Double dip or global deflation?

September 20, 2010

1936

The page proofs of my upcoming book, “Inflated: How Money and Debt Built the American Dream,” just went back to the editors. One of the benefits of writing a book about U.S. financial history is that it forces you to take a long view of both economics and the political narrative used to describe it. It is the issue of language and labels, in my view, that is making it so difficult for Americans to understand the current state of the economy.

The National Bureau of Economic Research just declared that the “recession” that began in 2007 ended in the middle of 2009, making it the longest downturn since WWII. The only problem is that none of the people who work at NBER today, which is one of my favorite research organizations, are old enough to remember what the U.S. economy was like before WWII; before the age of Keynesian socialism and the use of debt to stimulate growth and employment became standard policy in Washington.

Let’s start with the term “recession,” which itself reflects the assumption that economic growth is always positive and the trend line is always upward sloping. While many economists in the U.S. remain convinced that this is an accurate descriptor, what Americans and many other people of the world need to consider is whether the assumption that the economy will grow endlessly is reasonable.

In the period following the Crisis of 1907 and before the start of WWI, Americans faced a grim economic outlook. Jobs were scarce, product and commodity prices were flat, and the value of farm products and land had been falling for years. The American economy was entirely dependent upon Europe for financing and to buy U.S. products, mostly agricultural and other commodities. The dismal economic scene fed the rise of the Progressive movement in U.S. politics.

WWI provided a sharp relief from this picture of economic stagnation. Employment rebounded, American agricultural prices soared and the value of real estate around the U.S. also rose sharply. With renewed growth came inflation, however, so that by the time that WWI ended, prices for many consumer staples had doubled, but wages did not keep pace. Economic activity gradually slowed as the U.S. made its way through the Roaring Twenties, but many Americans never saw any benefit from this period of speculation and financial excess.

Following the Crash of 1929, the pretense observed by both political parties that all was well in the U.S. economy evaporated into almost twenty years of economic stagnation. While the massive mobilization  for WWII provided the appearance of a recovery, and the period of the Cold War extended this mirage on a sea of public debt and paper dollars, the basic issue of overcapacity remained.

From the 1970s, when the U.S. shifted from defense to housing as the chief driver of American economic growth, the illusion became ever more attractive and, seemingly at least, permanent. But the sad fact is that much of what Americans think was real growth supported by real income and real work was, in fact, the result of deficit spending and reckless monetary expansion by the Fed, first under Alan Greenspan and now Ben Bernake.

In an interview for my book former Fed Chairman Paul Volcker noted:

We live in an amazing world. Everybody has big budget deficits and big easy money, but somehow the world as a whole cannot fully employ itself. It is a serious question. We are no longer just talking about a single country having a big depression but the entire world. If the world as a whole cannot employ everyone who is ready and able to work, it raises some big questions.

Earlier this week in a research note for the IRA Advisory Service, we reported that some of the leading experts in the housing sector believe that the U.S. is less than 25% through the restructuring of defaulted loans on commercial and residential real estate, and that the backlog is growing.  Last week at the AmeriCatalyst conference held in Austin, TX, Laurie Goodman from Amherst Securities predicted that one in five U.S. households remains at risk of foreclosure. If this prediction turns out to be correct, the optimistic view of the U.S. economy and banking sector must be radically revised — and soon.

Just as the housing sector and the related debt was the driver of the U.S. economy over the past several decades, I believe that the deflation of the housing market could spell an equally drastic period of shrinkage in economic activity in the U.S. and around the world.  In order to meet this challenge, both the political and economic communities need to put aside preconceived notions of how the economy should look and begin to develop new language to describe what is really happening to consumers and businesses. Only then can we truly begin the process of working through what is the most serious economic contraction in the U.S. since WWI.

27 comments

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Keynesian “socialism?” Just slipped that one in there did ya?

Posted by PapaDisco | Report as abusive

Well written…. Now lets gets the pols in DC to read this, and then start a major educational push on all of the talking-head shows…. And maybe (MAYBE) you can avert another world meltdown….
Get schooled. It’s educational….

Posted by edgyinchina | Report as abusive

What is wrong with deflation on a global level? There is still the same amount of people with the same needs – in fact the population is still growing.

A new language and goal should be sustainability not economic growth. There is only so much room to grow. Picture economic activity as alchohol in your wine brew.

It will consume and consume and consume till it poisons itself out and stops altogether. Why should we chase this old out-dated model. Our science and technology has increased 30 times in the last 50 years.

We could all be living in a new renaissance with a better standard of living for all. Instead we consume and compete and destroy – thinking this is getting ahead in the world.

You reach 85 very quickly and realize you leave the world the same. No better, no worse – just different.

