Queue for the soup kitchen may start here
February 25, 2008 1:03 PM   Subscribe

"What we are now seeing is the break up of Bretton Woods mark 2." The Guardian's economics editor, Larry Elliot, on growing fears of a global depression. [single link op-ed alert]
posted by ClanvidHorse (122 comments total) 6 users marked this as a favorite

 
At this point there is a fork in the road. Policymakers act to allay the panic by cutting interest rates and throwing money at the financial system. If the measures work, it is back pretty much to business as usual within a few months. Lenders start lending again; borrowers start borrowing; economic activity recovers.

All the experience of the past 25 years mirrors this sort of pattern. The US recessions of the early 1990s and 2001 lasted for only eight months; there was barely a pause for breath when the Federal Reserve took pre-emptive action to prevent recession in 1987 and 1998.


Make no mistake: the reason things are so incredibly out of balance, and are in the process of collapsing, is precisely because the Fed did these things. We haven't had a significant recession in almost a generation, in the middle of the biggest economic shift in world history. China and India coming online are profound deflationary forces, and should have depressed wages in this country a very great deal, as we struggled to cope with the new reality that labor isn't worth as much as it was a generation ago.

Instead, we've been in a cash-induced euphoria... the endless money-printing of the Fed appeared to stave off the deflation, but in fact just set off an orgy of consumption. The incredible wealth that our ancestors built up has been squandered, pissed away, in just one generation. At its core, it's fiat money that allowed this, because endless supplies of new cash allowed the various entities in the economy to hide the fact that we are way, way past bankrupt, and have been for years now.

We should have gone into an incredibly deep and painful collapse after the stock market bubble popped, but instead we've inflated two more, ten times bigger. The fallout from these will be the worst economic times in living memory. You don't blow up the biggest bubbles in the history of the world without enormously serious damage when they unwind.

The pain you're starting to feel is really all due to just one man: Alan Greenspan. There's a whole host of other, lesser players to blame as well, who took advantage of his mismanagement of the Fed, but everything always comes back to him... the man who created the concept of the Greenspan Put.

When Uncle Alan will always bail you out... why have any shred of prudence? There's wealth to be extracted from a defenseless economy!
posted by Malor at 1:16 PM on February 25, 2008 [1 favorite]


An economist predicting something? Does he use the words "bubble" and "tulip" somewhere in the article? Seriously these articles are the economic equivalent of calling something fascist.
posted by geoff. at 1:17 PM on February 25, 2008 [3 favorites]


RTFA
posted by tkchrist at 1:21 PM on February 25, 2008


China and India coming online are profound deflationary forces, and should have depressed wages in this country a very great deal, as we struggled to cope with the new reality that labor isn't worth as much as it was a generation ago.

That assumes there is a sort of zero-sum game going on here? I look at it different: a bunch of cheap labor means increased specialization and cheaper goods while giant leaps in technology gains. I mean you're not going to have a bunch of data entry people forever, they're going to go home and become entrepreneurs and build the next iPod, whatever that might be. Unless we've hit some sort of global maximum or goods that consumers will enjoy, there's always a market out there for yet to be manufactured goods. This is sort of like predicting that computers would replace us, instead they made things better.
posted by geoff. at 1:22 PM on February 25, 2008 [1 favorite]


Or see Anatole Kaletsky in the Times:
Secondly, and more interestingly, when we look back through history - or think about the underlying economics of business cycles - we realise that every financial crisis and bear market in the past has been a buying opportunity because we can see, with hindsight, that the world never did come to an end. Yet if everyone in the market knew that previous financial crises and bear markets always created buying opportunities, then a new bear market could never occur, unless large numbers of investors believed that the latest financial crisis was somehow different - and worse - than any that had gone before. If people believed that this was just an average sort of crisis, they would now be buying instead of selling, and there would be no crisis.

In other words, to create any financial crisis - even a fairly mild one - there has to be a widespread belief that things are much worse than ever before. In terms of market psychology, the view that "this crisis is different from every other" is really just an echo of the cry "this time is different" that is always heard at the top of a bull market.
posted by TheophileEscargot at 1:24 PM on February 25, 2008 [12 favorites]


RTFA

I did and I still think it sucked. Brenton Woods, Dutch tulips and Alan Greenspan, oh my! Are all economists Chicken Littles or just the ones that work in the media?
posted by geoff. at 1:24 PM on February 25, 2008


Some economists (skims article, yep Roubini!) have been calling the demise of Bretton Woods 2 for at least ten years. Which isn't to say that they're not right this time mind you, if I knew that I'd be rich beyond all reckoning, just that this is hardly a new prediction.
posted by Skorgu at 1:27 PM on February 25, 2008 [1 favorite]


Of course I thought several years ago when oil prices were breaching $60 or so everyone was talking about the global catastrophe and how we would never sustain high oil prices. And here we are at $100 and consumption seems to be buzzing along. Sure there's talk of a recession, but that's because poor people got loans they shouldn't have. Or was it because people were getting fraudulent loans? Or because of a SocGen trader being sloppy in unwinding his positions? Or Brenton Woods? WTF?
posted by geoff. at 1:28 PM on February 25, 2008


I'm with geoff on this one. It reads like the guy strung together a bunch of economics oriented jargon and wrapped them around a thesis of doom and gloom. On one hand the economy is in deep, deep trouble, for a lot of reasons malor refers to, but on the other hand, we are a long, long way from having to "queue" for the soup kitchen.
posted by elwoodwiles at 1:32 PM on February 25, 2008


geoff, if you don't think there's a huge mess, you haven't been paying attention. Whole markets have frozen up. The contagion spreads and spreads and spreads.... and the whole thing started because Fannie Mae tightened lending standards a little. Like a tiny snowball high on a mountain peak somewhere, it has triggered a whole avalanche of failure.

You might want to think about that a little. How unstable does the system have to be for something so minor to knock the wheels right off the cart?
posted by Malor at 1:32 PM on February 25, 2008


Well, oil consumption may be buzzing along but it's certainly not the same.

And, pardon me for letting my inner conspiracy theorist out to play, but SocGen is the most poorly-executed coverup in the history of humanity. Christ, if you're going to claim you had no idea at all, zomg! try not to get caught paying him a bonus based on the trades he hid from everyone!.
posted by Skorgu at 1:33 PM on February 25, 2008


Cue Malor hyperbole. Check.

Isn't the Guardian having a economic editor something akin to whorehouse having a staff phrenologist?

Seriously.

Bernanke has sent out the signal that he cares far more about boosting growth than he does about fighting inflation, which is why the dollar has fallen and gold has gone up. So a return to soup kitchens and dustbowl economics should not be ruled out.

So, let me parse this gem. So the signal that Bernake sent out caused a falling dollar and rising gold prices. Wait a second. Isn't gold quoted in dollars? So wouldn't a declining dollar cause a de facto rise in gold prices? Even if EVERYTHING else remained the same? Why, yes, yes it would. So because of this, we should not assume soup kitchens will disappear and dustbowl economics - wait - what are DUSTBOWL ECONOMICS?

Jeebus. The mind reels at such insightful analysis. Oh, and what geoff. said.
posted by sfts2 at 1:35 PM on February 25, 2008


I just don't think it's that simple. People keep screaming "DEPRESSION!" every chance they get, but the Great Depression was as a result of a massive round of deflation, not inflation.

I think what we're really staring at is a long-term bear market. In other words, welcome to 1990s Japan. The new normal will be 8% unemployment, $150/barrel oil, and the end of housing as some sort of massive wealth generator.

OTOH, there's still plenty of wealth to be made. And most of those instruments are available to the middle class -- international mutual funds, currency, gold, commodities, shorting. It's just a lot more complex than just flipping a house.

And look at the rising populism as epitomized by Paul and Huckabee. That's a real sign of recession there. Populism generates third-party candidates and political change.

I just don't look at all of this and think bread lines and soup kitchens. I think more of Japan having to cope with homelessness and unemployment, things unheard of before their housing bubble popped. What does that mean for America? Hard to say, but in 1932 unemployment was over 30%. Right now it's at 5%. There wasn't an FDIC. The thin social safety net wasn't there yet.

The American Century is over. The Chinese and Indians are now gearing up to determine who gets to sponsor this century. G'night, America.
posted by dw at 1:37 PM on February 25, 2008 [5 favorites]


geoff has undercut any possible valid points he may have had by taking the stance that the economy is somehow great.

I wish I lived in geoff's world, it'd make investment a lot simpler. In my world, nearly every market is screwed up in some fairly significant way.
posted by mosch at 1:39 PM on February 25, 2008


That said, this article is quite hyperbolic, but give me a break, things are screwed up.

Anybody trying to argue otherwise voted Republican.
posted by mosch at 1:40 PM on February 25, 2008


Why is this article even remotely noteworthy? It doesn't say anything that hasn't been said better in prior posts.
posted by aramaic at 1:45 PM on February 25, 2008


Larry Elliott is an excellent economics correspondent, probably the best working outside the specialist financial press in the UK (whatever the Grauniad-haters say) but this isn't his best work.

For better stuff, see his Northern Rock analysis.

Even though this piece ain't great, his thesis remains sound. Bubbles come and go, and sometimes the medicine of cutting interest rates works, but sometimes it doesn't. We are now at the point where we will find out which way the global economy is going to go.

And only the economically illiterate (or devotees of the Chicago school) would argue that such a thesis is vague or unscientific.
posted by imperium at 1:45 PM on February 25, 2008


Oh, and far as this goes:

In other words, to create any financial crisis - even a fairly mild one - there has to be a widespread belief that things are much worse than ever before. In terms of market psychology, the view that "this crisis is different from every other" is really just an echo of the cry "this time is different" that is always heard at the top of a bull market.

What he's missing here is that the Fed, each time, goes to ever more insane extremes to hold the market together. We're not actually resolving anything, so each crisis gets worse and worse. We have financial cancer, and the Fed is prescribing massive doses of morphine... and that's ALL. So yes, the doom-and-gloomers have looked pretty stupid over the last six or eight years, but that's not because they were wrong, but rather because the Fed keeps changing the rules and coming up with new and exciting ways to bail out Wall Street.

Yes, this crisis may pass; the Fed may yet manage to get the wheels back on the cart for awhile longer. But the system as it is presently constructed is not sustainable, and it will collapse. And not just in the handwavy-longtime-future, in the relatively short term. It has to. It's built on an ever-growing mountain of debt, abstracted away in new and ever-more-profitable ways with each new generation of 'products'. The economy underneath is being destroyed; it can't grow anywhere near fast enough to service the exponentially growing debt load.

