“What is more mortifying than to feel that you have missed the plum for want of courage to shake the tree?” - Logan Pearsall Smith
There have been a lot of noises that the worst recession since the great depression is over. This comes on news such as that from the Bureau of Economic Affairs, which states that the US GDP grew by 2.2% for the 3rd quarter of 2009.(http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm) while the estimates for the 4th quarter are as much as 4%. Of course to many this might be a great indicator that the economy is recovering.
However along with this apparent growth is the fact that there has been no let up in job losses, albeit at a much lower rate. Even assuming the fact that the official records do not reflect complete figures of unemployed, such as those who have stopped looking for jobs, etc, the current unemployment situation at 10% (http://www.bls.gov/news.release/empsit.nr0.htm ) is still quite high. “Traditional” sentiments state that unemployment figures start to trend down a couple of months after the recovery process begins. However the so called recovery has been on now for 9 months, with 6 straight months totally in the black. We have yet to see unemployment figures going south.
Perhaps one reason for all the positive noises coming out is because some of the big banks are miraculously repaying the loans given to them by the government. The markets were bad for the last couple of quarters, till the middle of 2009, yet Investment banks could repay government loans to the tune of billions of dollars. So just, think; housing, automobiles, manufacturing, trade, and employment all head south, but the financial institutions are making money. It’s kind of funny.
If you go more deeply you may see some of the reasons. These banks could repay the TARP loans because of TARP itself. Look at it this way, the US government has pumped in excess of a trillion dollars in stimulus funds. The US Government paid AIG money, which paid Goldman Sachs money who repaid the loan given to it by the US Government. In all the exchange of money, what productivity has actually happened? Now also look at the fact that four institutions AIG, Freddie Mac, Fannie Mae and GMAC have received in excess of 600 billion from the US government and they may not be in a position to repay anytime soon.
However since banks like Goldman Sachs and Citi are now moving towards being free of the TARP induced controls, there are chances that we could see a return to the speculative scenario we had earlier. Over leveraging is still widespread, and has not been controlled. On the 27th of November just an announcement by the Dubai government on the potential delay in debt repayment was enough to cause global markets to crash. So if the economy is improving, why no confidence? Is it because the banks know a thing or two more about their actual health?
The whole approach of all governments have been one of containment, of effects and not associated with removal of causes for the economic recession. So we could probably see a recap of this crisis soon. I feel that we have actually patched up and postponed the full implications.
We have seen two successive governments, one republican and the other democrat throw hundreds of billions of dollars at the crisis, but no one has keenly looked at the regulatory precautions such as the “Glass Steagall Act” act enacted in 1933 to control wild speculation.
There are no efforts at bringing about systematic safety valves into the money system. We may therefore yet hear with regret the words of H. Jackson Brown, Jr, “Nothing is more expensive than a missed opportunity.”
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We’ve just gone through the worst financial crisis since the Great Depression, and economies don’t recover from that kind of thing overnight.
What led to this artificiality was that governments and monetary institutions around the world, led by the U.S. Federal Reserve, took unprecedented actions to mitigate the effects of the financial crisis. … In addition, the United States has undertaken an unprecedented amount of spending, ranging from TARP [the Troubled Asset Relief Program] and the auto industry bailout to the stimulus program and expansion of the social safety net. As a result, future federal budget deficits are also going to be unprecedented for years to come. Combined, these fiscal and monetary policies have led to sharp declines in the value of the dollar, a surge in commodity prices, and even serious questions about the role of the dollar in the global economy.
All of this seems to have worked in the short term, and the world economy is much better off in terms of its financial stability than it was a year ago. … A lot of what we’re currently seeing is more of a mirage than reality — and people should be wary of the false signals that may have come from these emergency actions. In a sense, we’ve put the global economy on “steroids” — and we know there will be long-run consequences — but even more importantly, we know these “steroids” are creating distortions in our normal measures of global economic well-being.
