In the following Wall Street Journal commentary, "From Bear to Bull," a long-time critic of the excesses and wayward policies that brought this country to its knees suggests the outlook for the economy is brighter than many people, especially the pessimists, believe:
James Grant argues the latest gloomy forecasts ignore an important lesson of history: The deeper the slump, the zippier the recovery.
As if they really knew, leading economists predict that recovery from our Great Recession will be plodding, gray and jobless. But they don't know, and can't. The future is unfathomable.
Not famously a glass half-full kind of fellow, I am about to propose that the recovery will be a bit of a barn burner. Not that I can really know, either, the future being what it is. However, though I can't predict, I can guess. No, not "guess." Let us say infer.
The very best investors don't even try to forecast the future. Rather, they seize such opportunities as the present affords them. Henry Singleton, chief executive officer of Teledyne Inc. from the 1960s through the 1980s, was one of these enlightened opportunists. The best plan, he believed, was no plan. Better to approach an uncertain world with an open mind. "I know a lot of people have very strong and definite plans that they've worked out on all kinds of things," Singleton once remarked at a Teledyne annual meeting, "but we're subject to a tremendous number of outside influences and the vast majority of them cannot be predicted. So my idea is to stay flexible." Then how many influences, outside and inside, must bear on the U.S. economy?
Though we can't see into the future, we can observe how people are preparing to meet it. Depleted inventories, bloated jobless rolls and rock-bottom interest rates suggest that people are preparing for to meet it from the inside of a bomb shelter.
The Great Recession destroyed confidence as much as it did jobs and wealth. Here was a slump out of central casting. From the peak, inflation-adjusted gross domestic product has fallen by 3.9%. The meek and mild downturns of 1990-91 and 2001 (each, coincidentally, just eight months long, hardly worth the bother), brought losses to the real GDP of just 1.4% and 0.3%, respectively. The recession that sunk its hooks into the U.S. economy in the fourth quarter of 2007 has set unwanted records in such vital statistical categories as manufacturing and trade inventories (the steepest decline since 1949), capacity utilization (lowest since at least 1967) and industrial production (sharpest fall since 1946).
It isn't just every postwar disturbance that sends Citigroup Inc. (founded in 1812) into the arms of the state or has General Electric Co. (triple-A rated from 1956 to just this past March) borrowing under the wing of the Federal Deposit Insurance Corp. Neither does every recession feature zero percent Treasury bill yields, a coast-to-coast bear market in residential real estate or a Federal Reserve balance sheet beginning to resemble that of the Reserve Bank of Zimbabwe. Yet these things have come to pass.
Americans are blessedly out of practice at bearing up under economic adversity. Individuals take their knocks, always, as do companies and communities. But it has been a generation since a business cycle downturn exacted the collective pain that this one has done. Knocked for a loop, we forget a truism. With regard to the recession that precedes the recovery, worse is subsequently better. The deeper the slump, the zippier the recovery. To quote a dissenter from the forecasting consensus, Michael T. Darda, chief economist of MKM Partners, Greenwich, Conn.: "[T]he most important determinant of the strength of an economy recovery is the depth of the downturn that preceded it. There are no exceptions to this rule, including the 1929-1939 period."
Growth snapped back following the depressions of 1893-94, 1907-08, 1920-21 and 1929-33. If ugly downturns made for torpid recoveries, as today's economists suggest, the economic history of this country would have to be rewritten. Amity Shlaes, in her "The Forgotten Man," a history of the Depression, shows what the New Deal failed to achieve in the way of long-term economic stimulus. However, in the first full year of the administration of Franklin D. Roosevelt (and the first full year of recovery from the Great Depression), inflation-adjusted gross national product spurted by 17.3%. Many were caught short. Among his first acts in office, Roosevelt had closed the banks. He had excoriated the bankers, devalued the dollar, called in the people's gold and instituted, through the National Industrial Recovery Act, a program of coerced reflation.
