Recesion/Depression?

Discussion in 'Politics, Religion, Social Issues' started by Desertrat, Feb 6, 2009.

  1. Desertrat macrumors newbie

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    #1
    This, from this morning's "The Daily Pfennig" from Everbank:

    "Could it be that we have now moved from a recession to a depression? My friend, Bill Bonner, thinks so... He was also the first to put in writing the thoughts about the U.S. following Japan's decade of funk, with his book Financial Reckoning Day, that was published about 6 years ago! So... I stop to listen to what he has to say... I don't always agree, but I sure do listen, for his track record is good... Recall, he also coined the "Trade of the Decade" at the turn of the millennium... "sell the DOW, and buy Gold on the dips"... That's worked out quite nicely, eh?

    Here's a snippet from the Daily Reckoning (www.dailyreckoning.com) where Bill does a great job of showing the difference between a recession and a depression... You can read the entire story by clicking on the link... But here's a snippet...

    "In a recession, the basic plan or formula for the economy is still valid.
    The economy just needs a little time...and maybe a little monetary boost...before it continues growing. Typically, inventories are sold down...so a new burst of production can begin.

    But in a depression, the problems are structural.

    One way of understanding this is just to look at balance sheets. Whether you are a business or a family, you can only afford so much debt. When you get too much, you have stop and pay it down. And when it becomes so great you can't pay if off - because you don't have enough income - you have to declare bankruptcy. A depression is when a whole economy declares bankruptcy...or should. Because it can't pay its debts. Businesses, for example, have been built for a level of demand that no longer exists. It is not a question of waiting a few months. By the time consumers are ready to buy again, the whole economy will have moved on. Imagine, for example, a guy who built a nationwide chain of stores just to sell ipods to teenagers. The business may have been a great success - for a while. And he took out huge loans so he could expand...and take advantage of the demand. But then comes a depression. He says to himself: 'I'll just get some more financing...and wait it out.' But who's going to lend to him? By the time the kids begin buying again, ipods will be like vinyl LPs. His business is history. His lenders have lost money. The loans should be written off and the business should be destroyed, not mummified and preserved.

    A depression is when the whole economy changes its business plan, in other words. And that takes time...and creative destruction.

    How much time? Well, in the United States alone there is about $6 trillion too much private debt...$1 trillion too much output capacity...and millions of "excess" workers. How long will it take to retrain, retool, and re-absorb these excesses?

    We don't know. The last depression took about 20 years...and a major war (talk about creative destruction!) Then, the United States was making the structural shift from a Japan-like capital investment-led economy...to a post-WWII consumer-led economy."
    ___________

    This is part of why I think the stimulus package will only have a palliative effect, and won't "fix" our problems. Obama et al are still treating this like a recession--and that won't work out anywhere nearly as they hope. IMO, we should never have gotten into bailouts, and should have done a repeat of Volcker's 1979 actions. Sharp, deep, miserable and short-term. I think that now we're in for deep and miserable and much longer-term.

    Sorry for the hit-and-run; I'm on the road to go do some socializing until tomorrow.

    'Rat
     
  2. 63dot macrumors 603

    63dot

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    #2
    I think the bailouts, if failed in the long run, are going to get blame all around. Obama is for them, but so was Bush. Congress loved the idea many months ago even though the Republicans are not on board with Obama's stimulus package the way it is. Of course, if the Republicans can get a few changes, they would be on board. I say let Obama make some concessions and get as many Republicans on board as possible, even if that means larger tax cuts for the ultra rich. Both sides have to work together to get out of this mess which officially started in mid-2006. If we want to be out in five years, we will have to do everything perfect, as a team, lest we have this downturn last until mid-2016 and another 10 year depression like the one in the '30s, the several in the 1800s, and the one in the late 1700s.

    We all need to work together to beat this recession. Places like Ohio, parts of Pennsylvania, cities like Detroit, and many other areas have long been in a depression from the mid-1980s with double digit unemployment almost continuously. It's only now that some areas not used to depressions are starting to see their recessions fall into depression economies.

    Huge sales everywhere, big drops in both rent and real estate prices, car deals as extreme as buy one American truck and get the second one free, yet people are not buying, unless it's McDonald's value menu or Wal-Mart. Mom and Pop used clothing stores, however, are seeing some of their best sales ever.
     
