Saw a documentary today that helped solidify my doubts about the crisis we are in...
1. Housing 'Bubble' - Falling Prices
2. Prices and assets linked to brick and mortar banks, and financial institutions
3. Credit Market Freeze
4. Partial thaw - 'Extend and Pretend'
5. Irrational exuberance - Equity & Debt Prices going up ?
6. Up ahead...
Factor 1 : Mistrust in USD strength => Movement to other currencies and gold (may be) => USD dumped => inflation (may be) => Consumer spending down (surely) => Deflation (surely) => Global GDP fall (surely) => GreatER Depression (may be)
Factor 2 : Large pile of illiquid assets on banks', financial institutions', people's (in effect) books => Asset prices fall further when Option ARMs switch to principal payments, when people who have lost jobs cannot afford to pay interest and/or principal => Prices fall further => Deflation ? => Consumption reduces further
My knowledge is limited, but I say this (as heard from Meredith Whitney):
"There is a price for everything"; the only way for prices from hereon is down. It is a certainty. By prices, I mean (almost) everything. There is bound to be something more catastrophic for the global economy by the end of 2011 - 2 years from now.
Of course, people will suffer, prices will stabilize and thing will even out.
I just tried to figure out why my predictions are so dire, and I answer as follows.
Consumption, usually, never reduces over the long haul. People switch from one good to another, one price level to another price level and so on...
It is reasonable to say that if there is a downturn, people will put off consumption for tomorrow and that is alright. This deepens a recession, but this is when the govt. comes in... makes capital easily available (knowing fully well that there will be inflation in the medium term thereafter), and things start turning to the normal.
IF, IF... there is massive unemployment (10.2% - glossed figure - in the US)
IF there are obscene Medicare bills - $60 Bn estimated for 2009, projected to go from 5% of US GDP to 20% of US GDP by 2050
IF taxes are low and cannot be increased till 2010 because of legislation during the Bush regime (I may be wrong on the legislation)
IF, by the time taxes are increased too many people have lost their jobs...
IF the government has a fiscal deficit of $1.7 Trillion for the year
IF outstanding public debt is $12 Trillion
IF the only way out of the fiscal mess is to print USD and stoke inflation, and more importantly, by doing so... assure EVERYONE that the USD is truly weak...
How does one expect the world to go back to happy days?
I believe the Great Depression might just pale in comparison to what is going to happen now.
The world is more connected than ever, technologically, culturally, and most importantly, financially; financially in terms of trade, fund flows, currencies.
What was the world like in 1929?
US, UK & commonwealth, Japan, Europe, Russia - the list ends there.
Population - estimated to be 1.8 billion.
US produced a third of global production.
All I am saying is this:
The chances of something catastrophic happening are very high.
Bill Gross talks of a double dip by 2010 -2011 and the New Normal (but he still finds hope in there somewhere...)
Everything is being extended right now and people are only pretending...
Just because something has not happened, does not mean that something cannot happen.
This is where projections fail, algorithms fail, formulas fail and past crises pale in comparison.
On a lighter note; there could be a nuclear war and so people have something much worse to worry about.
Of course, I could be wrong but I cannot see another way going forward.