"At the business trough in 1933," Mr. Darda points out, "the unemployment rate stood at 25% (if there had been a 'U6' version of labor underutilization then, it likely would have been about 44% vs. 16.8% today. . . ). At the same time, the consumption share of GDP was above 80% in 1933 and the household savings rate was negative. Yet, in the four years that followed, the economy expanded at a 9.5% annual average rate while the unemployment rate dropped 10.6 percentage points." Not even this mighty leap restored the 27% of 1929 GNP that the Depression had devoured. But the economy's lurch to the upside in the politically inhospitable mid-1930s should serve to blunt the force of the line of argument that the 2009-10 recovery is doomed because private enterprise is no longer practiced in the 50 states.
To the English economist Arthur C. Pigou is credited a bon mot that exactly frames the issue. "The error of optimism dies in the crisis, but in dying it gives birth to an error of pessimism. This new error is born not an infant, but a giant." So it is today. Paul A. Volcker, Warren Buffett, Ben S. Bernanke and economists too numerous to mention are on record talking down the recovery before it fairly gets started. They collectively paint the picture of an economy that got drunk, fell down a flight of stairs, broke a leg and deserves to be lying flat on its back in the hospital contemplating the wages of sin. Among economists polled by Bloomberg News, the median 2010 GDP forecast is for 2.4% growth. It would be a unusually flat rebound from a full-bodied downturn.
Our recession, though a mere inconvenience compared to some of the cyclical snows of yesteryear, does bear comparison with the slump of 1981-82. In the worst quarter of that contraction, the first three months of 1982, real GDP shrank at an annual rate of 6.4%, matching the steepest drop of the current recession, which was registered in the first quarter of 2009. Yet the Reagan recovery, starting in the first quarter of 1983, rushed along at quarterly growth rates (expressed as annual rates of change) over the next six quarters of 5.1%, 9.3%, 8.1%, 8.5%, 8.0% and 7.1%. Not until the third quarter of 1984 did real quarterly GDP growth drop below 5%.
One may observe that Ronald Reagan stood for enterprise, free trade and low taxes, whereas Barack Obama stands for other things. Yet President Obama's economic policies seem almost as far removed from Roosevelt's as they are from Reagan's. (Not for Obama, at least not yet, is a new National Recovery Administration). Certainly, Roosevelt never attempted anything like the fiscal and monetary resuscitation organized over the past 12 months. In the post World War II era, the government has attacked recessions with an average fiscal stimulus of 2.6% of GDP and an average monetary stimulus of 0.3% of GDP, for a combined countercyclical lift of 2.9%. (Fiscal stimulus I define as the cumulative change in the federal budget, monetary stimulus as the cumulative change in the Fed's balance sheet, both measured from the peak of the boom to the trough of the bust.) This time out, the fiscal stimulus is likely to measure 10% of GDP, monetary stimulus 9.5% of GDP, for a combined pick-me-up equivalent to 19.5% of GDP. Our Great Recession would be marked for greatness if for no other reason than by the outpouring of federal dollars to repress it.
What did we do before Timothy Geithner and Ben Bernanke? In the day, it was the self-regenerative power of markets that lifted us off the rocks. The brutality of the depression of the early 1920s could not have been far from the mind of President Harry S. Truman as he signed into law the 1946 act to make it the government's business to maintain the economy at full employment. That 1920-21 crackup featured a deflationary collapse—wholesale prices plunged by 37%—and, by 21st century lights, a highly unconventional set of government measures to set things right. To meet the downturn, the Fed raised, not lowered, interest rates and Congress balanced the budget—indeed, ran a surplus. Yet the depression ended. How, exactly, did it end? Falling prices opened wallets, the monetary historian Allan H. Meltzer explains. Finding bargains, consumers and investors snapped them up. "The fall in market prices raised the public's stock of real [money] balances above the desired amount, just as if the Federal Reserve had increased base money at a constant price level," Mr. Meltzer relates in his "A History of the Federal Reserve." After falling by 4.4% in 1920 and by 8.7% in 1921, inflation-adjusted GNP shot up by 15.8% in 1922 and by 12.1% in 1923.
