Krugman: The Third Depression

Not quite so. Remember demand and supply also depend on elasticities. in the case of oil both demand and supply are very inelastic in other words not sensitive to change in price in the short run.

Regarding the 145 oil price you need to take in consideration the impact the fictitious finance economy is having on the real economy. There is such thing as market manipulation.

Oil went from 23 a barrel in 2003 to 147 in less than five years then it deep to less than 40 and now is around 70. This looks like a bubble to me and HUGE manipulations.

Not all basic supply and demand is taught in ECO 101

 

Marc Faber: Nations Will Print Money, Go Bust, Go to War…We Are Doomed

http://www.elitetrader.com/vb/showthread.php?s=&threadid=199921

 

Krugman Uses the “D” Word

It has only been two days since the wrap-up of the G20 meeting, but already, second-guessing has shifted into high gear. Two statements in particular caught the attention of the markets; the first of these, officially removed the concept of a global “bank tax” off the table. The second, put forward a timeline for reducing government stimulus spending.

The axing of a coordinated bank tax came as no surprise. It was clear that some countries wanted to move forward on charging a levy, while others were vehemently against it. As it stands now, individual countries will act as they see fit. The agreement around spending and deficits on the other hand, presents a far more interesting story line; interesting because some big names are lining up publically to trash the idea.

In his article published earlier this week in the New York Times, economist Paul Krugman argued the point that this is the worst possible time to worry about deficits. In his view, moving too quickly from undisciplined spend-thrifts (my words) to fiscally-responsible penny-pinchers (again, my words), is the very formula that led to the depression of the 1930s. Krugman believes that failing to maintain spending levels, can only result in one outcome.

“We are now, I fear, in the early stages of a third depression,” writes Krugman, a depression brought about by a “failure of policy”.

Seriously? A depression?

According to Krugman, there have been two previous depressions. One in the 1870s, and the “Great Depression” of the 1930s. Krugman believes we are following the same path that preceded the last depression. So, at the risk of oversimplifying the causes of the last depression, let’s look at the major contributors that brought about the depression, and look for commonality with today’s situation:

1. Loss of Market Valuation and Bank Failures

As the stock market lost value – approximately $40 billion within the two months following the so-called “Great Crash” – a series of bank failures were triggered. Even by today’s standards, $40 billion is a lot of cash – imagine what it meant to the economy in 1930 when US GDP was just over $91 billion.

2. Decline in Public and Government Spending

Naturally, a loss equal to about 43 percent of the country’s total yearly GDP, resulted in severe deflation. The lower demand for goods and services had a devastating impact on employment, and as more people found themselves out of work, spending fell even further.

3. American Economic Policy

In order to protect businesses in America’s important manufacturing sector, the government introduced the Smoot-Hawley Tariff in 1930. The intent was to impose duties on imported goods in a bid to make US products more attractive for domestic consumers. As should have been predicted, other countries retaliated with similar tariffs, making American goods less competitive globally. The domestic market lacked the capacity to pick up the slack of the lost foreign sales, reducing further, overall demand.

The common theme these three contributing factors share is that they all lead to reduced spending. In his book “Essays on the Great Depression”, Bernanke placed much of the blame for the depression on economic policy that neglected to protect failing banks, while at the same time, allowing the supply of money and credit to contract.

Despite the public backlash sure to follow, Bernanke was not about to allow the same thing under his watch. Banks were rescued and stimulus money was spent. Given his recent remarks committed to the continuance of an expansionary policy, it is obvious that Bernanke and Krugman are in agreement that governments must continue to support the recovery.

After Years of Spending, Why the Sudden Swing Now to Deficit Cutting?

Of course, not everyone agrees with this approach. Several countries in Europe find themselves face to face with out-of-control deficits. Spooked by the sovereign debt crisis in Europe, Germany, and most recently Great Britain, have opted to follow a self-imposed austerity path to reduce government debt. Germany’s budget last month, includes 80 billion euros (US$107 billion) in spending cuts, while the David Cameron-led coalition in Britain, has also announced significant spending reductions as well as steep tax increases.

I don’t believe anyone an argue against the need to reign in deficits; rather, I think it is the timing that concerns critics. Certainly, countries cannot continue to rack up massive deficits each year, but nor is it to anyone’s advantage to choke off a recovery before it has chance to gain greater traction. This would, to use Krugman’s words, be a “failure of policy”.

“Around the world”, notes Krugnam, “most recently at last weekend’s deeply discouraging G20 meeting – governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.”

In the end, a compromise was reached that enabled all the G8 countries, with the exception of Japan, to find language they could support. The solution proposed by Canadian Prime Minister Stephen Harper, and supported by President Obama, called for a continuation of the planned stimulus spending in the short-term, with a longer-term goal of reducing deficits by 50 percent within three years.

It is hoped I’m sure, that the pledge to maintain spending to be followed by deficit cutting later on, sends a positive message to the markets. However, I fear that what is still missing, is a stronger commitment to a coordinated approach to ensuring sufficient stimulus over the next six to eight months.

The UK has already passed a budget to reduce spending, as has Germany. Greece has had austerity measures forced upon it in exchange for receiving emergency funding, thereby setting a precedent for other EU countries like Spain and Portugal on the brink of needing their own emergency bail-out. No matter what was promised in Toronto, it appears that Europe is determined to scale back on spending.

http://forexblog.oanda.com/20100630/krugman-uses-the-d-word/

 

Warning signals of a double-dip recession flash brightly across the world

The yield on two-year US Treasuries has fallen to a record low of 0.61pc in a flight to safety, a level not seen during the depths of the Great Depression. Ten-year yields dropped below the psychologically sensitive level of 3pc to 2.96pc.

