Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.

 This will be a long, ugly and nasty U-shaped recession lasting 12 to 18 months, not the mild 6 month V-shaped recession that the delusional consensus expects.

I'd say that's wildly optimistic given his predictions for the meltdown of large swathes of the banking market, and collapsing consumption. I'm not sure it's goin g to be U- or V-shaped, but it's going to last a lot longer than this. There's just too much cleanup needed, and the way down always destroys more than would be purely needed just to eliminate the accumulated imbalances: there's an overshoot on the way down too.

 Thus, equity prices will fall by about 40% relative to their peak. So, we are only barely mid-way in the meltdown of stock markets.

That's similarly optimstic. I still expect the Dow Jones to go down to 4,000.

The rest of the world will not decouple from the US recession and from the US financial meltdown; it will re-couple big time. Already 12 major economies are on the way to a recessionary hard landing; while the rest of the world will experience a severe growth slowdown only one step removed from a global recession.

I'm still not convinced of that, but time will tell. Many economies, especially in Europe, were not really pulled up by the US during the "boom" times, and I think they will be similarly insensitive to the US and UK crunch. And emerging economies are linked to the EU as much as they are to the US (witness Chinese exports, for instance) - notto speak of their own growing spending. Note that the Middle East and Russian oil exporters mostly spend their money in Europe.

Given this sharp global economic slowdown oil, energy and commodity prices will fall 20 to 30% from their recent bubbly peaks.

What "bubbly" peaks? But given that whatever the level of oil prices, people predict that it's a "bubble" and that prices should go, or will go 20% lower, this is an essentially meaningless prediction. I'm happy to stipulate that we'll regularly see oil prices 20% below a recent peak at various times...

Available exports of oil are shrinking as producers burn more and more of the stuff at home.

The Fed will have to cut the Fed Funds rate much more - as severe downside risks to growth and to financial stability will dominate any short-term upward inflationary pressures. Leaving aside the risk of a collapse of the US dollar given this easier monetary policy the Fed Funds rate may end up being closer to 0% than 1% by the end of this financial disaster and severe recession cycle.

It's called (as per Keynes) pushing on a string. I tend to agree with him that the US will choose inflation and currency devaluation as the most discreet way to default on their burdensome debt, but the risk is indeed that of a continued drop in the dollar, and the corresponding rising long term rates (those not set by the Fed) once this goes too far.

But his points flaggin the risk to the regional bank system, the unsustainability of the big US investment bank models, and the risk of an overall financial meltdown are quite in line with what I epxect too,yes.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Jul 16th, 2008 at 10:55:50 AM EST
description. Roubini is one of the few who has predicted the current symptomatic stages (along with John Williams), but his analysis is now reaching areas where the Common Wisdom of capitalist-oriented economics experts is failing/will fail. Shock doctrine and all, you know.

Karl Rove is correct about at least one thing - his group acted, while the experts studied the results. They changed the parameters to such an extent that your 'Anglo Disease' is more explanatory and predictive than any of their bromides and rules-of-thumb.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Wed Jul 16th, 2008 at 11:56:56 AM EST
[ Parent ]
All that Karl Rove, Greenspan and the rest have done is hasten the inevitable IMHO....

If the Anglo Disease had not broken out the result would have been the same, except we may have had ten to twenty years longer.

Maybe, in a strange way, they might even have done everyone a favour by precipating and intensifying the crisis.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Jul 16th, 2008 at 12:36:04 PM EST
[ Parent ]
here we are, and it's not ten or twenty years later.

I quietly agree with you that the precipitation and intensification of the crisis is a favor to the world in that it will bring an intense struggle sooner, but it's difficult to look into the barrels of guns and not feel some anxiety for both oneself and all of the other potential victims - not to mention for the shape and content of the next outcome in our never-ending cycle of cause-and-effect.

Good of them, too, to be so audacious and rapacious that they may have bankrupt their brand. Now all we need is a program (that's all - just a good program). Roubini, no matter the salience of his analysis, will not provide it. Guess we'll have to do it.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Wed Jul 16th, 2008 at 03:28:32 PM EST
[ Parent ]
Well, the program is pretty obvious. That is both the encouraging and frustrating feature of all this. Frustrating because it's not being done.