Bargain-hunting is the balm of recovery even today, dead set against low prices the Federal Reserve might be. Detroit is a living laboratory in many things, including the so-called real balance effect. As Marshall Mandall, a RE/MAX agent in that city, tells the story, house prices are still falling at the high end of the market, though they have stabilized at the low end. Transaction volumes are rising. Speculators are on the prowl, but so, too, are ordinary home buyers. It seems—who'd have guessed it?—that value sells. "They can buy something for half of what they could three years ago," Mr. Mandall says. "Everybody perceives bargains in their house-hunting." At the end of the second quarter, according to the Detroit Free Press, the supply of unsold houses was equivalent to 8.5 months' sales, down 39% from the year before.
Through the first six months of 2009, the Case-Shiller 10-City Composite index of house prices fell by 5.5% compared to year-end 2008. However, the rate of decline has been slowing and, indeed, the index recorded month-to-month appreciation in May and June. It may just be that the Fed's assumption of a 14% decline in prices this year (built into the base case of its bank stress test) is unrealistically bearish.
The Fed's voice is among the saddest in the lugubrious choir of bearish forecasters, and for good reason. By instigating a debt boom, the Bank of Bernanke (and of his predecessor, Alan Greenspan) was instrumental in causing our troubles. You might have thought that it would therefore see them coming. Not at all. Belatedly grasping how bad was bad, it has thrown the kitchen sink at them. And it maintains this stance of radical ease lest it get the blame for a relapse. However, by driving money market interest rates to zero and by setting all-time American records in money-printing ($1.2 trillion conjured in the past 12 months), the Fed is putting the value of the dollar at risk. Its wide-open policy all but begs our foreign creditors to ask the fatal question, What is the dollar, anyway? Why, the dollar is a scrap of paper, or an electronic impulse, the value of which is anchored by the analytical acuity of the monetary bureaucracy that failed to predict the greatest financial crackup since the 1930s.
Federal Reserve Chairman Alan Greenspan testifies before the Committee on Banking & Financial Services in Congress Feb. 24, 1998.
.The Fed may be worried about something else. By sitting on interest rates, it is distorting every business and investment decision. If mispriced debt was the root cause of the narrowly-averted destruction of global finance, the Fed is well on its way to setting the stage for some distant (let us hope) Act II. In the meantime, ultra-low interest rates have lit a fire under the stock and debt markets.By rallying, equities and corporate bonds not only anticipate recovery, but they also help to bring it to fruition. By opening their arms wide to such previously unfinanceable businesses as AMR Corp., parent of American Airlines, and Delta Air Lines Inc., the newly confident credit markets are implementing their own stimulus program. "Reflexivity" is the three-dollar word coined by the speculator George Soros to describe the dual effect of market oscillations. Not only does the rise and fall of the averages reflect economic reality, but it also changes it. One year ago, the Wall Street liquidation stopped world commerce in its tracks. Today's bull markets are helping to revive it.
I promised to be bullish , and I am (for once)—bullish on the prospects for unscripted strength in business activity. So, too, is the Economic Cycle Research Institute, New York, which was founded by the late Geoffrey Moore and can trace its intellectual heritage back to the great business-cycle theorist Wesley C. Mitchell. The institute's long leading index of the U.S. economy, along with supporting sub-indices, are making 26-year highs and point to the strongest bounce-back since 1983. A second nonconformist, the previously cited Mr. Darda, notes that the last time a recession ravaged the labor market as badly as this one has, the years were 1957-58 —after which, payrolls climbed by a hefty 4.5% in the first year of an ensuing 24-month expansion. Which is not to say, he cautions, that growth this time will match that pace, only that growth is likely to surprise by its strength, not weakness.
And that is my case, too. The world is positioned for disappointment. But, in economic and financial matters, the world rarely gets what it expects. Pigou had humanity's number. The "error of pessimism" is born the size of a full-grown man—the size of the average adult economist, for example.
James Grant is the editor of Grant's Interest Rate Observer. Among his books is "The Trouble with Prosperity."
