Perspectives on the global economic meltdown

[vsudhir]

Just yesterday I posted on how the messiah-mahatma duo were out to bailout the world with a new global scheme to come supported by their saviour complexes.

Downing St left embarrassed after President Obama scales down first meeting with Brown

Apparently the white house got wind of simply how non-credible the hyperbole appeared.

Downing Street was left scrambling to avoid a diplomatic embarrassment today after the White House ruled out a formal press conference to mark Gordon Brown's first formal meeting with Barack Obama.

Officials denied the Prime Minister was being snubbed after it emerged that the new president would not make himself available for the traditional joint appearance before the White House media.

Mr Brown's aides are trying to make the best of what is a distinctly low key visit compared to the family hospitality lavished on Tony Blair by George Bush when they met for the first time.

Tch tch. Too bad brown sahib. Seems word is getting around that labor wont be around in power too long now.

[John Snow]

I dont want to get into the discussion of Efficiency vs Effectiveness.

India may be bail gadi compared to others but its effective.

Captial and goods are exchanged in mercantile transactions

But this is analogous to a reversable reaction in chemistry

AB <> A + B

K = Active mass of A * Actives mass of B/Active mass of AB where A = Capital B = Goods

[svinayak]

So how can efficiency be achieved in the financial markets ? There is a supply of capital. That capital is then invested. That investment is then carefully and judiciously re-invested with risk adjustment. Thats what amri-khans started doing. Except they missed out on a keyword: There is a supply of capital


The famed wall street with the complex machinery to squeeze out the last ounce of efficiency from capital has run out of raw material. So what do they put in ? Capital taken from the masses that they do not have ! Well, start making loans out to everybody, get the money, squeeze efficiency. Now there is another avenue for squeezing efficiency: the loaning process itself !

This is very good.
You have not described how foreign capital adds to the total capital in the Wall St which is then loaned. Foreign investors bought these securities with their capital. Now those countries and banks also are short of money to lend and went bankrupt.People from those countries are going to bail out these entities with their savings.

[Singha]

American savings rate has increased from almost nothing to 5% in january. this is a historic event!

but bad news for the consumer goods sector. Sony might have to restart making
19" B&W CRT TVs for the african market and abandon the ever growing LCD panel size game to stay alive.

I hope nikon makes it alive from this singularity. the world needs the D3.

[Anujan]

Regular manufacturing for the vast majority of low tech products is simply not cost competitive anymore in much of the developed world, IMHO. The only way to squeeze cost competitiveness out of the G7 is either to lower wages and/or to hinder imports using tariffs, environmental standards, labor standards and all that jazz. Bottomline, there's a downward pressure on incomes and an upward pressure on prices of everyday, low tech items. Purchasing power in real terms takes a hit. Living standards in the west are in for a serious correction, IMO.

As for complex derivatives etc, IMO the desi mkt should go in cautiously for these innovations. Have heavy dose of regulation in place, design good dose of slack in the system to counter unexpected events and shocks. Time Des built its own corporate bond mkt and built institutions to facilitate capital flows within the Indian economy.

I agree with with you on both counts vsudhir-saar
The amri-khans realize this and hence the mantra of "alternative energy". If it becomes a reality, they would have a huge domestic market, export potential and it would have a double whammy of stopping the spending on oil imports. Other manufacturing industries with low tech, low value products are usually human intensive and simply do not have the margins to sustain the affluence that the society is used to.

As far as complex derivatives are concerned, India has to be doubly careful. Lax law enforcement, brilliant accountants (who might turn to the dark side), political sheltering of criminals, the size of the market (thereby making it vulnerable to manipulation) should all be taken into account. Heck, they had no wind of what the satyam guy was upto, till the contents of pakistan hit the pankha.

Snow-saar

I dont doubt the effectiveness. But I do doubt the efficiency. Take, for example, assessing the credit worthiness of customers and also collection in the event of non-payment. There is no developed system in India. You might argue that loans are still made by "personal touch" and hence are immune to wastage and manipulation, but a large section of population is still excluded from the loan pool. Take for example collection in the event of non-payment. IIRC There was an article about citibank employing goondas and getting pulled up by the court ! Ofcourse goondas are effective, but are they efficient ?

[Anujan]

This is very good.
You have not described how foreign capital adds to the total capital in the Wall St which is then loaned. Foreign investors bought these securities with their capital. Now those countries and banks also are short of money to lend and went bankrupt.People from those countries are going to bail out these entities with their savings.

Acharya-saar,
That is a huge and complex question. That is why I said

Well, we will sell treasury notes to China. In effect, attaching the vast middle class of China's population, who save 40% of what they make, as an extension of american population, as a source of capital. Is it a viable solution ? Who does the capital go to ? What kind of efficiency has been achieved by this round about route of capital ? Well turns out all is not hunky dory with this arrangement.

I dont know anymore if this is a viable arrangement, because of the intervention of Political forces in economy at this point. Consider for example that you live in nowhereistan and have saved 100$. Where will you invest ? You will invest in USA with its developed businesses, which will efficiently use your capital, invest in innovative business and give you a higher rate of return with a lower risk, when compared to the markets of nowhereistan which are highly volatile or is regulated by the government for issues of "social stability".

So a little bit of investment from the savings of developing countries to developed countries is inevitable. This whole arrangement becomes murky, if such a investment is Government policy to keep exchange rate low and use it as a future leverage. The chinese economists, I am sure, were well aware of the risks of accumulating dollar reserves. They could have instead, ploughed the money back into domestic spending, to improve infrastructure and employ more people. But that would have had the twin effects of

1. Reducing the competitiveness of chinese exports
2. Diminishing reserves and hence reducing Chinese leverage on the US and other developing countries (to whom they can lend the capital in return for commodities and influence).

The chinese chose the route of accumulating reserves and it has essentially become a "who blinks first" game. The amri-khans on the one hand can threaten that if the Chinese offload their dollar reserves, the dollar would tank and be useless for the chinese anyway. The Chinese can threaten that thats exactly what they would do and tank the American economy.

I would strongly expect some quid-pro-quo being worked out (especially under Hillary), where some of the bailout from US goes to rescue Chinese investors. The Chinese (if they are chanakyan, which they are) would insist not only on capital that their banks have lost (Who got the bailout money is still a murky question. Nobody knows. Nobody is asking or getting an answer if foreign banks got any, if so how much, money. In any case if the capital is generated by printing or borrowing from the future, it is risky capital.), but also commodities. I.E. Influence in regions which produce stuff. Which people need. I would look at long term contracts being signed by the Chinese with ore and oil producing countries. This might include some political as well as military agreements.

[John Snow]

Ofcourse goondas are effective, but are they efficient ?

Yes they are effective and efficient, It is human nature to optimize utility (curve)
and an informal goonda organization has less over head and constraints (operational)

[Satya_anveshi]

Mr Brown's aides are trying to make the best of what is a distinctly low key visit compared to the family hospitality lavished on Tony Blair by George Bush when they met for the first time.

Hope people cover this episode and Brown's travel to US to the finest detail. On the one hand we have fundamental weakness of US as discussed here in the last few pages but on the other hand, equally critical/fundamental on the alignment of old world and new world.

