Jul 27 2009

State of the Wave — "Economy Has Hit Bottom"

Friday in the Wall Street Journal (7/24/09) Alan S. Blinder, a Princeton professor and former vice chair of the Federal Reserve Board, announced that, “The U.S. economy appears to be hitting bottom.” Mr. Blinder presents his message in a good news/bad news format, indicating that although economic growth will soon arrive, we still are in a very serious global financial situation.

Intrade.com participants believe U.S. unemployment will hit 10% by December, 2009. Click usunemp.png

One of the especially scary economic signs so far is that our major recession has been mirroring the 1930s Great Depression, especially on a global level. This suggests while the U.S. may lead the world out of the recession, it may take longer than expected to do it. Although at 7.5 % growth — a 19 year low — China is still not economically large enough to play this role.

World GDP decline has been tracking the Great Depression’s pace well. (From Eichengreen and O’Rourke, 2009) Click worldgdp.doc.

According to financial advisor John Mauldin this is serious business,

To sum up, globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimize this alarming fact.

That’s why it’s so important that the U.S. economy finds the bottom and soon begins the recovery, which WSJ believes it has apparently done.

Despite this, Blinder states that,

Jobs will take longer, maybe much longer to revive … So even though the economy may be making a GDP bottom about now, the unemployment rate will probably keep rising for months … It will take years of strong growth to return to full employment.

Nobel prize winner and Berkeley economics professor George Akerlof and Yale economist Robert Shiller (Animal Spirits, 2009) see parallels between our current situation and the Panic of 1893 and the subsequent 1890s recession, “In the United States the obvious ‘trigger’ for the depression was the financial panic of 1893.”

The Panic of 1893 and the 1890s recession is a possible analog for our current financial situation and I’ve plotted U.S. unemployment for both; click 1890s1.doc.

In the plot, the 1890s revised unemployment data is from Christina Romer (1986) and cited in Akerlof and Shiller (2009). I have horizontally shifted the plots so that 1893 (the year of the panic) is directly above 2008 (the year of our panic); this allows the chronological trends of the unemployment data from both eras to be compared directly. (I assumed the unemployment for 2009 will be 10% but it might be higher.)

Although the dimensions of the global recession suggest that almost anything is possible, the apparent bottoming of the U.S. economy points to a more hopeful future. And if the 1890s are a descriptive model for today’s recession, it suggests an envelope for our current unemployment trends; i.e., nothing close to the peak of the Great Depression (~25%), although potentially one to a few years at or near 10%. This can be influenced by policymakers in Washington, DC and elsewhere around the world.

The 1890s model also suggests that unemployment should be well below 10% long before 2015, the expected opening date of our next Maslow Window. Keep in mind that the spectacular Maslow Window exploration and technology activities of the last 200 years were driven by a momentary, pervasive feeling of ebullience — not triggered by a high GDP, but by growth in real wages and declines in unemployment — because many people feel that they are really are getting ahead.

Despite the current major recession, these conditions are likely to be met prior to 2015. In fact, the feelings of euphoria generated by the end of the global recession itself are likely to trigger the initial ebullience that will rapidly accelerate into the spectacular 2015 Maslow Window. This would be a replay of what happened when the 1890s recession ended and gave birth to one of the most ebullient decades in U.S. history — the Peary/Panama Maslow Window.

One response so far

One Response to “State of the Wave — "Economy Has Hit Bottom"”

  1. Ruthon 28 Jul 2009 at 11:41 pm

    Have you taken into account the information by Carl Johan Calleman Ph.D. who discovered the cyclical and spiral phases of time from the Mayan Calendar? Your look at 1890’s correlation to now is related to economic parallels. But if you factor in the spirals of human consciousness evolution as he does, then you know that time has accelerated, human consciousness has evolved, and it ain’t the same world as it was 110 years ago. You only have to factor in the Internet and business that is hidden from regular economic indexes to see the difference…

    Hi Ruth,

    Thanks for your comment.

    I haven’t thought much about the Mayan calendar but I doubt there’ll be any cosmic catastrophe such as the ones that people mention — geomagnetic reversal or large impact. If something good happens that’s great, and I think it will. The last 200 years of historical and macroeconomic trends indicate we should be ramping up to the next Maslow Window near 2015.

    BTW, the Panic of 1893 and our recent panic (2008) are 115 years apart: that’s only 3 years greater than 2 economic long waves, assuming the well-documented 56 year cycle is involved. It does suggest that the 1890s have interesting economic and social parallels with our current situation.

    It’s certainly true that economic long waves are actually spirals because, for example, advances in technology like the one you mention — the internet — have an important impact on the details of what occurs during any portion of the wave.

    However, regardless of what historical or technological circumstances we find ourselves in, rhythmic, twice-per-century upswings in the long wave are always associated with major economic booms which trigger ebullient human explorations and grandiose macro-engineering projects. Outside these Maslow Windows we’re not so lucky; e.g., from the beginning of WW I to the aftermath of WW II, historian Eric Hobsbawm calls it an “Age of Catastrophe.”

    Best regards,
    Bruce

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