Econ: The Forecast is...?

[notyoueither]

I'm not sure if I should be cheered up by his aversion to the word 'depression,' or be depressed that denial is such a strong force.

[Jon Miller]

Also one could, on the corollary to the USSR going from nowhere to defeating Hitler, one can say Nazi Germany went from nowhere under crippling reparations to almost conquering Europe using a planned economy.... but let's forget about the cost of life to accomplish that (as we forget about the costs Stalinism had on the people).

I think this is the correct response.

I do think that the communistic plan will produce less, but that is some of the point (so that people work less, and have more time to enjoy themselves).

And I agree the point that all communist nations in the past have been dictatorships and in the end unsuccessful is concerning.

jM

[Arrian]

There was a time when if you said the United States was going to suffer a lost decade like Japan did in the 1990s, everybody would have said you were a mad pessimist. That begins to look like quite a good scenario. And I think it's a realistic scenario.

So he agrees with Krugman.

-Arrian

[DanS]

There is a lot to agree with in that article, particularly with regard to the causes and solutions. But the results that he lays out are too pessimistic. No doubt, we will be paying for this crisis for many years in the form of lower economic growth. But things like Japan's Lost Decade being a "good scenario" for the US makes him seem like he needs to take his meds. Japan was leveraged much, much more than was the US -- it was like California on speed.

[Theben]

As you know, Chimerica – the fusion of China and America

Now all we need is the lion head.

[notyoueither]

There is a lot to agree with in that article, particularly with regard to the causes and solutions. But the results that he lays out are too pessimistic. No doubt, we will be paying for this crisis for many years in the form of lower economic growth. But things like Japan's Lost Decade being a "good scenario" for the US makes him seem like he needs to take his meds. Japan was leveraged much, much more than was the US -- it was like California on speed.

Japan had other regions doing well to continue trade with. At least something was going right for them.

This is global, and getting worse by the day.

This is the stuff your grandparents' yarns are made of.

[Naked Gents Rut]

You need to pay more attention to leading indicators rather than lagging ones.

[notyoueither]

http://www.economist.com/world/europe/displaystory.cfm?story_id=13184594

Ex-communist economies

The whiff of contagion
Feb 26th 2009
From The Economist print edition

Eastern Europe’s woes are not unmanageable. But they are not being managed. The result could be catastrophe

AMID the wreckage of Latvia’s retailing industry, which has declined 17% year on year according to the latest figures, one item is selling well: T-shirts with seemingly mysterious slogans such as “Nasing spesal”. Latvians are glad to have something to laugh about, even if it is only their finance minister, Atis Slakteris. In an ill-judged foreign television interview, using heavily accented and idiosyncratic English worthy of the film character Borat, he described his country’s economic problems as “nothing special”.

Put mildly, that was an original interpretation. Fuelled by reckless bank lending, particularly in construction and consumer loans, Latvia had enjoyed a colossal boom, with double-digit economic growth and a current-account deficit that peaked at over 20% of GDP. Conventional wisdom would have suggested applying the brakes hard, by tightening the budget and curbing borrowing. But the country’s rulers, a lightweight lot with close ties to business, rejected that. Fast economic growth made voters feel that European Union membership was at last producing practical benefits, after a disappointing start when tens of thousands of Latvians went abroad in search of work, leaving rural villages and small towns depopulated.

The central assumption, in Latvia and many other countries in or near the EU, was that convergence with rich Europe’s living standards and other comforts was inevitable. Lending in foreign currency went from 60% of the total in 2004 to 90% in 2008. Why pay high interest rates in the local currency, the lat, when the cost of a euro loan was so much cheaper? In a few years Latvia would surely join the euro anyway. Similarly, worries about financing the inflows were dismissed: Swedish banks would no more abandon their subsidiaries in Latvia than they would pull out of, say, southern Sweden.

Last year tested those assumptions nearly to breaking point. First, Latvia’s housing bubble popped. Then the main locally owned bank, Parex, went bust and had to be nationalised, amid fears that it could not pay two syndicated loans due this year. In December Latvia accepted a humiliating €7.5 billion ($9.56 billion) bail-out led by the IMF.

The big cuts in social spending that the package entailed led to vigorous public protests. Now the government has resigned. At a time when strong leadership and public trust are needed more than ever, the country’s squabbling and discredited politicians look hopelessly out of their depth. Latvia is an economic pipsqueak, with just 2.4m people. But the rest of the region is watching nervously, fearful that more bad news from the Baltics could bring others crashing down too.

It is easy to be pessimistic. This is indeed the worst economic crisis since the collapse of the communist planned economies and the wrenching process of privatisation, liberalisation and stabilisation that followed. The main ex-communist economies are likely to contract by 3% this year, according to Capital Economics, a consultancy. Yet the picture is not uniform. Only a few countries have needed an IMF bail-out. One is Latvia, whose economy is set to contract by at least 12% this year, and whose credit rating has just been downgraded by Standard & Poor’s to junk. Another is Hungary, burdened with a larger debt-to-GDP ratio than almost any other new EU member. It received $25 billion in October and faces a contraction of up to 6%. A third is Ukraine—chaotically run, corrupt and badly hit by the slowdown in its main export market, Russia. Ukraine’s IMF deal brought it $4.5 billion in November. But a second tranche of $1.9 billion is stuck; the deal is unravelling as politicians squabble over spending cuts. Its economy is likely to shrink by 10% this year. Other countries with IMF packages agreed or pending include Belarus (a Russian ally which is still expected to see growth this year), Georgia (which was bailed out after last year’s war with Russia) and Serbia.

Most other countries in the region are faring much better, though. Poland—by far the largest economy of the new EU members—is nowhere near collapse. Unlike its central European neighbours, it is big enough not to depend chiefly on exports to the rest of the EU. By European standards, its public finances are in fairly good shape. Its debt-to-GDP ratio is below 50%. Growth will be negligible, or slightly negative, but nobody is forecasting a big decline. Some Polish firms and households have taken out foreign-currency loans—but the figure is around 30% of all private-sector lending, compared with twice that in Hungary.

The second-biggest economy, the Czech Republic, is in good shape too. Its economy may shrink by 2%, but it has a solid banking system and low debt. Its neighbour Slovakia is in better shape still: it managed to join the euro zone this year. Like Slovenia, which joined two years ago, Slovakia can enjoy the full protection of rich Europe’s currency union, rather than just the indirect benefit of being due to join it some day.

Farther afield, the picture is very different. For the poorest ex-communist economies, the problem is not financial meltdown. They lack much to melt. Their exports are raw materials, agricultural products and people. In six countries, money sent home by foreign workers counts for more than 10% of GDP (in Tajikistan and Moldova it is more than 30%). Outsiders who agonise over the Latvian lat or Hungarian forint are rarely bothered with worries about the somoni (Tajikistan), leu (Moldova) or manat (Turkmenistan).

That highlights an important problem. Outsiders tend to lump “the ex-communist world” or “eastern Europe” together, as though a shared history of totalitarian captivity was the main determinant of economic fortune, two decades after the evil empire collapsed. Though many problems are shared, the differences between the ex-communist countries are often greater than those that distinguish them from the countries of “old Europe” (see table).

They range from distant, dirt-poor despotic places to countries in the EU that are not just richer than some of the old ones, but have better credit ratings, sounder public finances and stronger public institutions. In almost any contest for good government, stability or prosperity, Slovenia (under a sort of communism until 1991) looks better than Greece, which invented democracy and was never communist.

The thirst for capital
Historical and geographical quibbles aside, what the ex-communist countries have shared over the past decade is a mighty thirst for capital. Having missed out on decades of growth and integration with the outside world, almost all (a few oddballs in Central Asia aside) are trying to catch up. Money from abroad has come in from borrowing on the bond market, from foreign direct investment or from selling shares. Most often it has come through bank loans.