To be sure, Mr. Grant rightfully acknowledges the folly of economic forecasting and is careful about pinpointing when we might expect to see his anticipated strong recovery.
Yet by citing the work of the Economic Cycle Research Institute, which has recently been suggesting that a major upswing is on the cards, Mr. Grant seems to make it clear that now is the time for optimism.
Unfortunately, his rationale is weak, if not totally wrong. For the most part, his argument rests on the premise that, historically at least, strong recoveries have followed severe contractions.
Aside from discounting the fact that there are aspects to the current unraveling that are historically unique and extraordinarily unsettling (e.g., total credit market debt relative to gross domestic product is well beyond anything this country has ever witnessed), Mr. Grant makes a number of curious assertions.
For one thing, he assumes that the current downturn is near its nadir, instead of a temporary floor built on a massive stimulus injection and a knee-jerk bout of inventory restocking. Among logicians, such an analytical approach might be described as "begging the question."
Mr. Grant also gives short shrift to the fact that in many ways -- see "A Tale of Two Depressions" by Barry Eichengreen and Kevin H. O'Rourke for more on this subject -- the economic episode that most closely parallels the current downturn is the one that occurred during the Great Depression, which lasted twice as long as the latest one has.
Perhaps our economy will rebound sharply in 2011, but from what level? Should we really be preparing for the best right now -- instead of the worst -- given how many icebergs --like the accelerating meltdown in commercial real estate and the mortgage reset timebomb -- are only just floating into view?
History suggests that time is not on the side of the optimists when it comes to episodes like the one we are going through. As I'm sure Mr. Grant is aware, Professors Carmen M. Reinhart and Kenneth S. Rogoff have published a research paper, "The Aftermath of Financial Crises," based on data going back more than a century, which concluded that post-crisis downturns tend to be "protracted affairs."
To bolster his allegedly contrarian argument, Mr. Grant points to the swollen ranks of pessimists preparing to meet the future from "inside of a bomb shelter." But after decades of bubble-induced euphoria and an economy built on massive debt and unparalleled overconsumption, I wonder if he is engaging in a bit of dot-com era relativism -- where the Nasdaq was "cheap" at 4,000 because it was down 20 percent from its peak (it is now 2,132).
If savings rates, debt levels, and the share of the U.S. economy accounted for by consumer spending were to return to, say, pre-Greenspan era norms, then one bomb shelter might not be enough to handle the economic onslaught that is still headed our way.
Finally, Mr. Grant makes the cardinal error of many ivory tower economists. He credits equity investors with the wisdom of crowds. Those are the same people who bid share prices to new all-time highs in the fall of 2007, just as credit markets were unraveling, home prices were collapsing, and the bottom was falling out of the real economy. Hmmm.
That said, it is certainly not my intention to lump Jim Grant with all those clueless strategists, economists, and policymakers who failed to see things coming. In fact, I think he is a very smart guy and I've always enjoyed hearing what he has to say. But the fact is that bull and bear markets frequently have one thing in common: turning points marked by the public capitulation of one or more prominent contrarians.
Given what Mr. Grant has just written, I can only ask: Did one of the world's best known bears just ring the bell at the top of the great dead cat bounce?
If we were to believe that the US and world economies have actually reached "bottom" then this article might make some sense. Unfortunately, the author fails to recognize the fact that the forces that brought down the economy are still in place and he gives no "source" of where growth can and will occur. His argument that "if there had been a U6 during the Depression it would have been 44%" is unjustifiable. Unemployment WAS determined in U6 terms during that period. It wasn't until Clinton that we began re-creating the definition of unemployment.
Bottom line: We have not seen the bottom of this cycle and the toxic assets and depressed real estate along with high unemployment will continue to be a drag on our ability to recover.
