"In just the past few days, we've had a big downward revision..."

[Kurt_and_Hunter]

Here's the most horrible thing I know: America probably has the world's strongest economy right now. How's that for "good news, bad news"! (That's why the talk about "what if China stops buying our bonds?" is off-base. Our bonds are in greater demand than ever right now--bid down to minute yields--because we, who are falling apart at the seams, are still the best investment. If China stops buying our debt it will most likely be because they're out of $$$... they are in deep trouble right now.)

Here's a pet example of mine of the sort of thing that puts Europe in an even scarier position than we where we are: No US bank has meaningful exposure in the former USSR countries. Almost all European banks do. Almost all debt, public and private, in the former USSR zone will most likely be defaulted on before this thing is over.

Notice in this hair-raising WASHINGTON POST article from today that everyone is showing 6% annualized contraction in the 4th quarter. We will too, when our numbers come out.

There's a reason 6% annualized contraction is not just the flipside of 6% annualized growth: Pretty much by definition there is not enough money in the world to pay the interest on outstanding debt. When a bank creates money through loans it creates the principle but not the interest. The difference has to come from economic growth. (A simplification, but a useful one.)

So even flat 0% global growth is an absolute disaster. Even 0% is enough to set off a cascade of defaults. I'm pretty sure we have never seen anything like -6%. (I don't think there's been a -6% quarter since the 1930s but maybe there was a stray quarter like that in 1982?)

Downturn accelerates as it circles the globe
Economies worse off than analysts predicted just weeks ago

By Anthony Faiola Jan. 24, 2009

The world economy is deteriorating more quickly than leading economists predicted only weeks ago, with Britain yesterday becoming the latest nation to surprise analysts with the depth of its economic pain.

Britain posted its worst quarterly contraction since 1980 on the heels of sharper than expected slowdowns reported from Germany to China to South Korea. The grim data, analysts said, underscores how the burst of the biggest credit bubble in history is seeping into the real economies around the world, silencing construction cranes, bankrupting businesses and throwing millions of people out of work.

"In just the past few days, we've had a big downward revision, we're seeing that an even bigger deceleration is on the way than we thought," said Simon Johnson, former chief economist at the International Monetary Fund and a senior fellow at the Peterson Institute for International Economics.

The depth of the troubles, analysts say, indicates that nations may need to spend more than the billions of dollars already planned on stimulus packages to jump-start their economies, and that a global recovery could take longer, perhaps pushing into 2010. Analysts are particularly concerned about the slowdown in China and the recession in Europe.

http://www.msnbc.msn.com/id/28823013 /

[leftstreet]

1. "a cascade of defaults"

Hmm...

[Kurt_and_Hunter]

3. Yup. A lot of defaults are not at all the debtor's fault.

Say I have a business loan that is well within my means to pay assuming my customers pay their bills.

My customers stop paying their bills.

Now I have no money to pay on my loan!

Republicans line up to say I am a bad businessman... blah, blah... survival of the fitest...yadda, yadda.

But I did nothing wrong other than fail to fully anticipate the situation other people would put me in.

Next thing you know my bank goes under, and so on.

The economy is finely tuned to expected default rate tolerances. Exceed those assumptions and it's a feedback loop whirling downward.

[jkshaw]

2. Lord, what a mess ...

[PBS Poll-435]

4. I would like to see Moodys and the S&P people testify before Dodd's and Rockefeller's

Committees.

[Kurt_and_Hunter]

5. About bond rating practices?

What should we want them to be asked?

[PBS Poll-435]

6. Not just bonds

Commercial paper and other long term debt instruments.

I think that they have been playing "favorites" for quite a while now rather than dispensing factual and accurate advice concerning the financial solvency of some of America's companies.

[Kurt_and_Hunter]

7. The article mentions the rating of government paper in Greece and Ireland. What it

doesn't get into is why Greece and Ireland are almost powerless to do anything. They don't control their own currency!

The birth of the Euro happened during a boom period and a lot of the implications of a central currency in such a diverse range of nations are only now being tested.

(Not a response to what you wrote. Just riffing on the associations)

[Kurt_and_Hunter]

8. CLARIFICATION: The statement that 0% growth is a disaster refers

CLARIFICATION: The statement in the OP that 0% growth is a major disaster refers to sustained 0% growth. One flat quarter is unlikely to trigger a default cascade because though we run close to tolerances we don't run THAT close.

A flat year, though, is a major problem. And any sustained contraction risks a default cascade

The general point is that the baseline for our economies is 2-4% growth (depending who you ask), not 0%. So 6% growth is only two or four points above target but 6% contraction is a whopping 8-10% below target.

[JVS]

9. USA USA USA!

[Zynx]

10. I think 1945 or 1946 was a really bad year for GDP.

One of them was something like -11%.

[Kurt_and_Hunter]

11. Yes, though that was relative to full world-war mobilization

We had massive unemployment because millions were decommissioned from the military. Plants had to shut down to retool from bombers to cars, etc. There were dislocations but 89% of our peak war-footing was still impressive in absolute terms.

What makes this situation so scary is that we are declining from an economy that wasn't great to begin with so the Fed is already largely disarmed. We cannot cut rates below zero, for instance.

So we are rolling off a very low table... a Bush era economy that hasn't been producing jobs even in times of okay GDP.

[Zynx]

14. Actually, Bush's GDP growth wasn't even average. It was at best high 2%s when things were

not a disaster. His presidential average going into 2008 was only something like 2.3%. As such it is no mystery we haven't produced jobs.

[avaistheone1]

12. If we have to spend money. I think Congress needs to take time and seriously study

the various ways our economy can be stimulated. They want to rush on the bandwagon of the existing Dem proposal - the effectiveness of that proposal is widely in doubt.

[Zynx]

15. Time is not something we have in great abundance. If we wait, say, four months

we may face 12% unemployment instead of 10%.

[avaistheone1]

16. We may face over 20% if we take on an economic stimulus we are not convinced will work.

We don't have alot of silver bullers to waste.

Haste makes waste in this case too. jmo

[Zynx]

17. Any amount of government investment at this point will have some positive effect.

I disagree with your very assertion that a less than ideal stimulus bill could make the economy worse.

[avaistheone1]

18. It could makes things worse and we only have so much money.

This problem did not develop in a few weeks, or a few months. Our Congress and our Senate need to get their hands dirty and dig into this and do it a thoughful, intelligent way.

They haven't even clearly identified the key problems or the solutions which best address them.
They keep acting as though this stimulus is just for the short term. I think their lies their folly. I think the problem is greater and more systemic than they are willing to entertain.
I think that kind of thinking will doom their efforts.

jmo

[Zynx]

19. We can probably borrow another 3-4 trillion without running into too much difficulty.

At this point, I want some kind of stimulus bill to get some demand growth in the economy. We can revisit it later. I would hate to see Congress debate until July and get nothing out. For one thing, the states will go broke. They have to act soon.

[acmavm]

13. I'm sick of this shit. Let it go under. We cannnot get a hold on the problem

and the problem is debt that came from crooks betting that the loans they made would go into default and then selling those bets.

Cancel the debt, let it go. BECAUSE NO ONE AND NOTHING IS HELPING THE MIDDLE AND LOWER CLASSES. THEY'RE ALL TOO BUSY HANDING OUT MONEY TO LIARS, CHEATS AND THEIVES.