This chart shows what the stock market had been doing since the summer
of 2007, when the effects of the economic crisis were openly recognized
by the Administration. You can see that that various
interventions have resulted in brief improvements, but nothing
sustained. The overall trend clearly is downward.
Unfortunately, I can’t recall where I got the graph (I saved it a
few days ago, decided to not write about it, then changed my mind).
Now, let’s compare that to the historical record. What happened
after 1929? The chart below compares the Dow during the
Great Depression to the S&P 500 of the modern recession. (The
did not exist during the Great Depression.) The chart is from href="http://dshort.com/">dshort.com.
What we see, is that all of the government and private interventions
things from falling completely apart, for a while. But those
actions are running out of steam. The S&P 500 companies are,
aggregate, about to report their first-ever quarter of href="http://norris.blogs.nytimes.com/2009/02/04/losses-mount-up/">negative
earnings. This probably explains why the Administration is so
adamant that something big must be done.
Of course, the charts do not tell us what will happen in the future.
But it looks bad.
Our (the USA) economy needs to add about 1.4 million jobs per
up with population growth. Instead, we are losing about
million per month, seven million per year. The downward momentum
vast. The Obama economic stimulation plan might produce three or
million jobs eventually, but that is roughly half of what is needed.
And that is just the USA. Worldwide, a conservative
estimate is that href="http://www.ft.com/cms/s/0/91526d30-ed34-11dd-88f3-0000779fd2ac.html">50
million jobs will be lost. The losses are occurring href="http://www.countercurrents.org/eley070209.htm">everywhere,
even in emerging economies, such as China:
“We see job losses accelerating for at least the next
several months to the point where that 600,000 mark will soon be a dot
in the distance behind us,” said economist Guy LeBas of Janney
Montgomery Scott LLC. Robert MacIntosh, chief economist with Eaton
Vance Management in Boston, said, “it is just another confirmation that
we’re in a deep and long recession, and the bottom is not even in
The flood of job losses in North America is an expression of a world
process. In December, Japan experienced the sharpest increase in
unemployment in 41 years. More layoffs are to come, as industrial
production declines precipitously. The Japan Manufacturing Outsourcing
Association has stated that 400,000 temporary workers will be laid off
by March. Many of these live in company dormitories, and will be made
homeless in the process.
Earlier this month, China announced a massive growth in unemployment.
Some 20 million of the country’s 130 million migrant workers are
unemployed. Manufacturing jobs for export production have been
In Europe, economists anticipate that the overall unemployment rate
will climb to 8.7 percent for the 27 EU countries…
Exacerbating the problem, we are entering a
period of href="http://www.businessweek.com/magazine/content/09_07/b4119000357826.htm?chan=top+news_top+news+index+-+temp_top+story">deflation
with regard to manufactured goods. This will make it href="http://www.rgemonitor.com/roubini-monitor/255398/is_the_us_a_japan_2_the_return_of_japans_free_fallin_stag-deflation_and_the_risks_of_a_us">very
difficult to get the employment numbers back up. In fact, not
only are the layoffs occurring at an increasing rate, but the href="http://money.cnn.com/2009/02/05/news/economy/jobs_outlook/?postversion=2009020607">number
of job openings is falling. This is true in all sectors
of the economy:
Manufacturing in general is doing badly, even compared to prior
recessions. The graph below shows the average change in
manufacturing output before and during recessions; the blue line is the
average of all US post-WWII recessions. The upper and lower
dotted lines show the upper and lower bounds. The red line shows
the current recession; the present day is in the center.
The pattern is similar to what we saw with the stock market. It
held up better, at first, but then took a big dive. One could
argue that manufacturing is less important now than it was during prior
recessions. Indeed, in recent years, financial
accounted for a greater percentage of GDP than manufacturing. Of
course, once the parasites outnumber the hosts, the parasites start to
So are they (banks) dying off? I’m not going to bother with a
you’d see the same thing with bank failures as with the stock market: a
little decline, then fits and starts, then boom. The href="http://www.fdic.gov/bank/individual/failed/banklist.html">FDIC
seized three banks in 2007 (1 per 122 days), twenty-five in 2008 (1
14.6 days), and nine in the first five weeks of 2009.
Those nine actually were closed in a span of 22 days (1 per 2.4
days). (Exercise: following this trend, how many banks
will close per day in
Admittedly, it is really too early to say that the banking
collapsing. There are about 8,000 banks, and most of them are
still open. Some would argue, though, that href="http://www.bloomberg.com/apps/news?pid=20601087&sid=aS0yBnMR3USk&refer=home">many,
if not most, are href="http://www.nytimes.com/2009/01/19/opinion/19krugman.html?_r=1">zombie
banks: insolvent. Jim Rodgers is quoted href="http://www.thisislondon.co.uk/standard-business/article-23600709-details/City+jobs+on+line+as+Bank+of+America+takes+axe+to+35,000/article.do">here:
Legendary US investor Rogers, who founded the Quantum Fund
with George Soros, said that without ill-deserved cash infusions from
the White House $700 billion bailout, many American banks would be bust.
“Without giving specific names, most of the significant American banks,
the larger banks, are bankrupt, totally bankrupt,” he said.
The following chart, from the St. Louis Fed, shows the total amount
borrowed (from the Fed) by US banks:
Some would argue that insolvency is not necessarily an emergency for a
bank, so long as they can borrow from the Fed and pay their
obligations. This is href="http://www.newyorker.com/online/blogs/jamessurowiecki/2009/01/what-does-insol.html">explained
by James Surowiecki. However, the rationale only makes sense if
the bank eventually turns things around. It is a monumental task,
under the circumstances.
Alan Greenspan (not the guy pictured above) recently wrote
concise essay summarazing his view of the crisis. In it, he
Though capital gains cannot finance physical investment,
they can replenish balance-sheets. This can best be seen in the context
of the consolidated balance-sheet of the world economy. All debt and
derivative claims are offset in global accounting consolidation, but
capital is not. This leaves the market value of the world’s real
physical and intellectual assets reflected as capital. Obviously,
higher global stock prices will enlarge the pool of equity that can
facilitate the recapitalisation of financial institutions. Lower stock
prices can impede the process.
He is saying that it will help the banks if global stock prices go up,
and it will be a problem if they go down. Oddly, he does not
emphasize the benefit that would come from increasing “the market value
of the world’s real physical and intellectual assets,” In other
words, the sum of all the valuable stuff and good ideas that we
have. This seems to imply that increasing the stock market
averages is more important than producing more stuff and ideas.
Does this show us the way out of this mess, or is it more of
the same thinking that got us into this mess?