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.

8 comments:

Anonymous said...

I agree that material standards in the US will likely decline... not sustainable.

If we have less material goods must we be depressed?

No macro measures on the emotional/spiritual state?

No measure --- no value.

Junior said...

Your version of the picture is almost more frightening than mine.

Will be interesting to see December's numbers and what happens after 1/20.

thank you for WC Varones. Perfect.

~ Adrienne

Independent Accountant said...

Junior:
What do you think will happen? Do you expect a 1922-23 German style hyperinflation? It is possible if Zimbabwe Ben keeps printing money at the rate of the last 12 weeks. What do you think has happened in the US since 1973? I estimate American living standards have fallen about 35-40% since they peaked in 1973. Nixon closed the gold window in 1971. Coincidence? I don't think so. You are welcome to the lead to WCV. He's a character. He just started the Chris Cox body count.

Anonymous said...

Merry Christmas IA!

Blissex said...

«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. ... »

This argument seems to be thoroughly idiotic as it is based on a ridiculous confusion between nominal prices and living standards.

Living standards are a measure of the real availability of goods and services, and that depends on accumulated capital and productivity. In other words average living standards depend mostly on value added, which does not depend on international competition, except as to access to internationally traded resource inputs.

As to nominal prices, of course there would equalization of the prices of *tradeable* (directly or directly) goods and services.

In particular wages in tradeable-producing industries should equalize with those abroad, where there is a huge labor surplus, and thus come down a lot (and prices in tradeable goods and services too would go down a lot). Wages in industries producing non-tradeables would also come down significantly, because there would be increased competition for jobs. Sure, prices of goods would also also go down a lot, so the fall in living standards would be less than the fall in wages, but there would still be *some* fall, but not due to equalization, but to the reduction in the capital/worker ratio in the first world, making capital relatively scarcer.

The winners would be the first world owners of businesses and capital, as third world countries have a lot less capital per worker than first world ones, and a lot of capital has indeed been flowing out of first wold countries to third world ones.

So living standards for most workers in the first world will indeed drop, but not as much as the article suspects, and not because of equalization, but because a larger chunk of the same or even higher value added produced in the first world will go to owners of businesses and capital in the first world, or owners of input resources wherever they be.

edgar said...

next year will be interesting!

happy holidays!

ho ho ho!

Independent Accountant said...

BS:
There is a Chinese curse, "May you live in interesting times". We do.

GS751 said...

Hyperinflation is from what I hear defined as a 50% m/m increase in prices (I do not judge inflation as an increase in price!). I don't think we will see hyperinflation but i can easy see 25% yoy inflation after this short term deflationary stuff passes. Im still gonna be long the dollar for the next 6 months. There is just so much destruction of wealth! its pretty incredible.