WSJ OpEd: Proj. 22%+ Jobless, $9 T+ Nat'l Debt Increase w/update

(UPDATED: Transposed names, Reinhart and Rogoff, for attribution purposes per a request directly from Professor Rogoff's office at Harvard.)

University of Maryland Economics Professor Carmen Reinhart, along with former International Monetary Fund Chief Economist and Harvard University Economics Professor Kenneth Rogoff, have a very notable OpEd piece in today's Wall Street Journal entitled, "What Other Financial Crises Tell Us."

In a sentence they tell us that history dictates this is going to be a rather ugly and prolonged slump.

Perhaps more importantly, and while Reinhart and Rogoff don't say it directly, their historical reference infers that we may very well come close to equalling unemployment levels here in the U.S. that we haven't seen since 1932, at the height of the Great Depression.  (More about that in a moment.)

Reinhart's and Rogoff's basis for their findings, conveyed in today's article, were developed from their evaluation of "standard macroeconomic indicators" which they had gleaned during a study they conducted for the National Bureau of Economic Research (NBER) last December.

Their conclusion, in four words: "Expect a long slump."

Their studies included comparisons between the current U.S. meltdown and serious financial crises in Spain (1977), Norway (1987), Finland (1991), Sweden (1991), and Japan (1992), as well as with other banking crises in emerging-market economies.

In their article in today's WSJ, they cite many parallels that "...are nothing short of stunning."

Reinhart's and Rogoff's Findings on the length of the current downturn, housing, and equities markets.

Some of their findings:

--the Recession (which they're tacitly telling us is really a Depression), should end sometime between the end of 2009 and September, 2010.

--the housing market will fall another 8%-10%, with a bottom not being reached until at least the end of 2010.

--a "sustained rebound" in the stock market may not occur until 2011, according to "historical benchmarks."

And, perhaps their two scariest comments in today's Wall Street Journal concern expectations as far as ongoing unemployment levels (at least when one reads between the lines on the jobless figures) and government debt are concerned.


With regard to unemployment:

Turning to unemployment, where the new administration is concentrating its focus, pain seems likely to worsen for a minimum of two more years. Over past crises, the duration of the period of rising unemployment averaged nearly five years, with a mean increase in the unemployment rate of seven percentage points, which would bring the U.S. to double digits.

Interestingly, unemployment is a category where rich countries, with their high levels of wage insurance and stronger worker protections, tend to experience larger problems after financial crises than do emerging markets. Emerging market economies do have deeper output falls after their banking crises, but the parallels in other areas such as housing prices are quite strong.

Their mean historical increase in unemployment--and it's important to note that we're talking about Bureau of Labor Statistics' "U3" unemployment levels here--is projected to be roughly  seven percent from the start of the downturn. If one approximates unemployment to have been at 4.5% at the start of the current downturn (and I believe that's fairly generous), this indicates an expected unemployment rate of 11.5% at the height of the current downturn would be expected based upon the duo's historical projections now.

However, "U3" unemployment rates are running at levels that are approximately half of current "U6" employment rates. December's "U3" rate was 7.2%. December's "U6" rate was 13.5%.

(Up until a couple of years into the Clinton administration, publicized "U6" rates were the norm, which included folks that had been out of work for more than a year, as well as underemployed members of the workforce--those forced into part-time and significantly lower-paying occupations primarily due to current economic conditions. These two segments are not accounted for in the "U3" rate, which is the "standard" unemployment rate that is widely publicized by the U.S. government now, even though the "U6" rate is also/still updated by the BLS on a monthly basis. John Williams over at Shadow Stats has very concise graphics on this as well as other information that certainly questions the propaganda we hear coming forth from our government's numbers crunchers on a regular basis. Well worth a read if you haven't been there already.)

Government Debt

Perhaps the most stunning message from crisis history is the simply staggering rise in government debt most countries experience. Central government debt tends to rise over 85% in real terms during the first three years after a banking crisis. This would mean another $8 trillion or $9 trillion in the case of the U.S.

Reinhart and Rogoff provide projections and conclusions based upon their historical analyses that also indicate the following:

--The real reason why a country's debt explodes as a byproduct of a Depression is not due to the cost of a government bailout, but is instead the result of diminishing tax revenues.

--Much higher interest rates are the norm once everything's said and done.

--A collapse in "today's bond market bubble" is to be expected.

--An inability to rely upon the U.S. 'exporting itself' out of harm's way due to the reality that this downturn is global in scope.

Most Prudent Disposition of Financial Services/Banking Sector

--accelerated bankruptcy

--temporary receivership of entities, if necessary; and "only then recapitalizing and privatizing them."

Perhaps their final sentence in today's WSJ is the most important of all:

This is not the time for the U.S. to avoid painful but necessary restructuring by telling ourselves we are different from everyone else.

Tags: Carmen Reinhart, depression, Housing market, Kenneth Rogoff, National Debt, Recession, stock markets, unemployment, Wall Street Journal (all tags)



Tips: It's a Depression. Let's admit it. n/t

by bobswern 2009-02-02 11:54PM | 0 recs
the difference between 1922 and today is that the

country financed itself out of the depression, today we will have to borrow all of it and who knows at what cost.... I'm sure China and Europe are setting their own advantageous interest rate, as we speak. What if, on the other hand, they look at the debt piled on the taxpayers' books and they don't see us as a good credit risk?

Here we are in the worst economic crisis in a lifetime, perhaps in our history, and on the brink of war in Pakistan and Iran while escalating the war in Afghanistan, and all we get is a government made up of the very people who have brought us to these crises.

Can someone, please, explain to me how borrowing this obscene amount of money on top of the present hopeless debts will not prolong this catastrophe?

by suzieg 2009-02-03 01:49AM | 0 recs
The problem is

It's all we've got.  Lowering taxes, despite the right's continued screeching that it does, does not help an economy out of a crisis like this.  Neither does raising taxes.  And in all reality, neither does stimulus and increased spending.  But what increased spending and stimulus does do is that it a) helps people feel as though the government is working to fix things and b) it keeps people from starving and being thrown out on the street.  Those things, in turn, increase consumer confidence (eventually) and people who have money to spend eventually will.  We also have the added problem of banks being incredibly stingy with loaning money, which they aren't going to do until they see that people are no longer terrible credit risks.  I have a feeling everything will start to lurch forward at once as people spend and banks lend again all at the same time, but I don't think it will happen this year.

by ProgressiveDL 2009-02-03 02:24AM | 0 recs
Re: the difference between 1922 and today

"the difference between 1922 and today is that the country financed itself out of the depression, today we will have to borrow all of it and who knows at what cost."

You realize you just said the same thing two different ways, don't you?

by Jess81 2009-02-03 09:51AM | 0 recs
Re: WSJ OpEd: Proj. 22%

If I I knew today this would be over by the end of 2010 I'd be even a bit cheerful.   I fear we could be in for another decade like the 70s.  Just a prolonged period of economic gloom.

We'll see.

I just wrote about the current stimulus bill.  I think we are blowing our one big chance to do something to perhaps impact our economic situation and we are blowing it big time.

by RichardFlatts 2009-02-03 04:37AM | 0 recs
Re: WSJ OpEd: Proj. 22%

 I loved the 70's. No drug testing. Non-stop sex. Mom and Dad were still alive. If we can return to the 70's, I'm on board that train!

by QTG 2009-02-03 06:11AM | 0 recs


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