Posted by: Mitch | September 19, 2009 at 08:51 PM
I think you have given Jim Grant less credit than he deserves, putting aside the correctness of his current view. In his excellent (and very expensive) newsletter "Grant's Interest Rate Observer" he "saw it coming" well before the mainstream Wall Street community. And the upscale Wall Street readership of his newsletter were duly warned well before the fact. His newsletter painstaking pried apart the offering paperwork on some of the more exotic real-estate derivatives and demonstrated clearly that artifice was being piled on top of artifice in putting these toxic contraptions together.
Whether or not Jim is right this time, he has earned his laurels as first-rate analyst and practitioner of clear thinking. To his additional credit, he has been in the gold camp forever and any of his readers who just paid attention to that piece of advice have profited very nicely.
Posted by: Herb Berkowitz | September 19, 2009 at 09:03 PM
Mr. Panzner your analysis of Mr. Grant is dead on. One thing most analysts as Mr. Grant fail to realize is not only PEAK OIL, but what is worse than peak oil and that is EROI (energy returned on invested). I did a article on that which you can find here:
http://www.financialsense.com/fsu/editorials/stangelo/2009/0820.html
In 1930 the USA had a EROI in oil and gas of 100:1, by 1970 we had 30:1, and in 2000 we had 11:1. That means in the 1930's one barrel worth of energy would produce 100 barrels for the market. We could have deflation and a return to health in the markets. Today...ITS GAME OVER for the USA as NET ENERGY or EROI is decreasing every year.
There is some speculation the USA will reach 1:1 by 2025...and that means it takes one barrel of oil to produce one barrel for the market. Unfortunately, a modern economy needs at least 3:1 for a minimum to survive.
As you can see, the USA is heading as Mr. Panzner states "FINANCIAL ARMAGEDDON". The Financial system will implode because the Energy system is imploding. We will have DEFLATION in things we OWN, and INFLATION in things we USE.
Posted by: Steve St. Angelo | September 19, 2009 at 10:03 PM
Poor Jim.
has he forgottent that 4 letter word. DEBT. All other "Greats" did not have the level of public//private debt we have now to act as a millstone. Until that debt is reduced there can only be "HollyWood" growth. ie. written bty scriptwiters
regards
Posted by: nevket240 | September 20, 2009 at 12:29 AM
MP:
I read Grant's WSJ piece too. It's the first thing he's written in years I take part exception to. I don't see any strong recovery in the cards. However I am wildly bullish on the stock market except for financials. Almost anything is better than holding dollars.
Posted by: Independent Accountant | September 20, 2009 at 01:57 AM
A documentary was produced some years ago on the life of Louisana governor,
Huey Long, a famous and infamous leader who used ruthless methods to bring
significant recovery to his impoverished state in the 1930s:
A simple, uneducated black man was interviewed who had a job working in a factory that was producing widgets for military equipment. I shall always
remember what he told the reporter: "Thank God for Hitler." Was it not World
War II that brought real life back into the American economy; the Korean War
that kept it going and the Vietnam War which consolidated the power of many
super corporations that were owned by Wall Street brokerage houses and banks?
Posted by: Marion Shaw | September 20, 2009 at 06:42 AM
I believe the discussion has a major oversight. It looks at what we are experiencing in economic (and to a degree political) terms when in fact what we are experiencing is a major social unpheaval globally. We must remember that what is happening is happening in a world where there is a totally different communications system -- this is a major change in the history of the human -- the world is different and is going to be even more different than it has been during and after any other economic phenomenon -- boom or bust -- isn't it inherently wrong, therefore, to try and understand the current economic situation in terms that were relevant within a different social/consumer context but are not relevant now? Yes, we will figure out a way to cope and succeed with a new economy and culture -- but "recovery" assumes a "return" -- I do not think we are returning anywhere -- I think we are going to come out of this economic period in the context of a vastly different world ...
Posted by: Doug Poretz | September 20, 2009 at 06:46 AM
Mr Grant is taking a very selective view of history. He is completely ignoring the experience of Japan's Lost Decade+. His analysis of the Great Depression ignores the fact that it too lasted over a decade (a sharp 3+ year falloff, followed by 3-4 years of weak growth, followed by a sharp 1 year recession, followed by a few more years of weak growth, and ultimately by World War). He's also ignoring the fact that many of the panics, crises, and depressions that preceded the Great Depression were also multi-year events. It's only been a little over a year and a half since the official start of this recession, and less than a year since the crisis phase got underway. We may eventually see that zippy recovery he talks about, but it may be a few years off, if not a decade off.