  3. barkomatic macrumors 68040

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    #3
    We are not in a depression. People think that because this is the worst economic experience they've had in their particular lifetime. If you are about 25 then this is probably your first ever recession and the drama of it is very new.

    The recession in the early 1980's was worse than this one but no one calls that a depression.

    I'm saying this because during the last recession in 2001 people came out of the woodwork saying that was actually a depression also but of course it wasn't. Every recession we have people who love drama like to talk about being in a depression. It sells papers and makes conversation more interesting.

    If we enter a depression it will be unmistakeable--you will absolutely know it without needing an analyst to theorize about whether we're in one or not. You will see young, able-bodied, college educated, formerly middle class young people without substance abuse problems or mental illnesses homeless in your streets begging for food.

    I'm not saying we might not enter a depression at some point--just that we're not in one right now. Of course, if you're one of the unfortunate people who lost their job/home then this is indeed a great depression as far as you're concerned.
     
  4. 63dot macrumors 603

    63dot

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    #4
    Woah, back up. Yes, I call it one where I lived.

    My town had just over 4,000 people in it with a small fragile local economy. After great loss of jobs in the early '80s, coupled with rents and mortgages that didn't adjust downwards to rising unemployment, our "town" is now more of a ghost town with 1,800 residents at this time.

    More than half of the dwellings are vacant, and if owned, are not occupied. No jobs here. That was all, or mostly, a result of the famous 1980-1982 downturn and it hit small towns like mine especially hard. The 1974-75 gas crisis and major recession was not a good thing either and before that, our town had eight gas stations. We have two now and both have to split rent with independent mechanics who work there.

    The majority of the young people right out of high school, like I was then, were out of work. We were not lazy, there just was not ANY work. College, thankfully, was cheap back then in my state, so kids went, but many as a result of having nothing better to do.

    Those early days of 1980-1982 were blamed on President Carter but many of us did not see any Reagan economic revolution as that bore fruit in other areas. We mainly saw our "heyday" from 1946-1973, and after that, it was downhill for our town and many small towns in the area. The YMCAs, vibrant park systems, and activities for young people steadily dried up until you have what is around now, an empty city (cities) with old timers recalling almost unbelievable stories about how great and thriving our area once was.

    On a larger scale, I am sure Detroit had their really good times which never seemed like they would ever end. And before that, the great steel towns had their unbelievable booms.
     
  5. nateDEEZY macrumors 6502a

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    #5
    I wish I could find the source, it was an article on unemployment on cnn about the difference between unemployment now and back then. The jist of it is, it's worse now more than it was back then due to the globalization of work force (labor reallocation.)

    Source:http://www.business.otago.ac.nz/ECON/workshop_08/Papers/Kleinert.pdf

    Not the original source, but the cnn article was pushing along of those lines as to why this recession is worse.
     
  6. Thomas Veil macrumors 68020

    Thomas Veil

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    #6
    I'm in my 50s and lived through that, and it was certainly not anything like this.

    What's more, Robert Reich would probably agree:

    Note when this was written...and things have gotten much, much worse since then.
     
  7. 63dot macrumors 603

    63dot

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    #7
    I am just slightly younger than you, and certainly now is bad as was '80-'82 as that two and a half year period was also rough.

    Our current downturn is already two and a half years old, if you count the housing and banking meltdowns as part of this whole equation, and so far, it's not the same as '80-'82 to be fair. We had, in real dollars, the largest deficit spending with Carter, only to have Reagan come in to fix it, and Reagan's idea of fixing Carter's overspending was to OUTSPEND him. Some "conservative" Reagan turned out to be. By the time eight years were up, not only did he not turn around the Carter deficit, he doubled it.

    It wasn't until President Clinton that we had somebody come in and erase the huge debts that those two Presidents, and the following President Bush had racked up.

    The '80-'82 recesssion/depression also came after an unremarkable tenure of President Ford who did not keep the books well on the domestic front. We had also spent a ton of money in a losing war in Vietnam and Cambodia with the previous generations of President Nixon and President Johnson.

    So it's hard to call our current recesssion/depression as fast, deep, or long lasting as the fiasco of '80-'82, which some economists say was also just a continuation of '74-'75. Also remember the United States started gaining a huge dependence on foreign oil and Detroit lost its domestic market to foreign cars which were better and more durable.

