Saturday, January 24, 2009

Violence in Trade Data Shows Enormity of Crisis

Swiped the above from a terrific blog the economist Toma referenced: "Calculated Risk"
They were posted to outline the price of oil's impact on trade as well as to qualify Geirthner's China comments on trade.
What I find interesting is not in terms of trade and China - though China is about 1/2 of the above data and the interesting essay long question is what this change is doing to China, but more so that these pictures are a very clear view of what is happening to the US economy.
In the end of the Clinton era Japan hit a wall with little effect on us but for their mercantalistic trade impact. The first Iraqi war also had large impact as oil went through large gyrations. Trade moves can be explained by these exogenous factors to USA domestic economic waxing and waning.
This time around there are little in the way of exogenous factors.
Trade numbers have gone through these incredible shifts due to the developments in the USA domestic economy
This gives us an early read as to what is happening to USA consumption. Foreign imports have dropped at around a $600 billion annual rate in a shock move. The rate of droppage in US imports has dropped over 20% in a very short time span. And these are likely snapshots midstream of the total move that is occurring.
This translates to a drop in USA consumption of around 6% which implies the USA ha increased their savings rate from 0% to well over 5% in about 4 months. It also makes mincemeat of the NBER "declaration" that the recession started in 12/07 - the recession clearly started in July 08 or later. This is even more appalling considering the speed and violence of this wrenching move. The 12/07 start date helped provide some "same old, same old" calming in terms of a "normal" developing recession.
If one uses the trade data to provide a "seismic" measurement of the USA domestic economy, a picture of an incredibly violent crash in USA consumption/investment becomes apparent as well as the view that we are still midstream. Better analogy is we are in some tenuous shelf on a Thai beach on a recent Christmas and the first of three tsunami waves has just passed by.
The eventual rise in savings and drop in consumption looks like it will be well over 10% of GDP.
That will likely result in are touching or being in reach of touching 20% unemployment.
The only small but important "hope" in the above data picture is that the swiftness, size, and velocity of the move indicates that it is technical, meaning it is not form inherent problem or sea-change in the USA economic structure but - and I know it is a large "but" - for the $700 billion to $1 trillion foreign flows imbalances which insisted on the bogus AAA RMBS assets creation. This means that the start of this crisis and still likely the main problem is still a very enormous bank credit crash. Fix that with a Bagehot like action in total finality and then mend the drop in consumption and calm folks so they drop their savings rate and we can fix this with the same speed and violence with which it is occurring. But if we do not match tempo with tempo, then no fix will work and if anything a Keynesian "muddle" develops to augment the original problem.
These trade pictures above should make you pause long and hard and think.
If we do not provide the fix we are entering an economic setting which we have no experience of, even the 1930s.
These are very very calm and reasonable thoughts which make this all the more terrifying.
We have no time. We have perhaps already crossed the point of no return but I suspect we have a few more months. But the violence of this trade reversal data is amazing - like being in the lifeboat and seeing the fully lit Titanic upend and start the slide this is an amazing and singular thing to see and witness. Rather watching this given the political action and will shown to date, it is more like being on the Titanic stern and watching the slide into the water. We cannot let this get to the point where massive social unrest and societal pain on a global basis forces a solution as that is always the time of demagogic leadership and fanatical thesis.
Write a letter to your Congress, Senate, and our new President - or, go buy a gun as the poor and desperate will come calling.


  1. Hi. Yes it's violent and I agree one had to ask for at least a few months whether it was technical. But now that months have passed, if it was a technical deleveraging event it has morphed into a condition and as you and I agree, unless at least 1.2T of Keynesian spend is coming, we will be facing a structural problem. Acute phase to chronic phase in 6 months.

    Your very best idea is tempo.

    You should do a whole blog post on your idea of meeting tempo with tempo. That may be the very best framing of the problem right now. 350B in actual spend doesn't do it. We need triple that amount and we need it choppered into every city with flags and dancing girls. (Seriously the DC and the States should advertise the spend with a comprehensive ad strategy.)

    On the dark side, it's probably time you read Orlov if you have not already. Always good to prepare for the worst. At least mentally.

    Club Orlov on the Five Stages of Collapse.



  2. Gregor I just dont want to get into the Russians yet - all that elegant and perhaps cirrect analysis Stalin commisioned or his lagacy encouraged to explain the demise of your's and my lifestyle. Not yet