On account of the economy

Today I want to talk about the economy again. I've always loved that line from Bruce Springsteen "Lately there ain't been much work on account of the economy". The lad in the song has no idea what that means "the economy": it is just what they told him when they turned him away and what he heard on the TV.

The economy is in some ways impenetrable and unpredictable. And some economists make it arcane and academic. But it is an emergent phenomenon from human society, so we can understand it at instinctive levels from the basic principles we know about our own behaviour and culture, if we think.

I was raised by a Tasmanian and a Kiwi, two of the most "no bullshit" cultures on Earth (it is that Scots heritage I think). I believe there are fundamentals that matter, and no fancy slick-talking carpet-bagging politician or businessman can talk them away. We partied too hard for twenty years and borrowed the money for the booze. We let the money merchants off the leash and they ran away with our society's money. When the banking system started to fall we guaranteed them, thus ensuring the bankers will be even less careful in future. We wedged trillions we don't have under the system to try to stop it toppling, which is a bit like building sand walls on the beach to stop the tide. In fact we threw so much future-borrowed money at it that the topple has even paused for a few months. But a huge over-spend has occured and real and imagined wealth has gone. The piper must be paid. The adjustments must happen.

There is still much empty air under the US economy. The UK is still in recession. US unemployment won't peak until mid 2010 - there are one or more rounds of further mortgage defaults still to come and a flat economy for years. China is a murky unknown that may or may not be holding up. And the money industry are staggering to their feet with our newly injected loot and heading off into the wilds again.

No crash follows a smooth slope down, it dips and dives like an out-of-control plane. Don't let a small up-tick fool you. Humans are natural optimists: that's how we cope with a nasty brutish planet. In 1931 government and experts were saying the worst was over. My parents grew up in the years that followed. My grand-parents lived it. The deprivation led to the rise of the Nazis (and their not quite so powerful equivalents all round the world).

I'm worried about 2010 - I think the slide may resume. As a freelance consultant I'm intensely worried. Most of our family's reserves are gone. Unless the Australian and NZ government free up my retirement funds, two or three more years like 2009 will see our house gone.

I'd dearly love to be wrong, and it is all one big guessing game even for the "experts", but I'd bet better than 50/50 I'm right. Pile cash. Cut debt. Secure your revenue streams. Don't let the governments let up. Keep the planet together - resist protectionism. Pray for China. And hold on.

[for more technical detail;, see this edition of the IT Skeptic's newsletter]



IT skeptic, journalism skeptic, now economic recovery skeptic :)

I'd rather sit on the more positive side, expecting smaller corrections in 2010 and 11, with a SLOW and steady rise after that. The way I'm paying my mortgage off however is assuming the worst, so I'll split my chips thanks. Being relatively youthful as well, I'm expecting the baby boomers to stay in the workplace a little while longer until their super and shares have recovered.

Here's hoping the skeptic family will be at two-hills for YEARS to come.

trying to talk the market up

Good point Tim: once you pass fifty as I just did you start running out of runway. Youngsters have time to recover - every good entrepreneur supposedly goes bankrupt at least once.

I read McKinsey and The Economist as my sources of prognosis on the economy. I think both are fairly objective. Neither has a vested interest in talking the economy up (or down) which can not be said of banks or governments. Anything that comes from politicians or from anyone employed by the money industry (including many economists) is no different to the twaddle you hear from real estate agents trying to talk the market up.

As I say nobody really knows but I give good odds on the US going into renewed recession next year. Throwing how ever many trillions at the world economy is like Arabs irrigating the desert - chuck enough money at it and of course you see some green shoots. But it is not sustainable. The US is already fighting two wars and has Iran and North Korea looming too, enriching a few powerful people but ultimately blowing up a lot of money and leaving it to rust in the sand. The USA has already spent more on stimulus than it can afford and pissed most of it up the wall of banks or of defunct industries like automobiles.

They are China's biggest export market. If they take China down we are all f**ked. Especially here in Australia and New Zealand, where we have been buffered from the recession by digging up large chunks of Australia and cutting down swathes of New Zealand (and milking and shearing the rest) and shipping it all off to Asia.

If I'm not calling it like it is and talking common sense I'd love to hear better arguments.

As you say

As you state you are 50/50 you are right..

The global economy is not a science, its an art. As for the Economist and McKinsey, they are about as useful as the Analyst Companies that scrutinize the IT market. Economic analysts have a great habit of predicting doom and gloom all the way to the bottom and missing the upswing, then predicting clear skies and fine sailing all the way to the top and missing the crash. The only certainty is, nobody will predict when the market will recover.

Your perspectives are obviously in sync with your situation and location. Being from that part of the world and have experienced a couple of the past crashes (even though at the time I was single), the wiggle room is always alot tighter because of the size of the economies and the distance from the rest of the world. With that in mind, you are calling it as you see it and in these times you gotta do what you need to do.

From my vantage point (no more informed than yours, but from a different situation and location), I see jobs being more readily available, I see the housing market freeing up (been looking to buy in the US in the last 18 months) and prices recovering, I see private capital firms back investing in new business (startups are growing like weeds), I see some major investors (Buffet and crew) buying up assets after being in cash for the last couple of years. I believe CY 2010 will be a better year, with maybe a few hiccups.

