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What do you call a long, shallow depression? A crater?

by Colman Mon Apr 28th, 2008 at 11:30:04 AM EST

A crater maybe? Wolfgang Munchau writing in the FT today, is happy to say that the subprime crisis is coming to and end.

But this would be disingenuous. It is no accident that our multiple crises – property, credit, banking, food and commodities – have been happening at the same time. The simple reason is that they are all part of same overriding narrative. The mother of all these crises is global macroeconomic adjustment – a rare case, incidentally, where the word “crisis” can be used in its Greek meaning of “turning point”.[...[
He enumerates the assorted bubbles that caused the problem here: he thinks the US and UK property markets might pick up by 2012 or so.
The really important question about the US economy is not whether the official recession starts in the first or second quarter, but how long this period of economic weakness will last overall. In Japan and Germany macroeconomic adjustment of similar scale took more than 10 years, starting in the 1990s. Even if you believe that the US is structurally stronger, the country will probably not replenish its savings in a couple years.[...]

Obviously inflation would make everything worse, and our future scenarios will depend critically on the inflation outlook. A rise in inflation might alleviate the pressure on some mortgage holders, but is not a good environment for a country to build up savings. If higher inflation were tolerated by the central bank, it would clearly prolong the macroeconomic adjustment process. If it were not tolerated, interest rates would go up and we might experience a re-run of the 1980s. It would get a lot worse before it got better.

Either way, adjustment would take time. Would you really want to predict that under any of those scenarios, the worst was already over for a fragile financial sector? There may be no global financial meltdown. But our multiple crises could easily return with a vengeance, like one of those bloodstained villains in a horror movie who rises to fight his last battle. [...]

Our macroeconomic adjustment is not going to be as terrible as the Great Depression. But it might be longer.

I doubt that Europe is going to escape this one easily, and it's going to make it harder to persuade people that they need to change the structure of the economy to deal with global warming and resource constraints if they're more worried about putting food on the table. Or maybe not: how can we insert some sanity into the narrative?


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There's something entertaining about the slowly rising pitch of the columns in the FT.
by Colman (colman at eurotrib.com) on Mon Apr 28th, 2008 at 11:31:18 AM EST
I already expalined my experience i na plane.. the FT looked like another newspaper altogether...I agreed with almost everything.... there are some serious guys with some knowledge...

But economists in the high echelons of academia are going towards our discourse..more and mroe economsits are looking at things very different than in the 90's....thanks god...theye ven comment on peak oil and hether it is a demadn or offer problem... and on the effects of high prices.

A pleasure

I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude

by kcurie on Mon Apr 28th, 2008 at 12:17:20 PM EST
[ Parent ]
the information has long been out there in the FT - they have always provided the facts. What is new is that you don't have to dig them up yourself anymore from isolated articles, they are slowly being integrated in the columns of the "generalist" pundits that generate/formalize conventional wisdom.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Apr 28th, 2008 at 01:16:29 PM EST
[ Parent ]
They are also assuming an economy can recover when oil prices are going through the roof. Sorry bub, that single issue changes all your rules.

keep to the Fen Causeway
by Helen (lareinagal at yahoo dot co dot uk) on Mon Apr 28th, 2008 at 11:37:56 AM EST
It's quite possible the crater will be enough to drop oil prices way back again for a while by demand destruction. Nowhere near previous prices, but much lower than currently.
by Colman (colman at eurotrib.com) on Mon Apr 28th, 2008 at 11:41:43 AM EST
[ Parent ]
The answer to that is: an emphatic NO!
by Quentin on Mon Apr 28th, 2008 at 12:17:38 PM EST
[ Parent ]
Why?
by Colman (colman at eurotrib.com) on Mon Apr 28th, 2008 at 12:19:31 PM EST
[ Parent ]
Because the economy for most of the middle class has been in trouble for twenty plus years and whatever secure feeling the middle class was able to take away from the 'growth'(greed) of the economy of recent years,  was due to their conspicuous consumption based on their ability to have higher limits on their credit cards and the ATM usage of their home equity. Their credit lines are being decreased dramatically and unfortunately their income will not be increased. Therefore they will no longer be the engine of the 'growth' of the economy for a small group of people and the illusion of this 'faux growth' will no longer be accepted by the middle class. No substantial recovery for many years until the inequality of income is addressed.
by An American in London on Mon Apr 28th, 2008 at 12:42:23 PM EST
[ Parent ]
I thought we were talking about the effect of a long-crisis on oil prices. Quentin seems to think the demand destruction will be insufficient to reduce them substantially I was wondering why.
by Colman (colman at eurotrib.com) on Mon Apr 28th, 2008 at 12:44:22 PM EST
[ Parent ]
Whether supply decreases or not, the direct and indirect expenses of capturing petroleum are already increasing: more difficult environments; the circular effect of increased 'energy' costs on production of tools, equipment, and supplies; the circular effect of increased 'energy' costs on transportation of oil; the lower EROI on potential 'alternative' sources (shale oil, tar sands, etc.).