It's funny watching the naysayers, like sfts2, saying 'Cue Malor hyperbole'.... when things just keep getting worse and worse and worse. If you want to argue with me from a position of knowledge, please do so... but simple witticisms don't suffice when things are getting this bad, this fast.
posted by Malor at 1:47 PM on February 25, 2008 [3 favorites]


Just because Chicken Little's saying it doesn't mean the sky isn't falling.
posted by bonaldi at 1:48 PM on February 25, 2008 [5 favorites]


geoff has undercut any possible valid points he may have had by taking the stance that the economy is somehow great.

But he is right. I mean, GDP is sluggish to non-existent right now, but breaking $100 hasn't exactly led to the depression everyone has always feared. And honestly, the economy can (mostly) handle the slow rise we saw to $100 from $70 three years ago. You can build that in and develop substitutions over years.

What it can't handle is going from $70 to $100 in a couple of weeks.

We still need to find effective substitutions for petroleum-based power, though. Even then, we may find ourselves beholden to African nations sitting on our limited supplies of rare earths like gallium and erbium.
posted by dw at 1:50 PM on February 25, 2008


Even then, we may find ourselves beholden to African nations sitting on our limited supplies of rare earths like gallium and erbium.

Judging from what's happened to Africa thus far, that seems unlikely.

The spectrum of likely outcomes is tilted heavily in favor of massive corruption abetted by dysfunctional governments and/or rapacious local thugs exporting everything they can get their hands on, while casually slaughtering anyone that happens to be handy while various multinational powers preach nonintervention and restraint.
posted by aramaic at 1:57 PM on February 25, 2008


But the system as it is presently constructed is not sustainable, and it will collapse.

Well, yes and no. The present system isn't sustainable, but it doesn't follow that it will "collapse" in any reasonable definition of the term. More likely we'll all just hobble along for awhile. The economic system is going to need a pretty radical restructuring in order to become stable again. This will require some political will. Until the Washington politicians and the Fed get their act together I think we are looking at 1990's Japan, as was mentioned above - but not a total fighting-in-the-streets-over-a-potato 1930's American Depression way....
posted by elwoodwiles at 1:59 PM on February 25, 2008


But he is right.

He insinuates that the only problem the economy faces at all compared to a few years back is that there are a few bad mortgages out there. This at a time when the dollar has crumbled from it's previous levels, the national debt has grown incredibly rapidly (causing all sorts of interesting and undesirable macro effects) and enormous numbers of nations are moving away from dollar reserves so as to distance themselves from the damage caused by an expected unwinding.

I'd argue that the biggest reason $100 oil isn't a large international issue is that the rise in price isn't so much an increase in the cost of oil as a decrease in the value of the dollar.
posted by mosch at 1:59 PM on February 25, 2008


Also, any one of Malor's posts, whether or not I agree with him, is way more interesting and enlightening than the posted article.
posted by elwoodwiles at 2:01 PM on February 25, 2008


We should have gone into an incredibly deep and painful collapse after the stock market bubble popped, but instead we've inflated two more, ten times bigger.

But the 80s stock market bubble was built on the backs of two bubbles -- the speculative bubble of precious metals of the late 70s, and the oil embargo bubble throughout the 70s.

The metals bubble popped after the attempt at cornering silver. The oil bubble popped with the opening of the North Sea and Reagan throwing the Southwest under the bus with the Oil Bust. All that money had to go somewhere... right into the stock market.

And they were built on the backs of all sorts of older bubbles. The history of America is bubble-boom-panic-bust-bubble.

The difference between older bubbles and now is an increasing reliance on the government to soften the blow of the bubble popping. We'd rather trade a longer recession for a short, sharp depressionary shock. And it makes perfect sense if you're in the money markets -- you need investor confidence to keep the markets running. If they're not willing to invest it, the economic wheels stop turning. If they start stuffing it in their mattresses, there's no money to loan.

The truth is, if the Fed wasn't interfering, we might have already resolved this crisis. But that resolution would have been just as brutal as 1933. Or 1907. Or 1893....
posted by dw at 2:01 PM on February 25, 2008 [2 favorites]


Anybody trying to argue otherwise voted Republican.
Now that's the kind of intelligent discourse I come to Metafilter for.

Economics is hard. Dealing with the mother of all complex systems, itself composed of an uncountable number of sub-systems, each more nonlinear than the last run by agents that have fundamentally flawed and imprecise pictures of the world and stupendously inaccurate reasoning faculties and view that all through the twin lenses of political bias and resoundingly incomplete reporting and it's a fucking miracle we're not all eating dirt.

People are just starting to come around to some of the ideas hardcore bears have been suggesting for decades: the probability distribution of the markets is decidedly non-Gaussian. Hence the "black swan" terminology that's now de rigeur in every blog under the sun. Because when Benoit fucking Mandelbrot says it it's crazy talk but Taleb writes a book and now it's in vogue. /derail Markets are riskier than we think, 25-std-deviation events happen every decade or so and woe to the quants who got that assumption wrong. The question, of course, is how fat is the tail? For Malor's or even Roubini's predictions to come true the tail would have to stay fairly fat all the way out to hugely high variances (surely a global market meltdown is at least as unlikely as 9/11, not that we're really equipped to reason about such things).
posted by Skorgu at 2:02 PM on February 25, 2008 [4 favorites]


While I don't think this article is terribly insightful, and I don't really believe that there is much of a chance of a new great depression, I am still worried. There are very good reasons to fear a protracted period of stagflation.

The current account deficit in the US can't be sustained forever; at some part, the party has to end, and the bill will come due. The burden of both public and private debt in the US and a slackening appetite in China for importing inflation from the US, is going to seriously limit the ability of America to compensate for any number of mounting pressure on its economy, whether that be the pressure of ever-rising energy prices, an aging population, or the consequences of more than two decades of eroding manufacturing and a paucity of public investment in infrastructure and human capital.

The American Century is over, but that doesn't mean the future is bleak. There are few things that would probably make the futures of American children a little brighter. For one, the opportunity cost of maintaining the military industrial complex is starting to look pretty fucking high.
posted by [expletive deleted] at 2:03 PM on February 25, 2008


Now that's the kind of intelligent discourse I come to Metafilter for.

Economics is hard, but it's not that hard. Nearly every single market has been significantly impacted in recent times. Not all harmfully mind you, but there's been an enormous shake-out as everybody tries to figure out what's safe and what isn't.

I simply don't see any way in which somebody can look at the markets of the recent months and say that everything is great (with any measure of confidence) unless one is simply engaging in purely partisan nonsensical bullshit talk.

If you can think of another reason to claim that everything's perfect, I'd love to hear it.
posted by mosch at 2:06 PM on February 25, 2008


Okay, we can all probably agree that the hyperbole is excessive, but the essential claims are legit: the federal reserve has been inflating its way out of trouble via the creation of bubbles for the last 15 years.

The problem is that each bubble leads to an even bigger bubble and the pain from each subsequent bubble bursting is getting greater.

The current situation is being debated hotly on a lot of finance blogs/websites where people are arguing between stagflation/Japanese style deflation/depression. I don't believe we're headed for a collapse ala the next Great Depression, but I do think we're headed into a deflationary cycle, especially in the US. The pressures facing American 'consumerism' are becoming too great to ignore (HELOCs being suddenly limited / turned off by banks en masse the past two weeks, for example) and are going to impact spending.

Anecdotally, I have some friends who own boutiquey type fluff stores who have, literally, seen their business dry up in the last three months. Even their loyal and good customers are shying away from spending and saying the same thing: I just cannot afford your products any longer.

Further, I have a friend who runs a very established luxury auto dealer who has seen what he calls their 'aspirational buyers' disappear since Christmas. These are the buyers who stretch as far as they can to acquire that first rung on the luxo-ladder. He attributes that mainly to the fact that he can no longer find acceptable financing for those deals.

At the other end of the spectrum we see companies like Wal-Mart doing very well these past few months. Analysts are attributing this to the downward migration in purchasing power and the fact that Wal Mart, for all its ills, does offer very low prices and a very large selection of goods under one roof.

So we may not see a collapse of the entire economy, but I think that at the *very least* we're going to see a big pullback in pseudo-luxury purchases and non-essentials. I think we're going to see fewer granite countertops and stainless steel kitchen appliances and a return to more basics in the home furnishings world as people realize that their $50,000 kitchen renovation ain't worth the money.

Another anecdotal from Cleveland: a recent Craigslist posting had a couple selling off their brand new Kraftmaid cabinetry and granite countertops from a kitchen that was renovated in order to tell their house. House didn't sell and is now in foreclosure, so they figure they might as well try to recoup some of the cost before the foreclosure.
posted by tgrundke at 2:10 PM on February 25, 2008 [3 favorites]


The spectrum of likely outcomes is tilted heavily in favor of massive corruption abetted by dysfunctional governments and/or rapacious local thugs exporting everything they can get their hands on, while casually slaughtering anyone that happens to be handy while various multinational powers preach nonintervention and restraint.

Well, true. You're looking at more Nigerias than South Africas. (Not saying there isn't any corruption in South Africa, but it's certainly not Nigeria.) And China is rapidly making deals to strip Africa of its natural resources in order to ship them back to Shanghai.

OTOH, if Liberia knew they were sitting the world's biggest reserve of mischmetal and we desperately needed the neodymium to build out a mag-lev system in this country, what would Liberia demand from us?
posted by dw at 2:14 PM on February 25, 2008


He insinuates that the only problem the economy faces at all compared to a few years back is that there are a few bad mortgages out there.

No, there's a huge difference between me saying I don't know what, if anything is wrong with the economy (because as an empiricist the data has yet to reveal anything substantial yet) and me saying the economy is 1999 buy-all-you-can.

Look the economy is like medicine. Let us pretend we're in England in the dark ages and everyone starts getting sick and displaying similar symptoms. Do you say that this is because everyone has been sinning (which everyone probably to one extent or another has), or that wearing a funky mask will stop the illness? Or do you say, I don't have any idea what is causing this so let us treat the symptoms of dehydration, blood loss, sanitation and keep people separate? I don't need to know how bacterium travel between hosts or how the process of infection works to treat the infection. Yet that's what we're seeing here, people postulating about the illness with absolutely no idea how it works.
posted by geoff. at 2:15 PM on February 25, 2008 [1 favorite]


In my world, nearly every market is screwed up in some fairly significant way.

And I could come up with a bunch of markets, equally large, doing just fine -- maybe not stellar -- but well within "normal volatility." My point is that the epistemological considerations for making even simple statements like the "economy is good" or "the economy is bad" is something that cannot be made until after the fact.

I'm not rosy about the economy, I don't think it is doing well at this point, but this is guided mostly by emotion...
posted by geoff. at 2:23 PM on February 25, 2008


I saw this thread and thought about posting "Que Malor predicting endless catastrophe", and yet Malor had the first post: predicting catastrophe.

