International Economic Growth:OECD Estimates for 2009

The OECD has released its estimates for growth in the major economies for 2009.  Robust growth of 6% to 8% is seen in China and India.  Less, but still good growth for Indonesia, while Russia, Brazil, and South Africa are less than robust, but still growing.  Australia and Turkey are growing, but even less than the others.

For most of Europe, the United States and New Zealand, it is recession.  Mexico, Spain and Scandinavia are expected to produce near zero growth.  Iceland, the tiny dark blue dot in the north Atlantic, is projected to have a -9.335% drop in GDP.

OECD Visualization of World Growth for 2009

The table below details the specifics of GDP projections for many countries.

 

Almost all of the largest economies and some of the smaller  ones, have growth stimulus packages in place or on the table.  This will help keep the recessions from going deeper in the red, especially if they all are implemented at roughly the same time.

If one country increases government spending is a stimulus program, then there will be an expected positive addition to GDP.  But, some of that growth will be exported to their trading partners.  For example, if the U.S. were to enact a stimulus program by itself, it would lose some of the growth to imports from Mexico, Canada and China.  But, if all four countries enact similar programs at the same time, there will be an even larger expansion in all countries.  The mathematics of this are somewhat complex, and they lack definitive precision.  But, the modeling that is used by economists are well tested over decades of experience.  Mr. Obama's economic team will be using this type of modeling in order to determine how large a stimulus is needed to grow our economy out of the recession.

One variable not tested in this type of modeling, however, is how the credit markets will accommodate simultaneous borrowing by many countries at the same time.  Is there enough world demand for debt to buy all the bonds that would be issued with the huge influx that would come from simultaneous borrowing?  I don't know the answer to this question, but it does seem to me to point to some limits on the ability of the world economy to engage in large-scale borrowing at the same time.

On the positive side, China is able to buy $2 trillion itself, out of current reserves.  If they stay positive in their trade balance, then they could buy even greater quantities next year.  There is still plenty of international credit available, even if the large banks are dried up for now.

Conservatives, Liberals and Progressives Speak on the new Stimulus Plan

Watch a well informed discussion of the new stimulus plan President-Elect Obama offered in his weekly radio (and YouTube) address.  George Stephanopoulos leads the discussion between George Will, Arianna Huffington, David Brooks and Robert Kuttner on the merits of the plan.

This is well worth the time if you want to see a well informed and civil discussion.  Every point of view is represented and debated--liberal, progressive and conservative.

Discussion of President Obama's Proposal on Stimulus Spending

In another interview, Paul Krugman, 2008 Nobel Prize winner in economics,  noted the need for a massive spending and employment program to get the economy away from the doorway of a major depression.  We are not there, he insisted, but we could get there without an immediate implementation of a plan to get people employed and money flowing again.

Mr. Krugman also emphasized that there are two crises happening at the same time: a financial crisis on Wall Street, where the American Banking system is breaking down, and another crisis on Main Street where breadwinners are losing their jobs, can't get loans and can't make their house payments.  So far, the Bush Administration has addressed only the Wall Street side of the problem.  Mr. Obama's plan goes a long way to begin a remedy of the second.  Mr. Krugman sees possibly another one and a half million additional jobs lost before Mr. Obama takes office.

Late breaking news on Sunday said that the Democrats in Congress would have a $700 billion stimulus plan ready for Mr. Obama's signature on the day he is sworn into office. 

President-Elect Obama's Stimulus Plan

Mr. Obama announced on Saturday a rough sketch of a major stimulus plan that would add several million new jobs to our faltering economy.  American workers will rebuild the nation's roads and bridges, modernize its schools and create more sources of alternative energy, creating 2.5 million jobs by 2011, Obama said in the weekly Democratic address, posted on his Web site.

"These aren't just steps to pull ourselves out of this immediate crisis," he said. "These are the long-term investments in our economic future that have been ignored for far too long."

To watch a video of Mr. Obama's Weekly Address to the Nation and to read the entire article:Click Here

Tim Geithner: The New Man at Treasury

A brief profile of Tim Geithner published last year at New York Times:

"If the brave new world of finance is daunting, the man in charge of it is not. With a boyish charm and a dry sense of humor, Mr. Geithner has taken advantage of the current calm waters of the financial markets to take an active stance, rallying Wall Street to peel apart the market of credit derivatives to try to understand its potential risks. . . .

