Our economic future – From best to worst case

by Doug Casey of Casey Research
Posted originally June 7, 2011

THERE IS A GREAT DEAL OF UNCERTAINTY ABOUT WHAT THE FUTURE OF THE U.S. ECONOMY MAY LOOK LIKE – so I decided to take a stab at what’s likely to happen over the next 20 years. That’s enough time for a child to grow up and mature, and it’s long enough for major trends to develop and make themselves felt.

I’ll confine myself to areas that are, as the benighted Rumsfeld might have observed, “known unknowns.” I don’t want to deal with possibilities of the deus ex machina sort. So we’ll rule out natural events like a super-volcano eruption, an asteroid strike, a new ice age, global warming, and the like. Although all these things absolutely will occur sometime in the future, the timing is very uncertain – at least from the perspective of one human lifespan. It’s pointless dealing with geological time and astronomical probability here. And, more important, there’s absolutely nothing we can do about such things.

So let’s limit ourselves to the possibilities presented by human action. They’re plenty weird and scary, and unpredictable enough.

THE MARKET FOR PROGNOSTICATION

People are all ears for predictions, whether from psychics or from “experts,” despite the repeated experience that they’re almost always worthless, often misleading and more than rarely the exact opposite of what happens.

Most often, the predictors go afoul by underrating human ingenuity or extrapolating current trends too far. Let me give you a rundown of the state of things during the last century, at 20-year intervals. If you didn’t know it’s what actually happened, you’d find it hard to believe.

1911— The entire world is at peace. Stability, freedom and prosperity prevail almost everywhere. Almost every country in Europe is ruled by a king or queen. Western civilization has spread to nearly every corner of the world and is received with appreciation. Stunning breakthroughs are being made in science and technology. There’s no sign of a gigantic world war about to come out of nowhere to rip apart the political and cultural map of Europe and bankrupt everybody. Who imagined that a dictatorial communist regime would arise in Russia?

1931— It’s early in a disastrous worldwide depression. Attention is on economic troubles, not on the virtually unthought-of possibility that in less than 10 years a new world war would be under way against Nazism and a resurgent Germany.

1951— Except for Vietnam, all that remains of the colonies the West had established in the 19th century are quiescent. Nobody guessed almost all would either be independent, or on their way, in 10 years. China has joined Russia – and many other countries – as totally collectivist. Who imagined that Germany and Japan, although literally leveled, would be perhaps the best investments of the century? Who guessed that the U.S. was already at its peak relative to the rest of the world?

1971— Communist and overtly socialist countries all over the world seem to be in ascendance, soon to be buoyed further by a decade of rising commodity prices. The U.S. and the West are entering a deep malaise. Little significance is attached to rumblings from the Islamic world.

1991— Communism has collapsed as an ideology, the USSR has disappeared, and China has radically reformed. Islam is increasingly in the news.

2011—The world financial/economic crisis is four years old, but things are still holding together. Islamic terrorism and collapse of old regimes in the Arab world dominate the news. China is viewed as the world’s new powerhouse.

BAD AND WORSE

Regrettably, I’m not much of a linguist. But I do pick up interesting semantic trivia. In Spanish they don’t say “in the future,” as we do in English, which implies a definite outcome. Instead they say “en un futuro” – in a future – which implies many possible outcomes. It’s a better way of assessing reality, I think.
Here are three 20-year futures to consider. There are, obviously, many, many more – but I think these encompass the three most realistic broad possibilities.

• BEST CASE – FACTS GET FACED

Realizing what a disaster the complete destruction of their currencies would be, most governments decide to endure the pain of allowing interest rates to rise and limiting increases in the money supply. Poorly run corporations and banks are left to fail. Talk of abolishing the Federal Reserve, and using a commodity for money, becomes serious and widespread.

Shaken, the U.S. ends its profligate ways, in part because it lacks the means to continue, and in part because everyone but collectivist ideologues has actually learned something from the brutal ‘10s and ‘20s.

Amidst massive protests, the government closes much of its counterproductive apparatus, eliminates many taxes, and lets 30% of its employees go. It also, albeit reluctantly, liberalizes its regulation of the economy because it has become impossible to deny that the U.S. has been falling behind in all areas.

