November 13, 2008

How big is the recession/depression going to be?

I haven't seen too many people try to calculate how big a recession we need to have -- i.e., if the government manages both to prevent a short-term liquidity crisis from wiping out half the economy and if the government doesn't inflate us into a new bubble that just means we'll have a bigger reckoning later. In other words, under the best case scenario, how much does the economy have to contract?

A super simple model would be to look at how much poorer we turn out to be than we thought we were. For example, say our wealth, such as real estate and financial instruments, is actually worth only 70% of what we thought it was worth 18 months ago.

Then, how does the wealth effect translate into economic activity? People who were taking vacations to Las Vegas by refinancing their mortgage to tap their rise in home equity probably aren't going to be going to Las Vegas for awhile.

If we're, say, 30% poorer now than we thought we were, how much less economic activity does that support? That's a difficult question, but it seems like one that's guessable.

So, just to toss out a round number, let's say that 70% as much wealth translates into a 90% as large a GDP.

So, what kind of recession does that look like? Say, a three percent decline in GDP for three straight years. That's a humongo recession. And that's the best case scenario.

Of course, I just made all those numbers up out of thin air.

Anyway, I'm not making a forecast, I'm just tossing out a framework for back of an envelope calculations.

My published articles are archived at iSteve.com -- Steve Sailer

31 comments:

Anonymous said...

Steve,
This isn't exactly a comment on the recession but I think it is relevant in the sense that it shows how very, very, very far we have drifted as a nation. I know Joel Kotkin is a neocon and he is way too open borders for my taste but he does typically have some interesting things to say about California (and America for that matter). I'm a Jersey boy myself but when I watch movies depicting California from even the early 1990s, such as Father of the Bride, I can't stop saying to myself, "How the Hell does this state have problems?!?!" It just doesn't make sense....

http://www.american.com/archive/2008/november-december-magazine/sundown-for-california

Harry Baldwin said...

Now that it's clear that our politicians and Nobel-prize winning economists had no idea that this was coming or what to do about it, on what assumptions should the individual plan for his future? Who would have expected the gas prices to collapse, or the dollar to rise against other currencies? Peter Schiff, Ron Paul's economic adviser, is the only economist who now appears prescient. His analysis from 2006-2007 at http://www.youtube.com/watch?v=2I0QN-FYkpw is dead-on, and it's a hoot to watch people like Ben Stein and Arthur Laffer deride him as a wacko as they paint their rosy scenarios. On the other hand, Schiffer advised people to buy gold, and gold has been dropping.

Does it make sense to make a contribution to the SEP plan this year, when the government may end up nationalizing private pension plans as did Argentina? Where else is it going to find funds to draw upon? With what has happened in the last six weeks, this Third-World-type scheme no longer sounds implausible to me.

I scoffed at those folks who were bailing out of the stock market when it dropped below 11,000, but do they look so dumb now? When are we going to see the DOW at 12,000 again? There are a lot of people like me that will be happy to cash out it gets anywhere near that again, and we won't be putting our money back in in a hurry.

king obama said...

It's hard to come up with forecasts of how long recessions will last. Everyone gets it wrong because there are too many variables and unknowns. Your "back of the envelope" calculation is pure bullshit.

Please, Steve, stick to writing movie reviews and talking about IQ. You sound like a fool when you deviate from those topics.

Reg Cæsar said...

People who were taking vacations to Las Vegas by refinancing their mortgage to tap their rise in home equity probably aren't going to be going to Las Vegas for awhile.

No, they'll be spending their money closer to home. That's why it will pay to be in the right business.

Anonymous said...

Peter Schiff, Jim Rogers and the folks at DailyReckoning.com have for the most part been SPOT ON! It's actually quite scary to read Schiff's "Crashproof" written at the beginning of 2006 and seeing now that the vast majority of his predictions have played out. Gold could still go up if the dollar tanks, which it certainly might. Essentially, Schiff, Rogers and the Daily Reckoning said one simple thing that somehow evaded the minds of our Nobel Laureates: You cannot maintain an entire economy based on debt and consumption. Prosperity only blooms in an economy based on production and savings.

