Courtesy of David Rosenberg

Obama’s State of the Union 2011:
“Two years after the worst recession most of us have ever known, the stock market has come roaring back. Corporate profits are up. The economy is
growing again.”

Herbert Hoover, May 1st 1930, US Chamber of Commerce Meeting:
“While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover.”

Obama’s State of the Union 2011:
“Thanks to the tax cuts we passed, Americans’ paychecks are a little bigger today. Every business can write off the full cost of the new investments they make this year. These steps, taken by Democrats and Republicans, will grow the economy and add to the more than one million private sector jobs created last year.”

Herbert Hoover, October 22, 1932, campaign speech in Detroit:
“It can be demonstrated that the tide has turned and that the gigantic forces of depression are today in retreat. Our measures and policies have demonstrated their effectiveness. They have preserved the American people from certain chaos. They have preserved a final fortress of stability in the world.”

Obama’s State of the Union 2011:
“But now that the worst of the recession is over…”

Herbert Hoover, June 1930, to a delegation requesting a public works project:
“Gentlemen, you have come sixty days too late. The depression is over.”

Obama’s State of the Union 2011:
“The steps we’ve taken over the last two years may have broken the back of this recession…”

Herbert Hoover, State of the Union, December 6, 1932:
“The unprecedented emergency measures enacted and policies adopted undoubtedly saved the country from economic disaster…”

What if … As Albert Edwards, Societe Generale’s global strategist, sees the risks running quite the opposite of the consensus, which has a global recovery on track with a steadily falling dollar. Instead, he looks for a double-dip back into recession leading to a surging greenback, with a collapse of “the China economic bubble” resulting in a double whammy for commodity prices.

He points to signs of doubts about the U.S. economic recovery, from the labor market remaining “very sick” with the uptick in unemployment rate over 10% plus the Conference Board’s consumer finding showing jobs getting still harder to get. Meanwhile, the ECRI Leading Indicator, which trumpeted recovery earlier in the year, has fallen for five straight weeks.

What if… China no longer will be accumulating currency reserves at nearly the same pace, leaving less to recycle into U.S. Treasuries. The reduced capital inflow would also slow China’s domestic monetary growth and real output, which track each other. Meanwhile, capital outflows from Japan, another source of global liquidity, could be hampered were there a sharp rise in its government bond yields.

What if… A synchronized end to the Chinese and U.S. economic recoveries could play out in increased protectionist pressures, including competitive devaluations.The sort of deflationary crisis, resulting in competitive devaluations, protectionism and contracting world trade that  recalls what happened in the 1930s more than what happened in the 1970s.

There is a lot of talk about the possibility of heading towards a ” New Great Depression” but we do NOT think so.

The good news is that we think  that we aren’t headed for the Great Depression, but the bad news is that we are in for the Great Recession, where household sector, the nonfinancial business sector and the financial sector will suffer a lot.

The contraction in asset values and debt will ultimately be pushed even further than they would normally have to go. So it is going to take years.

Here is a very basic fact about this period. Balance-sheet contraction makes it impossible for the private sector to generate the profits it needs to function, whereas balance-sheet expansion generates booming profits. Therefore, it isn’t a matter of getting rid of the bad assets from the bank, and then the economy is ready to go. This process involves not just cleaning up the banking sector, but also shrinking assets and liabilities.

We think that the earliest recovery would be in 2010. But we are not sure we are going to get a recovery then, based on the economic-stimulus plan that has been passed so far, although it is moving in the right direction. The enormity of what it is trying to overcome may be too great. It is very likely we will see additional moves by the government later this year, so there will be something added, mainly because of higher unemployment.

One of the problems for any government trying to deal with this situation is the expectation that, like past recessions, it is a problem that should get cleaned up and we should go back to some level of prosperity

Among the possible outcomes of this shock are: massive and prolonged fiscal deficits in countries with large external deficits, as they try to sustain demand; a prolonged world recession; a brutal adjustment of the global balance of payments; a collapse of the dollar; soaring inflation; and a resort to protectionism. The transformation will surely go deepest in the financial sector itself.

The proposition that sophisticated modern finance was able to transfer risk to those best able to manage it has failed. The paradigm is, instead, that risk has been transferred to those least able to understand it. 

Remember what happened in the Great Depression of the 1930s. Unemployment rose to one-quarter of the labour force in important countries, including the US. This transformed capitalism and the role of government for half a century, even in the liberal democracies. It led to the collapse of liberal trade, fortified the credibility of socialism and communism and shifted many policymakers towards import substitution as a development strategy.

The Depression led also to xenophobia and authoritarianism. Frightened people become tribal: dividing lines open within and between societies. In 1930, the Nazis won 18 per cent of the German vote; in 1932, at the height of the Depression, their share had risen to 37 per cent.

The impact of the crisis will be particularly hard on emerging countries: the number of people in extreme poverty will rise, the size of the new middle class will fall and governments of some indebted emerging countries will surely default. Confidence in local and global elites, in the market and even in the possibility of material progress will weaken, with potentially devastating social and political consequences. Helping emerging economies through a crisis for which most have no responsibility whatsoever is a necessity.

IMF latest analysis : http://www.imf.org/external/np/g20/pdf/031909a.pdf