You might want to think about that a little. How unstable does the system have to be for something so minor to knock the wheels right off the cart? -- Malor

I don' t know, why don't you tell us? Like with numbers. Your posts never contain any quantitative analysis, rather we get adjective soup:
"incredibly, collapsing, significant, depressed, euphoria, 'orgy of', 'incredibly deep', painful, huge, contagion, 'insane extremes', 'not sustainable', 'mountain of'"

None of those words actually mean anything specific at all. Although looking back I do see you said that the bubble became "two, ten times as big" after the dot-bomb. Do you have a reference for that? Are you literally saying we'll lose between 50% and 90% of our GDP (that's a pretty big range by the way)

It's funny watching the naysayers, like sfts2, saying 'Cue Malor hyperbole'.... when things just keep getting worse and worse and worse. If you want to argue with me from a position of knowledge, please do so... but simple witticisms don't suffice when things are getting this bad, this fast. -- Malor

Yeah, but you're not arguing from an actual position of knowledge either. You're just spouting pretty words signifying nothing whatsoever beyond general malaise.

And to top it all off you throw in a Ron Paulist cry for a return to the Gold Standard to fix all of our woes.
posted by delmoi at 2:24 PM on February 25, 2008 [1 favorite]


geoff.: So now your claim is that economy is sick, but there is no possible way to tell what is causing it, or what should be done?

Just a few moments ago you claimed everything was fine except a few mortgages.

I think it's fascinating (and telling) that you imply there is no possible scientific analysis that can be done at this point, that all we can do is wait to see how much sicker the economy gets, and pray that the answer becomes clear via a miracle.
posted by mosch at 2:25 PM on February 25, 2008


er, that should have been 'Cue' not 'Que' in the above post. Ah well.
posted by delmoi at 2:25 PM on February 25, 2008


So we may not see a collapse of the entire economy, but I think that at the *very least* we're going to see a big pullback in pseudo-luxury purchases and non-essentials.

Of course, the weird thing about this is that in times like this, "normal" people stop buying luxuries and start buying store-brand canned tomatoes, while the super-rich start loading up on luxuries. In other words, buy Wal-Mart AND Tiffany's, sell Macy's.

Anecdotally, it's hard for me to tell what's happening. More houses than even on the market, but prices in metro Seattle are right where they were this time last year. Target is more full than ever. Layoffs are picking up, but they're almost entirely in biotech with a handful of failing tech companies mixed in. OTOH, Starbucks just cut 380 jobs and WaMu is shedding nearly 2,000.

It's clear we're in a recession. The real question is when it will really hit home up here.
posted by dw at 2:26 PM on February 25, 2008


I think it's fascinating (and telling) that you imply there is no possible scientific analysis that can be done at this point

Just because there's a Nobel prize for Economics doesn't make it an actual science.
posted by delmoi at 2:28 PM on February 25, 2008


Disclosure: I happen to think that the S-word is going to be pretty popular in the next decade or so. What follows is at least half Devil's advocacy.

If you can think of another reason to claim that everything's perfect, I'd love to hear it.
1) In the history of the world humanity as a whole has never been so healthy, happy or wealthy. Everywhere you look child mortality is down, life spans are up, we're within sight of universal literacy(!) and we've never been more aware of sustainability issues like cradle-to-cradle and energy self-sufficiency.

2) Over a long enough timescale we're all dead the Great Depression has vanished to a distant, poorly-related memory. It was obviously the defining facet of two generations, but it hasn't had much of a lasting cultural effect beyond that.

3) Globalization acts as a huge buffer for this kind of disruption. By being able to expand and extend commerce to a much larger potential market, clever companies, nations and individuals can mitigate the effect of a nation-scale depression by (ab)using global credit flows.

4) When there's blood on the ground there's money to be made. Mr. Market is hardly rational.
posted by Skorgu at 2:29 PM on February 25, 2008


Heh, and while I was responding to your first post you make a second post retreating even further and indicating a belief that the economy isn't in fantastic shape.

Oh well, now that I've got you basically contradicting yourself, I guess my job here is done.

After all, I was annoyed that somebody said you were right, and now you've basically said that think you're wrong, but you haven't definitively proven that fact yet. I think that's as close to "victory" as is possible when trying to correct somebody's wrong-headed assertions on the Internet.
posted by mosch at 2:30 PM on February 25, 2008


Disclosure: I happen to think that the S-word is going to be pretty popular in the next decade or so.

Skorgu?
posted by mrnutty at 2:32 PM on February 25, 2008


geoff.: So now your claim is that economy is sick,

No, there's no real way of telling if it is "sick" or "healthy." This is not nihilistic but simple fact. The economy is not a person. What metric do you want to use? Historical volatility? GDP? Interest rates? I'm in favor of using general metrics to see how the economy is doing and while the GDP is sluggish, as said before, we have to see it tank. We won't know if it is sluggist because it is gearing up for a big push or if it is sluggish because it will see a big downfall.

but there is no possible way to tell what is causing it, or what should be done?

Right. Exactly. There's no way to tell what is causing it. Or at least, we don't have anyways currently to know what is causing it any moreso than we can say what is causing me to chose one wine over another for dinner.

Just a few moments ago you claimed everything was fine except a few mortgages.

Nope.

I think it's fascinating (and telling) that you imply there is no possible scientific analysis that can be done at this point, that all we can do is wait to see how much sicker the economy gets, and pray that the answer becomes clear via a miracle.

We go from scientific analysis to praying? I can plot the courses of the planets and tell you where they will be, but I cannot tell you why they are that way. That's the whole gist of science isn't? We keep digging deeper, we may get better at prediction, but the why is always hard to tell. The state of the economic analysis is much more like early modern medicine than it is astro-physics at this point.
posted by geoff. at 2:32 PM on February 25, 2008


In other news, US backs IMF moves to sell gold reserves to raise cash.

We should have gone into an incredibly deep and painful collapse after the stock market bubble popped, but instead we've inflated two more, ten times bigger.

Okay, slow down here. Look at a Nasdaq chart circa 2000-mid 2002. It went from 5000 down to about 1200. That's a decline of 70%. The entire index. Considering that's where all of the growth companies are, that's seems pretty painful to me. Yes, that includes pets.com, but it also includes "real" companies like Cisco, intel, apple, etc. The S&P 500 fared only slightly better, declining about 45%. That is very very bad. People thinking we're about to enter into a 1990's Japan have sort of missed the point that it started about 8 years ago. The only reason it stopped is because we as a country buckled down, made the hard choices, and spent $800 billion on defense.

Now we rely heavily on China to produce goods cheaply so as to mask us from the inflation we would normally experience. We're okay with it, because it means cheap shit at Walmart and Target. But we are supposed to experience some pain, not because the Wall Street Cabal has sold out our future, not because our paper money is somehow more worthless than money made out of a useless yellow metal, but because we in the United States make and sell precisely nothing that the world wants.

You want to be an economic power again, find a way to make T-shirts and jeans in the U.S. cheaper than they can be made in China. Build a better Ipod, flatscreen TV, etc. Design an engine that delivers 200hp and gets 80mpg. Don't wait for someone in the market to do it because everyone is waiting. But no one is really doing that. You know where the best engineers in America find jobs? Wall Street and Lockheed. Wall Street pays big money, Lockheed gives them the chance to build shit that people mistake for alien spacecraft. Name another company that much on the leading edge of its industry. Everyone else runs a strictly commodity operation that is better served by India and China.

I have no idea how this is going to play out other than (a) oil is getting more expensive over the long run, (b) China and India are going to compete with the US, Europe, and each other over resources with steadily increasing friction; and (c) we are going to fight more and larger wars sooner than you think. I've been wondering why so many people of all political stripes support keeping troops in Iraq, support massive defense spending, and I wonder if it's because they know something that leads them to conclude that it is a necessary evil.

Those are very real problems. Whether there is a recession or not is arguable, with some people arguing we're already in it. Whatever. I prefer to focus on the bigger picture problems that, while more distant, are also more certain.
posted by Pastabagel at 2:33 PM on February 25, 2008 [7 favorites]


Just because there's a Nobel prize for Economics doesn't make it an actual science.

We get it. You don't believe in economics.

Me, I don't believe in Physics, but I don't go around pissing in Physics forums about how it's all a wave-based lie, and that there is no grand unifying theory of everything.
posted by mosch at 2:33 PM on February 25, 2008 [1 favorite]


For once in my life, I agree with nearly every single word that Pastabagel wrote.
posted by mosch at 2:35 PM on February 25, 2008



After all, I was annoyed that somebody said you were right, and now you've basically said that think you're wrong, but you haven't definitively proven that fact yet. I think that's as close to "victory" as is possible when trying to correct somebody's wrong-headed assertions on the Internet.


Wow, I had no idea saying "I don't know" was so contentious. I'm saying we can not fundamentally know who is right and who is wrong. But I guess that is sort of a hard idea to take isn't it? All I am saying is let the data speak for itself. Why is this so hard? Why does this come off as contradiction?
posted by geoff. at 2:36 PM on February 25, 2008


OTOH, if Liberia knew they were sitting the world's biggest reserve of mischmetal and we desperately needed the neodymium to build out a mag-lev system in this country, what would Liberia demand from us?

I think the question is, what wouldn't we demand from Liberia?
posted by dubold at 2:37 PM on February 25, 2008


buy Wal-Mart AND Tiffany's, sell Macy's

I was just about to post something akin to that.
posted by elwoodwiles at 2:37 PM on February 25, 2008


Anecdotally, Here in Whistler I've noticed a lot fewer Americans in my store this year, as compared to last. I know a lot of that has a good deal to do with the Canadian dollar at par now, but still, the difference has been stark. Upper middle class Americans just aren't spending like last year. The only people shopping here are the very affluent.
posted by [expletive deleted] at 2:41 PM on February 25, 2008


geoff is a witch - burn him! He says that Satan isn't coming! He onlys says this because he is a servant of the dark one!
posted by sien at 2:41 PM on February 25, 2008


mrnutty: I'd like to think that my own popularity level has some growth potential in it, but I meant the shalt-not-speak-its-name Stagflation.

mosch: Plenty of well-respected physicists do just that with string theory. It's how we go from wrong to right.
posted by Skorgu at 2:42 PM on February 25, 2008


All I am saying is let the data speak for itself.

Your first post implied that there are no problems at all (a snark about tulips and bubbles). Your second post implied that things are getting better, just like with computers. Your fourth post claimed that the sole cause recent economic troubles was that some poor people got irresponsible loans.

And now you claim that you're saying let the data speak for itself? You're a funny, funny, ludicrously hypocritical man.
posted by mosch at 2:42 PM on February 25, 2008


Plenty of well-respected physicists do just that with string theory. It's how we go from wrong to right.

