Wednesday, December 24, 2008
The Coming Depression
"In spite of Friday's alarming rise of 533,000 in unemployment, when you look at the near-term future, there still seems little chance that the current unpleasantness will turn into a rerun of the Great Depression [GD], or anything like it. ... However, in the long term, things are not so rosy; over the next 15 years, Americans and Europeans may suffer a worse fall in their living standards than during the [GD], albeit played out agonizingly slowly. ... In terms of living standards, real per capita personal consumption expenditures did not recover to their 1929 level until 1941, giving American consumers 12 years of living standards lower than they had become used to. ... In the long run, a major economic effect of economic globalization is to reduce the income gap between rich and poor countries, by bringing the latter fully into the nexus of the global economy. ... There is one snag, at least for rich countries such as the [US], Western Europe and Japan. If the world becomes more equal more quickly than it become richer, then living standards in rich countries must decline. If the world were suddenly to achieve equal income levels between countries, without a significant increase in output, U.S. living standards would fall by over three quarters. ... A second factor intensifying the decline in U.S. living standards is the appallingly low U.S. savings rate and the reduction in the U.S. capital pool that has resulted from over a decade of excessively low interest rates. ... The final factor depressing long-term living standards is the unwise policy response in the last few months to the credit crunch and the beginnings of global downturn. ... Contrary to popular and journalists' beliefs, these expenditures are not free; they must be borrowed. ... There are few policy responses that will do any good. Probably the most important is to raise the real return on risk-free savings as quickly as possible to around 5% to 6%, higher than the equilibrium rate, while eliminating the federal budget deficit. ... Before you dismiss this speculation as far-fetched, remember: everyone used to think house prices could not fall nationwide", Martin Hutchinson (MH), 9 December 2008 at http://www.prudentbear.com/index.php/commentary/bearslair?art_id=10160.
I don't dismiss MH's comments, I think his scenario is likely. See my related 4 July 2008 post on sovereign debt, http://skepticaltexascpa.blogspot.com/2008/07/sovereign-debt-risk.html.