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Real economy shudders to a halt

Saturday, December 27, 2008, 10:06 AM

As we cast our gaze back on the year, it is clear that, even as the world’s monetary and fiscal authorities applied gigantic solutions directly to the banking industry, their efforts went largely unnoticed by the real economy.

The theme for the period from 2000 to 2008 was “globalization.” It turns out that this may have been a fad.

Frozen Ports in Long Beach, Singapore Mean Bleak 2010

Dec. 23 (Bloomberg) -- Chris Lytle, chief operating officer of the port of Long Beach, California, took in a panorama of the slumping world economy from his rooftop observation deck one day this month.

Shipping cranes stood still, truck traffic trickled and a cargo vessel sat idle, moored to a pier.

“You never see that,” Lytle said. “It’s quiet. Too quiet.”

Port traffic has slowed from North America to Europe and Asia as a recession erodes consumer demand and the credit crisis chokes off loans to export-dependent companies. International trade is set to fall by more than 2 percent next year, the most since the World Bank began measuring it in 1971. Idle ports around the globe are showing how quickly a collapse in trade can spread, undermining growth in each country it reaches.

“Everybody expects 2009 to be a bleak year,” said Jim McKenna, chief executive officer of the Pacific Maritime Association, a San Francisco-based group representing dock employers at U.S. West Coast ports. “Now, it looks like 2010 is going to be just as bleak.”

Coal is piling up at the Mozambique port of Maputo. Brazil’s exports of cars, household appliances, machinery and furniture fell in November from a year earlier. The port in Singapore, the world’s busiest for containers, posted its first month-over-month decline in seven years in November, at 1.5 percent.

“The problem is that people can’t get financing, no matter what their credit situation,” said Ed Rice, president of the Coalition for Employment through Exports, which represents companies such as Boeing Co., Caterpillar Inc., United Parcel Service Inc. and BNP Paribas SA. “Banks are canceling credit lines even for creditworthy customers.”

There is really no possible way to plan for such a rapid deceleration of business. When the dust settles and all that Fed money finally finds some traction in the real economy, we will almost certainly discover that ships have been scuttled, ports closed, and dockworkers laid off. Fed money is fast; rebuilding capacity is slow.

I am not certain when all that Fed money will hit the real economy – 12 to 18 months is my best guess – but when it does, it is likely to find itself short of things to do. When money exceeds goods and services, inflation is the result.

And over in another sector of the real world, the housing bubble continues to pop, doing exactly what many, myself included, predicted it would:  Return to the prices from which it began its bubbly ascent.

U.S. Economy: Home Prices Fall Near Depression Pace

Dec. 23 (Bloomberg) -- Sales of single-family houses in the U.S. dropped in November by the most in two decades and resale prices collapsed at a pace reminiscent of the Great Depression, dashing speculation the market was close to a bottom.

Purchases of both new and existing houses dropped 7.6 percent from the prior month, the biggest decline since January 1989, to an annual rate of 4.43 million, government and industry figures showed today. A 13 percent drop in the median resale price from a year earlier was the most since records began in 1968 and was likely the largest since the 1930s, the National Association of Realtors said.

“Housing is still in a freefall,” said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts.

The number of previously owned unsold homes on the market at the end of November represented 11.2 months’ worth at the current sales pace, up from 10.3 months’ at the end of the prior month.

Foreclosures and short sales accounted for 45 percent of last month’s home purchases, Yun said.

Purchases of total existing homes declined in all regions of the country, led by drops of 12 percent in the Northeast and 10.9 percent in the South. Prices also fell throughout the country, led by a decline of 25.5 percent in the West.

And if you read the above carefully, you will note that, as bad as the resale numbers were, they were inflated by nearly 45% if one chooses to exclude foreclosures and short sales from the pool of legitimate “sales."

What this means is that the Fed and the Treasury have only managed to stabilize the banking system, and only for now. They have not managed to change the trajectory of the real economy, where real houses and real goods are traded and sold.

Unfortunately, they are focused on getting us to return to a level of new credit/debt creation that can sustain a return to something resembling the former economy, but this is a pipe dream. That was a credit bubble 25 years in the making, and they would do well to ask if that is either a possible or worthy goal.

I have my doubts.

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13 Comments

The.Techno.Luddite's picture
The.Techno.Luddite
Status: Bronze Member (Offline)
Joined: Nov 26 2008
Posts: 34
Re: Real economy shudders to a halt

I'm thinking about it like extreme skiing at this point.  As everything tumbles down, might as well make some turns in the chaos and play in the froth of the avalanches!

