JOURNAL: Some Final Observations

One of the most interesting aspects of this crisis is that it is truly a global crisis. This is arguably a first. In historical crises, wars or catastrophes, there is always a large external environment of relative normalcy. Our first real global event will directly impact all economic activity from Botswana to Albany at a relatively granular level. It's even more interesting since the impact of this event is occurring simultaneously in all places at once.

This is a very bad thing. Not only is the information globally dispersed, but it is likely to recast world's economic psychology nearly overnight. Fear, uncertainty, and doubt spread at the speed of light. This has/will cause a substantial decline in demand as people and companies become cautious. Since it is all simultaneous in effect, the cumulative impact will be seen as a comprehensive demand shock (as in rapidly declining demand for goods and services).

If it occurs, this demand shock would quickly hit the global information systems that run the world's companies (they run everything on a just in time basis from finance to inventory). A rapid fall of in demand would likely rapidly translate into a quickly executed -- information technology enabled, so what used to take many months will now take days -- change in corporate behavior. This change in corporate behavior will force cut backs across the board from jobs to purchases to investments. Since it will occur nearly simultaneously (within weeks) of the initial fall of in demand, these cutbacks will be seen as another demand shock and so on.

Since there isn't any stable external environment untouched by the crisis, this may become a uncorrectable and self-reinforcing feedback loop. Also, since most economic statistics have substantial lag, we may not even know it is occurring until we reach the next big tipping point.

Hopefully, the global system isn't as efficient as we designed it to be.

NOTE: Here's an interesting academic paper that looked at whether the great depression of the 20th Century could have been forecast using modern economic techniques/analysis (remember, the depression looked like it was merely a recession when it began). It concludes that it couldn't have been anticipated. It was a black swan.

Comments

[tim302]

Things are moving fast. For the first time, I have started to notice shortages at grocery stores. Simple stuff, like staple food-- tuna, broth, rice and so on. Even if there is not a sale, I see the stuff fly off the shelf. Anyone else seeing this?

[Kim McDodge]

We run a food club that buys directly from distributors. For years our distributor was very even in ETAs and punctuality. We almost always received the staples that we ordered. About 6 months ago there was an article in the FoodDay of our paper about sustainable kitchen craft mentioning food clubs and the number of small food clubs shot up and put deliveries in chaos with panic buying. Now we get about 3/4 of our orders due to outages. The prices have doubled on most stuff. I expect it to get worse. The pick up point is getting more crowded and people are beginning to notice the truck and ask questions about clubs.

There may be a time when our city public soil food web garden may be a way out of a city in a railroad to better ground for those who will take nourishment seriously.

[Toronto real estate agent]

I have been always an optimist, even when the wave of foreclosures became in the USA, I was sure it would be ok. Now I don't believe it anymore. On the other hand - this crisis has to do a lot (like all others crisis) with mass psychology. I think most of the world is ok for now - I mean - employment is solid, price level is stable, no supply shortages (Tim, I haven't noticed any) - so why to cry NOW? We can start weeping when the bad times really come!
Best wishes and enjoy the day!
Elli

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[Mike in Milwaukee]

This should be a wild week again. Has anyone considered the possibility that the enormous FIRE economy collapses but the real economy somehow manages, due to built up and built in resilience, keep going in a fairly orderly fashion? Why should the farmer quit farming? Why would General Mills quit making Cheerios? In relative terms this productive effort will be very much in demand and somehow well compensated.

[James Bowery]

"Why should the farmer quit farming?"

Because he can't buy fuel to power his equipment.

"Why would General Mills quit making Cheerios?"

Because consumers can't afford to buy luxuries like Cheerios.

[Da Buffalo Amongst Wolves]

Let's see if I understand this correctly.

In retrospect, Yale and Harvard failed to forecast the stock market crash of 29 so IT MUST HAVE been a 'black swan'?

Laughable.

The same people failed to forecast THIS economic crisis either.

Quite simply, that's because the people writing these economic PR pieces disguised as 'economic forecasts' have a vested interest in optimistic outlooks.

Here's an illustration http://s233.photobucket.com/albums/ee241/photobastard/?action=view&current=Crymearivergreenspan.jpg of the depth of the rationalization and denial inherent in the minds of 'true believers' (Eric Hoffer's usage), you know... fanatics... In this case, so-called 'free-market' economic fanatics.