Last week, as U.S. President Barack Obama was preparing for his first visit to Beijing and the China-as-rising-superpower meme was center stage.
Despite conventional wisdom that a rejuvenated Chinese economy, which grew 8.9% in the third quarter, could pull the global economy out of recession, several skeptics were arguing the Middle Kingdom's performance was unsustainable — and even that it was mostly a mirage. Chief among these naysayer is billionaire hedge fund investor Jim Chanos, who famously sold Enron short in 2001 after concluding that the rosy reports and projections about the company were not based on facts. He has come to a similar conclusion about China, according to Politico.com, and is shorting the country just as he did Enron.
China's third-quarter GDP growth this year is unlikely to be "anywhere near" the official 8.9% cited by Beijing.
Never mind that the World Bank, International Monetary Fund, Moody's Investor Service, and various research houses and investment banks take the number at face value. "Beijing's statisticians have gone back to their old tactic of making up figures to support the Politburo's predictions." inconsistencies in other statistical indicators: car sales jumped 94.7% in August, for example, yet gasoline sales rose just 6.4%. "There are reports that central government officials have ordered state enterprises to buy fleets of vehicles and that these businesses are storing them in parking lots across the country,"
"Wholesale fudge factor" in Chinese statistics, including unemployment numbers. "Economic activity isn't necessarily building wealth," "If you have to keep putting up the same bridge every five years because it falls into the river, you're going to show a lot of GDP growth as you keep rebuilding the bridge [but] you're not generating any wealth for your countrymen."
Another China skeptic is Pivot Capital Management, investment manager of the $505 million Pivot Global Value Fund. In an August report, it makes the startling claim that China is not 45% urbanized as the World Bank and other international agencies estimate. That figure could be "understated as much as 20%," says Pivot, "meaning that instead of about 350 million people, only 100 million actually would need to be urbanized."
This is key, because it indicates in coming years there will be a dwindling in GDP-boosting activities such as construction. China's "industrialization and structural modernization are largely complete," according to Pivot's report. As a result, new investments will end up funding unneeded factories, buildings and roads. It concludes that the country's capital spending boom is unsustainable because it is "outstripping previous great transformation periods" experienced by Thailand and Asia's other tiger economies, as well as Germany and Japan.
Pivot Capital appears to accept China's reported growth in 2009 at face value, but says the "burst in economic activity has been inflated by a front-loaded stimulus package and a surge in credit growth," two drivers that will run out of steam in 2010. "The chances of a hard landing are increasing," the report warns. "The coming slowdown in China has the potential to be a similar watershed even for world markets as the reversal of the U.S. sub prime and housing boom."
It's hard to tell if the skeptics are right. China is like the proverbial elephant being described by blind men: anyone can say anything depending on which part they happen to be touching. Jim O'Neill, head of global economic research at Goldman Sachs, is dismissive of the doubters. "I've seen similar sorts of stories about 20 times this year," O'Neill said last week during an interview on Bloomberg TV. "These are generally written by people that obviously just don't follow closely or study China." He maintained that, if anything, China's economic strength is being underestimated. "The latest data we got earlier this week, in addition to the month before, suggest that GDP was actually stronger than 8.9% in the third quarter," he said.
Not that he minds doomsday predictions. "I like seeing those stories because this tells me that there are [still] so many unbelievers out there," said O'Neill, who has been visiting China for 20 years. "There will [then] be plenty of people to realize the power of recovery, and more importantly as it relates to China, to start to recognize what is quite simply the most important economic story of our generation and quite possibly our children's."
Translation: global markets will remain buoyant longer than expected as the short-sellers are forced to cover their anti-China bets and the unbelievers finally come around and belatedly take long positions. For the sake of 1.3 billion Chinese and the rest of us, let's hope
On the 60th anniversary of the Great depression the US Commerce Department Bureau of Economic Analysis released advance estimates that the US economy (GDP) had grown after four consecutive quarters of decline. If correct the US economy has posted economic growth for the first time in a year. America joins Japan, China, Germany and France as the world’s leading economies that appear to have emerged from recession and averted economic collapse. Some are arguing that this signals the end of the ‘great recession’ and a return to economic growth.