At one extreme is Russia, which enjoyed huge external surpluses thanks to its wealth of raw materials. But its big companies borrowed lavishly on the strength of that, creating a potential short-term debt problem. Russian corporate borrowers have to pay back around $100 billion this year. At the other extreme lie countries such as Slovakia. They attracted billions from foreign car manufacturers, drawn by a skilled workforce, low taxes and decent roads in the heart of high-cost Europe.

Countries that relied chiefly on foreign direct investment are the least vulnerable now. The new factories may shut down. But it is harder for that capital to flee. Those that rely on foreign investors buying their bonds, such as Hungary, are the most vulnerable: their fortunes vary with every twitch of a trader’s fingers. In the middle are those that rely on lending from foreign banks to their local subsidiaries. That looked solid in the boom years, as Western banks scrambled to win market share by offering good terms to borrowers and lenders in the fastest-growing bit of Europe. It is still highly unlikely that any Western bank will pull the plug on a subsidiary anywhere—even in troubled Ukraine.

But nerves are jangling. The ex-communist countries have survived the first phase of the crisis, thanks to their own policies and some external support. The second phase, in which the rich world is turning stingier and possibly more protectionist and lenders are scurrying to safety, may be harder. The ex-communist economies must repay or roll over a whopping $400 billion-odd in short-term borrowings this year. Coupled with the lazy but easy lumping of nearly three dozen countries together, that creates the region’s biggest danger: contagion (see article). In other words, failure in one place sparks a disaster in another, even though it may be far away and have the same problem in a far more manageable form.

Contagion could happen in many ways. One is if depositors lose confidence that their savings are safe. So far, Western-owned banks have enjoyed rock-solid credibility: more so, in many cases, than governments or other public institutions. But that confidence could be undermined. If only one foreign bank pulls the rug from under one local subsidiary, leaving depositors stranded, it will cloud perceptions of banks’ reliability across the region. The most dangerous kinds of bank runs would be those in which depositors try to pull out either their foreign currency, or local currency which they would then attempt to convert into hard currency. In some countries that could overwhelm the ability of the central bank to support the financial system.

Another weak point is where shareholders take fright. If a foreign bank with big exposure to the region—Swedish, Austrian or Italian—needs to raise more capital but finds that outsiders think its loan book is too risky, what happens? The price of rescue may be that it sheds a troubled foreign subsidiary. Signs of shareholder twitchiness are growing (see chart).

For now, the most likely source of contagion is collapsing currencies. The paradox is that for countries with floating exchange rates, an orderly depreciation would in normal circumstances be a good way of cushioning an external shock, such as the slump in export markets now hitting the ex-communist economies. It stokes competitiveness and, along with lower interest rates, it lays the foundations for a return to growth. Governments with sound public finances might also consider running a looser fiscal policy to counteract the downturn.

Propping up the currency
For most of the countries in the region, such a textbook response is out of the question. Some have currency boards, or pegged exchange rates. In the Baltic states these have been the centrepiece of economic policy for more than 15 years. Abandoning them would not only bankrupt big chunks of the economy that have borrowed in euros. It would also be a huge psychological blow to public confidence in the whole idea of independent statehood. These countries have suffered the most painful part of being in the euro zone—the inability to devalue and regain competitiveness—without getting all the benefits.

Countries with floating exchange rates have a bit more room for manoeuvre. Their problem (a big one in Hungary, a lesser one in Romania and Poland) is that falling exchange rates may bankrupt the firms and households which have, in past years, taken out unwise loans in foreign currencies, chiefly euros and Swiss francs. That was, in effect, a convergence play. If you believed your country was heading for the euro zone some time in the next few years, then why not take advantage of the low interest rates there, rather than suffer the higher ones in your domestic currency?

