Is this just the beginning of a depression?

By Felix Salmon
December 10, 2009
at Gluskin Sheff, has another of his very bearish reports out, and kicks off with this observation:

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David Rosenberg, the former Merrill Lynch economist now at Gluskin Sheff, has another of his very bearish reports out, and kicks off with this observation:

The credit collapse and the accompanying deflation and overcapacity are going to drive the economy and financial markets in 2010. We have said repeatedly that this recession is really a depression because the recessions of the post-WWII experience were merely small backward steps in an inventory cycle but in the context of expanding credit. Whereas now, we are in a prolonged period of credit contraction, especially as it relates to households and small businesses.

This rings true to me. The recession vs depression debate is really a matter of semantics, but the facts are that although markets have rebounded impressively, and big companies have regained access to credit, most of the economy and its working-age population will continue to suffer the effects of the current deleveraging for the foreseeable future.

America’s demographics don’t help, either:

The last time we had a consumer recession in the early 1990s, the boomer population was in their early 30s and they were still expanding their balance sheets. The last time we had a bubble burst in 2001 they were in their early 40s. Now they are in their early 50s, the first of the boomers are in their early 60s, and we are talking about a critical mass of 78 million people who have driven everything in the economy and capital markets over the last five decades.

I’m not optimistic that those of us in the post-boomer generation will be able to rekindle America’s historic rates of growth even as the percentage of the population of working age continues to dwindle and the boomers continue to demand the lifestyle to which they have become accustomed.

The point here is that while most recessions are cyclical phenomena, this one could mark a secular turning point — the beginning of the end of America’s hegemony in the global economy and the capital markets. And the turning point has come too early, before the rest of the world has generated enough internal momentum to take America’s place.

None of this means that Rosenberg’s market strategies are going to make money: even when economists are right about the economy, they’re often wrong about what that means for asset prices. But if you think that a happy stock market means a happy economy, it’s definitely worth reading Rosenberg to see just how big the disconnect between the two might be.

(HT: Chittum)


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Has anyone seriously worked out the effects of the Boomer cohort cashing out their financial assets over the next thirty years? I’d think, to zeroth order, that it would tend to keep asset prices down.

Posted by MattF | Report as abusive

Would we all have been better off if the boomer generation had simply had more children?

Posted by AreaMan | Report as abusive

America’s post-war “historic rates of growth” were only possible because we were exporting a lot of stuff. Since we now import a lot more than we export, it will be tough to grow the economy faster than population growth+inflation, as we burn most of the stuff we take out of the ground.

We were able to achieve massive trade surpluses (without resorting to low cost labor and undervalued currency, as China does today) initially because we were the only industrial power left standing after WW2, but then our surpluses were due to huge technological advantages. When the technology we created became commoditized and manufacturable by low cost economies, we invented new technologies. Lately, that’s not happening as much as it used to, and it will keep you post-boomers from attaining the same standard of living relative to the rest of the world that us boomers enjoyed.

I agree that most recessions are cyclical – the positive feedback that is endemic to market driven economies always causes oscillations, but this time the correction is more than just an adjustment – the economy is being re-sized, and unless we invest in new industries than can grow revenues or reduce expenses (think energy), it’s not going to be like your father’s economy.

Posted by OnTheTimes | Report as abusive

So, let’s see. Between 1945 and 1960, US exports averaged about 3.5% of GDP. Between 1995 and 2008, exports averaged about 10% of GDP. Yep, it’s obvious that the large export sector of the US economy drove growth inthe 1950s and 1960s.

Posted by DonCoffin | Report as abusive

Oh, and those massive trade surpluses in the 1950s? Averaged less than 1% of GDP.

Posted by DonCoffin | Report as abusive

I hope you’re not asking this seriously. Refer back to the bad neck-ring analogy. How, possibly, can things get better? The neck-rings came off and the big fat head fell over. Very little real economy getting much smaller at an accelerating rate. Forget about externalities. This is real.

Posted by Uncle_Billy | Report as abusive

Good catch, DonCoffin. People make similar mistakes about the 1930s.

Demographic projections are much worse for China, and everyone sees huge growth there.

Posted by Bob_in_MA | Report as abusive

Oh, and we have not consistently run a surplus since the 1960s and have continuously run trade deficits since 1976. Now that we are hopefully done piling on.

