Pondering a World-Wide Depression

I’m not an economist…. so I don’t know how to judge a story from the AP business wire this morning, but my spider sense tells me this writer is smarter than most and really “gets it.”

Which in this case is a bad thing.  Cuz if he’s right, this is scary.

You should take the time to read the whole thing. Twice. There is a lot to digest in there. But I’ll bold some of the parts that have me hiding under the covers this morning.

LONDON (AP) — World stock markets tumbled Friday on growing alarm that a global recession will ravage corporate profits and push smaller developing economies to the brink of collapse.

Futures indicated a sharp drop on Wall Street, with futures down 550 points, the maximum daily price change.

In the European morning, Germany’s benchmark DAX index was down a massive 10.76 percent at 4,033.27. The French CAC40 down 10 percent at 2979.95 while Britain’s FTSE 100 was 8.67 percent lower at 3,733.33 after third quarter GDP fell 0.5 percent, putting the country on the brink of recession, which is technically defined as two quarters of negative growth. The previous quarter’s growth was 0.0 percent.

Japan’s Nikkei 225 stock average slid 9.6 percent to 7,649. U.S. stock index futures were down sharply. On Thursday, the Dow rose 2 percent to 8,691.25.

The sudden gloom over growth expectations is having the added impact of putting small economies and currencies under extreme pressure. Investors are pulling money out of countries in Eastern Europe, Latin America and Asia on fears vulnerable countries will not only be hit hard by the financial crisis but may also default on debt.

“Periods of panic punctuated by occasional calm appears to be the manner of things for now,” said Daragh Maher at Calyon.

He said that as investors flee economies they view as less stable, the repatriation of money has boosted the dollar to the detriment of smaller currencies.

“For now this means much of the focus is on the International Monetary Fund and what it might have in mind to insulate emerging markets, given that they are now the clearest pressure point,” said Maher.

Markets are afraid that the world may see more countries go the way of Iceland, whose economy effectively collapsed this month after its financial sector went bankrupt.

In Europe, for example, Hungary, Ukraine and Belarus are all, like Iceland, in talks with the IMF to discuss possible loans.

The euro, which investors consider very exposed to the vulnerable Eastern European markets, fell to a two-year low against the dollar, dipping below the US$1.25 level. The British pound dropped to US$1.5264 against the dollar, the weakest since August 2002.

The dollar fell against the yen, however, as low as 90.89 yen, the weakest since August 1995. This is because the yen is used a currency to fund riskier investments — it is sold to raise cash to put in higher growth areas. When investors are scared of losing money in emerging markets, they undo those trades, buying the yen back. This flow intensified Friday, leading some to wonder whether governments and central banks may intervene in foreign exchange markets.

“We are getting used to wild swings in the markets, but today’s moves verge on the bizarre,” said Julian Jessop, chief international economist at Capital Economics.

He said direct intervention in currency markets could be warranted, since a rate cut by the central bank to support stock markets would do little, considering Japan’s interest rates are already at just 0.5 percent.

Elsewhere in Asia, Hong Kong’s Hang Seng index fell 8.3 percent to 12,618. Markets in India, Thailand, Indonesia and the Philippines were also down sharply as investors bailed from emerging markets to cut their exposure to risky assets and meet redemption needs at home.

“Funds are pouring out of emerging markets,” said Linus Yip, a strategist at First Shanghai Securities in Hong Kong. “A lot of money that flowed into the region during the last five years from the U.S. and Europe is being cashed out.

On top of all this, the Organization of the Petroleum Exporting Countries Friday cut its output by 1.5 million barrels a day as of next month in an effort to keep oil prices higher.

Light, sweet crude for December delivery today traded around US$64 a barrel, over 50 percent less than this year’s historic heights because the worldwide economic crisis has put a huge crimp in demand for crude.

Lower energy costs help economic growth at a difficult time, so the production cut’s effort to boost oil prices was not welcomed by stock markets.

I clipped most of the story, but it is still worth reading the whole thing.

While everyone is using the word “recession” I’m starting to wonder if that’s not being optimistic. — Now a bit of background, I ignore 95% of all economists predictions. As Zig Ziglar says, “Economists have accurately predicted 9 of the last 3 recessions.” — So I’m not an alarmist by nature.  But think about it…

If the people in Europe and the U.S. pull all their money out of the emerging markets, we’ll see countries around the globe implode. I frankly, ignore the day in day out gyrations of the Dow Industrial Average. If it falls 500 in a day, that just means that it will gain 505 next week. But this strikes me as different. It’s bigger.

I think, again being a layman, that in today’s world, a depression could be a lot worse than in the past, simply because we have more to lose.

Starbucks wasn’t selling coffee on every street cover for $5 a cup in 1929.  If this is as bad as they say, Starbucks is toast. – Which means the workers are toast.

In short, most of us, even “the poor” toss an exorbitant amount of money on things we could cut tomorrow.  But if each of us cut our spending by just 10% that means million of people out of work. Then they cut their spending on whatever it is you sell. – And yes, you’re selling something to survive. Even if you’re a lazy sot living off the government, you’re selling your soul.

I also worry about consumer electronics and technology. That’s been driving so much of the economy for the last 20 years or so. iPhone sales are off the chart, and big flat screen TVs are still selling at a brisk rate, but will they next year?  Would your calls not go through on a $20 cell phone? Could you live another year with your old TV? It just seems like a massive sector of our economy ripe for cutbacks.

None of us knows the future, but I’m pondering the possibilities … and I must confess I’m less optimistic than I was just a week ago.

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