Paul Krugman has emerged as Obama's toughest liberal critic. He's deeply skeptical of the bank bailout and pessimistic about the economy. Why the establishment worries he may be right.
By James Sterngold
March 27 (Bloomberg) -- The Obama administration’s plan to remove distressed assets from bank balance sheets may take three months to begin operating, risking further deterioration in the value of the securities and driving up rescue costs.
DoctoRx here: It's a good thing this turkey might just never get off the ground, because Geithner subsequently said:
“To get out of this we need banks to take a chance on businesses, to take risks again”.
Econblog Review begs to differ. Banks took far too many risks. If you go the track or Vegas, take risks and lose, and then have to go to your rich Uncle named Samuel for a loan. This is especially soon when Uncle is financially stressed, has a large family which increasingly is looking to borrow or get a gift of his money, and when Uncle Samuel's family thinks you've been wasting to much money already and just don't deserve more of his.
Conclusion: Geithner must go. The day his "resignation" is announced, I may turn wildly bullish, especially if he is succeeded by a Volcker type, meaning someone who actually believes in fiscal sobriety and wants to encourage saving, not borrowing.
Meanwhile, let's look at some economic statistics.
World trade is collapsing:
Global trade shrinks 20% since October – Speed of decline greater than during Great Depression
The best authority on real time global trade data is the Netherlands CPB Institute, which yesterday published its January trade data. Global trade are now down 20% since October. This is not annualised but actual. In other words, global trade volumes are down by a fifth compared to pre-crisis levels. FT Deutschland quotes a CPB staffer as saying this is faster than during the Great Depression (the estimates there range from 25-35% during 1929 and 1932).
In particular, Japan is in a special kind of economic Hell:
March 30 (Bloomberg) -- Japanese industrial production fell for a fifth month in February, the longest losing streak since 2001, as exports collapsed.
Factory output declined 9.4 percent from January, when it plummeted a record 10.2 percent, the Trade Ministry said today in Tokyo. Inventories fell an unprecedented 4.2 percent. . .
Japan’s exports plunged a record 49.4 percent in February from a year earlier as sales of cars and electronics dried up. Toyota Motor Corp., forecasting its first net loss in more than five decades, plans to cut thousands of jobs and slash domestic production by half this quarter. . .
Prime Minister Taro Aso is preparing his third stimulus package since October to counter the slump. Finance Minister Kaoru Yosano said on March 22 that a plan of as much as 20 trillion yen, double the total amount pledged since October, is “not out of line” as the economy heads for its worst recession since 1945.
“The longer this stretches out, the harder the domestic economy is going to be hit,” said Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo. “The government really needs to come out with another package.”
DoctoRx here. EBR begs to differ with Martin Schulz. The government has been "stimulating" the unstimulatable for many, many years. Japan's problems are not complicated. First, it has an old population that gets older by the day and that is certain to shrink in number as the years go by. So there is no growth, nowhere, no-how. So its economy needs to be geared for sustainablility, not stimulus. Probably it should pay down debt and invest in growing areas. It could purchase Brazilian reals, Brazilian land, the Indian rupee and good businesses in India, growth areas in China at the right price, etc. It should NOT follow either the example or advice of the country that continues to occupy it and print and borrow money to keep the financiers rich.
Speaking of Japan having its worst "recession" (think Depression) since 1945:
-- The U.S. jobless rate climbed in March to the highest level since 1983 and manufacturing shrank, putting the recession on the brink of becoming the longest in seven decades, economists said before reports this week . . .
Unemployment jumped to 8.5 percent from 8.1 percent in February, according to the median estimate of analysts surveyed by Bloomberg News before the Labor Department’s April 3 report. The figures may also show payrolls fell by 660,000 workers, bringing total job losses since the contraction began to 5 million.
DoctoRx again. Don't be surprised if unemployment "only " jumps to 8.3 or 8.4% and Big Finance "economists" try to spin this as good news because it is "less than expected". Focus on this being the longest economic banana since the 1929-32 "recession" (as it would called today). When that ended, the trailing yield on the Dow 30 was 11%, stocks sold well below tangible book value, and forget about the Dow being at merely a 12 year low and within the range of 6 years ago, as it is now. Who knows where things could go, but think about things another way.
The Economic Cycle Research Index of coincident indicators ("CI"), those that reflect how the economy is faring in real time, was at about 25 "units" 60 years ago. At that time, the Dow was around 300. That is a ratio of 12:1 Dow:ECRI CI. The ratio was about 10-12:1 until the early 1980's, when it began an inexorable rise to close to 100:1 at the market peak in 2000. This ratio is only down now to about 55:1.
In EBR's opinion, the stock market indeed is a weighing machine in the long run, and most people should ignore its short-term fluctuations. Right now, there are too many economic and valuation trends and ratios that argue for caution to allow a proper margin of safety for most people or institutions that need their savings to risk much of them in publicly owned common stocks.
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