What seemed a minor risk back then now looks painfully mistaken. For those earning forints or Polish zloty, the big swings in exchange rates in recent weeks have sent the size of both loans and repayments spiralling upwards. The zloty has dropped 28% and the forint 22% against the euro since the middle of last year. If the East Asian crisis of 1997 is any guide, these and other currencies may yet have further to fall.

This risk of a currency collapse will limit these countries’ options. So far many big central European countries have cut interest rates heavily to try to boost their economies—Poland’s central bank cut its policy rate again this week. But currency weakness will limit their room for manoeuvre. The Czech, Hungarian and Polish central banks issued a co-ordinated statement this week hinting they might intervene to support their exchange rates. But that route is tricky. Russia has blown half its reserves in a series of unsuccessful attempts to try to prop up the rouble.

Spending and tax policies would be another way of dealing with a downturn. But these are constrained, too. Those countries with a chance of joining the euro are scrambling to cut their budget deficits to get them in line with the 3% of GDP target set by the EU’s Maastricht treaty. Yet that aggravates the problem. The danger for Latvia and Ukraine is a downward spiral, where cuts in public spending damage the economy in a way that helps to entrench the deficit.

So far, the economic crisis has not translated into populist or protectionist politics. It is the east European countries that have been demanding that the rest of the EU stick by the rules of the single market. Their development over the past decades has been thanks to the free movement of capital, goods and labour. They would like a lot more of it: in a contest to subsidise industries, rich countries always win.

But that stance will not hold indefinitely if things get worse. Willem Buiter, a prominent economist, believes it is only a matter of time before some of the ex-communist countries introduce capital controls. That, in theory, would allow them to concentrate on stabilising their economies without worrying so much about the external value of their currency. If voters find the economic pain of adjustment unbearable, politicians can pass laws that will make foreign-currency borrowings repayable in local currency. That would be met with fury by the foreign banks, who would in effect see their loan books expropriated. But it could happen.

Against that background, what can be done? The east European countries are, belatedly, co-ordinating their approach within the EU, holding their own mini-summit on March 1st. They want to embarrass countries such as France for what they see as its protectionist approach to the crisis. They are supporting each other: the Czech Republic and Estonia were among those contributing to the Latvian bail-out.

But even co-ordinated local efforts are unlikely to make much difference, given the scale of the problem. The real lead, and the real money, must come from outside the region. That brings into play a slew of political problems. Having trumpeted their free-market principles in past years, and dismissed the stodgy approach of countries such as Germany and France, the new EU members from eastern Europe are now turning to old Europe in the hope that it can hurry up the flow of EU structural funds to counteract the downturn, bail out or prop up over-exposed banks in places like Austria, and stretch the rules of the European Central Bank to let it provide support to countries outside the euro zone. The case for such measures is strong, and it is in the interest of all Europe that contagion is contained. But that does not mean that it will happen.

[notyoueither]

You need to pay more attention to leading indicators rather than lagging ones.

Which leading indicators make you hopeful?

[Naked Gents Rut]

http://www.bloomberg.com/apps/news?pid=20601068&sid=aWM2uKBRuknQ&refer=home

Not great, but there's certainly no reason to think we're on the verge of another depression. The recession still seems likely to end sometime in 2009.

[notyoueither]

One, this isn't just about the US.

Two,

http://www.conference-board.org/economics/bci/pressRelease_output.cfm?cid=1

Although the LEI has risen during the past two months, it is too soon to say the contraction in the LEI that began in July 2007 is coming to an end. The LEI has continued to decline over a six-month period in the second half of 2008, with continued widespread weakness among its components. The primary sources of strength in the LEI in recent months have been the consistent and large contributions from inflation-adjusted money supply and the interest rate spread, and consumer expectations have only provided a weak positive contribution. At the same time, the CEI remains on a downtrend that began in November 2007, and the decline in the index has accelerated in recent months. All in all, the recent behavior of the composite economic indexes suggests that the economy will continue to be in recession in the near term.

