Sunday, January 18, 2009

Grim thoughts: truly frightened

I guess I shouldn't read the NY Times this seriously and especially on Sundays now. Amongst all the Saint Obama (man, I really really hope he is anointed) walking (hope not slouching) to Bethlehem stories found article after article which outline that this is not some recession we are entering but without enlightened swift policy, this is it - the big one.

Mostly in NY City, the financial segment of the economy has lost 240,000 jobs over last 18 months - all at the highest percentile in income for the nation be it clerical or head of the shop.

Trade is down world wide with the best being the likely cooked books or at least rigged currency of China down YoY 2% and the rest of the world down well over 10% in exports YoY.

Then we read banks are not lending out TARP funds but hoarding. Do you expect bank executives acting on behalf of their shareholders, as they should and have to legally, would do anything else?

And so on.

Folks, none of this pattern was seen before 81, 87, 88-91, 94, 98, 00, 02 - be it technical like Russian collapse of 98 or the stock market crash or the agency mortgage backed crash of 94 or Long Term Credit collapse, or dot-com crash of 00 - never have we even come close to such devastating macro economic metrics. I also can not find them as I extend past my experience, into the 70s, or the mania crashes of the 60s, the late 50s Eisenhower recession that gave Kennedy his entre, or the Truman Korea recession.

There are only two times these numbers start shows some precedent and it is not even 29 - 30, but 33 to 36 and the numbers that prompted the Fed creation in 07, the crash of 1903.

And while there was some correlation amongst global economies - with 03 having more global wide impact than 33 - 36, the correlation between nations has never been higher.

This is a global calamity in the making.

All those who have some wisp or even a cable of importance in the line of development of economic policy should, like Dickens Christmas Carol, take a ride in past, present, and future worlds given our current Scrooge orientation.

It is crucial we take on some common reference points and crisis management behaviour:

1. The USA is the unipolar power or factor - or call it whatever you have to be ye French or Harvard grad;

2. All rests on the USA - we save the USA we save the world, the USA crashes and carries on as it is Global misery of something we have not seen but for the worst of WW II will occur.

3. Keynes - as he seems to be the only developed lexicon that is shared and understood - is our template of solution

4. A steady read of bank crisis similar to what the USA is going through required an average of 15% of GDP absorption of problematic assets (toxic assets - call it what you will) onto the national balance sheet or national agencies, and then result to either a 4% of GDP to 18% of GDP (Japan's zombie approach) all in final cost.

5. That the balance sheet required for the bank crisis resolution is not at all the same funds required for the Keynesian fiscal stimulus spend required.

6. The Keynesian fiscal stimulus will be equivalent to the drop in consumption which results from the increases savings from folks with their wits scared out of them. Figure out the change in savings rate and one has the size of the fiscal stimulus required. The USA entered this crisis with a problematic 0% savings rate.

7. All moralistic and judgemental themes and approaches that qualifies bands of the populace going into this crisis must be scrapped. It will only impede the solution if the starting point is about the lack of character or morals of "spenders" and equally bad no status should be assigned to "savers". In fact savers now are the dangerous element.

8. There is no generational assumption or passing on of burdens in the USA. Anything we do now will either provide a vital and useful context for future generations or will provide a crucible of pain and all of that rests on civic structure and organization and has nothing to do with debt. "You shall not crucify man upon a cross of gold" has much applicability now as when Jennings used this rallying cry. The USA, as far as a valuation of going concern has only two values - infinity or zero. It is a digital with nothing in between. There is no shades of gray or incremental movement in this. In the long run the USA will prevail and maintain seinorage and the question is how much misery and suffering domestic and international does the path entail.

9. And the fact the USA will maintain seinorage, of an infinite economic value spot and forward, is perhaps the most dangerous and important variable. This is because the core power of the USA will be maintained and those in political control of the USA power will in the end insist on a reflation. The reflation will occur one way or another. Water will find its level. Given all the above the leveling involves at some point a $2 trillion bank crisis solution with at least a $1 trillion Keynesian stimulus - a total of $3 trillion or over 20% of USA GDP. This is the most alarming and critical consideration. Realize this leveling of the waters will occur, one way or another.

Historically the USA has only been able to implement a fiscal spend and evolution of over 10% of GDP via war. No other motive has been able to overcome the political tensions and frictions. This explains why Mussolini and Hitler were able to move their countries out of the depression that for them started in the 20s - dictatorship of national socialism allowed the development of political will to allows such a stimulative spend over 10%. It explains why the common understanding that the Great Depression was not ended but for WW II.

Therefore, certainty can be applied with the thought that we either develop a new commonly shared lexicon and principles such that the democratic political debate can apply a budget with well over 10% deficit in any one year or we will have war.

The trade numbers in today's NY Times start to suggest the genesis of the tensions required to prompt either a global potential adversary attack us and allow for a righteous defense as in Pearl Harbor, or for us to cook up the shared righteous wrath to attack someone, anyone, so as to go out and spend $2 trillion dollars.

The choice is ours. I hope everyone adopts the above points as a starting point.

I also must include a disclaimer that some emotional alarmist feeling in the above that I might express is that eldest son is in the US Army and middle son wants to sign up next week.


  1. You're right to focus on the savings rate - one of the key differences between Japan and US is that Japan was able to absorb the pain by way of a gradually declining savings rate over the lost decade. Absent that, the ways the US can handle its reduction in agg demand is to default, devalue or inflate. War can emerge out of any of these, and has historically been the most efficient way to consolidate political wills into a reflationary mode.

    However, I keep coming back to the question of what form serious, stimulative, reflationary war can take given advances in missile technology. ABMs are not good enough to avert MAD... perhaps belicose focus is on non-nuclear countries, but the political justification for engaging any trading partners apart from China, EU and Japan is tenuous.

  2. Extremely well done. I agree with 90% of what you've written and the other 10% is not crucial. So, adding on I would say that the EU, China, and Japan have to join in. Japan especially should do another flood of JPY into the world which is what they've been doing for years anyway. But the most important thing is the Keynesian spend. We need to see Siemens, GE, Honeywell, ABB of Switzerland, United Technologies and so on soar on the promise of a veritable wall of contracts from global governments. And that's just to get things going.

    As my traveling partner has been oil this decade, it's through the lens of oil that I came to many of the same conclusions as you. That 40% of global oil supply is iffy economically at 35.00 is the sign that a very, very unusual set of circumstances has now unfolded.

    And yet, the really dangerous thing that happened was that the world became over-optimized, so there is no recent model because all the crises and bad recessions of the last decades unfolded onto non-correlated global topography.

    Back to oil: oil at 145.00 was starting to unleash one set of resource driven pressures geo-politically. Now oil at 35.00 will unleash a different set. Petro-state collapse would be the most obvious. Nigeria is my first pick, and VZ my second. Both events would result in another leg down in production, from both of those countries.

    For now, oil is off the front page. But it's only through the very circumstances that have made may of us--and you-- afraid, that this is so. If we do reflate, we will have new beasts to slay, new nightmares to confront. Like you, I'll take those over the present challenges.