How This Economy Is Going To Play Out
Back in November, I wrote a brief article describing how I expected the financial meltdown underway to continue, and how I expected it to impact the real economy. Below I’m reprinting the 10 predictions I made and I’ve put in italics those which have already occurred.
1) Housing prices and sales will continue to decline. Expect 3 years before the bottom, as a very optimistic best case scenario.
2) Commerical real-estate will suffer a steep decline as well.
3) Consumer demand will drop. Unemployment will rise.
4) The US will go into a recession at best, a depression at worst. Expect first stagflation (high inflation and high unemployment), both because of the increased price of imports and deliberate pump priming by the Fed, then deflation, as asset prices collapse so hard they take everything else with them. The other likely scenario is stagflation followed by hyperinflation. Formal inflation numbers put out will become not just a joke amongst market-watchers, but amongst the actual population. Same thing with unemployment numbers.
5) The Asian economies are not going to "decouple", they are going to have their own financial crises and recessions. Yes, this includes China.
6) China’s stock market will collapse some time next year. China will go into a recession. There will be huge amounts of violence and the Chinese government will redirect anger towards the US and Japan.
7) Multiple banks will probably go insolvent. They are simply holding too much crap paper. There will be an extreme tightening of consumer debt of all kinds, including consumer loans, credit cards and mortgages (this is already beginning, but you ain’t seen nothing yet). Even people with good credit will start having difficulty getting loans.
8) Protectionism is going to get stronger. Even if Clinton, a free trader, is put in power, by the time the 2010 Congressional elections are over no "free trade" bill will be able to pass Congress and in fact actual tariffs are likely to be put in place.
9) I wouldn’t be surprised, at some point, to see capital controls put in place to stop money-flight from the US.
10) When the full extent of how bad things are hits Joe Public, expect a move for reregulation of Wall Street and to reinstitute something similiar to Glass-Steagall.
11) The government will have to bail out Fannie Mae and Freddie Mac because they are insolvent. Minimum 500 billion dollars. Possibly much more.
12) Large waves of government layoffs at the municipal and state levels as the inability to raise money cheaply and the reduced property taxes cascade through the system. (Yes, this is already starting to happen, so it’s kind of a safe prediction. But it’s going to get magnitudes worse. Many many municipalities are going to go bankrupt, and many states will be unable to maintain any but the barest of services.)
13) The price of oil will actually drop as there is an actual demand reduction for oil. Don’t expect this to necessarily be reflected in pump prices, which are constrained by refinery capacity.
14) The federal government will become the largest holder of mortgages, and in effect, owner of houses, in the country. By far. The Fed, which has been accepting sub-prime paper already, is going to wind up stuck with a lot of it, because some of the banks using it as "collateral" are not going to survive absent huge government bailouts.
15) A serious collapse of the US stock market, probably by September at the latest. Maybe within a couple months.
The important thing to know about all of these predictions is that they aren’t new. They aren’t even, really, from November. Myself, Stirling, the late Oldman and others were writing about how current policies lead to stagflation, for example, as far back as 2004. Stirling and I were talking about the Housing Bubble as far back as 2002 when it became clear that Greenspan had dropped rates so far he was bound to create one.
This is not to say that we were particularly bright (and lord knows I got the timing wrong), rather it is to say that for the last 6 odd years, nothing has changed. The basic pattern of the Bush years was set in stone after 9/11, the policies of the Presidency, the Fed and Congress haven’t changed. So the events unfolding now are just the logical consequences of decisions made years ago such as:
- to invade Iraq;
- to make tax cuts for the rich in order to bail them out from the dotcom crash;
- to drop interest rates through the floor;
- to allow a telecom oligopoly to form;
- to condone Chinese mercantilist policies which subsidized Chinese exports with a low Yuan;
- to tolerate the Yen carry trade, and
- to refuse to regulate the creation of money in the form of securitization and exotic derivatives.
In 2002 and 2004 the American people voted to continue these policies, including the war in Iraq. In 2006 they voted to end at least some of these policies, but Congress and the President decided to kick the ball down the field, pass some pork bills and wait till 2009 to do anything about any of it. Their bet was they could hold the meltdown off till after the election. They were wrong.
So, what had to be, now is. The performance with the stimulus bill, which was about the worst bill one could create if the actual purpose was to, oh, stimulate the economy, plus the various other futzing around by Congress indicates that no serious changes will be made before 2009. Occasionally something smart may be done, some good idea may go through on the margins, but overall we’re in a gray zone where the train trundles on towards that light in the tunnel, and nothing is going to turn it around until a new Congress and new President are sworn in.
And when they do get in, what are they going to do? The truth is that even they don’t really know. There are no easy answers because the US (and the world, in a sense) has dug itself into a hole that is bigger than the pile of dirt on the side. More damage will be done than there is free money hanging around to fix. The miracle of leverage in reverse is going to remind everyone why "over-leverage" is something old style brokers considered the greatest mistake anyone could make.
The old, oil based, suburban sprawl economy based on forever rising house prices, on easy credit, on subdivision after subdivision–on running up credit cards and on leverage piled on leverage piled on arbitrage, is in the middle of cracking up, spectacularly. While there will be a short term reduction in the price of oil, in the long term oil is still going up and the America of the sprawl economy; the economic geography of America, looks entirely different at $4/gallon gasoline than it does at $2/gallon gasoline. Huge swathes of exurbia and suburbia become simply economically unviable. Zombie Burbs.
Since I’ve been contributing here at FDL, a big part of what I’ve been writing has been an attempt to give readers a basic toolset with which to understand the intersection of politics and economics (and, at the macro level, they always intersect). Over the next few months I’m going to start writing less about what has happened than about what can happen. Not just about how we can "fix" things, but what sort of future the status quo path leads to, what other types of futures are available to us and what the tradeoffs are for various futures (and there are always tradeoffs. Never agree to a plan without knowing who’s paying, and what, because if you don’t, it’s probably you.)
The past is not the future, and the trendline is never inevitable. Hope may not be a plan, but there is always at least a chance to make a change, and make that change for the better. As the American economy collapses around us so too will a lot of the American power and policy apparatus which has made the status quo, a status quo which has served so few so well, and so many badly, so hard for anyone to change. And in the shadow of the collapse there will be a time when we are freer to make choices about what sort of society we want to live in than we have been for a long time.
But only if we’re ready for it. Only if we have thought about what sort of world we want. If we don’t know, others will know for us, decide for us.
FDR wasn’t just a man. FDR was a movement.
So let’s start making an FDR.