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The Coming Global Economic Slowdown and Rising Inflation: Is Stagflation-Lite in the Cards?

Author: Nouriel Roubini  ·   ·   › Share This Print

Is the global economy headed towards a global recession? Or should we worry more about the rising inflationary forces in the global economy? Or will both evils emerge in a stagflationary outcome of contracting output and rising inflation? Certainly recessionary pressures are mounting in many economies; while inflationary pressures are mounting in other ones.

So let us consider in more detail the recessionary and inflationary risks in the global economy…

First, there is a group of economies that is clearly headed toward a recession and where inflationary forces will be kept – over time – at bay by the contraction in aggregate demand (relative to supply) and the slack in labor markets that such a recession will entail. The recession club includes the US that is already in a recession (regardless of whether the official Q1 GDP growth this week will show a small positive or a small negative sign). It will also soon include in Europe the UK, Spain and possibly Ireland where the bust of their housing bubbles is starting in earnest. In the rest of Europe Italy and Portugal also look like in near recessionary territory. While in Eastern Europe one cannot exclude significant financial pressures and possible distress – given their external and other imbalances – in countries such as Latvia, Romania, Bulgaria, Hungary and Turkey. Going to Asia, Japan now looks near a recession (as the US recession and the stronger yen are starting to take a toll while domestic demand is still comatose).

A protracted and severe recession in the US, in parts of Europe and in Japan would then lead to a sustained global economic slowdown. Canada and Mexico – that are linked to the US by trade – would suffer first. Other Eurozone economies will slow down sharply (as a deflation of housing bubbles, the effect of the credit crunch, high oil prices, a euro close to 1.60, the US import contraction and an ECB stubbornly on hold) will take a toll on Eurozone and European growth. Already recent data show a sharp weakening of consumption and retail sales throughout the Eurozone. And if Europe slows down sharply the new EU accession countries will start hurting too with some facing outright financial distress.

Farther east in Asia a severe and protracted US recession would hurt China that is significantly dependent on the US consumer. A mild V-shaped recession in the US would be ok for China; but the US recession ends up being U-shaped and lasting four to six quarters the impact on Chinese growth could be significant. And if China were to slow down significantly (say towards 7-8% growth) the rest of East Asia would suffer too given its crucial trade links with China.

A US recession and a significant Chinese slowdown would be bad news not just for East Asia but also for commodity exporters among the emerging markets and advanced economies. In Australia and New Zealand the negative effect on growth of the deflation of their housing bubbles has been cushioned by the sharply rising commodity prices. But if the two engines of the global economy – US on the demand side and China on the supply side – stall all commodity exporters and many emerging market economies would suffer.

These emerging market economies have benefited from their much better policies (after the financial crises of the 1994-2003 decade) and the rise of Chindia. But they were also lucky as you had the best global conditions for the last five years: high global growth, high and rising commodity prices and low risk aversion of international investors searching for yield. Thus lower global growth, lower commodity prices and higher risk aversion will be painful for emerging market economies, especially those with macro, policy and financial vulnerabilities (current account deficits, fiscal deficits, excessive credit growth, weak policy credibility, fixed or semi fixed exchange rates, overvalued currencies and currency and maturity mismatches).

So what to make of the rising inflationary pressures in the global economy? In countries headed towards a recession those inflationary pressures will ease as a slack in aggregate demand relative to the supply of goods and services, a slack in labor markets and a fall in commodity prices (that will certainly occur once investors price the effects of a severe US recession on global growth) will control such inflationary pressures. G7 and G10 central banks are more likely to ease further – including the ECB some time in H2 – rather than stay on hold or raise policy rates as the recessionary or slowdown pressures take hold. But, as discussed below, short-run inflationary pressures will constrain monetary policy easing even among these G7 economies.

Inflation is an even bigger problem in fast growing overheating economies with undervalued exchange rates (China, India, Russia, the Gulf/GCC states, Argentina and other fast growing emerging markets that are informal members of the (BW2) Bretton Woods 2 regime). It is also becoming a broader problem in other emerging market economies because of the sharp rise in oil, energy, food and other commodity prices.

What is driving this sharp increase in commodity prices and is this rise sustainable? Peak oil and peak resources arguments would point out that longer term demand – driven by Chindia and other emerging markets – will grow much faster than supply; so this price increase is both fundamental and likely to persist over time. Others would argue that, for reproducible commodities such as agricultural goods, high prices will lead over time to a sharp supply response that will put a damper on the rise in prices (leaving aside the effects of diversion of land for bio-fuels production). Some point out that there may be a bubble in commodities as fundamentals of supply/demand cannot explain the recent rise in prices; and this speculative push is supported by hedge funds and even real money funds having discovered commodities as a new asset class. Some explain the bubble in commodities as being partly driven by the excessively easy US monetary policy that has now created a new bubble; and with some many economies effectively pegged to the US dollar their partially unsterilized intervention is adding to the fuel of global easy money. And some – a complementary story – relate the rise in the dollar price of commodities to the sinking US dollar that is driven by the US recession and by the aggressive Fed easing. Each one of these explanations of the commodity boom has some merit and will be discussed in more detail in further analysis. For now it is clear that these commodity price pressures are leading – whether temporary or more persistent – to a rise in global inflationary pressures, certainly at the headline level and, possibly over time, also at the core level if second round effects and greater inflation expectations take hold.

The right policy to address the inflationary pressures for these overheating emerging market economies would be to let their currency appreciate and tighten monetary policy: the two policies go together as monetary/credit tightening is not possible – given the “inconsistent trinity” – with fixed or effectively fixed or heavily managed exchange rates. Only greater exchange rate flexibility – that helps on the inflation front – would also allow these economies to regain monetary policy independence and tighten credit that is necessary to control the rising inflationary pressures.

Some of these BW2 economies – especially the GCC – are not likely to abandon their pegs any time soon for political reasons: they get the effective security blanket of the US military support in their volatile region and the last thing the US wants is to have them abandon their dollar pegs, a move that could then lead them to abandon the US dollar as the unit of account for oil pricing. So, with a move away from the peg barred by geo-strategic constraint the GCC economies will face trouble ahead: they nee
d to reduce nominal rates as the Fed eases to avoid further capital inflows and appreciation pressures at the time when their inflation rates are already in double digit territory. Thus, in these GCC economies real interest rates are already sharply negative feeding the goods inflation and a variety of asset bubbles. Negative real rates are already feeding a housing and real estate construction boom that will, in due time (after the rising fundamental demand for real estate is satisfied), lead to a massive bubble that would eventually go bust in the next couple of years. The way to avoid this rising goods and asset inflation would be to let their currency appreciate. But since that option is not available for geopolitical reasons, the way these countries are addressing their double inflation problem (goods and asset inflation) is suboptimal: first, they heavily subsidize their populations’ nominal incomes to avoid rising inflation from eroding real incomes; since their fiscal balances are highly positive with oil prices so high this fiscalization of the inflation costs is feasible even if it will perpetuate the inflationary pressures.

As for the real estate asset inflation and bubble the current fundamental demand for residential and commercial real estate is so far outstripping the new supply coming to the market: thus, for a while the construction boom will be driven by rising fundamental demand. But at some point – with such negative real interest rates – the real estate boom will become excessive and lead to a bubble that will – in two years’ time – lead to a painful bust. But since these economies are so wealthy (with their central banks and/or SWF holding hundreds of billions of dollars of net foreign assets) they can also ride and fiscalize the cost of the eventual real estate and asset bubble bust.

China is getting increasingly concerned about its rising inflation rate but its policy response of monetary and credit tightening has been slow and incremental. Why? Several reasons: first, faster tightening requires a more flexible exchange rate and a faster rate of RMB appreciation. So far that rate of appreciation has been heavily managed and kept under control to maintain export growth. Thus, there is not room for more aggressive tightening as long as the rate of RMB upward crawl remains slow. Second, China needs to carefully assess whether the US recession will be short and shallow (in which case Chinese growth will not slow down much and inflation becomes the dominant problem for Chinese policymakers) or longer and more severe (in which case downside risks to growth via an export slowdown may emerge as an additional problem for Chinese policymakers). Third, no major policy change is likely until after the summer Olympic games as Chinese authorities are always cautious and even more cautious before an important international event that is already in political hot waters. Fourth, the recent bust of the Chinese stock market bubble – down 50% from its bubbly peak – is a vulnerability that needs to be taken into consideration.

Since China is taking a slow and incremental monetary policy tightening approach to its inflation problem other effective members of BW2 among the emerging market economies are also taking a slow approach: they cannot let their currency appreciate excessively lest they would lose competitiveness relative to China; they are thus also limited by this exchange rate constraint in their ability to tighten money and credit; finally, they need to worry about inflation but they also need to worry about the global economic slowdown that the US recession will entail. So for now they are dealing with their inflationary pressures through a host of non-market tools (price controls, fiscal subsidies, and export controls in the case of the food exporters) rather than monetary and credit policy alone.