    Only time will tell if our current downturn is the same in scope.
     
  8. mactastic macrumors 68040

    mactastic

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    #8
    I'm sure you also remember the intense scrutiny to which the word "depression" was put through at the time.

    I seem to recall a lot of sturm und drang about the term being used, but not much discussion about what the implications of that would be.

    And, of course, we had people in here denying that we were in a recession all the way up to the election on the idea that we hadn't fulfilled the technical requirements yet. Which means that if we actually do fall into a depression, we'll have people denying it all the way down.
     
  9. SactoGuy18 macrumors 68020

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    #9
    I think this deep recession will finally make people look at one place where fixing it will go a long way in improving our economy: the income tax system.

    Since by definition income taxes end up discouraging savings and investment, maybe it's time to either radically simplify our tax code or replace it altogether with a consumption tax (e.g., no more income tax filings!), both of which will at least cut down drastically the mind-boggling US$300 billion per year (and climbing fast with every subsequent year!) cost of complying with the Federal income tax code.

    I mean think about it: how much time and energy are you spending to keep meticulous financial records so you can file income tax forms every April 15th or thereabouts? This is especially expensive if you own a substantial investment portfolio, own a home or run your own business. It may have made your local accountant, tax lawyer, Intuit, H&R Block or Jackson Hewitt rich, but couldn't we put all that time and energy spending US$300 billion per year and climbing to better use?

    And worse of all, everyone bases their economic decisions on keeping taxes low, not what's best for the individual or company. This of course ends up with too many emphasis on debt financing, which is a horrible idea as the sub-prime mortgage fiasco showed all too clearly. :mad:

    That's why I'm a big supporter of the FairTax consumption tax system to replace the current Federal income tax system. While it's not perfect, it's certainly way better than our current income tax system, that's to be sure. Even if FairTax is too radical an idea, even a plan like reducing the maximum marginal tax rate to 20% with a drastic reduction in the number of deductions and credits available would still be a huge improvement over what we have now, if only it would result in a far simpler income tax form that would cost a lot less money to comply with.
     
  10. pseudobrit macrumors 68040

    pseudobrit

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    #10
    Changing the income tax system will have no positive impact on our economy. Those of us for whom tax issues are a political pet think that taxes are a central issue in daily life, but the reality is that they simply don't hurt the average American family the way tax crusaders think.

    The market is complex and robust, and to be truly fair, a tax system must be equally complex and robust.

    Now if you simply wanted more supply-side faith-based economics that have failed miserably in every implementation over the past 30 years, you'd probably repackage the concept and give it a snazzy new name.
     
  11. Agathon macrumors 6502a

    Agathon

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    #11
    That's par for the course. Often the financial press won't admit that there was a recession until it is over.
     
  12. Rodimus Prime macrumors G4

    Rodimus Prime

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    #12

    Sum everything up you are a fan of taxing the poor much more heavily than the rich. The consumption tax system is basicly a sales tax which has been proven time and time again to be regressive. It taxes the poor much more heavily than rich taking a larger share of there income.

    The current system while not perfect is set up to put the burden of supporting the government on the rich and taxes less of the disposable income of the rich.

    If you think the taxes really stop people from saving then you have a problem. They sure as hell do not stop me from saving or even discourage me.
     
  13. 3rdpath macrumors 68000

    3rdpath

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    #13
    recession or depression...does it matter?

    it's kinda like standing on the beach and arguing if that object on the horizon is a tsunami or just a really really large wave...

    our economy ( and the world's for that matter) is in serious trouble...

    i'm continually amazed by how out of touch are politicians are. as if tax breaks for car purchases and home purchases are the answer. they just don't get it-people are broke, unemployed, underemployed or just plain scared to make any financial commitments( which is actually prudent but doesn't work in our buy! buy! buy! economy).

    the actual unemployment rate is closer to 13.5% when you take into account the underemployed and those who have quit looking for work. those figures are avail on the BLS site though they're a bit hard to find...wonder why? where exactly are these people going to find sustainable work?

    i don't always agree with rat but on this i do...you can't treat this like a recession. and throwing money at the problem isn't going to fix it...it'll just delay the inevitable.

    and that inevitable looks like a big-assed wave on the horizon.
     
