Current Recession Is No Great Depression (We're being excessively pessimistic)

Smart Money ^ | December 19, 2008 | Donald Luskin

[Freedom_Is_Not_Free]

I am talking about 2008 and going forward. The chart you posted is for the entire housing bubble years, and is therefore highly suspect, or as I would put it, artificial and therefore worthless going forward.

Furthermore, what is that blue line on the graph? Is that unemployment or is that employment. If it is employment, then employment has been falling steadily since 2000.

It looks like, despite an anomolous spike, real family income has fallen since Jan. 2007.

I’m talking NOW, not years past, and certainly not the free-spending, freewheeling, go-go bubble years when CEO pay and broker bonuses and title company and banker fees were at all time highs.

[Freedom_Is_Not_Free]

Finally, I wouldn’t be comparing how easy this crisis is to the 1970s until we have gotten through this crisis. Your comparison is premature. To date, things are not nearly so bad as the 1970s, but you are comparing this still unwinding crisis with its unraveling economic conditions, to what you know was the worst of the 1970s.

How about keeping your powder dry and will compare this crisis to others after the economy recovers and we have the hind-sight to discuss it intelligently.

When all is said and done, you and I may very well be comparing this crisis period accurately with the ‘70s, or maybe we will be wishing it was only as bad as the 1970s.

[Freedom_Is_Not_Free]

For clarity, meant the period until 1996. I typoed 1999, when I meant to say the period 1982 to 1996 represented a fundamental change in investor practices based on increased investment toward retirement, while the period of 1997 to 2007 represents a huge bubble based on easy money, and I competely disregard those patterns as being misleading and erroneous.

[expat_panama]

"...maybe we will be wishing it was only as bad as..."

That's the global warming argument and it's bogus.  I put my money on what is, and I expect things that've happened in the past during times like these to happen again.  I have to run a business on facts; although it's fine with me if others go on feelings til they feel their flippin' brains out.

[AndyJackson]

FWIW, I disagree that data from 1987 to 1999 is meaningless. IMHO, this trend still covers the massive transition from most workers covered by pension funds to most workers having to contribute into 401(k) retirement funds and IRAs. I still feel he period from 1982 to 1996 is based on fundamentals, and I draw my conclusions according. From 1997 onwards, I agree with you 100%. Why do you consider the period of 1987 to 1996 to be within the bubble era of easy money, rather than a fundamental shift in investing?

First, whether what you are indicating is merely a shift in responsbility for investment of pension money from corporations to invididuals. Second, I spent a lot of time in California in the 1987 - 1996 time frame. The bubble economy was already operating there. Most people I knew who were doing really well were doing well on trading paper and real estate, not doint something useful. The difference between then and later is merely the nationalization of the phenomenon.

But I will agree that 1997-1999 was a transition point, and the country would have been much better off if Bubbles Greenspan had kept his fingers of the credit expansion machine.

[Toddsterpatriot]

What *should* the rate of growth of M1 have been from the spring of 2005 to the spring of 2008

And as I’ve said in this very thread and elsewhere, a steady rate of increase that is a factor of long-term GDP growth trends is prob (although not proven) more effective and manageable. A relatively steady y/y rate in the 0% to +5% range and m/m changes of no more than 1% in either direction is both stable and flexible enough for policy purposes.

This chart shows M1 from January 2005 to January 2008. Looks like M1 grew $10 billion in 3 years. About 0.25% annual growth. Sounds like the Fed did a great job of keeping M1 at the very low end of your range.

Should the Fed be congratulated?

[rb22982]

Delinquency rates are soaring. Mortgage lates are at an all time record high. All other types of loans are having delinquency rates soar too.

[rb22982]

Yes (to depression conditions and a long L prolonged slump). Most people (75%+) don’t have the money to push money and there is almost no way we see pay increases in this environment. If the credit spicket gets completely turned off (HELOCs are already gone, credit lines are just starting to be cut—$2 trillion more in the next 2 years according to AmEx). The only way we see inflation skyrocket IMO is if the US gov’t/fed reserve begins to crumble—which could happen and is becoming more likely with each bailout. I have some silver/gold coins as a backup for that situation.

