The Form of Economic Recovery

It is time for me to put forth a prediction on the shape and form of when and where the present recession will end.  Recall that The Futurist correctly predicted when the recession will be deemed to have started, about 10 months before the NBER arrived at the same conclusion.  Also recall that The Futurist identified the housing bubble back in April of 2006, when suggesting such a thing could get you persecuted by fanatical home-owners. 

I hereby predict that :

1) The National Bureau of Economic Research (NBER) will declare the recession to have ended in the window of July-Sept, 2009.  However, they only declare this retroactively, several months after the fact.  The recession will thus have lasted 20-22 months in total. 

2) Employment will bottom at 130 Million jobs, which means that there are still another 3 million jobs to be lost (on top of the 5 million already lost in this recession).  This the steepest fall in employment of any recession in the last 50 years, even after adjusting for the size of the workforce. 

3) The Unemployment Rate will top out at 10.5% +/- 0.3% early in 2010. 

4) Neither deflation nor hyperinflation will happen to any significant degree.  No calendar year will have an inflation rate below -2% or above 5%. 

A conclusion of the recession, however, does not mean the recovery will be strong.  It will take many years for the unemployment rate to fall below 5% again.  It is, however, absolutely necessary for Americans to reacquaint themselves with the notions of frugality and delayed gratification, and hopefully this recession has taught a suitable lesson to enough profligate gluttons that better decisions are made in the future. 

Comments

[Zyndryl]

With the Fed increasing the base money supply so much, I disagree on your rosy inflation predictions, GK.

The Fed will not remove that money from circulation, but rather just jack up interest rates. Stagflation City.

[GK]

We'll see. There are just as many people worried about deflation as about high inflation.

[Tristan]

Predicting the economy forces you to think through several "megatrends" and what their effects will be. For example:
1) Inflation obviously - what happens with all the new money being created
2) Democrat anti-business agenda makes goods and services more expensive
3) Business reponse to #2 pushes capital and labor offshore
4) Larger deficits and lower tax receipts and economic growth move forward day of reckoning for entitlement programs
5) #1 and #4 triggers higher interest rates and a decline in the value of the currency
6) No new tech advancements in the US to speak of - will they occur overseas? Or at all? Except...
7) Lengthening in human life span and health care costs triggers #5
8) Populist conservative backlash leads to rollback which includes school privatization and deportation of illegal aliens
You can go on and on..

One other thing about the economy - Q42008 wasn't a recession or depression, it was an outright panic. I'm not sure how the GDP/NBER numbers will show the panic subsiding - maybe as a huge boost of growth. Regardless the "new" normal for the US is GDP growth that matches population growth - in other words <1% per capita GDP growth.

During those periods residential investment (i.e. housing) was falling double digits but was contained to some extent.

[jeffolie]

I have very long predicted:

1. The Crisis in The Fall of 2009.

2. Housing may stabilize in 2010

3. The end of the FINANCIAL world as we know it in 2012-13 with a Dollar crisis

4. Creative Destructionism will reign unti America recovers.

[GK]

jeffolie,

". The end of the FINANCIAL world as we know it in 2012-13 with a Dollar crisis"

What does this mean? The usage of money will not change, even if the institutions do.

"Creative Destructionism will reign unti America recovers."

What does this mean? Creative Destruction is ongoing at all times, and transcends any one particular nation.

[Snake Oil Baron]

Don't underestimate Obama and the Pelosi gang. I bet they have lots of dumb ideas that have yet to play out.

[Bas Hayek]

I rather go with James Turk: "Annual M3 growth rates exceeding 10% are not deflationary. The money supply is expanding [...]. A rapidly expanding supply of money - and double-digit growth rates are surely that - causes inflation. The dollar is being inflated and, in my view, is on the cusp of hyperinflation. I expect this to become increasingly clear within 12 months."

[jeffolie]

I will give you the good news and then bad news.

First the good news.

America is very fortunate that its politics and consequently its laws promote the property rights of intellectual property. New ideas and concepts can be capitalized and commercialized with the self interests of the creators santified and even glorified at times.

Creative Destructionism is most successful in times of long standing economic distress. Old concepts and industries are allowed to fail (except for the Obama tactics of propping up failed banks). Prolonged economic distress is necessary to wipe out unproductive, enshringed industries (automakers for example).

The bad news.

A Dollar crisis is coming where the Dollar will be replaced as the world's reserve currency that will remove all the advantages the US gets from it. Very rapid inflation will result from the current expodential expansion of Fed credits and American fiscal programs. The resulting chaos will resemble the devastation that happened in lots of places such as Iceland.

So what does the end of the FINANCIAL world as we know it mean? And will the use of money change?

First the easy part, the changing in the use of money. The Dollar will collapse in value. A basket of other currencies will be used to settle payments internationally. The American currency has collapsed before. Hence the phrase, 'not worth a Contential'. Also for a period of time, US currency was made of private currencies issued by private banks and localities. So this is not unprecedented. I am not predicting a gold backed currency, but gold will be a safe haven compared to the collapsing Dollar.

Second, FINANCIAL collapse is not hard to understand. A good example of this is the freeze in various parts of the credit markets such as 'securitization'. Commerce in inflation plagued countries freezes until the offending currency is replaced with an accepted new currency. This can take years during which lifestyles degenerate as well as government functions.

[jeffolie]

Also:

5. Stage 2 of the Big Obama Bailout (BOB)

[rjsasko]

I have seen the recast charts for Subprime/Option Arm/Alt-A/Jumbo mortgages and 2010 is going to be a very bad year just like 2009 and 2008. 2011-2012 before we hit bottom in the housing collapse and find sound footing. The Commercial RE and Credit Card collapses will be spectacular as well. We ain't seen nothin' yet in the unemployment department. We will be fortunate to max out at 15% unemployment (after they massage the numbers).

[David]

While I agree with most of your technological prognostications. I strongly disagree with your rosy financial picture and side with many of your commentors.

I see a financial collapse as very probable if Pres. Obama gets to print his trillions.

There is a race between technology and bureaucracy. The control and restrictions of people versus freedom. One example is that soon our houses will be our power plants and charge our cars. Imagine the freedom that will grant. But will it happen soon enough?

Eventually, cash will become obsolete as we trade materials and energy.

The question is, will technology solve our problems before we have a global collapse and/or lose all our freedoms. Cap and trade is probably the worst offender. Do you want government monitoring everything you do and then charging you for it?

David

[GK]

David,

We're only talking about the end of the current recession. What you are talking about is much longer term.

I think the risk of financial collapse has passed. Cash will certainly not become obsolete.

[MaskedMan]

fortunately no one else is militarily more powerful so that makes us still the best bet financially...

I doubt as much as everyone wants to replace the dollar with a different fiat instrument that they will be able to do so because no one else has the power we do to back our currency

as a commercial real estate broker, I do think that the chapter 11 filing of the largest mall owner is going to trigger more reorganizatons in the REIT markets and there is still some considerable bleeding coming...but overall I agree with GK's timelines unless it gets too much worse this summer

[tim]

5% is hyperinflationary and would be devastating to anybody on a fixed income.

[GK]

tim,

The fixed income can be routed into TIPS, thus shielding against inflation.

Financial education, as always, is the most important determinant of who suffers hardship and who tends to avoid it, or recover quickly from nasty surprises.

[Geoman]

We seem to be well on track to fulfill your predictions. Congratulations!

Shame they were not happier predictions...

[Commenter]

Thought from Spearhead.