Of Austerity & Depressions

Paul Farrell has an article up at Marketwatch about austerity in the US and depressions. Early on in the financial crisis I made comments that I did not believe we were in a depression and laid out some reasons why. At some point well into the crisis I began to think of it differently. In saying no depression I was thinking in terms of a 1930s type of event but there is no reason a modern depression has to look like the 1930s.

At some point I came to the opinion that history would look back on this period starting in the early 2000s and label it a depression. As a note I have a specific recollection of mentioning this a couple of times but I had trouble finding it in the archives (here is one post that comes close) which now consists of 4500 posts; today is post 4501.

This is not a call for apocalypse but in looking at the last dozen years, equity prices are 165 SPX points below the 2000 high, the employment situation has deteriorated badly. the housing market has deteriorated badly, we are debating the viability of programs like social security in a way that we have not done before, the country has taken on a debt load that would seem to be very problematic and we still have desperate and unprecedented policies in place trying to stimulate demand that is not really working. The divide between the haves and have nots seems to be the widest it has ever been.

As noted countless times before, the last 12 years has not prevented many markets from having normal or better than normal stock market results.  In thinking about longer chunks of time I continue to believe that healthy markets/economies can still do well. Short term of course and anything goes.

Any economy can reward innovation and resourcefulness be it on a grand scale like founding a social media company that goes public all the way down to monetizing a hobby. The extent we cannot rely on working for the same employer until we retire creates a crucial need for people to take a more proactive role in shaping their financial future.

Going along with that thought is personal austerity which addresses spending decisions and realistic attitudes about the lifestyle that be afforded. The recurring theme here is trying to avoid having your financial circumstance dictated by something other than your own work, habits and luck.

I draw an analogy to our recent scare with the Gladiator Fire in that I was very motivated to try to make sure our one road out of here would not turn into a parking lot. This was easy to foresee and so it was easy to get the word out about the potential. Similarly with what austerity in the US could turn out to be in terms of impacting social security and medicare, if you can envision cuts then you can try to take action that would minimize the consequence; save more and spend less.

If we turn into Greece at some point you might still want to go riot in the streets to have your political voice heard but it would be better if you didn’t have to riot in the street.

As a quick note the US’ fate could be terrible or great but would be different from Greece mainly because we can print our own currency. 

7 Comments

  1. I think you hit an important point that a present day depression will not look at all like the 1930’s did. People are expecting a return to lines at soup kitchens to mark another depression, but society has changed significantly and we should not expect to see the same behavior or the same reactions as we did back then.

    My parents were in their 20’s during the Great Depression. Dad drove a milk truck (and was lucky to have that job). Remember milk deliveries? People had iceboxes, not refrigerators. Radio was the big thing, but Victrolas were still common. Just a few indications of how much things have changed.
    Rich

    Reply
  2. Last night one of the indicators that i fallow has made a new low. This indicator precedes the market by one month both on the upside and the downside. So if yesterday eas the low in a month we’ll have a market low. So Roger by selling your coal equith and light down your portfolio I think was a good call.
    On black swan, Recently I had a personal black swan. An event that could not happen, but did happen, to keep the family safe and together I decided to go to switzland then germany to then arrive to jfk. At close to 60 it coul not happen at a worse time. Within a day I got emergency passports and tickets. The worse part was that none of us were ready. The best part is the quick decision to act immidiately and not think about material possesion has kept us together and safe.
    Best
    jeff from nyc

    Reply
  3. Jeff, Wow, I hope all this works out for you, it sounds very nerve wracking

    Reply
  4. Roger,
    tx. i have not traded for a while because i not psycological up to the job. But i see that there is so much complecency in the mkt. That spells out lower prices. Not sure how much lower.
    Best
    jeff from nyc

    Reply
  5. I would say 1.63% on the ten year is a sign of little complacency–not that the market can’t go lower.

    Reply
  6. Very thoughtful post Roger and I agree: We are in an economic depression, marked by the crash of 2000 but probably not originating there, and while certainly not identical to the Great Depression none-the less marked by characteristic features of economic malaise such as lack of demand, concomitant job losses (becoming chronic unemployment), equity loss, ultra-low interest rates, etc.

    Your final comment is key because if growth cannot accelerate spontaneously (and it is difficult to do that when the malaise is global so growth via export advantage is very hard to come by) there are really only two ways out of the trap: Depreciate labor cost (deflation) or depreciate currency (inflation); the former is painful and leads to social unrest among those who can no longer make a living wage, the latter is painful and leads to social unrest among those who have saved and can obtain an adequate return on savings.

    It is not a place a country wants to find itself and it is very much a place a country would wish to escape which is why clear, thoughtful thinking (and a general absence of hyperbole, partisanship and/or self-righteous moralizing) is not only desirable but utterly essential.

    Reply
  7. “…those who have saved and can NOT obtain an adequate return …”

    Not for the first time have I wished for an edit button on a blog post.

    Reply

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Of Austerity & Depressions

Paul Farrell has an article up at Marketwatch about austerity in the US and depressions. Early on in the financial crisis I made comments that I did not believe we were in a depression and laid out some reasons why. At some point well into the crisis I began to think of it differently. In saying no depression I was thinking in terms of a 1930s type of event but there is no reason a modern depression has to look like the 1930s.

At some point I came to the opinion that history would look back on this period starting in the early 2000s and label it a depression. As a note I have a specific recollection of mentioning this a couple of times but I had trouble finding it in the archives (here is one post that comes close) which now consists of 4500 posts; today is post 4501.

This is not a call for apocalypse but in looking at the last dozen years, equity prices are 165 SPX points below the 2000 high, the employment situation has deteriorated badly. the housing market has deteriorated badly, we are debating the viability of programs like social security in a way that we have not done before, the country has taken on a debt load that would seem to be very problematic and we still have desperate and unprecedented policies in place trying to stimulate demand that is not really working. The divide between the haves and have nots seems to be the widest it has ever been.

As noted countless times before, the last 12 years has not prevented many markets from having normal or better than normal stock market results.  In thinking about longer chunks of time I continue to believe that healthy markets/economies can still do well. Short term of course and anything goes.

Any economy can reward innovation and resourcefulness be it on a grand scale like founding a social media company that goes public all the way down to monetizing a hobby. The extent we cannot rely on working for the same employer until we retire creates a crucial need for people to take a more proactive role in shaping their financial future.

Going along with that thought is personal austerity which addresses spending decisions and realistic attitudes about the lifestyle that be afforded. The recurring theme here is trying to avoid having your financial circumstance dictated by something other than your own work, habits and luck.

I draw an analogy to our recent scare with the Gladiator Fire in that I was very motivated to try to make sure our one road out of here would not turn into a parking lot. This was easy to foresee and so it was easy to get the word out about the potential. Similarly with what austerity in the US could turn out to be in terms of impacting social security and medicare, if you can envision cuts then you can try to take action that would minimize the consequence; save more and spend less.

If we turn into Greece at some point you might still want to go riot in the streets to have your political voice heard but it would be better if you didn’t have to riot in the street.

As a quick note the US’ fate could be terrible or great but would be different from Greece mainly because we can print our own currency. 

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