My initial answer was simply to note belief that whatever the consequences of the financial crisis and the attempts to "fix it" will be they will play out over a longer period of time than people like Mish (a must read) and Peter Schiff call for.
Right or wrong the reason I feel this way is the extent to which the US is enmeshed in the world economy. Additionally I noted that reasonably speaking interest rates should have been much higher than they are now and part of the reason is the foreign interest in US paper but of course the debt that has been bought by the Fed has hurt either.
Weakly supporting the idea above about consequences happening slowly is the speed at which Iceland, Greece and Ireland ran into trouble. I use the word weakly because those countries are different than the US but still.
Then a couple of other things that have occurred, some anecdotal, that I think can also contribute to the slow motion wreck theory.
A fraternity brother of mine (actually my roommate during my junior year) and his wife are both teachers in California (but not in a big city) and if I am following his posts on Facebook correctly they have both been given pink slips and looking for jobs in another state. California as we all know has a slew of problems both of its own doing and as a result of the financial crisis.What date would you put as the start of the financial crisis? While there may not be any single answer most would agree it has been at least a couple of years. So a couple of years in, or more, and California is just now getting around to trimming payrolls (or they have laid people off previously and are still going)? I don't know the numbers of the layoffs but it would be reasonable to conclude that some folks effected will miss mortgage payments maybe with a little delay or maybe not.
My sister in law is a teacher here in Arizona and her job will be lost unless a one cent sales tax gets passed by voters. Again some portion of the teachers effected will miss mortgage payments with a little bit of a delay or no delay.
California and Arizona have been two states effected more than most but many states have problems with various taxes collected, pension obligations and budget deficits. More states will have to make painful cuts, this is clear. What is not clear, to me anyway, is the magnitude of the impact or the timeline. This could easily be in slow dribs and drabs, indeed it is starting now, a couple of years or more after the start of the crisis, in the states that are the worst off. Most states are better off than California and Arizona but in trouble nonetheless. I imagine some will avert desperate measures but some will not but I don't think we will know for several more years.
Karl Denninger noted some of the immediate aftermath of the passage of the health care bill. He detailed announced writedowns due to increased costs resulting from the rules of the bill by Deere (DE), AT&T (T) and client holding Caterpillar (CAT). Denninger noted that most of the effects aren't supposed to occur for several more years but are starting now. Ok starting now but even proponents have to concede that there will be more impacts later, so playing out over time.
Barron's noted another consequence related to job creation. Whatever the magic number of employees is for offering health care coverage why would a company, to use Barron's example, with 48 employees go to 51 employees? The expense incurred for health care compliance would be a deathblow for some, obviously not all and maybe not even half, companies effected.
This outlines one source of jobs for displaced state workers that will either not be there or will have fewer jobs for displaced workers.
In working through this I am not trying to predict a magnitude because I don't know. What seems clearer is that this plays out slowly with successive dominoes falling. If the crisis was as bad as we were told (worst in 80 years) then it should, as I have been saying all along, take a long time to play out. Additionally the fixes will have consequences of their own, like encouraging people to stop paying their mortgages in order to qualify for a new program, that will take a long time to play out.
I have been consistent from the start that this would not feel like the Great Depression, not even close, but I do believe we will look back on the totality of the event and refer to it as a depression. There were several depressions before the Great one, I believe the early 1920s, there was a bad bank panic in 1907, another depression in the 1870s and I am quite certain there were others so if the current period is labeled as such it will not be the end of the world and we are already a long way into it.
The picture is from the far east end of Molokai.
15 comments:
In our small town in Michigan, municipal services have been cut to the bone. We now have a millage increase on the May ballot to fund minimum levels of police and fire protection. I'm sure each of your readers has a similar story.
I think tax increases are inevitable everywhere, including at the federal level. Hopefully this, as well as other aspects of the slow motion train wreck, play out in a manner that allow investors time to make prudent adjusments to their portfolios.
And Kentucky is out??? Wow.
one or less number 1 seeds to the final four? has that ever happened?
Florida is about to initiate a series of employee reductions as well to balance the budget. States are always the last to act during a financial downturn. OT, have you looked at the PIMCO real return income funds as an alternative in your fixed income side of your portfolio structure? They look like an alternative to annuities for cash flow during retirement. You have stated that OEF's are not your thing, maybe an ETF i the future with a similar structure?
"Barron's noted another consequence related to job creation. Whatever the magic number of employees is for offering health care coverage why would a company, to use Barron's example, with 48 employees go to 51 employees? The expense incurred for health care compliance would be a deathblow for some, obviously not all and maybe not even half, companies effected."