Felix, this really does not make sense:

The point here is that while most recessions are cyclical phenomena, this one could mark a secular turning point — the beginning of the end of America’s hegemony in the global economy and the capital markets. And the turning point has come too early, before the rest of the world has generated enough internal momentum to take America’s place.

If they aren’t ready to take over, then the ‘hegemony’ definitionally is not over. In reality, this is a continuation of a process that has been ongoing since WWII. We have gone from roughly 50% of world GDP in the 50s to just under 25% recently. That rebalancing will continue in at gradual, perhaps faster, rate. And who is going to take over? If your argument is demographic, it certainly will not be Japan or Europe which are in worse shape. China? They have a long way to go. If you get past the public blather from talking heads, wall street happy time analysts, and the silly ‘official’ Chinese economic data and start looking at the facts, China has real problems.

Posted by djackson | Report as abusive

Looking at exports without imports is ridiculous. We’ve had massive trade deficits over the past, I don’t know, at least two decades. Those deficits are financed by either debt or selling assets. Either way, the wealth of the US declines.

If exports accounted for 10% of GDP in 2008, what do you think imports accounted for (don’t include cash flowing into the US to buy assets)?

Posted by OnTheTimes | Report as abusive

I think there is some right on thinking here, and some that is not too good. Our real problem is to get the engine of the country restarted again, since our industries and our government have lost touch with the people. It happened in 1930 with people talking about the pillars of industry and that prosperity is “just around the corner”. Losing the confidence of the people took it down then, and it can take us down now, if business and government don’t get there act together. The AIG mess ruined most peoples confidence in government and the actions of the current administrations in helping the unemployed is still drawining the well of confidence. It will be some time before things pick up.

Posted by fred5407 | Report as abusive

Talkin’ ’bout my generation, eh? Yeah, the peak spending years of us Boomers are behind us. Gen X? Well, just ain’t enough of them. But guess who’s coming to dinner? Not to mention the auto showroom, the subdivision, and the mall. The Millenial Generation. Their leading edge is now in their late twenties and — I know this brings a tear to the eyes of many a Boomer because we like being the focus of attention — they outnumber us. So don’t get too depressed. There’s a lot of stuff they’re going to need to buy.

Posted by ScottP | Report as abusive

It isn’t necessary for any one country to take on the role of economic hegemon. It is that the deindustrialized United States, with its crippling debt, declining wages, and high unemployment can no longer fill the role.

Posted by n4rky | Report as abusive

Felix – check this! Wyuy39ikI/AAAAAAAAL8g/Cp4XVVbTmqY/s1600/ worldgdp.jpg

In 1975 the US was at 26.3% of world GDP. In 2009, the US was at 26.7% of world GDP.

What has happened? Asia has risen sharply but the EU has diminished sharply. America has held its own.

America’s demographics are not bad in the long term, I say.

Please have a look at the following chart: atechart_stretch.PNG

There is a rut after the baby boom but after that the baby boom echo is just as big as the baby boom!

Not only that, but immigration (not included in that chart) has been large and growing. In short, the US labor force is larger than ever. Add to that the fact that folks are in knowledge jobs where they can work longer, and you have a strongly growing workforce, not a shrinking one.

Compare this to nations such as Japan, Germany, Italy and others. Those are the nations which must truly fear for their futures. Even China is facing an inverted population pyramid in only a generation.

Meanwhile, America has been *the* destination for people all over the world for two centuries running and that trend is only increasing.

A thought experiment: If everybody on the planet were given a chance to snap their fingers and be a citizen/resident of any country what would happen? I do not know how many people would appear be in the US, but I expect it is several billion at least. I say this not as nationalistic chest-thumping. We are a nation of immigrants. My mother is a first generation immigrant from Austria, my wife was born in Japan. You my friend enriched us from abroad too.

We are facing the perfect storm right now, but it is cyclical, not secular.

Posted by DanHess | Report as abusive

!936 through 1950s the U.S. was 51 to 53 percent of world GDP. Both during the Great Depression and through post WW II years.

1970 Nixon cancels Breton Woods(gold standard). Inflation takes off globally. Most scales to adjust economic data for inflation to my mind are suspect. I don’t believe the economic growth numbers.

Prolonged large trade surpluses and deficits put economies equally at risk for contraction and other economic harm. Balance of trade should be what the term implies, balance. I take Adam Smith’s word for it…”The Wealth of Nations”.