I hope something earth shaking comes out this and US makes sound forward looking decisions for the future. This also means making UK the mirror image of Zimbabwe differing only by the color.

[svinayak]

The chinese chose the route of accumulating reserves and it has essentially become a "who blinks first" game. The amri-khans on the one hand can threaten that if the Chinese offload their dollar reserves, the dollar would tank and be useless for the chinese anyway. The Chinese can threaten that thats exactly what they would do and tank the American economy.

I will try to change your thinking. What if China and US are both in this game and will screw the rest of the world. They can create protectionist trade barrier from other countries and trade between themselves.

The dollar will not be allowed to tank since they will make sure that other currencies will tank and dollar will become the currency of stability. They will coerce and create wars to tank other currencies.

[Prem]

Onlee if india and GCC free trade gets done in INR . This will change many future economic scenarios.

[ramana]

A book Review

AGENDA | Sunday, March 1, 2009 | Email | Print |


Merchants of debt, the wealth of nations

Despite little research, Crash of 2008 is a sound refresher course on the contemporary meltdown and the lessons history has been unable to teach. Although it may not interest a scholar, the book deserves a look by the layman, write Prafull Goradia and KR Phanda

The Crash of 2008, written by Arthur Swan and edited and revised by David M Pidcock has three special virtues: One, the timing of its publication so soon after the meltdown began. Two, the experience of the abuse of money over the centuries is catalogued. Three, the wisdom of distinguished economic minds beginning with Adam Smith on to David Ricardo and including John Maynard Keynes, is recorded in glimpses. The book has little real research or thinking to its credit. There is very little contemporary comment on the current crash or meltdown. Nevertheless, the volume deserves a look in by laymen as distinct from scholars who would know most of what has been said. The author's motive is best quoted in his own words: “My reason for writing this book is to show that inflation and unemployment are brought about by the same causes; the creation and control of the nation’s money supply by the private banking system and interest.”

A key to understanding the Crash of 2008 and the current meltdown is to realise that there are two different capitalisms: Producer capitalism and credit capitalism. The former is based on the farm and the factory while the latter is housed in banks. The former depends on the production of goods and services while the latter on the issue of metal or paper currency and its subsequent circulation. Money should provide the lubricant to facilitate the production of goods and their free flow forward. By being made adequately available, it can also play the role of stimulating demand and thus encouraging greater production. But that is where the role of money and, its custodian, the bank should be limited. Karl Marx offered a way out; “If all capital were in the hands of the industrial-capitalist there would be no such thing as interest and rate of interest.”

Instead, the banks assume the role of money manufacturers. They multiply finance in order to earn more and more money for themselves. Abraham Lincoln displayed a rare insight when he commented: “The money power preys upon the nation in times of peace and conspires against it in times of adversity. It is more despotic than monarchy, more insolent than autocracy, more selfish than bureaucracy...” The cost of minting coins and printing notes is negligible compared to the interest the banks charge. Even the cost of building and running banks in order to make money accessible to everyone in every part of the country is modest. The central or the reserve bank would be well endowed if it charged say two per cent to commercial banks who in turn could do well by adding another two per cent for their upkeep. A total of four per cent is the very maximum needed to provide banking of cash as well as credit to the entire economy.

Farms and factories produce goods steadily from year to year. The seasonal and incidental fluctuations are seldom big enough to cause either a boom or a slump. Even if an unusual shortage were to lead to a sharp spurt in prices of a few items, they would come down with increased supplies before long. Similarly with an unusual over supply and fall in prices. The rise and fall in prices are neither long lasting nor do they affect the rest of the economy. The goods led fluctuations are compartmental just as they are short lived. The crashes whether of 2008 or of 1929 or the recessions in between covered whole economies and they were not confined to any one country. In 1929, the world was not a global village and yet the ripples that began with a sudden crash in share prices on Wall Street, New York in October grew into waves that kept harassing all the world economies for 10 years. Little wonder in what JK Galbraith wrote: “'The study of money, above all other fields in economics is the one in which complexity is used to disguise the truth or to evade the truth, not to reveal it.”

How are the steady producing farms and factories harassed by radically unsteady fluctuations often called slumps and booms from time to time? With them suffer or prosper the people who work these cradles of production. Mind you. just as their output is about steady, so is its consumption by the people. The demand and supply of goods are, broadly speaking, inelastic. Yet, the prices are at times subjected to violent behavior. The explanation of author Arthur Swan is that the lure of earning more and more interest make banks create money beyond the need of the economy. Then they are continually looking for borrowers. Their hunt is so frantic that not all those who take the loans are sound operators. Nevertheless, the economy looks large, inflated and blooming. All the economic players enjoy the rocketing boom. At some stage, one or more of the unsound operators fumbles and fails. The bubble bursts; until then all including the farm and factories share the high prices. After the burst, they live to suffer the slump for several years. Which is why Lord Keynes advised, “By all means, save wealth for a rainy day but not money.”

This phenomenon is reflected in the bank behavior in recent years. Many a bank executive was given a monthly target of how much money he had to loan out. Which meant that he went out of his way in search of borrowers, perhaps some good and some not so sound. His manager also had targets to fulfill and hence he would also encourage his subordinates to somehow find borrowers. According to the practice in Britain, for every deposit of 10 pounds, a commercial bank could lend out 9 pounds by way of loans. Imagine therefore the multiplicative factor in the availability of money to lend out. Economist Geoffrey Crowther said eloquently: “The banker is a merchant of debt, and his assets as well as liabilities consist merely of debts; the whole system is built up of promises to pay erected on a narrow basis of cash.”

Most people who were employed whether on the farm, in the factory or the bank prospered. Everyone made hay while the sun shone. But with doubtful borrowers lurking on the horizon, some had to go under sooner or later. That would set off the crash. In the US this time around, the early flame of the crash was lit by loans given on houses which were sold by builders at exorbitant prices to people with ordinary means. When the buyers could not pay their installments, trouble began. The productive industry was thus let down by the finance business; producer capitalism was betrayed by credit capitalism.

The history of credit began in ancient Greece and may have operated in some form or another even earlier. Which is probably why the book under review has a label of A History of the abuse of money from Plato to NATO & Beyond. However, its inauguration on a grand scale was when the Bank of England was established by a group of businessmen headed by one William Paterson in 1694 AD with the support of the Chancellor of the Exchequer. At the time, Paterson himself was reported to have said, “The Bank of England hath benefit on all monies it creates out of nothing.” Being aware of the dangers of printing paper money, Paterson was against false credit arising out of mere paper issues. Therefore, he never swerved from the safe basis of gold and silver to back up all transferable bills.

Paterson’s successors were less conservative and used the power to create money out of nothing. In 1720, the South Sea Company, whose governor was King George I, was inspired by an enterprising spirit to buy up the entire national debt of Britain. The company began paying 100 per cent return and its share price soared from 128d in January to over 1000 in August. The company exchanged its shares for the annuities issued by the government; the transaction helped to offset the debt. The Directors could not sustain the hoax and in September the share price crashed to end eventually at 124d in December. Many investors were ruined. By comparison, the recent Satyam scam would appear elementary. In a 102 page chapter entitled ‘A Chronological Outline of the Misuse of Money’, the book traces the history from 2400 BC Sumaria to 1989 AD when some of the follies of Thatcherism and Reaganomics of letting the national debt rise indefinitely are enumerated.

