Approaching the 10% Decline

Although there is no single, consensus definition of what a Depression is, one widely accepted marker is a 10% contraction in the GDP. So far, by official numbers, this is still a ways off in most countries. But it is getting harder to fudge away the increasingly obvious.

March retail sales in the USA were reported yesterday having declined 9.4% year-over-year. This is now the fourth month in a row of sales declines in the vicinity of 9% year-over-year. Granted retail sales aren't the whole economy, but they are a fair proxy for the economy.

We don't expect this crash level of sales declines to continue - although it is possible - but it won't take too much longer for this shrinkage to put the economy into deeply red territory for the year. As we have stated before, we expect the Depression to continue for years. Even if there are a number of "growth quarters" sprinkled here and there (and we do expect them), the contraction should prove relentless.

For some time forward there will be a recovery bias to all reports about the economy. The drivel coming out of the Federal Reserve System is especially illustrative. It is going to take a while for it to sink in that things are bad, getting worse, and not going to recovery quickly.

Anger

It would appear that denial stage of the 2007 Depression's actually being a depression is gradually coming to an end. Gordon Brown, the U.K. P.M., is on record using the "D" word, albeit as a supposed 'slip of the tongue.' The more credible and honest Dominique Strauss-Kahn, managing director of the International Monetary Fund, calls it like he sees it.

As every student of Elisabeth Kubler-Ross knows, after Denial comes Anger. The ongoing spate of economically-related suicides, and murder-suicides shows that often anger is inwardly directed. Others will be looking for someone to blame. Some are actually blameworthy (corrupt mortgage brokers and regulators who looked the other way come to mind), but undoubtedly as is typical in human affairs, vengeance will be meted out upon the deserving and innocent alike.

Failure to prosecute criminal behaviour is always disruptive to social order, and reflects poorly on governmental legitimacy. At present there seems hardly any movement afoot to actually bring any but the worst of the criminally negligent to task. This will prove a terrible precedent as the social mood turns uglier in the coming months.

Denial

It is human nature to avoid stress, if possible. One healthily perceives ordinary happenings not as potentially dangerous and cause for alarm. To be locked into a vigilant viewpoint is incapacitating. When the time is right, however, it is critical to recognise signs of actual danger and respond appropriately.

Stock markets are crashing, there are mass foreclosures, bank failures, and mass layoffs. A whole nation – Iceland – goes from affluence to a basket-case in a matter of weeks. This is not a drill, ladies and gentlemen. And how are the professional firefighters – the Treasury Departments, the Central Banks – managing the crisis? They are, frankly, running around like chickens with their heads cut off. If a multi-building fire was raging in your city and its fire department was acting like Mr. Paulson, would you have much confidence in its ability to contain the fire?

The mainstream media aren't helping the situation. They couch discussion of the economy in terms such as “being at the brink of a recession,” or “there is risk of a deep recession.” It is time to stop pretending that the current situation is merely a problem of lack of confidence.

Chances are you have suffered some financial setbacks already, or know people who have. You wonder if things in general are going to get worse before they get better, and if so, how bad will things get. The answer is that things are going to get a lot, lot worse. The problem is, in a nutshell, that the world's economy has been built on an unsound basis. If you build a house on a weak foundation, it will come tumbling down. The unsoundness of the economic system is complex and reflective of unsound parts of culture. It will not be a simple matter to begin again, aright. There will be false starts and future depressions.

Here are a few components of the unsound basis: the illusion that wealth comes from money, or in today's credit-addled world, from access to money; the illusion that human beings may increase their numbers endlessly, and claim ever larger shares of the earth's resources; the illusion that the earth's resources are in any way, shape, or form unlimited; the illusion that shielding persons or organisations from negative consequences of their actions is a good. Future posts will discuss each of these points and others.

If you disagree with these points, we would like you to make your case. Please post comments and future posts will address them.