The stock market gained steadily through the 1930s. The American people did not. This ultimately was a function of a credit collapse. This is what has happened now.
We also foreclose 275,000 homes a month. 1933 saw that many foreclosures for the year. In 1933 we were the worlds largest producer and exporter of crude oil. We are now probably still the worlds biggest importer of crude. The Great Depression didn’t hit bottom until 4 years after the crash of 1929. We are little more than a year out from the crash of 2008. Our governments debt load is substantial compared to 1933 to 1938. Does anyone really believe we are out of the woods yet on this one?

Posted by eddieblack | Report as abusive

It’s over.

Everything has been tried for the bankers benefit and they will hold on to the largess of the dumbed-down American tax payers.

You should all straggle-around and check out the nearest dumpster for what is left of your so-called greatness.

I’m hopping you’ll meet your brethren, King Rat, on the way down into the stinking refuse that is your discarded ideas about yourselves: Who you are, who are you not and who you can never be as long as you persist in your delusion that you can put in two parts and get back four.

It’s all about “getting away with it”, isn’t it?

This whole culture has undermined itself with its inability to talk the truth because it doesn’t sell anything.

It’s boring, it’s what we knew as children but it just doesn’t sell, does it.

No way.

So, go fuck yourselves and die in your stupid dreams about yourselves while there has been over 80,000 chemicals created with no serious testing as to health concerns.

Then there’s the endless churning factory of birth:
children dropped on the dirt like it was some sort of
act of excretion.

Ha, what a fucked up place while Tiger Woods rushes to his lawyers to save his advertising image and the standing Government pukes it’s useless, stunned, deer-in-headlights crap about everyting.

You all know you suck as humans, as so-called profesionals, as so-called parent, as so-called people, your all just products.

Best thing about it all is you come in such bright and lucent wrapping.

It’s the most wonderful time of the year-yeah!

Ha, go fuck yourselves, my brothers and sisters, your such translucent shit, it’s unbelievable, ha!

Merry Christmas or Merry Purim or Merry Buddha or Merry “Fuck it”. woo hoo!

C’mon, let’s pray.

Posted by Whatzupwitdat | Report as abusive

It is difficult to fathom where the belief that the US is going to ‘regain its greater glory’ springs from. The last figures that I consider credible before the crash put the US at 22 percent of the world economy. Obviously that wasn’t sustainable.
What would have been sustainable? Ten or eleven percent? Who knows, and anyway it matters little as that was before the crash

What percentage of the world economy is the US now? I recently saw figures that indicated that 70 odd percent of the US economy was ‘retail’. That is selling crap that you import, but cannot pay for.

A fair picture of the US is that collectively the population has maxed out its credit, and the country’s credit is being held up by those who having invested heavily in US government ‘paper’ have to support the illusion long enough to unload as much of the worthless ‘paper’ as they can dispose of.

One example is China is out buying access to resources wherever it can find them, and whatever price they pay, as they are paying with their US ‘paper’, the price is cheap.

The US has been closing factories and sending the jobs offshore for what, thirty or forty years. Your factories closed because they were obsolete, with some notable exceptions, so were the products and the labour force had priced itself out of the market.

Today you have no modern factories, it is ‘others’ where have the ability to design super efficient plant, nor does the US have the skilled workforce the operate such factories, and even if you did, getting them to work at competitive wages would be all but impossible. Assuming that you can overcome all that, you would only be in a position to compete on an equal playing field against already established competition.

If you were looking to invest in a start up company with those prospects you would look elsewhere.

What has the US got to export? What raw materials do you have?

If the US was a company, would you invest your money in it, and if so, why?

That the $US will lose its status as the reserve currency is a certainty. For some considerable time there has been discussion on this issue, and the fact is that various countries have already begun moving to avoid utilising the $US. Notably China and Russia who recently agreed to conduct all trade between them in their own currencies.

Middle East oil producers have long been buying gold as opposed to US ‘paper’, and increasingly oil contracts are being written in other than the $US. Notably in Euros.

This leaves as the US as a ‘superpower’ in terms of its military, but ‘broke’. With the changing face of warfare what is regarded as the ‘awesome’ military technology, built to face another enemy in another time, will be seen as nothing but a pile of expensive junk.

Recently I threw out a Epsom colour printer, $800 odd worth. When I bought it, it produced a better image than the ‘Proof printer’ that a printer friend paid $30 odd for. Today I can buy a better printer, better in all respects for less than $100.

Similarly time and world has passed the US by.

Posted by peterhindrup | Report as abusive