Will this Pass Over?

Will This Pass Over?

Mah nishtanah ha-laila ha-zeh mi-kol ha-lelot? Why is this night different from all other nights?
Seder-ing the current situation: why is this recession different from all other post-WW II recessions. (1) In the first place there is loan toxicity the likes of which we have never seen, not even in the 1930's No one knows whether the worst is over, bailouts notwithstanding. [On the hurricane scale, I would rank this as Category 5.]

(2) Next this downturn is more international than any other, including not just Western Europe, but also Japan, South Korea, India, China and the OPEC countries (since the price of oil has plummeted)–and Brazil and I assume other places in South America and places I haven’t read of or followed. This means that exports, which were weak anyway, at least compared to imports–our trade deficit was unprecedented–cannot help us and will probably diminish and hurt us, especially since the dollar is incredibly strong against the Euro, one of which cost us about $1.60 a few months ago, and which now cost us about $1.27. (An ideal time to go to Europe, if you’re not broke.) [Category 3]

Third (3), consumption expenditures, which were at the heart of the "boom," and boom is used advisedly since the economy was only creeping upward, with most of the benefits going to the well-to-do, has plummeted, with household retail names going bankrupt–such as Linens & Things and Circuit City, with General Motors months or possibly weeks away. [Category 5]

Fourth (4), recessions since 1945 have been characterized by inflation bad enough that the Fed created the recession, by raising rates. Recovery occurred after they lowered rates. This time, inflation was not that serious and rates were not raised that high. Lowering them to 1% (with still another cut expected) has not increased loans much if at all. In other words, monetary policy is all but totally ineffective. Without going into it, that’s what’s meant by "liquidity trap." [Category who knows what, but high.]

Last (5) housing. Nothing like this since the thirties. Prices, as I read it, have fallen by about 10%, and have another 10% to fall. This, and the huge number of impending housing defaults, means that housing construction will be feeble for some time to come. (New construction for commercial real estate will undoubtedly also be equally feeble. [Category 5]

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The Times, on days after the markets are open, has a 5 x 2 graphic, with a title "Economic Indicators." Of recent, Real (adjusted for inflation) Economic Growth, as I suppose most know, turned negative. Housing Starts have been dropping steadily and are less than one half of what they were a few years ago. The change in Retail Sales, from a previous year, have been dropping for years and are now negative–this is really rare. Capacity Utilization, the percentage of factories being used (or, inversely, lying idle) has plunged.

Employment is now less than what it was a year ago, and, whereas for about 3 years, the increase in employment had been getting smaller, it is now declining. Manufacturing has recently plunged. The change in Construction Spending, from the previous year, has been dropping for years, but remained positive, but now it is considerably less than the previous year. Real Hourly Earnings declined for a number of years after 2003, then rose modestly for about a year but for the last year has been declining and for the last months declining at a faster rate. And the Leading Indicators–which are used to foretell the future–had shown a rate of increase, which had been declining since 2003, but is now actually declining this year, 2008, and recently declining at a much faster rate. No good news, period.

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Consumption is being hurt for four reasons, as I see it. First, there are the cutbacks by those who are earning less (or no) income and whose assets (in stocks and in the value of their houses) have declined,); second, there are those who cannot borrow any more against their houses to spend as they did during the earlier 2000's (and in some cases cannot use their credit cards as much); third, there are the retired whose savings have been partly lost–whether held in stocks or other assets owned outright or in pensions declining in value; and finally, there are many saving for a rainy day, fearful that they may be fired soon or simply believing caution is imperative in rocky times like this. [When it rains in England on St. Swithin’s Day (July 15), it is supposed to rain for another 40 days. I’m afraid that after St. Lehman’s Day, it is going to rain for another two years, if we’re lucky.]

A tax cut for many of these persons will be used to pay off debts or otherwise saved, but not spent (or much of it will not be spent). It is not an effective (or, dollar for dollar, efficient) stimulus. [However, for political reasons, Obama should, nonetheless, go through with his tax cut for those earning up to $200,000, but perhaps he should avoid unnecessary political wrangling by holding off his increase for those earning over $250,000, since their tax cuts will be rescinded in 2010, as required by the law enacted in 2001. For this group, perhaps, he should simply let the law take its course, avoiding a bitter but ultimately unnecessary fight.

Thus we are left with this conclusion: Since investment is weak, and growing weaker, and increases in exports are not likely to happen and if they did, they wouldn’t be that significant, and consumption is crashing, all that remains, to get us out of this mess, in a time span that is not disastrous, is a massive government stimulus program–i.e., spending. [This will discussed in a separate entry.]