  14. mactastic macrumors 68040

    mactastic

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    #14
    Now would probably be a good time to make sure everyone understands the difference between U3 (the commonly reported unemployment number) and U6 (where you get that 13.5% figure).
    IOW, the definition of unemployed has been manipulated over the years to make things seem better for political reasons. All parties share blame here, and the public needs to demand better from them.

    If our true unemployment number is approaching 14% already, things are truly dire.
     
  15. Desertrat thread starter macrumors newbie

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    #16
    A vote for "Depression": http://www.bloomberg.com/apps/news?pid=20601087&sid=a6aaWZ8ab8yU&refer=home

    And indicator of at least "deep doo-doo": http://online.barrons.com/article/SB123386164657053515.html

    And this is worse: http://www.telegraph.co.uk/finance/...et-calls-Feds-bluff-as-world-falls-apart.html

    Note that the commercial real estate market is just now getting into the realm of serious implosion, as retail stores fail and quit paying the rent which covers the mortgages on the malls and strip centers.

    It might not yet be a full-blown depression, but there's no indication that things will not continue the downward path.

    'Rat
     
  16. FX120 macrumors 65816

    FX120

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    #17
    Consumer funding in the last 9 years has been greatly funded by increasing home values, and borowing against the increasing equity in your home.

    I know of several people who were spending $60,000 a year, but only making $50,000 a year from their job.

    Now that the equity engine is gone for many people, they've had to cut spending on consumer goods, which in turn has caused businesses to cut production, which cuts jobs, which causes more people to stop spending, ect. Other debt has been a band-aid in the short term, but even that has caught up with many Americans.

    So yes, the key problem here is that people were spending outside their means, and a hard readjustment will have to take place because no ammount of new jobs or reduction in taxes will suddenly drive property values back up to where they were two years ago.

    What is going to have to happen is that essential goods manufacture will have to be brought back over to the mainland United States to bring back sustaining jobs that aren't reliant on federal debt to provide jobs. Our core manufacturing base has been shipped overseas, and this has to change before we will see a change in our current economic path.
     
  17. Rodimus Prime macrumors G4

    Rodimus Prime

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    #18
    Something that this recesion I noticed is it is changing the way people spend.

    It used to be a credit based system. You spending was limited by your credit but now it is ones spending is limited by their income.

    income has become the controlling factor in spending and that is what it should be controlled by. While it is fine to used credit to get a house, and a car. It is not fine to use credit to buy things like washer and driers, computers and so on.

    Those are things that are better paid in full when one buys it.

    Reason I can understand the car is that quite often is beyond what some one has in savings or is willing to burn though to buy out right.

    I roughly 10 grand in my bank account that I have saved in the past year. Lets assume in 2 years I want to buy a car and I will have 20-30 grand in savings. I want a new car but I sure as hell am not going to pay 20-25 grand to buy it out right. It would cut way to deep into my long term savings.

    Now I will drop 10 grand in a down payment and get the rest on credit but that is to preserve my long term savings.
     
  18. Desertrat thread starter macrumors newbie

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    #19
    More from Agora:

    "A little bit of the old juice from the central bank will cure a typical recession. It is nothing more than a pause in the inventory cycle, allowing businesses to clear their shelves before they are restocked. But this is not an inventory-driven recession; this is a balance-sheet depression. The problem is not really an absence of credit, but an excess of debt. Throughout most of the post-WWII period, private sector debt in the USA, for example, equaled about 80% of GDP. In the '90s and '00s, debt rose to 140% of GDP. The difference is about $6 trillion. Until this debt is reduced, Americans will be reluctant to borrow or spend.

    And it is not just the debt itself that must be eliminated. There are too many factories producing too many goods for too many people who can't pay for them. You can see excess capacity in the unemployment lines too. Suddenly, the world seems not to need so many sales clerks, or welders, or financial engineers. The United States alone may have $1 trillion of excess output capacity and 10 million people too many in the workforce.

    Debt and excess capacity can be liquidated quickly – as they were in the panics of the 19th century – through bankruptcies and defaults. But, today, liquidation would have to take place over the dead body of U.S. Fed chief, Ben Bernanke. While that would be our preferred method; alas, it's not going to happen."

    I don't see anything here with which I can disagree. Since we're creating even more debt--via government policies--how do we avoid a worsening economic situation? How?

