Archive for June, 2009

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The Concept of a “Super Depression”

Tuesday, June 23rd, 2009

Please note; some will find this post disturbing

I would like to call your attention to the article titled “A S&P500 Target of 100?” which is found under the “Investor” heading here:

http://www.economicgreenfield.com/prosperitybypencom-directory/

With the S&P500 currently at 893.72, I am sure that many will find the mere notion of the 100 level to be highly unlikely if not outlandish.  However, I would point out that our current economic situation is exceedingly complex, and that any further economic weakness could play out in an unpredictable fashion.

As indicated in the article, if the S&P500 were to fall to the 100 level the accompanying economic situation would likely be dreadful and chaotic.  It could very well represent the biggest challenge our nation has ever encountered.

Such a situation, if it were to occur, could be categorized as a “Super Depression,” which I would define as a severe Depression embedded with highly complex, difficult-to-solve problems.

In future posts, I will likely further comment on the prospects of a Depression and/or ”Super Depression.”  From my perspective, on an “all things considered” basis, both are (most unfortunately) possibilities.

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For those who haven’t yet read this site’s disclaimer, please see the “Special Note” here:

http://www.economicgreenfield.com/a-special-note/

SPX at 893.31 as this post is written

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Posted in Depression, Stock Market | 1 Comment »

How Can We Go Into a Depression?

Tuesday, June 23rd, 2009

As previously indicated, in this post:

http://www.economicgreenfield.com/2009/06/19/current-economic-forecasts/

most mainstream economic forecasters as well as many other financial professionals believe that “the worst is behind us” as far as economic damage.   It certainly would be nice if this were the case.

However, for a variety of reasons, I continue to believe that while it is possible that “the worst is behind us” there is more likely to be more damage ahead.  There is an array of serious problems, as well as various indicators that indicate potentially severe economic weakness ahead.  Any further economic weakness could certainly push the economy from a “severe recession” into a Depression. 

The way I view it, there are a range of various scenarios that can play out from here.  On the one end of the spectrum is the above-referenced mainstream economist consensus, one of gradual improvement.  On the other end of the spectrum is that of continued economic weakness that has the potential to build upon itself.

A question arises as to how continued economic weakness could happen, both from a fundamental basis, as well as a quantifiable one.  The situation is highly complex and there are many drivers.   Continued economic weakness, assuming it will happen, would likely “play out” in a very unpredictable fashion.

As a reference to our current situation, I would point out the writings in the “Investor” section, which provide some quantifiable aspects.  The writings in the “Articles” section will provide some other background as well.  They can be found here:

http://www.economicgreenfield.com/prosperitybypencom-directory/ 

SPX at 897.33 as this post is written

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Are We Avoiding a Depression?

Monday, June 22nd, 2009

Perhaps the most common refrain heard with regard to our current economic situation, and why it won’t become a Depression, is that we as a nation have been proactive and aggressive in “managing” this period of economic weakness.

This theory, more or less, has the following generalized (and summarized) structure:

  1. There has been rigorous research conducted on the causes of The Great Depression.
  2. Ben Bernanke is widely proclaimed as an expert on The Great Depression era.
  3. Through the knowledge derived through the extensive research of The Great Depression, as well as Ben Bernanke’s expertise of the era, we (as a nation) have a thorough understanding of the causes of The Great Depression, and how that period could have been better managed, if not avoided either fully or in part.
  4. During our current period of economic weakness, widely called “The Economic Crisis” (or “Financial Crisis”), we (as a nation) have been very proactive in deploying various intervention measures that would have avoided The Great Depression and therefore will act to help us avoid a Depression.

I question a variety of the assumptions above.  Additionally, and perhaps most importantly, is our current economic predicament analogous to that of The Great Depression?  While there are certain similarities, there appear to be notable differences as well.  Plus, just the time differential alone would appear to make comparisons difficult.

