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No "bottom" until the debt is gone
As detailed in Debt Deflation Bear Market Update Part I: 2009 Windup, the Debt Deflation Market that started in 2008 continues in 2009 with rallies driven by positive sentiment invoked by government stimulus spending announcements, such as the rally we have witnessed over the past few days. As we exit the Period of Panic that began in October and enter the Period of False Hope and Uncertainty in 2009, the brave hearted may attempt to trade these rallies, and we will attempt to identify them for subscribers. The false hope is that government spending can pull the economy out of its debt deflation, and that we are wiser than our grandparents and great grandparents were under similar circumstances. But that was then, and this is now.
MESSAGE READ TO CONGRESS; President Asks Speed on Bills to Create Work in Next Six Months. URGES PUBLIC COOPERATION He Advocates Federal Loans to Farmers--Hits at Speculation as a Cause of Depression. TREASURY LOSS $180,000,000. Caraway Wants Specific Bill. ASKS $150,000,000 TO AID THE IDLE. Most of Message on Depression.
By RICHARD V. OULAHAN. Special to The New York Times.
WASHINGTON, Dec. 2, 1930.--Frankly stating that the treasury was confronted with a deficit of $180,000,000 and plainly, indicating that this would prevent any continuance of the 1 per cent reduction in income taxes granted last year, President [Hoover] ...
The DJIA rallied 8% from 178 on Dec. 1, 1930 to 192 Feb. 16, 1931 on the promise of tax cuts and deficit spending programs, before declining another 76% to 45 on Jun. 27, 1932. Now that is a debt deflation bear market bottom. By RICHARD V. OULAHAN. Special to The New York Times.
WASHINGTON, Dec. 2, 1930.--Frankly stating that the treasury was confronted with a deficit of $180,000,000 and plainly, indicating that this would prevent any continuance of the 1 per cent reduction in income taxes granted last year, President [Hoover] ...
The “lesson” we are supposed to have learned is to not worry about deficits during recession -- or before or after them, for that matter. In the fictional world of mainstream economics, deficits don’t matter when the economy is expanding because we’ll grow our way out of it, you see, and they don’t matter during recessions because fiscal stimulus to prevent recession from turning to depression is paramount, you see. The lesson of 1930 was Hoover’s mistaken balanced budget policy during a recession. That plunged the US into a depression. Or maybe not.
RATES OF INTEREST, PAY TIED TO JOBS; RATES OF INTEREST, PAY TIED TO JOBS
February 6, 1947 (New York Times)
The experience of Sweden, the only country to stabilize its economy successfully during the world economic depression of the thirties, is that fixing interest rates that discourage saving and allowing wage rates to reduce profits may prolong or intensify unemployment, Dr. Bertil Ohlin declared last night.
Do we have it in us, to learn from Sweden? Then again, can Sweden learn from Sweden?February 6, 1947 (New York Times)
The experience of Sweden, the only country to stabilize its economy successfully during the world economic depression of the thirties, is that fixing interest rates that discourage saving and allowing wage rates to reduce profits may prolong or intensify unemployment, Dr. Bertil Ohlin declared last night.
New Nordic Outlook: Deeper recession - despite aggressive stimulus policies
Nov. 25, 2008 (Ad Hoc News)
The downturn in the Swedish economy is continuing at a rapid pace. Next year GDP will fall by 1.3 per cent, and economic weakness will persist in 2010. The recession will have a growing impact on the labour market. The job market will shrink by nearly 150,000 people altogether, and unemployment will climb to nearly 10 per cent by the end of 2010. The Riksbank will cut its repo rate at least to 1.50 per cent next summer. The government will implement additional fiscal stimulus packages, and by 2010 Sweden's annual surpluses in public sector finances will have turned into a deficit equivalent to 3.5 per cent of GDP.
Sweden “learned” what all governments “learned,” that a depression driven by debt deflation is like any other recession that can be cured by the cause, credit expansion; politicians who fail to pull out the umbrella of government credit, the bigger the better, to rescue debtors and wave it in the air shouting loudly might as well stand on a church steeple holding a golf club in a thunderstorm so guaranteed is inaction to lead to multiple strikes of fury by unemployed voters. Nov. 25, 2008 (Ad Hoc News)
The downturn in the Swedish economy is continuing at a rapid pace. Next year GDP will fall by 1.3 per cent, and economic weakness will persist in 2010. The recession will have a growing impact on the labour market. The job market will shrink by nearly 150,000 people altogether, and unemployment will climb to nearly 10 per cent by the end of 2010. The Riksbank will cut its repo rate at least to 1.50 per cent next summer. The government will implement additional fiscal stimulus packages, and by 2010 Sweden's annual surpluses in public sector finances will have turned into a deficit equivalent to 3.5 per cent of GDP.
Exporting Depression
One way to cope with recession is to ship it off to distant shores by means of capital controls.
