Is this guy a Chicken Little, or is the global economy on the brink of a depression?

Great Debates
1

I won’t try to recap everything in this blog by Ambrose Evans-Pritchard of the Guardian, but his basic point seems to be that Western governments have been getting away with a great big Ponzi scheme for decades and now the world economy is about to hit the wall. It’s a bit dense–frankly most of the technical jargon eludes me–but frankly for quite some time now I’ve felt that our economy is a house of cards and a strong wind’s starting to blow.

So am I being a nervous Nelly? Or should I stock up on gold, canned goods and firearms and start looking for a cave in the Rockies?

2

:smack: That’s the Telegraph, not the Guardian. I trust our cousins across the pond will be kind enough to forgive me.

3

Okay, I’m going to bump this thread once and see if I can get some kind of response here.

I’d like to believe this guy is wrong. However, I’m not knowledgeable enough about economics and the business world to say. Maybe he’s a crank. Maybe he knows what he’s talking about. I’m asking folks who do have some knowledge of these things to offer some opinions and maybe kick it around for a while.

Now, I’d also like to believe that our business and political leaders are savvy enough to keep such a thing from happening, but in light of recent history, I’m not reassured. The Enron disaster, the meltdown in high risk mortgages, the breakdown in local, state and federal emergency response in the wake of Katrina, the utter lack of foresight which left north Georgia’s water supplies in jeopardy*, the illegal immigration disaster–none of these inspire much confidence in our leadership these days.** The continuing devaluation of the dollar, which is leading some Mideast countries to consider switching to a basket of currencies rather than rely on the dollar as a reserve currency, can’t be a good sign.

So I’m nervous, and I’m asking you guys who do have some degree of expertise in this subject: Should I just relax and get some sleep, or would it be a good idea to batten down the hatches?

*And that one’s very personal.

**And I’m not going to talk about Iraq. I’m feeling just too fragile for that this morning.

4

I read the blog and it doesn’t seem particularly doom and gloom. The US economy is likely to have rough patch coming up, but I don’t see the rest of the world suffering too much.

The US dollar weakening is a good thing; it’s been overvalued for too long. The US net savings rate is way too low (currently at negative a fraction of a percent). The more the world decouples itself from the dollar, the better. Switching oil prices to euros (or a basket) will help Europe avoid recession. China will need to switch the yuan as well, or they’ll have some nasty inflation.

I think the US is likely to have a recession, or at least a slowdown, but there’s no reason the rest of the world has to anchor themselves to us.

5

Other than the fact that we are the world’s largest consumer base, and consumption is what drives economies?

6

Well, the first and most glaring problem with his thesis - and hell, you don’t even have to read it to come to this conclusion - is that he’s predicting the future. The central, most important thing you must always remember about any prognostication, no matter how logical or reasoned it is or how smart the person making it is, is that it’s probably wrong, and the more specific it is, the likelier it is to be wrong.

Evans-Pritchard, to put it in simpel terms, is basically saying this:

  1. The economy is based on credit,
  2. Credit has gone to shit, ergo
  3. The economy is going to follow.

Well, that’s possible. But there’s a few flies in his argumentative ointment, in the sense that many of his own examples - house prices dropping, the U.S. dollar falling in value, security insurance isn’t selling - are themselves indications that the economic is reacting logically to correct a surplus of credit. The U.S. dollar falling, for instance, isn’t necessarily a bad thing, despite the irrational pride people place in it. Why poeople get all worked up over their dollar devluing against foreign currencies I will never understand. I live in Canada, where the value of a Canadian loonie against the greenback is their weird source of national pride, and our dollar being at $1.04 US is practically giving people boners despite the fact that IT’S NOT GOOD FOR US! Higher Canadian dollars = fewer exports to the USA = fewer jobs. A lower U.S. dollar, low for a good long time, could reinvogorate U.S. manufacturing and exporting.

If the market corrects, it corrects; the question is whether or not there’ll be a panicked correction or a relatively slow one. In today’s economy, the likelihood of mass panic and corresponding economic devastation is really not that great.

The fact that the U.S. government is inept really has jack shit to do with it. Enron was not the government’s fault; the government can’t catch every thief, after all. But all that said, the only thing Washington could do to really screw up the world’s economy, short of starting World War III, would be mass protectionism. Even with protectionist emotions running high, it’s not likely that we’ll see massive tariff barriers.

COULD there be a huge global economic crash? Hey, there could be a global nuclear war tomorrow; any disaster is possible. But I wouldn’t bet on it.

7

I hear this line of reasoning a lot, but I don’t understand it. Taken to it’s logical conclusion, a country should be in great shape after its currency collapses, because look at how cheaply it’ll be able to sell its goods overseas! When our cuurency is on a par with the Mexican peso, every country with strong currency will want to move its factories here! Full employment!

Hooray!(?)

8

Without a few Doper economists to come along with something that makes sense to the rest of us, perhaps this thread should be resurrected, it not attributed, at least once a month for the next year. At the very least there will be one side gloating neener, neener, in a years time, or a number of oh shits!, because the economy went soft, or off the deep end.

9

Yeah well, it’s a double edged sword of course.

You want a currency that is as weak as possible against your major export market and as strong as possible agianst your major import partners. The Mexican peso is not in good condition because despite the fact that it is very weak against the US (a major export market) because it is also weak against Mexico’s major importers.

Canada would ideally want a dollar that is worth slightly less than the greenback so they can sell stuff to the US, but slightly more than the Chinese or Korean currencies so they continue to buy stuff at a good rate. With the Canadian currency over US$1 they can buy well but they have a tough time selling anything to get the money to buy with. Major cash flow problem. Ideally the Candian dollar would be worth about US$0.80. That allows easy sales to the US market, and in turn leaves enough money to buy from the Asian markets at a favourable rate.

10

Additional reading on the topic from Krugman (I haven’t had time to go through this).

Warning: pdf

http://www.econ.princeton.edu/seminars/WEEKLY%20SEMINAR%20SCHEDULE/SPRING_05-06/April_24/Krugman.pdf

11

That’s not true for the same reason that any number fo extremes aren’t true; drinking a few glasses of water a day is good for you, but drinking forty gallons will kill you.

A sudden collapse of a currency - if, say, the US dollar were to drop to half a cent Canadian in two months - would be a disaster simply because of the huge panic-induced costs involved in such a rapid change. Investments and savings in US dollars would effectively be wiped out; consumer goods reliant on imports would skyrocket beyond anyone’s ability to buy them; inflation would run away, and nobody would save, which leads to other problems.

In short: Correction’s good. Panic’s bad. We’re seeing corrections, and the more you see the less likely panic is in the long run.

A marginal change, such as what we’re seeing now - the dollar is not collapsing - is clearly just a revaluation of the currency, and can be good for exporters. The U.S. has a huge trade deficit, as I am sure you know, and that was partially due to the dollar’s over-valuation. All those jobs you hear Lou Dobbs bitching about going overseas were going in part - not entirely, but in part - due to the high dollar making exporting more difficult than it already was. Drop the dollar a little and overseas outsourcing is that much less valuable.