Inflationary pressures may abate over time if the US recession and global slowdown leads – as likely – to a bursting of the bubbly component of commodity prices. But by Q3 or Q3 many emerging market economies will have to face the difficult dilemma of how to deal with slowing economic growth while inflationary forces are still persisting: even very sound emerging market economies such as Chile and Korea are already facing this difficult dilemma of how to deal with weaker-than-desired growth and greater-than-desired inflation.

So while in the short run inflationary pressures seem to dominate the policy makers concerns in many advanced and emerging market economies the bigger risk to the global economy may turn out to be a more severe than expected US recession that leads to a sharper than expected slowdown in global economic growth, together with outright recession in a number of advanced economies. While inflationary pressures will recede in this slowdown environment the inertial effects on core and headline inflation of the price pressures that are already in the pipeline may limit the ability of many central banks to ease rates at the time when growth concerns will emerge with greater force.

Some central banks – like the Fed – may soon take an easing pause but they will be forced to ease further as the economic recession becomes more severe. Even the ECB that is playing tough on inflation will be pushed to ease rates – if cautiously – by H2 when the Eurozone economic slowdown will show up to be greater than currently expected. Other G7 central banks (BoE, BoC) are already easing and will ease more; and even the BoJ may go back to its ZIRP policy if Japan tips back into a recession.

Monetary policy tradeoffs will be much harder for emerging market economies’ central banks as inflationary pressures are still building up while their economies are still in overheating mode. Their growth slowdown may hit them – by year end – at a time when such inflationary pressures are not yet abated; thus, monetary tightening and further currency appreciation will continue at a modest pace during 2008 until the downside risk to growth become more dominant by year end.

Certainly the current rise in commodity prices and global inflation will complicate – for all central banks – the task of addressing the coming US recession and global economic slowdown. This will not be a full-blown global stagflation but the central banks’ ability to respond to the coming global growth slowdown will be constrained by the concerns about the still high inflation in the global economy. This constraint may thus further accelerate the global economic slowdown and the outright recession in a number of economies. Thus, even leaving aside the still stressed conditions in financial markets (where interbank spreads are still as high as they have been since the start of this severe financial crisis) the stagflation-lite shock now hitting the global economy (slowing growth & rising inflation) will significantly restraint the ability of policy makers to respond to these difficult macroeconomic trade-offs.

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107 Responses to “The Coming Global Economic Slowdown and Rising Inflation: Is Stagflation-Lite in the Cards?”

Guest • April 29th, 2008 at 10:10 am

11:06 Bush says he expects GDP data will show \’very slow economy\’Translation: \"We have rigged the inflation reading in the GDP nubmer to gaurantee a positive number so I don\’t look any more dumber than I do\"

Guest • April 29th, 2008 at 10:12 am

Says Lynn Franco, Director of The Conference Board Consumer Research Center: \"This month\’s decline in Consumer Confidence was the result of yet another sharp decline in the Present Situation Index. This continued weakening suggests that not only has the feeble level of growth in the first quarter spilled over into the second quarter, but that economic conditions may have slowed even further. And, not only are lackluster business and job conditions eroding confidence, but rising gasoline prices are undoubtedly heightening concerns. Consumers\’ inflation expectations continue to rise and this measure now matches the all-time high reached in the aftermath of Hurricane Katrina. The percentage of respondents intending to take a vacation over the next six months has fallen to a 30-year low, another sign of consumers turning more cost conscious. Looking ahead, consumers\’ outlook for the economy, the job market and their income prospects remains quite pessimistic and little changed from last month. Or, in other words, the glass remains half empty.\"

Guest • April 29th, 2008 at 10:46 am

You watch now, conveniently, the public outcry for cheaper energy will crush the political barriers to opening Anwar…

Guest • April 29th, 2008 at 11:29 am

Eli Broad, a philanthropist and co- founder of KB Home, the fifth-largest U.S. homebuilder by revenue, said he expects home prices to drop another 20 percent.\"I don\’t think we\’re anywhere near a bottom in housing,\’\’ Broad told Bloomberg TV at the Milken Institute Conference in Beverly Hills, California. \"We\’re going to have a big inventory of unsold, unoccupied homes that\’s going to take three or four years to clear out.\’\'Homebuilders, hurt by banks\’ stricter requirements for granting home loans and concern over the rising number of homeowners failing to pay their mortgages, have begun work on the fewest number of houses since 1991, according to the U.S. Department of Commerce.\"

Gloomy • April 29th, 2008 at 11:34 am

THE CHECKMATE SCENARIO\"Thus, even leaving aside the still stressed conditions in financial markets (where interbank spreads are still as high as they have been since the start of this severe financial crisis) the stagflation-lite shock now hitting the global economy (slowing growth & rising inflation) will significantly restraint the ability of policy makers to respond to these difficult macroeconomic trade-offs.\"

Guest • April 29th, 2008 at 11:45 am

Deflation has begun!!! Gold, oil, home prices, stock prices (soon), retail prices…Heli-Bens worst nightmare is upon him…

Guest • April 29th, 2008 at 11:55 am

Somthing important is going on that I must point out becuase no one is talking about it yet but the yield curve, in this case, 2yr – 10yr Treasury spread has actually FLATTENED by 62 bps. since peaking on 3/6/09…

Capone • April 29th, 2008 at 11:58 am

Bernanke has done it ! Dollar stronger. Gold and silver alternate currencies lower. Stocks HIGHER ! The man is brilliant ! USA USA USAFor he is a jolly good fellow. For he is a jolly good fellow. For he is a jolly good feeelllllooowww. That nobody can deny !

Gloomy • April 29th, 2008 at 12:10 pm

A HISTORY OF THE NEW DEPRESSION All of the conventional thinking states that we cannot have a depression, because the Great Depression was caused by policy mistakes and we have learned from the past. When the history of the New Depression is written several years from now, authors will point out how the Fed cut interest rates aggressively too early precipitating the depression: At this early point, rates did no good, as the root problem in the system was insolvency. The dramatically lowered rates stimulated inflation while not increasing growth. This inflation markedly worsened the depth of the economic slowdown, turning a deep recession into a depression. Had the Fed waited to lower rates until after the insolvency problem had been allowed to run its course, such rate reductions would have provided real stimulus and engendered optimism in the markets at a critical juncture, lifting the country out of its economic malaise without increasing inflation.

Octavio Richetta • April 29th, 2008 at 12:18 pm

Professor, what can I say? You Da\’ man! Best analysis of the complex current WW situation I have read so far. It makes sense to me 200%.

Guest • April 29th, 2008 at 12:18 pm

The yield curve is flattening agian in response to developing severe economic weakness. Those, including stocks, who beleive this will be a short and shallow event are dreaming. The best inflation slayer is a recession and the bond market knows it. Bush is a deceptor, his new name is \"deceptiCON\"

Octavio Richetta • April 29th, 2008 at 12:24 pm

Written by Capone on 2008-04-29 11:58:45I don\’t know if dat was supposed to be a joke (are you JMa?). Perhaps, it is too early to tell but, in case you were being serious, I want to say that I tend to agree with you, Benny seems to be doing the best he can under the circumstances; but it is way too early to tell. We need to wait until the next sh*t train hits the fan. Let\’s see what he does today…

Capone formerly JMa • April 29th, 2008 at 1:03 pm

@Octavio, I thought you were going on holiday and giving this all a rest for a while :) It was a joke sorry I did not mark it as such. Short term sure, the system has survived. He has gotten it done one way or another. It is humorous to see so many people writing articles in the MSM casually referring to him saving the \"system.\" Yeah, what a relief, the system did not collapse. What about the fact it nearly DID ! Mr Ben has more strings to pull to guide this thing where they all want it to go. So tough for him to fail. Time will tell. The history books will probably not be kind to him. Did he have much of a choice ? Who knows… I thought the job implied something related to protecting the currency… They will be especially harsh on the derivative super mega construct of this time which is currently in the early stages of unwinding.

Octavio Richetta • April 29th, 2008 at 1:17 pm

Written by Capone formerly JMa on 2008-04-29 13:03:15Good to see you back! I don\’t know how long it will last but, being short, what I read in the link below I did not like at all. If this lasts, I will have to cover. Good article!http://www.bloomberg.com/apps/news?pid=20602007&sid=adS3jA7wCyBQ&refer=ratesBonds, Stocks Show Bernanke Fixing Financial System (Update3) By Bryan KeoghApril 29 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke is persuading investors that the financial markets are working again. The Standard & Poor\’s 500 Index gained 7.88 percent since the central bank backed the purchase of Bear Stearns Cos. on March 16. Companies sold $45.3 billion of debt last week, the most ever. High-yield bonds are poised for their best month in five years and mortgage securities are outperforming Treasuries for the first time in 2008.

