Tuesday, June 29, 2010

Why I think Economic Outlook is very bleak....Part 2

Part 1 is here.

The article "Paul Krugman Throws In Towel , Says We're Headed for Another Depression" (see below) talks about Paul Krugman coming to the conclusion that the global economy is headed for a depression because govts are making the mistake of cutting off the stimulus too early thinking the recovery is in the bag. This same mistake was made in 1937 when govts cut spending after a huge rebound from the Great Depression to plunge the economy back into recession.

I think we are headed for tough times but I don't think Krugman is right about the part that govts are cutting stimulus because they think the recovery is well on the way. I think the Europeans are implementing austerity because they see disaster coming if they don't start cutting spending. If you look at the growth generated in the US and Europe by the stimulus packages, it has been quite dismal. The Europeans probably realised that they can't keep propping up the economy using stimulus and the economy will falter anyway given the results we are seeing. If you keep fighting off the inevitable, you will be worse off at the end of the day when the inevitable arrives. The bond vigilantes who launched an attack of the Euro and bonds of weak Europeans in May 2010 sent out a strong signal that there will be more pain unless Europe does something about its deficits. Parts of Europe i.e. Spain & Greece are already experiencing depression like conditions with unemployment rising to 20%.

The economic problems we are seeing have been in the making for the last 2-3 decades. The level of debt in the global economy is enormous and we cannot have sustainable and stable growth unless this debt is reduced. Pain may be inevitable and the Europeans leaders have thrown in the towel because they realised this....it is the American govt that is in denial.... still thinking they can spend their way out of this mess.

While Paul Krugman talks about depression, 68 units from a condo project called Waterfront Gold, a 99 leasehold condo tucked somewhere in Bedok Reservior were sold at a price of 1075 per sq feet[Link]. The developer has cleverly divided the project into 3 phases - Waterfront Key, Waterfront Waves and Waterfront Gold bumping up prices by 25% for each phase. The penthouse in Waterfront Gold with an area of 2000 sq ft went for more than $2+M....but there is no property bubble in Singapore says our wise MM Lee. The problem with bubbles is they have a way of bursting that catches people "off guard". In a few months, we may have to hear our esteemed Minister Mah talked about how unforeseeable and unpreventable this whole situation was. Singaporeans spend and invest a large part of their savings and income on property very often taking up huge debts to finance their purchase - this is perhaps the achilles heel of our economy.....
-----------------------

Paul Krugman Throws In Towel, Says We're Headed For Another Depression
[Link]

For the last several months, Princeton professor Paul Krugman has become increasingly agitated about what he feels is a disastrous mistake in the making -- a sudden global obsession with "austerity" that will lead to spending cuts in many nations in Europe and, possibly, the United States.

Krugman believes that this is exactly the same mistake we made in 1937, when the country was beginning to emerge from the Great Depression. A sudden focus on austerity in 1937, it is widely believed, halted four years of strong growth and plunged the country back into recession, sending the unemployment rate soaring again.

In Krugman's view, the world should keep spending now, to offset the pain of the recession and high unemployment--and then start cutting back as soon as the economy is robustly healthy again.

Those concerned about the world's massive debt and deficits, however, have seized control of the public debate, and are scaring the world's governments into cutting back.

Which fate is worse? It depends on your time frame.

Cutting back on spending now would almost certainly make the economy worse, at least for the short run. Not cutting back on spending later, meanwhile (and Congress has shown no ability to curtail spending), will almost certainly keep us on a road to hell in a handbasket.

The White House's own budget projections show the deficit improving as a percent of GDP to about -4% by 2013. After that, however, even the White House doesn't think things will get much better. After a few years of bumping along at about -4%, the deficit will begin to soar at the end of the decade. And thanks to the ballooning costs of Medicare, Medicaid, and Social Security--along with inflating interest payments from all the debt we're accumulating--the White House expects the deficit to soar to a staggering -62% of GDP by 2085.

What Krugman and his foes agree on is that that's no way to run a country. And it's time we finally faced up to that.

In the meantime, we'll continue to fight about what to do in the near-term. And Krugman thinks he has lost that war and we're headed for another Depression.

39 comments:

Anonymous said...

In the 1930s, there was a great depression and later followed by World War II.

After the end of the war, things pick up gradually with peace and prosperity returning again and last until today.

So even if there is another great depression again, things will pick up later. The cycle repeats. But there won't be another World War this time because weapons of mass destruction is a great deterrent to would be aggressors.

And now even if things are bad for US and Europe, their countries are still peaceful and system of govt still stable and will last till good times return again. And of course Singapore fares even better in this respect.

So nothing much to be concerned about.

Anonymous said...

No worry at all for Sg so long as it remains a safe haven for foreigners to seek refuges here for their monies and their personal safeties.

The world is too large for Sg to cater to all, just the super rich alone will have to vie for a shelter here. They have to bid with the highest price to get just a spot in Sg.

However, the locals must be prepared to be relegated to 3rd Class or lower unless they belong to the ruling elites.

The world can goes to war and all the more Sg will be desired.

http://vonhayek.blogspot.com/ said...

I partly agreed with Lucky. But I need to add that the problem global economy is globalism has allowed the rich to be richer by transferring production to 3rd world, while worker in 1st world countries goes into debt to maintain lifestyle.

Economics 101 will tell you tell when the rich produces $100 of goods, he must pay the peasants $100 in order that the goods to be sold.

Now the rich pay 1 cent for every $100 worth of goods. Thats where the debt problem comes.

And for the world to recover, USA, EU, BRIC must wack tax haven like Singapore that asshole LKY has been running.

LKY is not only a Singaporean blood sucker, he is a problem of the whole world.

http://vonhayek.blogspot.com/ said...

The problem of whole world is structural. When the rich made $, they park all these $ in tax haven like Singapore or Switzerland.

When corrupt official make $, they park them there as well.

And without equitable redistribution of wealth, eventually the rich will find problem in selling their goods.

And industries become unprofitable. The rich then tried to rent seek by recycling their monies into commodities, properties or exotic derivatives.

That crowd out production. Economics theory will tell you that the world can only develop when there is high velocity for money circulation.

LKY's tax haven and economic policy will only bring us to feudalism.

Anonymous said...

anon 10.20

fear not, the rich are fickle-minded. as soon as singaporeans can vote out a substantial number of pap leeches, the rich will pack up and leave.

yes, we need to find our collective conscience and do what is right for our future generations, rather than short term monetary gain...

Anonymous said...

I'm hoping for big economic & financial collapse in Singapore. Best if overall unemployment rate is 25% and every household in Singapore got at least 1 or 2 retrenched and unable to get work. Even better if 1 of the local banks, say OCBC, goes under too. (In reality MAS will engineer a M&A by another bigger bank, and pumping in tax-payer monies as incentive as well.)

When the above happens, I can take over condo units like the stupid bedok reservoir ones at 4 for the price of 1 currently.

For prespective, I picked up a couple of seaview 2-bedroom units in Marine Parade for less than $600K each in 2003. After SARS and after 2+ years of slogging recession plus scars of Asian Financial Crisis, you could find bargains all over the place!

Fox said...

Social security actually has a surplus of 5 trillion dollars built up over the last few decades. So, the US government does not have to incur a deficit just to finance SS until a few decades later when all the surplus has been drawn down. Even so, the problem can be easily rectified by simply indexing the retirement pension payouts to lifespan.

The killer is medicaid and medicare. There's no dedicated tax to fund them and their costs are rising more quickly than inflation.

"I think the Europeans are implementing austerity because they see disaster coming if they don't start cutting spending. If you look at the growth generated in the US and Europe by the stimulus packages, it has been quite dismal."

Well, the stimulus by France and Germany is fairly small relative to the size of their economies. Not more than 2 percent because of EU rules on budget deficits. Cutting down on the stimulus is a big mistake because most of the savings that you get from spending cuts are offset by the loss in tax revenue as a result of the resultant economic contraction.

Budget stimuli are not meant for propping up economies. Rather, try to think of them as defibrillators. Of course, applying an electric current to your chest is a bad idea most of the time but when you down with a heart attack, you have to do what you have to do.

"=Pain may be inevitable and the Europeans leaders have thrown in the towel because they realised this....it is the American govt that is in denial.... still thinking they can spend their way out of this mess."

Even if you cut back on spending, then your debt gets larger from the loss of tax revenus anyway.

It boils down to two choices: (1) Increase government spending to make up for the collapse in private demand. Of course debt will grow but so will the economy AND the ability to pay off that debt. (2) Cut govt spending. Demand essentially collapse and unemployment increases along with firm failures. Tax revenue goes down and govt debt gets bigger anyway. Lagi worse, your ability to pay off that debt is reduced.

Fox said...

"If you look at the growth generated in the US and Europe by the stimulus packages, it has been quite dismal."

How do you tell if the growth is dismal? If the economy with the stimulus has 1 percent growth and the economy without the stimulus has -6 percent growth, then the stimulus would have given you effectively 7 percent output growth.

Fox said...

"the White House expects the deficit to soar to a staggering -62% of GDP by 2085."

I won't extrapolate so far ahead. By 2045, 40 years before 2085, China will have no more savings to export to the US as a result of the demographic crunch in China.

Anonymous said...

We have gone through the litmus test during the last round of recession. If the price went up instead of down during that time, what makes you think it will go down this time. Don't compare with 1997 as the floodgate was not open then. No matter how bad the economy is, there is always rich people around.

Anonymous said...

Hi Lucky,

I tried to open the link for Part 1 but got the message, "the page does not exist". Just to let you know. But, not to bother 'cos I can find Krugman's article. Thanks.

Anonymous said...

In any bubble, the successful speculator usually gets away loaded with $$$ BEFORE the bubble bursts. They do their maths, know when to buy, price to buy. They also know when to get out, loaded with pots of wealth. Yes, when the bubble burst & prices are dirt cheep, cheep. Right, time to return. After all, have to look out for Number One, nobody else will.

Ghost said...

I think Paul Krugman is both right and wrong here. Govts are making a mistake of cutting off the stimulus now but it is not because they believe the recovery is in the bag. They are doing this because they no longer have the money, or the credit, to keep throwing money into the system. It might cause the world economy to go into ress/depression but you also can't throw something you no longer has.

Anonymous said...

in the old days, china and india were not super economic powers. it is a different story today. power has shifted from west to east. the west may be in recession but the east is not affected at all. china and india do not just produce for the west now. they are consuming and buying assets from the west.

Anonymous said...

Other countries gahmen can change every election.

In Singapore gahmen no change not because they are good but because no one can fight and replace them. 50% of those who suppose to fight them don't want to fight, let alone want to replace them.

Why other gahmens can't learn from the PAP?

Anonymous said...

Other countries gahmen can change every election.

In Singapore gahmen no change not because they are good but because no one can fight and replace them. 50% of those who suppose to fight them don't want to fight, let alone want to replace them.

Why other gahmens can't learn from the PAP?

Fox said...

@Ghost,

Actually, bond rates are at a record low now everywhere. Governments have easy access to a lot of credit. In most developed countries, government expenditure automatically increases (unemployment insurance payouts, means-tested medical aid, etc) and tax revenues fall. These things are auto-stabilizers help to keep the economy from going into a free fall. The fact of the matter is that most of the stimuli in the developed countries come from these fiscal auto-stabilizers and only a small portion comes from direct discretionary spending (e.g. additional infrastructure spending). These auto-stabilizers will be switched on regardless of whoever runs the governments in the UK, the US, France, Germany, etc. The thing to note is that they will be turned off once economic growth resumes.

In contrast, in Singapore and China, where welfare is virtually nonexistent, we do not have these auto-stabilizers. That's why the governments have to allocate extra-ordinary budget spending to fight the recession.

Anonymous said...

Dear Mr Lucky

I recall there was this expert would said that Obama and Timmy has helped the economy back to its feet.

And that expert was ...

Oh did you read about the chinese buyers who carried suitcases of cash to buy properties ...

Btw, your pet fox dares contradict you!
He must be a religionist\PAP dog!
Fatwa!
Excommunication!

Anonymous said...

Dear Mr Lucky

Cheer up!
A nice song from our era
http://www.youtube.com/watch?v=KW02qktxEZk

Things will work out somehow.
The 80s/90s were wonderful (to us) but the kids reading your blog wouldn't swap it for Internet/ipod/ipad/iphone/wii/xbox!

Anonymous said...

http://utwt.blogspot.com/2010/06/get-even-its-only-way.html

They dont think much of him Lucky.

Anonymous said...

Dear Mr Lucky

UTWT says Obama is not fixing the economy!!!
Blasphemy!!!
Fatwa!!!
Excommunication!!!

Anonymous said...

Dear Mr Lucky

Its a long cut-n-paste from some nobody. U may want to just skip to the last line.

============

Obama’s real "stimulus" was no more than 200 billion dollars.

Barack had the chance to embark the USA on a Very High Speed electric train network construction program, but he decided to not even try that. Better to listen to Dimon, Buffet, Goldman. The Deameon Gold Man had a Buffet, while Sacking everybody, indeed. Whereas many countries, including China and gigantic Russia have such Very High Speed train programs, using West European trains and technology transfers. Instead, Obama made it so that the Too Big To Fail Banks made huge profits again, using the derivative universe. Some may not know calculus, but they know derivatives, or so they think. It’s a great comedy, it has not turned to great tragedy yet. Just more than 5,000 US soldiers killed in the Middle East, for no good reason.

In the USA, we have ridiculous spectacles like Tesla, a company of the connected plutocrat Musk, selling car for hyper rich people (more than $100,000 for a two-seater!) which get enormous subsidies from the government. Why? Because Musk looks good, and he walks by the side of Barack. Barack also finances, through NASA, Musk’s ridiculous replacement-NASA-by-myself amusing adventure.

The root of the present crisis is income inequality.

Money is an abstraction of power. Much money, much possessions, much power onto others. When all the power is in a few hands, so are most decisions, and intelligence in the commons is useless. Not only does society, overall becomes stupid, but the commons actually have interest to become stupid, so that they make no waves, and suffer less, since the animal without a brain suffers less. Economic activity is then reduced to survival.

Anonymous said...

http://neweconomicperspectives.blogspot.com/2010/06/europes-fiscal-dystopia-new-austerity.html

Ah Loh said...

Been reading your blog since I tried to google for "sticker labels for kids". Haha. Not sure why but your views has been insightful. So will u vote 4 PAP?

Although I belong to Gen Y, my peers wouldn't care less but only themselves. Don't be so bleak about things. At least we're safe and we have good education here.

Just that I woke to the fact that I've become a slave to the economy the day I started work. How to help the poor have a better life and decrease the disparity? Sigh.

Anonymous said...

not when we have a minister telling us to be better,betterer and betterest(just heard it from the news).

errrrr...pls betterest your england can?

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