    FX120, I agree with your comment, "What is going to have to happen is that essential goods manufacture will have to be brought back over to the mainland United States to bring back sustaining jobs that aren't reliant on federal debt to provide jobs."

    We've had a number of threads here about jobs and foreign takeaways. What I've yet to hear from anybody here or in government or even in the private sector answers my question, "Such as?" What jobs? Making what? Selling to whom? Hiring some ten million workers?

    'Rat
     
  19. FX120 macrumors 65816

    FX120

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    #20
    Household consumable products, personal care products, textiles, and tools are major goods that will always be in demand regardless of the economic climate, and almost all of those goods are now manufactured over seas.

    Basically everything you see in a Wal-Mart becides the electronics and auto-care is what I would define as essential goods, and what has to be moved back to the mainland United States for manufacture. This can be forced by placing a tariff on the import of these goods making it easier for factories paying a living wage to compete against factories in China paying workers $2.50 a day. Unfortunatley we will probably never see this happen because companies like Wal-Mart have a lot riding on being able to buy socks made in China for $0.25, paying a unit price of $0.50 to ship it, and selling them for $7.36, and will fight hard to preserve the current method of trade. The short-term price increases would also be hard for many people to deal with, so it might have to be slowly put in place over a number of years.
     
  20. mactastic macrumors 68040

    mactastic

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    #21
    Because government debt is more akin to business debt that personal debt. If such debt can be leveraged to increase revenue, or increase tax take, it is not a Bad Thing.

    Large amounts of personal debt that cannot be leveraged to create new income is bad.

    It's bad for governments to take on debt that doesn't create significant new tax revenue -- such as fighting unnecessary wars halfway around the world. Debt is a tool, much like a gun. It's neither good nor bad in and of itself. It is only as good or as bad of a tool as the person wielding it.
     
  21. Desertrat thread starter macrumors newbie

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    #22
    ". If such debt can be leveraged to increase revenue, or increase tax take, it is not a Bad Thing."

    But that's not happening. No leverage, no increased revenue, no increased tax take. Now and in the foreseeable future. Just trillions more in debt. Lots of praying that foreign investors will continue to buy our toxic waste paper.

    FX120, if the products you list were made here, they could not then be bought by a large percentage of those who in the past could afford WalMart pricing. That's the original reason for overseas production: We priced ourselves out of the markets, both here and abroad.
     
  22. mactastic macrumors 68040

    mactastic

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    #23
    The whole point of the stimulus is to increase spending (sales tax) and decrease unemployment (income tax).

    Those are increased revenue sources. As opposed to sending pallets of money to Iraq where it doesn't have much benefit to the US economy.
     
  23. FX120 macrumors 65816

    FX120

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    #24
    We didn't price ourselves out of the market, corporations got greedy because there was a less expensive option.

    Once upon a time many of those things were made here, the people buying them could afford to buy them, and the people making them could afford to buy other products. It's not that they can't be made here cheaply, they can, they were, but corporations would rather have the money in their pockets rather than paying workers more. It works fine for a while as long as the consumers here in the US can continue to borrow to afford those products. So by removing the incentive of cheap labor overseas by taxing heavily imported goods, the corporations can be forced into domestic production, paying workers here a legal wage, at the cost of slightly increased prices (prices are still limited by the spending capability of the consumer, and competition), and lower profits for the corporation and it's investors.
     
  24. SactoGuy18 macrumors 68020

    SactoGuy18

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    #25
    I have to disgree for these reasons:

    1) Americans (private citizens and businesses) are going to spend a mind-boggling US$300 BILLION this year just to comply with the Federal income tax rules. And even more frightening, the IRS has all kinds of seizure powers that could wipe out your financial assets in no time flat. Is it really necessary to go through that rigmarole every year? :mad:

    2) If we had a true consumption tax system with no income taxes, the USA would suddenly get a GIGANTIC influx of foreign money into our financial system because foreigners will discover they can put their assets into our financial institutions and build production facilities here in the USA with no tax consequences. And unlike tax havens now like the Cayman Islands, Bermuda, Bahamas, etc. there will be real profits to be made investing in the USA as production of goods in the USA no longer have tax consequences, which results in a large number of foreign companies banging down the doors rushing in into set up production plants here in the USA.
     

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