If the two periods are fundamentally different, why are people apt to compare them?  While this is difficult to answer, it may be (at least in part) because Americans have few periods of severe economic weakness to reference, especially over the last 100 years or so.  If this is correct, it may also call into question the appropriateness of comparisons between this period and The Great Depression.

With regard to whether we, as a nation, have a thorough knowledge of The Great Depression, has been questioned by some.  If our current period of economic weakness is not comparable to that of The Great Depression, it becomes more of an ”academic question” as “lessons learned” from The Great Depression would not necessarily be applicable to the situation we now face.

Furthermore, if our current period of economic weakness is not comparable to that of The Great Depression, the main concern becomes whether our intervention efforts, that purportedly would have avoided The Great Depression, will help us avoid going into our own Depression.

As one can see from the above, I think there are considerable questions that can, and should, be raised with regard to the widely held aforementioned theory and generalized structure presented.

SPX at 904.99 as this post is written

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Are We In a Depression?

Monday, June 22nd, 2009

One of the questions that seems to be popular since the economic events of 2008 is whether we are in a Depression.  As such, for the next few posts I will be commenting on the topic.

Here are two links that indicate that we are not in a Depression:

http://seekingalpha.com/article/142831-great-depression-ii-it-s-not-even-close?source=email

http://www.calculatedriskblog.com/2009/06/update-what-is-depression.html

Yet, as indicated in this following link, the rate of decline in various measures seems to indicate that our experience to date at least matches, if not exceeds, that of The Great Depression.

http://www.ft.com/cms/s/0/b31c06a2-5a7a-11de-8c14-00144feabdc0.html

So, as seen above, there seems to be contrasting measures regarding our current economic weakness.  At this point, most in the mainstream use the term “severe recession” to classify our current economic predicament.

In my opinion, on an “all things considered” basis, I think the “severe recession” classification is apt, but one could also strongly argue for using a “mild Depression” tag at this point in time.  The Unemployment Rate and GDP decline seem to be cited as the predominant statistics in determining whether a Depression exists.  While it is true that both of these measures are not near those that would indicate a Depression, there are an array of other measures that have undergone severe declines and currently stand at (or near) multi-decade lows.  As well, it just seems like there is an extraordinary level of stress evident from a fundamental perspective that is far out of the ordinary even for “tough times.”  

Regardless of the economic classification used, I think the more important issue is the characteristics of the economy; the underlying problems and how easily they can be solved; and the economy’s future trend – either recovery or further decline.  Of course, whether we are on a path to Sustainable Prosperity, as well as associated issues, should be considered.

SPX at 921.23 as this post is written

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The Global Economic Future

Sunday, June 21st, 2009

One of the questions I received when I first started this blog is why I didn’t choose to discuss the global economic future, as opposed to America’s Economic Future.

This is a good question.  In essence, I do believe its focus is on the global economic future, as not only is the United States (obviously) the largest economy, but its economy and its characteristics are so pivotal to those of the rest of the world.  Perhaps as importantly, the United States seems to have attained global leadership with regard to how to best ”manage” an economy, as well as how to “fix” The Economic Crisis.  It is evident that many global economies, especially the more developed ones, have adopted (to varying degrees) the same philosophies and actions that the United States has as far as overcoming The Economic Crisis.

As such, I believe an economic discussion that focuses on the United States can in many ways be extended to other countries as well.  The main issues of this blog, such as Sustainable Prosperity, Economic Greenfield vs. Economic Brownfield, etc. are certainly pertinent and applicable to countries and regions worldwide.

SPX at 921.23 as this post is written

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Moral Hazard Wonderland

Sunday, June 21st, 2009

To date, I haven’t written or otherwise commented about the issue of Moral Hazard.

Perhaps the main reason is that I am afraid if I start writing about it, I may never stop…

Needless to say, the issue of Moral Hazard and its implications are massive, and just seems to grow with time.  It seems as if the issue has taken a “back seat” for quite a while now, and, paradoxically, seems to have become even less of an issue, policy-wise, since The Financial / Economic Crisis began.

