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Morgan Stanley is the first major Wall Street bank to warn that it may now be too late to stop a recession, though most have shifted to an ultra-cautious stance in recent weeks.

The bank at first treated the August crunch as a "mid-cycle correction", much like the financial storm after Russia's default in 1998. But the collapse of the US commercial paper market has now continued for seventeen weeks, suggesting a "fundamental deleveraging of the banking system."
Doesn't sound good: http://www.telegraph.co.uk/money/ma...A1YourView&xml=/money/2007/12/11/cnusa111.xml
 

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It isnt good, and a huge part of it is the housing market which has a huge disconnect with personal and household income which puts people in a position where they need to take hefty credit risks
 

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If the FED drops rates to 4%, rather then the pathetic 4.25 they are at now, and tightens lending practices then we might avoid a recession. The UK is following the US market by about 18 months and there, house prices are beginning to fall. Reasonable controls are however in place and it's unlikely to crash completely.

By dropping the rates, the FED can ensure people who need credit can get it but tightening lending practices will ensure that loans only go to those who can actually pay them back. This will put a turnaround on the cards for 2009/2010. The builders need to reduce their volume until the supply in the market is eaten up.

Also the Dollar is too weak, it was articifially supporting the ecomomy by making exports cheaper but it has been allowed to go too far and now makes imports of raw materials, products and services more expensive. Currency forwards are reducing the effect to the Us consumer for the moment but they won't last forever. Large corporations are also trying to take a loss in the States but balance that with greater profits in Europe, but that also won;t last forever.
Normally it should be around 1.65-75 to the Pound and 1:1 with the Euro. Right now its at 2.049 to the Pound and 1.47 to the Euro. Back in the day Euro countries had to trade with the USA. Today they don't. They can and are replacing that trade with the larger group of European Countries, China and Russia.

The government here took their eye off the ecomony and fumbled.

If you've got the money or can get a good load deal, next year will be a nice time to picke up a home for a reasonable price.
 

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I don't think there is anything the Fed can do to prevent a recession (or Great Depression II). The problem is that most people are already in debt up to their eyeballs, many can barely make monthly payments on the debts they already have. Even if the nominal interest is lowered to 0% (such as during the 1930s) this will not have much of an affect on most people because: 1) just because the Fed lowers the interest rate doesn't mean the banks will do the same and considering they have all suffered huge losses they will be looking to try to recoupe some of the losses by keeping consumer interest rates high 2) people can only borrow so much money, even if the interest rate is 0%, once all of your income is going to pay monthly loan bills you simply can't take on anymore debt, no matter how good the deal may be, I suppose you could refinance with a lower interest rate and squeeze out a couple more hundred bucks out of your income to get another big screen TV but that's pushing in.

Banks have used up the entire pool of potential credit card holders where many people have dozens of cards and most teenagers now have credit cards too. Unless they can figure out a way to channel all the credit card applications that we get to overseas and sign up some poor saps in 3rd world countries to also become debtors there is just no other way to do this short of giving out free money.

You laugh, but in all seriousness if Bernanke can't figure out a way to get more people to go into more debt he has mentioned that they could do things that are almost the same as just give out money for free.

Bernanke @ National Economists Club, Washington, D.C., November 21, 2002:
Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior). 8
Here is the footnote related to that quote:
8. Keynes, however, once semi-seriously proposed, as an anti-deflationary measure, that the government fill bottles with currency and bury them in mine shafts to be dug up by the public.
I really hope that they can resolve this crisis but I just don't see how they can do it short of cancelling everyones debts and giving out lots of free money. They are already doing those things to a certain degree. It'll get really bad when we start getting checks in the mail to go and spend... say hello to hyperinflation. Best example of what would happen is if you look at Argentina, a first world country in many respects, that fell to hyperinflation in 2001. They got out of it but it took 4 very miserable years. On a Great Depression scale it doesn't sound so bad but you have to consider that in the 1930s American farm boys could feed and take care of themselves regardless of the economic hardships; today most people work desk jobs and know nothing about feeding themselves beyond a visit to the grocery store.

Whoever thought that we could sustainably run an economy on debt is insane. Sooner or later reality will kick in and people will realize that you can't borrow to pay off your debts in perpetuity.
 

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Actually banks will follow the Fed, but not immediately or to the same degree. The Fed sets the interbank lending rate and by reducing rates they make the cost of money cheaper. That means people will have an options to refinance and thus keep their homes etc.. The Fed does however need to balalce intrest rates againt inflation otherwise assets loose value as does the currency, and some banks in Eurpoe think the dollar might fall to 2.30 to the pound. Refinancing is not so you can buy another TV, it is to make the debt burden manageable, not simply to redistribute it. Anyone doing that is an idiot.