Then, of course, there is the standard class analysis. Oil is oligopolistic, and the oligarchs have a fairly consistent history of trying to husband their interests. I would say that this is the more important aspect of the question; 'market forces' are secondary.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Mon Apr 28th, 2008 at 03:46:43 PM EST
[ Parent ]
I think so too. The high prices will be maintained, in any way, for the benefit of the producers. The recession, no matter how deep, will be of no interest to them. Just cut production. 'Market forces' mean: I have something you need to stay alive and I can set the price. Even if Coleman is right and prices go down because of less demand, the previous level of demand will not/cannot be 'destroyed', it will only lie dormant, so to speak, as the bosses (1990s  movers and shakers, ha!)are noy planning to kick the fossil fuel addiction. Tomorrow as the recession recedes, maybe partly owing to reduced energy prices, the price of energy will rise in parallel with the recovery. Any recession that causes prices to go down substantially over a long period will definitely not be a nice experience for most people around the world. The price is now structural. But everyone knows the solution: reduce the consumption of fossil fuels. Easier said than done, maybe. Where there is a will, there is a way. Maybe. Doomsday: the price of oil reflects devaluation and inflation, the price of food is catching up, and the prices of all other goods will soon follow suit. This implies that each individual will soon need twice as much money as (s)he has today to live at the same standard. And where are we going to get this money? I have no idea. Let the printing presses and the good times roll.
by Quentin on Wed Apr 30th, 2008 at 03:48:29 AM EST
[ Parent ]
what is there to add? "The price is now structural." Well formulated.

paul spencer
by paul spencer (spencerinthegorge AT yahoo DOT com) on Wed Apr 30th, 2008 at 04:51:55 PM EST
[ Parent ]
because the West doesn't drive oil demand anymore:

  •  a "recession" in China means 5% growth instead of 11%, and 5% growth still means increasing oil demand by them;

  • the countries with the biggest oil demand increases are pretty much all oil producers (Saudia Arabia, Iran, Russia), and they subsidize demand, or are otherwise booming thanks to high oil prices - thus demand over there will continue to go up;

  • and back 'at home', demand destruction is not really happening. In the 70s, the power sector and industry cut sharply on demand, but households not so much; even in a sharp recession we should only expect  demand to go down by a few percent points, not enough to stave off price increases

given the elephant in the room: stagnating production and skyrocketing production costs...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Apr 28th, 2008 at 01:14:37 PM EST
[ Parent ]
and back 'at home', demand destruction is not really happening. In the 70s, the power sector and industry cut sharply on demand, but households not so much; even in a sharp recession we should only expect  demand to go down by a few percent points, not enough to stave off price increases

short term I agree, but over the longer term I suspect that demand destruction will occur as people gradually replace lower mileage vehicles with more efficient ones.

by MarekNYC on Mon Apr 28th, 2008 at 01:26:03 PM EST
[ Parent ]
How long did the 70s oil shock last?
by Colman (colman at eurotrib.com) on Mon Apr 28th, 2008 at 01:28:45 PM EST
[ Parent ]
A decade. And it happened in two spikes with the the first being followed by a retreat in oil prices limiting the effect (oh, ok, that was just an aberration, no need to change). The latter part of that period did see significant gains in vehicle fuel efficiency, but the two decade long slump in fuel prices that followed quickly put an end to that, at least in the US. In Europe the policy of keeping gas prices high helped preserve the trend, but that's been partially counterbalanced by the simultaneous completion of the switch over to universal car ownership and the shift to a more American car based social geography (shopping outside city centers and suburbanization)
by MarekNYC on Mon Apr 28th, 2008 at 01:37:48 PM EST
[ Parent ]
If we maintain a "bumpy plateau" for some number of years I think we'll see serious price volatility in both directions. Remember what the Asian financial crisis did to the price of oil - and  the economic "crater" we're descending into will likely be worse.

you are the media you consume.

by MillMan (millguy at gmail) on Mon Apr 28th, 2008 at 01:39:26 PM EST
[ Parent ]
a "recession" in China means 5% growth instead of 11%

I should have added that there is no reason to believe this will continue indefinitely.

you are the media you consume.

by MillMan (millguy at gmail) on Mon Apr 28th, 2008 at 02:41:50 PM EST
[ Parent ]
Even if you believe that the US is structurally stronger

What could he mean?

*Lunatic*, n.
One whose delusions are out of fashion.

by DoDo on Mon Apr 28th, 2008 at 02:19:26 PM EST
"The economic fundamentals are sound" or something like that was the mantra of the chattering classes between the Crash of 1929 and the start of the Great Depression.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Mon Apr 28th, 2008 at 02:53:26 PM EST
[ Parent ]
Our macroeconomic adjustment is not going to be as terrible as the Great Depression. But it might be longer.
Time to dust off the history of the Long Depression
The Long Depression (1873-1896) affected much of the world from the early 1870s until the mid-1890s and was contemporary with the Second Industrial Revolution. At the time it was regarded as the Great Depression, until the more severe Great Depression occurred in the 1930s. It was most notable in Western Europe and North America, but this is in part because reliable data from the period is most readily available in those parts of the world.
Let's note that the start of the Long depression coincides with the Bank Panic of 1873.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Mon Apr 28th, 2008 at 02:52:04 PM EST


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