Adam Smith (1723-1790), the author of Capitalism, had seen the rise of true capitalism based on the savings of individuals being ploughed back into the business and thereby achieving greater levels of production. He stood for free trade. “A trade which is forced by means of bounties and monopolies may be disadvantageous to the country in whose favour it is meant to be established,” wrote Adam Smith. In his magnum opus An Enquiry into The Nature And Causes Of The Wealth of Nations he said that by the use of banker's money business can build a pyramid of paper instruments, that places a demand on real wealth of the nation. What is happening today is no different from what Adam Smith had predicted implicitly by referring to a fourth class of people or landlords who “love to reap where they never sowed.”

David Ricardo (1772-1823), a successful stock operator turned economist, was no less scathing in his criticism of the nuisance of paper money. The Bullion Committee of 1810 had been set up to consider the issues raised by Ricardo. The main findings of the Committee were: The value of notes used as a currency depended on the quantity issued. The quantity of notes regulated and their value maintained if the notes were convertible into gold. And yet the Bank of England spokesman told the Committee “that no creation of credit by the Bank of England against sound assets could have any effects on prices or exchange rates.” On this, Walter Bagehot, the famous journalist, reacted by saying “such comments had become almost classical by their non-sense.”

Nevertheless, in the words of the once Bank of England Governor, Sir (later Lord) Montagu Norman, the dogs may bark but the caravan
marches on.

-- The Crash of 2008 is written and compiled by Arthur Swan and edited and revised by David M Pidcock. Published by Pentagon, it is priced at Rs 495

[Satya_anveshi]

Hope people cover this episode and Brown's travel to US to the finest detail. On the one hand we have fundamental weakness of US as discussed here in the last few pages but on the other hand, equally critical/fundamental on the alignment of old world and new world.

Obama Meets With British Prime Minister Brown - CQ Transcripts Wire - Tuesday, March 3, 2009; 1:48 PM

Look at the tone of the question:

QUESTION: Nick Robertson, BBC News. Mr. President, it's often been said that you, unlike many of your predecessors, have not looked towards (ph) Europe, let alone Britain. Can you just respond to that comment?
And, also, the prime minister is talking to you about a global New Deal today. Will that actually help hard-pressed American consumers?
And if -- if may briefly put a question to the prime minister...

and answer:

OBAMA: Well, first of all, the special relationship between the United States and Great Britain is one that is not just important to me; it's important to the American people.
And it is sustained by a common language, a common culture. Our legal system is directly inherited from the English system. Our system of government reflects many of these same values. So -- and, by the way, that's also where my mother's side of my family came from.

So I think this notion that somehow there is any lessening of that special relationship is misguided. You know, Great Britain is one of our closest, strongest allies. And there is a link, a bond there that will not break. And I think that's true not only on the economic front, but also on issues of common security.

Read on...

[ss_roy]

Why do you persist in your desire to play a rigged game? Understand the rigged game (objectively).. take its best features and create your own improved rigged game.

Do not forget to screw players of the older rigged game. Payback!

[ss_roy]

There is one issue we almost never seem to talk about in any worthwhile detail-

What is the objective meaning of terms like "capital", "jobs", "efficiency", "legalism", "wealth", "money" or even "knowledge".

What is their purpose, meaning, origins? What do these concepts do? How do they work? For whom do they work? Under what conditions do they work? or fail?

Until you can distance yourself from the various 'experts' on these subjects and see them for what they are, you will keep on playing a rigged game. You might even get rich playing that game.. till it collapses.

Far too often, we do not tear down these so called "experts" by objectively questioning the system.

The question then is "what is 'here'?", not "why am I here?".

[John Snow]

The question then is "what is 'here'?", not "why am I here?".

What is here ? Is answered by PURUSHARDHA

Why am I here? Is answered by PRARABDHA.

The rest of the questions I will attempt to answer a little later.

[Raghav K]

The U.S. Economy: Designed to Fail

President Barack Obama showed a great deal of gumption in standing before Congress last night delivering his first speech to the joint assembly. All the trappings of power were on display as members of the House and Senate, the Supreme Court, the Joint Chiefs, the Cabinet, and the VIP guests hugged and waved at each other, radiant in their tailored attire only two nights after the Hollywood stars put on their own show on Oscar night.

Too bad neither the president, nor Vice President Joe Biden and Speaker of the House Nancy Pelosi applauding on the podium behind him, nor the jubilant Democrats with their solid majorities, nor the grumpy Republicans slouching in the minority across the aisle, know what they are doing as economic extinction stares the United States of America in the face.

Yes, it’s that bad. The day after the speech the Dow-Jones dropped to 7,271, almost 50 percent off its October 2007 high, with no bottom in sight. According to the Washington Post, the Big Three automakers are now facing a “bottom-up” collapse of their component supply lines if their vast network of suppliers doesn’t receive new federal loans within a week. Worldwide the situation is just as bad. The U.N.’s International Labour Organization reports:

“What began as a crisis in finance markets has rapidly become a global jobs crisis. Unemployment is rising. The number of working poor is increasing. Businesses are going under.”

President Obama’s speech was long on resolve but short on substance. He assured the nation:

“We will rebuild, we will recover, and the United States of America will emerge stronger than before.”

But accomplishing this depends entirely on one thing: more federal deficit spending to serve as the economic engine in an economy where bank lending has dried up because businesses and consumers can no longer repay their loans.

Unfortunately, the deficit is approaching the breaking point.

During fiscal year 2009 the U.S. Treasury is on-track to pay over $500 billion just in interest payments to finance the already-existing debt. New debt this year will likely exceed a trillion dollars. The total debt burden on the economy as a whole could reach $70 trillion by 2010, with annual interest payments for individuals, households, businesses, and all levels of government likely to reach $3 trillion out of a $14 trillion GDP that is now in sharp decline.

Financing the deficit continues to depend on whether China will still purchase Treasury bonds. This is why Secretary of State Hillary Clinton said frankly during last week’s trip to China : “We are relying on the Chinese government to continue to buy our debt.”

But at least President Obama is trying. He knows the economy can only recover if growth is rekindled. So he is focusing on the creation of jobs that translate into real worker income. But can he reverse a generation of job outsourcing and income stagnation? I don’t know of anyone who believes he can. Will the Republican nostrum of tax and spending cuts do anything? You jest. Not when unemployment is approaching Great Depression levels..

But neither President Obama, nor his Democratic supporters or Republican antagonists, should feel badly about what is happening. This is because the system they have been given to work with was designed to fail. The U.S. was saddled long ago with a debt-based monetary system, whereby the only way money can be introduced into circulation is through bank lending. It was the system that was instituted in 1913 when Congress gave away its constitutional power over money creation to the private banking industry by passing the Federal Reserve Act.

