This Economic Depression is Just Beginning

[Crewleader]

Economics / Great Depression II Aug 05, 2009 - 02:10 AM

By: Mike_Whitney

Economics

Best Financial Markets Analysis ArticleToo bad Pulitzers aren't handed out for blog-entries. This year's award would go to Zero Hedge for its "The 'Money on the Sidelines' Fallacy" post. This short entry shows why the economy will continue its downward slide and why the US consumer will not get off the mat and resume spending as he has in the past. The fact is the Net Wealth of US Households has "declined from a peak of $22 trillion to just under $12 trillion in early March."

Ouch!

The problem is compounded by the fact that Total US Household debt, as of first quarter 2009, amounts to roughly $13 trillion, and has stayed within that range for the last 3 and a half years.

Zero Hedge:

"From the end of 2007 through Q1 of 2009, household equity has declined by 94%. Is it surprising that today's GDP number would have been a complete debacle if the consumer had been left alone to prop the U.S. economy, on whom 70% of the economy is reliant? Obama pulled a Hail Mary with the stimulus: without it there would be no debate America is in a depression right now." (http://www.zerohedge.com/article/money-sidelines-fallacy)

What does all this mean?

It means the consumer is down-for-the-count. His credit lines have been cut, his home equity eviscerated, and his checking account swimming in red ink. That spells trouble for an economy that's 70% dependent on consumer spending for growth....which brings us to another interesting point. The uptick in GDP last quarter was almost entirely the result of the surge in government spending; ie "fiscal and monetary stimulus". How long can that go on? How long will China keep slurping up US Treasuries rather than let their currency rise? Here's a clip from the Wall Street Journal on Friday:

http://www.marketoracle.co.uk/Article12535.html

[DJ13]

1. K&R

Its too bad some here are so scared of the truth they will neg rec a post like yours.

[Crewleader]

2. Makes it obvious the truth scares them.

thanks DJ13

[Coyote_Bandit]

3. The real object

isn't economic recovery. Rather it is to ratchet the standard of living downward in the US. That is the inevitable end result of economic globalization and the univesal worldwide standard of living it brings.

[DJ13]

5. Sadly I think you're right N/M

[AndyA]

4. This is why we need to make things in this country again.

And American consumers need to buy those things. It will create jobs, and increase tax receipts.

We cannot outsource jobs and have a thriving economy in America. It just doesn't work, and you don't need to be an economist to see what outsourcing has done.

We also need to reign in the banks and credit card companies, as they are largely responsible for this mess with their 1% interest payments to consumers on savings accounts, and 25% interest charges for credit card debt. That's so they can pay out multi-million dollar bonuses to executives. This needs to STOP, and Congress is going to have to do it.

[Crewleader]

8. well said AndyA

:thumbsup:

[ixion]

14. spot on, Andy

until we start making things here again, we're not going to see any type of recovery.

[xchrom]

6. kick

[CoffeeCat]

7. Economic news is bipolar right now..

There's a story on the front page of DU about consumer confidence being up
in EVERY state.

I am literally getting a stomach ache from all of the confusion.

On one hand, the msm is telling us that the recession is over but it will take some
time to recover.

On the other hand, we have horrendous news about another Depression just beginning. I don't trust
the msm, and most of the economic news seems contrived. However, what is the truth???

It makes it really difficult to live and prepare--when you have no idea if the economy is improving
or on verge of collapse.

[sendero]

12. It's only bipolar..

... because of the media and government pump monkeys. They believe, correctly I think, that if everyone knew how bad things really are, that would make it that much worse. So they continually talk up the economy despite the fact that virtually ALL of the fundamentals are negative at best.

So, they have taken it upon themselves to emphasize the positive and eschew the negative. That's fine, dishonest but what would you expect from media or government? So, the hapless "consumer", upon hearing about all of the "green shoots" popping up naturally gain more "confidence".