Posted by: RueTheDay | September 20, 2009 at 07:49 AM
"but recovery assumes a return. I do not think we are returning anywhere,"
Doug, your point is well taken that we are in a new world with instant
communications. But if there is not going to be a "return" there will have to
be some basic maintenance. Afterall, the communications revolution depends on
computers, which depends on production, which depends ultimately on electricity,
People will still have to eat, wear clothes and shoes and have shelter. Of
course, if civilization cannot recover the means by which to maintain these
basic necessities,as well as the means by which the communication revolution
is sustained, the only future I can foresee is one where the majority of
the human race, now at risk in losing these known ammenities of life, could
end up living in a prehistoric culture: something that was very evident after
Europe and Asia were decimated by World War II.
Posted by: Marion Shaw | September 20, 2009 at 08:47 AM
An interesting comparison between Grant's position and that of Stephanie Pomboy:
If the demand for credit revives or employment and income begin to grow, neither of which seems to us likely to happen anytime soon, that'll be the time to start worrying about inflation in the traditional sense. At the moment, the only serious inflation is in stuff like financial assets, because all the surplus "liquidity" that has been pumped into the economy has nowhere else to go....She tabs the equity rally as exceedingly long in the tooth. Earnings expectations, she submits, "have never been so far afield of economic reality, and the market's banking on a $1 trillion spending swing over the next 12 months."
Posted by: ca | September 20, 2009 at 09:40 AM
To comment on the points above by Doug & Marion, it seems inevitable that - as communication (in the broadest sense) makes the world a newly tiny place - the developed economies in particular cannot indeed go back to where they were. Even if their currencies stumble one-by-one in a race to the bottom, the developing economies will maintain a competitive edge until there is a yet more general levelling of global wage disparities. The resulting slow growth for "the west" will at least mean less pressure on raw resources & oil/gas prices, allowing time for e.g. alternative means of energy production and usage to become fully developed.
In essence, the less the possibility of a sharp recovery by the West now, the greater the likelihood of a more stable economic future for us all. And by the way, any emerging trade wars would be a populist knee-jerk reaction to national incompetence and lead long-term only to a global economic downward spiral.
Posted by: Stevie b. | September 20, 2009 at 10:05 AM
When comparing the recovery from the recession in 1981-82, he touts Reagan's political philosophy: "Our recession, though a mere inconvenience compared to some of the cyclical snows of yesteryear, does bear comparison with the slump of 1981-82. In the worst quarter of that contraction, the first three months of 1982, real GDP shrank at an annual rate of 6.4%, matching the steepest drop of the current recession, which was registered in the first quarter of 2009. Yet the Reagan recovery, starting in the first quarter of 1983, rushed along at quarterly growth rates (expressed as annual rates of change) over the next six quarters of 5.1%, 9.3%, 8.1%, 8.5%, 8.0% and 7.1%. Not until the third quarter of 1984 did real quarterly GDP growth drop below 5%.
One may observe that Ronald Reagan stood for enterprise, free trade and low taxes, whereas Barack Obama stands for other things. Yet President Obama's economic policies seem almost as far removed from Roosevelt's as they are from Reagan's."
One may also observe that interest rates were at 20% in the Spring of 1981 and had been slashed in half by 1983. Maybe it's just me, but I have a hard time taking anyone seriously who doesn't acknowldge the effect of interest rates during the recession and recovery of the early 80's.
I wonder what kind of boom we would see if we could slach interests rates by half:) I guess we've done that:) What if we could slach interst rates by 10%?
Posted by: jer | September 20, 2009 at 10:21 AM
Jim Grant is a good writer and entertaining but when it comes to specific recommendations it has, in my experience as a subscriber to his newsletter, been somewhat hit and miss. Anyone else remember his strong BUY AIG recommendation just before it would have gone to zero but for government assistance to favoured friends?