It was then that the catastrophe we are now facing became inevitable. It took nearly a century to get here but it finally happened. We should have known it was coming when Federal Reserve-created bubbles replaced economic growth from our disappearing heavy industry, starting with the recession of 1979-83. We could have seen it coming when the dot.com bubble collapsed in 2000-2001, and Fed Chairman Alan Greenspan worked with the George W. Bush administration to substitute the housing bubble for a real recovery.

The day of reckoning is here. So don’t worry, Mr. President. It’s not your fault. When the collapse takes place the international bankers who will take over might even let you keep your job.

Richard C. Cook is a former U.S. federal government analyst. His book on monetary reform, We Hold These Truths: The Hope of Monetary Reform, is now available at www.amazon.com. He is also the author of Challenger Revealed: An Insider’s Account of How the Reagan Administration Caused the Greatest Tragedy of the Space Age. He can be contacted through his website at www.richardccook.com.

http://www.globalresearch.ca/index.php? ... &aid=12493

[vina]

This downturn is more like the '73 recession, 1873 that is

The 1873 panic was the longest in modern history, lasting 65 months. The 1929 depression lasted 43 months.



The Real Great Depression
The depression of 1929 is the wrong model for the current economic crisis

By SCOTT REYNOLDS NELSON
As a historian who works on the 19th century, I have been reading my newspaper with a considerable sense of dread. While many commentators on the recent mortgage and banking crisis have drawn parallels to the Great Depression of 1929, that comparison is not particularly apt. Two years ago, I began research on the Panic of 1873, an event of some interest to my colleagues in American business and labor history but probably unknown to everyone else. But as I turn the crank on the microfilm reader, I have been hearing weird echoes of recent events.
When commentators invoke 1929, I am dubious. According to most historians and economists, that depression had more to do with overlarge factory inventories, a stock-market crash, and Germany's inability to pay back war debts, which then led to continuing strain on British gold reserves. None of those factors is really an issue now. Contemporary industries have very sensitive controls for trimming production as consumption declines; our current stock-market dip followed bank problems that emerged more than a year ago; and there are no serious international problems with gold reserves, simply because banks no longer peg their lending to them.
In fact, the current economic woes look a lot like what my 96-year-old grandmother still calls "the real Great Depression." She pinched pennies in the 1930s, but she says that times were not nearly so bad as the depression her grandparents went through. That crash came in 1873 and lasted more than four years. It looks much more like our current crisis.
The problems had emerged around 1870, starting in Europe. In the Austro-Hungarian Empire, formed in 1867, in the states unified by Prussia into the German empire, and in France, the emperors supported a flowering of new lending institutions that issued mortgages for municipal and residential construction, especially in the capitals of Vienna, Berlin, and Paris. Mortgages were easier to obtain than before, and a building boom commenced. Land values seemed to climb and climb; borrowers ravenously assumed more and more credit, using unbuilt or half-built houses as collateral. The most marvelous spots for sightseers in the three cities today are the magisterial buildings erected in the so-called founder period.
But the economic fundamentals were shaky. Wheat exporters from Russia and Central Europe faced a new international competitor who drastically undersold them. The 19th-century version of containers manufactured in China and bound for Wal-Mart consisted of produce from farmers in the American Midwest. They used grain elevators, conveyer belts, and massive steam ships to export trainloads of wheat to abroad. Britain, the biggest importer of wheat, shifted to the cheap stuff quite suddenly around 1871. By 1872 kerosene and manufactured food were rocketing out of America's heartland, undermining rapeseed, flour, and beef prices. The crash came in Central Europe in May 1873, as it became clear that the region's assumptions about continual economic growth were too optimistic. Europeans faced what they came to call the American Commercial Invasion. A new industrial superpower had arrived, one whose low costs threatened European trade and a European way of life.
As continental banks tumbled, British banks held back their capital, unsure of which institutions were most involved in the mortgage crisis. The cost to borrow money from another bank — the interbank lending rate — reached impossibly high rates. This banking crisis hit the United States in the fall of 1873. Railroad companies tumbled first. They had crafted complex financial instruments that promised a fixed return, though few understood the underlying object that was guaranteed to investors in case of default. (Answer: nothing). The bonds had sold well at first, but they had tumbled after 1871 as investors began to doubt their value, prices weakened, and many railroads took on short-term bank loans to continue laying track. Then, as short-term lending rates skyrocketed across the Atlantic in 1873, the railroads were in trouble. When the railroad financier Jay Cooke proved unable to pay off his debts, the stock market crashed in September, closing hundreds of banks over the next three years. The panic continued for more than four years in the United States and for nearly six years in Europe.
The long-term effects of the Panic of 1873 were perverse. For the largest manufacturing companies in the United States — those with guaranteed contracts and the ability to make rebate deals with the railroads — the Panic years were golden. Andrew Carnegie, Cyrus McCormick, and John D. Rockefeller had enough capital reserves to finance their own continuing growth. For smaller industrial firms that relied on seasonal demand and outside capital, the situation was dire. As capital reserves dried up, so did their industries. Carnegie and Rockefeller bought out their competitors at fire-sale prices. The Gilded Age in the United States, as far as industrial concentration was concerned, had begun.
As the panic deepened, ordinary Americans suffered terribly. A cigar maker named Samuel Gompers who was young in 1873 later recalled that with the panic, "economic organization crumbled with some primeval upheaval." Between 1873 and 1877, as many smaller factories and workshops shuttered their doors, tens of thousands of workers — many former Civil War soldiers — became transients. The terms "tramp" and "bum," both indirect references to former soldiers, became commonplace American terms. Relief rolls exploded in major cities, with 25-percent unemployment (100,000 workers) in New York City alone. Unemployed workers demonstrated in Boston, Chicago, and New York in the winter of 1873-74 demanding public work. In New York's Tompkins Square in 1874, police entered the crowd with clubs and beat up thousands of men and women. The most violent strikes in American history followed the panic, including by the secret labor group known as the Molly Maguires in Pennsylvania's coal fields in 1875, when masked workmen exchanged gunfire with the "Coal and Iron Police," a private force commissioned by the state. A nationwide railroad strike followed in 1877, in which mobs destroyed railway hubs in Pittsburgh, Chicago, and Cumberland, Md.
In Central and Eastern Europe, times were even harder. Many political analysts blamed the crisis on a combination of foreign banks and Jews. Nationalistic political leaders (or agents of the Russian czar) embraced a new, sophisticated brand of anti-Semitism that proved appealing to thousands who had lost their livelihoods in the panic. Anti-Jewish pogroms followed in the 1880s, particularly in Russia and Ukraine. Heartland communities large and small had found a scapegoat: aliens in their own midst.
The echoes of the past in the current problems with residential mortgages trouble me. Loans after about 2001 were issued to first-time homebuyers who signed up for adjustablerate mortgages they could likely never pay off, even in the best of times. Real-estate speculators, hoping to flip properties, overextended themselves, assuming that home prices would keep climbing. Those debts were wrapped in complex securities that mortgage companies and other entrepreneurial banks then sold to other banks; concerned about the stability of those securities, banks then bought a kind of insurance policy called a credit-derivative swap, which risk managers imagined would protect their investments. More than two million foreclosure filings — default notices, auction-sale notices, and bank repossessions — were reported in 2007. By then trillions of dollars were already invested in this credit-derivative market. Were those new financial instruments resilient enough to cover all the risk? (Answer: no.) As in 1873, a complex financial pyramid rested on a pinhead. Banks are hoarding cash. Banks that hoard cash do not make short-term loans. Businesses large and small now face a potential dearth of short-term credit to buy raw materials, ship their products, and keep goods on shelves.
If there are lessons from 1873, they are different from those of 1929. Most important, when banks fall on Wall Street, they stop all the traffic on Main Street — for a very long time. The protracted reconstruction of banks in the United States and Europe created widespread unemployment. Unions (previously illegal in much of the world) flourished but were then destroyed by corporate institutions that learned to operate on the edge of the law. In Europe, politicians found their scapegoats in Jews, on the fringes of the economy. (Americans, on the other hand, mostly blamed themselves; many began to embrace what would later be called fundamentalist religion.)
The post-panic winners, even after the bailout, might be those firms — financial and otherwise — that have substantial cash reserves. A widespread consolidation of industries may be on the horizon, along with a nationalistic response of high tariff barriers, a decline in international trade, and scapegoating of immigrant competitors for scarce jobs. The failure in July of the World Trade Organization talks begun in Doha seven years ago suggests a new wave of protectionism may be on the way.
In the end, the Panic of 1873 demonstrated that the center of gravity for the world's credit had shifted west — from Central Europe toward the United States. The current panic suggests a further shift — from the United States to China and India. Beyond that I would not hazard a guess. I still have microfilm to read.

