Depression or Recession? Too soon to know

I have posted a number of examinations of our present economic situation that raised the possibility that we might beheaded into an depression. I also have suggested that i lack the wisdom to determine if that were in fact the case. We have witnessed the collapse of a speculative bubble in the American Housing market. It would appear that this speculative bubble was accompanied by secondary bubbles in the energy and construction materials markets. The collapse of the latter bubble appears to have had little consequences, but the collapse of the housing bubble, appears to have destroyed numerous financial institutions, and to have had vast and disturbing ramifications that are still being worked out.

It is clear that President Bush's economic team was frightened in the fall of 2008, and believed that they needed to act decisively in order to avoid a collapse of the banking system, and indeed the whole economic system. We can assdume that what the Bush economic team feared was something far worse that an economic recession. if we look at what has happened in iceland e can see what the Bush team feared. The entire national banking system of Iceland has collapsed last October. Outside charities have acted to assure that food was avaliable for people whose finances were devistated by the banking collapse. The government of Iceland has defaulted on its bonds. Unemployment and prices are both rapidly increasing in Iceland.

Despite the apparent disaster to the Islandic economy the drop in the GNP is only 10%, enough to qualify as depression range if sustained. What happened to the japanese economy during the last 3 months of 2008, was even worse, loosing almost 13% of its economic activity if adjusted to an annual basis. The contraction of the American economy was not been that great yet, but the cost so far has been breathtaking. So far the downturn has cost Americans:

• An $8 trillion negative wealth effect from declining home values.

• A $10 trillion negative wealth effect from weakened capital markets

The misery is international. Stock markets around the world have collectively taken a terrific hit. The following stock markets data was published by The Economist (21 Feb. 2009) which shows the extent of the fall since Dec 31st 2007:

US (NAScomp) - 44.7%, US (DJIA) -43%, US (S&P 500), Japan (Nikkei 225) -41.3%, China (SSEA) -55.1%, Hong Kong (Hang Seng) -52.9%, Canada (S&P TSX) -53%, Australia (All Ord.) -61%, Britain (FTSE 100) -55.8%, Euro area (FTSE 100) – 59.5%, Euro area (DJ STQxx 50) – 58.7%, France (CAC 40) -56.1%, Germany (DAX) -55.3%, Greece (Athex comp) -73.7%, Italy (S&P/MIB) -63.1%, Netherlands (AEX) -60.4%, Norway (OSEAX) -64%, Denmark (OMXCB) -55.2%, Sweden (Aff.Gen) -57.7%, Russia (RTS, $ terms) -77.1%, Turkey (ISE) -70.3%, India (BSE) -64.9%, South Korea (KOSPI) -62.6%, Taiwan (TWI) -50.5%, Brazil (BVSP) -53%, Argentina (MERV) -56%, Mexico (IPC) -52.9%, Venezuela (IBC) – 55.6%, Saudi Arabia (Tadawul) -56.8%, South Africa (JSE AS) – 54.1%.... WORLD all (MSCI) -51.2%.

In addition to the loss of wealth we have rising unemployment.

It is clear then that the continuing economic disaster of 2007-2009 will have a long term effect on human society. Typically the economic down turn caused by a recession is over after a few quarters. After a a year or two of economic pick up, lost wealth begins to be recovered, as the price of homes and stocks begins to go back up. This does not seem likely under the present circumstances. The impact of such a significant loss of wealth seems likely to belong term, and to negatively impact the standard of living both in the United States and world wide.

Nuclear Green is an energy blog, not an economics blog. Yet the fact is that future energy projects both in the United States and World Wide are linked to the fate of the national and world economy. One of the assumptions which motivated me to start Nuclear Green was that post-carbon energy solutions have to be low cost yet must provide abundant, reliable and sustainable energy. To me this seems obvious, but many of my energy blogging peers are completely oblivious to the questions of cost. I do not for one moment think that I am smarter than they are, but for some reason and despite my limitations, I appear to be a step ahead by asking questions about energy costs, and the impact of the downturn economy on the future of the of energy.

