done for 2 centuries. The skills are not lost. For the last perhaps 15 to 20 years we have had Walmarts and other big boxes come in, later than for other communities, and the people love them for the big variety and low prices.

How does one plan to come in and upset that apple cart?

Posted by: rapt | Dec 4, 2007 4:17:17 PM | 15

@rapt don't forget that the radical right-wing Wall St. Predators first actions when coming to power via Reagan was to abolish tariffs & anti-trust laws. Begin by enforcing those. WalMart is wayyy too large & needs to be broken up for starters. It's funny looking back on Clinton. Then I thght. Arkansas - what the hell does someone from there have to do w/the price of eggs. Clearly he was WalMart's boy. Laws requiring most products carried by retailers be American made, in some sophisticated form might be helpful. Basicallly, produce regionally, consume locally makes sense. Why waste precious oil shipping in garbage from Timbuktu. People need to get organized. Since the Fundie Churches seem to be so good at that, it'd be amusing if fundies started meeting there asking these kinds of questions :)

As far as the tariffs are evil garbage that has been force-fed to so many, I heard an interesting interview on Thom Hartmann yesterday. Author of United States of Toyota. He said that China has an auto industry 'cuz they have a 30% tariff. Japanese auto industry likewise protected 'cuz it's understandably considered "a strategic asset"; but Japan protects them via currency manipulation. Why does xUS have no auto industry left? Try a 2% tariff, on top of Wall St. greed & organizational stupidity. Virtually all of China's industries that were stolen/transferred from us are protected...So why were xUS industries transferred to China? Political reasons. The Elite went insane when democracy started breaking out here in the 60's & vowed to return control of the country to a handful of Wall St. bankers & lawyers. This required destruction of the middle class. Mission just about accomplished.

Posted by: jj | Dec 4, 2007 8:24:59 PM | 16

From here we ship primo hardwood logs right from the woods to Indonesia of all places. Opposite side of the globe. They make coffins from the wood and ship them back here to be buried.

Howz that for a waste of freighter fuel?

Posted by: rapt | Dec 5, 2007 2:26:28 PM | 17

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