You're right about the false idea that the country can live off credit, but the government and industry as well as the people have been doing it for decades. It's not a new idea, over here everybody seems to lease cars, appartments etc.. Actual ownership rates aren't that high. Europe is more tuned to ownership of assets, but the lifestyle doesn't seem so rich. Here, the belief is that over time your income will rise as will the value of your house and that this will allow you to stay ahead of the curve. The problem with the housing crash was greed, by everyone, and a stepening value curve driven by artificial demand.

As for interest rates, remember that Japan has had zero or NEGATIVE interest rates for most of the last two decades. The difference is that their economy is being balanced reasonably well. Remember also that inflation is an artificial construct invented in the last 100 years or so. Here the Fed screwed up by making rate jumps small and then not waiting or allowing themselves to see the effect before hiking again. They should have done 0.25 or 0.5% raises every six months instead of the 17 straight 0.1% raises whose effect was so small and gradual that people didn't really notice and kept buying credit they couldn't afford. they should also have done more to stop the weak landing practices that led to so many people overburdening themselves. Unfotunately they and the government liked the idea of strong growth rather and economic stability.

There is however plenty of credit available but not for sub-prime lending or weak lending rules. If you've got good credit and the capacity to pay, loans are available as are funds. Good credit isn't enough as you still need to have enough free income to pay the load back. Ultimately thought if someone signed up for more than they can afford, shit happens. If you got caught by the crash, tough. For every millionaie who made a good call, there are thousands who failed. There is plenty of A, AA and AAA credit available.

GWB is a good guy but he is out of his depth with the economy, and you can also blame Bill. Opening the door to China has caused a lot of the current issues with the US Economy and it's financial state not to mention the increase in demand and hence the price of oil and other resources.

The question is not can the Fed can do things to stop a recession, the question is will they and what will they do to make the economy stronger in a meaningfull manner.
 

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Discussion Starter #7
Refinancing is not so you can buy another TV, it is to make the debt burden manageable, not simply to redistribute it. Anyone doing that is an idiot.
Depends on your perspective. Your goal may be to make the debt burden manageable but that wouldn't help the economy. The point of a debt economy is so that people spend money, and I mean a lot of money and they must spend more year after year. The nice folks at the Fed aren't interested in everyone being able to manage their debt burden and spend within their means because this will cause a recession as people suddenly stop spending like insane lunatics. So, the stated purpose and full time job of the Fed is to make sure that people continue to spend money. They do this in several ways: 1) they create inflation, which discourages saving, so people either invest in the stock market or buy things, so inflation is a tool to discourage savings and to encourage spending 2) they print money out of thin air and come up with clever ways to get it to people without making it look like they are giving it away willy-nilly. Of course printing money and inflation are essentially one and the same and despite it's destructive long term outcome you have to admit it's a pretty clever system.

Unfortunately we've reached a point where a majority of the population is in debt up to their eyeballs so unless they come up with some clever way of allowing people to go into even more debt the economy will have no choice but to slow as people stop spending so much. In the short term this will be bad because our standard of living will go down but in the long run there is a small chance that we'll wise up and try to living within our means in the future.

I think right now the Fed is banking on the idea that they can continue this debt economy for a while longer. I don't blame them, it has worked for a while and it definitely made us all materially rich, nothing wrong with that in principle. The problem is that in the end you can't get something for nothing. You can't spend more than you earn indefinitely, eventually something has got to give.

You're right about the false idea that the country can live off credit, but the government and industry as well as the people have been doing it for decades. It's not a new idea, over here everybody seems to lease cars, appartments etc.. Actual ownership rates aren't that high. Europe is more tuned to ownership of assets, but the lifestyle doesn't seem so rich.
This isn't a uniquely American problem, as far as I know every single other country in the world has a fiat based economic system. Look at Germany after WWI, Argentina in 2001 and Zimbabwe today for just how absurdly the fiat system can unravel itself. The subprime mortgage problems in Europe are just as bad if not worse than here. England already had their bank runs a few months ago, we're still okay on this front although we did have a few near bank runs (the irony of both of these incidents is that people took money out of one bank and put them into another bank ignoring the fact that almost all banks are negatively affected by the subprime loans).

