The economic correction

By Razib Khan | August 18, 2012 10:50 pm

Finally the social bubble seems to be bursting. Do remember that in 2000 there was backlash against Amazon as well, and it’s still around. Still, global oil demand level is low. Most people seem to agree that some of the “fixes” to the 2008 financial crisis were only band-aids, and the fundamental structural problems were put off for another day. Is that day now? Pessimism is cheap, but if you feel it, why not share it? I mused about a possible recession in May of 2007, and some of the comments were kind of funny and tragic. I’ll quote, with names removed to protect the guilty:

They’re practically glorified hiccups nowadays. I don’t get what the big deal is.

In a word, no. Unless you’re talking houses here in the Bay Area, but the “recession” is more like a return to a normal, vanilla market. All the economic signs I see look good. Krugman’s cat must be hurting.

The economy has been generally good, unemployment has been relatively low throughout. And so no, I don’t see the looming failure ecomomically.

I doubt it. People often react to one aspect of the economy without looking at the larger picture. Yes, there was an overextension of sub prime lending, but those are only a fraction of mortgages.
Other fundamentals are still very strong, and the yield on equities (earnings divided by price) is often less than the after tax cost of money (about two thirds the long term interest rate to borrow). I think a recession is extremely unlikely when stocks are so cheap compared to money and smart companies are using their cash to buy back in their own shares and acquire other companies.

I don’t get the impression of any looming recession, though I have read people predicting one over a year.

Razib, this article from Donald Luskin should put your mind at ease. “Growth This Spring Is Strong, and Looks to Continue.”

http://www.smartmoney.com/aheadofthecurve/index.cfm?story=20070504

“They’ve been saying the same thing for a year now, as housing has fallen off a cliff. But it just never comes true. There’s simply no evidence of infection of 95% of the economy by the 5% represented by housing.
“Income is strong. Spending is strong. Jobs are strong. Corporate earnings are strong. Everything is strong but housing.”

The U.S. Equity markets have been hitting all time highs, and valuations aren’t egregiously out of whack like they were back in 1999/2000. U.S. Corporations have posted double digit quarterly profit increases for at least 12 straight quarters, and are now sitting on boatloads of cash. Unemployment is at a reasonable level. I think at worst we’re going to see a *correction*, but not a depression. In addition, Alan’s doomsday prophesying aside, China has been posting nearly double digit *GDP* growth for the past 25 years (see here). Think about it: it’s unheard of for corporations to accomplish this, let alone an entire country. China may suffer the slings and arrows that come with grander economic cycles, but predicting its collapse is, I think, a bit misguided. And, as for Russia, Alan’s population numbers are 1) incorrect and 2) not taking into account the loss of population due to the breakup of the Soviet Union. Also, population loss does not equate with a deteriorating economy. That’s just Malthusian wrongheadedness.

CATEGORIZED UNDER: Economics
MORE ABOUT: Economics
  • http://www.delicious.com/RobertFord Darkseid

    it seems like the trifecta of china over-heating, the Euro mess and the commercial lending “cliff” all playing out simultaneously might lead to problems. that and that fact that we never really did much to fix the ’08 issues in the first place…

  • Luke Raines

    An important distinction between Amazon and Facebook is that Amazon sells products while Facebook is essentially an updated version of MySpace and Friendster.

  • wes

    People have been overconfident for 15 years. We’ve had a bit of a mirage economy since the late 90s. I remember tons of guys telling me how smart they were for their stock picking skills. I remember the smirks when anyone challenged them. Always a bad sign.

    We will probably have a fairly stagnant economy for many years to come. And as demographic changes kick in, with half of some populations not graduating high school, it may be decades of stagnation.

    The economy will probably be lumpy, with some areas/populations doing fine, and some hurting very badly.

    Poor Don Luskin. Look up youtubes of him acting like a cocky ass with Peter Schiff (I don’t agree all of Schiff, but it is fun to watch, now that we know Luskin was wrong)

  • http://math-frolic.blogspot.com Shecky R

    People (and especially politicians), too often think/act only for short term appearances. There were 2 roads through the economic fiasco from 2008: either suffer through a 4-5 yr. depression that would’ve devastated this country & the world, and wasn’t a real option, or suffer through an 8-10 year recession, which will be almost as destructive, but by being spread out is more palatable. If the economy seems well improved in much less than 8 years it will only be by creating yet a new bubble to re-burst in 4-5 yrs. and begin the havoc all over again. The can is forever kicked down the road, and the folks (corporacracy) who created this mess essentially still run the show for now.
    (hey, you asked us to share pessimism)

  • Vincent Archer

    I would probably define myself as a “Krugmanite” mostly, but I also have the unfortunate problem of living in Europe, which means my problems are slightly different than your problems. Most notably (and I’ll be a bit strong in that wording), I don’t live in a country with an institutionalized democratic corruption (known as “campaign contributions”. The kind of campaign contributions you have lead people to trial here).

    One of the points where I disagree with Krugman is the measure of the depth of depression. Most economists will use the difference between what GDP “should have been” by extrapolating the GDP curve without the housing shock, and comparing to current value. But, once you figure out that the GDP progression was, in part, fueled by bubbles, and you know it was unsustainable, and that the extrapolated GDP is, and always was, fiction.