...and a chart of the non-borrowed 'reserves' at the fed... http://i233.photobucket.com/albums/ee241/photobastard/non-borrowedreservesofdepositoryins.jpg (There ARE NONE)

But it's OK, the Homeland Security Business is STILL booming http://i233.photobucket.com/albums/ee241/photobastard/financialhomelandsecurity.jpg (GSN security insider)

...and the ol' short-timer himself, GW, wants to personally thank you all for that:

http://i233.photobucket.com/albums/ee241/photobastard/bush_heil.jpg

[S]

John,

One things to remeber here is critical: the US is acting in its own self interst. The China People Daily ran an editorial this weekend saying the US is abusing has abused its hegemony. The US is in the process of acting in itse own self interest under the guise that we need to save ourselves to save you. As the fire burns they say stay put whil I go get water. The world is in the process of cracking out of the US shell and the real tell is the Fx markets. Watch what happens when the yen stops going down.

I don;t think the US stands a chance of executing a reflation at the expense of the rest of the world. The whole meme that we went down first and will come out first is absurd. The rest of the world is not ok. From Africa to Latam to Russia, ME, China and Korea, the fires are burning in sight or not. But that is beside the point. Overcapacity is rampant across the world.

The action is in the payments system and when that breaks the US breaks. The rest of the wworld is in the process of oragnizing a front. What will be the Us anwser. So far it has been to export chaos into the emerging markets in hopes of shattering the front. But that was an opening salvo. Watch what happens to this paradigm it will be the roadmap.

[S]

Be very interested in your take on the Stratfor piece this week re the re emergence of the State. They use the financial crisis as the backdrop to assert that the State is the only player in town. It might have been interesting had they taken the other side and argued that the futility of gov't action heretofore suggests exactly the opposite. Spitting in the ocean more like it.
As an aside, their "analysis" IMO tends to be quite shallow and further impaired by their lack of breadth (firepower to bridge the economic / geopolitical).

[complexfatwa]

S, do you have a link to said piece?

John,

An excellent piece.

A minor point - for those that remember the AIG bail-out (it was about 3 bail-outs ago, or about a month). Back then AIG needed only $85bn. Now its $144bn. Quite a lot of people are seriously asking "where did the money go?". I mean, needing $60bn more within a month is a little high. GM and Ford are asking for only $25bn, and they make real stuff.

http://www.nytimes.com/2008/10/31/business/31aig.html?ref=business

A number of the more cynical people in the insurance business are suggesting that AIG was, by 2008, an Enron-style accounting shell. But that'd just be being cynical, and insurance people are never cynics. Really.

Unsurprisingly AIG has refused to explain where the money has gone. After all, dropping $20bn on the 2.30 at Chepstow might be seen as embarrassing.

Today AIG need another $21bn. Now, granted, $21bn is at this stage loose change (who remembers the happy days of "a billion here, a billion there and soon we're talking about real money"), but its still enough money to feed Africa for five years; or pay for almost 2 months of Iraq.

Here's the good news: Its simply not possible to fire enough people to make back $20bn, $80bn or $144 billion. It simply can't be done.

That's the downside of efficiency, when things go pear-shaped there are very few people left that can do the work. In some companies in the financial services area there are sometimes only 2 or 3 people that understand a multi-billion pound area of business. I know of some areas where only one bloke has the knowledge. He has the best career of all time - in at 10, a few hours of meetings, then lunch, then the pub, home at 3. What are you going to do, fire him? He's the only person alive that completely understands a piece of business worth £100m a year. The ultimate irony of efficiency, is that sometimes in the real world its incredibly inefficient.

So either AIG keep lots of people on to keep the paperwork moving, or shoot the whole company through the head, letting all the insurance behind the $60trillion derivatives market completely fail, making some very rich people unhappy. Hm. Decisions, decisions. Its a tough call.

Nope, AIG are going to get more money from the taxpayer, so that rich people can stay rich.

[Whitespiral]

Stratfor have a tendency to follow a lead and go way, way overboard with what implications it holds.

They tend to make dramatic, and quite frankly, bad predictions, and always frame their outlook on what seems like an infatuation with an imperial US. George Friedman especially reminds me of Robert Kaplan.

[swimmer21]

Good stuff, John.
What is behind all this is the inconditionnal trust in the economy as a way to build the world. This is never questionned.
Money in this system is just evaporating. Why not just put zeros when the negative trend is too hard when it hit, as you put it down, everyone, everywhere?

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