Attracting Foreign Investment, Sony
Japan's economic depression was rooted in the interest equalization tax instituted in July 1963 by the President of the United States John F. Kennedy... At the time, the American economy was in recession, resulting in a tremendous outflow of domestic capital. To slow this trend, Kennedy took strong measures -- a 16.5% interest equalization tax on all capital leaving the U.S. While this move did indeed decrease the outward flow of American capital, it also incited panic in world markets. Japan was no exception. In 1965, Japan felt the full effects of the tax -- the securities market slumped into the worst depression in its history. When the Tokyo Stock Exchange average dropped to 1,020 yen, many thought that the Japanese economy would collapse.
But that won't work again. The US was a net creditor and an ample market for exports. Now we are neither. Japan's economic depression was rooted in the interest equalization tax instituted in July 1963 by the President of the United States John F. Kennedy... At the time, the American economy was in recession, resulting in a tremendous outflow of domestic capital. To slow this trend, Kennedy took strong measures -- a 16.5% interest equalization tax on all capital leaving the U.S. While this move did indeed decrease the outward flow of American capital, it also incited panic in world markets. Japan was no exception. In 1965, Japan felt the full effects of the tax -- the securities market slumped into the worst depression in its history. When the Tokyo Stock Exchange average dropped to 1,020 yen, many thought that the Japanese economy would collapse.
The Bubble that Broke the World, again?
A facet of the delusion that once again engulfed us is explained in the section of Garret Garrett's 1932 classic The Bubble that Broke the World above. I bought an original copy of the book in 1998 from the Victor Hugo used book store on Newbury Street in Boston. It has been a constant guide ever since. The facts of the current global credit crash vary little from his description except in the speed and fury of the current instance. If you have not read it yet, I recommend it highly.
Global Crash
Tearing a page from the last Great Depression hymn book, world leaders at the G20 summit last week agreed to not repeat the errors of the past by erecting trade barriers and repeating of the beggar thy neighbor policies of the 1930s that lengthened and deepened the depression. But the modern global economy isn't giving them a chance. Who needs tariffs to slow trade when we have a real-time global credit network crash and demand collapse doing it for us?
LAYUPS OF SHIPS REFLECT DETERIORATION IN WORLD’S CONTAINER TRADE
November 24, 2008 (PETER T. LEACH – Shipping Digest)
If current trends continue, Ron Widdows says, he’ll soon be able to see much of the world’s container ship fleet from his office window in Singapore. The chief executive of Neptune Orient Lines is joking, but it’s gallows humor — the growing number of laid-up ships is a sign of hard times that are likely to become worse.
The container shipping industry is being hit by a synchronized global economic shock more severe than any recession since the advent of containerization. The impact is only beginning to be felt. It’s likely to change the face of the industry by forcing some lines out of business, forcing others to merge or sell off ships and cause layups of hundreds of ships in the next year or two.
Until the end of October, the slowdown appeared to be a cyclical downturn that container lines could manage the way they have managed previous slumps. But then consumers in the U.S. and Europe, seeing what was happening in the financial markets, closed their wallets and purses. With businesses hit by weak demand and tight credit, container lines saw their cargo bookings plummet.
No, this global debt deflation is not like the last. It is much more swift, and that carries with it its own unique risks. November 24, 2008 (PETER T. LEACH – Shipping Digest)
If current trends continue, Ron Widdows says, he’ll soon be able to see much of the world’s container ship fleet from his office window in Singapore. The chief executive of Neptune Orient Lines is joking, but it’s gallows humor — the growing number of laid-up ships is a sign of hard times that are likely to become worse.
The container shipping industry is being hit by a synchronized global economic shock more severe than any recession since the advent of containerization. The impact is only beginning to be felt. It’s likely to change the face of the industry by forcing some lines out of business, forcing others to merge or sell off ships and cause layups of hundreds of ships in the next year or two.
Until the end of October, the slowdown appeared to be a cyclical downturn that container lines could manage the way they have managed previous slumps. But then consumers in the U.S. and Europe, seeing what was happening in the financial markets, closed their wallets and purses. With businesses hit by weak demand and tight credit, container lines saw their cargo bookings plummet.
Exit Fantasy
Next year the fiction will be dispelled that governments can stop debt deflation by means that do not either produce mass unemployment or horrific inflation. As they try and repeatedly fail to meet expectations the Period of False Hope and Uncertainty will give way to the Era of Total Despair, and then we will see a bottom. Lost and wandering the ideological landscape with all of the old beliefs washed out, men go mad and grasp for any explanation but the truth -- that the debt must be deflated before recovery can begin -- and anything can happen. Watch Kudlow’s show and you’ll see what I mean.
Economic eras may share similarities but not two are alike. What worked in the last debt deflation will not work now, and what did not work then will most certainly not work now. In debt deflation governments are either fighting the last economic war or some ancient war fought under conditions that will never recur, but all the same the root causes are alike: the economic delusions produced by excess credit.
The US cannot export its way out of debt as Japan did from 1990 until recently – and what will happen to Japan in this recession with its public debt now 193% of GDP? We hear that Asia will lend no more, so the US cannot borrow its way out of debt.
At least iTulip readers can resign ourselves to our fate, and the sooner the better. There are consequences to debt. How shall we take it, by inflation or deflation? I say inflation is inevitable, so let's get it over with.
iTulip Select: The Investment Thesis for the Next Cycle™
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