    Still, it’s the difference between six feet under, and five feet under only.

    There’s still no sign of any political will to put back banking controls, even though everybody agrees that the crisis was fueled by out-of-control financial instruments. Unless politics step forward to put that back under control, it does not matter ultimately what fixes you can make to the economy: you’ll get back another crisis in a few years after the depression is over. Even if the government has let Lehman fail for an example, the current era is still an era of “moral hazard”: for the financial operators, it’s mostly a world of “heads we win, tails the taxpayers lose” with no one watching carefully the coin.

  • http://lesterhalfjr.blogspot.com/ lester

    People are good at making arguments but you don’t see the part where they don’t know what they are talking about till later.

    http://www.youtube.com/watch?v=fhb66XYEYAM&feature=plcp

    4:12 Hussein Ibish “you will be amazed at how difficult the post conflict situation will be”

    Tucker Carlson, Cakewalk guy “oh shut up”

  • jose

    I find Tyler Cowen’s The Great Stagnation to be depressingly convincing. Peter Thiel makes similar arguments that we have hit a serious lull in innovation in recent decades.
    We (America, Europe, etc) are poorer than we thought we were — largely due to technological stagnation and rising energy costs. We borrowed massively and promised tremendously generous pensions based on projections of continued innovation and rising wealth that did not occur.
    So now we have to painfully adjust to the reality of our societies being much poorer than we thought we were going to be.
    Politicians can be counted on to kick the can down the road as long as possible because voters don’t want to be told the truth. This will just make the inevitable adjustment more painful.
    I expect US politics to get even more vicious as we fight over the scraps of a diminishing pie. I see that the Medicare vs Obamacare debate is already being framed in starkly racial terms – old white people vs young brown people.

  • simplicio

    Well, against all reason or common sense, Donald Luskin is still being paid by people for his economic opinions, so that’s an indicator that at least one of the problems present before the last recession hasn’t been fixed.

  • http://https//roc.iwcc.con Jan Lunde

    “Those who don’t know explain and tell; those who know neither explain nor tell.”

  • Grey

    Every 60-80 years the banking system creates a gigantic credit bubble and when it eventually bursts everyone – except the banks – pays a very heavy price.

    The size and breadth of these credit bubbles and the subsequent deflation when they burst depends on how globalized the banking system is so the credit bubble that built up since the late 90s and which burst in 2008 is both the biggest and *widest* in history. If things follows the same pattern that has afflicted Europe for centuries we should expect a deflationary spiral followed by mass unemployment, political turmoil, revolution and war.

    Everything that has been done since 2008 has been the equivalent of emergency brakes but to save the banks – not the economy – hence why it won’t stop the usual outcomes as it’s not designed to do that. It’s just designed to delay the crash so the banksters can survive with their wealth intact.

  • chris y

    Nobody has yet produced an unassailable explanation for Kondratiev cycles, but empirically, the recent crash arrived right on time. If I were the sort of person who managed their own portfolio, I might have speculatively liquidated it in 2007 simply on the basis of the precedents.

  • Superfast Jellyfish

    I’m pessimistic about Europe–that will not end well, as those folks are in denial about basic reality. I’m more optimistic about the U.S. because whatever is going to happen to us will happen in Europe first, and more severely.

  • Sandgroper

    Australians keep deluding themselves that they “dodged the 2008 recession.”

    Former Treasury Secretary Ken Henry seems to be one of the few public figures who is trying to spell out the real state of things, and the future new reality: “At the moment it looks okay for the resource rich states, and for the others it looks desperately bad. But, even for the resource rich states, at some stage the royalties will deliver less revenue than they’re presently delivering, at some stage they’re going to confront a grimmer fiscal reality as well.” He also says that people are going to have to start paying a lot more tax if public services are to be maintained at their present levels – which is really not good news, because if you factor in all direct and indirect taxes, including import duties, many Australians on moderate incomes are already taxed to hell, while many others have their hands out for more “entitlements”.

    I’ve been trying to point out to people in Australia for 2 years that the “boom” in the mining states is not going to last indefinitely, and that when it ends, there is nothing else – they innovate nothing and produce nothing; and that the non-mining states are already in recession and have been for a while – and that this is going to be the new “normal”.

    Everyone just stares at me blankly. There’s a reason for that – no politician of any stripe will admit the reality, so what I say just doesn’t make sense to them, despite the fact that all the data confirm that what Ken Henry is saying is true.

  • Grey

    @13 Yes, globalization works both ways – greater interconnectedness means no-one can escape the bust: China’s momentum slows down as their western export markets slow down and eventually that slow down will knock on to the suppliers of raw materials.

  • Sandgroper

    Yep, I think most people have figured out that the “Asian decoupling” thing is illusory and irrational. Both India and China are slowing down pretty fast now, and Japan is stumbling after the initial post-tsunami lift.

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About Razib Khan

I have degrees in biology and biochemistry, a passion for genetics, history, and philosophy, and shrimp is my favorite food. In relation to nationality I'm a American Northwesterner, in politics I'm a reactionary, and as for religion I have none (I'm an atheist). If you want to know more, see the links at http://www.razib.com

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