Indra Maghavan said...

Even the mainstream business pages are calling this the worst recession since "in the post war years", i.e., since the Great Depression. The retail sector is being annihilated as we speak.

Wow, shock of shocks, it turns out you cannot support an economy with only retail jobs and restaurants! Who woulda guessed?

At least our Democratic Congress should have the gumption to enact some protections for our industries, so we can have a chance to rebuild our industrial base.

When Americans can't even get jobs selling cheap junk, you know the gig is up.

Anonymous said...

No one is even mentioning the fact that social security starts paying off boomers in what, 4 years?

Tsoldrin said...

What if this economic crisis were planned from the beginning? The wealthy always do well in such times. They have no need to sell off tangible assets to survive, while others are forced to. They also, regardless of economic times, usually have the cash to purchase such tangible assets. When and if things turn around, tangibles will skyrockets in value.

Hmm.

ziel said...

That would be unprecedented - negative growth over a 3-year period has never happened in the U.S. in the post-war period.

Still, the good news is even a reduction of 10% in our GDP would still only make us as bad off as Switzerland.


Link

Lucius Vorenus said...

I'm a Jersey boy myself but when I watch movies depicting California from even the early 1990s, such as Father of the Bride, I can't stop saying to myself, "How the Hell does this state have problems?!?!"

If you want to watch a movie which will really break your heart, then check out The Endless Summer.

Reg Cæsar said...

Peter Schiff, Jim Rogers and the folks at DailyReckoning.com have for the most part been SPOT ON! --anonymous

I'd be a little more comfortable with Jim Rogers if he weren't a drinking buddy of George Soros. (Did he sell short again at just the right time?)

Lucius Vorenus said...

I know Joel Kotkin is a neocon and he is way too open borders for my taste but he does typically have some interesting things to say about California (and America for that matter).

http://www.american.com/archive/2008/november-december-magazine/sundown-for-california


Okay, I just skimmed that essay, and I want my five minutes back.

Anonymous said...

I read the Kotkin article and see it as a preview of what will happen to the nation writ large under Obama / Reid / Pelosi.

"California’s shift to the Democrats had become inexorable and, with the fading of a GOP counterweight, influence within the party flowed to its more radical factions further to the political left. As a result, the state moved decisively away from the economic growth focus of Pat Brown. It seemed determined to wage war against its own economy. As pet social programs, entitlements, and state employee pensions soared, infrastructure spending—the hallmark of the Pat Brown regime and once 20 percent of the state budget—shrank to less than 3 percent.... The educational system, closely aligned with the Democrats in the legislature, accelerated its secular decline.... Instead of reversing these trends, the state legislature decided to spend its money on public employees and impose ever more regulatory burdens on business."

Doesn't that sound like what we're about to see on a national level?

Pat Shuff said...

Just ask Harry Schultz. Or Howard Ruff. Or Jim Dines.
All three advisers, each of whom has been editing an investment newsletter at least since the 1970s, have built their investment careers by questioning conventional wisdom's trust in the soundness of the financial system. Not surprisingly, all three have been vociferous champions of gold and other precious metals.

Of the 181 newsletters on the Hulbert Financial Digest's monitored list, these three advisers' newsletters are in 173rd, 175th, and 176th places for year-to-date performances through October 31, with losses ranging from minus 64.9% to minus 70.0%.