Here, the belief is that over time your income will rise as will the value of your house and that this will allow you to stay ahead of the curve. The problem with the housing crash was greed, by everyone, and a stepening value curve driven by artificial demand.
You can call it greed but I think people just wanted to live the American dream and own a house. Loans were easily available, houses were going up like crazy, you were almost stupid not to go out and buy your family a home to live in. Governments encouraged it and gave you tax breaks on the interest, etc. Everyone benefited, your family, the economy and the banks. The problem came when people couldn't afford to make the mortgage payments. I think ignorance and irresponsiblity are a bigger problem than greed. Our government tries to pamper us from cradle to grave and people just don't bother to take matters into their own hands, they assume that the government regulates everything and that anything they buy at the store or a loan they take out at the bank has been vetted by the government and is safe for them to consume and if anything goes wrong the government will save them. This is precisely what is happening today with the mortgage bailouts both for the banks and the home owners. Why bother be responsible if someone else will clean up your mess?

As for interest rates, remember that Japan has had zero or NEGATIVE interest rates for most of the last two decades. The difference is that their economy is being balanced reasonably well.
zero or negative nominal interest rates = people are in debt up to their eyeballs and can't even take interest free loans :duh:

According to Bernanke the Japanese are having a really hard time:
... Japan's economy faces some significant barriers to growth besides deflation, including massive financial problems in the banking and corporate sectors and a large overhang of government debt. Plausibly, private-sector financial problems have muted the effects of the monetary policies that have been tried in Japan, even as the heavy overhang of government debt has made Japanese policymakers more reluctant to use aggressive fiscal policies (for evidence see, for example, Posen, 1998). ...
... As the Japanese certainly realize, both restoring banks and corporations to solvency and implementing significant structural change are necessary for Japan's long-run economic health. But in the short run, comprehensive economic reform will likely impose large costs on many, for example, in the form of unemployment or bankruptcy. As a natural result, politicians, economists, businesspeople, and the general public in Japan have sharply disagreed about competing proposals for reform. In the resulting political deadlock, strong policy actions are discouraged, and cooperation among policymakers is difficult to achieve. ...
Above comes from the same speech where Bernanke mentions that the government will do something a little more elaborate than just give out money willy-nilly. Speech.


Remember also that inflation is an artificial construct invented in the last 100 years or so.
The first historical records of paper money date back to China in the Song Dynasty (960–1279). So, the idea of governments printing money (definition of inflation) has been around for at least a millennium.

Here the Fed screwed up by making rate jumps small and then not waiting or allowing themselves to see the effect before hiking again. They should have done 0.25 or 0.5% raises every six months instead of the 17 straight 0.1% raises whose effect was so small and gradual that people didn't really notice and kept buying credit they couldn't afford. they should also have done more to stop the weak landing practices that led to so many people overburdening themselves. Unfotunately they and the government liked the idea of strong growth rather and economic stability.


It's not a matter of liking or dislike, that is the sole purpose of the Federal Reserve: to monitor the growth of the economy and make sure that it keeps growing. Bernanke is doing exactly what he's getting paid to do, cut just enough interest rates to get people to start going into debt again. That's all he thinks about for eight hours a day (minus lunch maybe) is how to get people to borrow more money and ultimately to spend more money. Now, ideally people just keep getting raises at work and this allows Bernanke to go on vacation to the Bahamas but when the SHTF he has to start experimenting with the interest rates again. He's like an alchemist of sorts 8)

GWB is a good guy but he is out of his depth with the economy, and you can also blame Bill. Opening the door to China has caused a lot of the current issues with the US Economy and it's financial state not to mention the increase in demand and hence the price of oil and other resources.
Presidents don't run the economy. Bankers do. It should be the producers and the consumers, at least that would be the case if we weren't in a debt based economy. Being able to make money out of thin air kindof gives you the upper hand :eek:

The question is not can the Fed can do things to stop a recession, the question is will they and what will they do to make the economy stronger in a meaningfull manner.
A government cannot make the economy stronger, every communist government has tried it and failed. The only way we can get back to sanity is to get rid of this monopoly money business.

:2cents:
 

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I agree with much of this, but a couple of points not so muc.

It was greed and not just Americans wanting the dream. Many people bought more than one home, so me several with the belief that they could flip prior to closure or at leasst within a few months of closure. That was greed.
Mortgage companies using shady selling tactice to dump high profit mortgages and then selling them on prior to forclosure. That was greed.
Homebuilders building more homes and selling more mortgages than the market could take all hoping thay could get out before it went pop. that was greed.

Agruably many regluar people got caught as well and that wasn't their doing.

Yes, it's not just a US problem but the issue here is the greatest because the credit philisiphy is so pervasive in the corporate and domestic markets. When we moved over here we soon realized that by using the Us credit system we could live a much richer lifestyle if we wished.

The US has a really odd scheme with credit which I haven;t seen anywhere else in teh world. The more you need credit, the more expensive that credit is. If you're poor and have little credit history you can get a loan but at a very high rate. In the UK rates are the same no matter what your credit history. The difference is whether the loan is available, secured or unsecured. Diffrent strokes admittedly but vsariable rates depending on credig worthiness basically screws the poor.

