Toro, could you explain something please?

Discussion in 'Economy' started by Paulie, Jan 11, 2008.

  1. Paulie
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    Paulie Platinum Member

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    I noticed you said in another thread that the economy should start coming back sometime next year...spring, maybe, but I forget exactly when you said.

    Could you explain in detail why you think that, and based on what information?

    Because I see exactly the opposite. You're the educated economist here, and I just read about it online. I'd like to know where you're coming from.
     
  2. AllieBaba
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    AllieBaba BANNED

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    I love the myth that the economy is failing.
     
  3. Toro
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    Toro Diamond Member

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    Paul

    Just to clarify, I'm not an economist.

    I think we are going into a recession for a whole host of reasons - the collapse of the housing bubble, the restriction of capital in the money markets, the collapse of the subprime and structured products markets, as well as several economic factors including rising unemployment, slowing durable goods orders, deteriorating purchasing managers surveys, slowing growth overseas, rising inflation, and so on.

    Generally, after asset bubbles pop, there is at the very least a slowing economy and usually a recession. That is what is occurring now.
     
  4. eots
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    eots no fly list

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    sinking like a stone in a lake
     
  5. Paulie
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    Paulie Platinum Member

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    What reason do we have to believe that it isn't going to be much worse, especially considering the seemingly insurmountable debt this country is up to it's eyeballs in?

    From everything I've read, we've never had ourselves so buried in the history of the country.

    I'm hearing from accredited economists that it could make 1929 look like a cake walk...that the Fed is not going to be able to manipulate it's way out of things this time.

    What in your education of economics (I realize your not an economist, but you know what I mean) tells you it won't be that bad?

    Also, if you don't think it'll be that bad, can you explain how we'll be able to pull through?
     
  6. Toro
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    Because the debt isn't as large as it seems.

    What matters is not the absolute debt but the debt relative to the size of productive assets.

    You can measure it a few ways - relative to GDP and relative to the value of assets. Relative to GDP, government debt is about 68% of GDP. Sounds big, except it was double that after WWII. In 1995, Canada was 100%. (Today, Canada is a bit under the US.) Japan today is ~150% and Italy ~125%. Last time I checked, of the 29 countries in the OECD, the US ranks 11th highest. So, government debt isn't really a problem.

    You can also measure total debt - consumer debt, government debt, mortgage debt, corporate debt - against total assets. That is called net assets or net wealth. The net assets of the country have never been higher, pushing $60 trillion excluding government debt as of the third quarter, and above $50 trillion including government debt. Even if you collapsed the housing market 25% and the stock market 30%, net wealth would still be higher than it was several years ago.

    You have to understand that doomsayers who have been predicting another Great Depression have been around forever. But the simply truth is that the US has experienced only two recession since 1981, both relatively mild, and the longest period in recorded history with such low volatility in the economy. Most economists don't believe catastrophe awaits. Most don't even believe a recession is on the way. But I think that this speaks to the failings of the economics profession, since I think we are either in one or about to go into a recession now.

    That doesn't mean that aren't risks. IMO, the risks lie in the derivatives market, particularly in counter-party risk where the opposing side is unable to pay the other side of the contract. That could set off a chain of defaults throughout the financial system, which could have enormous ramifications for the real economy.

    Maybe it will be bad, I don't know. But the structure of the American economy is enormously adaptive, flexible and dynamic. There are excesses in some parts of the economy but not in others. For example, the technology industry went through a true depression after the collapse of the tech bubble in 2000-2002, yet the economy experienced only a mild recession. Also, the global economy is deeper and structurally more sound than it was even five or ten years ago. That doesn't mean the other economies cannot go through a downturn. However, real structural change is occurring in Asia which has tremendous (positive) ramifications for the global economy, making it stronger and more likely to emerge from a recession.

    So maybe the end of the world is coming, I don't know. But it is unlikely.
     
  7. Paulie
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    Paulie Platinum Member

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    Thanks for taking the time. That cleared things up pretty good, I'd say. I'm looking for any kind of light at the end of the tunnel right now. My line of work depends on the housing market, and I've been laid off for a few months now. I live in an upper class income area, and all sectors of the housing industry are desolate right now around here. I've personally never seen it this bad, or had it this bad. There's all kinds of houses that were being built, that have been abandoned in mid-construction. I guess that has to do with slumping new home sales, but for it to be bad HERE, is quite telling.

    Anyway, I hope you're right.
     
  8. Toro
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    Well, unfortunately Paul, the problems I see are primarily in the housing market. I expect housing prices to bottom either late this year or next though, and think we are about half way through all the bad stuff. However, it will take a few years for all the inventory to work out.
     
  9. Paulie
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    Paulie Platinum Member

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    Well the bright side is that this is a seasonal tourist shore area I live in, and it's usually slower in the winter regardless. In the summer during the influx, these people will spend money on a bag of dog shit if it says the name of their favorite shore town on it.

    Alucard knows what I'm talking about. :lol:
     
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  10. jillian
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