http://www.marketwatch.com/news/story/some-advisers-lose-big-despite/story.aspx?guid=%7BD1D98B9B%2DF8A6%2D4174%2D9563%2D38B2439A6090%7D&dist=morenews

~~~~~~~~~~~~~~~~~~~~~~~

The irony of the doom and gloomers who chanced upon getting it right, including Schiff, is that they have _managed_ to lose a far greater share of their clients' and subscribers' capital than a buy and hold index fund.
Personally, they have lost it all, on paper, year to date, verified by checking up on required SEC filings.
They consumed their own cooking to a far greater, riskier degree than the needs, tolerances, and horizons of their clients.
Their book and newsletter sales continue to do well.

Lucius Vorenus said...

Harry Baldwin: Now that it's clear that our politicians and Nobel-prize winning economists had no idea that this was coming or what to do about it, on what assumptions should the individual plan for his future?

Suppose you were a citizen of Rome - a youngish citizen, say - in the general timeframe of 425AD, and you were asking yourself the same question: Where do I invest for the future?

Then fast forward through your life another 30 or 40 years, through Aetius's triumph over Attila, and Aetius's murder at the hands of Valentianian, and the chaos which followed Valentianian's assassination the following year, and what would you have learned about your plight, circa 455AD to 465AD?

The answer is that you would have learned that you had made a terrible mistake back in 425AD when you assumed that you ever had a future in the first place - the truth of the matter was that the demographic foundation had already been laid for your ruin, even before you were born, and there was never anything you could have done to alter any aspect of your fate.

And if your ghost were doomed to walk the streets of Rome for all eternity, then you would also have come to learn, over time, that there wouldn't be anything in greater Italy worth investing in for a good 'nother millenium after your death.

Which, tragically, is the problem we face today, everywhere in the civilized world, as nihilism exerts its power, as once-goodly peoples embrace Death, and as the great nations of the world begin to cede their places, fade away, and disappear into the annals of forgotten time:

List of countries and territories by fertility rate
en.wikipedia.org

IQ and the Wealth of Nations
en.wikipedia.org

Welcome to the dawn of the Second Dark Age.

PS: Remember that the most important rule about hopeless situations is to first admit to yourself that the situation you face is indeed hopeless.

Only after admitting the hopelessness of your plight can you begin to formulate an exit strategy, and only with an exit strategy can you [and your loved ones] have any hope of avoiding extinction.

Henry Canaday said...

Okay, if Steve Sailer and Steve Wynn are sponsoring a pool, with truly Vegas-level prizes for winners, put me down for:

- Cumulative decline in real GDP in trough: 2%

- Maximum unemployment rate shortly after trough: 8%

Now, I would like to see a real depression, since that would mean declining price levels, and I could earn a 10-15% real return on my government-backed CDs. And I know Steve would like to see a depression, since that would mean Hollywood has to make good movies again, so he doesn't have to sit through self-indulgent obscurities and try to make sense of them.

But life sometime disappoints.

Anonymous said...

It's going to be horrible.

Twenty-somethings in outside sales will no longer drive around in leased 528i's. Dad may be forced to choose between the boat and the ATV's. Mom will be sitting in the carpool line in a two-year old Honda instead of a straight-off-the-lot Tahoe. People will buy Levi's at Target for $20 instead of plunking down $200 for blue jeans at Saks--gay men will be too ashamed to leave their 15th floor condo's.

I don't even want to live any more.

--Senor Doug

RobertHume said...

"No one is even mentioning the fact that social security starts paying off boomers in what, 4 years?"

Just a technical point ... there is a looming crisis with the boomers, but it is not social security, it is Medicare. See Dean Baker's blog, for example.

Argent Paladin said...

As a back of envelope calculation, you have to account for the continued baseline growth of GDP. For example, suppose that we should be at 90% current GDP. Well, since GDP "naturally" grows at 2-3 percent, we could just have 0% growth for 4 years. No recession necessary, even with the GDP being overvalued by 10%. That's why a previous commenter is correct: we've never had three consecutive years of -3% growth since that would imply that the GDP is not 9% overvalued, but closer to twice that.

Big Bill said...

Pack your bags, baby. It is going to be a long stormy night. At least three years, but possibly a decade.