Cute article on the economy from todays NY Times:

"Stop Being Stupid""
by Bob Herbert
http://www.nytimes.com/2008/12/27/opinion/27herbert.html?_r=1&ref=opinion

 

brandenism's picture
brandenism
Status: Member (Offline)
Joined: Sep 14 2008
Posts: 21
Re: Real economy shudders to a halt
The.Techno.Luddite wrote:

I'm thinking about it like extreme skiing at this point.  As everything tumbles down, might as well make some turns in the chaos and play in the froth of the avalanches!

Cute article on the economy from todays NY Times:

"Stop Being Stupid""
by Bob Herbert
http://www.nytimes.com/2008/12/27/opinion/27herbert.html?_r=1&ref=opinion

 

 

Are you sure Ron Paul didn't write that?

 

But seriously, he's been saying that exact message for years..

..if only people would listen.

Maybe in 2012? 

mainecooncat's picture
mainecooncat
Status: Gold Member (Offline)
Joined: Sep 7 2008
Posts: 488
Re: Real economy shudders to a halt

I  think some of the most terrifying implications for the US are contained in seed form in the above posting by Chris.

As trade and exchange between countries continue to slow and as countries become more protective and isolationsist in their international dealings, where does that leave the country that doesn't make anything of its own?

In an unenviable position to say the least. If these trends don't scream self-sufficiency and re-localization, I don't know what does.

RussB's picture
RussB
Status: Silver Member (Offline)
Joined: Dec 9 2008
Posts: 101
Re: Real economy shudders to a halt

This freezing up of the flow of commodities is what Marx called the "separation of sale and purchase" (meaning a willing seller couldn't find willing and able buyers), or more cryptically the "forcible unity of sale and purchase" (which I think really means, their being demonstrated to be a unity when their separation triggers a crisis).

(He also called it the "interruption of the metamorphosis of capital". Just some fun terminology.)

Regarding the housing market, I'm sickened to see that, even as the prices and sales of residential structures keep falling, and more and more stand vacant, a glut signalling that price is still seeking its correct level (and has a long way to go yet), that builders are lining up with their mooching sacks begging to be bailed out. If there was ever a more clear-cut case of a useless industry begging to be artificially fed, I haven't heard of it.

Mike Pilat's picture
Mike Pilat
Status: Platinum Member (Offline)
Joined: Sep 8 2008
Posts: 929
Re: Real economy shudders to a halt

mainecooncat: I agree with your thoughts and they seem to echo the beliefs of Peter Schiff. While many people say Japan and China "need" America, it's clear that they don't - at least in the long run.

 

An interesting thougth I've had though is as we hear about very bad conditions in China mixed with some mild civil unrest, etc. it's clear that today, tomorrow and next week (the short run) the Chinese require American consumers just to keep themselves employed and maintain social order. At a fundamental level, there's no reason to think that China should need America at all, but in the short term, it seems, timid American consumers are a potential cause for civil unrest and social disruption in major exporting countries.

Any thoughts on how long this short run scenario can play out before a transition is made in Asia to actually consumer or reinvest their surpluses rather than simply exporting them?

 

Thanks,

Mike 

 

jkibbe's picture
jkibbe
Status: Martenson Brigade - YouTube Channel Admin (Offline)
Joined: Aug 5 2008
Posts: 71
Re: Real economy shudders to a halt
brandenism wrote:

Are you sure Ron Paul didn't write that?

But seriously, he's been saying that exact message for years..

..if only people would listen.

Maybe in 2012? 

I'll vote for him in 2012 -- too bad he'll be like 77 years old!  :)

Headless's picture
Headless
Status: Gold Member (Offline)
Joined: Oct 28 2008
Posts: 363
Re: Real economy shudders to a halt

And as the "real economy shudders to a halt," which, as Russ B reminds us, is also known as the "separation of sale and purchase" in the words of Marx, we should all pause to "highlight" the contributions of Edward Bernays, the original enabler of the lesser among us: advisor to Nazis (via his writings), the U.S. government, and Wall Street.  Bernays planted the seed of materialism in the womb of humanity; he is Godfather and midwife to the immortal American child.

Hitler? Bernays? The tally's not in yet, and the counting of "fractional lives," aka, consumers, overestimates the number of survivors.

If you're not familiar with Bernays and you are interested in how we got to a point where responsible consumption could cause a society to collapse:

The Century of the Self ( in 4 parts)

mainecooncat's picture
mainecooncat
Status: Gold Member (Offline)
Joined: Sep 7 2008
Posts: 488
Re: Real economy shudders to a halt

Thanks for the link, Nonzeroone, very much looking forward to watching it after catching the first couple of minutes.

mainecooncat's picture
mainecooncat
Status: Gold Member (Offline)
Joined: Sep 7 2008
Posts: 488
Re: Real economy shudders to a halt

Hi Mike,

It’s late, but here are some ideas in my head at least somewhat apropos of our discussion thus far.