If I was going to troll a forum claiming that they're all wrong, I'd at least have the good sense to offer some sort of alternate hypothesis, or at least indicate specific flaws with their ideas.

Delmoi is just saying economics doesn't exist and pissing off. Pretty much the exact opposite of useful criticism.
posted by mosch at 2:43 PM on February 25, 2008


dw said: The history of America is bubble-boom-panic-bust-bubble.

Isn't that some sort of video game?
posted by symbioid at 2:50 PM on February 25, 2008 [1 favorite]


Just because there's a Nobel prize for Economics doesn't make it an actual science.

I don't read any nonexistence claims in there. Economics has a very hard time making testable, falsifiable and repeatable claims not least because natural experiments are rare and the fundamental building block of any simulation is nothing less than the human mind. I'll let any mental health professional chime in with how imperfect our understanding of that mechanism is.

Not to be a dick about it, but it's hard to take anyone making predictions seriously when they're not making them from atop a heap of utility.
posted by Skorgu at 2:51 PM on February 25, 2008 [2 favorites]


Anecdotally, Here in Whistler I've noticed a lot fewer Americans in my store this year, as compared to last. I know a lot of that has a good deal to do with the Canadian dollar at par now, but still, the difference has been stark.

Here in Seattle, I hear a lot of French spoken in stores, I see a lot more BC license plates in the Target parking lot. I've heard it's even more that way in Bellingham -- Bellis Fair Mall is packed out with more Canadians than locals every Saturday.

I'd chalk a lot of it up to the loonie-dollar parity. I know a few people who stayed in-country over Presidents Day weekend rather than go to Victoria or Vancouver. That is, they made a decision to go to a B&B on Whidbey Island instead of drive to Vancouver because of the exchange rate.
posted by dw at 2:54 PM on February 25, 2008


Isn't that some sort of video game?

It's the cheat code that unlocks John Maynard Keynes in Economic Kombat II.
posted by dw at 2:56 PM on February 25, 2008 [7 favorites]



Not to be a dick about it, but it's hard to take anyone making predictions seriously when they're not making them from atop a heap of utility.


That's funny. In that case I'll continue to consider my own predictions to be reasonably useful, and I'll continue to ignore you.
posted by mosch at 2:57 PM on February 25, 2008


Another thing I've noticed with these wild predictions is that there's always this disconnect between "things are different" and "things never change."

We laugh at how people think the economic realities change with the rise of the newest bubble because we know the bubble always pop. But the thing is, the realities DO change. Every bubble is built on the back of the previous bubble. With busts the government tightens some rules and loosens others. Investors treat each bubble differently. There are new suckers and old hacks.

What that all means is that how a bubble pops and how we react to it changes every time a bubble forms. Economic reality is always changing. It does not stop the bubbles and the aftereffects, but it does mean that the economy reacts to a silver bust in the 1890s far differently than it does an Asian market bust in the 1990s. And we expect the economy to react differently.

We can't control busts. But we can control how we react to them.
posted by dw at 3:08 PM on February 25, 2008


Comment 1: China and India coming online are profound deflationary forces, and should have depressed wages in this country a very great deal, as we struggled to cope with the new reality that labor isn't worth as much as it was a generation ago.

Response 1: That assumes there is a sort of zero-sum game going on here? I look at it different: a bunch of cheap labor means increased specialization and cheaper goods while giant leaps in technology gains. I mean you're not going to have a bunch of data entry people forever, they're going to go home and become entrepreneurs and build the next iPod, whatever that might be.


So true. Americans (or Canadians) are never going to be able to competitive in the mfg space ever again unless companies (and workers) focus on value-added products and processes. There's going to be 10 billion people on this planet one day and plenty of capital to build factories wherever (Africa will be industrialized within ten years, thanks to Chinese money).

China and India coming online doesn't necessarily mean we have to live with depressed wages (and escaping wage deflation over the past decade is somehow "bad"); we just have to focus on more innovation, more knowledge creation.

Of course, any teacher will tell you that not all kids are created equal: we can't all be lawyers or software engineers, members of the "creative class."

For some folks, factory jobs were perfect ways to make a living. And now what do those folks do? Work at Wal-Mart or a pork slaughterhouse? Change diaper in an adult-care facility?
posted by KokuRyu at 3:09 PM on February 25, 2008 [2 favorites]


But we can control how we react to them.

Step-one of the economic grieving process: "I Told Ya So!!11one!!!"
posted by mullacc at 3:21 PM on February 25, 2008 [1 favorite]


but because we in the United States make and sell precisely nothing that the world wants.

Movies, television, McDonalds, Coca Cola, wheat, foodstuffs etc.

We don't make steel and cars and stuff that the world wants anymore but that's not the same as "nothing".
posted by Justinian at 3:24 PM on February 25, 2008


Wow I'm half asleep and will be totally out of it in about five minutes, but I've got Roubini & Setser's paper of the same title in front of me, and it was hardly as conclusive as Elliott's quote "Nouriel Roubini, professor of economics at Columbia University in New York, is one of those sceptical about the idea that the US will suffer only a short, shallow downturn." would leave one to believe (not having read or seen the paper that is).

In fact it seems to end with a series of possible outcomes, and referencing only the positive (hey! I'm an optimist!) -- 2.4.1 Will China continue to bear the burden of anchoring the system; costs & benefits, 2.6 Will Japan's Ministry of Finance (MOF) resume large-scale intervention to support Bretton Woods?, 2.7, Will Europe sell Euros to privde the US with a very large loan? , 2.8, Central Bank Financing, 2.10 Mitigating Factors to delay the hard landing (about two pages of factors). The paper is quantitative and non conclusive. In fact the last paragraph reads :

"Consequently the risk of a disorderly unraveling of the Bretton Woods 2 system are growing. Such an unraveling could result in a sharp economic slowdown in the US. It will force countries that now depend on US demand growth for their growth to adjust as well. But if the financing for the United States is not available global adjustment is unavoidable".

Maybe he's refined his thoughts since then, but I can't find an updated paper and unfortunately Elliot doesn't cite source.

But I think Eillott is referencing 'Will the Bretton Woods 2 Regime Unravel Soon? The Risk of a hard landing in 2005-2006', Roubini, Stern School of Business, Setser, Oxford University, First Draft 2005. This paper may have actually been published in a peer reviewed journal since it was passed to me for review, but I'm too tired for an extensive search and a quick Athens shows nothing.

FWIW, this paper was presented at a Federal Reserve seminar in San Francisco in 2005, looking at Asian development.
posted by Mutant at 3:32 PM on February 25, 2008 [2 favorites]


DW Very soon Canadian purchasing power may not be worth the trip... especially because of rising fuel prices.

It's obvious the US economy is due for a serious correction. KokuRyu is right. Even a best case scenario correction still leaves tens of millions of Americans with falling standards of living. It's bad out there and it's gonna get much, much, worse.
posted by tkchrist at 3:36 PM on February 25, 2008


Movies, television, McDonalds, Coca Cola....


HAHAHAAHA. I think you better research that list.

Not only that we ain't supporting an economy of 200+ million people on Big Macs and Will and Grace re-runs.
posted by tkchrist at 3:38 PM on February 25, 2008


On the call about buying Wal-Mart and buying Tiffany - good point. Unfortunately, Tiffany was another high end retailer that found poor sales going into the end of the year.

On the comments about globalization and depressed wages: it is true that China and India doesn't necessarily mean we have to live with depressed wages, but it does mean that we (North Americans, US citizens in particular) need to be able to move our large labor force into other competitive professions while maintaining strong wages.

As an example - the Big Three are still looking to chop more people from their payrolls through more buyouts. GM also announced, very quietly last week, that they were looking to re-hire many of those jobs not at $28/hr. like the current jobs pay, but at $14/hr. with no medical benefits and no pension plan. Sure these guys could go work at a Wal Mart or a pork slaughterhouse, but those jobs do pay less, at $10/hour on average.

This means that as a big portion of the labor force moves into these jobs either they buy less/fewer goods, or due to creative financing, they leverage themselves with debt to keep up a lifestyle they otherwise couldn't afford. I think that this is a large part of the transition we are seeing now and why I think a slow deflation is what we're going to encounter over the next few years.

And KokuRyu is right - we're not all equal and that's why this current economic transition is going to affect the country differently depending on where you live. As someone else said - Seattle seems to be pretty prosperous, and it is overall stable. Many parts of the Midwest (Ohio, Michigan and Indiana excluded) have been relatively stable, but California, Arizona, Florida, Texas, DC-VA-MD, Mass, New York, Utah and others that were major boom towns are experiencing major busts right now.

The real estate bubble in particular is clobbering California. Their deficit has ballooned to between $14 - 16 BILLION at the moment. Dems big bucks.
posted by tgrundke at 3:40 PM on February 25, 2008


I have a factory job. You saying I should switch careers to diaper changing?

Sheesh, what an elitist asshole.
posted by Eekacat at 3:42 PM on February 25, 2008


Movies, television, McDonalds, Coca Cola, wheat, foodstuffs etc.

The entire entertainment industry makes about 10 billion a year. Our trade gap is about 700 billion a year.

The US needs to start making *something* other than paper portraits of presidents, because those aren't nearly as popular as they used to be. I'm sure it'll happen, but it'll suck for a while, until it does.
posted by mosch at 3:46 PM on February 25, 2008


Sheesh, what an elitist asshole.

No he is not. He is stating facts. Nobody should be mad about facts. Are you upset the sky is blue?

You can read into what ever you want about what it means to be a factory worker. But that's your kink not his. The fact is that Manufacturing Jobs are disappearing fast. It used to be that people with lower educations could easily work in this sector and have an expectation of rising living standards. That day is gone.

The point is that health care and elder care are growth sectors of the economy. Read into what it means to perform THOSE jobs all you want. Again your kink. But this one sector, that the average person could train for quickly and easily, cannot possibly absorb the numbers of people who going to be put out of work and who will have a near impossible time transitioning to other sectors. See?

The so called "Creative Class" should not be feeling too secure either as they are no more special than a member of the creative class in India. I bet a good quarter of US MeFites will have found them selves out of work at least once this time 2010. A bold prediction!
posted by tkchrist at 3:54 PM on February 25, 2008 [1 favorite]


"And not just in the handwavy-longtime-future, in the relatively short term. It has to."

I'd really like to see you quantify that. What metrics will be where when. And I'd like to see you put money on that—not abstractly, not "we're all going to lose money" etc.

When you define your terms and place a wager—$20, $40, $100—then I'll decide how seriously to take your claims and whether or not I'd take that wager. Otherwise, well, hell, it's all kinda nebulous.
posted by klangklangston at 3:55 PM on February 25, 2008


I have a factory job. You saying I should switch careers to diaper changing?