Printing money and inflation have very little to do with each other. Printing money gets you out of the barter system. Inflation is a way of calculating the cost of money.

You're right about presidents not running the economy, but they do influence it with policy and not just monetary policy. Also governments can direct the course of an economy and these policies affect an economy's strength.
 

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It was greed and not just Americans wanting the dream. Many people bought more than one home, so me several with the belief that they could flip prior to closure or at leasst within a few months of closure. That was greed.
Using that definition of greed just about anyone who tries to improve their life by taking risks would be labeled greedy. In that case, what is wrong with greed?

Someone buying a second home so that they could flip it would be an entrepreneur in my book. They are willing to risk having bad credit for an opportunity to be successful. If nobody took risks and tried to improve their life we would be living in the stone age.

Mortgage companies using shady selling tactice to dump high profit mortgages and then selling them on prior to forclosure. That was greed.
An investors full time job is to determine if an investment is worth buying. Anyone buying up mortgages without making at least a small effort to make sure that they are worth the investment is being lazy and deserves what they get. If the banks provided false data regarding the mortgages then that's a different issue and investors can sue the bank. Of course some banks got around this by slicing up the mortgages and packaging them so that the investors couldn't practically decipher what the heck was in the pacakges but why would the investors buy them then?

If I came to you with a box and told you it was worth billion and asked you if you wanted to buy it? Wouldn't you want to know what was in the box first? Apparently not these investors... ::)

Investment firms have purchased billions of dollars in mortgages without having any clue what was in them! You can blame the banks for selling those bad mortgages but I think ultimately it's the investors fault for not looking more into it, that's their full time job after all to research these things!

Homebuilders building more homes and selling more mortgages than the market could take all hoping thay could get out before it went pop. that was greed.
That's competition. There are millions of products that don't get sold every year because someone with a better product comes along.

But the root of the problem is our debt based economy. Everyone has been conditioned to believe that we can continue to buy, buy and buy. So it's only logical that home builders would build more and more houses. The banks, the government and consumers are encouraging them to do it!

Greed? Sure, everyone wants to make a buck. Capitalism wouldn't function if it wasn't for greed. But free money breeds unsustainable levels of greed.

Agruably many regluar people got caught as well and that wasn't their doing.
I know a lot of 'regular' people that live in McMansions. Regular people are just as greedy as the bankers and the politicians.

Wether you like it or not we're all greedy.

Yes, it's not just a US problem but the issue here is the greatest because the credit philisiphy is so pervasive in the corporate and domestic markets. When we moved over here we soon realized that by using the Us credit system we could live a much richer lifestyle if we wished.

The US has a really odd scheme with credit which I haven;t seen anywhere else in teh world. The more you need credit, the more expensive that credit is. If you're poor and have little credit history you can get a loan but at a very high rate. In the UK rates are the same no matter what your credit history. The difference is whether the loan is available, secured or unsecured. Diffrent strokes admittedly but vsariable rates depending on credig worthiness basically screws the poor.
I agree. That is what happens. But you have to consider that a bank is wondering why a poor person is poor? There isn't exactly a shortage of jobs in America. Anyone determined enough can become wealthier. So any bank would be responsible to consider why a poor person is asking for credit. If they weren't able to manage their money to get out of being poor than what faith could the bank have in the individual that they would pay back the debt. Of course, this isn't always true and that's why we have so many poor people getting loans to buy expensive houses (of course, in many of those cases the banks have merely found some sucker investors to repurchase the loans ;) ).

I think the point here is that it's a very broken system -- all because of easy money.

Printing money gets you out of the barter system.
Yes and there are many variants of 'printing money'. You can have governments printing fiat money or certificates redeemable for some commodity (gold, silver, what have you). You can also have private individuals printing money redeemable for some commodity (see: http://www.libertydollar.org ).

In my original statement I was referring to fiat money. Which is obviously not the only way to get out of the pure barter system.

Inflation is a way of calculating the cost of money.
The cost of money is a direct result of there being more money printed. The more money you print the less value it has and the less money you print the more valuable it becomes. I guess both definitions are correct for all intents and purpose. I just prefer to get at the root of the problem which is the printing of money as opposed to the result of the problem which is rising/falling prices.

I guess it's better to qualify it by saying inflation of the money supply or price inflation. I agree those are different things.

You're right about presidents not running the economy, but they do influence it with policy and not just monetary policy. Also governments can direct the course of an economy and these policies affect an economy's strength.
By the same token me and you also have an impact on the economy but still no one individual has as much impact as Ben Bernanke.
 