To read the whole story, follow this link: to RayHendon.com

How Bad Can it Get?

How Bad Can it Get?

My last blog on the economy was entitled: It’s Worse Than We Think. So what comes after, worse than we think? Worser is not a word, but it’s what comes to mind today when I see the latest employment and price data.

To continue reading, follow this  link to the complete article.

Report of the G-20 Meeting

Here is a link to the full text of the press release of the attendees: Press Release of G-20 Members

There were two agendas at the G-20 meeting on Saturday:

• Strengthen the world's economies and reduce the effect of the world-wide recession that is getting worse daily.
• Find a way to share the authority over the structure of the global financial system. Europe, Asia and Latin America are all clamoring for more say-so in how things work.

On the first agenda, that of working together to strengthen the world's economies, there is progress to report. All that could reasonably be expected from the Conference would be to reach agreement on what to do for the next meeting, and this was accomplished. They agreed to meet at the end of April, about 100 days after Mr. Obama assumes his duties as President of the United States, and take up a specific list of agenda items:

Stimulus spending

Interest rate cuts

IMF funding and lending to shore up currencies under attack

Regulatory oversight on banks and other financial institutions

Oversight on credit default swaps and credit rating agencies

Transparent accounting standards for all world-wide financial institutions

A Supervisory College to meet and discuss world banking developments

Limiting compensation for financial executives

There has been no agreement on the structure of any of these issues, but there is agreement that these are the items that will be worked on for the next meeting. It is a rich agenda, and one full of difficulties to resolve. Bank regulation, alone, poses a host of thorny issues that will test the ability of the G-20 to work together.

As of yet, there has been no agreement as to who will fund the IMF in its increased lending activities, which is essential to stop the excessive volatility of the currency markets. There are, generally, three nations that have the wherewithal to do this: Saudi Arabia, China and Japan. All three of these countries have huge reserves of foreign currencies (China as over $2 trillion), and they will be needed if the plunge in currency values of both emerging and developed markets is to stop. There will probably be much discussion on this issue before the next meeting.

As to the second agenda, the spreading of authority, there is little talk, so any analysis of this issue will have to be done by reading between the lines. The background for this agenda has its roots in the vast changes that have taken place in the world economy since the 1944 Bretton Woods Agreement . The United States probably produced at least half the GNP of the world when the meeting took place. It now accounts for about 25%. Also, the economic power has shifted from Western Europe and North America to be more dispersed over all continents. Asia has enormous economic power since the rise of China, India, South Korea, and Taiwan. Plus, there are a host of South East Asian economies that are growing fast and that are now fully integrated into the world's finance system. In addition Europe has not only recovered from the devastation of WWII, but has coalesced within the EEC, and Eastern Europe is taking off.

The first reading between the lines is the fact that it was the G-20 that was called into meeting rather than the G-7 or G-8. This reflects the reality of the new power dispersion. In times past, it would have been the top industrialized nations meeting at the behest of the U.S.

The second reading regards the desire to expand the powers and monies available to the IMF. This institution, which has contributed to world economic stability over the years, has been a virtual fiefdom of the United States. But the ousting by Europe last year of Mr. Bush's appointee to head the IMF set the tone for things to come. In my view, it would be beneficial to expand the membership and voting of the IMF, to include the emerging markets. If this step cannot be done, then continuing the G-20 as the major tool of international policy making would be an important step. Over time, the members will sort things out and determine where the consultative power lies.

Below is a list of the world's top 20 economies, measured in U.S. dollars for the year 2007. This is not the exact membership of the Group of 20, however.

The G-20 has added Saudi Arabia, South Africa and Argentina, and eliminated Spain, the Netherlands and Belgium. the European Union was also added as a single member.

The list goes a long way in explaining how things need to change in regulating the world's economies. Although the United States still dominates--no one else is even close, there are many new, major players on the list. China will probably soon replace Germany as the third largest economy, and Brazil has been gaining on Canada the last few years. Turkey is now growing fast, and Indonesia will likely pass Belgium before long. The new world order needs to reflect these realities.