The following is an interview with FDIC Chair Sheila Bair which discusses the Moral Hazard topic and related issues:

http://www.cnbc.com/id/31443313

SPX at 921.23 as this post is written

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Current Economic Forecasts

Friday, June 19th, 2009

It seems as if there appears to be a growing consensus among private and public sector economists regarding economic forecasts; that of slightly positive third-quarter GDP growth, which gradually improves going forward; as well as a peak in unemployment around 10%.

This is reflected in the latest (June) Wall Street Journal Economic Forecasting survey :

http://online.wsj.com/article/SB124464007697702065.html

In the survey, the average 3Q 2009 GDP growth rate is seen at .6%, followed by 1.9% in Q4, and then 2.3% in 1Q 2010 and 2.8% in 2Q2010.  Unemployment is seen at 9.9% in December 2009 and gradually declines to 9.4% in December 2010.

Again, this survey of 54 economists seems to generally match the consensus among other public (Federal Reserve and other government agency) and private sources.

I will use this post as a reference going forward.  It seems to confirm that economists in general see that “the worst is behind us” for the most part and that mild economic growth (i.e. a recovery) awaits in coming quarters.

SPX at 924.54 as this post is written

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Managing Economic Uncertainty

Friday, June 19th, 2009

A couple of days ago I posted excerpts of a speech by Ben Bernanke in which he outlines various reasons for inherent uncertainty and difficulty in economic predictions and forecasts.

It appears that ever since the start of The Financial Crisis, in early 2007, it has been very difficult for forecasters to accurately predict economic performance.   For those interested, I have compiled numerous examples of this, which can be found under the “Predictions” title under the “Articles” heading here:

http://www.economicgreenfield.com/prosperitybypencom-directory/

In light of this inherent uncertainty (and what some may call inability) of economic forecasting, and by extension efforts to “manage” the economy, how can this uncertainty be best managed given that the country has embarked on such a large, and expansive, intervention  (including bailouts, guaranteed loans, stimulus plans, etc.) effort?

Months ago I put together a framework on how to best manage the risks and uncertainties inherent in the various intervention measures.  Just like businesses can successfully manage business plan risk, our country can, and should, seek to manage risks inherent in the various intervention measures. 

The article is entitled “Business Planning Principles Applied to the Stimulus / Intervention Efforts” and can be found under the “Articles” heading here :

http://www.economicgreenfield.com/prosperitybypencom-directory/

Please note this is not necessarily an endorsement of these intervention efforts; it is suggestions as to how best manage the efforts as the stimulus/interventions are put into effect.

SPX at 926.51 as this post is written

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Businesses and Economic Stress

Thursday, June 18th, 2009

My analyses indicate that, unfortunately, businesses will continue to face very challenging conditions.

Many already find themselves in rather perilous circumstances, as witnessed by the number and breadth (across industries) of companies experiencing double-digit revenue declines, not to mention innumerable other statistics.

On a couple of occasions I have written about the conditions that businesses face during this period of economic stress, with some ideas as to how they might better manage and adapt.  Those works can be found under the “Business” heading (near the bottom of the page) here:

http://www.economicgreenfield.com/prosperitybypencom-directory/

SPX at 919.64 as this post is written

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Consumer-Led Recovery Story

Thursday, June 18th, 2009

This story, “On Borrowed Time : Consumer-Led Recovery” was in The Wall Street Journal on June 9.  I found the chart and its implications to be interesting.  One is led to wonder “how much gas is left in the tank” with regard to Household Debt as a Percentage of Disposable Income.  This is  especially an issue with ”Income” and asset values under pressure.

Also, there are various implications concerning Sustainable Prosperity…

http://online.wsj.com/article/SB124449816432295655.html

SPX at 911.96 as this post is written

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