Giraf • April 29th, 2008 at 1:33 pm

Written by Guest on 2008-04-29 12:18:34\"The yield curve is flattening agian in response to developing severe economic weakness.\"I don\’t believe that is a correct explanation. The curve has been flattening with yields across the curve ALL INCREASING but with larger bp moves in the short end. This is inconsistent with \"severe economic weakness\"

Guest • April 29th, 2008 at 1:33 pm

Octavio, yes companies sold debt but at what cost or yield!!! You notice the article says \"high-yield bonds…\"

Guest • April 29th, 2008 at 1:36 pm

Giraf- if bonds felt the economy was on the road to recovery, spreads have typically widened over 250 bps. before the flattening process began in that instance. This time, spreads peaked at 209 bps in march and have come in dramatically since then.

Gloomy • April 29th, 2008 at 2:15 pm

@ORIMO this is the best part of your Bloomberg article. “In the near term, if he\’s a triage nurse, you have to say he\’s definitely stabilized the patient,\’\’ said James Swanson, who helps oversee $204 billion as chief investment strategist at MFS Investment Management in Boston. “That\’s what I\’d call it, a triage nurse using radical procedures. But they worked. Whether they\’ll be proven right in the long run, I don\’t know.\’\’

Guest • April 29th, 2008 at 2:17 pm

This will go over well with public sentiment!Profit from Europe\’s biggest oil companies was so astounding that not even analysts saw it coming, writes Jim Jelter.

Fairbrother • April 29th, 2008 at 2:55 pm

Opec, the oil producing cartel, has warned that the price of crude could keep rising to reach $200 a barrel.Opec president Chakib Khelil blamed the falling value of the US dollar, which makes other assets, including oil, more attractive for foreign investors. http://newsvote.bbc.co.uk/2/hi/business/7370441.stmThe stakes couldn\’t be higher for Ben Bernanke. If the Fed chief decides to lower rates at the end of April, he could be condemning millions of people to a death by starvation. The situation is that serious….Wheat, corn and soya are at record highs and threatening to go higher still. Commodities are up across the board…. Bernanke\’s \"weak dollar\" policy has ignited a wave of speculation in commodities which is pushing prices into the stratosphere. The UN is calling the global food crisis it a \"silent tsunami\", but its more like a flood; the world is awash in increasingly worthless dollars that are making food and raw materials more expensive. Foreign central banks and investors presently hold $6 trillion in dollars and dollar-backed assets, so when the dollar starts to slide, the pain radiates through entire economies. http://www.globalresearch.ca/PrintArticle.php?articleId=8824

Guest • April 29th, 2008 at 2:59 pm

Confidence among Silicon Valley venture capitalists is at a new low, says Mark Cannice of University of San Francisco. Stacey Delo reports.

Guest • April 29th, 2008 at 3:00 pm

According to The Conference Board, consumers\’ inflation expectations continue to rise and this measure now matches the all-time high reached in the aftermath of Hurricane Katrina. So much for \"well-anchored.\"

Guest • April 29th, 2008 at 3:05 pm

4:02[HRS] Harris Q3 net income 78c vs $1.52 a share 4:03[FLEX] Flextronics Q4 net loss 11c vs earns 20c

4822 • April 29th, 2008 at 3:06 pm

\"Opec, the oil producing cartel, has warned that the price of crude could keep rising to reach $200 a barrel.\"Trouble is, they know it would take us over 10 years to replace their \"contribution\" to our energy needs.

K J Foehr • April 29th, 2008 at 3:39 pm

Gloomy on 2008-04-29 12:10:17“A HISTORY OF THE NEW DEPRESSION At this early point, rates did no good, as the root problem in the system was insolvency. The dramatically lowered rates stimulated inflation while not increasing growth. This inflation markedly worsened the depth of the economic slowdown, turning a deep recession into a depression. Had the Fed waited to lower rates until after the insolvency problem had been allowed to run its course, such rate reductions would have provided real stimulus and engendered optimism in the markets at a critical juncture, lifting the country out of its economic malaise without increasing inflation.”Great point! I always appreciate your posts and respect your well reasoned and supported views. So please don’t think I am criticizing you when I post things contrary to yours. I believe debate is beneficial to me and to everyone who is open to considering all points of view, which I assume is just about everyone here. Also, I often think out loud (in writing) here to see if others present opposing views that may cause me to change my thinking. But this idea, that lowering rates too soon was a big mistake, is very interesting to me. I initially thought it was questionable, but after thinking about it a little, I think I agree 100%, well maybe 90%…I can see how rising gas and food prices could clearly be seen as exacerbating the recession, and thus could be the final straw that pushes us into a very severe recession / depression. Further, as the Prof has pointed out in his latest post, inflation (and the weak dollar) will hamper central bankers ability to stimulate growth in the coming months, so this is also a negative consequence of lowering rates to much too soon.However, although I am essentially 100% short, with leverage, I still don’t see a depression. But that is just a matter of degree; I feel we are substantially in agreement.A depression implies very high unemployment, and that doesn’t seem to rising very fast or very materially. Why not?

K J Foehr • April 29th, 2008 at 3:45 pm

Citigroup to sell $3 bln in stock; shares fallTue Apr 29, 2008 4:37pm EDT (excerpt)NEW YORK, April 29 (Reuters) – Citigroup Inc on Tuesday announced plans to sell $3 billion of common stock to bolster its capital levels, an offering that caused shares of the largest U.S. bank to decline.\"We are issuing common equity at this time as we continue to optimize our capital structure,\" Chief Financial Officer Gary Crittenden said in a statement. He said the New York-based bank has received \"strong\" interest in the public offering, which may grow in size to meet demand.Citigroup announced the offering after U.S. markets closed, following a 46 percent run-up in its stock price from a 52-week low of $18.00 set on March 17.Shares of Citigroup fell 77 cents, or 2.9 percent, to $25.55 in after-hours electronic trading. The shares had dropped 49 cents to $26.32 in regular trading. http://www.reuters.com/article/marketsNews/idINWNAS053420080429?rpc=44SPY trading lower and SKF higher AH.

Alessandro • April 29th, 2008 at 3:47 pm

4:26 [C] Citigroup announces $3-billion secondary stock offering4:28 [C] Citigroup shares down 2.2% at $25.71 in evening trade

Guest • April 29th, 2008 at 3:53 pm

Written by Octavio Richetta on 2008-04-29 12:06:26Thanks, I got it, just complaining about the injustice. And somehow I knew it was you!

the Guest • April 29th, 2008 at 4:41 pm

I wonder whatever happened to this blog. It used to be really interesting. Seems a lot of NR bloggers are no longer here and the number of posts are down. Tepid trader analysis sounds like talking head \’blah blah blah\’. Mish\’s blog and Calculated Risk still have some good exchanges. Mish does post controversial stuff although his blog is moderated. This blog has just fizzled out and just barely limps along it seems IMO. This is the end of the good times so the novelty of the Crash may be wearing off I guess

4822 • April 29th, 2008 at 4:43 pm

\"This is the end of the good times so the novelty of the Crash may be wearing off I guess\"or maybe people have to spend some time away from the blogs to get work done LOL

Anonymous • April 29th, 2008 at 4:46 pm

Unemployment and earnings lagging indicators. Corporations still have stockpiled cash reserves to run through until firing begins. Inflation (approaching 20%) in some stats implies 20% paycuts across the board without union, morale, strike issues.Financials are experience deep systemic distress at top of boom cycle, instead of traditionally at the lower end. THIS is an indicator of the degree of severity of future contraction. If now were truly a bottoming process, they would ride it out instead of offering fire sales on illiquid securities and punishing existing shareholders with crushing dilutions via new stock offerings. Using latest bear rally to replenish for next dramatic plunge with Alt-A vintages coming on line soon.Credit still contracting, rate cuts \"pushing on string\" assist only at margins, housing is progressing through worse distress, gov\’t and fed remedies have been ineffective. Mortgage interest and lending scrutiny are worsening. Inflation is destoying cash reserves which might have been used for downpayments, now people hold their reserves for food, fuel, emergencies as future \"feels\" bleaker.