Sheesh, what an elitist asshole.


I think I am the asshole you are referring to. So, in response, I would say that I have a degree in Creative Writing and a degree in Education (bachelor degrees in Canada have about the same currency as high school diplomas did 25 years ago, so don't call me an elitist for having gone to university), both of which should peg me as lower middle-class.

I have learned the hard way that is important to be able to adapt to a changing labour market. After returning to Canada as a teacher in 2004 there were no teaching jobs - a lower birthrate meant declining enrollment - I couldn't get a job. Thanks to some hard work I am now a manager in government in a totally unrelated field.

I don't call myself elitist: I call myself a hard worker.

Anyway, if you have a factory job and you make shower curtains, then yes, you should change jobs because you won't have one for long. If you are a Canadian mfg worker and sell to the American automaker, yes, you should get a new job.

However, if you build or assemble value-added products such as solar panels or whatever, then you should be safe.

Anything in mfg that demands quality - something the Chinese are not good at - is safe. Unfortunately, American car are the worst pieces of shit around. Who would have thought that driving a Hyundai would be a better bet than driving a Ford?
posted by KokuRyu at 4:04 PM on February 25, 2008


You talking about killing? Hmm? Y'all experts? Y'all know about killing? I'd like to hear about it, potheads.
posted by uncanny hengeman at 4:15 PM on February 25, 2008


we ain't supporting an economy of 200+ million people on Big Macs and Will and Grace re-runs.

Our trade gap is about 700 billion a year.

Ah. You guys obviously think that a trade deficit is inherently a bad thing. That isn't clear at all. Some developed countries consistently run a trade surplus; others consistently run a trade deficit. But a trade gap is not, in and of itself, a huge warning sign of economic problems to come.
posted by Justinian at 4:16 PM on February 25, 2008


Mutant - I think it was an article in the Global EconoMonitor. The articles are subscription only, but there's a discussion of it by Martin Wolf in the FT: "America’s economy risks mother of all meltdowns".
posted by patricio at 4:16 PM on February 25, 2008


This Guardian article on food is also pretty frightening.
posted by KokuRyu at 4:33 PM on February 25, 2008 [1 favorite]


Ah. You guys obviously think that a trade deficit is inherently a bad thing. That isn't clear at all.

Ah. I think a lot of people are also thinking that spending $lots and only making $pittance is a bad thing, and linking the two ideas. The former is clear, is the latter wrong?
posted by bonaldi at 4:54 PM on February 25, 2008


The trade deficit and the budget deficit are completely different entities. The budget deficit and our rapidly expanding debt are huge problems; the trade deficit is not related.

Spending $lots while making less is a budget deficit. A trade deficit means we import more goods than we export. But, again, that's not necessarily a bad thing. It means people in other countries value the US dollar more than they value the sweat of their brow. And vice versa.

Theoretically speaking a US dollar that continues to fall would mean the trade deficit would narrow and (if it fell enough) reverse, but there are complicating factors like China pegging their currency to the dollar and so forth.
posted by Justinian at 4:57 PM on February 25, 2008


Very soon Canadian purchasing power may not be worth the trip... especially because of rising fuel prices.

Soon? Sure. Very soon? Probably not. One of the big reasons for the run over the border is that even with parity a USD 20 shirt at JCPenney's costs CDN 25 at The Bay. If you're loading up, making the trip to Burlington pays for itself and more. If you have a big shopping trip, all you're losing in going to Bellingham is the border crossing time.

And remember that gasoline in WA is 10-15% cheaper than it is in BC.
posted by dw at 5:03 PM on February 25, 2008 [1 favorite]


Spending $lots while making less is a budget deficit. A trade deficit means we import more goods than we export.

Is spending $lots necessarily a budget deficit? I understood that to mean purely government spending, whereas I think I mean the $lots in terms of your overall economy spending externally more than it generates internally in a given period. And that would relate to the trade deficit, surely, in as much as that reflects how much it is getting from outside. (In an incredibly simplistic fashion, I mean all this).
posted by bonaldi at 5:09 PM on February 25, 2008


And remember that gasoline in WA is 10-15% cheaper than it is in BC.

WA is also the biggest state of Australia please stop being a racist.
posted by uncanny hengeman at 5:11 PM on February 25, 2008


Either I missed something, or Larry fucking Elliott doesn't know the difference between Columbia and Stern. Which should be taken as an insult by the Columbia community.
posted by Kwantsar at 5:14 PM on February 25, 2008


Ah. You guys obviously think that a trade deficit is inherently a bad thing.

A small trade deficit is probably sustainable over a very long period, essentially 'forever' in economic terms. (50+ years). But a large one is not.

Historically, Mr. Market has been quite punitive toward countries that have exceeded a trade deficit of 5% of their GDP. We're at about 7% if you believe the government GDP numbers; I suspect it's more like 8 or 9%.

Essentially, we've been shipping dollars overseas instead of goods. To keep their own currencies cheap, and their exports more competitive, the Chinese and Japanese central banks have sopped up enormous quantities of those dollars -- in essence, importing our inflation. That's what shocked Japan out of its two-decade doldrums (to which I fully expect it will return if monetary sanity resumes there; the only way they can recover is if they let their zombie corporations die). That's also what set off a great deal of the building frenzy in China; it didn't show as inflation as much as wild expansion... now it's starting to turn into inflation.

So, not only are we in unbelievable debt, we ALSO have let foreigners build up massive, massive dollar holdings. This means that we're now competing against our own prior profligacy when trying to buy global goods and services. If the Chinese, Japanese, or Arabs really want something, they can HAVE IT, and there's very little we can do about it.

I'm still not sure whether we're going to inflate or deflate; we can go into a very sharp deflation if our debts start to collapse. I suspect the government will step in, as everyone expects it to these days, and will prevent that outcome -- resulting in wild inflation instead.

Until we get past the idea of government bailouts for irresponsible companies, things will never really get better. They may stabilize for short periods of time, but until the backstop of Uncle Ben and Congress is removed, the global financial institutions will not learn proper caution and will continue to make stupid decisions. This hurts all of us. Bailouts prevent immediate pain, but they insure more of it over the long haul.

A market can only be healthy when bad businesses are allowed to fail.
posted by Malor at 5:25 PM on February 25, 2008


Sigh. Hit Post too soon. Was going to add... that's why Japan suffered for more than twenty years after THEIR property bubble... they refused to let bad companies fail. We will do the same thing, and we will suffer at least that long.
posted by Malor at 5:31 PM on February 25, 2008


The entire entertainment industry makes about 10 billion a year.

That's only true if Disney is responsible for about half of the entertainment industry's profits.
posted by Kwantsar at 5:31 PM on February 25, 2008


When you define your terms and place a wager—$20, $40, $100—then I'll decide how seriously to take your claims and whether or not I'd take that wager. Otherwise, well, hell, it's all kinda nebulous.

That's purposeful. When you have intelligent agents at the center, attempting to manipulate outcomes, it's very hard to be specific about just what will happen. How would I know, a month ago, that the Fed would cut rates by 1.25%? I would have assumed that was crazy talk. Or that they would open up a new facility just to inject money into banks without telling anyone that they were doing it? That's absolutely ridiculous... but they're doing it.

I believe we're boxed into a corner. I don't think there's any more rabbits to be pulled out of hats. And I think we're going to see something a lot like the 1970s, except a lot worse and lasting a lot longer. But, depending on how the entities at the center react, we could perhaps avoid the worst of it, and inflate some new bubbles somewhere else, bringing on an even more severe crash in a few years. Or they could the RIGHT thing and just let the market shake out, removing the bad players and rewarding the prudent ones... which would result in massive deflation. I don't expect that to happen, as it would be too politically unpopular. People don't like being unemployed and visiting the food bank.... even though with the bailouts, they're eventually still gonna be visiting the food bank because food will be too expensive to buy on a normal wage. But, to our modern fiscal 'planners', pain tomorrow is always better than pain today, even if the pain will be much worse.

With the massive dollar holdings worldwide and the massive debt of the US government, my guess is that commodities will be the king of the world for the next decade or two.
posted by Malor at 5:41 PM on February 25, 2008 [1 favorite]


What I've always found odd is how many people who self-identify as "free market" types will support the kind of monetary policy hotdogging that we're seeing. Part of believing in the free market is believing that failure is part of the game. Granted letting banks fail is problematic from a larger economic point of view, but surely we can come up with more fine-tuned policies than the sledgehammer we seem to be employing at the moment. Talking up the moral hazard and then chopping the discount window like that is just a bit counterintuitive.

This thread spawned my first internet hate mail! I'm so proud!
posted by Skorgu at 5:53 PM on February 25, 2008


"When you have intelligent agents at the center, attempting to manipulate outcomes, it's very hard to be specific about just what will happen."

Which is why it's kind of hard to take your sturm und drang seriously. I mean, I largely agree with you (though my girlfriend is much more in your corner), but without saying "Well, by 2015, we'll have 15% unemployment. I'd stake $20 on it," it's kind of hard to know how to evaluate these claims or what sort of preparations should be made, etc. And $20 would represent a very small risk, unless of course our deflation is so terrible that we return to 1840s money.
posted by klangklangston at 6:23 PM on February 25, 2008


that's why Japan suffered for more than twenty years after THEIR property bubble... they refused to let bad companies fail.

Not exactly correct, which leads me to question many of the assumptions or "facts" posited in this thread.

While it has been *nearly* twenty years since the Japanese asset bubble popped in 1990, most folks believe the economy bottomed out in 2003.
posted by KokuRyu at 7:04 PM on February 25, 2008


Granted letting banks fail is problematic from a larger economic point of view

But may be inevitable:
The Federal Deposit Insurance Corp. is taking steps to brace for an increase in failed financial institutions as the nation's housing and credit markets continue to worsen.

FDIC spokesman Andrew Gray said the agency was looking to bulk up "for preparedness purposes." ...

The agency, which insures accounts at more than 8,000 financial institutions, is also seeking to hire an outside firm that would help manage mortgages and other assets at insolvent banks, according to a newspaper advertisement.
...
"Regulators are bracing for well over 100 bank failures in the next 12 to 24 months, with concentrations in Rust Belt states like Michigan and Ohio, and the states that are suffering severe housing-market problems like California, Florida, and Georgia," said Jaret Seiberg, Washington policy analyst for financial-services firm Stanford Group.
posted by ryoshu at 8:04 PM on February 25, 2008


So, not only are we in unbelievable debt, we ALSO have let foreigners build up massive, massive dollar holdings. This means that we're now competing against our own prior profligacy when trying to buy global goods and services. If the Chinese, Japanese, or Arabs really want something, they can HAVE IT, and there's very little we can do about it.