Scott Reynolds Nelson is a professor of history at the College of William and Mary. Among his books is Steel Drivin' Man: John Henry, the Untold Story of an American legend (Oxford University Press, 2006).

Why in heaven's name our "eminent" historians , like those found in JNU and other ding dong places, are simply unable to write a cogent intelligent piece like this is beyond me. Maybe their heads have been stuffed so full of the Marxist horse dump, that they actually ceased having any mental faculties beyond going and checking some standard Marxist tome for explanations for anything and everything.

[vsudhir]

One blog commentator wrote up an interesting piece. Potentially hajaar significant. Lemme quote.

No bail outs for eastern europe [meaning no bail out for western european banks]

I don't think that this is the case. If you look at this post where I quickly translated this Spiegel article that says:

... Merkel went against the thrust of Baden-Württemberg's Minister President Günther Oettinger (CDU) to let the wounded HRE go insolvent. The reasoning: It has been internationally agreed that no more banks that could topple others would be allowed to go bankrupt. The state has to take care of Hypo Real Estate. Another collapse such as the one of U.S. bank Lehman Brothers has to be prevented. ...

This is one of the most significant quotes IMO in the past few months and it hasn't attracted a lot of attention. I don't know why. There must be a major agreement somewhere...

I have little doubt that such an int'l agreement is indeed in effect. The colossal amounts poured down the AIG black hole point to it. Lots of Eurostani (as well as wall st) banks are counting on AIG being around in order for themselves to be around, to put it crudely.

Link

INteresting indeed.

[ramana]

Mortgages undewater in US per WSJ blog

More US mortgages under water

Can some one post the graphic here please?

[svinayak]

[vsudhir]

Pensions time bomb is rearing its head, thanks to asset collapses across the board.

Public Pensions may require a trillion dollar bailout

Corp pensions are underfunded too and thats no secret. Point is if public pensions are bailed out, things might sour really fast. Coz the corp employee is gonna ask - "my 401k is underwater but my taxes are used to bailout govt employees pensions now, eh?" That fight won't be pretty, I suspect.

[ramana]

Nightwatch's comments 3/3/09

Globalization Special Comment: During travel two weeks ago, NightWatch discussed the implications of the global economic meltdown with some brilliant, well-informed and perceptive Readers. The consensus was that globalization has reached its high water mark in this life time. The first signs of four major consequences are emerging in Latin American and Russia.

Decline in world trade. A new article in the Economist details the drop in trade among global markets. Specialization in a global market place is being replaced by generalization in local markets. Thanks to a brilliant and perceptive Reader for the reference to the Economist.

The second consequence is the rise in self-sufficiency movements and various forms of isolationism. The decline in profits from specialization to compete in global market places will encourage a growth in the domestic production of goods to meet the demand for items that can no longer be obtained from the global market place. Prices for locally produced goods will increase, but localization of production will produce more and different jobs than globalization did. NightWatch expects regional markets to replace the integrated global market.

More nationalizations. The Bolivarian countries, led by Venezuela, have been ahead of the times in spearheading a revival of nationalization, but for socialist reasons. Ecuador, Argentina, Bolivia as well as Venezuela have been in the lead in expropriating the assets of multi-national corporations and in rewriting the terms of business. Other nations will follow as the economic consequences bite deeper. No government can withstand the allegation that it has allowed foreign companies to prosper at the expense of the well-being of its own populace. Expropriation of multi-nationals is good politics and maybe good business, in the short term, irrespective of neo-socialism.

The fourth consequence is the rise of authoritarian governments promising reform and better times. Strong willed leaders who promise reform, an end to corruption and a free lunch will sweep elections and sweep out pluralistic democracy. The leading edge of this trend is Russia, Venezuela and Bolivia. Consultative, elected, deliberative government is too slow, too expensive, and too stodgy to respond effectively to emergency needs in poor countries. Demagoguery will have a new day.

The high water mark of globalization and the high water mark of elected, pluralistic government both have been reached for now.

[vsudhir]

Good commentary by nightwatch. A tad alarmist sounding but filter out the noise the western media regurgitates and you do see these trends solidify the world over. And yes, it is a welcome trend.

Meanwhile, a topic rather close to moi heart....

The unfortunate uselessness of most ’state of the art’ academic monetary economics

Thats William Buiter in FT. Gr8 piece for some acad orienteds. Ensoi.

Update: Too good to pass on! Lemme dive right in...

If one were to hold one’s nose and agree to play with the New Classical or New Keynesian complete markets toolkit, it would soon become clear that any potentially policy-relevant model would be highly non-linear, and that the interaction of these non-linearities and uncertainty makes for deep conceptual and technical problems. Macroeconomists are brave, but not that brave. So they took these non-linear stochastic dynamic general equilibrium models into the basement and beat them with a rubber hose until they behaved. This was achieved by completely stripping the model of its non-linearities and by achieving the transsubstantiation of complex convolutions of random variables and non-linear mappings into well-behaved additive stochastic disturbances.

Ouch, ouch!

Most mainstream macroeconomic theoretical innovations since the 1970s (the New Classical rational expectations revolution associated with such names as Robert E. Lucas Jr., Edward Prescott, Thomas Sargent, Robert Barro etc, and the New Keynesian theorizing of Michael Woodford and many others) have turned out to be self-referential, inward-looking distractions at best. Research tended to be motivated by the internal logic, intellectual sunk capital and esthetic puzzles of established research programmes rather than by a powerful desire to understand how the economy works - let alone how the economy works during times of stress and financial instability. So the economics profession was caught unprepared when the crisis struck.

Bulls eye thru and thru.

Read it all ere the copywrite nazis unload here.....

