http://www.calculatedriskblog.com/2009/05/shiller-on-depression-scares.html

Either way: A few notes for you guys who wonder how this can be.

1) Understand that US media try to distract you from how bad the situation in the US really is. a) Compare the total loans of Central European banks to Eastern Europe with the GDPs of European countries. b) Figure at what point of their macro business cycle Eastern Europe is and what the mentality of the people is. Whoever comes to the conclusion that Eastern Europe compares to the US subprime mortgage calamity: I’d love to debate your points.

2) Understand that e.g. Germany differs significantly from the US. a) Germany provides a means for companies to have heir employees work part time during recessions while the government compensates a significant amount of the resulting lower wages for quite some time. b) Even in the poorest regions of Germany, the average household has access to (non-retirement) savings of more than US$ 20,000 and credit cards don’t really exist in Germany (the so called credit cards Germans have are really debit cards; they have to pay all they spent at the end of the month or the card will be blocked, period). c) Germany is an exporting country, not an importing country, and a significant amount of the government’s debt is owned by its citizens (and its own banks, of course). d) More than 99% of Germans have access to health care and social security mechanisms (beyond the one mentioned above) which are much more powerful (and cheaper) than in the US.

3) Most Euopean, and in particular EU, countries still have an economy where banking and service are far less significant to the GDP than in the US and Great Britain, and the wages are more balanced on average. This implies that for each laid-off banker, fewer other (“service”) jobs are at risk (simply because there’s less “service” he paid for) and it also means the economy is more focused on industry and/or farming than on financial and non-financial services. And again, looking at Germany: Yes, they largely depend on exports, but guess which country is their most important traing partner (by volume)? Another European country.

4) Yes, European governments have to deal with “off-balance sheet” (funds) debt, too (including future pension issues), but these liabilities differ by oder of magnitude from the situaion in the US, which were at around 320% of US GDP in 2006 if you assume US$ 42 billion.

5) Yes, the German cntral bank is sort of run privately, too, but it feeds back its revenues to the government. (Question remains, how do they calculate their revenues, but hey…)

Looks like while we all thought we were involved in a process of globalisation and the Internet significantly contributed to the global flow of information, the detailed knowledge and intuition regarding how to judge certain information from around the world still provides potential for improvement. I see both European and US media significantly misjudge information from each other, just because they don’t have the time to research the underlying fundamentals. Not sure it’s always propaganda though it sure looks like it from time to time.

Having said that… keep up the excellent work. After all, the fact that I can post a comment to your article indeed gives power to the people. (Limited, though, because one resource is limited in particular, and always will be: Time.)

I expect that nearly all the Japanese analysts never dreamed that the Nikkei would have taken the path that it has since 1990.

When you are in unique circumstances, wildly different from anything that has ever been experienced before (example: when was the last time that the Fed was printing $300B to buy Treasury debt?), trying to project from past experience is a fool’s game. And you know what happens to fools and their money …

I didn’t mean to imply that we’d be seeing 89% down in the market, just that your point that the market bottomed well before the economy was well needs to take into account how far the market went down. And you could still be correct in your general point. We could see a bottom in the market this fall in the 500s, or something like that, for instance, and the market will have bottomed well before the economy is well. The point is that it just doesn’t mean that much.

This economy is tremendously damaged by the amount of leverage we built it on and the consequent unwinding we’re going through. Undoubtedly the Fed is helping to mitigate the fall, but that doesn’t mean that it’s going to create something that looks like a typical cyclical downturn.

IMO the market is reacting as if it is. I’ve seen plenty of investment commentary saying as much. They’re betting on the fact that the steep drop will yield a sharp recovery as the demand comes back off the back of the deep inventory drop. That’s incomplete and shallow analysis, IMO. Yes we may see a blip caused by the inventory cycle, but it will be transitory as the reality of the bigger structural problems takes hold. The market right now is reflecting that thinking after a technical bounce off of deeply oversold conditions. It’s a blind leap hoping there’s something solid to land on.

http://www.businessinsider.com/henry-blodget-about-that-gdp-inventory-decline-2009-5

“Oh oh…”

IMO, that’s why Ben decided to buy Ts now instead of last Fall and Winter when he initially threatened to do so.

…..

Onlooker from Troy Says:

“…
But look at where the market bottomed. Approx. 89% down from the peak. It could hardly go down any further.
Look at what happened in ‘01-’02. The market bottomed well after GDP went positive.
I wouldn’t hang my hat on that one.”

Yes, but the economy had deteriorated much more than it has so far this time, so it is logical that the market fell much further.

“During the Depression, unemployment was 25% and wages (for those who still had jobs) fell 42%. Total U.S. economic output fell from $103 to $55 billion and world trade plummeted 65% as measured in dollars.
The Depression was aggravated by poor monetary policy. Instead of pumping money into the economy, and increasing the money supply, the Federal Reserve allowed the money supply to fall 30%.”
http://useconomy.about.com/od/grossdomesticproduct/f/Depression.htm

Regarding “liquidity injections” by the Fed. Do you guys realize just how big the debt contraction is going to be by the time it’s all said and done? We were HUGELY overleveraged and that’s now unraveling. The Fed’s actions are like pissing on a bonfire right now (OK, maybe a garden hose). Look at their own comments. They’re still very worried about their ability to fend off deflation. …”

No I don’t realize it; I have little conception of the amount of damage done or how irreversible it might be. All I know is never before in my lifetime have Fed rates been cut to 0.25%, and hundreds of billions of dollars been pushed out the door so fast, even to the point of actually printing money through the purchase of Ts by the Fed.

The amount of stimulus / liquidity being injected is massive compared to that resulting from simply lowering interest rates by 3 or 4 points as was done in past recessions. Perhaps they are pushing on a string, but at some point, when the string is completely compressed, the hand doing the pushing has to meet the object being pushed directly.

How much liquidity will it take to reverse course? Nobody knows for sure, I suspect. We must wait for the data to tell us, and that, of course, will be after the fact, and most likely after the bottom in the market, the ’02 bottom notwithstanding.

I began sniffing a double dip a couple months ago, and the smell is getting stronger as the weeks pass.

And raising rates later? That would destroy the value of the assets on the banks books. Just like Japan we will not be able to raise rates. Unless people truly think taking away mark to market solved the banks problems.

So we know the gov’t will try to keep rates low. That means the increase in government debt will simply be taking money from investors that would otherwise be investing in the US economy. Therefore growth in the future will be slower than normal. Therefore PE ratios in the market must decline to account for that.