My contention is that the future of energy, that is the future of post-carbon energy belongs to the technology that can deliver reliable, sustainable energy at the lowest cost. i believe that LFTR technology has the inside track to do that, but confirmation of my views cannot rest on my work alone. I lack the technical skills to make that case, although i can certainly point in the directions I think the case should take.

A response to Axil on Economic Cycles

Axil commented on my yesterday's post on the possibility that we wereentering a depression:

What is your opinion of the Kondratieff Cycle? IMO, there may be something to it. If the 54-60 year cycle is based on generation aspects, then it would naturally be 'stretched' beyond 60 years. Since these cycles of wars and economic birth and renewal occur every 2-3rd generation, we can say that when the generation to last see a depression dies off, it's time for another cycle to begin. Our great credit bubble of the last 60 years is being washed away at the very trough predicted by the Kondratieff wave.

Here is my response:
Axil, an interesting idea. It is clear to me that during the 19th century, there were several waves of investment driven economic growth followed by sharp and painful contractions. The expantions ended when capacity grew to such a point that investments failed to return borrowed money. At that point investors lost significant amounts of money, and no further investments in capacity were undertaken, because it would have ben highly irrational to do so. The last such episode was the great depression of 1929. Boom and bust cycles did not stop, but they became localized. I witnessed one such cycles in the Dallas real estate market during the late 1970's and early 1980's. The Dallas economy at that time was dominated by three big banks and smaller but ambitious savings and loans. Dallas was growing so banks began to make more and more loans for speculative construction of office towers while the S&Ls financed a speculative housing market. Loan officers completely lost sight of the probable future demand. The speculative economy convinced everyone that the boom would go on forever, and that there was no downside. Eventually it became clear that office and home construction in Dallas greatly exceeded the demand. The Banks and S&Ls went bankrupt, and the banking insurance agency drained their funds bailing out Dallas depositors. Had that boom been national This contraction hurt the Dallas economy for anumber of years, but eventually a new wave in telecommunications picked up the slack. That wave in turn went through its own boom and bust cycle. Huge amounts of money were lost in fiber optics investments, for example. Cell phone manufacture was a booming business for a while in Dallas, until production shifted off shore.

Spy argues that our problem is not too little production capacity but too much. Too much investment in under utalized production capacity, with Americans borrowing too much in order to consume. But the Chinese save too much while under consuming.

My assessment of the current cycle is that Asian investments in production capacity have exceeded the saturation point. Asian economies are frequently characterized by irrationally high saving rates, so they lack the economic development to consume goods produced locally. As a consequence goods must be sold abroad, but there is a limit to the ability of non-Asian markets to consume Asian made goods. The united States was exporting industrial jobs to China, thus giving up the ability to pay for the goods it bought from China through trade. The Asians basically loaned the money to their customers to pay for the Asian produced goods. American financial institutions turned to speculative investments to make profits. The ultimate driver for those speculative investments was the loans from China, secured by the credit of the United States Government. Eventually foreclosures of speculative subprime housing loans, started a collapse of the speculative investment driven economy. At that point, it seems to me that conditions were ripe for an international depression, of which we are now seeing the early stages. I lack the wisdom to say that this account is certainly true, but this is the way I try to make the events in my world intelligible to myself.

The solution would be for China to develop a consumer economy, so that the people of China will drive in their EVs to Wal-Mart to buy all those 60" LCD TV sets and microwave ovens that China now produces. 1.3 billion Chinese consumers can certainly pull the world out of depression. Meanwhile the United States should put up trade barriers and begin rebuilding its economy. (Did I just say that? Did I just utter the "P" word?)

Depression and nuclear power

Eric Sprott, a Canadian investment funds manager has read the tea leaves. Sprott has stated:

“There are so many job cuts and output cutbacks it’s shocking. That’s not a recession, that’s a depression. I look at the data points and they just scream at me that we are off the cliff.”

