Pain To The Economy May Just Be Starting

[babylonsister]

Economy May Face Prolonged Pain, History Suggests
By GREG IP
May 5, 2008; Page A2


The worst of the financial pain may have passed, but the economic pain could be just starting.

The nation's financial markets have rallied since early March, with stocks up and yields on risky corporate and mortgage-backed bonds falling relative to safe U.S. Treasurys. Optimists got an added boost Friday from a government report that U.S. unemployment fell in April.

But history suggests celebration may be premature. It's common in a crisis for markets to hit bottom long before the economy does. That's because markets are forward-looking and because economic weakness is the way the underlying imbalances that produced a crisis are corrected.


"The financial crisis is usually an expression of broader problems in the economy," says Harvard University economist Kenneth Rogoff, who along with Carmen Reinhart of the University of Maryland, recently wrote a history of financial crises back to the 1300s. "It's a mechanism that exacerbates and deepens the recession, but it's seldom the trigger."

The economic fallout from a crisis depends on how much underlying economic factors -- such as consumption, investment and asset prices -- are out of whack with their fundamental determinants. The 1987 stock-market crash and the near-collapse of hedge fund Long Term Capital Management in 1998 threatened the heart of the financial system. But the underlying imbalances were largely limited to the financial markets themselves: stocks overvalued relative to earnings in 1987, and excessive hedge-fund borrowing in 1998. Thus, once the Federal Reserve's rescue operations had mitigated the threat to the financial system, the economic fallout was limited.

The current crisis is different. For several years, U.S. home prices and home construction kept climbing past levels considered sustainable. Homes became collateral for trillions of dollars in borrowing. That depressed savings, inflated consumption, fueled rapid lending and loosened loan standards.

more...

http://online.wsj.com/article/SB120993516590765753.html?mod=rss_whats_news_us

[leftofcool]

1. I predict gas will be 6.00 per gallon by Mid July

[lonestarnot]

4. And $20.00/ gal. after we attack Iran.

[But....]

2. I afraid your right..

there's a lot of hard work ahead.

[KharmaTrain]

3. It's The GOOP Version Of A Tax Hike...

We're already seeing consumption and spending going down...prices continue to rise and more and more personal incomes are spent on paying for housing, putting food on the table and keeping the tank full. But that's not the real pain...it's all the additional costs of the high price of oil and the low dollar that will really bite hard in the fall. Think of all the crops out in the fields now and how much its costing to produce...then add in the production and distribution costs and this fall we could see a big wave of inflation as this regime will do little...prefering to see Americans suffer as some kind of either "incentive" or punishment for not voting repugnican.

[Frustratedlady]

5. I was out of town last weekend, and the thing that surprised me was the lack

of traffic. My destination was 125 miles away with mainly small towns, farms and lots of countryside and all 2-lane highways. The traffic is normally light, but with all the hills, you seem to waste a lot of time waiting for a good opportunity to pass. There were many times when I could not see another vehicle ahead or behind for as far as my view would take me. On the way to my destination, I passed so few vehicles, I began counting. The number was so low, I ignored it as a botched exercise. However, on the way home, I was a bit more earnest in getting a true count. I passed a total of 11 vehicles and I'm the type who does not like to follow a vehicle if I can pass and get a clear path ahead. I kid you not...11.

Now, most of this driving was between 10-12:00. Wouldn't you think people would be going to or coming home from church? Beautiful day...not out sight-seeing or visiting others? It has to be the price of gas that is keeping people home.

I notice that there is markedly less traffic going by my house, which is on a popular street. If the prices remain this high or higher, I can't imagine how anyone can travel this summer...particularly if they need to stay in a motel. Another industry takes a hit.

[KharmaTrain]

7. I Watch For Station Closings...

...an old habit from those glory oil shortage days of the 70's. When either supplies or money runs tight, you'll see stations close up early and on weekends...cutting payroll...or just closing down altogether. The price margins on many stations aren't very high and having to shell out more and more to less demand is sure to mean we'll see less 24/7 stations...also it cuts down on the drive-offs and chance of hold-ups.

I agree...many people are rethinking where they drive...a common topic among everyone around Pleasant Valley Sunday is the latest price...it's almost an obsession. Anyone who says having to bring $50 to fill up and it doesn't hurt lives in a bubble.

Travel will definitely take a hit...I'm not sure who gets the worst of it...the big ticket locations that rely on airlines that are all but scaring people away from going near an airport...or the resorts and tourist towns that may lose some business, but make it up from others staying closer to home.

The crystal ball doesn't work well here as long as prices continue to rise and this regime sits back and lets their stock portfolios grow.

Cheers...

[MikeNearMcChord]

6. Yeah but Warren Buffett says the worst is over.

But then again if I had $60+ billion in my name, I'm not exactly losing sleep about it well maybe a tad, but I don't think the sage of Omaha, is going to be sleeping in a highway underpass soon.

[Javaman]

8. In the days after the great crash in 1929...

all sorts of prognosticators came out and stated, "the worst is over!". Only for things to get...worst.

I listen to no one. No one knows.

The economy is shitty, the financial sector is shitty.

This is a whole new ball game. And NO ONE knows how it's going to be played out.

[chaska]

9. Anybody that thinks we're coming back from this is dreaming....

This is the beginning of a long slow slide back to the 19th century.

...And ain't that great? I mean really, I would give anything to live the way they did then. Actually, I have and do live that way, to the extent I can. I would be so happy to never hear the sound of an infernal combustion engine again.

HELL YES, LONG LIVE THE BICYCLE!!!

What is likely is that things will get bad, then come back, then bad again, then come back, then bad again. Think DESCENDING a stairway, each comeback will be a little bit "worse" than the one that came before.

I highly recommend http://thearchdruidreport.blogspot.com/. David Michael Greer is the smartest man on the web. I never, ever miss his weekly posts.