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Generational Dynamics Web Log for 12-Jun-2009
World Bank forecast for global economy turns sharply worse

Web Log - June, 2009

World Bank forecast for global economy turns sharply worse

The world economy will contract by 3% this year, far more than the 1.7% drop predicted just a couple of months ago.

According to the World Bank press release:

"According to the latest Bank estimates, the global economy will decline this year by close to 3 percent, a significant revision from a previous estimate of 1.7 percent. Most developing country economies will contract this year and face increasingly bleak prospects unless the slump in their exports, remittances, and foreign direct investment is reversed by the end of 2010.

“Although growth is expected to revive during the course of 2010, the pace of the recovery is uncertain and the poor in many developing countries will continue to be buffeted by the aftershocks,” Zoellick said ahead of the Group of Eight finance ministers meeting in Italy. “Waves of economic pain continue to hurt the developing world’s poor, who have less cushion to protect themselves. There is much more we need to do in the coming months to mobilize resources to ensure that the poor do not pay for a crisis that is not of their making.”"

The World Bank forecast is in sharp contrast to the Polyannish discussions of "green shoots" that we keep hearing about from people who wish to increase their political popularity, or who wish to continue to make fat fees and commissions from investors.

I keep being astonished at the sheer inanities that I hear from the financial media.

On Thursday morning, the Labor Department announced that 601,000 Americans filed for unemployment claims last week. This is a disastrous figure, but CNBC and other mainstream financial commentators were oohing and ahhing because it had been 625,000 the previous week, and the reduction was considered good news. Meanwhile, the number of continuing claims has been rising continually for months, and it reached a record 6.82 million last week.

You can read the Calculated Risk blog almost every day and read a great deal of bad news. That's not cherry-picking. The long-term trend that I've been talking about for years has not changed, and is still in full force.

The credit and real estate bubbles, which created hundreds of trillions of dollars in money liquidity, has been leaking steadily since August, 2007. Since then, we've been in a massive deflationary spiral. The amount of money in the world has been decreasing by a few trillion dollars every month. That contraction in liquidity means that fewer people can pay debts, can make investments, can meet payrolls.

For example, a new Federal Reserve report says that the net worth of US households fell by $1.3 trillion in the first three months of this year, after falling by $4.9 trillion in the previous three months. These losses make even the bailouts and stimulus programs seem puny by comparison. How much good will a $1 trillion stimulus program do when US households are losing that much net worth every month or two?

And that represents only a fraction of the liquidity losses in the U.S., and a tiny fraction of the liquidity losses around the world.

In a recent column by Ambrose Evans-Pritchard, who is pretty much the only mainstream media journalist who is talking about what's really going on, he wrote:

"Those of us who still question whether the world has purged its toxins are reduced to the same tiny band of moaning Druids from early 2007, when we shook our heads in disbelief as the carry trade swept Iceland to fresh madness and bankers laughed off sub-prime rot at Bear Stearns.

We learned then to thicken our skins with walnut juice, lie down in dark rooms, and dissent from Goldman Sachs. Such seclusion is called for once again as Goldman replays its BRIC anthem and raises its oil forecast to $85 a barrel this year, betting that the world will roar back on a tidal wave of liquidity.

It is perhaps unkind to mention that Goldman issued a $200 call at the top of the speculative frenzy last year, just before oil crashed, but they have broad shoulders."

His point, of course, is that Goldman Sachs, like other politicians and financial firms, stand to benefit financially and politically by making fairy tale claims that the economy has bottomed, and that there'll be a new spurt of growth -- a reflating of the credit bubble -- in the last half of this year. His point is also that these people have been consistently wrong since August, 2007.

He compares today's economy to that of 1931-32:

"The fall in industrial output has been roughly equal to the 1929-1930 stage for Germany and the Anglo-Saxons, but worse for Japan, France, Italy, and Eastern Europe. The collapse in world trade has been swifter: the global equity crash has been twice as bad. "It's a depression alright. The good news is that the policy response is very different. The question now is whether that response will work," they said.

The elastic was bound to snap back, just as it did in the bear rally of early 1931. Whether the underlying economy has begun to heal is another matter. World Bank chief economist Justin Yifu Lin said capacity utilization is running at an historic low of 50pc-60pc. Companies will have to fire a lot of workers. This is where the danger lies, and why he fears that deflation is creeping up on us."

He quotes a number of figures in the article to make another point, which I'd like to explain in a slightly different way.

You may recall what happened last fall -- China's economy came close to collapse after the Beijing Olympics ended, leading to a collapse in world wide trade and transportation. As I described it at the time, it was like the science fiction movie, "The Day the Earth Stood Still," except that it wasn't science fiction.

Since then, there have been massive stimulus packages implemented in China, and in other countries including the U.S., and these have given boosts to trade and transportation, pushing up oil, copper and other commodity prices.

This cannot possibly last for long, and Ambrose Evans-Pritchard makes the point that the stimulus packages seem to have run out of steam in the last couple of weeks:

"Trade data from Asia are flashing warning signals again. Korea's exports were down 28.3pc in May, reversing the April rebound. Malaysia has slipped to -26pc, and India has touched a new low of -33pc.

US freight data is getting worse, not better. The Association of American Railroads said traffic was down 22pc in the third week of May from a year earlier. Canadian freight was down 34pc.

The American Trucking Association (ATA) said it saw fresh drops of 4.5pc in March and a further 2.2pc in April. Tonnage is down 13pc over 12 months. Bob Costello, the ATA's chief economist, said companies have not cut inventories fast enough to keep pace with declining sales. The contraction in truck volume has "accelerated".

Yes, the Baltic Dry Index for bulk shipping of resources has quadrupled since January, but this reflects China's bid to stockpile metals while prices are low."

Right now, these are just short-term figures that have to be confirmed. But they're consistent with the long-term trend of falling money liquidity. The point is that the stimulus and bailout packages may already have run out of steam, as they must sooner or later, and the sharp deflationary spiral will resume with full force.

Meanwhile, the laugh-a-minute Nobel Prize winning economist Paul Krugman, who was chosen by the Nobel Prize committee because he shared their hatred of President Bush, said the following a couple of days ago:

"I would not be surprised if the official end of the U.S. recession ends up being, in retrospect, dated sometime this summer. Things seem to be getting worse more slowly. There’s some reason to think that we’re stabilizing."

Gee, summer's only 11 days away. I guess we'll find out pretty soon whether he's right or wrong.

I like to save these quotes by people of Krugman's ilk, so I can quote them later.

The steadily worsening World Bank forecast, which shows the world economy plummeting twice as fast as they expected just a few weeks ago, is a more realistic appraisal of what's really going on.

(Comments: For reader comments, questions and discussion, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (12-Jun-2009) Permanent Link
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