Once the baby boomers realize all those little Mexican babies are not going to wipe heir bottoms in retirement AND they are going to have to keep working into their 70s to support them all, it is going to come as quite a shock.

I told my 77 year old dad he is lucky. He is the last generation of white men to get a pension. It ain't white folks country anymore.

I would say "go read South Africa Sucks" to get a taste of life as a white minority, but they took the site down this week. They don't want us to see it coming, I guess.

Born Again Democrat said...

Roubini has an excellent post up today on that very subject. He is the best.

http://www.rgemonitor.com/roubini-monitor/254419/20_reasons_why_the_us__consumer_is_capitulating_thus_triggering_the_worst_us_recession_in_decades

AS said...

Peter Schiff got the housing and U.S stock market crash right, unfortunately he made a huge mistake by believing in decoupling, hyperinflation and dollar crash. Those who followed his advice lost even more money than they would have otherwise. (In the long run however Schiff might still be right.)

But why not listen to people whose advice was much better, for example Mike Shedlock who predicted not only the U.S. crash but the global crash and dollar rally as well.

He has a great takedown of Schiff here-

Peter Schiff Hugely Right, Enormously Wrong as Hard Landing Hits China

Schiff jumps off the deep end with a "print print print" rant about hyperinflation, a huge rant against Obama, talk of recovery in his funds, and finishing up with "There is no way the dollar can possibly survive what is coming".

The big thing Schiff missed this year was in his decoupling theories. Schiff invested as if the US would crash and that everything else would be fine. The decoupling theory never made much sense. To believe in decoupling is to believe the tail wags the dog. And instead of saying how much his fund is up off the lows, he ought to disclose precisely how his anti-dollar fund plays are doing this year.

What happened was that although the US stock market collapsed, China, India, Iceland, Japan, the UK, and numerous other places collapsed more. So when the dollar rallied on top of that, investments in those places got mercilessly hammered.

Even though the US dollar index fell from 120 to 70, Schiff was still looking for a collapse of the dollar. It had already collapsed.

Schiff ignores monetary printing in China, huge bank bailouts in Europe, housing bubbles in Australia, Canada, Spain, and the UK, all bigger than in the US. The stock market bubbles outside the US were even bigger than the stock market bubble here.

Furthermore, there has been more monetary printing in China this year than in the US. And as noted above China just announced the same reckless measures the US did in trying to stimulate the economy.

The UK and ECB are doing the same thing (bailing out banks), and the UK is arguably in much worse shape than the US overall.

Finally, there were many signs the US dollar were going to rally and those signs were pointed out in real time on this blog.

One thing that is for certain is that nearly everyone, especially Schiff, failed to see the deflation we are now in. And rest assured it is deflation that central bankers across the globe are fighting.

Schiff needs to get off his anti-Obama, anti-dollar mindset and take a look at the global economy and problems elsewhere, especially in China, the UK, and the Eurozone. That video proves he is not capable of doing so. It equally proves he does not fully understand the deflationary forces of Peak Credit and the global debt unwind that are happening.

Black Sea said...

"Please, Steve, stick to writing movie reviews and talking about IQ. You sound like a fool when you deviate from those topics."

This comment reminds of one some months ago in which a guy said something like, "Steve, shut the fuck up about the bubble! You do not understand this topic!"

That was the extent of the comment, at least as I remember it. No rebuttal. No explanation of how or why Sailer might be wrong. Just "Shut up!"

You might provide a little commentary for the rest of us to think about regarding what you take issue with in the original post. Otherwise, there isn't much point in making the comment.

I agree with roberthume's point about Medicare being the real looming issue regarding boomer retirement, but my understanding is that Medicare is actually a part of the Social Security system, and so both the pension and health care components could collectively be described as "Social Security."

I may be mistaken about this, I realize.

Anonymous said...

Of course it is clear that we are heading in to a recession / depression.

The real issue is, how much will crime escalate as a result?

Why shouldn't we assume that crime in the San Fernando Valley won't go through the roof, with a dramatic increase in burglaries, home invasions and carjackings?