Posted by: Jonathan | September 20, 2009 at 12:02 PM
Does the inflating equities ATM become the new Home ATM?
Posted by: Blurtman | September 20, 2009 at 02:29 PM
Strong recoveries have typically followed contractions because:
1) The deadwood was destroyed, in this case the deadwood is still getting all the liquidity.
2) Mortgage bond losses still haven't been tallied, and they are building in the agencies and FHA, etc., if that's his idea of recovery, well good luck.
3) The debt is not only huge in the gubbermint, but also individuals and corporations. Just because stocks keep going up does not make them a prudent investment.
Recovery is in the eye of the beholder. Some will flourish, some will die, and some will be propped up by the federal reserve which should have been allowed to die. That includes the 19 too big to fails. Nice recovery if you're a fascist.
Posted by: edgar | September 20, 2009 at 04:21 PM
Oh yeah,
4) Interest rates could be lowered along with lending standards. They are trying to make lending easier and sleazier but how long they can do that before the dollar goes down the toilet is anyone's guess.
Posted by: edgar | September 20, 2009 at 04:25 PM
5) Corruption is pervasive. I don't know of any society which has general prosperity under those conditions.
Posted by: edgar | September 20, 2009 at 05:25 PM
Maybe Jim Grant is on to something. Notice that there is not a single comment on this thread that believes that economic growth over the near term will surprise to the upside.
I don't believe that Jim is stating that the downturn is done and we are now living in a peaches and cream environment. His point is that government stimulus this time is unprecedented. I would add that globally government stimulus (fiscal and monetary) has been nothing short of extraordinary. Jim's other point is that central banks this time around have stated clearly that they will not reduce the gas until they see inflation. Consequently his thesis is that in the near term we will see inflation in some asset markets and that will aid in re-liquifying of impaired balance sheets and that will show up in improved economic growth numbers. We could see a surprise to the upside which will force the bears to reconsider and the bulls to get cocky. At some point when everyone is on the bull wagon we will then hit up on the next crisis - upward pressure on rates leading to further monetization and a crisis in government finance.
Posted by: ab initio | September 20, 2009 at 06:59 PM
@ Stevie B
Congrats--you're the only one I've read who brought up the part about interest rates. In the early 80's the recession was caused by Volcker's Fed, which raised short-term rates to double digit levels. (Remember when everyone hated him, and builders were sending him 2x4's in protest? We were much better off when people hated the Fed chairman, or at least when they didn't know his name.) How, short of giving money out to all and sundry is the Fed supposed to end this recession? They can't cut rates any lower--good luck with that crackpot "negative interest rate" thing. Money would move out of the banks so fast it would crash the system if they were ever lunatic enough to try it. The Fed has just spent over a trillion dollars on MBS and Treasuries to keep mortgage rates down and that (along with the tax credit) has barely spawned an uptick in housing sales.
I know Mr. Grant is a very smart man and he writes well, but I'm afraid that he and others are relying on a totemistic belief in economic cycles. This is a very different world, and this is a very different country from 1920, 1930, or even 1980. I know the idea of the business cycle seems compelling and "natural" but there is no particular reason why it need happen--especially in this day and age of interlinked global finance systems, where fiscal and monetary stimulus in one country can wind up blowing asset bubbles in others while doing nothing in particular in their home economies--see Japan in the last fifteen years. Japan certainly has not had a business cycle to speak of lately in any meaningful sense--and yet the cycle paradigm remains preeminent in almost all economic speech.
Posted by: But What do I Know? | September 20, 2009 at 09:15 PM
Jim Grant was five years early calling the bear market of '00-03...my guess is that he is substantially early calling this recovery. He is fun to read and gets the ideas right...but not really useful for timing purposes.