Such levels are clearly incompatible with assumptions on Wall Street for 3pc growth in the second half of this year. “If the bond market is correct then this recovery could be dead in the water,” said Jim Reid, credit strategist at Deutsche Bank. The credit markets tend to sniff out trouble first and have acted as an early warning alert at every stage of the financial crisis over the past three years.

Mr Reid said deflation has emerged as the dominant risk in the West and will force central banks to renew quantitative easing, the Americans “pre-emptively” and the Europeans “only when their backs are against the world”.

Triple tremors from the banking crisis in Spain, crumbling confidence in the US, and a setback in China’s leading economic indicator all combined with a vengeance on Tuesday. “The market in risky assets has capitulated _today amid fears that the _global recovery is petering out,” said Gavan Nolan, head of credit at Markit.

Rumbling in the background are influential voices warning of a global slide into economic quagmire. Nobel Laureate Paul Krugman said premature tightening in much of the North Atlantic region at the same time would lead to _disaster. “We are now, I fear, in the early stages of a third depression, primarily a failure of policy. Both the United States and Europe are well on their way toward Japan-style deflationary traps. The Fed seems aware of these deflationary risks, but what it proposes to do is, well, nothing,” he wrote.

China’s Shanghai composite index of equities fell 4pc on Tuesday and is now 55pc below its peak in late 2008. The authorities have been tightening this year to slow inflation and curb property speculation as home prices in Shanghai and Beijing reach 13 times incomes, but it is unclear whether they can engineer a soft-landing in an economy where state-owned banks have built up huge hidden debts.

The Baltic Dry Index that measures freight rates for bulk goods – and watched as a proxy for the ups and downs of the Chinese economy – has dropped by 40pc over the past month.

In Europe, investors remain jittery as the European Central Bank prepares to shut its emergency facility of €442bn (£361bn) of one-year loans, the largest sum ever lent by a central bank.

A report in the Financial Times that Spanish banks have been begging the ECB to extend the one-year scheme has heightened fears that they are totally shut out of the interbank markets. The shares of BBVA fell 7pc and Santander fell 7pc.

The ECB is offering a three-month tender on Wednesday, which will indicate how many banks are under strain. Hans Redeker, curency chief at BNP Paribas, said this facility is unlikely to reassure the markets. “This just builds up a tidal wave of short-term funding needs that all need to be rolled over at the same time,” he said.

The Spanish cajas or savings banks are clearly in trouble, relying on the ECB for 21pc of their funding. There were signs of an incipient run on Spanish banks on May 7, an episode described by ECB president Jean-Claude Trichet as perhaps the most serious crisis since the First World War. These pressures linger. The Spanish daily Expansion reports that the Bank of Spain has ordered inspectors to track capital flows abroad after the haemorrhage of €18bn in the first half of the year, mostly to accounts in Switzerland, Luxembourg and Ireland.

“Foreign capital flight is under way. This can only make matters worse given the climate of insecurity and the country’s lack of credibility,” said Borja Duran from Wealth Solutions in Madrid.

The latest twist is a rise in credit default swaps on Italian debt, which jumped 16 basis points to 203 yesterday. An auction of Italian bonds this week went badly, with low bid-to-cover ratios.

The Bank of New York _Mellon said its flow data had picked up a relentless flight from both Greek and Italian debt. It is clear evidence that the EU’s €750bn shield with the IMF for eurozone debtors has failed to restore the confidence of global investors, who fear that the EU’s austerity strategy risks setting off a self-defeating downward spiral.

Spreads on Greek debt have jumped 350 basis points since the EU announced its plan in early May. Portuguese and Spanish yields have both jumped sharply despite direct action by the European Central Bank to force down yields. Private buyers are clearly dumping their holdings onto the ECB as fast they can.

Mr Redeker said Japanese life insurers and institutional investors are slashing their estimated $700bn holdings of European debt. The funds are being recycled into yen, which reached ¥107 against the euro yesterday, the strongest in nine years.

The flight to safety in Tokyo depressed yields on Japanese 10-year bonds to 1.11pc. There are concerns in any case that Japan itself may be sliding back into deflationary deep freeze. Japan’s unemployment rose in May for the third straight month to 5.2pc. _Industrial output fell slightly. Production of capital goods – a leading indicator – fell 4.4pc.

Italy has been largely immune to Europe’s bond crisis until now, thanks to high savings. None of its banks have required a rescue. However, fresh threats of secession by the Lega Nord and last week’s general strike over austerity measures have revived fears about the stability of the political system.

Italy’s public debt is the third largest in the world after the US and Japan. Everybody knows that if the crisis ever reaches Rome, the game is up for monetary union.

http://www.telegraph.co.uk/finance/...ecession-flash-brightly-across-the-world.html

 

1720

 

it isn't necessary to quote yourself. From what I have seen so far, the less you say, the better...

 

Regarding Mr. Krugman predictions being true, someone has said "unfortunately, all the doomsayers had been on the mark so far".

Read this whole thread. It is interesting.

 

Thanks for quoting me.

I have zero intention to offend; Just a friendly cautionary statement: Remember BuyLowSellHigh?
Are you becoming him? Is your trading in trouble?

 

Krugman: "I’m Gonna Haul Out The Next Guy Who Calls Me “Crude” And Punch Him In The Kisser"

http://krugman.blogs.nytimes.com/20...o-calls-me-crude-and-punch-him-in-the-kisser/