-A massive, government-managed, program of infrastructure investment with the target of reducing environmental impact of our activities. Take no prisoners there: any tax spent that way will be repaid tenfold in reduced costs later on. And by all means tax the externalities -then redistribute some so that the poors are not negatively affected unless they worsen their environmental impact). Invest all of what's left.

-Healthcare for all in the USA.

-Tax the revenue from money at least as much as the revenue from work.

-Get rid of all the exemptions from regulation (hedge funds may complain that their business model would be jeopardised if they had to be transparent about their transactions, but hey, armed robbers similarly may complain that their business model is jeopardised by thievery being illegal. If you can't do your business within the law, the first reaction ought to be changing your business, not the law).

I could add other chapters of course. But anyway, the first is the main one to get us out of the big mess. It would have such a positive impact that many, many other things would stem out from it.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Thu Jul 17th, 2008 at 03:35:04 AM EST
[ Parent ]
I think we need to redefine the term "bubble" relative to commodities, in particular energy commodities, and further note that spot oil is up 65% in euro terms since the beginning of 2006, as opposed to 125% in USD terms, which is a currency issue more than a commodity price issue.

When we price commodities in Euros, I agree with Roubini we see a "bubble" of maybe 10-20% (who the hell knows - but demand decline expectations will almost necessarily prompt a decline in futures prices) in euro terms, down to maybe EUR70/barrel, which itself represents still 35% unit price growth in a relatively short period of time, indicative of rising fears of peak oil filtering into market expectations. And that will, in the long run, continue to rise as peak oil expectations are increasingly priced by markets. But, I am still pretty convinced that this is more an underly USD issue than a commodities price issue, and since we see everything priced in USD, we get these constant "holy shit" moments when in fact all that's happening is the US economy is starting to be valued, like the average Argentine eventually, at what it's  worth rather than what it thinks it is worth.

So, we may get some oil price relief in the short and even perhaps medium run, but not the Americans. The continuing dollar decline due to inflationary fed policies to bail out the wealthy shareholders of US financial institutions will ensure that the dollar continues to go nowhere but down.

100% with you on decoupling. Some economies have made great strides to integrate, at their peril, into the US economy, in the name of globalisation, headlined by the 51st state outre-manche and their junior "no voting" partners to their geographic left. But not all. There will be demand strains of course, but considering these have already been priced into EUR-denominated exports via a tanking dollar over the past 2-3 years, it's hard to imagine those strains getting worse, especially if you consider the dual economy in the US, that high SES americans act differently than low SES americans, that they exhibit, generally speaking, demand inelasticity for the types of consumer products they tend to buy, and that we are in no risk that the us will figure out how to change its income distribution to an extent where that inelasticity is impact anytime soon. The upper-middles may stop buying Louis Vuitton in increasing measure though as the second and third income deciles in the US get hit by the coming long )I'm thinking Japan-style) recession. Still, markets for those same goods are growing rapidly, in Russia, in the PRC and now, given commodities prices, even sub-saharan Africa.

Imho, we are not going towards a global economic recession so much as we are entering a global economic pivot. How we position ourselves relative to the shift in economic power, away from North America and towards the developing world (Brazil, Argentina, PRC, India, Viet nam, Sub-saharan Africa) and the commodity producers in the middle east will determine our future economic prosperity.

Personally speaking, as far as France goes, as well as most (but not all, noting Spain, Portugal and Ireland in particular as being at risk) the EA-15 economies, I am not exactly confident, but definitely cautiously optimistic.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Wed Jul 16th, 2008 at 12:38:45 PM EST
[ Parent ]
Along with the Economic Pivot we are facing Peak Oil, Peak Water, Peak Food, and Global Warming.  Together these are the necessary conditions for the collapse of 'Normal' into a new Fitness Landscape with its own Emergent Properties and Attributes.