You know, I've heard that whole "China has so many dollars they can dictate the terms" thing for a while, and it leaves out one important point:

If the US calls their bluff and they dump the dollar reserves, then they will be effectively hoisting their own export economy on their own petard. And that would stop China's growth dead in its tracks.

Yeah, they'd have Taiwan, but now they'd not only lose MFN with the US, there wouldn't be a single buyer in the US able to afford their exports. And there's no way Europe can make enough of it up.

The Beijing leadership would have democracy protestors on their front doorstep faster than they can run them over with tanks.

I believe we're boxed into a corner.

At this point, it's all rocks and shoals. I think it's entirely possible to navigate this mess and keep the recession to eight quarters. It's going to require direct government intervention with foreclosures. It will require some significant revaluation of both the housing and credit markets. But it's possible. The question is what comes after.

There will ALWAYS be more bubbles. I forgot the S&L crisis in my list of bubbles. I also forgot the oil shale bubble of the late 70s. All this "oh no bubbles will KILL US ALL" talk is ludicrous. It's all boom-bust. The question is whether we can navigate away from the big bust while not sending us into some stagflation or deflation nightmare.
posted by dw at 8:38 PM on February 25, 2008


A sobering 12-step scenario.
posted by The Card Cheat at 8:41 PM on February 25, 2008 [1 favorite]


If the US calls their bluff and they dump the dollar reserves, then they will be effectively hoisting their own export economy on their own petard.

Yep. If you owe the bank a thousand dollars, the bank owns you. If you owe the bank a trillion dollars, you own the bank.
posted by Justinian at 9:15 PM on February 25, 2008


There will ALWAYS be more bubbles.

There's a difference between booms and bubbles. Booms happen -- they're bad, but they happen. Bubbles don't need to. They're a different beast.

In 2000, the Nasdaq WAS the economy, just like housing is today. All the other 'bubbles' you cite didn't have anywhere near a system-wide response when they unwound. The S&L crisis was pretty bad, but that was very much a symptom of the modern malaise; this new one is S&L writ large, because we didn't learn the lessons from that one.

Also note that virtually all of your examples are post-1971. When we were at least theoretically on a gold standard, we didn't really see much of that. We had the long-term alternation between stocks and commodities, (the Nifty Fifty giving way to the gold boom), but no real bubbles that I can think of. Pre-Fed, there were plenty of small panics and crashes, but nothing that ever really threatened the integrity of the whole system. And it's been pointed out that our economy was very young at the time, and that young economies are prone to doing that regardless.

I believe you're using your own life experience, which likely doesn't much predate the Greenspan Fed, as being 'the way economies always are', and that just ain't true. Things have been screwy for a whole generation, and it's badly messed up people's ideas of how markets should work.

When you get an aged, supposedly refined economy, in which the players are running around like giddy schoolgirls, throwing money after the latest fad... that does a lot of damage, particularly when the latest fad causes self-reinforcing feedback loops that make more money appear to be available.

Marc Faber likens the present monetary system to being on a giant plate, and the Gods of Money tip the plate around as they intermittently choose different industries to bless with their fountains of endless cash. He figures the way to profit is to try to be where the money is ending up.

That's pretty good advice... but it also drives home that a very large chunk of our economy has moved to speculation instead of production. We're a casino, not an investment allocation mechanism. And many of the players, particularly the US government, are in hock so far they can't even see daylight anymore.

Couple other random comments:

If the US calls their bluff and they dump the dollar reserves,

They don't have to do that. They can just buy whatever it is they want. Whatever it is. If it's a broadly available commodity, that means we'll see wild inflation here, as we compete with the money we spent last year for food and energy today.

I posit that them doing this is absolutely inevitable: once they realize their dollar holdings are worth much less than they think, they'll start slowly trying to divest. They'll try to avoid shocks, but big inflation is extremely likely... and remember that whoever accepts the dollars will, in turn, then use those dollars to buy yet more goods. There's a LOT of US dollars in play out there, and if they slip out of the strong hands they're presently in, that will cause us a great deal of pain without even a deliberate attack.

but without saying "Well, by 2015, we'll have 15% unemployment. I'd stake $20 on it," it's kind of hard to know how to evaluate these claims or what sort of preparations should be made

The biggest reason I don't make specific predictions is because I don't want you blaming me for leading your investments astray. I don't give investment advice. I can tell that the system is unstable and has to break, but I can't tell which way it will break with any certainty. It's like watching a window that's been shot, and is quivering and starting to fall out of its frame; I can't tell you very much about individual shards, but I can tell you with pretty strong assurance that the overall trend is down. Complicating this are the guys with paper and glue, ever so much glue, desperately trying to hold the pieces in the frame.

Also, when I first started talking about this on MeFi, I got many accusations about how I was a 'short seller' and 'trying to panic the marketplace'... so I specifically do not give advice on anything. You have to do your own homework and figure it out for yourself. These opinions of mine are real, unfeigned, and not an attempt to manipulate markets. They may be wrong, but they're as honest as I know how to be.

My purpose in posting in these threads is primarily to keep people focused on the Fed, which I believe is the core of the entire problem; as different segments of the market fall into disarray, everyone pays attention to that segment, instead of the root cause of all these different segments being in so much trouble in the first place. They're in trouble because the Fed has only allowed two economic conditions since Greenspan took over: boom and less boom. Booms induce waste and fraud, which recessions clear. We've been building up that waste for more than twenty-five years, almost a generation. All that pain still needs to be gone through; it hasn't been escaped, just deferred and magnified. And our ability to cope with the problem has been largely destroyed by the same boom, because we have so little actual production left.

As Pastabagel says way up there, we need to learn how to make things again: at the moment we are a shoddy producer of second-rate goods.
posted by Malor at 10:23 PM on February 25, 2008


So how is this particular fearmongering any different than any of the other econofearmongering we've seen on the Blue recently?

I mean, don't get me wrong. I don't doubt that we're fucked. It just doesn't seem like this guy is adding much to the conversation.
posted by Afroblanco at 10:28 PM on February 25, 2008


Delmoi is just saying economics doesn't exist and pissing off. Pretty much the exact opposite of useful criticism.

I didn't say it didn't exist, I said it wasn't a science, which it's not.

That's funny. In that case I'll continue to consider my own predictions to be reasonably useful, and I'll continue to ignore you.

Have fun with that.
posted by delmoi at 11:11 PM on February 25, 2008


"The biggest reason I don't make specific predictions is because I don't want you blaming me for leading your investments astray. I don't give investment advice."

Haha. Dude, I'm flattered, but I'm paying off my student loans bit by bit. That's where my extra "investment" cash goes. There is absolutely no chance that I would blame you for leading my imaginary investments astray.
posted by klangklangston at 11:11 PM on February 25, 2008


Really people, everything is okay:
Joe Lents hasn't made a payment on his $1.5 million mortgage since 2002.

That's when Washington Mutual Inc. first tried to foreclose on his home in Boca Raton, Florida. The Seattle-based lender failed to prove that it owned Lents's mortgage note and dropped attempts to take his house. Subsequent efforts to foreclose have stalled because no one has produced the paperwork.
posted by ryoshu at 12:23 AM on February 26, 2008


patricio -- Thanks for the links. Curious this stuff was (apparently) only published on Roubini's own web site; I've gone back into Athens and searched some more and can't find evidence that the working draft I cited above (passed to me at Uni back in 2005) ever was published in a peer reviewed journal.

Not that this discounts from the message mind you. On the other hand, there is what looks to be a derivative work published -- How Scary Is the Deficit? By: Setser, Brad, Roubini, Nouriel, Levey, Brown, Foreign Affairs, 00157120, Jul/Aug2005, Vol. 84, Issue 4 where Roubini & Setser debate Brown & Levy on this topic.

Since we sorta know Roubini & Setser's view (I say sorta as its not clear to me if Elliott has read their research - I have, just happened to have been reviewing it this weekend) I guess I can summarise Brown & Levy's. These points were extracted only from the first two paragraphs, showing this is a contentious topic at best for those working in macro economics (thankfully not myself, I'm more a capital markets kinda guy). Their conclusion is interesting as well:

"Setser and Roubini see the United States as a floundering Leviathan; we see it as a firmly grounded giant. Over the last decade, business investment in equipment and software (even excluding vital "intangible investment") has increased 66 percent in real terms, compared to a 44 percent increase in personal consumption. The result is an economy leagues ahead in the production and utilization of information technology."

Just to balance the points here, this was published about three years ago, but still is worthy of consideration. Like I said, this FPP only caught my eye as I'd been rereading Roubini's paper on Bretton Woods last Sunday afternoon. Top of my research pile actually, curious timing this would be posted...

ryoushu -- Heh, I've read before that this has been happening. This statement is interesting "``I can't believe the handling of notes is worse than it was five years ago,'' "

Well, just to calm everyone's nerves on this topic, there has been a huge backlog in trade confirmations, I don't work on that side but I think they've been making progress. By no means cleared down, but a hell of a lot better than it was a few years ago. So there were / are times when even the banks involved aren't sure who owns a particular CDO or CDS...until there is a credit event then all hell breaks loose, lots of scrambling to find the paper, fun, fun, fun for all involved.

So that being said, I'm not at all surprised to read about paperwork delays in what amounts to the last step of the entire mortgage process as it exists today. Seems like everyone is waiting for some kind of federal pronouncement on this, as states can and will disagree with each others rulings.

And when you've got instruments at the top of the pryamid that can be (not necessarily are) actively traded, the underlying paper trail all the way down to underlying mortgages is obviously protracted.
posted by Mutant at 1:16 AM on February 26, 2008 [1 favorite]


Here in Seattle, I hear a lot of French spoken in stores, I see a lot more BC license plates in the Target parking lot.

All due respect and stuff, but why would Quebecois people be travelling a couple of thousand miles to shop in Seattle? That's puzzling to me. French is spoken as a primary language by an exceedingly small minority of people in British Columbia.
posted by stavrosthewonderchicken at 1:57 AM on February 26, 2008 [1 favorite]


Anything in mfg that demands quality - something the Chinese are not good at - is safe.

Not good at yet. The same thing was said about Japan in the 70's and Korea in the 80's. It's just a matter of time.
posted by stavrosthewonderchicken at 2:01 AM on February 26, 2008


"Anything in mfg that demands quality - something the Chinese are not good at - is safe.

Not good at yet. The same thing was said about Japan in the 70's and Korea in the 80's. It's just a matter of time."


I'm not so sure I agree with this overall statement of Chinese quality guys; I'm always intererested in making money (who isn't?) and on the side I own a small business importing MP3 players into the UK.