Posted by Butch_from_PA | Report as abusive

The recession may have ended in the middle of 2009 for the Fortune 1000 and all of their 6/7/8 figure salaried workers, and it may have ended for Wall Street and their 8/9/10 figure salaried employees but it did NOT end for Main Street.
But we are not alone, Europe has exactly the same problem. Until we can get the people making the decisions that are on a fat salary to experience what the rest of us live day to day, nothing will change.

Until somebody figures out how to address this inequality we will be mired in a world-wide recession for years to come…

Posted by stanrich | Report as abusive

It was actually a Depression, but the politicians, including Obama, afraid to call it such. But, historians will eventually.

Posted by Haqi | Report as abusive

Agree with edgyinchina. Most Americans are pretty clueless about what is happening economically. Instead they embrace empty platitudes like “God and Country” from Sarah Palin and friends.

Posted by MerrillGrinch | Report as abusive

MerrillGrinch says – “Instead they embrace empty platitudes like “God and Country” from Sarah Palin and friends.” Is the blind embrace of “Yes we can” (can what, I ask??) the answer??? Leave the red vs. blue out of it.

Very nice to eschew the political/monetary gains from either world wars, as the truth only hurts more.

Personally, I don’t believe we have an oversupply of housing. I believe we lack the diligent working population (caused by lack of industry, production, etc. yes I know…) needed to fill the supply. The demand is out there, but with America’s protectionist policies it will be ever harder to draw peoples from around the world to the US.

What America does have is natural resources and a sense of community, i.e. what it means to be American in America. I agree completely that “the deflation of the housing market could spell an equally drastic period of shrinkage in economic activity in the U.S. and around the world.” However I think the solution is not just addressing the housing market but also including corporate real estate and real estate in general. As an Environmental Designer I understand how what we live in affects every facet of life. America needs to re-think how it builds, how it showcases itself, and how development impacts society.

Development that increases natural resources while fostering a sense of community is the only solution to our economic woes. Hang on America, I’m coming!!

Posted by teh_admiral | Report as abusive

Butch from PA, you got it right. We gotta change our whole outlook on life and what we aspire to. The way we are going now, only worried about growth and everyone in the developed world living in utter luxury, we are destroying the planet and end up with more debt than anyone will ever be able to pay back. I can only put it down to our politicians worldwide having been too busy avoiding the total meltdown, with civil war and everything else that might follow, to realize that the system has to change.
How about aiming for our energy supply to be 4% cleaner every year so that less polar bears drown every day? I wonder anyway when someone is finally going to shoot a movie showing one of these precious animals fighting for their life, and losing.

Posted by Rhino1 | Report as abusive

You state, “Economic activity gradually slowed as the U.S. made its way through the Roaring Twenties, but many Americans never saw any benefit from this period of speculation and financial excess.” But, REAL wages rose substantially throughout the 1920s (after the brief recession of 1920-1921) with dramatic increases among skilled, semi-skilled, unskilled, male and female factory workers in particular. Why paint such a bleak picture? Who do you think was buying all the autos, radios, etc. that were produced during that time?

Posted by DeeBee9 | Report as abusive

Thank you for suggesting we adjust to our circumstances versus living on expectations. the T party and I want fewer rewards for all of us. Entitlements and other budgeted expenditures must be limited to debt plus cost and be balanced with income. The expectation of ever expanding entitlements, McMansions and no child left behind should all die with the loop-holed IRS. Families will stay together through necessity. So for now, we should be frugal and thoughtful of others. The next “chief driver of economic growth” may be square and boring and green.

Posted by pHenry | Report as abusive

Well-written but way too bearish. Apparently we were all bamboozled for the past sixty-five years? And now, thanks to Mr. Whalen and his NEW BOOK – look for it online or at your favourite bookstore! – we now know better? C’mon, this gloom trade is getting carried away with itself. I fully expect to see Mr. Whalen on all the financial news shows, hawking this book to all and sundry, profiting enormously by scaring everyone to death. How pathetic. As I noted earlier, the gloom trade is overdone and getting crowded; time for a major correction.

Posted by Gotthardbahn | Report as abusive

Yes, there must be more to what has gone so wrong in the housing market. The government won’t acknowledge the scary scenerios that lie ahead. Instead, along with big business, we get more smoke and mirrors. God forbid that they address any analysis that doesn’t benefit them. They will give the consumers ever bigger blinders. You open debate on horrifying outcomes that are now at our doorstep. But, as long as this country can continue to print money then I guess we’ll be okay.