The final analysis may reflect that the most significant part of the G-20 meeting of 2008 was that the G-20 meeting was called. If they did nothing else, the fact that all twenty of the members came and participated marks a boundary of recognition that things have changed. Managing the world's economies will no longer be confined to the top seven or eight nations of the world. Power has shifted to include the newer, faster growing economies.

Join me in welcoming Mr. Obama to the world of international economics and finance. I hope he puts a strong team together, soon. There is some heavy lifting ahead.

Brief on the G-20 Conference Today in Washington

The emergency meeting of the Group of 20 this Saturday, November 15, was called because the world’s financial system is broken. The meeting was suggested by French President, Nicolas Sarkozy to President Bush. Although Mr. Bush did not want to take up the issues that will be brought up at the meeting, he agreed to host it at Mr. Sarkozy’s insistence.

The primary issue to be discussed will be helping the developed and emerging markets out of the deepening recession that the world now faces. But, included in the discussions will be proposals made by European and emerging market leaders to reform banking regulations that would prevent the kind of financial meltdown that started the downward spiral this year.

Mr. Bush has publicly warned about stifling economic growth by excessive regulation, while the European leaders and Brazil, specifically, are more prone to take a strong government hand when they see a larger public need.

This argument is ancient in origin, and there has never been a consensus about the exact amount of regulation that is needed in every situation. Don’t look for a resolution to this issue at the meeting today. Mr. Bush couldn’t do anything about it even if he wanted to, given his status as out-going President, and the discussions today will last only about five hours.

Another meeting is planned after Mr. Obama assumes the Presidency, and at that meeting, more detailed work can be done to help coordinate government efforts to stave off what threatens to be a major downturn in many of the world’s economies. America is just entering a recession now, and the prognosis is looking increasingly bad. Europe is already in a recession, lead by Germany, the world’s third largest economy. Almost all the emerging markets, with the exceptions of China and India, are in recession, and even China and India are experiencing significantly lower growth rates for 2009.

The following description from Economix of the NY Times will be helpful in understanding the structure of The Group of 20:

The Group of 20, or G-20, is an international body that meets to discuss economic issues. Some of the things members discuss are ways to expand (or at least stabilize) the international economy, to reform international economic financial institutions like the International Monetary Fund, and to coordinate economic and financial policies (like policies that reduce tax evasion)

Members – 19 countries with some of the world’s biggest industrial and emerging economies, plus the European Union – represent about 90 percent of the world’s gross national product, 80 percent of world trade (including trade within the European Union) and two-thirds of the global population. Member countries usually meet annually.

The annual meeting already took place last weekend in São Paulo, Brazil. This weekend’s meeting was not on the regular schedule and was arranged specifically to address concerns about the international financial crisis. It is unprecedented because heads of government will be attending.

The member countries are Argentina, Australia, Brazil, Britain, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey and the United States. The European Union is also a member, represented by the rotating council presidency and the European Central Bank.

The membership of the G-20 has not changed since it was established, and the organization says there are “no formal criteria for G-20 membership.” With the exceptions of Argentina, Saudi Arabia and South Africa, all of the member countries fall within the list of the top 20 biggest state G.D.P.’s in the world.

Usually, the attendees of the annual meetings are the finance ministers and central bank governors of the member countries, plus top leadership of the World Bank and the International Monetary Fund.

This is the first time that heads of governments will attend a G-20 meeting.

A number of economist and other leaders are hoping specific policy proposals will be discussed at this meeting, but the expectations for what can and will be accomplished in the next 24 hours are relatively low.

The last-minute nature of the meeting allowed for little preparation time. The meeting itself is also relatively short.

“I would be surprised if much happens,” said Edwin M. Truman, a senior fellow at the Peterson Institute who served as the assistant secretary of the Treasury for international affairs during the founding of the G-20. “When you think about it, it’s 20 people, and they’re all heads of government. They’ll meet tonight for dinner, informally, and then they’ll meet tomorrow for just five hours. That’s not a lot of time for everyone to talk.”