Guest • April 29th, 2008 at 4:54 pm

Critical Mass:What appears to be a consensual world where the apparent linear trends demand a \’major\’ shift to determine a future position as a new focus; there exists in physics (science, if you prefer), a well worn phenomena known as \"critical mass\" which, in terms of consilient induction, requires merely an ~5% shift to bring about a syssion; a fusion; a change of direction, if you will.Consensuality is a term that infers human preference where \’human\’ (here) means a phenomenon that has not yet reached its zenith (effect) and therefore, consensuality is more likely to define merely, \’wishful thinking\’ or, at least a position most unlikely.Hayek will tell the student that only a \’free-market\’ is capable of responding precisely (price disclosure) to the conditions of all the induction parameters, accurately and within acceptable time constraints where governments, bureaucrats and errant bankers and all that hangs off them, merely distort the markets; normally to their own benefit, a priori, of course.The Laws of Physics (science) are a far more reliably test of the probabilities of theory via prediction. Ahhh, but \"economics\" is founded in …………, and based upon ……………….. ?Ho humPeterJB

the Guest • April 29th, 2008 at 5:00 pm

I think what the deal is concerning blandness is this blog is fairly depoliticized now which makes the reading a little unreal and detached.

Guest • April 29th, 2008 at 5:02 pm

McCain seeks tax credit to help buy health insurancehttp://news.yahoo.com/s/ap/20080429/ap_on_el_pr/mccain_health_careMcCain said Tuesday he would offer families a $5,000 tax credit to help buy insurance policies. Everyone would get the credit, whether he or she keeps a policy through an employer or shops for a new one.Unfortunately people will first have to spend the money on the health insurance to be able to get the credit:-) And how will they be able to do that, ha ha.

ptm • April 29th, 2008 at 5:08 pm

Octavio Richetta on 2008-04-29 12:24:27 (are you JMa?)Written by Capone formerly JMa on 2008-04-29 13:03:15Good call OR! I did not see it. Someone else also asked, but no reply?Regardless, Nice to meet you Mr. Capone, I look forward to reading more of your posts.Also OR, Monday the Today show did a \"Where in the World is Matt Lauer\" segment. Well he was in Argentina. http://today.msnbc.msn.com/id/24282949/ Seems like you picked a bery nice place to live! If it gets as bad up here as I\’m thinking, do not be surprised if you see me or other fellow posters knocking on you door next summer.

Medic • April 29th, 2008 at 5:12 pm

@ Guest on 2008-04-29 16:41:08 – I, for one, am still here. I have been reading daily, but my views have been posted here many times and I am loathe to post just for the sake of seeing my thoughts on the screen. I am in unchartered waters for me. The enormity of what I fear is coming is setting in and I have been planning accordingly. I have recently added a pellet stove to my home that is capable of providing enough heat for the entire house (reducing my oil comsumption) and my wife has created a local grocery guide and price list so we can shop smarter and save as much money as possible each week. The other thing we have done recently is to reduce our debt (via an old 401k I cashed out) and purchased some silver to hold in case we need a medium to trade in the event of hyperinflation or a collapse of the financial industry. I should note here that I am not a survivalist. I don\’t live in the woods and distrust people. I am just a regular guy who happens to think that the government is incapable of stopping an event it has encouraged for many decades. Since I am closer to the bottom rung than anyone running the country, I have the scent of despair in my nose. It is getting closer and I see it everyday. This blog is not dying off or getting any less interesting. Some of us are just not interested in repeating ourselves and so we stand back and let others take a turn. Some of us have also been busy planning and implementing those plans to position ourselves in the best way possible so we don\’t get washed away in the coming tidal wave.

the Guest • April 29th, 2008 at 5:22 pm

Well maybe some are still lurking who are \’regulars\’.One of the next problems for \’our\’ economy is the spectre or prospect of a U.S. attack on Iran. This is why I bring up \’politics\’. That unwise move would be the dagger in the heart of the American economy with the cost of oil spiking unbelievably IMO plus the uncertainty of expanded Middle East war. Preparation of an attack on Iran has been in place for a while. What a disaster and what an ignorant move IF the U.S. does expand the \’endless war\’. And for what?

Medic • April 29th, 2008 at 5:27 pm

@ Guest on 2008-04-29 17:22:31 -You are quite correct. An attack on Iran would be, perhaps, the largest policy error ever in the history of the US. I can think of nothing as disasterous as a war on top of our already foolish invasion and occupation of Iraq. That being said, no one ever accused the Bush administration of having forethought…….

tutterfrut • April 29th, 2008 at 5:28 pm

\"Well maybe some are still lurking who are \’regulars\’.\"Others may be preparing for the Olympics…

jkiss • April 29th, 2008 at 5:35 pm

gloomydunno… cutting rates was terrible until considering the alternatives… the major point was to assist banks in making profits, much easier with falling rates, all in order to mask underlying insolvency. Losing the banks is arguably worse than commodity inflation, which anyway is partly caused by investors jumping on the only horse still standing… IMO commodity inflation will die down as punters realize how severe the recession is, but losing the banks would mean more deflation sooner. In fact, commodity boom masks other deflationary indications, i.e. people are not yet (except re) putting off buying on the grounds that pretty soon price is lower.IMO next low point for the bear around end May, followed as usual by vicious rally. Onward and downward…

Softwarengineer • April 29th, 2008 at 5:40 pm

I\’M SO RELIEFEDI feel I fit in to this blog now, it doesn\’t seem so \"stuffed shirt\" anymore, more relaxed and laid back.Anyway, here\’s a high school essay I helped my daughter with on the future for our children (it fits the stagflation article from Dr. Roubini), enjoy [it got a 95% by the way]:United States Government B28 April 2008 Executive Branch Essays Assignment The size of the federal bureaucracy continues to grow at a horrifying rate, as the Department of Homeland Security was added on after 911 because of severe security risks our country faces. The President’s ability to properly control government is getting mitigated as the country and its government grows at this alarming rate. Far more problems are occurring in the country now too, with basically uncontrolled population growth in America, causing a plethora of economic, security and environmental impacts to a degree we have never seen in the history of America. I’m sure voting for a proper Senator and Congressman that is in line with your views is far more practical than just a commander and chief Presidential choice, as at least they can form committees and draw from popular vote strengths and opinions from the people more effectively. This is far better than a President choice picked by a handful of lobbyists led executive power direction, that lack proper pragmatic details, direction, vision and morals to plan a way out of the coming American quagmire.It’s easy to say, reduce the federal bureaucracy that will fix the problem. What is the federal bureaucracy? It’s the Food and Drug Administration that makes sure your food is clean. It’s the Federal Aviation Association, which makes sure your plane trip is safe. It’s the Department of Defense that makes sure you’re safe. In other words, are you going to be happy in land without a postal department? No, the answer isn’t reducing our safe guards and critical services by reducing government in those areas, nor is it removing all the regulations that protect us too. The answer is depopulating our country and our environmental and security costs will reduce substantially. We can solve the greenhouse gas problem and set an example to the rest of the world to depopulate too. I see terrorism, hunger, energy/food/water shortages, etc; etc just plain going away in a few decades and the President can draw a sigh of relief and reduce many of his departments’ bureaucracy. We must act now. Politicians are clearly afraid to act against uncontrolled population growth in America because special interests want lower wages and uncontrolled growth for short-term greed and without special interest money, you can’t get elected. Let’s hope their fear and greed doesn’t lead us all over the cliff, because we acted way too late.The civil service system has been beneficial to the operation of the federal government by assuring that people stay put and gain experience. It is an honor to serve our country in America’s civil service system; as the majority of our federal servants are doing all they can keep this country afloat. Without our federal civil service system, we’d have to contract out for many times the cost, less effectiveness and far less experience to draw from too. It’s definitely helped America.Raising taxes in America right now is ludicrous. We’re in a recession and it would make it far worse, as that’s why we’re giving out economic stimulus checks this week. No, we must regain our industrial base again and hence a tax base back again too; or we face the horrifying possibility of becoming a third world nation with no scientists and engineers inventing dreams for my children and I. If we do something like build a government patented car with 100% American labor and materials only; that might work.

the Guest • April 29th, 2008 at 5:52 pm

\’Politics\’ has to do with where the next \’smart money\’ of big investors go. It\’s war for sure. But also \’bioengineering\’ in order to reduce sunshine theoretically to \’reduce\’ global warming. The Great bioengineering shield \’experiment\’ is underway right now with aerosals(barium, aluminum, etc.) being \’appleid\’ to the skies all over the world. Look up! The next bubble after \’endless war\’ will be the \’bioengineering\’ of the skies to supposedly reduce global warming. This is where the \’smart international money\’ will be going in addition to the \’prison industrial complex\’…

