Back to the Great Depression

The UK Times Online had the temerity to post this article with a question mark.

“Some of it is clearly to do with the oil price but essentially what we are seeing is a slow-motion car crash,” said George Magnus, senior economic adviser at UBS.

“The first act was the housing market, the second act was the credit crunch, and what we are now seeing in this third act is the bigger picture of a downturn that has a long way to run.”

Few are gloomier about that prospect than Albert Edwards, strategist at Société Générale in London. “America is leading the way, diving into deep recession as a collapse in consumer confidence induces the great unwind,” he said. Edwards compares the economy with a pyramid scheme that is poised to crash to earth and interest-rate changes can do nothing to avert it.

He thinks Wall Street and the other main markets have a lot further to drop, and will end up 70% below the peaks of last year. That would imply a level of just 500 for the S&P 500, which was at 1,280 on Friday, and 4,500 for the Dow, compared with Friday’s closing level of 11,346.

The FTSE 100, which closed at 5,530 on Friday, will plunge to 3,000, he predicts. The good news is that he expects the oil price, which was above $142 on Friday, to slump to $60 a barrel. The bad news is that he sees this occurring as a result of “deep” recession in the advanced economies and a sharp slowdown in emerging markets.

“The last time loan losses were at these levels was 1934,” he added. “I don’t believe we are going back to a 1930s environment with people living in tents.” That's because people nowadays lack the gumption and knowhow to pitch a simple tent to protect themselves from the elements and to survive. The 1930's environment was rife with folks who had initiative, knowhow, basic survival skills, and some semblance of community to which to turn in the face of systemic governance catastrophe.