Posted by: CF | September 20, 2009 at 10:50 PM
Unlike some here, I kinda enjoyed being a "saver" (dirty word, I know) under Volker: those 14% T-Bill interest rates were fine and dandy with me. I know, old fashioned, but getting rewarded for frugality had it's appeal.....Funny how we never hear "Neither borrower nor lender be" any more in this modern, Wall Street Shyster/Bankster era...nor a "penny saved is a penny earned", so out-of date. "Go Shopping, it's your patriotic duty"! and "Greed is Good! Debt is Wealth!" all more up to date advice....
Independent Accountant: any particular set of indicators you care to share to validate your bullishness on the stock market? WAY overvalued P/Es? Falling sales? Falling revenue? Falling manufacturing volume? Six digit job losses monthly? Insider sales at all time highs...what? Counting on Obama to allow Bernanke to shovel more trillions to Goldman-Sachs and the other pirates looting and gaming the system, and you will 'coattail" it with timed trades? Good luck. "Almost anything is better than holding dollars." The NYSE is now priced in Yuan? Who knew?
Jim Grant still has Reagan Worship? Perhaps a requirement to write for the fish wrap WSJ?
Ah yes, old Ronnie, the brain-addled B-actor that tripled my state taxes as my governor ("Reagan stood for..low taxes"), doubled my FICA taxes, and accumulated more National Debt than all the presidents that preceded him, whatta "miracle" dat supply-side was/is. And now Obama is acting like him, GHW Bush and GW Bush on steroids.
As soon as I read that sentence on Reagan, I knew Grant was a deluded liar. Period. End of comment.
Posted by: farang | September 21, 2009 at 10:32 AM
To have a truly robust recovery, the consumer must have the money to buy more than groceries and pay the phone bill. This is the foundation upon which businesses and government revenue depends. Where is the money? Conspicuous consumption is out, basic needs is in, and the 30%+ of excess capacity will be here for a long time.
Add to this the fact that the pre-retirement crowd (which has lots of - if not most of - the money) are in a hightened state of anxiety about their retirement savings, and squirreling away their money.
Not the formula for robust recovery is it?
Posted by: Ropy | September 21, 2009 at 10:35 AM
I'll echo farang by stating that as soon as I saw Grant quoting with approval Amity Shlaes, I knew I could stop reading. He is a deluded liar with an agenda.
Posted by: weinerdog43 | September 21, 2009 at 01:44 PM
http://www.forexhound.com/article.cfm?articleID=158790
Comments; 'Et tu, James Grant?
How many bearish forecasters are in the econobin, again? One? Three?
All seem to be trying to outdo Dennis Kneale in bullish enthusiasm.
Does anyone need a better turning point indicator, for the current S&P top, than when bears capitulate ... like James Grant is doing?
I hate to break it to you, but the downturn is just getting started. The problem isn't just credit, it's credit amplifying peak energy and rising energy costs. These costs drive out profits and put businesses in bankruptcy.
The governments and the rest of the establishment are trying to turn the nation's public and private debt into a gigantic 'Option Arm' mortgage with the recast period as ... never! How long can the establishment keep this up? Until all $45 trillion debt is taken 'off balance sheet'? Then what?
The process will continue only until it causes indirectly oil prices to move up a little bit more and then the game is done.
Posted by: steve from virginia | September 21, 2009 at 02:11 PM
I keep hearing about this bullish bandwagon, but everywhere I turn I see hesitation and outright bearishness, oft supported by an unending string of reasons. From my vantage, bullish appears a bit contrarian.
Posted by: Bill Pete | September 21, 2009 at 02:58 PM
Read Taleb's "Fooled By Randomness" to appreciate Grant's track record.
As for his prediction, it's pure fantasy, seeking to continue to fuel the American Pipe-Dream of getting something for nothing. I do think we'll be surprised, though -- by the ultimate depth & brutal savagery of what most are still considering a temporary downturn.
To be fair, there's probably one more bubble for the astute investor: profiting from the chaotic collapse of the USA. Any benefit from this bubble will be fleeting, as the negative consequences will probably be global & permanent.
Posted by: Damon | September 24, 2009 at 05:02 PM