Some are probably even re-entering the stock market, seeing these great gains that they have missed out on. Few of them understand that these gains are the result of liquidity created by governmental cash infusions and program trading, and that these gains have nothing whatsoever to do with the economy at large, the financial prospects of corporate America, or anything real. As soon as enough of the suckers have gone all in, the market will tank again, fleecing them of their last assets. It's getting hard to feel sorry for them, they are like Charlie and they just don't get that the football will be jerked away every single time.

It's a cold world out there and most Americans have not caught on to just how cold it is, and how rigged the entire system is. There are going to be a lot of sad and angry people here in a few years.

[orwell]

9. After reading the Tyler Durden post at Zero Hedge...

...I still can't understand his logic.

For instance, he seems to assert that a 2.7 trillion increase in market capitalization since the march lows means net 2.7 trillion needs to be added to the market. Since only 400 billion has been drawn down from money markets, he asserts that the rest came from banks, both foreign and domestic, who received injections from the Fed. He then asserts, using what I believe is fallacious logic, that new equity buying interest will need to come from the New York Fed.

You don't need 2.7 trillion in new capital to increase the capitalization of the market by 2.7 trillion. Prices are set at the margin, not in aggregate. If the latest buyer of a share of stock pays 1 penny more than the previous buyer, we can say that the company is worth more in aggregate, yet only 1 penny additional has changed hands. In other words it only took 1 penny in net inflow to increase the capitalization of the company by 1 penny times all the shares of stock outstanding.

Secondly, his notion of net wealth is extremely selective. He only includes total market capitalization plus money market funds. There are many other repositories of wealth in the society, such as current property value minus mortgage owed, private business values, value of intellectual property. There are better measures out there to determine wealth. I suspect that Mr. Durden has chosen a statistic that paints the gloomiest picture possible to buttress his argument.

I am not asserting that we are not in a deep recession/quasi depression that may take years to fully recover from. I do assert however that this article is highly confusing and logically flawed. Mr. Durden needs to be far more specific about how these indices are compiled to allow the reader to follow his logic.

For the record, I like Mike Whitney's writing. He is one of the few who warned early of the current financial mess we are in. I do fear however that he and others run the risk of diluting their arguments by being less than rigorous with their methodology.

[girl gone mad]

11. You should ask Tyler this question.

He'll answer.

I think it's fairly straightforward and other analysts have come to the same conclusions. The market is headed for some downside volatility because there is no general support and no pool of money looking to get in at these levels. People generally don't use home and business equity to speculate in the stock markets. I've never seen intellectual property used as market collateral, either.

[orwell]

13. I helped to develop one of the first money flow models that worked...

...over 25 years ago. I was an options trader for a hedge fund in my early twenties. We were spectacularly successful because our mathematical model gave us an advantage in the market.

I still assert that Mr. Durden's logic is fundamentally flawed. That does not mean that the market could go down here and he would feel vindicated in his analysis. Many people can be right for the wrong reasons and build a very lucrative career out of it. Names like Robert Prechter and Joe Granville come to mind.

Future price movement based on money flow is an extremely complicated analysis, similar to fluid dynamics. Add to the basic complexity the enormous pools of liquid capital available worldwide with the ability to move at a moments notice and you have a dynamic system that is almost impossible to characterize using true money flow analysis. About the best you can hope for is a very short term analysis of marginal flow, intensity, and price elasticity. That is why it was applicable to option trading.

To put it simply, the system is far to complex to model in such a rudimentary fashion.

[Warpy]

10. That's exactly why this country needs to start spending on infrastructure

Yes, we needed to prop up the financial system, although it could have been done much more efficiently and cheaply by nationalization.

There are still systemic problems, including the policies of the government that have encouraged offshoring and the importation of cheaper labor from overseas for the good jobs we have left. This is still a jobs and wage crisis on top of an infrastructure that's been looted along with everything else.

It should be obvious what should be done, building the energy infrastructure that will support the next wave of domestic enterprise while ending the programs that favor foreign labor over domestic.

They're just waiting for the captains of industry to realize they're SOL without customers to buy all the crap they produce and/or import.