Think Easter Island or Chaco Canyon writ large.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Wed Jul 16th, 2008 at 01:48:36 PM EST
[ Parent ]
could up and leave. Perhaps they did.  

But what happens when there is no where to go?  That's the Easter Island scenerio, the one that we are--incredibly, for whatever reason, consciously or unconsciously--striving with all our effort to bring about.  

It is now the most likely--though far from sure!  

The Fates are kind.

by Gaianne on Fri Jul 18th, 2008 at 01:25:13 AM EST
[ Parent ]
Both areas depopulated when the carrying capacity of the land collapsed.  Easter Island seems to have depopulated through starvation and war; there may have been some people who got off in the last canoes -- nobody knows.  Chaco Canyon depopulated by internal warfare, as there are instances of Chaco-like structures on easily defended buttes and mesas, but it seems most of the people scattered over thousands of square miles.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Fri Jul 18th, 2008 at 03:03:47 PM EST
[ Parent ]
The Easter Islanders seem to have been isolated from other human societies, but did range hundreds of miles to the nearest (uninhabited) atoll.  

there may have been some people who got off in the last canoes  

THERE is the makings of a story.  They would have been adventuring into the (for them) unknown.  Say, a team of dolphin hunters out on the ocean thinks about what they are going back to, and what is bound to happen, how their catch is really not going to make any difference . . . and decide not to return . . . Brings to mind Kim Stanley Robinson's "Icehenge."  

The Fates are kind.

by Gaianne on Sun Jul 20th, 2008 at 10:25:11 PM EST
[ Parent ]
Nothing will begin to change long term until the pain is so acute; we demand the cleanup of the corruption in both government and business and make social justice the highest priority of our society. Free enterprise is fine as long as it is not detrimental to the basic needs of most of the society. In order for this to be fathomable; we will need a completely new reulatory structure.

The corruption is so entrenched there has been no quid pro quo reregulations in exchange for the bailout of the insolvent finance system.

Until we are forced to make demands and 'man the barricades' ; nothing will happen structurally and all we will be doing is prolonging a very sick capitalistic system.

by An American in London on Fri Jul 18th, 2008 at 08:49:28 AM EST
[ Parent ]
All, not untrue. But the last 8 years have shown that this administration  has whored for those who listened to no one but the Viagra of their own greed as it shifted its Rapacious Express to plaid...and the last year has shown that the Democrats are both indentured to the system and/or too timid to call Bush's bluff. They haven't pushed for real change either.

Whether the dems will change patterns when they have control of both congressional houses and the presidency will have to be seen once they win it.  I tend to doubt it as too many of them come from pretty conservative "country right or wrong, dressed in the flag, we saved the Philippines and never had an empire" backgrounds.

Meanwhile, even conservative hedge-fund pushers like John Mauldin is calling for regulation of markets. I'll quote one part of this week's letter, but he made an earlier comment about regulator not enforcing rules.

He also points out that the numbers were being given are wrong, that employment is worse, housing starts are lower. And, something no one here has mentioned yet, that US imports are down, and exports are up. I suppose one would suspect this as the dollar drifts into 3rd world status.

The World Will Not End
And while we are on regulators, it is time for Bernanke and Paulson and SEC chairman Cox to force the credit default swap (CDS) market to move to a regulated exchange. If there is a major risk to my happy news scenario at the beginning of this e-letter, it is the credit default swap market collapsing. That is why Bear Stearns had to be rescued, and why other firms like them are too big to fail.

If the CDS markets were on an exchange like any futures contract, Bear could have been allowed to fail. It would have been a sad day, but the Fed would not have had to risk $30 billion. Greenspan was wrong when he said these derivatives did not need to be regulated. They are good for the markets, and I think they are necessary. But let's put them on an exchange where there is clear transparency and the entire economy of Western Civilization is not put at risk by some cowboys who decide to leverage up.

Never underestimate their intelligence, always underestimate their knowledge.

Frank Delaney ~ Ireland

by siegestate (siegestate or beyondwarispeace.com) on Sat Jul 19th, 2008 at 05:31:43 AM EST
[ Parent ]


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