From what I read the world economy is about to implode…or explode…or something else real bad. Greece, Portugal, Spain, Ireland, Italy are within days, maybe minutes of total destruction. And the US is now 15 trillion in debt, or another way of putting it is, if we pay off 15 trillion, we’ll be broke.
So what is going to happen? Massive depression like in the 1930s? A couple more years of doomsaying and recesssion/depression, and then an upcycle starts? Or maybe the worst is over and everything starts getting better this week?
And what should I do to protect myself and my family? Become a survivalist? Sell my house? Buy stocks? Buy bonds? Buy farmland? Sell everything and hide the money under the mattress?
I’m not sure if this belongs in GD, but I thought I’d try it here first; maybe there are a few facts out there. Of course, posters may say things like “If congress does____then we can expect____” or “If Romney is elected, then we can expect____.” I’d be interested in those thoughts also.
And, if the mods decide this belongs in GD or IMHO, that’s fine.
India, China, and South America are booming. In comparison, Greece, Portugal, and Ireland are barely worth mentioning other than the fact their debt might cause a few problems. In my view the ECB is handling this well. The PIIGS are a tiny part of the world economy.
In the US I don’t see the budget deficit as a big problem as long as interest rates remain near historic lows. As long as US GDP is above 1% we will avert any economic disaster.
Some say the government needs to spend, spend spend (to get the economy going again); others that it needs to cut, cut cut (to prevent the so called debt getting any bigger, I think).
If I asked you in 2000, before 9/11, what the future would be, what would you answer?
If I asked you in 2007, before the economic meltdown, what the future would be, what would you answer?
It doesn’t matter whether I ask you or ask an “expert,” nobody sees the future. The future is unpredictable.
There are long-term trends that will continue. China will grow. But it also has huge internal problems that will blow up on it sooner rather than later. Europe will recover from the current crisis and its total economy is enviable. But it has a huge problem with hated toward immigrants and that will blow up sooner rather than later. India is rapidly expanding and is becoming an information powerhouse. But it has huge divisions between classes, language-speakers, and areas and that will blow up sooner rather than later.
IOW, the whole world has magnificent opportunities as well as impossible internal problems. Which, remarkably, is just like us.
Note that the following may not actually be true.
“A widely cited incident involves when J. P. Morgan (1837-1913) was asked by someone what the market would do that day. ‘It will fluctuate, young man. It will fluctuate,’ Morgan reportedly replied.”
[Quote=Lex’s dad]
Son, stocks may rise and fall, utilities and transportation systems may collapse. People are no damn good, but they will always need land and they’ll pay through the nose to get it!
[/Quote]
Good in theory. Has been known to work in practice.
But you can bankrupt yourself if you sink all your assets into land that nobody wants yet and provides negative returns through taxes.
And if you’re in a country where the government owns all the land, that’s not even an option.
Beware investment advice that claims to be universal but works only in one time and place and under only certain conditions. Better yet, beware investment advice.
Anytime the future of our economy and what our experts have to say about it comes up, I like to reflect on this TED Talk from Tim Hartford about the “God Complex.”
While it’s true that only the CIA knew Bin Laden was determined to attack within the U.S. in 2000, thousands of smart experts knew that the technology sector was massively overvalued and would drop.
Experts talked about the risk of the real estate bubble years before your average home buyer even knew that home prices were skyrocketing and would continue to do so forever.
It’s always possible to look back and find a few people who made a perfect prediction, and of course you need to be wary of how much was talent and how much was luck. But people saw big things like the housing bubble and financial system collapse coming.
You can read Michael Lewis’ The Big Short to see the people who saw and profited from the 2007 collapse. Plenty of people knew there was a real estate bubble, plenty of people (too many, in fact) tried to hedge against the bubble bursting, but few people saw beyond their own little corner of the market.
I have no doubt there are people out there who are betting on a collapse and are planning to profit from it. Remains to be seen if they’ll have books written about them or not.
Basically, nobody knows. Remember that economics is a relatively new field, and they are basically a few stages of above the “alchemy and leeches” phase. Added to that is that it has deep ideological divides, and it’s not unknown for economists to have an agenda. And then the world keep inconveniently having massive sweeping changes, rather than neatly operating in predictable cycles- technology, globalization, etc, keeps screwing with us. Our sample size for how phenomena work past “the industrial revolution” is relatively limited to a couple hundred years, and fragmented into hundreds of countries with their own economies that interact with each other in complicated ways, and sometimes these individual countries do things that make absolutely no economic sense.
So there is no real way to know. History shows that basically anything can happen.
