The face of the river, in time, became a wonderful book . . . which told its mind to me without reserve, delivering its most cherished secrets as clearly as if it had uttered them with a voice. -- Mark Twain

Feeling Depressed?

Posted: January 26th, 2011 | Author: | Filed under: Uncategorized | No Comments »

This past week there was all sorts of good news about the economic recovery spinning forth from National Public Radio. In a sure sign the recovery is moving forward, Obama has decided to replace his recovery oversight team with some sort of a new job creation team. Apparently the recovery process is forging full steam ahead in the housing sector as well, with home sales on the rise nationwide. Now, increased sales would have nothing to do with the fact that there’s an unprecedented wealth of repossessed property hitting the market with hugely eroded value, of course… or that excessively positive spin from the media is influencing investor buying?

The media seems desperate to report something positive about the economy these days. I understand the draw. People are tired of the bad news and the tough times. The idea that things could get worse or go on like this for much longer is frightening. But isn’t the function of journalistic reporting to cut to the truth of the matter? I am coming to completely distrust anything positive I hear from the mainstream, even NPR. The atmosphere is verging on Orwellian these days, but with the ludicrous conflict of interest at play regarding sponsors such as the National Association of Realtors backing public radio and the commercial media already beholden to the designs of big business, it only stands to reason we are not going to get a clear picture of where the economy stands.

Surprisingly, one recent article from CNBC did manage to cut through the chatter with a title declaring Housing Market Slips Into Depression Territory.  The article itself was perhaps not wholly accurate as it described the economy as revving back to life with “signs of hiring on the horizon.” That remains to be seen. I suppose it depends on the distance of that horizon, but I don’t expect to see any bold improvement for a while without the development of some amazing new energy technology or such to drive it. Nonetheless, it was refreshing to have the press acknowledge the severity of the situation we are steeped in.

According to the CNBC article, home values have now seen a worse decline than they did during the Great Depression, having hit a 26% reduction nationwide with home prices still falling. While it wasn’t addressed in the article, the housing market and the investments attached to it are what led us into this downturn, and falling prices continue to put downward pressure on the greater economy. The fact that housing is now worse off than it was during the Great Depression suggests our economic engine may not be revving back to life with quite the verve the press would have us believe.

I suppose it is wise for the press to be careful. If you subscribe to the school of behavioral economics you understand the influence emotion and attitude have on the market, and it can be argued that this is just cause for prudence in reporting. However, there are multiple and very reputable economists, investors, analysts and scholars alike who are calling the situation we’re in a depression.

Nobel Prize recipient and Professor of Economics at Princeton University, Paul Krugman, warned in a New York Times article published last July, “We are now, I fear, in the early stages of a third depression.” Though he has since come to believe the severity of the downturn was tamed to some degree by fiscal stimulus, he again referred to the economy just yesterday on his Conscience of a Liberal blog as being in a depression.

Last month 87-year-old promoter, trader and investment letter author Harry Schultz warned in his final issue of the International Harry Schultz Letter “Roughly speaking, the mess we are in is the worst since the 17th century financial collapse. Comparisons with the 1930’s are ludicrous. We’ve gone far beyond that.” He should know, having grown up during the Great Depression.

Former US Budget Director for the Reagan administration David Stockman issued an alarming warning recently, advising “Get some gold, beans, water, anything that Bernanke can’t destroy. Ron Paul is right. We’re entering a global monetary conflagration. If a sell-off of U.S. bonds starts, it will be an Armageddon.”

Telegraph columnist Ambrose Evans-Pritchard stated last year “The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history.” This statement was issued when we all still thought we were dealing with a mere 700 billion dollar stimulus package, before the new Dodd-Frank reform  law exposed the trillions in stimulus the Fed had secretly poured into the global economy.

Kevin Giddis, Managing Director of Fixed Income at Morgan Keegan revealed last May “There is big money making big bets that at a minimum we’ll have a [second] recession if not a depression that could last for years.” Always follow the insiders to see where the real action is taking place.

Trends forecaster Gerald Celente warns we will see an unprecedented collapse of the US economy by 2012. “We’re going into the Greatest Depression, and it’s going to be ugly.” Celente believes we’d already be in the throws of such a depression if it hadn’t been for those trillions the Fed covertly doled out to prop up the world, but calls the stimulus effort unsustainable and believes a crash is imminent.