Gloomy • April 29th, 2008 at 6:00 pm

@KJ Like you I welcome dialog. IMO this is not your father\’s depression that happened suddenly. My view is that this is going to be a very protracted downturn. We are now a long way from depression, but we will get there. Start with the facts that A) 70% of our economy is consumer spending B) consumer spending in the US has fallen and will continue to fall as long as housing prices fall. The best economists (IMO) expect housing prices to decline into late 2010 or 2011. That means housing prices and consumer spending will continue to decline for 30-40 MORE months. Keep in mind that huge numbers of Americans are highly levereged and have little savings. In the early stages of this downturn, consumers have been able to borrow more on their credit cards and from their 401Ks. But gradually these lines of credit will be tapped out, resulting in steadily increasing rates of bankruptcy (bear in mind bankruptcy laws have been made much more onerous). So consumer spending (and hence the economy) is going to drop much more than the 30%-50% or so that knowledgeable economists expect housing prices to drop. Consumer leverage was great on the way up. It will be disatrous on the way down. The second ingredient that needs to be thrown into the pot is emerging markets (China, India, etc). IMO the notion that the emerging markets will be the strength of the global economy is a cruel hoax-cruel for them, as billions of people will slip back into poverty, and cruel for investors who buy into this nonsense. For some reason people forget that emerging market economies are EXPORT based and that much of that base is the US, which runs huge trade deficits. Surpise- as we stop spending, emerging markets will stop exporting and their economies will tank. This is what the precipitous drops in Chinese and Indian stock and property markets are anticipating. And when these bubble economies pop, a large component of global economic output will tank. This collapse, added with ours will greatly exacerbate the economic situation. When thing get really bad, commodities will collapse too, and the Brazil, Russia, Arabia, etc. will fall hard. So in my view, this is going to be a worldwide depression, with no part of the globe spared. Finally, I think that the banks are insolvent and zombified. They will be unwilling to lend for years as they try to maintain capital while asset writedowns from real estate foreclosures and bad cosumer loans continue to mount. How can the economy restart when borrowers aren\’t credit-worthy and lenders are reluctant to lend? There is more, but these are some basics. I would love to here your view on what you think will prevent a relentless downward spiral.

Gloomy • April 29th, 2008 at 6:18 pm

@jkiss IMO all roads the Fed could have taken led to depression. But history will try to make a good story out of it and no matter what course the Fed would have taken and will take in the future, it will get the blame. The truth is that the dye is cast and the Fed is powerless against overleverage and insolvency on this scale.

Gloomy • April 29th, 2008 at 6:57 pm

EUROPEAN ANGSTYet these same forces are also widening the pool of middle-class Europeans who see themselves on the edge of impoverishment.\"The problem,\" said Julián Cubero, chief economist for Spain for BBVA, a leading Spanish bank, \"is that if your salary rises more slowly than the cost of products you buy on a daily basis, you feel poorer every day.\"That concern boiled over to anger last week in Britain, when teachers closed the country\’s schools for the first time in two decades to protest pay deals that are not keeping up with the soaring cost of living. Especially for those who were not lifted by the latest financial market bubble before it started to collapse last summer, there is fear that proposed pay rises of about 2.5 percent are too meager to absorb food and oil costs that have surged in Britain by about 7 percent and 20 percent, respectively, from a year ago.Their rallying cry is the latest to echo across Europe. German workers in several industries last month waged a series of strikes to demand a greater piece of the economic pie after years of being asked to make do with stagnant wages.In France, a range of professions from teachers to factory workers have taken to the streets to urge politicians to counter a decline in purchasing power. This month, thousands of European workers protested on the same theme in Ljubljana, the capital of Slovenia, which currently holds the EU\’s rotating presidency.Bowing to public concern, some European governments are promising relief, though their powers to curb inflation or raise pay are limited. In France, where the erosion of purchasing power has overtaken unemployment as the No. 1 public concern, the administration of President Nicolas Sarkozy is, among other things, looking into alleged \"abuses\" of pricing by food merchants. Neighboring Germany is mulling lower social insurance taxes to offset higher prices.http://www.iht.com/bin/printfriendly.php?id=12443752

Giraf • April 29th, 2008 at 7:01 pm

@Gloomy 2008-04-29 18:00:58While I tend to agree with your analysis of the economy, I\’m not quite as bearish – yet. (What is the statistical definition of a depression BTW?)To play the Devil\’s Advocate, why are your (and my) conclusions not picked up by economists in general? Are we missing something that is plainly obvious to them, or vice versa? I know it is unusual for an equity analyst to say sell for fear of alientating an investment banking client but what impediments are there for economists to not paint a realistic picture?

Gloomy • April 29th, 2008 at 7:06 pm

PARIS: French consumer confidence fell to its lowest level in more than two decades in April as households became gloomier about the outlook for living standards.More bad news for France, the second-biggest euro-zone economy after Germany, came amid signs that the French housing market was cooling rapidly and amid predictions that industrial demand would slow in the second quarter against a backdrop of worsening export competitiveness.http://www.iht.com/bin/printfriendly.php?id=12439906

Octavio Richetta • April 29th, 2008 at 7:17 pm

Written by ptm on 2008-04-29 17:08:50Yes! Capone! Cool name! The JMa name sounded to me kinda like Aunt Jemima. I love her pancakes but don\’t expect here to be a poster here. Al Capone, a paisano who lived in Chicago just like JMa. That is how I guessed. Yes, Argentina is a great country big geography like the US. Beautiful people. It houses some of the most beautiful women in the world.BTW, market feels tired. I hope the bloomberg article about uncle Benny wonder moves I quoted above has got it 100% wrong.

Gloomy • April 29th, 2008 at 7:22 pm

@GirafI think this situation really is a black swan and that most thinking is anchored to certain tenets that, looked at objectively, are highly questionable:1) The Fed and government can fix anything. I don\’t believe government can fix insolvency and overleverage on this scale involving two crucial pillars, financial insutitutions and consumers. How could they? I\’d love to know.2)Another depression cannot occur. Every \"knowledgeable\" person I talk to says we can\’t have another depression because we won\’t repeat the mistakes of the past. I have written about this in the past on this blog. Why can\’t depression occur through a different set of circumstances?I\’d love to get an answer to this question.3) We live in a global economy now and emerging market economies will support us. I wrote about this above to KJ. It is pure fantasy (see above). IMO it is very difficult for people to lose their preconceived notions and look at the situation objectively. What will stop the downward spiral? On what basis will economic recovery occur any time in the next few years. So far I\’ve not heard one economist (including NR) who can provide a reasonable answers to these questions. Absent such answers, I have no choice but to conclude depression is coming.

Giraf • April 29th, 2008 at 7:24 pm

@ORAnd Argentina produces a disproportionate share of the world\’s top soccer players; Messi, Tevez, etc.

Guest • April 29th, 2008 at 7:40 pm

When PMI and mortgage insurers go under from too many foreclosures, many insolvent banks go under from \’fair value accting.\’ UK banks bailouts to be kept secret, London Banker?

Capone • April 29th, 2008 at 8:14 pm

@Medic – I spent a good part of the day this past Sunday acquiring what I deem to be comfortable levels of everything in the event of hyperinflation. I made the list, it is almost complete and then I will not worry and rest easy REGARDLESS of what happens. Insurance just like anything else.I may perhaps be one of the most guilty of all to over post. The Professor and all have commented on this whole chirade for so long. It does almost seem to simply be a waiting game for the next chapters to unfold and all has been said. Memory fades with time – so a walk down short term memory lane ? Does everyone recall how timely technically and otherwise day trading Fed was during the past waves of addressing this credit crisis to save the equity market ? Things sure feel quiet now. Tomorrow is an expected and scheduled cut. Any thoughts on the Ben\’s actions should an equity decline come which is meaningful again AFTER the cut tomorrow ? Will Ben return to equity day trading firing his rate cutting gun from his hips again if not tomorrow then weeks or months from now ? Speaking of over posting, Capone was given to me following a drunken tirade here. So why not – it is laugh or cry time. I choose to laugh for now.Thanks for the Grantham article Another Anonymous.

ptm • April 29th, 2008 at 8:40 pm

@some guest too shy to offer a non de plume: I wonder whatever happened to this blog. It used to be really interesting. Seems a lot of NR bloggers are no longer here and the number of posts are down. Tepid trader analysis sounds like talking head \’blah blah blah\’. This blog has just fizzled out and just barely limps along it seems IMO.Too bad you do not understand the significance of inflation blah blah blah blah. Inflation yada yada yada yada, So on and so on inflation. Quack quack inflation quack quack. Hyperinflation quackedy quack, quackedy quack, quackedy quack!