There is only so much that attendees at this event can commit to, anyway, since any major policy changes will likely have to be approved by leaders’ full governments back home. President Bush — as an outgoing president — would have an especially hard time committing to anything substantial. (Former Secretary of State Madeleine K. Albright, and former Representative Jim Leach will meet with representatives of G-20 nations on President-elect Barack Obama’s behalf this weekend.)

The smaller G-7 and G-8 have memberships of only the largest economies, which exclude, China, Brazil, India and Russia, to name a few, and there has been strong criticism leveled at these groups because they exclude far too many of the world’s economic powerhouses. Most would agree with this criticism, and for this reason, and bolstered by the enormous growth of the emerging countries, the G-20 will probably assume a much larger role in the future in discussions of global economic issues. We may be seeing the first emergence of this new role in today’s meeting.

I look for much more substance from the second meeting than this one, but this one is important as a necessary first step.

Economy: It's Worse Than We Think

The evidence is mounting that the American economic downturn is going to be much worse than generally thought. A downturn that was thought to see unemployment at 8%, which is a recession level, is seen now to have an easy potential of 9% or 10%--levels not seen for decades--a deep recession.

Here are the culprits:

• Falling home prices are not showing signs of stopping. This quotation from the AP sets the latest news:

The number of homeowners caught in the wave of foreclosures in October grew 25 percent nationally over the same month in 2007, data released Thursday showed.More than 279,500 U.S. homes received at least one foreclosure-related notice in October, an increase of 5 percent over September, according to RealtyTrac Inc. One in every 452 housing units received a foreclosure filing, such as a default notice, auction sale notice or bank repossession.

More than 84,000 properties were repossessed in October, RealtyTrac said.

A nasty brew of strict lending standards, falling home values and a tough economy is filtering through the housing market. By the end of the year, the company expects more than a million bank-owned properties to have piled up on the market, representing around a third of all properties for sale in the U.S.

The problem with home foreclosures is that once the mortgagee takes them over, the prices falls much more than if the home had been sold while occupied. Repossessed homes tend to sit vacant for longer, deteriorating and bringing down the entire neighborhood as they fall further into to disrepair. This puts pressures on all the other homes in the neighborhood, making it more likely that other owners will walk away from their mortgages which may be twice the current market value. It is a vicious cycle, and once started, it spirals quickly down.

• Lending standards have tightened to the extent that many consumers can no longer get automobile or furniture loans. This is pushing General Motors, Ford and Chrysler into bankruptcy, imperiling over three million jobs in the process.
• Rising unemployment is sapping the spirit and incomes from ten million Americans right now. This has a tremendous effect on the morale of everyone they know and everywhere they live. Unemployment is a killer for spending plans. Those unemployed tend to pull back significantly on their spending, and their gloom spreads to their friends and relatives. It is contagious and destructive and will kill consumer spending which has, for the last five to ten years, been the mainstay of the American economy. An AP report released today (11/13) shows the extent of new jobless claims:

The number of newly laid-off individuals seeking unemployment benefits has jumped to a seven-year high, the government said Thursday.

The Labor Department reported that jobless claims last week increased by 32,000 to a seasonally adjusted 516,000. That is the highest total since just after the Sept. 11 terrorist attacks and second-highest since 1992.

The total was much higher than analysts expected. Wall Street economists surveyed by Thomson Reuters expected claims to increase only slightly to 484,000.

The four-week average of claims, which smooths out fluctuations, rose by 13,250 to 491,000, the highest tally in over 17 years.

Thursday's figure is the first time claims have topped 500,000 during the current economic slowdown. Jobless claims above 400,000 are considered a sign of recession. A year ago, claims stood at 338,000.

• Falling economies around the world. As the world’s economies fall into below-trend growth, their spending slows down. The buy fewer airline tickets, fewer American cars, less software, and less American wheat. America does import much more than we export. But, we still export a lot, and many jobs depend on them.

the Commerce Department said the trade deficit declined by a bigger-than-expected amount in September, falling by 4.4 percent to $56.5 billion as imports experienced a record plunge.

The import decline was led by a huge fall in imported oil as the average price for crude dropped by a record $12.41 per barrel and the volume of shipments fell to the lowest level in five years. But demand for other types of imports also fell, with imported cars and car parts dropping to the lowest level in more than five years, an indication that foreign automakers are feeling the pinch hitting U.S. consumers.