"The Soup Kitchen," Norman Wilfred Lewis, ca. 1937

These are just a few examples of the voices we generally aren’t hearing on the radio and television. The list goes on and on across the political spectrum, and alarms have been sounding for years now. Economist Dean Baker of the Center for Economic and Policy Research in Washington DC issued warnings as early as 2002 that an emerging housing bubble would threaten the development of a downturn rivaling the Great Depression. Yet we still hear little discussion about the possibility of economic depression. So the question arises, what is a depression anyway? Would we even recognize one if we were sipping it from our soup bowls?

Ray Dalio is one of the world’s leading hedge fund managers with clients including world governments, central banks, pension funds and endowments. In 2010 he was the most profitable hedge fund manager of the year. He defines economic depression as a specific process which is fundamentally different from the process describing recession. He prefers to avoid the term “depression” because people tend to characterize it by the bread lines, shanty towns and other stereotypical images they associate with the Great Depression of the 1930’s. Instead he prefers to use a term he coined himself, calling it the “D-Process.”

In an interview with Barron’s two years ago he described how economic depression differs from recession.

“Most people,” says Dalio, “think that a depression is simply a really, really bad recession. But in reality, the two are distinct, naturally occurring events. A recession is a contraction in real GDP brought on by a central bank tightening monetary policy, usually to control inflation, and ends when the central bank eases. But a D-process occurs when an economy has an unsustainably high debt burden and monetary policy ceases to be effective, usually because interest rates are close to zero, and the central bank has no way to stimulate the economy. To compensate, the value of debt must be written down (risking deflation) or the central bank must print money (a trigger of inflation), or some combination of both.”

In an article about his company Bridgewater, in Fortune magazine a month later, Dalio warned the US was entering into an economic depression.

“In recent years the level of debt as a percentage of GDP in the U.S. has skyrocketed past previous highs last seen in the early 1930s. And the Federal Reserve’s benchmark rate is now hovering just above zero. To Dalio, therefore, it’s clear that a D-process is under way,” the article states.

Dalio’s definition of the depression process definitely characterizes today’s economy accurately, while the definition he gives for recession does not. Many today are unwilling to refer to our economy as being in a depression because it doesn’t exactly resemble what we saw in the Great Depression. Where are the breadlines? Where are the disenfranchised masses poking about for spare dimes? Well, every depression is going to look different depending on the various forces in place at its inception. Today, for example, we have all the social programs set in place after the Great Depression to help us avoid events we saw in the past. Today’s bread lines have manifested as a massive increase in the use of food stamps. Today’s dimes for the disenfranchised are delivered as checks via the unemployment insurance program.

Dalio also makes the distinction that while recessions are relatively common, depressions are not. We tend not to understand the phenomenon well because of this. We also tend to become overly confident as the event of depression slips into the realm of history that it will never happen again, and we lose our ability to recognize it when it does. The fact is, no one saw the Great Depression for what it was until years after it was over. Hindsight is 20/20, as they say.

Whether or not you want to call today’s economic situation a depression, we can certainly agree it is at the very least depressing. While the elite discuss the technical aspects in ivory conference rooms the people on main street continue to suffer with diminishing wages and unemployment that won’t budge, with increasing foreclosures, with lost benefits, lost prospects and debt they are unable to service. No one  knows exactly what lies in store for us ahead, but some of those discussing economic depression have issued some pretty alarming warnings. I suppose I’d rather be safe than sorry.

I return to a quote from the unorthodox economist Robert Prechter of Elliot Wave International who, suspecting we are headed for a depression worse than any we’ve known before, has issued the following advice:  “Winter is coming. Buy a coat. 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.”

New York Times
The Conscience of a Liberal
The Demand-Side Temptation
Paul Krugman
January 25, 2011

Housing Market Slips Into Depression Territory
Cindy Perman
January 11, 2011

Market Watch
Harry Schultz’s Last Testament
Peter Brimelow
January 10, 2011

Business Insider
23 Doomsayers Who Say We’re Heading Toward Depression In 2011
Michael Snyder
June 29, 2010

The World’s Biggest Hedge Fund
Brian O’Keefe
March 19, 2009

Recession? No, It’s a D-process, and It Will Be Long
Sandra Ward
February 9, 2009

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