Twofish's Blog

October 16, 2008

Recession versus depressions

Filed under: china, finance — Tags: , — twofish @ 3:14 am

http://blogs.cfr.org/setser/2008/10/15/will-the-world%e2%80%99s-macroeconomic-imbalances-soon-reduce-to-china-the-us-and-europe/

Michael: His point was, since the current leadership is doing that, there will be no such credit contraction and economic depression. If only the dogma fit the facts.

We have to distinguish between a recession and a depression. The prevailing economic believe is that in 1929 as now a nasty economic contraction is inevitable. However, the choice is between a painful recession similar to what we saw in 1981-1983 and a decade long depression which we saw between 1939 and 1941 or 1972-1975. Bernanke’s belief is that between 1929 and 1932, things contracted so hard that it damaged the economy so that when things did hit bottom in 1932, there was no ability for the economy to recover until you had massive government spending associated with World War II. One thing that you do see around the workl is that when people end up losing their life savings whether through bank failure or hyperinflation, it scars them for the rest of their life, and it takes a generation to undo the damage.

If Bernanke is right then there *will* be a nasty credit contraction, but it will have worked its way through the system by 2012 rather than by 2022.

Michael: it didn’t stop thousands of banks from closing, and it didn’t stop the unfolding of the credit contraction.

There will be a credit contraction. However we will know whether we are looking at something bad or horrific if we see people lose their savings through bank failures which is what happened in 1930, and I don’t think this is likely, if for no other reason that we have FDIC.

The other big question that I’m think about is what happens if the stock market goes down and then stays down. It’s possible that the Dow will go to 5000 and stay their for a few years. If this happens then you have lots of people whose 401(k) is completely shot. You then have a very big problem of aging baby-boomers with no retirement savings counting on a government who owes lots of money to China to address it’s aging population problem.

Leave a Comment »

No comments yet.

RSS feed for comments on this post. TrackBack URI

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

Blog at WordPress.com.

%d bloggers like this: