We Are On the Verge of Great, Great Depression

That is according to Peter Yastrow.

“What we’ve got right now is almost near panic going on with money managers and people who are responsible for money,” he said. “They can not find a yield and you just don’t want to be putting your money into commodities or things that are punts that might work out or they might not depending on what happens with the economy.

“We need to find real yield and real returns on these assets. You see bad data, you see Treasurys rally, you see all bonds and all fixed-income rally and then the people who are betting against the U.S. economy start getting bearish on stocks. That’s a huge mistake.”

[...]

“Interest rates are amazingly low and that, thanks to Ben Bernanke, is driving everything,” Yastrow said. “We’re on the verge of a great, great depression. The [Federal Reserve] knows it.

I think at the very least the idea of a “double dip” is much more of a possibility now than it was a few months ago. Dave Schuler has three posts (here, here and here) about the weakness of the recovery. Dave notes the anemic job growth even though the recovery is almost a year old two years old (thanks Dave). The slow down in manufacturing, drop in consumer confidence, the malaise that the housing market is in, and other wonderful news.

On top of it there is this interesting post by Prof. James Hamilton about when the economy reaches “stall speed”. Much like an airplane when an economy’s growth rate drops below a certain threshold (yet is still positive) it strongly suggests the economy is about to go into a decline.

Nalewaik notes first that the 4 quarters prior to recessions were usually characterized by slower real GDP growth than is typically observed in an economic expansion.

He then estimates Markov-switching models in which there may be an intermediate phase the economy moves into before or after an economic recession. This approach allows for a variety of possible outcomes. For example, it could capture a phase of rapid GDP growth in the first few quarters of a recovery, as proposed by Sichel (1994). However, Nalewaik usually finds evidence of a “stall” phase that the economy enters before going into a full-blown recession. For example, real GDP might be expected to grow at only a +1 to +2 percent annual growth rate per quarter while in the stall phase, before falling outright at a -1 to -2 percent rate during a recession. Unemployment in the stall phase might be expected to increase by 0.1% per quarter, before rising at 0.6% per quarter once the recession proper begins.

Consider that one of the points Dave Schuler noted was that the BEA in calculating real GDP is using a GDP deflater that is considerably lower than similar statistics put out by agencies such as the BLS (link). Using a higher deflater for calculating real GDP could in fact mean that growth is very anemic or even possibly negative.

The importance of the price deflater used by the BEA cannot be overstated. In calculating the “real” GDP the BEA continued to use an overall 1.9% annualized inflation rate, which is substantially lower than the inflation rates being reported by any of the BEA’s sister agencies. The mathematical implications of the deflater are simple: a lower deflater creates a higher “real” GDP reading. If April’s CPI-U (as reported by the Bureau of Labor Statistics) of 3.2% year-over-year inflation is used as the deflater, the reported 1.84% annualized growth rate shrinks to a 0.56% annualized rate, and the “real final sales of domestic products” is actually contracting at a 0.63% rate. If instead of the year-over-year CPI-U we were to use the annualized CPI-U from just the first quarter (5.7%), the “real” GDP would be shrinking at a 1.82% annualized rate, and the “real final sales of domestic products” would be contracting at a recession-like 3.01%.

Makes me wonder, did all of the government spending on TARP and the stimulus mitigate the depths of the economic down turn only to extend the duration? Are our current problems related to the sky rocketing debt with no end in sight? I’m not surprised by the bad news in the labor market. After all the previous two recessions had long recovery times in labor markets and the recovery time was longer in the most recent recession–i.e. if the pattern holds and given the depth of this recession the job market could remain grim for a considerable period of time. And as Dave Schuler notes we should expect something similar in the housing market. With the last recession we basically diverted too many assets into housing. And housing has historically played a significant role in the economy.

All in all, not looking like it will be a fun summer.