How logical is it to live in the San Fernando Valley, vs living in a part of the USA that lacks an "underclass"

Let me put it another way, where in the world can i live and still enjoy the amenities of a city and get away from the coming apocalyptic crime wave?

If i were of Japanese ancestry i would certainly go live in Japan. Crime there is going to stay very small vs. San Fernando Valley or LA.

If I spoke Danish I would move to Denmark - Denmark not only has low crime but has wisely decided to not rush to become an islamic state (unlike much of Western Europe)

But as a person that can only speak English, Where is the best place to live if my only concerns are having the amenities and attractions of a city nearby and also avoiding the anarchy and crime that is sure to engulf Southern California ?

Harry Baldwin said...

lucius vorenus, I enjoyed your erudite and doom-laden response to my questions about planning for the future, but I still think the individual may take steps to provide for himself despite the fact that his society is doomed. For example, a German Jew who cashed out and left the country in 1936 made a good decision. There are good decisions I might be making right now if I had a clearer sense of where this calamity is headed. Unfortunately, as the wise yogi once said, "Prediction is very hard, especially about the future."

Roger Chaillet said...

Steve should have mentioned Dr. Gary Shilling of Forbes. http://www.forbes.com/intelligentinvesting/forbes/2008/1110/050.html

Interested readers can read all of his old columns at Forbes.com.

He's been spot on with his prognostications.

Ronduck said...

Big Bill said...

I would say "go read South Africa Sucks" to get a taste of life as a white minority, but they took the site down this week. They don't want us to see it coming, I guess.

The owners of Why South Africa Sucks have now bought their own domain so that they won't be silenced again. They are now located at:

http://www.zasucks.com/

none of the above said...

Models of complicated systems are almost always based on looking at what's happened before and predicting that things will be kinda similar this time. That often works, but I don't think it does now--I don't believe anyone has a good model for where we're going, because so much has changed so dramatically since the last time we faced a huge financial and economic crisis. The US and the world are radically different in hundreds of ways from what they were in the 70s' stagflation, say, or the Depression. The rise of China and India, the withering of a great deal of US manufacturing, the change in demographics (both age and race), the fraction of our workforce here illegally, the massive shift in female employment, the age-related upcoming massive outflow of government money for Medicare and SS, the widespread use of computer-assisted trading in markets--all those and many more things make this situation fundamentally different from any other.

The system is too complex to model from first principles. And we're in a region of the system's behavior that doesn't let us predict what will happen next from previous behavior, because we haven't seen this system in this state before. So, economists and financial insiders and regulators and politicians all have a different song every day about what's going on and how to fix it. They don't come to any consensus, because they just flat don't know what they're talking about. Everyone in the world concedes that Bernake and Paulson are genuine, proven world experts on this stuff, and yet it's plain as day watching them that they have only a vague idea what the hell they're doing, that their plans and rhetoric change every week or two as stuff they try doesn't work the way they expect.

This is a good time to stop trying to predict the expected size of the decline, and instead to recognize that far-off-in-the-tails seeming events are possible, because your model is f--king broken. I claim that given our current knowledge, we can't rule out Iceland style national bankruptcy (it would look different here, but we're basically a bank--the Treasury borrows short and spends long), or a massive economic collapse, or an economic downturn that drives some amazing level of innovation in technology that rescues us. We just flat can't know, because our model is so thoroughly broken.

Anonymous said...

One of the differences with the great depression and previous ones is that in the 1930s the majority of the population was living in cities. The majority of the population now lives in suburbs vs. cities or rural America.

Crime is much worse now, especially violent crime. The family is fragmented and in many cases non-existant. We also are much more diverse, diverse meaning that we will never have any sort of National consensus.

Lucius Vorenus said...

Harry Baldwin: There are good decisions I might be making right now if I had a clearer sense of where this calamity is headed.