I've bought lots of samples, some of them are very clearly rubbish but others are indistinguishable in terms of build quality from the real thing. Software doesn't always work the same, but that's fine. In fact it actually took me about one year to find suppliers that wouldn't put a well known manufacturer's name on the players. We've had shipments seized at the border as they had someone's else name on the player. Not cool.

Anyhow, we currently focus on three models, all of which look (and largely work) like the real thing. We sell for half the price but all come with full accesories, headbuds, cables, line charger, sport twice the memory, and offer features only available as add ons (e.g, Radio, Voice Recording, etc) to some other folks players.

And no, they don't have anyone's name on them but our own. I wonder about cost on the Mainland China side though - our operating profit is a little under 200% across the line, and I'm pretty sure (given how my suppliers love to negotiate and haggle and the pricing flexibility they've shown me) folks upstream of me in the food chain are making about the same margin.

But back to quality - if you pick your product carefully they do a damn good job. Anything higher up in value add (e.g., iPhone/Touch iPods) are rubbish (I haven't brought any in as my business model is based on low low low cost and ZERO litigation, but I've got friends who operate at the upper end and they've told me). HW is good but these are largely software driven devices. Lower functionality devices are very good quality.

So my own experience would suggest that unlike the Asian developed nations, where everything is high quality, The Chinese track record is a little spotty right now. But stavros is correct - given them time
posted by Mutant at 2:55 AM on February 26, 2008


"In fact it actually took me about one year to find suppliers that wouldn't put a well known manufacturer's name on the players. We've had shipments seized at the border as they had someone's else name on the player. Not cool."

Whoops - that reads poorly. The point is it isn't cool to put someone else's name on the MP3 player. Not that someone seizes the shipment at the border...those folks are just doing their job. Even if they seized and destroyed 10K shuffles of ours a few years ago ... OUCH!!!

I've told my suppliers they're building a wonderful product that can and should stand on it's own merits...

posted by Mutant at 2:59 AM on February 26, 2008


I agree with Mutant on Chinese manufacturing. They're _very good_ at manufacturing, and getting better very quickly; with the amount of money flowing their way, it's no real shock. I have speakers that were made in China, and I've rarely seen such good craftsmanship.

Hell, America itself used to produce poor quality goods, compared to the fine European items... they were crappy, but very cheap. Gradually, as our skills improved, we entirely eclipsed them, and for a time were the manufacturing titan of the planet.

I expect the same will happen with China, although I figure they're in for a real rough patch for awhile when the US economy cools. Once they recover, and I am absolutely certain they will, I expect they will emerge as one of two or three dominant world powers. I'm thinking Europe, Russia, China, and maybe India as the most significant of the world players, with the US in sad, sad shape for a generation or more. If we get past our wishful thinking and refusal to accept reality, we can recover, just as Russia did.... but it'll be a long, hard slog.
posted by Malor at 3:18 AM on February 26, 2008


As another data point, Morgan Stanley's chief US economist doesn't see stagflation looming, though he's hardly cheery either.
posted by patricio at 3:43 AM on February 26, 2008


"...I figure they're in for a real rough patch for awhile when the US economy cools."

Following Peter Lynch, I love anecdotal indicators....maybe I'm reading too much into this, but I think some of the Chinese players are already scrambling.

I've noticed the past month or so a lot more follow up and persistence to inquires I've made regarding products. A year ago you'd ask for terms, get a response then never reply to their email as you weren't interested (price, volume, whatever, rude of me I realise...). But then again you'd never hear from them either. So no worries.

But now it seems I'm getting chased a lot by suppliers. Maybe its because they've advanced their business practices and have adopted Western style CRM solutions and demand pipeline modeling - that's possible, but I'm not so sure as I've also read about massive unemployment in China, perhaps as high as 25% of the total workforce, and it's getting worse as the planners try to dry up excess liquidity.

And they also seem to be far more willing to cut deals then they were a year ago...
posted by Mutant at 4:00 AM on February 26, 2008


Meanwhile, the head of the GAO resigns, apparently frustrated that nobody would listen to him tell us that we're bankrupt.
posted by Malor at 4:36 AM on February 26, 2008


Check out #163 with a bullet! GO USA!
posted by stavrosthewonderchicken at 5:25 AM on February 26, 2008


> You might want to think about that a little. How unstable does the system have to be for
> something so minor to knock the wheels right off the cart?
> posted by Malor at 4:32 PM on February 25 [+] [!]

You may well be right that doom is upon us. But when, malor, when? Name the day, let's have a testable prediction. Or if you can't pick it to the day, can you narrow it down to a certain week, or month, or year, or decade, or century? "Sometime soon" isn't a prediction; "sometime soon" always remains in the future and never gets here.


> The biggest reason I don't make specific predictions is because I don't want you blaming me
> for leading your investments astray. I don't give investment advice.

No, sir. The biggest reason you don't is that making a testable prediction would open the possibility of being proved wrong, and we can't have that, can we? Untestable predictions are content-free: they have the form and appearance of predictions but do not actually predict. They fail the fundamental tinfoil hat test.
posted by jfuller at 6:43 AM on February 26, 2008


Also note that virtually all of your examples are post-1971.

1893? 1907? The speculative stock bubble of the late 1920s?

Have you considered that part of the reason there were fewer bubbles between 1913 and 1971 is because of two wars, the Great Depression, and most of the speculative capital being centered in oil?

Pre-Fed, there were plenty of small panics and crashes, but nothing that ever really threatened the integrity of the whole system.

Pre-Fed, there really wasn't a "system," per se. Wall Street was a non-stop pump-n-dump operation, to the point that people didn't put their money in the markets. Our overreliance on the gold standard led to William Jennings Bryan sort of populism (and the demands for the silver standard). Oil was emerging as the hot new commodity; lots of speculation there. And land, of course.

And there were bubbles and booms all over the place. And lots of busts. The Silver Bust almost saw Nevada "decommissioned" as a state.

Thing is, a gold standard nowadays just wouldn't work. We don't have enough gold. And we also don't have enough silver. Or platinum. We're probably looking at a large basket of metals just to get us to M1. And even then, we're then at the whims of scarcity and supply.

I think a lot of the gold standard folks forget that the US had to get out of Bretton Woods because global economic conditions were making it increasingly untenable to defend the $35/oz set price of gold. And our gold reserves are still very, very low.

All that said, don't assume that post-1971 is any more bubbly than pre-1971. Truth is, it took a generation for the markets to recover all they lost in 1929, and we had a war in there. But there have been a lot of speculative bubbles in the history of the US. They just haven't been on the size of the most recent ones simply because we've never had a middle class pushing their investment and retirement capital into the markets before the 1970s and 1980s. And the sheer amount of capital that can move into bubbles is much, much higher than ever before. If a stock drops in price, it affects tens of millions of people around the world. 100 years ago, it affected only tens of thousands.
posted by dw at 7:45 AM on February 26, 2008


All due respect and stuff, but why would Quebecois people be travelling a couple of thousand miles to shop in Seattle? That's puzzling to me. French is spoken as a primary language by an exceedingly small minority of people in British Columbia.

That's what I've been wondering. I know you can fly Air France straight to Sea-Tac, so maybe that's playing into it. But you never heard French in Seattle stores before this year, and I heard three different sets of shoppers use it in the last three months. If you hear any foreign languages in Seattle, they're usually going to be Chinese, Japanese, Russian, or Tagalog.
posted by dw at 7:48 AM on February 26, 2008


jfuller -- I've taught Forecasting Financial Markets to Masters degree finance students, and at our opening lecture tell them everything they needed to know about predicting the markets - If you name the date, DON'T name the amount. And if you name the amount, DON'T name the date. That way you're ALWAYS correct.

But joking aside I think Malor has already provided a good lead with his view on commodities - "With the massive dollar holdings worldwide and the massive debt of the US government, my guess is that commodities will be the king of the world for the next decade or two." - which I share (I'll qualify by saying to some extent).

Now folks will have to pick their own instruments, but I think precious metals are still good candidates for buys, and I like anything based on high yield corporate debt that pays regular (as in monthly please) cash flow. Set your stop losses accordingly and enjoy the monthly cash flow. And twelve payments per year - rather than getting paid annually / semi annually / quarterly - gooses current yield by a few basis points. Sweet. High coupons pay relatively high cash flow as well. The experience is sorta like owing money on one of those usurious credit cards, but in reverse as you are getting paid. Double sweet.

If you can pick some vehicle that pays regular cash flow from assets that are NOT denominated in the US dollar, triple sweet as you'll get share price appreciation and dividend growth (both due to US $ declines relative to the local currency) while being paid by a company to hold their paper.

This is a curious time in the markets, and while I grok modern portfolio theory and optimisation strategies, I chose to maintain only five positions. After all, concentration risk is a good thing if approached properly (as JP Morgan, Gates or Buffett will all confirm).

Some guys that I know doing cash flow investing won't put more than 2.5% of their equity into any single security, trying to diversify away specific risk, rendering their portfolio sensitive only to systemic risk that can't be diversified, but as I like to engage management I can't hold that many positions. It does lead to some problems, but as long as I'm not holding more than 10% of average daily trading volume, I'm not too concerned about liquidating my positions if I have to get out fast. I've only had to do that once in about fifteen years of cash flow investing anyhow, as I know what I'm buying and know why I own it. Kitchen table is covered with annual reports for everything I'm holding and anyone owning a share should do the same.

I'd suggest that agricultural commodities are to be avoided, not so much as there's been lots of press but because prices are so so high now you can bet acreage planted for food will increase leading to a price crash. Yes, I think we've got a bubble to some extent in agricultural commodities.

I took initial positions in Gold starting in 2004 and Silver in 2005. Gold is only physical but for Silver I'm holding both physical and an ETF. I'd suggest ETFs for new positions as physical incurs storage charges (for valuation think being long a share with negative dividend yield). I'm running about one third of my equity in precious metals currently, and I use other peoples money (that cash flow from the high yield positions mentioned before) to purchase more, especially Silver as I've become very interested in that market. I hate having that much of my equity out of cash flow generating securities, but as I've said before on MeTa - this period of economic uncertainty reminds me a lot of the post Vietnam period, huge deficits, oil shocks, uppity Arabs, on and on. I became convinced the folks in charge were gonna inflate their way out of this mess. Make the debts a lot smaller in real terms then allow growth in GDP to rationally resize the debt in nominal terms.

So I'd suggest selected commodities, especially so anything moving inversely with respect to the US dollar, and especially anything that pays cash regularly. I might be wrong, and in fact in the past I have been wrong. But this is where my money is (for the time being; I'm not emotionally attached to anything I own and dump if the price / yield tradeoff is right compared to other securities ...)
posted by Mutant at 8:51 AM on February 26, 2008 [3 favorites]


Target is more full than ever.

