Saturday, October 04, 2008

How Long Will the Coming Depression Last?

Many of the financial calamities/unwinds covered here in the past three years have already come to pass; many more are about to. As the global financial system unravels, I will do my best to offer information and analysis which might help you weather the coming financial storms.

On Wednesday I presented technical evidence that the U.S. stock market will follow its global brethren like Russia and China into 60% declines from its peak in 2007: The Stock Market Limbo: How Low Can We Go? (October 1, 2008).

On Thursday I covered Why a Depression Is Already Baked In (October 2, 2008).
And yesterday (still posted below) I offered evidence for The Coming Destruction of U.S. Bonds (October 3, 2008).

Two astute readers have posed one of the key questions of our era: how long will the coming Depression last? That question will be the theme of next week's entries, for no one analysis is broad enough or deep enough to address that question.

Longtime correspondent Cheryl A. posed the key question thusly:

How long do you think the depression will last? I've seen estimates of 2-10 years, after which the government monetizes all the debt thereby cutting the value of the dollar in half.
Hopefully your postings will save some people from total devastation.

Knowledgeable reader John M. provided insightful context for the query:

Something has been on my mind lately...

I'm thinking this recession started in January (when the monthly job losses started and when ISM non-manufacturing went below 50), but if you look at the monthly job loss numbers, the ISM numbers (the non-manufacturing number said we were in *expansion* mode, i.e. above 50, in April, May, August, and last month), etc., this looks like a mild recession SO FAR compared to past recessions, even the 2001-02 downturn. In the first 9 months of this year, we've only lost 760k jobs. In the first 9 months of the 2001 recession, we lost 1.6 MILLION jobs. In the 1974 recession, we lost 2.4 million jobs.

Nouriel Roubini (who has predicted this whole credit crisis with eerie accuracy) expects this recession to last about 16 months, so if it started in January, it will end somewhere around April 09 in his opinion. Yet the job losses, ISM numbers, etc. are still not that bad...yet...

According to all the "official" data out there, this recession is a baby kitty cat so far.

With all this talk of a coming depression, I'm a little baffled at the moment. If this is going to be a depression, the ISM non-manufacturing number needs to be dropping into the 30s eventually, from 50 now. Also, in a 1930s-style depression, continuing weekly unemployment claims would be in the millions instead of 500k like now. With such a steep worsening of data needed, which would take time, this would last a lot longer than April 09.

What do you make of this odd data? This recession has been running a while, yet it still seems "mild," milder than the last one. Seems like the economy needs to really accelerate its slide down the slope for this to match the 2001-02 downturn, much less the 1974 or 1930s funks. Thank you, Cheryl and John. Just as a sort of appetizer, let's cover a few points which suggest the Coming Depression will exceed all expectations for depth and length:

1. government data (inflation, unemployment, etc.) is misleading/bogus so it makes a poor data set to work from
2. the debt load for consumers, government and private-sector/corporate is unprecedented, much higher than '74-81 or even the Great Depression. (see chart in the entry on bonds)
3. the U.S. no longer has unlimited cheap oil
4. the expectations of the U.S. citizenry ("I was promised", "I deserve this", etc.) have risen to astounding heights, lifting denial and entitlement to levels so far beyond the reality of what is sustainable that a psychological "crash" is inevitable.

As longtime correspondent Riley T. recently observed: "Greed is a wonderful motivator but fear works much faster." I think the deep wisdom of this observation is about to play out in grand fashion.

The key driver of the collapse in personal income will be job losses. Asset depreciation (i.e. plummeting real estate, stock and bond values) will gut the net worth of all American households who hold these assets, but even worse will be staggering job losses in virtually every sector of our economy.

I recently made the case that some 30 million of the 135 million jobs in the U.S. were superfluous. I continue to see that as a realistic target for job losses: an unemployment rate of about 20-25%.

I take no joy in stating this. As a construction worker in the severe recessions of 1973-75 and 1981-83 I was laid off and barely scraping by for long periods. Any debt/credit-based employment like housing is always the first field hit by the layoff scythe.

Just off the top of your head: what do we have little need for more of? How about furniture, mattresses, light fixtures and loans, just to name a few?

How about what we could easily do without? How about exotic foreign travel, shopping excursions to N.Y., L.A. or S.F., ice cream, frappacinos, "fine dining" of the sort where main courses for $35 are considered "reasonable," hundreds of specialty wineries producing $40-$50 bottles of wine, artsy programs paid for by tax dollars, non-profits doing nice things with donations, gew-gaws for pets, spa treatments, lawsuits with unknown odds of success involving plaintiffs with no money, cosmetic surgery, "financial services," having your nails done, costly haircuts (cut your kids' hair yourself), house cleaning services, dog walkers, travel consultants, kitchen remodels, Mercedes vehicles, or indeed, any new vehicles, now that any decent vehicle lasts 10 years with minimal maintenance, 6-foot long BBQs, "entertainment centers," more iPods, kids' toys, or clothing of any sort or type or style, given that you can buy heaps of clothing for a few dollars at garage sales or thrift stores?

This is a tiny selection of literally thousands of goods and services we can easily do without, and indeed, did do without a mere generation ago, when now-commonplace luxuries like $100 per person dinners and hip surgeries for pets would have been reserved for flamboyant millionaires.
It is, of course, a feedback mechanism: the more jobs which are shed to maintain solvency for the business or government agency, the less consumer income will be available to buy goods and services.

Greed is a wonderful motivator but fear works much faster. As a business owner, solvency requires that you keep expenses below revenues. As a government manager, you are required to align expenditures with tax revenues; only the U.S. Treasury can print money and run stupendous deficits.

We need to wake up to the reality of just how fast fear can work. Vehicle sales of Toyotas fell by 30% last month. I have read that "emergency committees" within some local government/universities are planning for 30% declines in funding. A third less revenue eventually means either a third less employees or a third less income for employees.

Many of us have long noted that the entire last decade of "prosperity" was bogus, as it was fundamentally based on credit/real estate/asset bubbles, during which people extracted equity and freely spent it. Those days are over, never to return.

Lastly, please re-read Mark Your Calendars: The Crash of October 7, 2008 (September 22, 2008) this weekend.

Thank you, Grant P. ($15), for your generous donation to this site, and for your kind encouragement. I am greatly honored by your ongoing support and readership.

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