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Discussion Starter #10
Milton Friedman on Greed:

 

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Good video, and I agree.

I didnlt say greed was bad and calling it good doesn't stop it being one of the reasons for the current financial problems. Greed drived productivity and that drives and economy.

If I came to you with a box and told you it was worth billion and asked you if you wanted to buy it? Wouldn't you want to know what was in the box first? Apparently not these investors...
Yes, but who is to blame the individual who invests directly of the managed fund that invests on someone's behalf. what about the bank that issued the loans after flouting the lending basis for the fund?

That's competition. There are millions of products that don't get sold every year because someone with a better product comes along.
No, that's pure greed as the CEOs build their companies to get big bonus payments before jumping ship and letting the next CEO clean up the mess. Competition is where you develop your firm to compete sucessfully with your compettitors. Risking the company's future to the extent of KB Homes and others where they risk bankrupcy is based on profit greed and is not sound business management. Having your mortgage arms falsify paperwork to get mortgages approved is not good management.

Wether you like it or not we're all greedy.
I disagree. Take me. I make six figures, have a comfortable life and own a home in Spain as well as here. I have one Mortgage and about 2k on credit cards and that's the limit of my credit. My rating is good in teh mid 700s and I'm not as greedy as many of my friends who seem to be leveraged to the eyeballs. I have lots of available credit but don;t care to use it.

I think the point here is that it's a very broken system -- all because of easy money.
I agree 100% on this .

In my original statement I was referring to fiat money. Which is obviously not the only way to get out of the pure barter system.
Good point.

The cost of money is a direct result of there being more money printed. The more money you print the less value it has and the less money you print the more valuable it becomes. I guess both definitions are correct for all intents and purpose. I just prefer to get at the root of the problem which is the printing of money as opposed to the result of the problem which is rising/falling prices.
Not entirely correct. A dollar note is worth a dollar, supposedly backed by the Gold Reserves, though most countries don't seem to bother as there is not enough gold in the world to back up the paper money. Inflation is when the cost of living rises so that the price index goes up and what cost you a dollar last year now costs you a dollar and four cents. That would mean inflation of 4%. It affects the price index as homes go up while other items from Walmart go down and so on.

By the same token me and you also have an impact on the economy but still no one individual has as much impact as Ben Bernanke.
This is true, be it good or bad.
 

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I believe this is the actual Morgan Stanley report discussed in the article above:

Recession Coming
December 10, 2007
By Richard Berner & David Greenlaw | New York

We’re changing our calls for US growth and monetary policy. Since the shock of tighter financial conditions surfaced in August, we’ve incrementally reduced our outlook for future growth. But the time for incremental changes is over. A mild recession is now likely: We expect domestic demand to contract by an average 1% annualized in each of the next three quarters, no growth in overall GDP for the year ending in the third quarter of 2008 and corporate earnings to contract by 5-10% over that longer period. Three factors have tipped the balance to the downside: Financial conditions continue to tighten, domestic economic weakness is broadening into capital spending, and global growth — for us, long the key bulwark against a downturn — is slowing.

The prospect of real GDP growth persistently between 0-1% changes the character of and risks to the outlook. Thus, even if the data do not immediately validate our call, we expect the Fed to insure against worse outcomes. That process should start this week with a 25 bp reduction in the Federal funds rate, a 50 bp cut in the discount rate, and possible extensions of term open-market operations to as long as 65 business days to help ease strains in money markets. Following that, we think officials will ease by at least another 75 bp over the next 7-9 months. Here’s why.

First, compared even with a few weeks ago, financial conditions have tightened significantly further as the price of credit has risen and lenders have made credit less available. Money-market rates have risen significantly, and yield spreads over those money-market rates on loans have stayed high or widened. Three-month dollar Libor-OIS spreads have jumped by 60 bp to 100 bp over the past month, so that Libor rates in that tenor are merely 20 bp lower than where they were in the spring. Some of that jump in Libor rates reflects the transitory impact of year-end precautionary demands for liquidity. But we think that some also represents a more fundamental deleveraging and re-intermediation of the banking system that will last well into 2008 (see “Funding Pressures: More Fundamental than Turn of Year,” Global Economic Forum, November 19, 2007).

Leveraged loan and credit default swap spreads over Libor, meanwhile, have been mixed: They have tightened appreciably over the past fortnight but have widened by 40 bp or more over the past month, measured by either the LCDX leveraged loan index or the S&P secondary LCD/LSTA measures. High-yield and CMBS spreads have widened even more significantly, increasing the cost of borrowing appreciably for lower-rated borrowers, including those in commercial real estate. As a result, the absolute cost of borrowing is higher than in June.

