Meltdown

[ezodisy]

countdown to the next bailout

Ministers are considering plans to guarantee up to £20bn of loans to small businesses to help them survive the downturn, the BBC has learnt.

and if the downturn lasts 5 years? These boys are projecting another 12 months or something ridiculous and then we'll be back in positive territory and spending with a blindfold on again. Someone needs to sit them down and remind them that nothing's permanent except death, taxes, and the sex appeal of eastern European women. As it is this lack of foresight is going to cripple the economy for a long time I think

[BachQ]

"Great Britain does not meet the entry criteria for the euro," said Lorenzo Bini Smaghi, the ECB's board member in charge of international affairs.

Ambrose Evans-Pritchard:

If anything, Mr Bini Smaghi may have been too kind to Britain. The UK Treasury expects the deficit to reach £118bn in the 2009 tax year - almost 8pc of GDP - but there are now fears that this will rise even higher as tax revenues collapse. Some analysts have begun to warn that Britain will soon face a deficit of 10pc of GDP, the sort of catastrophic levels seen in Latin America in the 1980s.

Perhaps both the UK and the US will join the Eight Percent Club, as last week, the Congressional Budget Office released its "Budget and Economic Outlook: Fiscal Years 2009 to 2019" which includes deficit projections indicating:

-- that the US budget deficit will skyrocket from $455 billion (2008) to $1.2 trillion in 2009;
-- that the deficit will represent 8.3% of GDP (the highest percentage since WW II);
-- that publicly held debt will soar from 41% of GDP in 2008 to 54% of GDP in 2010. The CBO has previously stated that this percentage could theoretically reach 400% by 2050.



However, the 2009 projections include neither the cost of Obama's stimulus package (roughly $700B - $1T and growing), nor the cost of entitlements (e.g., social security & medicare). 

The Economist

Back in 2005, the situation was already quite dire:





Q: How much more of this PURE IDIOCY will the American people take?
A: This will continue until the dollar collapses, and will likely continue even beyond that point.

[BachQ]

As it is this lack of foresight is going to cripple the economy for a long time I think

"Foresight" and "government" are mutually exclusive concepts. 

[ezodisy]

well we can have a race between the UK screwing itself and the Euro(zone) imploding

http://www.ft.com/cms/s/0/9f80f414-e0da-11dd-b0e8-000077b07658.html?nclick_check=1

[BachQ]

Spain might be the first major European power to fold:

WSJ: S&P puts Spain on CreditWatch negative, may lower Spain's AAA rating

FT Alphaville: So begin the (serious) sovereign downgrades...?

[BachQ]

well we can have a race between the UK screwing itself and the Euro(zone) imploding

http://www.ft.com/cms/s/0/9f80f414-e0da-11dd-b0e8-000077b07658.html?nclick_check=1

Current Eurozone implosion watch list (to be updated from time to time  ):

-- Greece
-- Ireland
-- Spain

[bwv 1080]

Good paper at:

http://www.economics.harvard.edu/faculty/rogoff/files/Aftermath.pdf

Broadly speaking, financial crises are protracted affairs. More often than not, the
aftermath of severe financial crises share three characteristics. First, asset market
collapses are deep and prolonged. Real housing price declines average 35 percent stretched out over six years
while equity price collapses average 55 percent over a
downturn of about three and a half years. Second, the aftermath of banking crises is
associated with profound declines in output and employment. The unemployment rate
rises an average of 7 percentage points over the down phase of the cycle, which lasts on
average over four years. Output falls (from peak to trough) an average of over 9 percent,
although the duration of the downturn, averaging roughly two years, is considerably
shorter than for unemployment. Third, the real value of government debt tends to
explode, rising an average of 86 percent in the major post–World War II episodes.
Interestingly, the main cause of debt explosions is not the widely cited costs of bailing
out and recapitalizing the banking system. Admittedly, bailout costs are difficult to
measure, and there is considerable divergence among estimates from competing studies.
But even upper-bound estimates pale next to actual measured rises in public debt. In
fact, the big drivers of debt increases are the inevitable collapse in tax revenues that
governments suffer in the wake of deep and prolonged output contractions, as well as
often ambitious countercyclical fiscal policies aimed at mitigating the downturn.

[BachQ]

Good paper at:

http://www.economics.harvard.edu/faculty/rogoff/files/Aftermath.pdf

The US is already well on its way to an 86% increase in its cumulative real public debt.  But it seems quite unlikely that GDP will drop by 9.3% over 2 years, at least not using "official" data. If it drops even half that: Yikes. With the 2007 US housing price decline of 28% already more than twice that of the Great Depression, it's frightening to think that the housing crisis could last a total of six-years.

[BachQ]

In his weekly radio/video address last Saturday (3 Jan 09), Obama unveiled his "American Recovery and Reinvestment Plan", under which Obama intends to create 600,000 new government jobs by:

    * doubling renewable energy production and making public buildings more energy efficient;
    * rebuilding infrastructures for roads, bridges and schools;
    * computerizing the health care system
    * modernizing classrooms, labs and libraries; and
    * increasing tax breaks to American workers.

Meanwhile, the details of Obama's $1T stimulus package remain controversial.

[bwv 1080]

The US is already well on its way to an 86% increase in its cumulative real public debt.  But it seems quite unlikely that GDP will drop by 9.3% over 2 years, at least not using "official" data. If it drops even half that: Yikes. With the 2007 US housing price decline of 28% already more than twice that of the Great Depression, it's frightening to think that the housing crisis could last a total of six-years.