I too will hedge bets when it comes to family and responsibility. But the outlook is positive.


Brad Vaughan

What recession?

I couldn't comment on the economy. Haven't had enough time to think about it. Our service management consultancy has been way too busy. We're on track to have our best quarter *ever*. We haven't been able to keep up with demand.

Is anyone else seeing this?

I think everyone that is

I think everyone that is appointed to public office should be required to read "Economics in One Lesson" by Henry Hazlitt. Of course, the Kensyians and the like will want their own books because Hazlitt is too easy to understand to be right.

store up fuel for the big one

You move my position when you cite Buffet - a fine bellwether if ever there was one. OK 60/40 against :)

But I just don't see the correction happening. In Australia they finally woke up a decade or so ago that if you keep putting out the little bushfires you just store up fuel for the big one. I don't think we've prevented a big recession or a depression - we've just deferred it. If all that money the US government spent on propping up financial companies that deserved to fall and dead manufacturing industries (i.e. their mates) had been spent on social assistance for auto workers and mortgage assistance for low income families, we'd have taken the blow but softened it, but that wouldn't be The American Way. instead all we've done is wound the spring tighter.

Actually NZ and Australia have been sheltered from the worst. I've seen next to no personal impacts around me. Australia - i think - never officially went into recession at all. Some of the main Aussie banks (which are also the main NZ banks) are amongst the safest (famous last words). NZ unemployment is up there with USA's but retail has held up and the property market has only crashed not collapsed.

new leadership

I wonder how things would have turned out differently if:

a) it happened while the Bush administration was still running the show (I'm guessing more financial handouts to the crooks who caused much of this)
b) it happened when the Obama administration had matured somewhat, rather than straight after the election.

Although I could be completely wrong and the Senate played a much larger role in these decisions. To the casual observer, it seemed like Obama was trying to show he was being tough without really addressing the significant issues.

Why we MUST bail out the banks....

I know the handouts feel wrong, but they are a direct result of the hard lessons learned during the great depression, and if they hadn't happened a re-run of the depression was a certainty.

The great depression was caused by the world sinking into a deflationary spiral. Because people were losing their jobs they couldn't spend as much money on goods and services. Because they weren't spending as much money on goods and services factories and businesses had to cut back production and make more people unemployed... you can see how it goes. To add to the pain, companies start dropping prices to encourage people to buy, but in a deflationary spiral, people begin to realise that if they wait longer, prices will come down even further, forcing companies to drop prices, making people feel it's worth waiting a bit longer for the prices to drop..... Japan has been in a deflationary spiral for the last 20 years and has struggled to escape even when the rest of the world is booming. Imagine how awful it would be if the entire world was in one... that was the great depression, and the government stimulus of war preparations was what helped the world escape. Let's hope we don't go there.

You might think 'where are the banks' in my description of the deflationary spiral. The banks are in the background, lending money to companies to help them bridge the gap between spending money making something and receiving money when its sold - remember most company payment terms are 30 days, so the gap between purchasing the goods to make something and receiving money for what you've sold is usually in the order of months, and of course if your goods/services aren't selling, the gap stretches out even longer. Trade finance, loans by the banks to companies, help them cross this gap.

Because the banks suddenly realised they had no idea which sub-prime mortgages were bad, or even how many of those potentially bad sub-prime loans they might end up responsible for, they refused to lend money to each other or anyone else. Banks lend money to each other all the time, a constant cycle of lending and repaying money overnight to help them cope with the fact that they loan out money for fixed periods of time, but the savings they are loaning out can be called in all at once (this is called a run on a bank, and makes banks go bust).

The need to hoard cash (in case depositors demanded it all back at once) meant that not only did banks refuse to loan to each other, they also refused to lend to companies to help them tide them over the gap between making something and being paid for it. This meant that companies were suddenly short of cash, which meant companies were laying people off, asking them to work shorter hours for less pay etc. As you can imagine, there was severe danger that a deflationary spiral - companies laying off workers who then can't buy as much, forcing companies to lay off more workers, and constantly decreasing prices leading to even less buying as customers waited for prices to go even lower - would be triggered.

The handouts to the banks were designed to get the banks to start providing trade finance again - so that productive, profitable companies weren't forced to lay off staff because they were struggling to bridge the gap between making something and getting the money in after it was sold.

I know it's a strange backward world when you have to 'reward' the very idiots who got you into the mess in the first place, but it was a VERY hard earned lesson, and we have to thank Mr Keynes seeing how counter-intuitive governments must behave when you have a banking crisis.

experiment in theoretical economics

I understand the theory. It remains to be seen if it works in practice - whether it was right and whether it was enough. personally as I said I'd like to have seen the stimulus injected at the grass roots of those who got screwed by the system not those who screwed it.

This is a multi-trillion dollar experiment in theoretical economics based on the now-widely-questioned premise that economics is based on rational man. It was your precious Mr Keynes himself who said many decisions "can only be taken as a result of animal spirits"

Alex Masterley understands the resulting reality
and most of all HERE

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