Credit availability, moreover, likely has dwindled beyond where the Fed’s November Senior Loan Officer survey left it. As delinquencies and defaults soar, lenders and investors are tightening credit for commercial, credit card and auto lending, as well as for mortgage borrowers. Delinquency rates on all 1-4-unit residential mortgages jumped to a 19-year high of 5.59% in the third quarter, and the foreclosure start rate rose to a record 1.69%. With home prices just now falling by some measures, credit tightening, and resets looming, more foreclosures are likely. The new plan to freeze ARM resets for five years may be a win-win for some borrowers and lenders; foreclosures are costly for all. However, US bank analyst Betsy Graseck estimates that the partial freeze will only be a modest positive and will not appreciably lower the expected level of bank provisioning (Subprime Rate Freeze Benefit Too Modest to Matter, Sticking with Cautious View, December 10, 2007). In addition, it may add a risk premium to mortgage credit and further reduce its availability. Delinquencies and net charge-offs (NCOs) for other forms of credit are still low by historical standards but they are rising.

The second new factor is coming weakness in business capital spending. This tightening in financial conditions likely will undermine spending to some degree, but three other factors account for most of the prospective weakness in corporate capex. Slower top-line growth itself, sagging operating rates, and a downturn in corporate profits all seem likely to promote a 1.7% contraction in real business capital outlays over the four quarters of 2008.

At work will be the time-honored “flexible accelerator” model of investment, which implies that business investment will respond with a lag to changes in the desired stock of capital in relation to output. As a result, a slowing in the growth of economic activity will depress the level of investment. Managers will tend to extrapolate a slowdown in business activity into dimmer expectations of future growth, lower perceived returns from investing, and a reduced need to invest. Until the economy re-accelerates, therefore, capital spending probably is at risk (see “Capex Recession Ahead?” Global Economic Forum, October 1, 2007). Moreover, the coming earnings recession means internally generated cash flow that has helped to finance investment over the past six years is fading fast as earnings decline — just as lending markets have turned inhospitable (see “The Earnings Recession,” Investment Perspectives, December 6, 2007).

The final factor behind our change in view is that while growth abroad is still strong, slowdowns in Europe and Japan are undermining it. Our European colleagues have cut their GDP growth forecast for the euro area by 0.4 percentage point for 2008, to 1.6%, and by 0.3 pp for 2009, to 2.2%. Eric Chaney notes the reasons: On top of spillovers from the US slowdown, a strong currency, and elevated energy prices, increased stress in money and credit markets is likely to hurt corporate spending for most of 2008. Likewise, David Miles and Melanie Baker think tighter credit conditions and falling home prices probably will undermine UK growth.

And in Japan, our team has just cut their 2008 forecast by a full point to 0.9%. While Japan doesn’t face a full-blown credit crunch, Takehiro Sato believes that domestic policy blunders will combine with the US slowdown to produce serious weakness. Changes to regulations are hurting consumer and small-to-medium business financing; revision of the Building Standards Law has led to a sharp drop in housing starts; and fear of tax hikes has further harmed consumer sentiment. The upshot: Global growth likely will slip from 5% in 2007 to 4.2% in 2008, and the risks lie south of that still-hearty pace. That’s because spillovers into other parts of the world may yet undermine legitimate resilience in Asia and Latin America. And that means downside risks to growth in US exports.

While investors are expecting that an ongoing housing downturn and threats to consumers already menace growth, it’s worth noting some lesser-plumbed features of the domestic scene. First, we think tighter lending standards will depress housing demand further. But even if demand stabilizes, so large is the supply-demand mismatch that builders must slash single-family housing starts by 40% from current levels to eliminate the inventory of unsold homes. As a result, we think overall housing starts will run below one million units in each of the next two years — a level not seen in the history of the modern data since 1959. The housing downturn will likely subtract 0.9% from growth in the next four quarters, and the housing recovery in 2009 will hardly merit the name.

Second, while energy prices have come down from their recent peaks and may continue to slip, the rise in energy and food quotes between June and December of 2007 likely will have drained about $45 billion, or 0.4%, from consumer discretionary income. Moreover, long-term relief is unlikely; Doug Terreson and our oil team expect that crude oil quotes (measured by WTI) will average about $83/bbl in 2008, or about $10 higher than this year (we translate that into a $7 increase for Brent to $79.40).