Rog: I have heard the argument made by Barron's and don't agree. In fact, I see companies with say 90 employees (example) creating two companies (say, one for each location or function) with 45 employees each thus avoiding the mandate....
I agree that this one won't feel like the Great Depression. The main reason is we have the safety nets in place to mitigate the most harmful effects of the Great Depression. If we didn't have unemployment insurance, then there is no doubt this would feel like the 1930s. Or, if FDIC didn't exist, we would have seen bank runs. People trust FDIC today even though it is underfunded.
I also think there is a huge misconception about the Great Depression that leads to Roger's question. When you mention the Depression, people think of bread lines, apple carts, and bank runs. They think that everyone experienced this. That simply isn't true. The old saying that if you were part of the 80% who kept a job, the Depression wasn't so bad. After the market crash of 1929, things picked up initially. Then the economy started a decent down again, and it was more like a slow death. There wasn't another panic.
Rogoff and Reinhart talk about this in their recent book, "This Time is Different." You have an initial panic followed by a slow slog that takes about six years to clean up. So, I think this will feel like a few years of an occasional punch in the gut, but not a death knell. Japan is a great example. The economy never fell off a cliff, but a malaise has existed for years. Japan could still face a currency issue due to its debt levels, but I would expect more anemic growth.
I think Japan gets to another point by Roger. The panics he mentioned in 1920, 1907, 1876, etc. were brutal, but short in duration. The key difference between those periods and Japan (and probably the US now) is government intervention. Our government will intervene, which will mute the pain now, but malaise will ensue. Malaise will consist of a volatile stock market like Japan and deflationary or disinflationary forces in housing, prices and GDP growth.
The US in the 30s had the government intervention, even Hoover despite claims by Keynesian he did nothing. However, what really made the 1930s depression great was the Smoot Hawley as well as the drought (family farms were still a large force in America's social make-up).
If we see a return of protectionism, this will get substantially worse than a malaise. If not, I think we have a few years of sub-standard growth and volatile markets. I hope we won't see a moment of collapse or panic. But, as Roger says, I think when it is all said and done it will be classified as a depression.
Roger, completely off-topic; your Bespoke link is outdated.
7:22,
I don't follow, I just checked it and it went right to the homepage.
If we are like the Japan situation, which was a single country event, then global diversification is the answer. However, my recollection of reading history is that the Great Depression was a global event, although some stock markets were hit less than others. Are we England and China the US?
Maybe bonds are just about the only things that will do well ? Inflation or deflation?
I think the passage of the Heath Care Bill may inpact (i.e. reduce) foreign interest in U.S. Bonds more than local interest which may accelerate rate increases beyond what would otherwise be expected.
CA
A depression era middle aged adult might or might not take issue with "this would not feel like the Great Depression", but sadly they are dead. My impression is that they always felt that prosperity was just around the corner...and they waited for many years. That has a familiar ring to it.
For those interested; http://newsfrom1930.blogspot.com/
Does Peter Schiff have a regular column or a blog?
about once a week, probably most easily found on Seeking Alpha
We were brought up in the U.S. that our economic model was pretty well set in stone. We are now seeing we have no answers for this "model". I now firmly believe that most of our "leaders" are full of hot air...both in business and government. I've worked for some excellent leaders but, man o' man, I've worked for a bunch of losers also. Anyone that takes an idealiatic stance, has no credibility to me....a flexible approach is needed for guidance.
Both Peter Shiff and Mish are fascists. Part of the problem.
They beleive in "no government" - how absurd is that?
We need good "liberal" government for the people. A huge shift back to the left from the extreme right wing, nut jobs like Peter Shiff.
Peter Shiff has NO ANSWERS, just a bunch of ideological crap, same crap actually republicans spew ever election - liberal this, socialist that,
...no government except vote for me of course so I can steal you money and funnel into wall-street and defence while screwing the middle class ....
@ anon 4:16
I don't think you know what a Fascist is. One could make a strong argument that we are a fascist country. Fascism advocates a strong relationship between government and corporate interests. It is a corporatist form of government. This is from the great resource Wikipedia:
"Historian Gaetano Salvemini argued in 1936 that fascism makes taxpayers responsible to private enterprise, because "the State pays for the blunders of private enterprise... Profit is private and individual. Loss is public and social." Fascist governments encouraged the pursuit of private profit and offered many benefits to large businesses, but they demanded in return that all economic activity should serve the national interest."
Fascism promotes the collective over the individual.
So Mish and Schiff aren't fascists, just as Obama, Bush, and our government is socialist.
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