Mark • April 29th, 2008 at 8:41 pm

@Written by Softwarengineer on 2008-04-29 17:40:48A problem with the paper is that it, without any detail, states that we should ramp up industry. in order for this to viable you must consider:1) Escalating energy prices;2) Escalating raw material prices (steel is shooting through the roof);3) US citizens are up to their eyeballs in debt, therefore manufacturing would have to cater primarily to the export side- who then is going to buy US goods at US prices? (US labor and associated costs gets crushed by cheaper producers!)It\’s the elephant in the room, we don\’t want to acknowledge that declines in oil/energy is here to stay and that this means no future growth. A world-wide depression is inevitable until the population (more appropriately, per-capita consumption) levels off; until it does, per-capita wealth will deteriorate.Ah, oh, I\’m back after a brief review of the beautiful women link :-) The most stunning woman that I ever saw was in a restaurant in Norway: her sight burned into my brain like a shadow from an atomic bomb burns into concrete. Younger brunette wearing a barely opaque white dress as the sun shone behind her. But yes, Sweden is amply stocked! (had I not been married at the time…)Mark

Tyro • April 29th, 2008 at 9:08 pm

@ GloomyLet’s think about your question in a different way. Currently, you believe that a depression is unavoidable based on your interpretation of the facts. OK, let’s agree with you that a depression is inevitable. Then what will ultimately lead us out of the depression? Or, do you think that it will be a permanent end state? That is highly unlikely. Given that there are future factors that can and will lift us out of depression perhaps we should focus on what those factors are. Furthermore can these same actions be taken sooner to avoid such an outcome?

Mark • April 29th, 2008 at 9:35 pm

@Written by Tyro on 2008-04-29 21:08:11Or, do you think that it will be a permanent end state? That is highly unlikely. Given that there are future factors that can and will lift us out of depression perhaps we should focus on what those factors are. Furthermore can these same actions be taken sooner to avoid such an outcome?Whoa there boss, you can\’t toss out phrases such as \"highly unlikely\" and \"factors that can and will\" without providing some information.Saying so doesn\’t make it so. We can click our heels together but that won\’t make us appear in some desired state.Until someone can provide an example of how something can be done with NO energy, or provide some fact-based new and amply sufficient (for future consumption) energy, I\’m sticking by my argument (in Gloomy\’s camp) that it\’s all downhill from here.Mark

Mark • April 29th, 2008 at 9:47 pm

Why the US won\’t invade Iran:Reports: China, Iran near huge oil field dealhttp://www.msnbc.msn.com/id/11404589/He who has the money makes the rules. Seeing as China has the money (and the US doesn\’t), China is going to get its oil. It won\’t tolerate any attack against Iran without severe economic penalties to the US. I suspect that the upcoming Olympics are a big reason why China isn\’t being boisterous at this time.But maybe the neo-cons see this endgame playing out and figure that pulling off another unilateral war of aggression now (before the Olympics, and while Bush is still in office), rather than later, is the only way any such last ditch effort can be undertaken. And I have no idea what it would be that would be the expected result, as it\’s all downhill from here regardless; my hunch is that it\’s more about subduing the US populace (turning them hyper nationalist) than anything else (need people to step up and take shrapnel for the wealthy elites, who won\’t be able to step foot in any other country).Mark

Guest • April 29th, 2008 at 10:01 pm

MarkIndia yesterday reported the same thingdespite US actions, India is negotiating with Iran on supply of energyRemember, Switzerland did the same thingRussia has been supplying nuke power supply to Iranif im not wrong, russian nuclear scientist/specialist are in Iran too (busher facility- funny… sounds like someone we know)US arent allowed to attack Iranif we do.. wow..

Medic • April 29th, 2008 at 10:01 pm

@ Softwareengineer: While I am sure you are trying to provide a solution, please allow me a few questions. 1. Exactly how should we \"depopulate\" the country? 2. Is the size of government really growing, or just its budget? 3. Do you have any understanding of the lobbying industry (hint: they influence more than just presidents)? With all due respect, the paper you present here is typical of what the common American accepts as truth, yet is in fact greatly out of touch with reality. Most Americans don\’t know that: 1. The vast majority of the federal budget goes to military and related agencies; 2. The US pays the least amount of taxes of any westernized industrialized nation; 3. Corporate tax revunues are less than 1/3 of what they were in the 1960\’s; 4. The US is insolvent, carrying more debt than it could ever pay off. The answers will not be simple, nor will they be pleasent. But before any discussion can begin, the facts should be out on the table and honest discussion can then ensue. @ Gloomy & Mark;You are both correct. There is no way out of this mess without severe pain and it will be a protracted path out. Depression is inevitable when you look at not only the current crisis, but also the Boomers soon retiring and making further demands on already limited funds. Social Security will not kill us, but without reforming the healthcare system, Medicare will.

Medic • April 29th, 2008 at 10:10 pm

@ Softwareengineer:You know, after re-reading the paper and the grade it received, I am now also very concerned for our public education system.

Octavio Richetta • April 29th, 2008 at 10:21 pm

Written by J. on 2008-04-29 16:37:37So J is the Bloomberg piece inaccurate in saying that the technology to get the Brazilian latest black gold finding is to be developed? I didn\’t get the point you were trying to make.

J. • April 29th, 2008 at 10:27 pm

@ Giraf on 2008-04-29 19:01:21You asked: I know it is unusual for an equity analyst to say sell for fear of alientating an investment banking client but what impediments are there for economists to not paint a realistic picture?I could go into how – and why – neoclassical economics became dominant by the end of the 19th c, but that\’s not necessary unless someone has an interest in the history of economics and the development of industrial capitalism. Suffice to say that what became mainstream economics had directly ideological purpose and that, even with all the development since, this remains embedded within it. Foundational assumptions/axioms have, over and over, proven false yet remain as does the unstated demand that reality must conform to theory (if and when not, there\’s always some \’exogenous\’ rationale pulled up to \’save the day\’). We had, by the mid-1800s, developed a fairly refined, anchored and functional set of theories but these were cast aside in favor of subjectivisms. That is, not all economics is identical and some still use a more developed version of the classical which is not neoclassic.Anyway, this attached can give a better idea:Ideology and Economic Developmenthttp://www.monthlyreview.org/0504lebowitz.htm More detailed:WHAT IS NEOCLASSICAL ECONOMICS? The three axioms responsible for its theoretical oeuvre, practical irrelevance and, thus, discursive power by Christian Arnsperger Hoover Chair in Economic and Social Ethics University of Louvain (Belgium) and Yanis Varoufakis Department of Economics University of Athens (Greece), 2005For which I don\’t have a link handy but knows it can be downloaded.

ptm • April 29th, 2008 at 10:44 pm

Medic on 2008-04-29 22:10:39: You know, after re-reading the [software engineer] paper and the grade it received, I am now also very concerned for our public education system.Okay, the paper had jingoistic and xenophobic fringes, nevertheless overpopulation is a valid concern for society in poor economies. So, as a teacher, do you suppress essay writing or encourage it? Has the essay met the assignment criteria? Yes, it probably did. It would have been nice for the teacher to suggest ways to make it a better essay, but who has the time for that with 60 or more other essays to grade?My peers love sit around the lounge table and chat about how bad today\’s students are compared to previous classes. But there are multiple issues going on. Universities are no different than any other large business. They must compete for a large population of raw material to crank out a product which in turn feeds the organization through sports and alumni donations. So yeah, students are not as well prepared as they were in the past (population dilution), but that\’s not my worry. My job is to teach \’em best I can regardless of background.And just like that lady on the gurney in the ER hallway that should have received IV fluids two hours ago, we all do the best we can…

J. • April 29th, 2008 at 11:42 pm

Octavio Richetta on 2008-04-29 22:21:40,I\’d say that the article was overstated, that the discovery was not so new as presented and there may have been some financial shenanigans involved — whether all the required tech is presently available, I\’m not sure but expect it will be if Petrobas and partners decide development is worthwhile. I don\’t know their planning horizon.

Fairbrother • April 29th, 2008 at 11:45 pm

I\’ve been reading this blog for over a year and don\’t feel it has deteriorated. If anything it feels even more free thinking than before, when certain sociopolitical views, sometimes extreme views, were posted ad nauseum by one or two regulars. I also read CR and enjoy it but find it much more conservative. For some reason CR readers seem to be more set in their ways, more attached to their POVs. Here one finds more pliability of thought, which I respect. Also more comraderie, mutual respect, and a great tolerance for out of the ballpark thinking. CR posters will often fight amongst themselves and sometimes get rather testy when people post \"fringe\" ideas. Incidentally, as a layperson, I must say that I find economists in general to be more disconcertingly \"sure\" of their POVs than, say, a biologist or a musical theorist. Perhaps those trained in economics are susceptible to a kind of rigidity of thought due to a training that seems, to an outsider, more mechanistic and perhaps even false vis a vis \"how things typically work.\" If I were to study economics today, the question to the instructor uppermost in my mind would always be, \"Yes, but if that is the case, how can you explain what we see today?\" I know I\’m not making much sense here, but I\’m tired. Just wanted to say I FOR ONE do appreciate the thoughts on this blog and have learned a great deal from reading it.

Guest • April 30th, 2008 at 12:27 am

@ Fairbrother on 2008-04-29 23:45:54,As I\’d mentioned above, not all economics is identical. There is, for example, this type which combines the economic, the social, the political.Short, one page paper, attached that – as you\’ll see – captures much of where we are, implicitly how we arrived and what the consequences likely will be.What is a crisis of overproduction?http://www.marxmail.org/faq/overproduction.htmWritten by J.

