11/27/2008 05:12 am ET | Updated May 25, 2011

The Old Order Falls

We are cursed to live in interesting times. We all have front row seats to the death of a global economic order. The old order ran from the late 1970s through the spring of 2007. We have watched faith and wealth in the old system decline in rapidly accelerating fits and starts. A look at any global stock market index will show you increasingly coordinated and global declines in the value of assets. A glance at the employment situations, economic growth rates or business and consumer sentiments will make clear that we are all slowing together. Thus, we know that global economic pain and tumult are very much a reality and will be for many, many months. Capitalism is not dead. America is not dead. What type of regional and global economic order comes next is not unknown, it is unknowable. We do know it will take an unsecure and fraught while to emerge. All of our lives will be profoundly shaped by how the old order falls and the new order rises.

Unquestioned faith in the old order produces shock and panic as one pillar after another crumbles and falls. So it is with cursedly interesting times. The borrowing by investors, financial firms, and households must be reduced. Losses and forces sales beget losses and forced sales. Oil, food commodities, stocks, homes are being driven down in price. Vast oceans of money are injected by global policy makers, central banks and lenders. Banks and creditors are lending much, much less. Thus, the oceans of money added are not enough to replace the purchasing power lost by shrinking credit. This is the deleveraging of households, banks and financial firms. What you can be confident in are the following changes. Those of you who have been oppressed by regular reading of my work have seen some of the below before. However, it will be as different to see it again as it is different for me to write it again in this very changed environment.

Major portions of the US consumer economy will not survive the declines in consumer demand that have arrived and will continue. For years debt has topped up consumer spending. Past debt will now drag on consumers. We will discover that we have already done much future consumption and therefore have to consume less than constrained income. Buying with debt today can be seen as moving consumption to today, from tomorrow, in return for less consumption in the future as debt must be repaid. Retail firms -- particularly those selling expensive items -- will suffer. We already see this in autos, furnishing, and appliances. The big three car companies will likely soon be a smaller two -- with potentially damaging failure of major suppliers. The furniture business was correlated to the great housing/credit boom and must now shrink. The large appliance market is a similar story. All three rely on inexpensive and available consumer credit. We will see large segments of the consumer economy go through a process of decline like the deindustrialization of the 1970s-1980s.

Pain is global. We are exiting the phase of this crisis where pain is concentrated in the financial sector and the US. Financial firms will continue to face weakness and will not return to their recent apex. This week we will see the first of a series of post-boom US GDP numbers. There will be further bad news on that front. The carnage in the developing world will be significant. The recent turmoil in Hungary, Ukraine, and Pakistan will be repeated elsewhere. China will slow dramatically and be tested by their first serious cyclical downturn as a market economy. As a leading beneficiary of the collapsing architecture of the global economy, China is very vulnerable to US, European weakness. Long-term Chinese prospects remain interesting. The next few years will not be pretty there. Their economy boom was very, very much a creature of the last few decades. Their $2 trillion in reserves -- heavily in dollar assets -- might be put to work in many useful ways. However, China soared on foreign transnational corporate production for export to US and European consumers. Raw materials were imported and export markets secured -- in part with an artificially low currency value. This cannot continue, neither can their export focus for rapid growth in output and employment.

Unemployment and social dissatisfaction will rise, fast. The losses to pension funds, mutual fund holdings, house values and confidence in the economy are huge. October, so far, has seen over $10 trillion in global asset losses. American house prices have fallen and will fall further -- in many areas. This vast and global wealth destruction has sapped confidence and reduced people's willingness and means to spend. It will take some time for this to filter through in rounds of demand destruction. It will be harder to sell lower quantities of many goods. In short, we will see large gaps in demand for many products. This creates falling earnings and dropping payrolls. Asset price increases and credit expansion were the fuels of the global economy. These two growth accelerators have become brakes on forward motion. This will proceed in fits and starts as asset markets sell-off and then jump back up as they get in front of and then behind economic weakness. Right now, asset markets are front running economic weakness. This will not always be true, it will always be important and worth watching. Folks with no stocks and no homes must watch and understand they are not exempt from the pain born of other's losses. Economies are systems of interdependence.

The US will be a different county/economy when this is over. America will still be a large and wealthy economy but, it will not feel that way for many over the next few years. How this shakes out, how deep we go and who endures the brunt is still to be shaped by the policy choices we make. It is time to weigh options and discuss how to cushion blows, what to save and how to build the architecture of a new order.