In order to asses this one would need to look at the factors that caused the recession and then analyze if they still are present or have they been replaced by economic conditions that will bring new and sustainable growth.
The growth in Western economies in the last decade was driven by the real estate bubble which stimulated the remainder of the economies of the West. The bubble reached exceedingly colossal proportions because banks were able to create various financial products from debt which were then sold to other banks based upon the assumption that the housing bubble will continue to expand.
The collapse of the worlds largest Sub prime company – New Century Inc in April 2007, the collapse of Northern Rock in February 2008 and then AIG, Lehman brothers and a whole host of other banks brought to the forefront that the boom of the last decade was unsustainable and built upon the wild assumption that real estate prices will continue to rise. The subsequent collapse in housing prices exposed gaping holes in lending practices of the worlds largest banks, many banks were forced to write off billion in debt, as they on mass were being defaulted upon. As banks collect customer deposits and lend to new business and projects all of this came to a grinding halt and because of this a crisis that was inherently financial, shifted to the real economy, hence production fell, many companies collapsed and unemployment increased. Hence the economies of the West were driven by real estate which had now run out of steam.
To avert catastrophe Western governments intervened on colossal scale to save their economies from collapsing. The idea being, whilst many would not be able to spend and hence stimulate economic activity, the state would provide the necessary money to stimulate the economy and this would bring back confidence and kick start the economy. Western governments took three key approaches to the crisis: nationalization, stimulus packages and the printing of money.
Analyzing the Economic Recovery
Many economists and policy makers are arguing that the world’s premier economies have shown economic growth between April and June 2009 and this marks the end of the great recession.
Germany lost 6.7% of national income over the course of the recession. Germany is the manufacturing heart of Europe. It relies upon exports to fuel growth. So its biggest problem has been the huge fall in global trade, which the World Trade Organisation predicts will have contracted by 10% this year. However populist polices by Chancellor Angela Merkel and the agreement to supply Russia with German automobiles shows that growth in the German economy at best based upon temporary factors and not underlying economic fundamentals. In February 2009, the country approved a 50 billion euro (£44bn) stimulus plan, Germany also launched a car scrappage scheme in February 2009 where drivers receive a cash incentive to scrap their old car and buy a new one – to boost the ailing car industry. The scheme has been widely deemed a success, with more than 1.7 million applications.
The peak-to-trough decline (the beginning of the first quarter of decline to the last) for France was s 3.5%. The French government announced a 26 billion euro (£23.5 billion) initiative designed to revitalise the economy. France and Germany have come out of the recession because their financial sectors, account for a smaller proportion of their economies.
The total decline for Japan has been a whopping 8.4%. Government stimulus measures totaling $260bn (£159bn) helped to boost the economy, including cash handouts and subsidies to buy energy-efficient cars and home appliances.
If the US has come out of recession its loss in income will have been 3.7%. Third quarter GDP data reveals that August retail sales surged a seasonally adjusted 2.2% over the previous month, producing the largest monthly percent increase since January 2006, However the surge in August was driven primarily by an 11.6% increase in automobile sales, which was a direct result of Cash for Clunkers scheme. The end of this scheme saw retail sales fall 1.5% in September.
Stimulus Packages = Leg up
At the peak of the economic crisis many Western states developed Stimulus packages in order to save their economies from collapse, the most infamous being the US $1.2 trillion stimulus package in 2008. However any stimulus is a high-octane boost and a temporary measure. They are designed to kick-start stalled economies, not to fuel sustained economic growth. Hence the current growth seen in some nations are the inflated results of stimulus measures achieving their intended effect to be temporary. Government initiatives such as
Car Scrappage schemes as seen in most nations, the reduction in the general sales tax in the UK and tax credits for first-time home buyers as seen in the US and France contributed to the respective 1 percent and 0.5 percent portion of the total GDP increase attributable to increased motor vehicle sales and residential investment. As these programs end, so will the contribution to the economy.