During the last few months the Fed and the US Treasury has been running the printing presses at a historically high rate. The money creation machine has been working overtime. Conventional economic theory tells us that this should lead to rampant inflation yet as Craig Harrington notes

Despite the Fed’s creation of hundreds of billions of dollars out of thin air and the Treasury’s massive foreign borrowing campaign, the prices of everything from gas and groceries to electronics and clothing has gone down. Most of us are struggling through economic hardship of our own, and the recent drop in prices has been a welcome relief; but these price corrections could have a more sinister undertone. When prices fall across the board the phenomenon is called “deflation.” If this occurs over the course of a few months we typically herald it as a relief. If it occurs over an elongated time period, it spells doom to an economy.

When prices drop across the board companies are forced to lay off workers, lay offs lead to decreases in disposable income which in turn lead to decreased consumption. In order to bring in customers companies must drop prices further, thus setting off another cycle. If this spirals out of control we could see massive joblessness, falling personal income, and prices so low companies cannot afford to produce or sell goods.

The word depression seems appropriate. What is happening is not a local mater in the United States. We are dealing with a world wide phenomena. The entire golbal economy economy is in a tail spin. The insane economic policies of the Bush Administration have something to do with the problem, but the Bush administration policies were expediencies designed to cope with a deeply flawed international economic structure. In my own oppenion, the problem has at least as much to do with distortions in the international economy by the fact Asian consumption of consumer goods was not growing as fast as their production in China and to a lesser extent India.

From time to time I have to adjust my thinking to catch up with the economiic reality we confront. Chinese overproduction forced prices some dow, while Chines spending to to expand their economy drive the prices of energy and raw materials every higher. Eventually something had to start giving, and eventually the United States absorbed more debt than it could handle, and as debtors were unable to reopay their loans, financial institutions began to collapse, and with the resulting collapse of confidence, consumers world wide have stopped buying.

It is probably too soon to assume that we will have a deep and prolongured international depression, but we certainly cannot rule it out. certainly we will see a reversal of the inflation in the price of energy production facilities. This will be true of nuclear power plants.

Normally a reasonable assumption in predicting the future is that the future will be like the present. This assumption is not always correct, hovever. We seem to be undergone a sea change in the international economy, and its consequences still have to be measured. Many of our deepest held beliefs about economics may have to be unlearned, and the international economic structure may have to be rebuilt.

Recovery will probably be the eventual outcome, but when is the big question. The present national and international debt structure appears to be collapsing. Irving Fisher argued that this is precisely what caused the Great Depression of the 1930's. Fisher postulated 9 factors that lead to the prolongued depression:

1. Debt liquidation and distress selling
2. Contraction of the money supply as bank loans are paid off
3. A fall in the level of asset prices
4. A still greater fall in the net worths of business, precipitating bankruptcies
5. A fall in profits
6. A reduction in output, in trade and in employment.
7. Pessimism and loss of confidence
8. Hoarding of money
9. A fall in nominal interest rates and a rise in deflation adjusted interest rates

All nine conditions have arguably have been meet, and the collapse continues at a pace. By this time next year, economic conditions are likely to be much worse than they are now.

Recovery may take far more time than we would expect, and thus projecting the future becomes impossibly problematic. The impact on the cost of building new nuclear power facilities could be very considerable. How much no one knows. But the price of muclear facilities before the power plant inflation between 2002 and 2007 was running around $2 billion per GW. It could drop considerably lower than that, however. The price of basic material like steel and cement has dropped dramatically, as has energy costs. If the price of labor falls over the long term, the cost of reactor construction could fall very dramatically.

At the very least, high end estimates of the future cost of nuclear power seem improbable. If last week, I thopught that the high end cost of building a nuclear plant in 2015 woud run to $8 billion, $4 billion nows seems more like the extreme limit, and $2 billion or less is at least plausible. A depression is extremel grim news the world's economy, but it ought not to stem the fight against global warming, and will significantly lower the cost of achieving success in that fight.