[svinayak]

Lords of Finance: The Bankers Who Broke the World
by Liaquat Ahamed (Author)

# Hardcover: 576 pages
# Publisher: Penguin Press HC, The (January 22, 2009)
# Language: English
# ISBN-10: 159420182X
# ISBN-13: 978-1594201820

From the 1870s to 1914, the world's developed nations basked in a shimmering age of commerce. The European powers were at peace. Goods flowed home from colonies. The newly reunited United States was growing into muscular adolescence. And all of the world's major economies rested on a seemingly solid base: the gold standard. But it proved to be a system in a snow globe, easily shattered. World War I broke the idyll and unhooked country after country from dependence on gold. They resorted to printing money to fund the war, leading to massive inflation, unemployment, political instability and general suffering across the Continent. It's no wonder, then, that after the signing of the armistice in 1918 the world's four most powerful bankers -- a fraternity described in newspapers of the time as "the world's most exclusive club" -- did everything they could to force nations back to the discipline of the gold standard.


It was a ruinous decision. as Liaquat Ahamed notes in Lords of Finance, all the gold mined in history up to 1914 "was barely enough to fill a modest two-story town house." There simply was not enough of it to fund a global conflict or to allow economic recovery afterward. Ahamed's illuminating and enjoyable book focuses on the four men whose arrogance and obstinacy, he contends, caused the worst depression in modern times: Benjamin Strong Jr., the morphine-using, consumptive governor of the New York Federal Reserve; Montagu Norman, the spiritual seeker at the helm of the Bank of England; Emile Moreau, the xenophobic governor of the Banc de France; and Hjalmer Schacht, the president of Germany's Reichsbank, a Prussian by temperament, if not by birth, whose sensibilities led to a flirtation with the Nazis. They were the most important central bankers in their respective nations when those four countries controlled most of the world's wealth and one -- England -- was its unrivaled lender. It was a time, almost unrecognizable to us, when the central banks that printed each nation's currency were privately owned, and regulation was unheard of. As a consequence, this handful of men -- who knew each other intimately enough that one was godfather to another's son -- could wield a coordinated, long-lasting and terrible impact on the global economy. The gold standard's role in the worldwide depression of the 1930s has been probed before, notably in Barry J. Eichengreen's scholarly Golden Fetters (1992).

But Ahamed -- a hedge fund adviser, a World Bank veteran and a supple writer -- personalizes the story, exploring how insular relationships led to bad choices. Strong and Norman, for instance, became friends and gained each other's trust through lengthy correspondence. Strong used his influence to secure a loan for England, then prodded Norman to put England back on the gold standard. Norman, in turn, persuaded Strong to push down U.S. interest rates, helping to create the stock bubble that eventually burst in October 1929. When Strong died in 1928, his replacement became Norman's thrall and fell in lock-step with the emphasis on gold, extending the economic agony. Meanwhile, the unchecked concentration of power in one banker's hands was also roiling Germany. In 1924, Schacht went bizarrely off the farm and attacked his government, releasing public statements accusing the state of losing control of its finances and saying that Germany was too broke to pay additional war reparations.


Liaquat Ahamed, a former World Bank economist and investment fund manager, began research on this book long before the current financial crisis, having no idea of the relevance it would have upon its publication. It is a history of the financial and economic turmoil that began in 1914 and didn't really end until after World War II. He traces the development of this crisis through the lives and actions of four central bankers: Benjamin Strong of the Federal Reserve of New York, Montagu Norman of the Bank of England, Emile Morceau of the Banque de France, and Hjalmer Schacht of the Reichsbank of Germany. The liquidity crisis of 1914 has suddenly become a subject of interest as it bears relevance to today's problems.

Ahamed's central thesis is that the critical decisions made by these four bankers not only caused the Great Depression but also created the conditions for World War II. The most fateful event of all was the decision to adhere to the gold standard. In retrospect, tying the amount of currency a country has in circulation to the amount of gold it has in its vaults appears arbitrary and nonsensical. However, it seemed like a good idea at the time, it provided a universal standard against which countries could stablize their currencies. Unfortunately it became a straight jacket which gave them little room to maneuver.

When the big four bankers came into power in the mid-1920s, the use of the gold standard actually seemed to be working, currencies were stabalized and capital was once again flowing. The problem however was that there was not enough gold in existence to proide enough capital to finance world trade. According to Ahamed, this was the central flaw in the financial system that led to the Crash of 1929 and the subsequent Great Depression. Of course, the chain of events was more complicated than that and Ahamed recognizes the complexity. Each of the four bankers and their respective countries were pursuing their own agendas as opposed to trying to save the system as a whole, the gold standard was the proverbial straw that broke the camel's back.

Ahamed has written an interesting history of what otherwise would be a fairly dull story. It makes one think about flaws in the system - like sub-prime mortgages, derivatives and the excessive use of credit - and how things could have been different if they had been recognized earlier.

The author of this book has done an excellent job in analyzing what the main cause of the Great Depression was.The crucial pages in the book that provide the answer are pp.295-302.It is here that we find Benjamin Strong,in August of 1927, who knew full well that the United States was in the midst of not one ,but two raging, speculative bubbles,one in stocks and the other in real estate,forced through a one half of one percent rate cut that simply fueled the specultive bubbles even further.We find Herbert Hoover,blamed for the Great Depression in the United States,calling the future outcome one hundred percent correctly when he stated that the speculation of the late 1920's would lead to a Depression unless the banker financed speculative build up was stopped.Hoover's attempt to stop the insane rate cut failed.President Coolidge simply pointed out that there was nothing he could do because the Federal Reserve System was independent of the Federal Government.He stated that he had no authority to attempt to get the FRS to reverse the rate cut ,which they eventually did in February ,1928.
Unfortunately,by that time that action was too little and too late.Only a policy of credit restriction applied against speculators might have mitigated the eventual depression.

I highly recommend the book.It puts to rest once and for all the canard ,repeatedly told by Murray Rothbard and Milton Friedman,that the FRS was part of the Federal Government and was controlled by government bureaucrats who told the bankers what to do.It is just the reverse.The bankers were so powerful that they could tell an American president what to do.It is interesting to realize that the bankers have again brought the United States to the edge of financial catastrophe with their highly speculative loan policies




The book is primarily the story of 4 Central Banks - those of the US, England, France, and Germany, and of the heads of those banks. The book actually covers a longer span than the inter-war period, it includes important information about the banks just prior to the First World War, their activities during the war, and extends into the Second World War. The lead-in is especially important, because it explains so much of what happened during the inter-war period.

The events are too complicated to review in detail, but the author explains them well and shows how the personalities of the Bankers as well as the politics of the times influenced events. Let us just say, mistakes were made.

My one quibble with the book is that the author is rather unsparing in his criticism of the bankers. Although this is somewhat justified, I ended up feeling sympathetic to at least the heads of the US Federal Reserve and the Governor of the Bank of England. Their primary fault was an inability to see beyond the conventional economic wisdom of the times. In point of fact, the only person who seemed to get it right during this time was Maynard Keynes. If we are to judge everyone against the standard of the most brilliant mind in their field, very very few of us are going to come out well.