An American cold has given most others pneumonia. That started it. Where it ends...

[Naked Gents Rut]

You can believe whatever you want; none of us can predict the future. I'm just pointing out that your fears of depression have no basis in economic fact.

[notyoueither]

You can believe whatever you want; none of us can predict the future. I'm just pointing out that your fears of depression have no basis in economic fact.

That's an interesting statement.

Can you point me to some of these 'facts?'

http://online.wsj.com/article/SB123574078772194361.html

FEBRUARY 28, 2009 Economy in Worst Fall Since '82
Output Sank 6.2% Last Quarter; Plunging Trade, Investment Signal Trouble Ahead

By CONOR DOUGHERTY and KELLY EVANS

The U.S. economy deteriorated far more than previously thought in the fourth quarter, according to new revisions of government data, casting fresh doubt about the chances of a recovery this year.

With falloffs in consumer spending and exports, gross domestic product declined at a 6.2% annual rate in the fourth quarter of 2008, according to a Commerce Department report Friday. The agency's first estimate for GDP, reported in January, was for a 3.8% decline.

The more recent figure -- which represents the steepest dropoff since the depths of the 1982 recession -- raises pessimism among economists. Until recently, many had been hoping for a rebound in 2009 and now sound downbeat about the remainder of this year.

Besides the revised GDP, economic indicators for the first two months of the year point to a deepening recession -- and the prospect of a dismal first quarter, too. Every week in February, more than 600,000 people filed new claims for unemployment insurance, and the unemployment rate rose to 7.6% in January, from 7.2% in December.

"The first quarter is going to be bad," said Christina Romer, chairwoman of the Council of Economic Advisers, at an economics gathering Friday sponsored by the University of Chicago and Brandeis University. She told the audience that Obama administration officials have been watching with deepening concern what's been going on around the world.

The U.S. has been hurt by the synchronized nature of the current global downturn. Exports declined at a 24% annual rate, compared with the 20% rate previously reported. Meanwhile, it appears the world's other economies truly fell apart in the fourth quarter. India reported on Friday its fourth-quarter GDP growth was lower than expected, while Japan said last week its GDP had contracted more than 12%. Growth in both Europe and the U.K. fell at an identical 5.9% annual rate. These numbers mean the U.S. can't lean on its trading partners to buy goods and help buoy business activity.

Private investment, which encompasses everything from business spending to homebuilding, fell at a 21% annual rate in the fourth quarter. That portends poorly for the first quarter of this year since one company's cutbacks in spending can lead another to do the same.

In Essex Junction, Vt., Bradley Aldrich, the president of an engineering firm, says he is putting off big purchases until he gets a clearer idea of where the economy is headed. His company, Forcier Aldrich & Associates Inc., spends up to $40,000 a year on various equipment. Mr. Aldrich has particular interest in a $30,000 software system that would allow the firm to hold a vast database of blueprints and other documents. He guesses it would save up to $5,000 a year in paper costs.

"It makes sense to do it, but with the economy the way it is right now we're reluctant to make the investment," says Mr. Aldrich.

Still, Ms. Romer strikes an optimistic tone about the prospects for a turnaround in the economy later this year. The Obama administration Thursday offered economic projections in its budget that were rosier than most private-sector forecasts. Defending the projections, Ms. Romer said a turnaround is likely this year as the federal fiscal stimulus package works its way through the economy.

Some economists have a much dimmer view, arguing the best the stimulus can do is prevent a recession from turning into depression. "There's no way we are going to be able to avert a deep and long recession," says Joshua Shapiro, chief U.S. economist at research firm MFR, Inc. Conrad DeQuadros, senior economist at RDQ Economics in New York, forecasts "a fairly lackluster recovery in 2010," and projects that unemployment will graze double digits from its current 7.6%.

