"Emancipate yourself from mental slavery, none but ourselves can free our mind.” - Bob Marley

Friday, October 10, 2008

"One cannot rule out a systemic collapse and a global depression"

The title - "one cannot rule out a systemic collapse and a global depression." - comes from Nouriel Roubini's article yesterday:


The world is at severe risk of a global systemic financial meltdown and a severe global depression


Although long called Doctor Doom, and long predicting the chaos in the financial markets, he has previously predicted only a long, severe, recession...until now. The fact that he was most pessimistic but only predicting a recession was comforting, but confusing.

I guess I'm less confused and more uncomfortable now.

6 comments:

Anonymous said...

When does American Idol start?

bobn said...

Anonymous - thanks for the laugh!

OBloodyHell said...

I would not rule it out, either, but there is a key difference between this market and the 1930s one, assuming Obama and Co. don't "fix" it all into the toilet.

This is not an industrial economy. It does not require factories to be built, or plants to be reconstructed, in order to increase wealth production.

This is an IP & Services economy.

You can get wealthy tomorrow just by finding a service people want and will pay for, then doing it, and adding hirees to do it, as your business grows.

You can get wealthy tomorrow by writing the right software, or the right game, writing the correct song, or making the right TV Show or Movie (and that latter is the closest to something resembling a factory or a production line, except that it utterly lacks the infrastructure. A few cameras, some editing tools, and the right people, and "You've got Movie!")

The seedcorn of wealth generation is in far, far more hands than it ever was in the industrial age. It now ties not to Real Property, but to Imagination and Talent.

And that is why it is improbable that the kind of stagnation present in the 30s is possible again (I don't write off the ability of Obama and Co to find a way to stifle it, mind you).

The Depression, I argue, was a response to the fact that society was ignoring a radical change in the manner of which the economy functioned -- the transition from an Ag economy to an Industrial one was a radical one, requiring a massive shift in people and training -- and theey did not handle that transition all that well.

"The New Economy" was not wrong. It was a First Draft. Now we've got the second draft, and, boy, does it stink. Send 'em back for another rewrite of that First Draft.

I'm not suggesting that there are no problems, nor that the market corrections won't be painful to implement -- but it will take a massive clusterf**k by Obama, et al, to manage to stifle THIS economy's inherent qualities the way Hoover and FDR did the one they were surrounded by.

bobn said...

Doesn't somebody still need to make *things*? Cars, frying pans, etc.?

Can a nation really subsist selluing services to each other while buying everything manufactured elsewhere?

I may be showing my age, but I don;t get the idea that a nation with *no* factories is a great nation.

OBloodyHell said...

> Doesn't somebody still need to make *things*?

Someone does, but not in the USA.

This is an IP and SERVICES economy.

Bob, which part of those two things do you not get?

IP is "crystalized ideas" -- music, patents, movies, books, etc... ALL of those can be and are distributable in digital form.

Services is "duh".

All future real wealth for this country will not come from manufactured goods any more than the main portion of its wealth comes from producing food any more.

It will come from those two things, and they don't generally require anywhere near the same level of capital investment that it does to start up a production line.

They are very much an element of the entrepreneurial spirit so basic to this country.

And absolutely anathema to EVERYTHING Obama stands for.

So this IS a key election. If Obama gets elected, the economy WILL tank and I'll bet you the DOW drops below 5k within a year (they will VERY loudly be blaming that on the GOP, however). OTOH, if McCain gets in, it will be back above 10k, possibly to 12k, within a couple years, and any recession will be over by then, too.

One thing to realize -- 700 billion sounds like a hell of a lot -- but, at least up until a couple months ago -- it was about 20 days output for the nation.

Think about that. You're walking down the street with a money envelope in your hand which has three weeks of your work in it. Some thug grabs you, roughs you up, and takes it.

It's gonna hurt to lose that, but, it's probably not going to break you. You're almost certainly not going to lose your income, your home, whatever, just because you lost a couple paychecks.

I'm not saying it's no problem at all, but it isn't what it's been painted as, either. Unless Obama gets the chance to screw it up by poking it with a stick, there's too much that's right about the USA for that to take it down.

bobn said...

This is an IP and SERVICES economy.

IP is "crystalized ideas" -- music, patents, movies, books, etc... ALL of those can be and are distributable in digital form.

All future real wealth for this country will not come from manufactured goods any more than the main portion of its wealth comes from producing food any more.

It will come from those two things, and they don't generally require anywhere near the same level of capital investment that it does to start up a production line.


From a purely national defense point of view I must disagree. A philosophy based only on comparative advantage is a mistake when it comes to weapons and ammo. Much of our military advantage comes from our physical armaments being better and smarter than the enemy's, but you can't evolve or even properly test that stuff if you don't make it.

Materials research, as opposed to just technological tinkering, requires significant resources.

In a world where everybody placed their rational self-interest first, comaparative advantage might work for the rest of the economy. Unfortunately, that world does not exist. For starters, the Chinese and Russians have no respect whatsoever for the sanctity of IP. The radical Islamists want to kill us because we are not Muslims. Etc.

So this IS a key election. If Obama gets elected, the economy WILL tank and I'll bet you the DOW drops below 5k within a year (they will VERY loudly be blaming that on the GOP, however).

I think serious problems are baked into the economy, for reasons I'll note below, and that either candidate will/would witness a worsening of the economy. The scale of the problems is so great, and the adverse feedback cycles, so-called vicious circles (in engineering talk, a positive feedback loop) are already setting in.

One thing to realize -- 700 billion sounds like a hell of a lot -- but, at least up until a couple months ago -- it was about 20 days output for the nation.

Once again, I submit that you miss the broader view. It is not *just* the $700 Billion to 1 Trillion for the "Swindlers Bailout Bill of 2008".

It is also the $700 Billion or more that the FHLB "loaned" out in 2007 using dodgy mortgages or mortgage securities as collateral.

It is also the $1.5 Trillion expansion of the FRB's balance sheet based on similar collateral, most likely with a smaller "hair-cut" than used by FHLB. The FRB refuses to disclose what this collateral is. This is predicted to reach $3 Trillion by the end of this year.

It is also the $40 Billion per month of toxic sludge that Fannie and Freddie are now committed to buying, going forward.

Note that the horrible lending practices that were evident in the residential mortgage markets aslo prevailed in Commercial Real Estate, auto loans and credit card debt. Through various means, including the feedback loops wioth the real economy, these are already playing a part.

Finally, back to the original black hole for money, this chart shows that we have another 2 years of hell at least. All the "Option adjustable rate" loans will probably difault due to the extreme toxicity of these loans (when they "recast", monthly payments can explode by 60%). All the other categories will see significant default rates as well.

Money continues to be detroyed on an inxconceivable scale.

About Me

I'm a 57 year old geek. I voted Democratic for 20 years, because I disliked the Republicans more. But now, nobody really speaks for me. I'm for Guns, for more correct government regulation of the financial world, against illegal immigration and amnesty. (in 2008 I ended up voting Republican - too many questions about Obama, and voting against anybody who voted for TARP 1.) In 2010 I voted a stright republican ticket because the Democrats have completely lost their minds.