The most important point the book makes is how factors other than purely economic issues play a role in making economic decisions, but how the consequences of those economic decisions then rebound onto the wider political history of the times. While the book deals with a different time and political landscape, the parallels to our own times are VERY frightening. The author does not emphasize the parallels, and the book was actually completed before many parallel events occurred. To my mind that just makes them more compelling.

Mr. Ahamed has written a wonderful book on both the financiers who dominated money policy in the period between the two world wars and the economic history of that period. Mr. Ahamed writes very clearly and well about both the bankers and the period. His writing is also as vivid and interesting as it is clear. And Mr. Ahamed's writing imparts a extremely vast amount of detail and information on the economics of the 1920s and the Great Depression. He has provided an extensive list of references along with a vast amount of footnotes. Mr. Ahamed's work is history and economic history at its best.

Among the major gems of information provided by Mr. Ahamed is the baneful effect of the gold standard between the world wars. As other economists such as Peter Temin have indicated, each economy began to recover from the Great Depression when the economy left the gold standard almost invariably. Mr. Ahamed demonstrates the absurdity of Montagu Norman's policy of restoring the British pound to its pre World War I value in gold.

Mr. Ahamed also demonstrates how World War I drastically changed economic conditions so that the British led prewar gold standard was an impossibility. He also demonstrates the pernicious and poisonous effect of the reparations imposed on the former Central Powers by the Treaty of Versailles. These reparations gravely hindered international cooperation. And Mr. Ahamed makes evident that the central bankers have a colossal impact on the economy and the lives of individuals all over the world.

This book is a must read for all Americans, particularly those who have studied economics.

[Sanjay M]

Geographical Heat Map of US Unemployment:

http://www.nytimes.com/interactive/2009 ... HARDT.html

[svinayak]

Goldman Cuts Global GDP Forecast, Sees 0.6% Decline (Update1)

By Simon Kennedy

March 5 (Bloomberg) -- Goldman Sachs Group Inc. predicted a deeper global recession than it previously anticipated and said the slump could yet worsen.

Goldman Sachs now expects worldwide gross domestic product to shrink 0.6 percent in 2009 compared to a previous forecast for a 0.2 percent contraction, London-based economist Binit Patel said today in a report to clients.

“The economic environment overall is still likely to remain challenging and uncertainty is high,” Patel wrote.

Already stuck in its worst recession since World War II, the world economy is deteriorating even as central banks slash their interest rates to record lows and governments rescue banks and introduce stimulus packages. U.S. stock futures extended declines after the Goldman report.

Goldman released its new forecast as the European Central Bank and Bank of England follow the U.S. Federal Reserve in cutting interest rates to the lowest ever. A report today showed European consumer spending fell the most in 13 years in the fourth quarter, while China signaled it may not extend its stimulus plan.

U.S. Treasury Secretary Timothy Geithner yesterday said the U.S. recession is “deepening” and the Fed said there’s little hope of an improvement in coming months. Italian Finance Minister Giulio Tremonti said in Rome today that “looking beyond all forecasts, we know we are in an unknown territory.”

[Singha]

a huge 10 page article on the foreclosure scene in Cleveland, Ohio
http://www.nytimes.com/2009/03/08/magaz ... =1&_r=1&hp

shades of steinbeck's grapes of wrath here talking of the lenders and the abandoned homes...homes being bought for $1500 by predatory "coyote" owners

[vsudhir]

a huge 10 page article on the foreclosure scene in Cleveland, Ohio
http://www.nytimes.com/2009/03/08/magaz ... =1&_r=1&hp

shades of steinbeck's grapes of wrath here talking of the lenders and the abandoned homes...homes being bought for $1500 by predatory "coyote" owners

Terrible.

I was in Cleveland, like, 2 weeks ago on business (no, not trying to buy a house or anything). Remember thinking this looks like a kewl, nice, laid back city.....Now I know better.....

[ramana]

What was the contraction in world GDP in earlier recessions/ Its not helpful of GS to say there will be 0.6% reduction. What was it in past to give a context? And what does it mean to different areas? Especially India?

Suraj, Again what does it mean to the old prognosis? Does it delay or advance the dates?

[Singha]

the depopulation of the rust belt continues. 100k people have left cleveland the article says in last few yrs...second only to new orleans(post katrina).
Buffalo was a ghost town of defeated looking blacks even a decade ago,
miles of rusting abandoned sheds and factories.

contrast US to Germany...which is still a manufacturing superpower + good in services too.

the total sellout to PRC of US manufacturing must rank as one of the more foolish strategic decisions in last 50 yrs.

a large nation of 300mil with low taxes (big rich-poor gap) cannot live on "service sector" alone

[John Snow]

Acharya ji credit rating are plummeting like AIG ratings, because he forgets to give credit to the source, lest we get confused with source of wisdom.

The graphic is from Wall Street Journal.

[Singha]

no wonder Potus is going grey haired...

yahoo news:

12 pct. are behind on mortgage or in foreclosure

By J.W. ELPHINSTONE, AP Real Estate Writer J.w. Elphinstone, Ap Real Estate Writer – 56 mins ago

NEW YORK – A stunning 48 percent of the nation's homeowners who have a subprime, adjustable-rate mortgage are behind on their payments or in foreclosure, and the rate for homeowners with all mortgage types hit a new record, new data Thursday showed.

But that's not the worst of it.

The reckless lending practices in states like Florida, California and Nevada that were the epicenter of the housing crisis are no longer driving up the nation's delinquency rate. Instead, the foreclosure crisis now is being fueled by a spike in defaults in states like Louisiana, New York, Georgia and Texas, where the economies are rapidly deteriorating and thousands are losing their jobs.

A record 5.4 million American homeowners with a mortgage of any kind, or nearly 12 percent, were at least one month late or in foreclosure at the end of last year, the Mortgage Bankers Association reported. That's up from 10 percent at the end of the third quarter, and up from 8 percent at the end of 2007.

Prime and subprime fixed-rate loans saw sharp increases in the fourth quarter, a sign that the problem is now the economy.

"We're seeing increases in fixed-rate categories and that's where the problems are coming from," said Jay Brinkmann, the group's chief economist. "The foreclosure picture is more clearly driven by the jobs market."

That trend highlights one of the biggest challenges confronting the Obama administration's mortgage relief plan launched this week. While the $75 billion plan could help change the loan terms or refinance up to 9 million homeowners, unemployed borrowers will have a hard time qualifying.

On Thursday, the Labor Department said new unemployment claims last week totaled 639,000, lower than expected, but still at elevated levels. Factory orders also slipped for the sixth month in a row in January, the Commerce Department reported.

"There can be no doubt that employers continue to shed labor at a frightening pace, with no end in sight," Ian Shepherdson, chief U.S. economist at High Frequency Economics, wrote in a client note Wednesday.

The key is what kind of workers are losing their jobs, Brinkmann said. Unemployment for people with college degrees, some college education or technical training — those most likely to own homes and have prime fixed-rate loans — has nearly doubled over the past six months.

In New York, for example, where the financial industry is handing out pink slips like ticker tape, homeowners who once had good credit are defaulting at an increasing clip.

The only bright spot in the report is the devastation wrought by subprime ARMs appears to be waning. Their 30-day delinquency rate continues to fall and is at the lowest point since the first quarter of 2007.

