The Third Depression

Last month Nobel Prize winning economist Paul Krugman of the NY Times put forth a dire warning that we are in the beginnings of a third depression.  There have been two already in US history, the Long Depression that followed the Panic of 1873 and the Great Depression of the early 20th Century.

“We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense,” Krugman writes.

Most agree it was a failure of economic policy that brought us to this point.  However, the proposed solutions differ greatly among various economists and business leaders.  Krugman’s Keynesian approach would be to increase stimulus spending, but critics argue that this approach has been ineffective so far and warn against the consequences of driving deficits to even more precarious heights than where they now stand.

“In the last two years, we’ve had gargantuan spending and ultra-easy money,” says CNBC host Larry Kudlow in an interview with CEO Steve Forbes of Forbes magazine, “which is what Professor Krugman has been advocating the whole time. And he still thinks we’re in a depression. So I need to ask you, maybe his policies are what threaten the depression.”

“Well, it’s like the old physicians who continue to bleed the patient and wonder why the patient isn’t getting better and then bleeds the patient even more,” Forbes responds. “What we should be doing, yes, we should be cutting back spending because it takes money from productive citizens.”

Fiscal conservationists (a.k.a. “deficit hawks” to those who side with Krugman on this issue) maintain the US national debt is already at a tipping point and taking on further debt would threaten to push the country itself into bankruptcy.  They also point out that the consumer is tapped out between personal debt, diminished credit and unemployment, and simply cannot afford to pay higher taxes or subsidize further bailout programs.

Liberal economist and co-director of the Center for Economic and Policy Research in Washington D.C., Dean Baker, sides with Krugman.  He likens the stimulus effort to trying to put out a forest fire with only a few buckets of water.  He explains it’s not working because we need more water.

“I mean we lost over a trillion dollars a year in annual demand. We tried to replace it with the stimulus that it came to from the federal sector about $300 billion a year, you subtract out the cuts at the state and local level, that’s $150 billion a year. Where I come from $150 billion isn’t going to make up a loss of a trillion. That’s simple arithmetic.”

As the debate rages on about how to deal with the fiscal crisis in which we find ourselves, more and more economists seem to agree that difficult times lie ahead.  We may even be heading into a real depression.  In a recent interview with Charlie Rose, NYU economist Nouriel Roubini warned of a looming global crisis.  He now says a double dip in the recession has already arrived.

“Fasten your seat belts for a very bumpy ride.”   At best, Roubini says, “we face a protracted period of anemic, below-trend growth in advanced economies as deleveraging by households, financial institutions, and governments starts to feed through to consumption and investment.”

On the extreme end, market forecaster and social theorist Robert Prechter of Eliott Wave International is convinced we are headed for a crisis worse than any we’ve seen yet, with the possibility of the Dow falling below 1000.  His analysis is based on principles developed by Ralph Nelson Elliott in the 1930’s, which assert that financial markets move according to complex but predictable fractal patterns based on cycles of social mood among investors.

“I’m saying: ‘Winter is coming. Buy a coat,’” Prechter forecasts. “Other people are advising people to stay naked. If I’m wrong, you’re not hurt. If they’re wrong, you’re dead. It’s pretty benign advice to opt for safety for a while.”

At the close of the G20 conference in Toronto last month US policy makers seemed to be turning away from the idea of employing further stimulus at this time and toward adopting a plan of greater fiscal austerity and balanced-budget orthodoxy, as the Euro zone has done with verve as of late.  Hence, Krugman’s lament.

“And who will pay the price for this triumph of orthodoxy?” he asks.  The answer is, tens of millions of unemployed workers, many of whom will go jobless for years, and some of whom will never work again.”

Wherever we may go from here, the fact is we are already experiencing unemployment at depression levels according to the U6 measurement, which accounts for those who are underemployed and those who have given up looking for work out of despair, as well as those who are unemployed and receiving benefits.  And there is no visible source of job creation on the horizon.  What lies ahead instead is a further rise in unemployment, larger budget deficits, continuing decline in home prices, larger losses for banks, shrinking access to credit and possible protectionist measures that will dampen growth.  Depression is upon us.

New York Times
The Third Depression
Paul Krugman
6/27/2010
http://www.nytimes.com

NewsBusters
Kudlow, Forbes Debunk Krugman’s “Third Depression” Call
Jeff Poor
6/29/2010
http://newsbusters.org

New York Times
A Market Forecast That Says “Take Cover”
Jeff Sommer
7/2/2010
http://www.nytimes.com

Moneynews.com
Robini: Don’t Fear A Double Dip, It’s Already Here
Julie Crawshaw
7/22/10
http://www.moneynews.com

Ghost Mall Opens Near You

According to analysis from New York based real estate research firm Reis Inc, vacancies at US neighborhood shopping centers moved closer to the highest on record during the second quarter of this year.  This contributes to evidence that the economic recovery has not taken hold amongst the people despite what you might read in the press.  Consumers are tapped out with the highest debt levels in history and plummeting credit scores.  Malls are becoming ghost towns.  Consumer sentiment is eroding and frugal attitudes are most likely here to stay for a long time.  Forget about consumer sentiment, no one’s got any money to spend and now there are fewer places to spend it.

