Monday, April 28, 2008

Prozac for the economy?

A fair number of "underground" or anti-establishment economists and pundits think we're in for a sequel: Great Depression 2. Some of them can be found at Financial Sense.

Jim Willie, who operates a site called The Golden Jackass, sums up the Cassandra vibe as well as anyone:
The United States is tragically entering a gradual state of failure, from insolvency, corruption, and indescribably horrible economic counsel. An astronomical rise in USGovt federal deficits could occur in the next few months. Capitalism has failed in an historical spectacle of catastrophe. The nation has lost its legitimate income sources from industry. The nation has relied upon inflation contraptions and financial engineering devices for two decades. The exotic devices have blown up in our faces. The reflection upon the USDollar is certain to continue.

Recent adoptions of broader US Federal Reserve lending facilities has given a cup of water, a piece of bread, and a peptalk to a crippled man burdened by a 150-lb backpack of debt even as Wall Street thieves empty his pockets of loose money and all pension receipts. To accept that the worst is over is an exercise in stupidity, naivety, and further con game victimizations.
The more realistic story is that the United States is entering a failed state condition.
Can he be serious? Well, he claims to be. Here's part of his analysis:

  • USGovt is running huge federal deficits, to grow worse as recession worsens
  • US trade deficit is widening, as is the corresponding Current Account Deficit
  • US bank system is in technical insolvency, with negative non-borrowed core assets
  • Nearly 10% of homeowners have negative equity in homes, to reach 20% by year end
  • US car industry is reeling from higher gasoline costs, and piglike SUV emphasis
  • US airline industry is reeling from higher jet fuel costs, and strangled networks
  • US truckers are being squeezed, as highway actions are on the rise
I've been reading a fair amount of this sort of commentary lately, as well as more orthodox economic soothsaying, trying to figure out what to believe. The exercise has been enough to do my head in. Most of the predictions, from all quarters, are based on assumptions that are untestable by ordinary folks like me, or maybe anyone. The arguments are scaffolded with all sorts of economic jargon, arcane formulas, the dubious benefits of charting price moves, and in some cases hints of secret Dark Forces at work.

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Since I make no claims of expertise in this area, my take-away from studying the economic omens is probably no more valid than the predictions of the experts. Anyway, here goes:

We would be smart not to let our attention get too fixated on political issues, as urgent as they are, and forget to be defensive about personal finances. And I do mean defensive. The downside risks at the moment are far greater than the upside potential.

There's no doubt in my mind that we have a lot to worry about. For years, the economy has been riding on credit spending, by the U.S. government as much as by citizens. As a country we've been mainlining cheap credit so long we've forgotten what it's like to live within our incomes. Now the banks that poured out credit have turned off the tap, some of the biggest having themselves been suckered into gorging on complicated derivatives of the housing market that has now tanked. Bear Stearns was the first of the big boys to puddle, and I don't think it will be the last. Who's next? Citigroup? Bank of America? We'll see.

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That's bad enough, but you also have to take on board the background. By and large, this country no longer produces wealth. Its economy is based on financial speculation, a zero-sum game, and selling stuff to itself. When the buyers can no longer buy, no fallback position is left. And then there's our tragic misadventure in Iraq, whose direct costs are rapidly heading toward $1 trillion. Even if you argue that
it's worth it morally, or for national security, from an economic standpoint the only beneficiaries have been war contractors. The rest of the money might as well have been sent to the moon.

Still, considering worst-case, or even bad-case, scenarios doesn't mean it's time to panic and start hoarding canned foods, DVDs and gold bars in a clandestine lair in the hills. Our New Depressionists are probably partly right, but not completely right. One point to keep in mind: nobody in the economy predicting business is a purely disinterested, objective observer. Some are covering for the government, some for the financial institutions. The Götterdämmerung Gang have their own vested interests: they want to sell you anti-Depressants — precious metals or commodities or subscriptions to their newsletters.

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Nonetheless, this is a time to play defense. Metals and commodities are cyclical like any other variable investment, but they seem like a better bet than dollar denominated bonds or most U.S. stocks, especially if you buy on the inevitable downdrafts.

Once again: I am not a financial professional and this is only my own speculation. Always get a second opinion — your own.

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2 comments:

David said...

Rick...interesting thoughts on commodities (and lots of other stuff) by fund manager John Hussman:

www.hussmanfunds.com

Rick Darby said...

David,

Thanks for the heads-up. I've only done a quick skim so far, but this site looks like it's worth investigating.