No, it's not.
posted by oaf at 9:19 AM on February 26, 2008


Malor -- "Also note that virtually all of your examples are post-1971. When we were at least theoretically on a gold standard, we didn't really see much of that. We had the long-term alternation between stocks and commodities, (the Nifty Fifty giving way to the gold boom), but no real bubbles that I can think of."

Well, I'm not so sure about this. There is a bubble, mania or panic resulting in a market collapse about once a decade, somewhere on this planet. Gold standard or not. I think it's human nature to take a good thing too far.

So assuming the United States went on a gold standard in 1900, (late in the game, the UK went on, for example, in 1717, and most of Europe seemed to have adopted a gold standard by 1893) let's see -- So no shortage of financial crises. Like rats with free availability to alcohol, give people money and some way to speculate and they'll do so. To the point of destruction, it would seem.

We're programmed on some level for irrational behaviour.
posted by Mutant at 10:00 AM on February 26, 2008 [4 favorites]


I'm reading and semi-enjoying "Demon of our own design" by Richard Bookstaber (ex-head of Morgan Stanley risk) whose thesis is exactly that the financial system itself is programmed to produce crises. The book is worth a read, if a little melodramatic.
posted by patricio at 10:09 AM on February 26, 2008 [1 favorite]


delmoi: Take a moment and re-read your posts and ask yourself this simple question: "If somebody disagreed with my base assertions, what compelling reason would they have to re-consider their ideas?"
posted by mosch at 10:50 AM on February 26, 2008


So my own experience would suggest that unlike the Asian developed nations, where everything is high quality, The Chinese track record is a little spotty right now. But stavros is correct - given them time

The Chinese won't be improving their product anytime in the next ten years, which is plenty of time for the US (and Canada!) to revamp their own value-added manufacturing industries.

MP3 players and household appliances are fine, but anyone can build those. And how many iPods are manufactured in the United States anyway?

American companies have to start thinking up and producing things that no one else can do - hopefully the focus won't be on military technology or refined ways to kill people.

Take alternative energy technologies, for example. At this time, no one has figured out how to make money off of the millions of acres of dead pine trees in British Columbia.

Sure, some folks have developed a basic technology that turns these stands of dead pine into wood pellets that fire cogen electric generating plants, but this process does not add value to this tremendous resource. And, as it is, although there plenty of folks out there who want these wood pellets, which are a net-carbon neutral source of energy, there is no economical way to transport the pellets to overseas markets.

However, if the time, money and brainpower was spent on developing biorefining solutions for this dead wood - essentially creating liquid fuel - it would add value in any number of ways:

- no one else is developing the expertise on biorefining, and British Columbia can sell that expertise around the world

- a new, net carbon neutral source of fuel would be created that could be easily sold all over the world

- a new and sustainable industry would be started

Any number of folks would be needed to staff that industry. In fact, the number one skills need in green power solutions is software and IT developers - the folks who make the grid work.

You can say that these jobs can be outsourced to India or China or wherever, but I think not. The IT and software jobs that are outsourced to India or China are generally comodified, low-value positions. Great for a 25-year-old in the States, not so great for a 35-year-old, and a ridiculous joke of a position to give to a 45 year-old.

Sure, China may (and may not - how reliable can a bunch of IP thieves be?) catch up on the quality side, but for higher value work requiring higher levels of investment and therefore higher levels of risk, people will prefer to deal with trusted talent close to home.
posted by KokuRyu at 10:57 AM on February 26, 2008


I didn't say it didn't exist, I said it wasn't a science, which it's not.

Anything involving humans is going to be somewhat imprecise, but saying that economics isn't a science is just ignoring reality.
posted by oaf at 11:21 AM on February 26, 2008


Mutant: I'd suggest that agricultural commodities are to be avoided, not so much as there's been lots of press but because prices are so so high now you can bet acreage planted for food will increase leading to a price crash. Yes, I think we've got a bubble to some extent in agricultural commodities.

Hmm, maybe. The market so far seems to disagree. There were people predicting the same thing, for the same reasons, a year ago. The market has been a bit crazy lately though, that's for sure. $DJAGR is up something like 20% so far just in 2008. I'm not too expert in agricultural commodities, and have mostly stayed out of it. But I certainly wouldn't bet against further price rises just yet; and even if this year the conventional wisdom does prove right and prices come down, that alone wouldn't change the long-term picture which still looks pretty bad.

It's as that article KokuRyu linked to says, "The booming world economy has driven up prices for all commodities." Suspiciously simple though it is, I think there's some truth in this. Of course it is not only economic growth, it's also population growth which is still going strong, and also the normal boom-to-bust cycle, among other factors. The difficulties in increasing production to meet the rapid rise in demand are considerable, for various commodities that've gone up in price. Perhaps more so than last time around. Some of them, including grains, may be uncomfortably close to reaching the limits of what the world can produce with present technology and organization. Not that they can't increase further, just that as we get closer to the limit, it takes longer and high prices lose some of their ability to put an end to high prices. If it weren't for this problem, I'd say the possibility of a financial crisis was not such a big deal.

So yes, although the cycle might yet end in a normal way, I'd wait for some better evidence of this before trying to guess when. This "bubble" might live a while yet. Like the people who were predicting the housing market bust in 2003, these things always take a while longer than you might think. And every time, there is at least the possibility that things actually are different this time. Even if it's not "peak oil" right now for example, you know it will be some day. So, take it as it comes.

"something a lot like the 1970s, except a lot worse" -- I seem to remember the phrase "wage/price spiral" coming up a lot back then. Before expecting the same kind of outcome today, I'm waiting to see those rising wages.
posted by sfenders at 11:24 AM on February 26, 2008


"Ah. You guys obviously think that a trade deficit is inherently a bad thing. That isn't clear at all. Some developed countries consistently run a trade surplus; others consistently run a trade deficit. But a trade gap is not, in and of itself, a huge warning sign of economic problems to come."
posted by Justinian at 4:16 PM on February 25 [+] [!]


I agree! I bet the City of Rome ran a huge trade deficit while it built its empire! Where did all that stone and all those slaves come from?
posted by JKevinKing at 11:33 AM on February 26, 2008


This New Yorker by George Packer about the economics of megacities makes for an interesting read: who do people get by in the absence of any real economy?
posted by KokuRyu at 11:42 AM on February 26, 2008


If you guys are right then the solution is for the government to guarantee all the liabilities of the monoline insurers. Then, the officers and directors of the companies should be fined and have their financial licenses revoked or suspended.

In the future, government should excercise more regulatory control over the financial industry.

A market only works when the possibility of failure exists for the actors in the market. If failure is not an option, like in the financial industry in the modern West, an unregulated market cannot work. In this case, the taxpayers have to bail out failed financial companies time after time; otherwise the economy would grind to a halt. It will happen every time because businesses always fail. With our current policy, assessment of risk atrophies because, in the end, the businesspeople responsible for the decisions know that, worst case scenario, the government will bail them out and they'll ride out on their golden parachutes.

The better option is to regulate the industry such that these busts do not happen. Theoretically, it might be less efficient most times than an unregulated financial market, but nonetheless it is better than the taxpayers regularly subsidizing failed financial professionals.

In my opinion, this sort of wealth redistribution upwards is part of what has caused the United States to become more and more unequal over the past 30 years. People, including the President, have been able to get rich despite failing, sometimes multiple times.
posted by JKevinKing at 11:56 AM on February 26, 2008


the taxpayers have to bail out failed financial companies time after time

You're only assuming this is a proxy for failure... The real failure is when there are no taxpayers to bail out financial companies. What exactly is the definition of failure?

It must be said that the folks taking out interest-only loans were in effect investors. Perhaps they didn't understand the risk they were taking, but they did expect that asset inflation would help them pay their mortgage. Folks who understood the nature of bubbles may have instead stuck with their apartments - and survived with a roof over their head.

If government has money to regulate the economy, then great. This safety net becomes part of the system.

Real failure in an economic system exists in places like Angola or Nigeria: tremendous (oil) wealth is generated, but 99% of the population has very little, if any access to that wealth.

At least in Western economies, there is basic infrastructure, there are jobs, and there is a modicum of prosperity. Mostly.
posted by KokuRyu at 12:49 PM on February 26, 2008


sfenders -- "Hmm, maybe. The market so far seems to disagree. There were people predicting the same thing, for the same reasons, a year ago. The market has been a bit crazy lately though, that's for sure. $DJAGR is up something like 20% so far just in 2008. I'm not too expert in agricultural commodities, and have mostly stayed out of it. But I certainly wouldn't bet against further price rises just yet; and even if this year the conventional wisdom does prove right and prices come down, that alone wouldn't change the long-term picture which still looks pretty bad."

I understand fully and actually agree to some extent as timing never works. But I like to buy things when nobody else wants them (e.g., Gold & Silver 2004/2005, I went long REITS back in 1996, my entire portfolio was nothing but REITS at one point) and sell when everyone wants them. I sold all my REITS but for one in the years after the dot com collapse - all of sudden folks wanted established businesses, not start ups so the value of such vehicles spiked. Even though I was getting 22% current yield on a couple of them, I couldn't pass up the chance to snatch a few years dividends by a realising a profit.

I think there's lots of value in high yield now, the entire sector has been beaten up so, I'm sitting on paper losses for a couple of my positions of 20% or so (even though they are yielding dividend of 15% ) - once again, buying things when nobody else wants them.

I too, don't fully understand commodities either, and a lot of my distrust comes from the fact the underlying data generating process for many commodity series is non stationary; which, for the non econometricians out there implies the variance & mean (and perhaps and other moments) aren't constant with respect to time. Now even though I understand ARCH & GARCH modeling (and other techniques), I just can't get my head around modeling a commodity series. Ain't natchural, I tell ya!!

And I guess ultimately there is the question of bandwidth; I'm active in a few other asset classes, and just don't have the time. I've dabbled in oil (via an ETF, DBC) making about 18% in six weeks or so, but that's about the extent of my commodity trading.

That being said, I have no doubt there is money to be made. It's just that I'm not a student of such markets and when I read about the futures markets stopping out to the upside days if not weeks in a row, well that market is far too heady for me. All the best if you're long though!!

JKevinKing -- "In this case, the taxpayers have to bail out failed financial companies time after time;"

Well, you're correct it does happen but I'd suggest that for every one government bailout there are 'N' takeovers of the weaker entity by a more successful market participant. After all, governments are hardly that active in the financial services industry. Bailouts are rare compared to hostile takeovers or successful business purchasing the assets of a failed competitor during bankruptcy.

Now what value is 'N' you might ask? I have no idea, but it's non zero and probably well above 100, if not 1000.
posted by Mutant at 1:30 PM on February 26, 2008 [1 favorite]


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