More signs of a Depression?

Well, if you look at the collapse in global manufacturing and trade, you'd sure be worried.

Here's an excellent summary from Nelson Schwartz in the Times: Rapid Declines in Manufacturing Spread Global Anxiety

A few highlights/lowlights. I simply bullet-pointed some amazingly striking data and quotes:

• In Europe, for example, where manufacturing accounts for nearly a fifth of gross domestic product, industrial production is down 12 percent from a year ago.
• In Brazil, it has fallen 15 percent.
• In Taiwan, a staggering 43 percent.
• Even in China, which has become the workshop of the world, production growth has slowed, with exports falling more than 25 percent and millions of factory workers being laid off.
• In the United States, until recently a relative bright spot for manufacturing despite the steady erosion of blue-collar jobs, industrial output fell 11 percent in February from a year ago, according to statistics released Monday by the Federal Reserve.
• The depth and speed of the plunge are striking and, most worrisome for economists, a self-reinforcing trend not unlike the cascading bust that led to the Great Depression.
• “Manufacturing has fallen off the cliff, and it’s certainly the biggest decline since the Second World War,” said Dirk Schumacher, senior European economist with Goldman Sachs in Frankfurt.
• The pattern of manufacturing and trade ominously recalls how the financial crisis of 1929 grew into the Great Depression: tightening credit and consumer fear reduced demand for manufactured goods in one country after another, creating a downward spiral that reduced global trade.
• “Plunging manufacturing suggests that as bad as things were in the fourth quarter, they are at least as bad now,” said Robert J. Barbera, chief economist at ITG, a New York research and trading business. “This is a classic adverse feedback loop. It won’t quickly correct itself.”
• In fact, trade is shrinking even faster than production. Germany’s exports down are 20 percent from a year ago, Japan’s have plunged 46 percent, and in the United States, exports fell at an annualized rate of 23.6 percent in the fourth quarter of 2008.

In the previous post, I argued for a large and coordinated fiscal stimulus by the G-20. This collapse in manufacturing and trade in, as noted above, self-reinforcing if not intervened with. Any fiscal stimulus would, by necessity, include those in the G-20 who are surplus countries. - after all, many of them are suffering the worst, or soon will be. The Chinese seem to get this, the Germans most decidedly do not. The US, UK and Spain are spending, but could certainly do even more.

Martin Wolf is still on the case, continuing to argue for a coordinated 'rebalancing' of the global economy, which in the long run will require surplus nations to spend those surpluses, not simply hoard them: Why saving the world economy should be affordable

Can we afford this crisis? Will governments destroy their solvency, as they use their balance sheets to rescue over-indebted private sectors?

The debate, as it has so often been, is between the US and Germany. Thus, in a speech last week, Tim Geithner, US Treasury secretary, noted that, “The IMF has called for countries to put in place fiscal stimulus of 2 per cent of aggregate GDP each year by 2009-10. This is a reasonable benchmark to guide each of our individual efforts. We think the G20 should ask the IMF to report on countries’ stimulus efforts scaled against the relative shortfall in growth rates.” Needless to say, no such firm pledge was forthcoming, with Germany particularly resistant.

...there is also a current agenda: rebalancing of world demand.

Surplus countries subcontract to their trading partners the job of spending oneself into bankruptcy, while lecturing the latter on their profligacy. Thus the reason the US, the UK and Spain have huge fiscal deficits is that they are offsetting the collapse of private spending at home and the export of demand abroad. This is unsustainable, in the long run.

The danger now is that the surplus countries expect recovery to come from enormous and sustained fiscal expansion in deficit countries. Some analysts argue that the US should have refused to take fiscal action at all, leaving it to surplus countries. Unfortunately, that would have meant a global depression. Nevertheless, without rebalancing there can be no healthy recovery. On this point, the US is right and Germany is wrong.

Indeed. In the near term the economic emergency necessitates massive spending and, yes, large deficits. This is unavoidable. What is also unavoidable, alas, in the mid term, will be paying the bills for this response. And there will be no easy or pain-free ways to do so. Entitlements in the Euro zone, the US, Japan etc need to be radically altered. Currencies (esp the dollar) will be under huge pressures. Interest rates will skyrocket.....None of this is fun. But it is unavoidable, given the depth of the crisis we have created

And that's why this blog has its title - things are indeed worse than you think they are, and will be for years to come.

Sorry to say so.