Because of the wealth concentrated where I live in Los Angeles we are not seeing the devastation to shopping centers that some other areas are, but I noticed recently on a trip to a local mall that the  wide selection of goods we grew accustomed to during the boom years has greatly deteriorated.  On this particular occasion I was looking at costume jewelry specifically, trying to find a simple long silver-tone chain necklace.  I thought I’d have twenty to choose from at Macy’s alone.  No such luck!  They had two, and neither was long enough.  (My goodness, what’s a girl to do?)  I wandered from store to store and finally came across something I could use after three hours of searching.  The good news for me is it had been marked down to half price- cause no one’s buying out there!  At the same time I’ve noticed the selection of specialty housewares and luxury items explode over the last couple of years at second run retailers like Marshall’s and Ross.  Heated slippers and olive tongs are just not viable in today’s recessionary market, I suppose.

Expect to see more economic damage to shopping centers.  People are moving toward frugality (it’s the new black!).  This is as much out of necessity as it is out of a growing distaste for frivolous consumption and addictive spending.  Heck, we may even have a real depression in the works here after all.  In any case, it seems the party of a lifetime is long over and we find ourselves coming to in some sort of an abandoned shopping center with a splitting headache and an empty wallet.

Bloomberg Businessweek
U.S. Shopping Center Vacancies Approach Record High, Reis Says
Hui-yong Yu
July 7, 2010

http://www.bloomberg.com/

The Paper Boat Set Afloat

I am very pleased to announce the launching of my new website, The Paper Boat.

After several years of publishing via e-mail I have taken the bold step of creating a blog on the internet. In the tradition of my mailings I will continue to bring you articles, information and thoughts regarding personal finance, the housing market and the economy at large. I hope to share with you in joy and enlightenment as we explore the mysterious dynamic waters of the economic flow on our journey toward prosperity.

“The river delights to lift us free, if only we dare to let go.  Our true work is this voyage, this adventure.”
– Richard Bach

Signs of the Stimulus

Here’s an interesting article from ABC News pointing out how more of our taxpayer dollars are being wasted as “stimulus.” The article focuses on partisan politics, so let me say up front that I have no partisan agenda here. My intention is to examine the economic effectiveness and the integrity of this stimulus spending.

From ABC News
Signs of the Stimulus
Jonathan Karl and Gregory Simmons
July 14, 2010
http://abcnews.go.com/

Apparently, millions of dollars of stimulus money has been spent by states on road signs designating areas where other stimulus money has been spent. The signs read “The American Reinvestment and Recovery Act” and “Putting America Back to Work.” The estimated tab for the signs ranges between 5-20 MILLION dollars, depending on who you ask. It seems no accident that these signs are popping up everywhere just as the mid-term election season approaches. So, first of all, is this spending about stimulating the economy or is it about politicians promoting their careers and lobbying for your future votes (on your dime)?

A second concern the article touches upon only briefly is the cost of the actual projects themselves. One project in Washington DC is mentioned as an example:

“On the road leading to Dulles Airport outside Washington, DC there’s a 10′ x 11′ road sign touting a runway improvement project funded by the federal stimulus. The project cost nearly $15 million and has created 17 jobs, according to recovery.gov.”

This is obviously a horrible waste of funding and a failure to create meaningful sustainable work, and from what I have read elsewhere the example is not isolated. This gives rise to another point not mentioned in the article, but which I feel is a fundamental one to look at when examining the effectiveness of stimulus spending. That is the return on the investment. In other words, the potential for the money spent on a project to generate value and income in the future. Too often decisions are made looking only at the short term, and the long term return is not given adequate consideration.

There has been a lot of spending on infrastructure, for example, but much of this spending seems to have been done without vision. We’ve repaved roads that don’t need repaving. We’ve built new roads and bridges to outer ring suburbs. How much should we be investing in a petroleum dependent transportation network when we are confronting issues like peak oil and collapsing exurban real estate? Seems like throwing good money after bad. Our stimulus funds should have been spent on businesses that would grow and create more jobs and wealth. We’d be much better served creating a high speed railway system, for example, or solar energy farms all across the sunbelt. These are projects that would actually give us some bang for the buck and move us toward a sustainable future in the global economy.

Putting people to work on temporary construction projects is like burning tinder. It’s a quick fix and when it’s over we’ve got nothing left. What if we’d bought a few seeds with that stimulus cash instead? We could grow a forest of tinder and trees. We need to think of the long term. We need to think like investors, not like the addicted consumers we are. And what’s going to happen to all those signs we’ve been throwing up across the country? How long are those viable? Maybe someone will start a business recycling them and lead us out of this recession.