Gail The Actuary Presents Her Outlook

Gail the Actuary on the OilDrum presents a thoughtful, well-organized piece on economic prospects for 2009. She outlines levels of debt resting on actual income. The economic outlook is not rosy. Below is her opening figure:

She points out that

It is only when the system is under stress, and shortfalls in income of the ordinary citizen start shaking the system, that these connections becomes clearer.

She notes that there are “many feedback loops” in the tower.

When things are very good, the feedback loops tend to make things look very, very good (higher wages-> higher spending -> profitable businesses -> more hiring -> rising home prices -> less need for government programs). These same feedback loops work the opposite direction when things are bad (layoffs, for example), making a bad economic scenario truly terrible. The huge tower is also expensive to maintain, and takes resources from productive uses, like building infrastructure and new factories. As more and more layers are added to the tower (like TARP), the tower becomes more and more unstable, and more and more likely to have big reactions to small events.

To drive her point home, she presents the following graph:

I would add one graph of my own:

Unless root causes, not symptoms, are addressed, then there is little hope that the future will be very bright. We move blindly from one crisis to another, trying to staunch the latest wound with another expensive band-aid.

We have become incapable of holding more than one idea at a time.

Does the lobby wheel cater only to special interests that have led us into the health care morass and other disasters as well? Will the vulture-lobbyists-politicians be there to guide the latest stimulus package? You betcha. But forget about them. We need the stimulus package.

Have banks refused to loosen up credit after being given loads of money? You betcha. But forget about them. We failed there. Let’s try something else. Bring on the latest stimulus package.

Is our trade deficit and current account balance dangerous? You betcha. Forget about that. We need the stimulus package. Besides, only a handful of economists–Peter Morici among others–have complained. We should be glad we are getting cheap goods. Well, to keep its export machine going, Asia will certainly do its best to make that export machine alive. Goods will be even cheaper. Deflation is on the prowl.

Are the massive and dangerous trade imbalances a result Asian currency manipulation, export tax rebates, cheap labor–and a flood of FDI into these countries trying to cash in on the export machine to the U.S. You betcha. But forget about all that. Get the stimulus package going. We can’t let their export machines collapse. Globalization, as structured, needs to be rescued.

Always the latest crisis; always the latest short-term solution. Is there any vision? Hardly. We are watching a parade of the thoughtless, the foolish, and the dangerous.

I am reminded of Eugène Ionesco’s Rhinoceros where crowds of people morph into dangerous, thoughtless rhinos, blindly following each other in one rampage after another.

And where were the economists, even those we most admire?

With Nouriel Roubini at the academic helm, a year ago the World Economic Forum issued its 2008 Financial Development Report. Guess what? The U.S. was rated number 1 in financial sophistication and maturity.

Talk about squaring the circle! The link to this report has been put on this site a number of times. (I did once or twice; Movie Guy did once.) You can lead a rhino to water….

One year later, we are on the verge of the next Great Depression, so says Krugman…and I agree. Did the economists for that Financial Development report take a vote, after polling numerous well-heeled CEO’s and fellow economists? Damned if I know.

But consider all the glowing predictions and all the glowing congratulations that have been made and offered in the past six years. The world is on the path to a new millennium, the hey-day of free trade as orchestrated by the WTO and the globalization zealots, who cared not a whit that global imbalances were growing ever more precarious. It will all right itself in the end, they said. Just keep the party going.

Gail sets her grim picture against resource depletion as world population increases. I depair of even thinking about that problem, along with that nameless other (global warming. Forget I even mentioned it.)