AfA • April 30th, 2008 at 12:51 am

One of things that could pull us out of recession if and whenever that happens would be the self-regulating market dynamics (e.g. deflation will make assets undervalued and thus attractive) However, given the bold and repetitive interventions by the Fed and the government to alter the course of free markets I doubt these dynamics would properly work (they could even result in unattended consequences that will make things worse and delay recovery).In science, especially biology, most organisms have auto-corrective stimili which keep the organism close to the equilibrium state. Interventions by the Fed are similar to administering insulin to a person suffering from malnutrition to increase his consumption of glucose and to store fat.

London Banker • April 30th, 2008 at 1:32 am

Guest-who-shall-remain-nameless may think this blog\’s a bit stale, but I found the diversity of posts here pretty wonderful this morning.@ A not her Anonymous: Many thanks for the Grantham link. I\’m only on page 5, but it ties together the frustrations and outrages I\’ve felt over the years observing the deliberate debasement of the Fed as a regulatory authority responsible for constraining exposure of the banking sector to excessive risks and as a monetary authority responsible for preserving the value of the currency. The Greenspan Fed dismantled the regulatory system, then poured on excess monetary growth with sustained low interest rates. We will all live with the consequences of these parallel excesses for many years to come.@Guest on 2008-04-29 19:40:12The UK has largely followed the course set by the USA, and the regulatory system and currency are debased here as well. The difference between how the crisis is managed is the difference between a big city and a small village in dealing with a crime wave. The big city elects some new politicians, raises taxes for more police, builds bigger prisons, and sells more locks and guns. None of this is effective, but no one is ever blamed for failure, and everyone in politics, the police, the prison industry and the lock and gun shops enjoys the money flowing through the system.The small village tries a little of that, but as everyone who is a victim is well known and so are the perpetrators, they quickly get fed up with lack of progress through official channels. At some point, usually when someone\’s wife, daughter or mother becomes a target, the elders of the village gather to quietly dispense justice through direct action, sending a brutal and unmistakeable message to all the gang and any youth thinking of going astray in future. The crime wave will suddenly abate. No one will ever publicly discuss the measures responsible for the reform, but everyone down at the pub will comment on how nice it is to live in a small village rather than the city.Britain will follow America for a time, hoping that cooperation through the usual channels will really sort the problems. When it fails and the pain hits hard close to home, we will quietly determine our own course, brutally punish at least one malefactor, and subtlely let it be known that new rules are in force. There are only a couple hundred people here in London that really matter in influencing policy, and at some point enough of these will agree on direct action to make a striking difference in outcome. London has been the heart of global capital markets for 400 years because it cleans house very effectively as and when necessary.@ Software engineerI too found your daughter\’s essay a difficult and inconclusive read, full of erroneous assumptions. It repeats a great deal of propaganda, but I suppose that is to be expected of the young. My own children exhibit no better grasp of proper sentence structure and clear organisation of thoughts, so I offer more sympathy than criticism.Perhaps the best thing you could do for her education would be to send her abroad for a year on an exchange programme, as opening her mind to public policy as it is practiced in other countries will help her better evaluate its abuse at home.

Expat • April 30th, 2008 at 1:33 am

I like this blog. It has a good beat and is easy to dance to. I give it a nine out of four.The Brazilian field is deep, deeper than Emmanual Kant on a good day. The geology has more layers than a French patisserie but without any soft, creamy bits. The oil is hotter than Giselle Budchen and under more pressure than Ben Bernanke. It will cost a lot of money to develop. What does that mean? It means it will be expensive in costs more money per barrel kind of way (easy explanation in case GWB happens to stray from his Barney the Dinosaur page and surf onto this blog). Same with Saudi oil. No more cheap oil left. That is Peak Oil. There is oil out there, but it is going to cost a hundred Euros a barrel to produce it.

London Banker • April 30th, 2008 at 1:53 am

@ FairbrotherAs they say here, a financial economist is someone who observes the markets in practice and wonders whether they work in theory.J. is right about the self-reinforcing neoclassical cabal that controls and polices economics dialogue today. Someone who challenges any of the precepts will risk his thesis failing, or receive no offers from good universities, or will be denied tenure, or will never gain a lucrative consulting career.As the Grantham paper makes plain, Greenspan is the quentessential expression of the cabal\’s accession to power, having been a pliable mediocrity who reliably supported neoclassical and neocon ideology regardless of results – and always blaming exogenous factors or unreliable allies/adversaries for any failure.

Andrew Bernhardt, St. Louis • April 30th, 2008 at 3:25 am

I\’m expecting real gdp growth to be about -0.2 to -0.3 today at 8:30. Then I\’m expecting, since expectations among many cheif economists are so high at about +0.5%, I\’m expecting the stock markets to depreciate in a major way, since invetors of equities are thinking things are still rosy. I\’m also expecting fixed income to rally. And at 2:15 central time, I\’m expecting the FOMC to reduce fed fund interest rates from 2.25 to 2.00 percent. I think Q1 will be better than Q2, and I think Q2 will also be negative. Recession here we come!

GSM • April 30th, 2008 at 3:30 am

Much discussion here on Depression etc.I don’t believe we are in for a Depression, either in the US or globally. A severe US recession, possibly a Euroland/UK recession or minimally a major slow down, a commodity price pause (far from a collapse though) .Worldwide a period of sub par economic growth definitely. This will occur within an environment of a very weak dollar which, combined with demographic powered global demands, will not allow commodity prices to fall far at all. Lasting 2-3 years I expect. However, I see high saving , emerging/developing economies emerging from this period in very strong shape relatively, adjusted and capitalizing on their decades of organic wealth expansion to propel new growth. This will be in stark contrast to the US/UK and parts of Europe. The US in particular is headed for years of low , sometimes negative growth as it works out how to deal with it’s myriad financial crises that have all now arrived to roost simultaneously it seems.The benefits of the wealth and manufacturing capacity transfer that has occurred in past decades, from developed to developing countries, will manifest itself very powerfully in the recovery from this economic slow down. Their economies have never had better infrastructure, their currencies will remain relatively healthy, their demand profiles will grow, their governments (with surpluses) will be actively pursuing growth strategies assiting their manufacturing sectors. Some developed countries will benefit from this situation, namely Australia and I believe Canada, due to their commodity sectors. This will all be fertile ground for growth after this current decline bottoms out. So, decoupling or divergence ahead of sorts ahead where the developed debt bloated economies struggle to find growth ex – lending and ex- financial system hoodwinks with their manufacturing sectors eviscerated , while emerging and developing nations capitalize on their favorable financial and demographic circumstances.

Guest • April 30th, 2008 at 3:42 am

Excellent OpEd in the WSJ this morning tying the commodity bubble/shortage perception to lax dollar monetary policy:Déjà Vu: The Fed\’s Interest Rate DilemmaBy BRIAN WESBURYBetween 1960 and 1979, the federal funds rate averaged 5.6% and nominal GDP growth averaged 8.4%. With the funds rate 280 basis points below GDP growth, monetary policy was highly accommodative. The result: a falling dollar, rising commodity prices and fears that resources were being used up.In 1980, then Fed Chairman Volcker lifted the fed funds rate significantly above GDP growth and held it there long enough to end inflation. This policy instigated a steep decline in oil prices, and drove a stake through the heart of stagflation.Oil and inflation stayed low in the 1980s and \’90s, when the Fed held the fed funds rate 74 basis points above GDP growth on average. By 1999, with oil prices still low, the Economist magazine wrote that the world was \"drowning in oil.\"Low inflation turned to deflation in 1999 and 2000, when the Fed mistakenly pushed the funds rate above nominal GDP growth again. This deflation spooked the Fed and led to a radical reduction in interest rates. Since then, the fed funds rate has been well below GDP growth – an average of 210 basis points – the most accommodative six years of monetary policy since the 1970s. No wonder inflation is on the rise and commodity prices are setting new records.The Fed lifted the funds rate from 1% to 5.25% between 2004 and 2006, but monetary policy was never tight because the rate never went above nominal GDP. This suggests that housing market problems were not caused by tight money in 2006-07, but by excessive investment during the super-easy money of the years before.Nonetheless, the Fed opened up the old playbook and cut rates aggressively when subprime loans blew up. This cemented higher inflation into place, crushed the dollar, pushed commodity prices up sharply, and created major problems in the energy, airline and agricultural marketplaces. And just like the 1970s, it is now popular to argue that the world is running out of resources again.The answer to all of this is for the Fed to lift rates back to their natural rate, which is somewhere north of 5%. Tax-rate reductions and interest-rate hikes cured the world of its ills in the early 1980s. They can do so again.