Thus, consumers still face what could be a perfect storm. Job gains have been supportive of income growth, with monthly gains in nonfarm payrolls running an average 103,000 in the past three months. That is hardly surprising, as the economy grew at a 4.4% annual rate in the past two quarters, and employment lags GDP. But the number of nonfarm self-employed workers fell by a monthly average 138,000 over the same period, although that job canvass is certainly less reliable than the payroll survey. And more timely labor-market indicators such as jobless claims are weakening; the rise to 340,000 on average over the past four weeks is a two-year high. With wages decelerating, income gains are slowing significantly. (As an aside, revised data show that the level of wage and salary income is $45 billion lower than previously thought). Housing prices and stock markets are both under pressure; we expect a 10% real decline in home prices over the next year, and that has just begun. Thus, consumers will be more cautious.

In addition, the same factors that are hitting capital spending are also depressing inventories. Such stocks aren’t especially high in relation to sales, but slipping sales and tightening credit are pushing companies into liquidation mode, especially in motor vehicles. Auto analyst Jonathan Steinmetz thinks that Detroit is switching from “putting money on the hood” to accepting lower sales and making production cuts. We estimate that cuts in motor vehicle output will trim 0.3% and 0.5% from Q4 and Q1 GDP, respectively. Moreover, slipping revenues and rising health costs are constraining state and local government budgets. In response, some officials, like California’s Governor Schwarzenegger, are calling for sizable spending cuts. Finally, a faltering economy will create uncertainty, which itself is the enemy of growth. It will impair willingness to lend and dampen animal spirits.

Those negatives sound like the recipe for a serious recession, so why do we think it will be mild? Although it is slowing, global growth is still strong, and we expect that net exports will add about ¾ percentage point to growth through the end of 2008. In addition, we think that corporate capital and hiring discipline in this expansion mean that there are no business-investment or labor-market excesses to unwind, adding to US economic resilience. Finally, low inflation gives officials the latitude to respond to weakness. But while any downturn in our view will be short and mild, the range of possible outcomes is high.

The Fed, in response to this unfolding weakness, will have more work to do. As Fed Chairman Bernanke noted ten days ago, “market developments have resulted in a further tightening in financial conditions, which has the potential to impose additional restraint on activity in housing markets and in other credit-sensitive sectors. Needless to say, the Federal Reserve is following the evolution of financial conditions carefully, with particular attention to the question of how strains in financial markets might affect the broader economy.” Just to keep monetary policy neutral, the Fed must ease to offset tighter financial conditions, yet we think policy ultimately will need to turn accommodative. At a minimum, therefore, officials will want to bring the real Federal funds rate down significantly. Inflation risks are not dead, with the dollar having weakened, import and energy prices rising, and productivity growth slowing. But the Fed will likely judge that the downside risks to growth outweigh upside inflation risks.

A more aggressive Fed, an earnings recession, healthy growth abroad, and a scramble for liquidity all will reinforce our longstanding market calls for steeper yield curves, higher volatility, and challenges for risky assets. While many of these themes are in the price, economic uncertainty may extend them further. And markets are not priced for the weakness in either US capital spending or the coming deceleration in overseas growth. As our colleagues Abhijit Chakrabortti and Stephen Jen outline in separate pieces, despite the US downturn, those factors lead to two paradoxical and out-of-consensus market conclusions: Outperformance in US stocks and a stronger US dollar (see Atonement – Navigating a US Recession and The Dollar Smiles in a Recession, December 10, 2007).

One risk is that both our outlook and the Fed’s are too optimistic, because they pay too much attention to the economic resilience of the past, and not enough to the future effects of financial and economic headwinds and the dynamics of the downturn. Dramatically slower growth in domestic demand leaves it vulnerable to shocks. Insufficient Fed action could again threaten a deeper economic slowdown. A contrasting risk is that we’re swayed by Wall Street pessimism and that things may be better on Main Street. In our view, downside risks still dominate.
 

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It's a good report. I used to work for a couple of their competitors.
 

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Lex & MickeyC, This is some heavy-duty stuff. Most of the stuff is like talking french to me. I'm a blue coller worker, mid-50's, home paid for, 401-plan that goes crazy,driving a 16 year car, pay my credit cards off every mo. if I use them, low-800 credit rating. What can I do, if anything to get a hedge on economic diaster? THANKS
 

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I'm not a financial advisor but your setup seems pretty smart to me.

If it were my setup i'd keep my 401k out of financial stocks for the time being. I don't think they have bottomed out yet, but as a longer term investment minng and metal production is seeing good demand and over the longer term, say 10 years, it should show good growth. If you're looking for another property as an investment, wait a year or so. Be careful about rental incomes as the market is in a glut right now.

biotech is good but a ig risk though Spencer Trask have a good record of success there and there is always technology. Big now is Virtualization and this area will grow for the next few years with nice levels of consolidation and short term profit potential.

Go to MSN and read the Jubak colum. The guy is right more often than not and he has some colums that may help you.