[JasonC]

It is indeed, especially when you know absolutely nothing, but defy instruction by stuffing your ears with media-supply venom.

There isn't a capitalist soul left on FR. Instead we get class warfare hatred and mindless venom on a scale that would make Nazis blush.

[JasonC]

How an investment is financed has nothing to do with how productive it winds up being. You can invest in absolute stinkers with 100% equity and lose every dime of it, or in outstanding business entirely with debt and do fine.

More illiteracy...

[sanchmo]

Nice try, quoting me out of context. Did you notice I said this:
As I said multiple times, trying to manage M1 short-term (under 12-18 month) growth based on very short-term (under 3-6 month) CPI or PCE trends is not manageable due to both the incompleteness of data and the policy lag.

And did you notice this:

[investigateworld]

So whatta’s a matter with the Smoot-Hawley law?
Actually - I'm amazed there was that much intelligence in our Congresscritters back then.
What we call free trade is actually ‘labor arbitrage’, - seeking out the lowest possible unit cost of labor for the production of goods and services.
Germany and Japan had the lowest labor costs in the civilized world back then.
Imagine how tough they'd been to defeat if they had a booming economy in the years leading up to WWII. Hopefully our grandkids will find it in themselves to forgive us for what we've done to them - if they survive.

[editor-surveyor]

All wise investors will ask santa for a time machine ;o)

[Toddsterpatriot]

Jason C asked you,

"What *should* the rate of growth of M1 have been from the spring of 2005 to the spring of 2008"?

If you don't want to be quoted out of context, answer the question.

[editor-surveyor]

"When others lose their jobs, it’s a recession. When you lose your job, it’s a depression."

When quoting Ron Reagan, give the dude credit ;o)

[sanchmo]

I answered the question very clearly. The answer is that asking for an optimal rate of M1 growth for any 3-year period without taking into consideration what has transpired over the previous 5-10 years is meaningless, and provides no useful information for monetary policy.

[Toddsterpatriot]

What we call free trade is actually ‘labor arbitrage’, - seeking out the lowest possible unit cost of labor for the production of goods and services.

Is that why we trade so much with Canada, Japan and Germany now? Is that why they trade so much with us?

[rb22982]

True—but when you leverage up you are far more likely to go lose it all than if you have no leverage. Rio Tinto for one that is learning that the hard way.

[Toddsterpatriot]

I answered the question very clearly.

Really? You mean the answer I quoted out of context? LOL!

The answer is that asking for an optimal rate of M1 growth for any 3-year period without taking into consideration what has transpired over the previous 5-10 years is meaningless

You know what transpired over the previous 5-10 years. Try again?

[AndyJackson]

How an investment is financed has nothing to do with how productive it winds up being. You can invest in absolute stinkers with 100% equity and lose every dime of it, or in outstanding business entirely with debt and do fine. More illiteracy...

I know that following a train of argument is way beyond your mental capacity, but I would remind you, first, that the issue had to do with a posters comment that debt to gdp was a meaningless figure. Illiterate unthinking fools like yourself might not see anything but coincidence in the fact that this bubble burst right after debt:gdp hit a centennial high. Those with more sense of financial history see cause and effect in the same things. But to each his own.

Second, how a capital project is financed (debt or equity) may not be a measure of its ultimate productivity, but the reason that credit bubbles burst is that the rapid expansion of credit historically has enabled the channeling of large quantities of productive output to useless activities as paper profits chase paper profits, all out of proportion to whether there is any underlying value. This we have witnessed through the dot com bubble and then the real estate bubble. It is no coincidence that rapid credit expansion has happened at a time when we have a glut of shopping malls, Miami beach condos and macmansion housing developments.

If you were literate in the history of finance you would recognize that what is happening now has happened before and will happen again. It is the old story of human frivolity and greed.