Although there is a resurgence of libertarian thought – reminiscent of the Reagan-Thatcher era – simple practicality is mainly responsible for forcing the government’s hand. For one thing, it can’t afford the bureaucracy needed to enforce detailed interference. For another, entrepreneurs are increasingly just doing what they please, partly from necessity and partly from a growing sense of righteousness. Interest rates go to 25%, to compensate for high levels of inflation. That’s high enough to make it worthwhile for people to save, and the capital base starts growing. The stock market has collapsed to its lowest level in living experience (in real terms), but the values available encourage people to become investors. Business is restructured on a sound, debt-free basis, with little speculation.

The U.S. radically cuts its military spending and pulls almost all troops out of their foreign bases and wars. The War on Drugs comes to an end, and the crime rate in both the U.S. and Mexico plummets.

The government solves most of its overhanging financial problems with a seriously devalued – but not hyperinflated – dollar. The Social Security deficit is eliminated by abstaining from benefit increases and by inflating away much of what had been promised before. Most Americans suffer a severe drop in their standard of living, as they’re forced into new patterns of production and consumption. A generation of college students find that their degrees in sociology, political science, economics, English lit, Black studies, gender studies and underwater basket weaving are of no real value.

When it’s all over, the tough times that started in ’07 prove to have been no more than a cyclical bump in the road, like all the other recessions since WW2, just much bigger.

A rough and memorable ride, but it ends with a return to prosperity.

Japan update: It’s much worse than it looks

by madhedgefundtrader
Originally posted March 15, 2011

I just got off the phone with several frightened, somewhat dazed survivors of the Japanese earthquake who work in the financial markets, and I thought it important to immediately pass on what they said. Some were clearly terrified.

Japan’s economic outlook now appears far more dire than I anticipated only a day ago. It looks like GDP growth rate is going to instantly flip from +2% to -3%, a swing of -5%, similar to what we saw after the Kobe earthquake in 1995.  We have just had a “V” shaped economy dumped in our laps, and we have just embarked on a precipitous down leg. Two very weak quarters will be followed by two strong ones. The initial damage estimate is $60-$120 billion, and that will certainly rise.

Kobe had a larger immediate impact because of its key location as a choke point for the country’s rail and road transportation networks and ports. But the Sendai quake has affected a far larger area. Magnifying the impact is the partial melt down at the Fukushima Dai Ichi nuclear power plant, forcing the evacuation of everyone within a 12 mile radius.

Most major companies, including Toyota, Nissan, Honda, and Sony have shut down all domestic production. Management want to tally death tolls, damage to plant and equipment, and conduct emergency safety reviews. In any case, most employees are unable to get to work because of the complete shutdown of the rail system. Tokyo’s subway system is closed, stranding 25 million residents there.

Electric power shortages are a huge problem. The country’s eight Northern prefectures are now subject to three hour daily black outs and power rationing, including Tokyo. That has closed all manufacturing activity in the most economically vital part of the country.

Panic buying has emptied out every store in the major cities of all food and bottled water. Gas stations were cleaned out of all supplies and reserves, since much of Japan’s refining capacity has been closed. There are 20,000 expatriates waiting at Tokyo’s Narita airport as foreign companies evacuate staff to nearby financial centers in Hong Kong and Singapore. Airlines are diverting aircraft and laying on extra flights to accommodate the traffic.

The Bear Market Surprise

By Bill Bonner, The Daily Reckoning
San Diego, California, Posted April 6, 2009 


“People in this country don’t realize how bad things can be,” said Richard Russell on Saturday night. “I lived through the Great Depression. I remember people standing in bread lines. It was hard to get a job, any job, back then. But now, you see the restaurants are still full. People are still spending money. They may be worried and they may be beginning to save, but there’s no sense of urgency. And there’s a rally on Wall Street. You know, every bear market produces a rally. You can expect the market to retrace its steps by one- to two-thirds.

“And every bear market has a surprise. I think the surprise is that this is going to be a lot worse than people expect.”

Richard Russell is 84. He’s been writing his investment newsletter, Dow Theory Letters, for 50 years. This weekend a group of his admirers, including your editor, came together to say thanks. There are a lot of people with opinions on the economy and the stock market. You can hardly turn on your computer without getting dozens of them. But there are not many opinions with the depth of experience and knowledge behind them as those of Richard Russell. He’s been studying “the language of the markets” for more than half a century. Though no one ever fully masters the language of the market, Richard can at least carry on a conversation with it.