Saturday, November 08, 2008

View of the New Depression

President-elect Barack Obama is wasting no time addressing America's, and the world's, economic crisis. His administration is naturally being compared to the Roosevelt presidency.

So, can Obama fix things? Unfortunately, he can do almost nothing to fix the economy. He can bring "change". Change is coming no matter what, but a competent and inspiring leader, which Obama seems to be, can at least steer the nation in sensible directions, instead of making it all worse. But one thing he can't do is fix it. BTW, Roosevelt wasn't able to fix much either. I am inclined to believe there is no way to fix it: the world's economies simply need to slowly build up from the ground level.

Many writers are wondering if the nation is facing a recession or a depression. Joe Nocera, in the New York Times, says America is not as bad off as it was when Roosevelt took office, "not even close", he says.

Nocera is deluded. It is far worse this time. Nocera points out that numbers for unemployment are not as bad as they were in 1933. But when Roosevelt took office it had been three terrible years since the famous stock market crash of 1928. We have only had about three months. Nocera says in the Great Depression there were far more bank failures. Joe, two more banks just failed yesterday (Franklin Bank of Texas and Security Pacific of California). But really, the number of banks failing is not the problem. The failure of thousands of local banks in the Great Depression was catastrophic for millions of Americans, but it is simply nowhere near as bad as the linked chain of derivative defaults that characterizes the current global crisis. The losses are in the trillions. This process has only begun. The real problem with Nocera's shallow analysis is that it ignores the fundamental source of America's problem: in 1933 we were self-sufficient in the three key areas:
  • Energy
  • Manufacturing
  • Capital
Sadly, we have none of these left today. We are broke, busted, and up shit creek. Maybe we can scrape together enough cash to fix our railroad infrastructure, as James Kunstler proposes. That would help.

For those who think the American economy is on the mend, I would refer to the weekly chart of the Philadelphia Housing Index. This is not showing any signs of turnaround. It would help to at least get a bounce here. If we break down through the lower trend line, there will be yet another shit-storm of huge defaults, and end-of-the-world panic newscasts. It will probably be big enough to bring about the State of Emergency I predicted in my last post. If we get a bounce, say up to the upper trend line, we'll have one of those delusionary interludes where we'll be sing "Happy Times Are Here Again" and Jim Cramer will start jumping up and down saying we should BUY FINANCIAL STOCKS. Don't fall for it. Not unless the housing index punches up from the upper trend line (not likely), the banking system will continue to suffer catastrophic losses every quarter.

Meanwhile, the international finance system is on the verge of systemic breakdown. I'm not talking about some secret cabal of Swiss bankers. The international finance system is what trades clear in every day for doing ordinary business. The currency of international business happens to the US Treasury Bill. T-bills are very precarious right now - they have been in a year-and-a-half rally, but have broken that rally. If treasuries collapse, we will have a US dollar crisis. This is looking increasingly likely, and is the direct result of the Fed and the Treasury selling all these bills to raise the money to bail out everyone on the whole planet who looks like they might be about to default. This will be the crisis that stops virtually all trade.