I know people in Houston (which had a hugh real estate bust in the 80s) who bought houses in the early 80s whose house values got back to their original purchase prices (in nominal terms) in this decade.  Take your average 2500 sq ft $500,000 house sold at the height, price it at a replacement cost of $80/ft (generous) and throw in another $50K for the lot (again generous) and you have a 50% decline

[ezodisy]

Shipping rates hit zero as trade sinks

[ezodisy]

just introduced to the BBC archive online. They have a series called City Season about old financial life pre-1970

http://www.bbc.co.uk/archive/menandmoney/

[BachQ]

Good paper at:
http://www.economics.harvard.edu/faculty/rogoff/files/Aftermath.pdf

The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years.

Martin D. Weiss, Ph.D.:  Unemployment is snowballing. Layoffs beget consumer cutbacks, and consumer cutbacks beget more layoffs — a classic vicious cycle that's gaining momentum.

[BachQ]

Shipping rates hit zero as trade sinks

Ezodisy, that is extremely scary sh!t.    "This is no regular cycle slowdown, but a complete collapse in foreign demand," said Lindsay Coburn, ING's trade consultant.  Exports have fallen:

-- 30% drop in Korea
-- 42% drop in Taiwan
-- 27% drop in Japan

The Baltic Dry Index (BDI) which measures freight rates for bulk commodities such as iron ore and grains crashed several months ago, falling 96pc. The BDI – though a useful early-warning index – is highly volatile and exaggerates apparent ups and downs in trade. However, the latest phase of the shipping crisis is different. It has spread to core trade of finished industrial goods, the lifeblood of the world economy.  Trade data from Asia's export tigers has been disastrous over recent weeks, reflecting the collapse in US, UK and European markets.

[BachQ]

Good paper at:
http://www.economics.harvard.edu/faculty/rogoff/files/Aftermath.pdf

Real housing price declines average 35 percent stretched out over six years

The chart below convinces me that the bottom for housing prices remains several years away.  With tons of prime,  Alt-A, "option adjustable rate," and other adjustable rate mortgages (ARM's) resetting in 2010-2011 (the total number of ARM's is even greater than the total number of subprime mortgages), there will be a second wave of foreclosures, and a second wave of collapsing housing prices.  Not to mention that defaults in commercial real estate are just beginning to gain momentum.  The wild card in this is future government action, such as allowing bankruptcy judges to modify the mortgage terms on a case-by-case basis.



What a mess.

I know people in Houston (which had a hugh real estate bust in the 80s) who bought houses in the early 80s whose house values got back to their original purchase prices (in nominal terms) in this decade.  Take your average 2500 sq ft $500,000 house sold at the height, price it at a replacement cost of $80/ft (generous) and throw in another $50K for the lot (again generous) and you have a 50% decline

A 50% decline seems entirely plausible, if not likely.

[ezodisy]

One thing that annoys me is the often said assumption, "US led the world into recession, US will lead it out". There is really no basis to that. Other countries will lag behind, the US might look better off for some time as I think the US dollar might continue to strengthen against £ and Euro. But this is a long process, not an 18 month thing, and it might take a good deal of time before the US dollar collapses. In any case I don't think the US will lead anyone out of anything as there's a lot more pain to come and more bubbles to burst and more money to print and more things to crumble (I mean for the US). If anyone wants to back up the idea that the US will lead out then I'd like to hear it because I don't see it happening. If this turns into a L-shaped recession as Roubini thinks it may then there won't be anyone leading anyone else out of anything

[BachQ]

Oil < $37 

[ezodisy]

yeah but that doesn't help me as I closed out  Question is will we see price rise to meet the end-of-year price contracts around $60 or the later contracts come down to meet us? Or is that even a question at all? Range 20-60 sounds okay  0:)

How about gold? It's a gonna tank baby

[BachQ]

Oil < $36/bbl   
Gold < $810

yeah but that doesn't help me as I closed out  Question is will we see price rise to meet the end-of-year price contracts around $60 or the later contracts come down to meet us? Or is that even a question at all? Range 20-60 sounds okay  0:)

How about gold? It's a gonna tank baby

Oil will fall to $15/bbl this spring, and close 2009 at $66/bbl.

Gold will fall to $450, baby!

[BachQ]

One thing that annoys me is the often said assumption, "US led the world into recession, US will lead it out".

Hogwash.

In any case I don't think the US will lead anyone out of anything as there's a lot more pain to come and more bubbles to burst and more money to print and more things to crumble (I mean for the US).

I agree.  Indeed, in many respects, the USA's consumer-driven house-of-cards economy is among the most FRAGILE economies right now, and even after pumping trillions into the credit markets, and bailing out countless companies, it's still plunging into the abyss.  Even if the US somehow manages to squeeze out a shallow, short-lived recovery, it will remain consumer-oriented (rather than manufacturing based), and will remain saddled with a gigantic anchor of debt, causing it to fall back into the abyss. 



Not to mention that an economy cannot grow without energy; and once any economy begins to pick up steam, it will hit the wall of energy constraints head-on, causing the economy to tumble back down the hill.



I do not see the US pulling anyone out of a recession.  If anything, the US will drag down other economies, with its trillions in toxic assets bundled into derivatives (and fraudulently sold to foreigners with phony AAA ratings), and its trillions in treasury bonds ballooning into a bubble on the brink of bursting.