It seems that tinderbox is an apt adjective for much of the world today. And because I totally agree with your take -- that in the short run China does require US consumption that no longer exists to stave off broader social unrest – I don’t see China fairing too well over the next couple of years. Right now it’s almost hard for me to imagine China even reaching the long run in a stable enough state to decouple itself from the US in a controlled fashion.

One of the strangest things to me is that much of what China produces for the US is more or less useless. It’s non-utilitarian, non-essential trinket/widget/junk. All that cheap, highly-disposable plastic stuff populating the shelves of America’s discount retailers. So we’re not even talking about traditional manufacturing, things like automobiles, appliances, factory machinery, etc. Could it be that the lack of demand for hollow, plastic pumpkins or ceramic elf shoes is the downfall of the global economy?

I just watched an interview with Schiff on Australian television and the fella asked him what he would do if he were president, perhaps implying that there’s a solution to all of this. Schiff’s response was that it didn’t matter because pain was unavoidable and that hard times had to be endured to get back to a place, some kind of stable footing where things could truly begin anew. I’m not optimistic about what’s going to be happening over the next several years, and I do agree with Schiff that some kind of almost – for lack of a better term – Darwinian purging must take place on many levels.

I also think that one of our Achilles’ heels is our global system’s increasing complexity and interconnectedness. Both Kunstler and Nicholas Nassim Taleb (author of "The Black Swan") emphasize this point, and though I’ve always agreed with this aspect of things, I see it playing an even greater role with each passing week.

James Wandler's picture
James Wandler
Status: Martenson Brigade Member (Offline)
Joined: Aug 12 2008
Posts: 219
Re: Real economy shudders to a halt

mainecooncat and Mike,

I wonder if China might be beholden to the US for food in the medium term since I've heard that they (and India) are depleting the water in their aquifers to support their unsustainable agriculture.  I don't know the specifics of this so it would be great if anyone could shed any light on this.

If China (and India) are dependent on the US for food that means that all three countries are beholden to oil exporting countries since agribusiness in the US depends on fossil fuels for its current production levels.

If true - what a tangled world we weave.... 

mainecooncat wrote:

I just watched an interview with Schiff on Australian television and the fella asked him what he would do if he were president, perhaps implying that there’s a solution to all of this. Schiff’s response was that it didn’t matter because pain was unavoidable and that hard times had to be endured to get back to a place, some kind of stable footing where things could truly begin anew. I’m not optimistic about what’s going to be happening over the next several years, and I do agree with Schiff that some kind of almost – for lack of a better term – Darwinian purging must take place on many levels.

To me, part of the "stable footing where things could truly begin anew", would include sustainable farming.  Agribusiness runs on imported oil and requires a network of complicated connections to run - I don't like the look of this in an unraveling global system, peak oil, etc.  By contrast sustainable agriculture uses the sun, nature, grass, replenishment of soil, conservation of nutrients, is also decentralized and less dependent on inputs....oh, and it uses more labor which would provide employment for people being thrown out of the system...

I'm not saying it is the only answer - just the bedrock to turn the corner on a lot of problems.

James

Mike Pilat's picture
Mike Pilat
Status: Platinum Member (Offline)
Joined: Sep 8 2008
Posts: 929
Re: Real economy shudders to a halt

James: I agree with you.

I think we need to wake up in this country and realize that we cannot simply continue doing things the way we always have. It's outrageous to contemplate the number of miles the average food item has traveled before reaching your store. Those transportation costs, coupled with the direct petro input costs into farming are on a track to utterly wreck our food production and distribution system in this country.

I think most Americans are woefully unprepared for the prospect that they might need to start "getting their hands dirty" and farming themselves. In terms of farming, the only real substitute for petroleum is human labor. I suspect that this realization and the subsequent transition will be quite painful.

As I've stated before, I believe that the government will attempt to maintain the status quo and will tend to impede the paradigm shift to local businesses. Taken to an extreme: If every single household practiced subsistence farming, what real need would there be for a Federal Government? Again, the Federal Government's role is central control and regulation. If everything is done at an individual level, then it seems that a lot of bureaucrats will soon lose their jobs - not a happy prospect for those that make our laws.

I believe the solutions are fairly clear, but I think we as individuals, and our government as a whole are going to be our own worst enemies in fighting the changes that must come. Education of the type that appears on this site is the only hope that we have to making a peaceful and somewhat orderly transition. Let us just remind ourselves once more that humans have lived happy, fulfilling lives for milleniums before the age of oil, computers, airplanes, and Big Macs.

Mike

Damnthematrix's picture
Damnthematrix
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 3998
Re: Real economy shudders to a halt

Just Google "the oil we eat"

Mike 

MarkM's picture
MarkM
Status: Platinum Member (Offline)
Joined: Jul 22 2008
Posts: 849
Re: Real economy shudders to a halt
Damnthematrix wrote:

Just Google "the oil we eat"

Mike 

Nice.  Thanks Mike.

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