Brian Bethune, economist at IHS Global Insight said with regards to the end of the recession: “It’s good to have the economy growing again, but we don’t think that rate of growth is sustainable because it is distorted by all the government stimulus. The challenge here is to get organic growth – growth that isn’t helped by fiscal steroids.” Unemployment is currently 9.8% in the US, that is over 15 million people.
When looking at the quality of growth much of the economic factors are temporary and not driven by any factors that can be considered sustainable. Dana Saporta, an economist at Stone & McCarthy Research in Skillman, New Jersey confirmed this: “Much of the strength in theUS economy is due to temporary factors such as fiscal stimulus initiatives like the home- buyers credit.” In fact the leg up provided by governments around the world shows the importance of government aid to the emerging economic recovery, when this is removed – which eventually governments will have to as they cannot continue with expensive stimulus plans, it is very much possible that Western economies will fall into recession again.
The stimulus packages have driven artificial growth, once Western states remove the leg up they have provided we will need to see if the free market can function on its own. With the busiest shopping season of the year approaching – Christmas, the coming quarter will provide a good gauge of ‘unstimulated’ consumer activity. However with unemployment at its highest, national production at best premature and debt still very high this quarter’s turnaround is in no small part due to government stimulus measures, and is therefore most likely artificially inflated and not sustainable.
Conclusions
Whilst the US, the worlds largest economy appears to have moved out of recession its economy is dependent on consumer spending, which makes up approximately 70% of its GDP, exports make up only 11% of its economy. So sustained consumer spending will be essential for the US and consumer spending shows no signs of recovering.
The leg up provided by the Capitalist world in no way dealt with the underlying economic problems of unsustainable growth, debt driven spending, casino finance and bubble economies. What such stimulus packages have done is kept Capitalist economies afloat when unemployment, repossessions and bankruptcies have all increased. So whilst statistically Capitalist economies
maybe coming out of recession the reality on the ground is much different. Socialist intervention by Capitalist governments have for the moment halted any economic collapse, however once all the temporary initiatives are removed from the free market it is highly unlikely the market will stand on its own feet. Hence the world economy in reality is in the same position it was a year ago.
Whilst the majority of Capitalist societies face the grim prospect of unemployment and repossessions, they will not be receiving any handouts to ease their situation, the recent bonuses announced by some of the worlds largest investment banks shows where the bailout packages have gone. This shows the agreements made at the G20 summits were really only for public consumption. Western governments have still not passed any legislation to stop bonuses.
The conditions in the world economy have stopped worsening, however unemployment remains high and consumer spending is still low to sustain any economic recovery. At best the current quarter growth seen in some of the world’s major economies is premature, the underlying economic fundamentals remain absent. Hence economic recovery currently is in reality just a mirage
Irrespective of the media reports, we do see a lot of change.
People are buying things.
Textile industry which suffered badly have reported getting good orders now.
Automobile sales have gone up.
Some people who lost jobs got some other job.
Not heard any one getting pink slips in recent past.
Lets believe that the worst is over.
Ramesh
The Human Search Engine
The economic recovery is not a mirage. That is a truth. But, the mirage has always been a fact. You have to look at the reasons for the mirage being formed. A glistening sand with scorching sun. We are actually caught between the two currently. The government impetus and the run for profitability by the corporates. Between the two what is happening is that the the sentiment becasue of large project announcements by the government pushes the mood up and hence the consumer sentiment. The profitability rush pushes for the cost measures to be taken and hence less money in the hands of consumer. Between the two we need to strike a balance. The actual economic recovery happens,when the consumer is spending because they can "afford" and not when because the sentiment is positive. The other kind of spend might lead to another spiral. We would surely come out of the same, by the end of CQ3 (the quarter after CWG2010) this year, my guess. This comment is based only on the India scenario.
Cheers!
Deepak Sar
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