From the just released FOMC minutes:
In the forecast prepared for the meeting, the staff revised down sharply its outlook for economic activity in 2009 but continued to project a moderate recovery in 2010. Real GDP appeared likely to decline substantially in the fourth quarter of 2008 as conditions in the labor market deteriorated more steeply than previously anticipated; the decline in industrial production intensified; consumer and business spending appeared to weaken; and financial conditions, on balance, continued to tighten. Rising unemployment, the declines in stock market wealth, low levels of consumer sentiment, weakened household balance sheets, and restrictive credit conditions were likely to continue to hinder household spending over the near term. Home building was expected to contract further. Business expenditures were also likely to be held back by a weaker sales outlook and tighter credit conditions. Oil prices, which dropped significantly during the intermeeting period, were assumed to rise over the next two years in line with the path indicated by futures market prices, but to remain below the levels of October 2008. All told, real GDP was expected to fall much more sharply in the first half of 2009 than previously anticipated, before slowly recovering over the remainder of the year as the stimulus from monetary and assumed fiscal policy actions gained traction and the turmoil in the financial system began to recede. Real GDP was projected to decline for 2009 as a whole and to rise at a pace slightly above the rate of potential growth in 2010. Amid the weaker outlook for economic activity over the next year, the unemployment rate was likely to rise significantly into 2010, to a level higher than projected at the time of the October 28-29 FOMC meeting. The disinflationary effects of increased slack in resource utilization, diminished pressures from energy and materials prices, declines in import prices, and further moderate reductions in inflation expectations caused the staff to reduce its forecast for both core and overall PCE inflation. Core inflation was projected to slow considerably in 2009 and then to edge down further in 2010.
What's really going to happen:
Because the Fed fears a deep, deep recession, they will print and print more money. This means that the recession will be over much earlier than they foresee, sometime before the end of 2Q 2009. Inflation, not deflation, will be a major problem in 2010.
What's really going to happen ...
ReplyDeleteI respectfully disagree.
The economic disruption we are going thru this year was something I have known was coming for more than 10 years - there is a human psycho-social cycle, seperate from things like the Kondratieff or Elliott Wave stuff, that is based on an idea called a saeculum.
The Etruscans used it to predict exactly when their own civilization would collapse (after 800 years). It's a pretty simple idea - the saeculum is a cycle 80 years in length because that is the length of a long human life, and each society uses the knowledge of it's elders to avoid problems. When the elders die off, the problems begin to repeat.
The Great Depression was 79 years ago. What you are experiencing right now is another GD. The Fed printing like a madman is going to have the same effect as the Fed dropping interest rates for the last year and a half - i.e. nothing more than a slight delaying effect.
Two other things to think about - go look at a comparison chart for 1929 and the end of 2008:
http://i38.tinypic.com/2s0048z.jpg
We are going to pop back up near the 200 MA this spring (Obama rally will be the excuse of the pundits) and then we will go down fairly steadily - never popping over the 200 again - till we hit an SPX bottom around 170 in the summer of 2011 (corresponding to the 1932 bottom). After the Spring '09 rally we will have an especially brutal Fall '09 crash - I figure from about 900 down to 600 SPX.
We can check back in Dec '09 to see which theory, yours or mine, was correct.
One more thing - go back and look at US war history a bit closer:
1780 Rev War
1860 Civ War
1940 WWII
WWI was a minor war for the US - my grandfather was in it and he bitched all his life about 'All we did is go over to france and build a radio station, then the goddamn war was over.'
2020 is another big war for the US if the saeculum theory (from the Fourth Turning book) is correct. I think another GD is what is going to propel us into it. Just like last time - 10 years of grinding depression and you'll have everyone lining up, eager to go to war again. Gotta have some outside agency to blame your own problems on - couldn't possibly be the fault of the American people themselves, their greed, their arrogance, their cruelty.
So consider that if, in Dec '09 I end up being right, then you might want to consider this prediction as well.
kochevnik
RW,
ReplyDeleteWhy are you ruling out the possibility of an inflationary recession? What if we get price hikes of 15% but nominal GDP increases of only 10%? Thus the Fed would be right in predicting negative real GDP growth, and you (and I) would be right in predicting price inflation.
Bob,
ReplyDeleteI am not completely ruling out stagflation. However, I believe Hayek and Rothbard based their theory of stagflation as being when a central bank inflates, but not enough to maintain a consumption-savings ratio that remains in favor of savings.
In the current condition think the Fed will print enough to overcome this problem. That said, I, of course, recognize that hyper-inflation totally wrecks an economy, but we are not there just yet.