If you use managed funds, take a look at their 10yr, 5yr and lest 12 months performance and take a good look at what they have been investing in. some of these guys have been a little risky with funds.

My take is that I'd rather take managed risk and be confortable if it fails than take a crazy risk and go for broke. But that's just me and after all, how many houses can you live in, or cars can you drive?
 

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What can I do, if anything to get a hedge on economic diaster?
To be perfectly honest I have no idea, MickeyCs advice sounds good and he obviously has the personal success and experience to back it up.

The problem that I see is that things have gotten really complicated. So I try to err on the side of simple and practical. The most important thing is to live within your means which it sounds like you're already doing. Own your own home debt free in a place where the property taxes are reasonable. Or if you live in Texas you may look into getting a limited allodial title which would allow you to purchase the title of your home from the state out right and no longer pay property taxes for the rest of your life (Nevada also had this but the bureaucrats got rid of it in 2005).

So, priority number one would be to make sure you can continue to own your home despite any economic crises that may come ahead - which simply comes down to being able to afford property taxes.

The next thing would be to make sure you can feed your family. There are of course the very simple stuff like stocking up on a month or more of food in your home. Some other options if you have the money would be to purchase a farm somewhere in the country and rent or lease it out to some farm hands, allow them to make money off the land, etc. If things ever get tough economically you can move to your farm and sustain yourself indefinitely. If things never get ugly then likely by the time you retire the city limits would have reached your farm land and you could sell it for a hefty sum. A much simpler approach is to join food or farm coops. There are all kinds of setups but the idea is that you are helping your local farmers and when things get tough it's much liklier that they would be willing to help you back than if you were just some stranger. Where I live in NH there are a lot of these coops and generally you pay upfront at the beginning of the year ($600 or something) and then pickup fruits and veggies every week while the season lasts.

So, first and foremost make sure that no matter what shit hits the fan you can maintain a reasonable way of life. I'm not suggesting you build a bunker under a basement or get paranoid about things. There are lots of things you can do that would prepare you and save you money at the same time. For example, if you buy things like rice or grains in bulk you can usually get high quality organic stuff for much cheaper than if you bought a little box at the grocery store. So by buying bulk and having some kind of strategy you would be eating better quality food, cheaper and you would have a stock in case things get difficult.

So, once all of the basic needs are taken care of you can try start looking at diversifying your savings. Buy some gold, it does fluctuate price (partly because of a fluctuating currency and partly because the supply of gold also fluctuates), so don't look at it as a high yield investment, but it has proven successful over thousands of years so you really can't go wrong there. Talk to an expert as MickeyC suggested, let someone who knows the market manage a portion of your savings (hopefuly not the investors who'd buy mortgage packages without making sure the people holding the loans can actually make payments ::) ).

If you are interested more in this there is a really cool blog run by a guy who does preparedness consulting for a living. The blog is http://survivalblog.com . There are a lot of very good ideas on there and he definitely knows what he's talking about.

I hope this helps. Just think about things logically, think about what's important to you and I think you'll make the right decisions.
 

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I never heard of the limited allodial title, I'll have to look into that. I live in the country with pleanty or wildlife & large ranches sourounding me, so I don't see food a problem. My main consern is my 401. I can't get to it without getting hit real hard, if it stays there I'm screwed also. I've been putting 25% into it for about a year now since I turned 52. For some reason I feel real bad about that move.
 

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I never heard of the limited allodial title, I'll have to look into that. I live in the country with pleanty or wildlife & large ranches sourounding me, so I don't see food a problem. My main consern is my 401. I can't get to it without getting hit real hard, if it stays there I'm screwed also. I've been putting 25% into it for about a year now since I turned 52. For some reason I feel real bad about that move.
You may look at doing an IRA vs the 401k. Here is an article that discribes the differences: http://www.usatoday.com/money/perfi/columnist/krantz/2005-11-25-retirement-accounts_x.htm
 

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Good artical, I've read a bunch like it. But from what I'm getting from a ( GREAT DEPRESION II) No matter where you have your savings, that money would be non-existant, worthless, the rich will be jumping out of windows, & we will be going back to some kind of boarder system.
 

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Good artical, I've read a bunch like it. But from what I'm getting from a ( GREAT DEPRESION II) No matter where you have your savings, that money would be non-existant, worthless, the rich will be jumping out of windows, & we will be going back to some kind of boarder system.
If you want to get an idea of what will happen the best place to look is Argentina. There was a really excellent collection of posts by a guy who lived through the collapse there but it was taken down. I have a backup of it. Let me see if I can stick it online for you to read. I think you will thuroughly enjoy it.

Stay tuned...
 
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