Alessandro • April 30th, 2008 at 4:11 am

London Banker: \"Perhaps the best thing you could do for her education would be to send her abroad for a year on an exchange programme, as opening her mind to public policy as it is practiced in other countries will help her better evaluate its abuse at home.\"I cannot agree more. In general I\’m more pessimistic than you on how Europe and Italy in particular will fare during the present crisis, but the student exchange programs are the single best point of optimism for me.Soon after finishing my studies I lived in Germany for 3 years and being well connect with the local university I were mainly hanging around with students coming from all around Europe and South America via exchange programs like Erasmus. The exposure to massive \’different thinking\’ has been extremely important in forming my personal point of view and I think, it was the same for most of the people I learned to know.Europe has the chance to be more ready to change and adapt thanks to the more diverse thinking we have. Erasmus students grasp much better that things can change and they can get better or worse.

Medic • April 30th, 2008 at 4:37 am

Perhaps after some sleep, I should expand on a bitter sounding (now that I re-read it) remark: The paper posted above was portrayed as one that received a 95 – I don\’t mean to insult the writer, but the one who grades the paper was being too generous. ptm, While I understand your point, I too have worked in education (at the college level) and left after being forced by my superiors to pass students I had failed. They wanted numbers, I wanted competence – it was their school, so I left. PS – The lady in the hall is likely ignored because there is someone else in worse condition and there are too few staff. If I recall correctly, you work in a state university system and no doubt encounter some of the same issues we do, namely lack of funding. For private schools / colleges however, there is no excuse for not having enough staff so that students receive the time and attention necessary to learn. Last, but not least – Softwareengineer, appologies for my caustic remark.

Guest • April 30th, 2008 at 4:53 am

i know why post are less \"aggressive\"maybe because we have acknowledged and accepted whats to comethat anxiety has, Goneat least we have good football/soccer entertainment tonightim a liverpool fan BTW hehehealways like underdog, maybe thats the reason i like prof Roub\’s blogbut this year champ league is an all english affairbummer, was hoping barca got throughwell if you want an entertaining finalwish for Liverpool to win :)

Gloomy • April 30th, 2008 at 6:33 am

From an email I recieved, on the lighter side…How to use Your IRS Rebate check…As you may have heard, each of us will be getting a tax rebate check to stimulate the economy.If we spend that money at Wal-Mart, all the money will go to China . If we spend it on gasoline it will go to the Arabs. If we purchase a computer it will go to India . If we purchase fruits and vegetables it will go to Honduras , and Guatemala . If we purchase a good car it will go to Japan . If we purchase useless stuff it will go to Taiwan and none of it will help the American economy.We need to keep that money here in America . The only way to keep that money here at home is to spend it at… Yard Sales!!!!since those are the only businesses left owned by Americans !!

Octavio Richetta • April 30th, 2008 at 7:17 am

Written by Andrew Bernhardt, St. Louis on 2008-04-30 03:25:24Cool post. You have some big cojones sticking your neck out like that. I hope you are right on target.On the difficulty of deep water oil exploitation, take a look at this colorful brochure by the US gov. Despite all the PR you can get a fairly good idea of the complexities involved. In the new Brazilian finding we are talking about is harder by about an order of magnitude than anythings that has been done in the Gulf of Mexico. We are talking billion dollar wells. Despite the impression that one billion bucks is not much money from all the write-downs we read about daily, let me remind you that 1 billion USD= one cool 35 Ton truck load of Gold.http://www.mms.gov/Assets/PressConference11152004/MSGlossySingle_110404.pdfBTW, doesn\’t it make a lot of sense that since the earth is 2/3 water, most of the oil is under water and yet to be found? The trick is to get it out.We in the US will have to adjust to living the European way. Ask Alessandro. Gasoline has been very expensive in Italy for as log as I can recall (I started visiting there in 77).Gloomy: cool post. Spending the rebate in yard sales gets you the greatest multiplier effect.

Octavio Richetta • April 30th, 2008 at 7:45 am

Here is the full report on GDP:http://www.bea.gov/newsreleases/national/gdp/2008/pdf/gdp108a.pdfDig this, price deflator 3.5% vs. 3.7% in Q4. GDP was positive due to Inventory build-up (not a good thing), 0.81% points contribution, and Government spending, 0.39% points contribution. PCE was a sea of red. Only positive contribution was housing and related expenses plus utilities.It would appear that Q2 should be better than Q2 due to the rebate checks??? Perhaps, the Professor will shed some light on the numbers. They don\’t seem to indicate a deep recession of any sorts to me. .

Guest • April 30th, 2008 at 7:58 am

NONSENSEDo the match: US uses 20 milllion barrels of oil a day. That equals 7.3 billion/yr. Oil has gone from $95 to $116 today. That increase X 7.3 billion barrels = $153 billion. The stimulus package was $175 billion. Most of has already been eviscerated!

Capone • April 30th, 2008 at 8:05 am

oh shoot, it is black and the government told us all it is white again ? there may never be official recognition by the financial dictators of the reality. this AM it looks all good, better GDP, GM beats, PG beats and PCE met expectations? and market up small. now a rate cut coming, it should be all good right ? my powder is very fresh for this cut. near the end of the LBO craze, i went off here on how, why and who were the fools still funding the deals. The profiteers could care less we were about to walk of a the LBO deal cliff as they were more concerned about fees placed in their pockets after the deal was struck. well, the seemingly endless bank capital raising has me thinking the same way – who is, how and why are people ponying up endless cash for these banks. Yes, the stock markets are high, the BSC was averted but oh my banks still DESPERATELY NEED CAPITAL. How much more do they all need and who are the happy folks to fund ? Is there a limit to the amount the true owners of the world are willing to fund ? Is this ultimately how one or more will fail ? The true owners BEYOND even the FED should be contemplating who really needs to survive and who may need to go and fund accordingly.

Medic • April 30th, 2008 at 8:09 am

WHAT! The government lies to US?! I, for one, am shocked.People, pull your heads out of the sand! You can always tell when this administration is lying – their lips will be moving. This is all bullshit meant to keep the masses from rioting in the streets and marching into Washington to drag all their corrupt representatives at all levels of government back home to do with as the masses see fit. The lies you and I see and hear everyday are bought by the populace – they are master manipulators of the media (all of it is owned by huge corporations with much to lose and \"friends\" in government), the message, and the money. DON\’T FALL FOR IT.Listen to what your heads should tell you is a scam. Is this country really growing? Is your dollar worth more today than at anytime in your life? Do lobbbyists not actually write many of the laws in this country? You bet.The system is broken because we let ourselves get sacked and brainwashed. The government is not the problem – the people running it are.

Not a Fed Fan • April 30th, 2008 at 8:16 am

A commodity bubble is forming, and because the Fed only pays attention to the core inflation rate, that means it is going to get much worse.No one lives in a world where they don\’t purchase energy or food, so the Fed needs to completely scrap the core inflation rate and only report the headline inflation rate.The Fed needs Volcker leadership again.

tutterfrut • April 30th, 2008 at 8:27 am

Treasury to auction $21 bln, brings back one year billhttp://www.marketwatch.com/News/Story/Story.aspx?guid=%7BF4DA3AD8%2D049B%2D45A4%2D9458%2DCD1C3A8CC10E%7D&siteid=mktwDo they come with an AAA-rating?

JH • April 30th, 2008 at 8:27 am

While the .6 GDP is nothing to be happy about on the face of it, anyone who reads the details should be downright sad. Even exports slowed from the 4th qtr pace.With inventory building adding 0.8 percentage points to growth, the headline GDP figure was stronger than the details of the report.Final sales of domestic product fell 0.2%, while final domestic sales dropped 0.4%, the first decline since the recession of 1991.Consumer spending increased 1% after rising 2.3% in the fourth quarter, the weakest growth since the 2001 recession and less than half its growth in the fourth quarter. Spending on durable goods fell 6.1%. Spending on nondurable goods fell 1.3%, the biggest decline in 17 years. as consumers cut back on the amount of food and energy they purchased. Business investment fell 2.5% annualized after a 6.0% increase in the fourth quarter. Investments in structures dropped 6.2%. Investments in equipment and software dropped 0.7%. Inventories increased by $1.8 billion after falling $18.3 billion. The change in inventories added 0.8 percentage points to growth.Residential investments fell at a 26.7% annual pace after falling 25.2% in the fourth quarter. Exports increased 5.5% after 6.5% growth in the fourth quarter. Imports rose 2.5% after falling 1.4%.The GDP price index rose at a 2.6% annual pace, the fastest inflation in a year. Consumer prices increased at 3.5% pace.JH

Guest • April 30th, 2008 at 9:26 pm

Medic- We have our pellet stoves, but have you considered solar? We are both in New England and I am not sure the sun is good enough, i.e., that we do not have to put a dozen panels on the roof at 20k+ … How do they work with snow?

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