2714: Economic Forecast, 4 April, 2009

The situation in the economy has played out to the point where some trends came come into focus. Equally important,the Obama administration's objective, style, and general level of competence have become clear.

1. For the time being, we have avoided a Depression. While it is still possible for a major terrorist attack or an asteroid strike to trash the economy, the nominal situation today is that most major countries are following a policy of economic stimulation. The recent decision to give the IMF another $1T extends this policy to the international trade system.

2. What we have is easily the worst recession since the 1970s, and is probably the worst recession since the 1930s. It has not hit bottom yet. Nobody expects the bottom much before June, and the consensus is that January, 2010 is when global economic growth will resume.

3. Unemployment will continue to increase, both in the US and in the world generally. The political implications of this are unknown, but probably bad.

4. The Fed is going to have its hands full, as the money supply plays "crack the whip". During the next 6-12 months, the Fed will be expanding the money supply at a high rate, in order to get the financial system working again and in order to prevent a liquidity trap. Then, they will have to contract the money supply at a high rate, in order to prevent inflation. This is not going to be easy.

5. Once this recession is over, things will not return to the previous situation. If Peak Oil has already happened,* then we are going to recover from the current recession into a world of permanently high oil prices and limited capital for non-energy-related investment.

6. The stock market is much harder to predict than the physical economy, but I will try:
The current rally will not last. The DJIA is going to go to 5500. Even if that particular prediction is wrong, you can be sure that the lows will be tested before we see a new bull market. I don't know where the bottom of the market will be, but the rule of thumb is that it occurs at 1/3 the value of the top, adjusted for inflation. The top was 14400, so the bottom should be something like 4800.

The reasons why I expect a recovery in December are kind of boring and technical, mainly focusing on stuff like the TED spread and the shape of the bond yield curve. The bottom line is that the Fed cut interest rates starting last Fall, and there is a 9-18 month lag time before this sort of Fed action causes the physical economy to recover. "Mark your Calendar". The reasons why I do not expect a recovery before December focus on the poor quality of government policy around the world. The US bank bailouts are being done under the rules of "Crony Capitalism", and most of the money is not going to places where it will help real people. The political backlash from that makes it very difficult to provide any more money to future bailout programs**.

The Germans and the Japanese have behaved in a completely irresponsible way, basically hoping for their exports to increase as an excuse to do nothing. The IMF is part of the problem, and the Chinese and French fascination with expanding the role of the IMF is inexplicable. Oh, yeah, the US stimulus package is not going to kick in until October, 2009, and the "leftist wish-list" character of the program makes it very unlikely that any additional stimulus money can be extracted from congress. The long-term situation is dominated by the question of what to do about Peak Oil. One major political problem is that people are aware of the fact that the 1973 and 1979 Oil Crisises and the 2001 Enron Electricity Crisis were all scams, and there are a lot of people who think that Peak Oil is a scam. Another problem arises from the "hair shirt greens" whose entire attitude is that Peak Oil is an excuse to force people to give up their cars and live in smaller houses. Equally problematic are the nuclear people.

I tend to regard the "US Oil Import/National Security" problem as a subset of the "US Government is Extremely Corrupt" problem, but that does not make things any easier to deal with. I am afraid that the political system is part of the problem, both with regard to the banking system bailout and with regard to long-term energy policy.

So, here's the bottom line: Things will get worse for the next six months, then they'll start to get better. When we get renewed global economic growth (in 2010?), the price of oil will skyrocket, which will probably cause growth to be capped for a decade or more. The political system will mostly make things worse.

-dave

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* I'm pretty sure that Peak Oil was last year. Even if I'm wrong about that, you can be sure that Peak Oil is less than 20 years away. We have no choice but to deal with it.

** I mean, would _you_ give any more money to AIG?