naked capitalism

Leo Kolivakis says:

The IMF is following the OECD in saying its the most severe and sychronized recession in post-war history.

The big question for the U.S. is the worst behind now? Unemployment will creep higher but employment is a lagging indicator.

On the positive side, mortgage refinancing is picking up and the USD has fallen, allowing exports to pick up. Moreover, the effects of fiscal stimulus and quantitative easing should start kicking in during the second half of the year.

But any recovery will be tepid at best. Real wages are falling and people are saving more in the U.S. so consumption will not pick up in the next year or so.

The staggering job losses will make this the weakest recovery in post-war history.

As for the stock market, all the liquidity being pumped into the system will create another bubble in financial assets.

Where? Your guess is as good as mine.

cheers,

Leo

utopiaorbust says:

The first signs of how deep the recession was going came from the employment numbers. Im not sure why employment numbers should be considered lagging numbers, certainly not like RGDP.

viv says:

I thought we’re now in a depression officially? I remember that post from VOXEU about a tale of two depressions, showing that this downturn globally has been even worse then the great depression.

The IMF are being very cautious, look at how their expected credit related write downs rose to 4 trillion plus compared to less then a trillion when the crisis started.

There’s no need to guess, this is a depression and unemployment and social unrest are well on their way.

Biggest credit bubble in history and we all read daily how preposterously the world is responding. China’s loan boom is going to push up stocks, the US’s fiscal stimuli and bank bailouts are a pointless exercise without the pre-requisite transparency and openness. Why are the Zombie banks allowed to live? Why is mark to fantasy allowed or AIG being used as a conduit to funnel money to other banks?

Bloomberg openly challenge whether Japan’s stimulus programs will do anything to help the economy? Japan has kicked the can down the road for 20 years and look where it is now? An economy possibly contracting at an annualized rate of 20% in the first quarter.

Britain is technically bankrupt IMO with it’s huge deficits, 450% Debt to GDP ratio and low currency reserves. Eastern Europe is on the precipice because they borrowed in foreign currencies to fund their boom, now bust.

The Obama administrations budget deficit is projected to reach 1.8 trillion but given how Govt statistics always understate the situation, i’ll give it 2.2 trillion. Plus the US Treasury has to roll over 2.56 trillion in debt this year. Where is the money going to come from? That’s nearly 4.5 trillion there.

This will crowd out the private sector, local and state governments. The bad money and misallocation of capital is driving the good money out and confidence with it. This bear rally is without any legs at all as implied by the Zero Hedge post here recently, the green shoots of recovery are more like poison ivy.

The problem is too much debt, the government is trying to borrow it’s way out of debt? Past crisis were papered over but always led to something worse down the line. The credit bubble started expanding greatly under Reagan from 1982. Since then the solution to any crisis has been an adrenaline shot of debt(credit).

At some point the cancerous tumor of excessive debt must be removed from the system, adrenaline shots won’t do. The US economy is on its death bed. The Banks must be allowed to fail, the bad debt must be defaulted on. We must start “clean” (perform triage) or perish.

joe says:

Leo Kolivakis – Why is this different than what the Japanese did, which seems to me as close to anything we have? The biggest difference being the Japanese didn’t have the entire global economy going south.

mmckinl says:

The new GEAB is out … and it’s UGLY

Summer 2009: Crash of International Currency System CONFIRMED

Thus, in this GEAB N°34, our researchers develop more their anticipations on the possible forms that the American suspension of payment will take by the end of the summer 2009, and from April 2009 (principal month of collection of the tax incomes in the United States) will be impossible to mask (10). The suspension of payment by the United States in the summer 2009 is indeed a topicality increasingly more extreme from now on with the public deficit completely out of control on the back of explosion of the expenditure (+ 41%) and of collapse of the revenues from taxes (- 28%), like LEAP/E2020 anticipated more than one year ago: for only March 2009, the federal deficit was assembled to nearly 200 Billion USD (much above the most pessimistic forecast), that is to say not under half of the deficit recorded for the whole of the year 2008 (11). And the same phenomenon is repeated on all the levels of the public structure of the country: federal state, federate states (12), counties, cities (13) … everywhere the revenues from taxes disappear involving in an accelerated way the worldwide in an overdrawn spiral that nobody (Washington in first chief) controls any more.

Leo Kolivakis says:

"Why is this different than what the Japanese did, which seems to me as close to anything we have? The biggest difference being the Japanese didn't have the entire global economy going south."

>>Don't get me wrong, in many ways it's worse than Japan. I agree with Krugman who thinks we are creating Japanese-style zombie banks.

But I am not a perma bear or a perma bull. I call it like I see it. There are some glimmers of hope out there, but nothing to get excited about.

The structural debt in our global economy will take years to clear out. I do think that Q1 might have been the worst of it, but I expect weak growth for a long, long time.

Leo

Brick says:

The IMF has released two sections from its up coming paper as a sort of teaser. While the first about how long the recession is likely to be and how quick and strong the recovery will be is interesting especially because they clearly express their view that this is very similar to the great depression, it is the other paper that has me more worried.

The context of this section is that financial systems are closely linked and a financial problem in developed countries can quickly impact emerging economies. Whilst this may seem obvious some of the implications may be slightly less obvious. First up is

Banking flows to emerging economies are likely to take a severe hit Ok not such a surprise there now that it has come to pass, but confirmation that is a consequence of the financial problems.

the degree of current account and fiscal deficits will likely determine how quickly economies can reestablish financial stability, once stress in advanced economies recedes. Not so obvious and seems to imply that if China goes down the stimulus route it is now, then it will take a long time to recover.

In turn, a broad-based economic and financial collapse in emerging economies would have a significant negative impact on the portfolios of advanced economies. This could further exacerbate financial deleveraging in mature markets and lead to further stress transmission, capital outflows, and economic slumps. In other words it does not matter how US banks or the US economy is doing if the Korean and Malyasian economies are continuing to fall this will come full circle back to the US.

it is clear that under current circumstances, policies will need to focus on averting further escalation of stress in emerging economies. This would not only limit the impact on the real economy in these countries, but also would thwart a second round of global deleveraging in the wake of damage to lenders’ balance sheets in mature markets. So the solution is to use US tax payers money for a stimulus in China rather than at home. I can just see US politicians trying to sell that one. It does make an important point that any individual countries attempt at recovery can be thwarted by lack of action elsewhere. In other words our economic fortunes rely on economic cooperation between countries that could not agree on a price of a loaf of bread.