The economists I know are somewhat pissed off that things have been handled so poorly. There are people who can be blamed, but they are not the ones having to shoulder the economic burden for their mistakes/gambling/etc. I know people who are worried about the decline of the global middle class, and increasing wealth polarization even in places like China. I think the worst-case-scenario is less like Mad Max, and more like modern South Africa…lots of very poor people in shanty towns with poor public services, and a smaller amount of people living an upper middle class lifestyle behind tall, barbed-wire topped fences. Indeed, we are seeing a transition away from the idea of “rich countries” and “poor countries” and seeing more of these stark economic differences being within countries.
The again, I mostly know development economists, and they are going to be more concerned about that than some other type of economist.
Anyway, I feel a lot of frustation but not a lot of fear. Countries go through crisis. It happens all the time. Countries even go into complete economic collapse fairly often. Usually they recover. It’s ugly for a while, but it’s not like broke countries explode or anything.
Who’s the famous trader who turned Bear in 1929 when his shoeshine boy started giving him stock tips? (Or am I thinking of Stringer Bell who sold Nokia and Motorola when he noticed his lowest corner boy had two cell phones? )
It’s very hard to believe smarter speculators were unfamiliar with the bubble concept. Yet the mass media was bombarding Americans with a “Home prices will continue skyrocketing forever!!!” message. Remember the 1990’s bestseller with a title like The Dow will go to 100,000 points? (Or was it 1,000,000 points – I forget.)
I can’t give you detailed cites; the clearest example may be a top-notch Merrill-Lynch analyst who, in private e-mails, described as “dogs” the very stocks at the top of his public Recommendation List. (Did he go to prison, and if not, why not?)
The transfer of wealth, as a result of recent collapsed bubbles, from the gullible public to smart Wall Street operators may be one of the biggest wealth transfers in all of history. (Some here may call this caveat emptor capitalism at its finest. :smack: )
My previous post only hints at a partial answer, which is: Don’t rely on “popular wisdom” for long-term financial prediction.
The Efficient Market Hypothesis, which may be useful for short-term predictions, often fails dramatically, IMO, in the long term. Case in point: I see many Dopers predicting that U.S. inflation is not likely in the medium term “because U.S. bonds are priced high.” But central banks, seeking stability, prop up these bonds and traders respond to that, not to a sanguine view of the future.
I still haven’t answered OP, and don’t claim to know the answer. But with increasing resource scarcities, destabilizing technological and cultural changes, and politics increasingly paralyzed or irrational, I envy anyone who can remain optimistic.
I recommend that the ECB allow higher inflation, or better, implement an NGDP path level target (which would result in higher inflation in the short term though not necessarily over longer periods).
As much as I have the will to do so, I try to limit my predictions to abstract if-then statements about well-established causal relationships. If I drop my pencil, it will fall toward the ground. If NGDP levels return to their pre-crisis trend line, things will get better more quickly. If not, then they won’t. My political read is that this is unlikely to happen. I think the eurozone is unlikely to exist in its current form two years from now. But that’s politics, and politics is messy. Other things have a tendency to come up.
In the middle of the worst downturn since the Great Depression, the ECB decided it would somehow be a good idea to tighten money with higher interest rates. They did so twice.
Dealing with a crisis of running out of time, they made the decision to shorten the fuse.
The Italian government, by itself, has the third largest sovereign debt market in the world.
It has the single largest sovereign debt market in Europe.
The eurozone brought European financial markets closer together, thus putting balance sheets in places like Germany into more exposure to the possibility of a default. The entire European financial system hangs in the balance on this one. The world economy, in turn, would itself be exposed to a European financial collapse. Countries like Spain are already experiencing Great Depression levels of privation, and the dominoes are set up in such a way that things could easily become even worse. It’s nice that India and China are growing, but there is at least the possibility here of the sort of mess we last experienced in the 1930s repeating itself, GDII instead of Great Recession. It would be nice to have people at the ECB who showed some understanding of that.
There are some legitimate criticisms of the EMH, but it’s hard for me to see that as one of them.
New information comes to light over time. Markets will then shift to incorporate that information. Over a longer time period, one would naturally expect a larger chance of highly surprising information to come to light. Even as market predictions become ever more imperfect over longer time periods – as one would naturally expect – the market remains, in many contexts, the best estimate we have available by being somewhat less wrong than the alternatives.
Of course, the EMH is a useful starting point for thinking about these things, not the Word of God. But we’d better have a good reason to disagree, large mountains of immediately relevant evidence. Evidence against the market is entirely lacking in this case. This story is straight-forward. Bond prices are high, while the spread between TIPS and typical bonds is low, because inflation expectations are low because the future is looking sustainably bleak. It’s a silly and preventable problem, but at least it’s better than the unsustainably bleak situation in Europe.
So people who shorted Internet stocks in 1999, or mortgage packets more recently, just got lucky?
My opinion is worth no more than I charge for it, but I think people confidently buying Americans stocks or bonds for the long-term now are likely over-confident.
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