Friday, December 05, 2008

The Sky is falling!!! but maybe not all the way

With apologies to chicken little, it is bad out there: over half a million jobs lost in one month and almost 2 million so far this year, stock markets down, people fearing for their jobs, and the governments bail outs seemingly being every day events.

Not surprising this bad news is forcing investors to become more risk averse and many to become more pessimistic. Indeed, with all this bad news economists are suddenly making Thomas Malthus (the person largely responsible for Economics being called the Dismal Science) seem the norm.

A few of the more dire forecasts:

MarketWatch reports that
"...former Goldman Chairman John Whitehead? He "sees" a tragic ending: This Reagan Deputy Secretary of State and former New York Fed chairman "sees" America burning through trillions, over many years: "Nothing but large increases in the deficit ... worse than the Depression." See previous Paul B. Farrell. He worries that "tomorrow is the day Moody's and S&P will announce a downgrade of U.S. government bonds." Politicians and public are delusional, promising huge new programs plus tax cutting: "This is a road to disaster.' .... he says: "I don't see a solution.

(FTR the article presents several near Doomsday scenarios)

Faced with these possibilities, the government is doing what it can to prevent a repeat of the Great Depression of the 1930s.

Clusterstock quoting the Spectator:

"The Americans allowed a depression to develop in the 1930s because they were afraid of the consequences of losing the principles of sound money. In an effort to avoid a re-run of the 1930s, the Western world is imposing the opposite, equally unbalanced and intemperate solution. We might thereby avoid a depression — but the bad stuff which follows currency compromise will crash down upon us with great vigour. This is the one and only one, and probably last, shock that the credit crunch has yet to impose on a still unsuspecting world.

....The world has survived and thrived under a paper regime. But the greybeards were right, too. Within 15 years, the currencies of Russia, Germany and Austria were worthless. France’s had dropped in the eight years up to 1926 by 86 per cent, Portugal’s was down by 93 per cent and by 1930 only six had held steady against the ‘gold exchange’ dollar of 1918. The rules were understood by all. If you were going to have an inconvertible currency, you had to behave impeccably: deficits were dangerous and there must be no growth in the money supply."

Will it work? We don't know. But they are trying. Will it lead to inflation? Maybe. Probably. Is inflation better than the alternative of a long long recession/depression? Again, the best I can give you is a "probably".

How long will recession last? No idea.
How bad will it get? No idea.

So instead of just guessing, let's turn to noted NYU Economist, and famous Bear, Dr. Roubini. "Dr. Doom" does think equities will fall by another 20-30% and further drop in equities but that the recession will only last another year.

Dr. Doom Foresees Much More Pain So Why Is Roubini's 401(k) All in Stocks: Tech Ticker, Yahoo! Finance:
Roubini predicts that macroeconomic news and earnings will be much worse than expected in the coming months, as the dollar weakens even further. 'The surprise is how bad the the economy [will get].'""
But adds
" I'm not in the Armageddon camp," forecasting a severe recession through 2009, but not a repeat of the Great Depression.

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