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.

Comments

[SisterAnn]

I can't claim to be a financial expert, but it looks to me like a group of wealthy people decided to rule the world. They have suckered everyone into the stock market, then crashed it, taking trillions of dollars from the investors. This includes countries overseas.

'Rule of Law' has it about right.

They have dismantled everything they could that was put into place to prevent another depression.

What can you expect, when you give tax breaks to companies that hire overseas? What can you expect when you cut taxes during a war except a large deficit that eats billions every day? What can you expect when you allow oil companies to ruin profits for businesses and budgets for families? What can you expect when you allow health care insurance and costs to bankrupt families? What can you expect when any business can ride roughshod over their workers?

They want to topple this country and if they succeed, they will be the only ones with money and they will rule.

Obama is our only hope, but it may be so advanced that nothing can stop the coming nightmare.

[Henry]

Max,
I believe that the real story is what kind of agreement is reached at the new improved Bretton type meeting that is in the offing. Will Russia and China participate? Will reserve currencies in the form of dollar or euro denominated debt instruments continue? Will the carry trade become illegal without covered contracts for exit? Will currency manipulation become eschewed instead of tolerated? How will the undeveloped world fare in the meeting and its outcome? Is it possible that the IMF will come up with the international transaction denomination into which all others will convert? Will the OPEC cartel be labeled as illegal and its members be excluded from the WTO? What is it going to be? I for one am anxious to see.

[americaforme]

Why do you delete (world) from order? Where have you been for months? Yes we are jockeyed into position, for the destruction of the (old) economic way. In order to adopt or adapt, in this (new order) we must sacrifice our Blessed America, to financial thieves.

[MFWolff]

Many of you have written- usually in polite and decent ways- to inquire as to my past positions. Thanks for asking as opposed to blindly flinging little barbs without checking the record. For those interested, I have provided some links to my work on these issues over the last few years.

Many thanks for reading and responding to my work.

Best,

Max

Links:
A 4 year old prediction of consumer debt issues:

http://prudentbear.com/index.php/guestcommarchivedisplay?art_id=9446

A 2 year old real estate forecast:
http://prudentbear.com/index.php/guestcommarchivedisplay?art_id=9732

A 1 year old forecast of US debt and global economy position:
http://prudentbear.com/index.php/guestcommarchivedisplay?art_id=9829

[DuganS1]

The bearish prediction in Nov 2004 was about three and a half years off and the analysis was a bit flawed in many ways, particularly by using the real median income statistic. If you used the real disposable income statistic the analysis would have been much different, and more different still when you take into account the increase in home values accounted for most the inflation from 2001 thru 2005 (which won't affect those who bought before the inflation), nor does it take into account refinancings during the low interest rate period which freed up cash month to month from then on. The two year real estate forecast was the same as about 99% of folks on the street.

[Henry]

The old order falls. I am concerned about the prospects for the dollar. I have foreign investments that have lost 40% of their value because of the increase in strength of the dollar. I am aware that foreign currencies have had their respective values distorted by the carry trade and the implications for this distort "free" trade, yet noboy seesm concerned about this. It would follow logical that the trade deficits accumulating at nearly a trillion per year would damage the value of the dollar. I understand that Japan purchase oil in dollars, yet this is not free market economics, it is cartel based on other than free trade. Why should the U.S. have been the currency of the world when econ types bray about "free" trade? It does not make sense. I see the big issue, what happens to the dollar? One of the big big problems facing global trade is what happens to the different central bank rates? Brazil 12.0% Japan 0.5% now there is a difference that can be arbitraged by the less than ethical for free billions that can be used to consume the production of others.

[DuganS1]

The author seems to overlook that the "correction" in many of these areas has been ongoing for a long time now. Housing peaked in early 2006, furniture sales stagnated from 2006 to mid-2007 and has been in correction every since ( nearly a year and a half now), and auto sales peaked in 2005 before spiraling downward over the past year. Consumer borrowing has already been down for some time and debt levels have been declining for a year now (and in some categories more). Plus with rapidly declining oil and food prices, real incomes will accelerate quickly giving consumers much more buying power. I think the credit market will be on the mend by early next year and growth could accelerate strongly by mid-2009.

[Sundialsvc4]

Max, I quite-frankly suggest that this well-timed "end of the economic world as we know it" will mostly turn out to be an election-time rhetoric. The actual problem is much stranger and much deeper...

(1) Even though "trillions have been lost," blah-blah, it does not match trade of, you know, "physical things." It matches only the trade that is taking place in this non-existent thing we call "money." Now, we all need money to facilitate trade, but we don't need and have never needed -- nor have we actually had -- "this much money." The Federal Government will eventually insert two new records (one "debit," one "credit") into a database somewhere and, miracle of miracles, "the crisis will cease to exist." But if it were really that easy, it would never have been a crisis to begin with ... and probably, it isn't.

(2) Let's just overlook the whole business of "crime," because, you know, we can't do anything about it anyway. Because they said so. "Impeachment is off the table," remember?

(3) Now... trade. As in, "things." We used to make the things we needed, here at home. It's when we stopped doing that, that we started printing cash. But the factories are still here. Hundreds of millions of people are also right here. Doesn't really take a rocket scientist to know what to do. But... it's harder than printing millions of dollars a minute and calling yourself "rich and influential."

