IS there a chance a depression could be averted?
A few months ago, it seemed all the posts here and on other sites I visit frequently firmly believed a depression was unavoidable and inevitable. A "perfect storm" was brewing and it was just a matter of time, compounded by harmful govt responses speeding the whole thing up.
But even on these boards the tone seems to have changed. There’s a little bit less of how to prepare for the inevitable depression and more talk about how the govt had better do this or that or its their LAST CHANCE to avert a depression.
So, from now, is a depression really avoidable? If so, what needs to happen to prevent it?
A few months ago, the entire financial system was on the verge of systemic collapse. That is pretty much a fact. And without a gigantic and heroic transfer of private debt to public debt the implosion of the financial system pretty much WOULD have happened.
Now the debt is not gone. It is merely transfered and transformed. But there is no free lunch and the consequences of that debt will have to be dealt with.
So what has happened, IMO, is that the consequences have been delayed and the problem has morphed. Instead of a deflationary collapse you will get an inflationary collapse. This is not unpredictable; CM and others like Eric Janzsen have long forecasted that there would be some sort of implosion or near-impolosion of the economic system followed by a stage where government/central banks intervene, followed by a bit of a paue, followed by the consequences of that intervention.
This is how it goes and it is why I come down firmly on the inflationary collapse side. There is a short term solution to a deflationary collapse and it is called printing. There is no solution to an inflationary collapse.
My sense is that we are in sort of the eye of the storm right now.
I agree with Lemon. The government has been able to avert a systemic banking collapse for the time being. However, all the debt and "nonperforming" assets are still on the books of the big financial institutions. Perhaps the government will be able to phase out these bad loans over the next 5- 10 years? The gov was asleep at the wheel before but now they are all over the place on this credit crisis. With regards to inflation, because there are soo many indebted people in the US i dont see how they can take on more and more debt. With people taking on less loans the money multiplier will stay low. With regards to China and all our other foreign creditors they will start dumping their treasuries eventually but i dont think they will dump the dollar overnight. Any drastic action would be harmful to the them and us and i think they know this. I believe that the Chinese know that their treasury holdings are essentially worthless but at the same time they understand that they need to have a somewhat functional US. You never want to wack your best customer on the head too fast. Eventually China will break its currency peg to the dollar and raise the RMB, but its going to take time.
Just a thought, but maybe, the "worst" of the freefall is over. Maybe from now we will keep getting weaker and poorer as a nation, just at a slower pace than we were in late 2008.
I thought the financial sector did collaspe, and has been on life support since Sept 15, 2008. I haven’t seen any evidence that what is being done or proposed will really help that, and in fact the old model of the banking system is over and a new one has not yet emerged. More than anything else, the CM reports on Oil suggest that a depression is not something that the world will have the oil to grow itself out of. And the level of resource depletion in commodites other than oil supports that conclusion as well. We still don’t know what our leaders will do, so we don’t know if this will be an inflationary-depression or a deflationary one. With the shadow banking system under the weather, it remains to be seen what the central banks and governments of the world can/will do to prop up the system up and get it "working" again. From what I read here at CM and other places, I have to say that a period of no or negative growth (ie a depression) is what we really need and what we really need to get used to going forward. I hope we can make that transision with compassion.
I think it is remotely possible that some new energy technology could replace oil (except for farming and manufacturing (i.e. petro chemicals to build stuff like plastic and everything else). If it came out quickly it could possibly create a bubble bigger than any in the past.
That said it would take one heck of a bubble to off this debt (well over 70 trillion) or at least prolong the popping of this mess.
Short of that or some God forsaken pandemic I’d say this thing is a train wreck in progress. When? How long? From most the charts I see we are about 1/3rd to 1/2 way down the cliff.
Any catalyst could fast forward this mess. Hyperinflation, oil prices, bank failures, housing crisis redux, currency collapse of just about any nation other than some banana republic, large BK, bond failure, another majro leg down in the market…The place is a forest of dry dead wood and leaves.
Just my 2 cents. Take care.
David Lachman writes "From what I read here at CM and other places, I have to say that a period of no or negative growth (ie a depression) is what we really need and what we really need to get used to going forward"
So right. All the experts I read and listen to state that a depression is a natural economic cycle – maybe the rebuilding will bring some sort of new energy tech. and sustainable living.