That offers little reassurance to Florida, where 60 percent of homeowners who have a subprime ARM are at least one payment behind and one in five of all mortgage holders aren't current.

[John Snow]

Suraj garu did not utter the word contraction.

contractions occur when there is more than recession, we are in depression....
The asset deflation is rampant and will continue for a while.....

the dollar pumping has not hit the main street (marco econ) yet, the dollars are just being sucked into a black hole of fixing the books and (credit worthy ness) of the financial institutions, the real black hole of andromedia strain is AIG, which under wrote policies and reinsured and got reinsured from Lyllods of London (whichin itself is is in last throes).

The insurance game is played by under writing policies of great magnitude by setting aside as low reserves $1 for a policy, when the claims come in they start to scramble fro funds to pay claims...

There is lot to come, for instance Citi Bank itself must be having a policy fro AIG just in case they go belly up apart from pulling FDIC and bailout money

The day of judgement has arrived, because we now have gained experience

[Suraj]

What was the contraction in world GDP in earlier recessions/ Its not helpful of GS to say there will be 0.6% reduction. What was it in past to give a context? And what does it mean to different areas? Especially India?

Suraj, Again what does it mean to the old prognosis? Does it delay or advance the dates?

The world GDP is not of much importance in that comparison. What matters is how fast those with larger GDPs than us are growing. The western economies are almost all reporting negative GDP growth. However, keep in mind that any comparison is also a function of the unit of comparison, i.e. typically the USD. Therefore exchange rate dynamics of each economy matters along with growth. A simple assumption ought to be that weak economy = weak currency. But that is not strictly true. Both the US and Japan are facing strengthening currencies while reporting -ve GDP growth - the Japanese particularly so. If compared in absolute GDP terms, exchange rate dynamics are a wild card, but in PPP terms, we'll catch up earlier than projected.

[Tamang]

Has this been posted here before?

http://www.youtube.com/watch?v=2I0QN-FYkpw

[John Snow]

Mercantile countries (nearest KSA assuming they manufacture nothing except) pump commodity like oil may have stong currency but very weak ( or fragile eeconomy) based on demand for oil....

So how can we tell the difference between a recession and a depression? A good rule of thumb for determining the difference between a recession and a depression is to look at the changes in GNP. A depression is any economic downturn where real GDP declines by more than 10 percent. A recession is an economic downturn that is less severe.
By this yardstick, the last depression in the United States was from May 1937 to June 1938, where real GDP declined by 18.2 percent. If we use this method then the Great Depression of the 1930s can be seen as two separate events: an incredibly severe depression lasting from August 1929 to March 1933 where real GDP declined by almost 33 percent, a period of recovery, then another less severe depression of 1937-38. The United States hasn’t had anything even close to a depression in the post-war period. The worst recession in the last 60 years was from November 1973 to March 1975, where real GDP fell by 4.9 percent. Countries such as Finland and Indonesia have suffered depressions in recent memory using this definition.

from google

[Chinmayanand]

Onlee if india and GCC free trade gets done in INR . This will change many future economic scenarios.

India-GCC free trade in INR????GCC will become Iraq.

[Raghav K]

What's Dead (Short Answer: All Of It)

Just so you have a short list of what's at stake if Washington DC doesn't change policy here and now (which means before the collapse in equities comes, which could start as soon as today, if the indicators I watch have any validity at all. For what its worth, those indicators are painting a picture of the Apocalypse that I simply can't believe, and they're showing it as an imminent event - like perhaps today imminent.)

* All pension funds, private and public, are done. If you are receiving one, you won't be. If you think you will in the future, you won't be. PBGC will fail as well. Pension funds will be forced to start eating their "seed corn" within the next 12 months and once that begins there is no way to recover.
* All annuities will be defaulted to the state insurance protection (if any) on them. The state insurance funds will be bankrupted and unable to be replenished. Essentially, all annuities are toast. Expect zero, be ecstatic if you do better. All insurance companies with material exposure to these obligations will go bankrupt, without exception. Some of these firms are dangerously close to this happening right here and now; the rest will die within the next 6-12 months. If you have other insured interests with these firms, be prepared to pay a LOT more with a new company that can't earn anything off investments, and if you have a claim in process at the time it happens, it won't get paid. The probability of you getting "boned" on any transaction with an insurance company is extremely high - I rate this risk in excess of 90%.
* The FDIC will be unable to cover bank failure obligations. They will attempt to do more of what they're doing now (raising insurance rates and doing special assessments) but will fail; the current path has no chance of success. Congress will backstop them (because they must lest shotguns come out) with disastrous results. In short, FDIC backstops will take precedence even over Social Security and Medicare.
* Government debt costs will ramp. This warning has already been issued and is being ignored by President Obama. When (not if) it happens debt-based Federal Funding will disappear. This leads to....
* Tax receipts are cratering and will continue to. I expect total tax receipts to fall to under $1 trillion within the next 12 months. Combined with the impossibility of continued debt issue (rollover will only remain possible at the short duration Treasury has committed to over the last ten years if they cease new issue) a 66% cut in the Federal Budget will become necessary. This will require a complete repudiation of Social Security, Medicare and Medicaid, a 50% cut in the military budget and a 50% across-the-board cut in all other federal programs. That will likely get close.
* Tax-deferred accounts will be seized to fund rollovers of Treasury debt at essentially zero coupon (interest). If you have a 401k, or what's left of it, or an IRA, consider it locked up in Treasuries; it's not yours any more. Count on this happening - it is essentially a certainty.
* Any firm with debt outstanding is currently presumed dead as the street presumption is that they have lied in some way. Expect at least 20% of the S&P 500 to fail within 12 months as a consequence of the complete and total lockup of all credit markets which The Fed will be unable to unlock or backstop. This will in turn lead to....
* The unemployed will have 5-10 million in direct layoffs added within the next 12 months. Collateral damage (suppliers, customers, etc) will add at least another 5-10 million workers to that, perhaps double that many. U-3 (official unemployment rate) will go beyond 15%, U-6 (broad form) will reach 30%.
* Civil unrest will break out before the end of the year. The Military and Guard will be called up to try to stop it. They won't be able to. Big cities are at risk of becoming a free-fire death zone. If you live in one, figure out how you can get out and live somewhere else if you detect signs that yours is starting to go "feral"; witness New Orleans after Katrina for how fast, and how bad, it can get.

The good news is that this process will clear The Bezzle out of the system.

The bad news is that you won't have a job, pension, annuity, Social Security, Medicare, Medicaid and, quite possibly, your life.

It really is that bleak folks, and it all goes back to Washington DC being unwilling to lock up the crooks, putting the market in the role it has always played - that of truth-finder, no matter how destructive that process is.

Only immediate action from Washington DC, taking the market's place, can stop this, and as I get ready to hit "send" I see the market rolling over again, now down more than 3% and flashing "crash imminent" warnings. You may be reading this too late for it to matter.

http://market-ticker.denninger.net/arch ... Of-It.html

[Satya_anveshi]

^^Winner

[John Snow]

Thats why We have keep throwing $$ into a black hole called AIG