[DuganS1]

The US still manufactures a lot of things, but mostly producer goods (rather than consumer goods). In fact, if you discount petro, the trade deficit for August was the lowest since 1998, and a lot of that had to do with continued massive increases in exports.

[Novista]

I'm sooooo tired of seeing "this all started with Reagan"!

Hard to draw a line in the sand, but I reckon Dec 23, 1913 planted the seed of destruction. And it's been 95 years downhill for the U.S. dollar.

Notwithstanding the apparent post-WW2 affluence -- except that America then held 80% of the world's gold reserves. And this bought American prosperity. Until in 1971, foreigners (U.K. etc.) were redeeming dollars for gold -- and seeing the much diminshed reserve, Nixon trashed Bretton Woods, breaking the final link to that 'barbaric relic' and floating the fiat dollar. And now it's sinking -- oh, it may look strong lately. So does a heavyweight boxer who's over the hill ...

[Sundialsvc4]

Novista, could the actual supply of a particular pretty element -actually- be the basis of the world's wealth? I don't think so. But it WAS "limited," and you couldn't simply "produce it."

Look, I appreciate that shipload of goods you just sent me. Now, I'm going to go down to the office supply store and buy a ream of 500 sheets of paper. With my laser-printer I'm going to print the words "ONE THOUSAND DOLLARS" twice on each page, cut each one in half, and give it to you, thereby paying the $1 million debt that I owe you. Fair enough?

No...?

Okay, then, I'll just omit the pieces of paper. "Save the Planet," you know. And I'll just enter a debit in your account in the amount of $1 million, and for a correspond­ing-credit I'll pretend that I just "borrowed" $1 million and "promise to pay it back with interest real soon."

Still... no?

Okay, "I am the Federal Government." And as a matter of fact, I "omit the pieces of paper" in just this way each and every minute, around the clock.

"Houston, I think I know what the problem is."

It's the "Inverse Rumpelstiltskin Effect." Spinning gold into straw.

[theeconomicfractalist]

The Blog of Gary.Lammert: 2005

The Economic Fractalist - An introduction
Posted at 2005-07-01 13:54:52 by gary.lammert Welcome to the small alcove for the advancement of cause and effect saturation macroeconomics. This site pursues the hypothesis that the nature of market valuations and economic cycles is both causal and quantitatively decipherable. Valuations conform to fractal cyclical patterns that can be recognized, interpreted in conjunction with data....., and used with short term and long-term predicative power. Information from this site is not ..... This site has been constructed because of the expected inevitability of a major sudden phase transition to occur at the conclusion of a grand 140 plus-year second fractal cycle starting in 1858. For the masses this phase transition will occur both very unexpectedly and very suddenly. Approaching the global macro economy from such a causal and fractal Weltanschauung may help those considering further debt obligation and those in position of formulating future interest rate and monetary policy. The cyclical nature of the macroeconomic system operates by causality rather than chance. Valuations of assets are controlled chiefly by interest rates - the cost of money. Lowering nominal interest rates, below asset inflation controlling rates, leads to macro economical disequilibria with excessive money expansion through increased borrowing. This expansion engenders unbalanced forward consumption, consumer saturation, overproduction, and inflation of assets and consumer items. With the addition of ongoing wages of the consumer masses, these oppositional elements are countervailing, and periodic macroeconomic imbalances will self correct.

[Rule Of Law]

once more--

Your observations are dead-on. Except one: There'll be no "new order." Because, all of this has happened just as planned!

Unless, of course, you are referring to the "New World Order" as proffered by the Trilateral Commission, David Rockefeller and George Bush I, where the moneyed elites run the entire world, in which case, I agree. This meltdown lays the groundwork for the final establishment of their dream and was a carefully constructed financial coup.

What we will continue to see is further consolidation in finance, and in corporatism in general, that began with the creation of the so-called Federal Reserve, accelerated under Reagan and reached its penultimate with Bush II. Free Market, Trickle Down, Laissez-faire, Neo-conservative, Chicago School, Friedmanism--what ever you choose to label it, is too entrenched in our economy and our Government to simply be overthrown with the election of a new president.

Labels are meaningless today with Americans kept uneducated about history and the role the Banks have played in it. But under Mussolini, this unholy marriage of Government and Corporate was called Fascism. This give away of the American Treasury we are witnessing today, where the Corporation takes precedence over the People who exist only to serve the state, is eerily similar to what happened in Italy in the 30's.

So, a new order? I must disagree. You stick with the horse that got you this far, and they aren't done riding roughshod over us yet.

[MilwaukeeDan]

Great post Max, I'm afraid most of what you say will come true. Peter Schiff has been harping about this for quite a while. Americans are going to need to make adjustments to their standard of living. Forget McMansions and new Escalades, that era has passed. This all started with Reagan, but the debt based economy really exploded over the last 10 years, now it's broke. It's all about good paying jobs that left us replaced by the "financial industry" and Wal-Marts.

[DuganS1]

What started with Reagan? There are plenty of "good jobs" out there. For some reason people equate "good jobs" with blue collar union jobs. From where I sit, I see good jobs everywhere.

[Zeje]

There are good jobs -- and hundreds of people applying for each one.

[davusan]

At last ,someone has had the insight to frame this crisis correctly.

[davusan]

At last, someone has had the insight to frame the current crisis correctly.