Federal Reserve officials in recent days have tempered their call for an economic rebound this year, saying they still expect one, but it depends critically on the success of officials in repairing the damaged financial system. "Below-potential growth is likely to persist until financial markets and financial institutions can resume more normal functioning," Eric Rosengren, president of the Federal Reserve Bank of Boston said at the Friday economics conference.

Nearly half of the revision was due to inventory levels that turned out to be lower than originally thought -- meaning companies ordered fewer goods in anticipation of weak customer demand. Inventory levels were first reported to add about 1.3 percentage points to growth in the fourth quarter, but that was revised down to just a 0.16 percentage-point boost. The silver lining, however, is that companies may rebuild stocks sometime in the first part of this year, possibly giving a bigger boost than anticipated to growth.

Retailers in particular weathered a brutal fourth quarter, as the loss of consumer spending hit right during their crucial holiday season. The Commerce Department's GDP report showed that consumer spending on non-durable goods, such as food and clothing, declined at a 9.2% annual rate. That compares to the previously-reported figure of 7.1%. With an abysmal finish to 2008, retailers responded with layoffs, store closings and cost-cuts that stand to further weaken the U.S. economy.

Saks Inc., for example, expects sales in stores open at least a year to drop by double-digits this year, as chief executive Stephen I. Sadove this week called the current landscape "perhaps the most challenging the company has faced in its 84-year history." Leather-goods retailer Coach Inc. laid off 150 employees, or about 10% of its U.S. corporate staff. It is also reducing prices and paring back new-store openings this year.

Even lower-priced chains are reeling, and are moving quickly to adjust inventories to match customer demand. Kohl's Corp. said Thursday its fourth-quarter net income dropped 18%, and chief executive Kevin Mansell said the company is "planning conservatively in our sales expectations, inventory levels, and expenses" for 2009.

Federal spending helped blunt the GDP decline, but was offset by a fall in state and local spending. Falling sales, income and property taxes have saddled cities and states with the worst budget gaps in a generation, forcing them to lay off employees and make cuts in normally untouchable programs like schools and police forces.

—Jon Hilsenrath contributed to this article.
Write to Conor Dougherty at conor.dougherty@wsj.com and Kelly Evans at kelly.evans@wsj.com

[Naked Gents Rut]

You think the worst fall in quarterly GDP since 1982 is a sign that we're in a depression?



While I find your baseless insistence that we're in a depression to be funny, it would be even funnier if the credulity of people like you wasn't being used to sell the biggest expansion in the U.S. federal government since WWII.

http://online.wsj.com/article/SB123569611695588763.html

We are so ****ed.

[notyoueither]

You think the worst fall in quarterly GDP since 1982 is a sign that we're in a depression?



While I find your baseless insistence that we're in a depression to be funny, it would be even funnier if the credulity of people like you wasn't being used to sell the biggest expansion in the U.S. federal government since WWII.

http://online.wsj.com/article/SB123569611695588763.html

We are so ****ed.

Read the thread.

It is not just the US, but feel free to continue thinking it is all about you. You're more relevant to yourself that way.

On your last sentiment, I agree somewhat. However, you should stop being so pessimistic. You're not much more ****ed than you would have been, but we can agree that you are ****ed.

Now, if only we can split the hairs as to what ****ed means exactly. You say recession, for like, a while, maybe. I say recession with largish drop in GDP, with high unemployment that persists over a long period of time is a depression. And it will be that way in a great many places, maybe not in your apartment though. And again, it isn't all about you.

Oh, and we're not 'in it' yet, to get technical; although maybe some people are. However, more of we are in this handbasket, and we are wondering at the increasing downward velocity, and we are asking ourselves where it is headed and how fast.

I think you are foolish to think the train has a stop nearby. You think I'm a fool for having gone out of my way to prepare for a longer journey.

Time will tell who is the larger fool.