Posted by Albertson | Report as abusive

People have voted for more services than they can pay for and governments happily obliged printing money recklessly because it has been in their personal interest to do so (it’s easier than working for a living). This free lunch nonsense will soon end the only question is what will follow. My guess is the repercussions will be farther reaching than any imagine – they nearly always are.

Posted by Truth_Teller | Report as abusive

So let me get this straight the current recession started between December 2007 and June 2008 according to money magazine, December 1, 2008 article. Now these same experts are claiming the recession was over in April 2009. I think Haqi is correct, history will show we where in a depression. Personally I think the recession started early in 2007 and is still present today and is ready to dip again. I see no signs of employment improving anytime soon. The real estate market will see many more voluntary foreclosures in the coming years as people get tired and just walk away. I don’t find Ben’s article to be to bearish. Greg Urroz, CRS Phoenix Realtor.

Posted by gurroz | Report as abusive

(it’s easier than working for a living) meaning who? Those who are lucky to have jobs are in denial and talk of those out of work as too lazy to get a job or a better education. They go on about ‘free lunch’ and government spending but never look at the WHOLE picture and don’t care to really understand. BLAME, BLAME, BLAME

Posted by sjbstl | Report as abusive

Posted by Rhino1: Butch from PA, you got it right. We gotta change our whole outlook on life and what we aspire to. The way we are going now, only worried about growth and everyone in the developed world living in utter luxury, we are destroying the planet and end up with more debt than anyone will ever be able to pay back. I can only put it down to our politicians worldwide having been too busy avoiding the total meltdown, with civil war and everything else that might follow, to realize that the system has to change.
How about aiming for our energy supply to be 4% cleaner every year so that less polar bears drown every day? I wonder anyway when someone is finally going to shoot a movie showing one of these precious animals fighting for their life, and losing.
================================
OMG! The Polar Bears are drowning. EVERYBODY just stop! STOP I SAY!! This has gone far enough! Greedy bad SUV driving, big house owning, non-recycling people. Bad, Bad BAD!!! Then again, they make for a nice rug in front of the fireplace.

Posted by GLK | Report as abusive

Amazing Article.

Thanks
Amaresh Gangal

Posted by Amaresh_Gangal | Report as abusive

Excellent article.

Posted by yr2009 | Report as abusive

The only bright spot I see on the horizon are all the baby boomers hitting retirement age.

Posted by gruven137 | Report as abusive

The standard of living steadily improved in the US from its trough in the mid 1930’s until, roughly, the late 80’s and early 90’s. This was not an illusion. There is an abundance of wealth in this country; but its distribution has been distorted during the past few decades (we now have the greatest disparity in wealth and income since the 1920’s). Consequently, too many people don’t have money to put back into the economy while a very few have plenty that they’re doing nothing productive with.

Posted by KingMax | Report as abusive

The problem with us boomers is that they threw out the rules and repealed the laws which protected us from the loco locusts on W-Street, so we can’t retire. But it looks like if the elections go the way of most mid-terms, the Retarders will retard our cozy recession/recovery just as they have so far.
If regression hasn’t worked for 10,000 years, maybe buck it and go for progress, vote relative non-regression. That means that if we want more of that bushy 2007, don’t vote, or don’t vote for Democrats.
All I can say is that Obama is the beast chance to get some consumer protection, some reining in of the corporate shark pack.
It’s only a chance, but I have seen the NO alternative.
bobby99

Posted by BOBBY99 | Report as abusive

‘what Americans and many other people of the world need to consider is whether the assumption that the economy will grow endlessly is reasonable.’

Congratulations on actually getting the main issue out there. I’d substitute the word ‘should’ for ‘will’, but at least this is a helicopter view at last.

This isn’t a recession, its a restructuring. It started to show up around 2003/4, but Alan Greenback decided to put it off. Taking his example, the credit-scorers started to put it off some more. Following their example, the EU’s central bank decided to extend the policy to its sovereign members. Now read on.

We are constantly told by our media, governments and banking institutions that we must buy, consume, borrow and thus grow….as if growing was for us like moving for sharks: stop doing it and you die.

In Britain we are calling the end of this ‘austerity’. Austerity? Most people alive today don’t know what hardship is.

Adjust,restructure, move on and to hell with growing: that’s for the shareholders. Real people just want a life.

http://nbyslog.blogspot.com/2010/09/ther es-austerity-and-theres-austerity.html

Posted by nbywardslog | Report as abusive

The idea that unemployment is somehow evil is very shallow, because in a society with slavery as its base no one would ever be unemployed (their food and shelter simply become their unwilling ‘wage’). Not everyone needs to work, what they need is enough to live. What is so hard to understand about this ‘amazing’ world, there is no real difference between a $1 bill and a shell a Polynesian would once collect as ‘currency’, or the human attributed value for gold Vs a 1st edition of Superman. What makes it all possible is energy and raw materials, but what makes it happen is the DEMAND for those materials. In other words if demand can be created by almost any means (even being forced to rebuild after being utterly devastated by war) then human economy flourishes… as long as energy and raw materials exist in reasonable quantity that is.