For the last year or so, I had been working on a theory of investment strategies in the face of prevailing extinction-level fertility rates:

List of countries and territories by fertility rate
en.wikipedia.org

IQ and the Wealth of Nations
en.wikipedia.org

I knew that eventually The Left would make a power grab and attempt to seize control in the face of a collapsing American socio-political infrastructure, but I thought that the timeframe for their power grab would be more like 2016 to 2020 - I didn't think that a demagogue like Obama would be able to rise to power quite as soon as January of 2009 - I had been thinking that we would have another six or eight years to prepare for the rise of such a figure.

But don't kid yourself - if Obama rules the way he has very consistently claimed throughout his entire life that he would rule [as sort of a Luddite Maoist - which I guess maybe you would call a "Potist"], then there won't be any opportunities for "investment" in the USA.

Now you might think that maybe a nation such as China would offer some hope for the future of the species [paradoxically - or counterintuitively - given their historical flirtation with Maoism], but, as things stand right now, nihilism has an even stronger hold in China than in Blue America:

China orders termination for mum-to-be
news.com.au

A STORM of international protest is building over a Chinese ruling that a Muslim Uighur woman who is six months pregnant must have an abortion or lose her home.

Chinese authorities have ordered Arzigul Tursun, who is 26 weeks pregnant, to abort her unborn child because she has two other children...

China says its population would have risen far more if 400 million abortions had not been performed in the past three decades.


Any reader of iSteve who is no more than about 40 years old, and who experiences a fairly normal lifespan [for another 40 or 50 years], will live to see the collapse and the disappearance of the Chinese nation - that's a mathematical certainty, just as sure as the sun will rise in the morning & set in the evening.

[Which is not to say that we do not have natural allies in China - we do have natural allies in China, but they are still a relatively small minority of all Chinese people, and, for the foreseeable future, we will be a minority in the USA.]

Look, the bottom line is that things are about to get very ugly - I can't talk too honestly about this even at iSteve, for fear of being censored [Steve often censors up to half of all my posts] - but the American welfare state is about to collapse, and half of all children in the USA now have IQs so low that they cannot reasonably be expected to master basic literacy, and Blue America [which controls all of our institutions] is suicidally nihilistic, so, as I said above, don't kid yourself: The coming years are going to be hell on earth.

But that's not to say that we can't survive - it's just that there won't be an easy avenue for our survival.

On the other hand, our ancestors faced these same sorts of dilemmas themselves, and after the Stamp Act, the Sugar Act, and the Tea Act, they decided that they'd had enough.

So before too long, we will learn whether we deserve to live as citizens in a free republic, or whether we deserve to live as slaves.

If nothing else, though, it will certainly make for a more interesting conclusion to our lives than would have been the case had we merely gotten old, fat, and gray - eventually collapsing & dying from the sheer boredom of playing endless games of shuffleboard in the retirement compound.

PS: Harry Baldwin, if you do not already own a gun or a rifle [or guns and rifles], then the most important investment you can make right now is in guns and rifles and ammunition.

If you have a spare $5000 or so you want to sink into something right now, before Obama takes power, then I'd purchase "assault" shotguns and "assault" rifles and heavy caliber handguns and as much ammunition for them as I could afford.

[I myself made a large purchase of high-velocity ammunition just before the election.]

PPS: I'd also be looking into fake identification - I would give serious thought to purchasing [or creating] some fake social security numbers and thereby inventing one or two more identities for yourself - could you plausibly pass as, say, a Mexican immigrant, maybe an Henrique Banderas, rather than as just plain old white-bread Harry Baldwin?

Anonymous said...

Let me put it another way, where in the world can i live and still enjoy the amenities of a city and get away from the coming apocalyptic crime wave?

Almost anywhere you want - following a visit to the local gun store.

If i were of Japanese ancestry i would certainly go live in Japan. Crime there is going to stay very small vs. San Fernando Valley or LA.

My ancestors have been here between 280 and 12,000 years. I'm not leaving.