Posted by JRM | Report as abusive

If Europe and USA were the only 2 economies then sustainability should be the objective. Unfortunately, China is growing dramatically. As the USA is to say, the Netherlands then in a few decades China will be to the USA. So?

Then the USA will be very, very, subject to China. And all the talk about the moralistic or sustainable goals we should be achieving will come to nothing as China dictates what the USA will have. What do you think China will let the USA have?

Posted by AtlanticBeech | Report as abusive

Wealth disparity is the main issue.
When a Wall St trader makes $5M from a trade, where does that $5M actually come from?
Profits without wealth generation is private parasite tax.
Workers, inventors, scientists, engineers create wealth and the parasite class: management, lobbyists, politicians, etc. destroy it.
The parasites are killing the host.

Posted by OzzAndy | Report as abusive

Double dip?I dont think that we’ve reached the very bottom yet.we use that term when we are analysing the market and hoping that this is the bottom and soon we will see a rebound in the market.Possibly it will happen that way ,but we do not have strong facts to support it.If we are looking on a chart(like with stock market price in Wall st)measuring it on a five year price history ,then technically , it will rebound. But right now fundamentals are strong indicating more problems with the economy not only for USA but around the globe.
The reality is, we are in a “economic limbo”. The stats confirms that there’s no such recovery yet , fundamentally maybe about 8%, Unemployment data for Aug is 464,750 in a 4week average, GDP ?numbers not good either,we have a huge deficit in terms of Balance of trade(import againts exports)
In 1930 ‘s depressions era, the GDP was first initiated by group of economists;Mr Arnold Kuznets from Bureau of Foreign and domestic commerce plus the NBER (national bureau of economic research.
Today,we are facing a new challenge,i still believe that it will be a good deed if these new economists that will be assigned to manage our economy will follow and learn from them because we’ve seen already how they failed to manage, otherwise our economy should have flourish by now. I dont blame any, i salute them for their works, its just that ,their expertise is somewhere else ok?

Posted by it809 | Report as abusive

During the economic doldrums of the 30’s the national government was able to accomplish the major hydroelectric projects, established the TVA and was able to do a lot of conservation work in national parks. They were able to do it for relatively cheap wages too. There was also a major campaign of constructing public buildings. Town Halls, Courthouses, and public schools were built all over the country. Most of the Art deco or “art moderne” public buildings that still stand date from that period.

Years ago I met an old coal miner from PA who said he was getting $5 per day during the depths of the depression. He was making a very good income for the time and for his trade. It was a surprise to hear that because I thought those guys were worked to death. That they were the most exploited laborers.

This country can’t do anything cheaply apparently. That would be a disaster in its own right.

The stimulus money was spent keeping the cost structure up and paving a few roads. Billions just don’t seem to deliver much of a punch.

But if growth is not to be expected here – what do the inmates do – especially the unemployed inmates? One can’t even be innovative or adaptable if one lacks the means. A one-year at home online computer graphics course can cost from $14,000 to $17,000. For what?

The wealthy aren’t holding lavish balls or giving big and expensive parties as they did during the depression, with the very self conscious idea that they had to spread the wealth somehow – Noblesse oblige – and the bargains they must have got. But they stopped doing that under Roosevelt or thereabouts. It looked bad in the papers and was ridiculed.

WR Hearst at San Simeon had a workman build a fireplace and chimney for one of his guest houses, and then ordered it torn down and rebuilt in another wall and than changed his mind and ordered it torn down again and moved back where it was to begin with. The fireplace was three stories of modern and antique masonry and reinforced concrete. One of the masons was so upset he quit at the time when Hearst’s castle was one of the few active construction projects in the state of California. I know a great many construction workers who would dearly love to meet a modern Hearst.

To heck with re-labeling the current recession or incipient depression or global big sleep! A much clearer idea of what the real course of action should be is needed. It isn’t encouraging that the few economic bright spots the author describes were during the major blood baths of WWI and WWII. But not even war expenditures are delivering the economic adrenaline rush they used to. It also suggests that perhaps the only time the economy is really kicking is when cannibalism is being practiced. That humanity had to eat itself to feed itself?

Maybe the country is just dying. It is getting old and needs to rest? God help the young. It isn’t fair to them to be pulled into the grave with those more than ready, and maybe more than deserving, to hang it up.

Posted by paintcan | Report as abusive