The feedback loop in this kind of international recession is horrible. U.S. and European economies enter into recession. This feeds back to the emerging markets as a lower demand for their products, thus inducing recession in their economies. The recession there reduces demand in the U.S. and Europe for things they make: airplanes, large computer, computer software, agricultural commodities, etc. This further reduces employment in the U.S. and Europe, etc., etc.

It will take a Herculean effort by all the world’s economies to break this cycle. There is a meeting beginning the 15^th in Washington of the G-20, approximately the 20 largest economies in the world, and they will attempt to address the problem. Probably not much will come of the first meeting since American leadership is in a transition stage that won’t formally begin until January 20. But a second meeting will most likely be agreed to, and at the second one I would expect much better results of a comprehensive and coordinated efforts to bring the world recession under control.

For a more detailed look at this meeting, see my recent article @ http://seekingalpha.com/article/105737-the-g-20-sings-a-song-of-sixpence

Pictures of an Employment Crisis

The five graphs below show with stunning visibility how bad the economy is today. Chart 1 shows changes in nonfarm employment from 1990 through the end of October, 2008.  You can see the dramatic drop of 240,000 jobs lost last month in this graph. Also shown are the relative lengths of the last two recessions: the 1991 drop was relatively short, lasting about one year. The 2001-02 recession was much longer and less well defined than previous recessions.  There was an increase in jobs shortly after 2002, only to plunge back into the red again in 2003.

This graph also shows the anemic recovery that followed. Note that the job creations shown in the space above the zero line after 2003 were well below those of the earlier recovery. We never made a full recovery from the 01-02 recession.

Chart 1: Change in Nonfarm Employment

All data from Bureau of Labor Statistics: Graphs from NY Times

Chart 2, below, shows the overall unemployment rate over the same period. Again, the recovery during the early period of President Clinton’s Presidency showed a rapid recovery—seen by the falling unemployment rate to a low of around 4% when he left office. Beginning in 2001 the unemployment rate increased 2003.  After 2003 a fairly good recovery began and lasted from 2004 until 2007. At that point, things began getting bad again. What was an anemic recovery quickly gave way to a more serious downturn, which we are just beginning to experience.

Chart 2: Unemployment Rate

Chart 3 shows the unemployment rate among different ethnic groups. Blacks have always had a higher unemployment rate than whites, and since the Department of Labor began keeping track of unemployment by ethnic groups, Hispanics have traditionally been lower than Blacks and higher than Whites. Also, once Asians were tracked, their rates of unemployment have more closely mirrored that of Whites. All groups, however, are suffering with the current downturn.

Chart 3: Unemployment by Ethnic Group

Chart 4 shows that the unemployment crisis also affects those who keep working. The number of part-time workers who want full-time work rises dramatically once the unemployment rate begins climbing. This reflects the reality that many full-time workers are effective in getting only part-time work during the down-turn.

Chart 4: Part-Time Workers who want full-time work

This is a hidden cost of unemployment, since these workers don’t show up on the unemployment statistics or unemployment benefits program.

Chart 5: Real Weekly Wages

Chart 5 shows the effects of unemployment in terms of the general wage level of all workers. The real wage is the dollar wage per week adjusted for inflation, showing that even those who continue working in a downturn often end up getting behind the inflation curve.  During recession they work for less purchasing power than when the economy was sound.

It doesn’t look good for the coming months. Many respected economists predict that the unemployment rate could reach eight percent before it begins getting better. You can surmise from these charts, that this will be especially hard on the minority populations.  They will work less than they want and for real wages below what they need.

This is not a pretty picture, and it points to the need for a significant stimulus program that will directly create jobs. In a nation that needs to rebuild its infrastructure after decades of neglect, there will be plenty of men and women willing to work on such projects. Job creation, in my view, will be much more effective in easing the pain of unemployment than stimulus checks. Those checks that were mailed earlier this year were not spent as freely as Congress had expected. During tough times, when jobs are harder to get and hold, the fear factor enters the equation.  Stimulus checks given at that time are often hoarded rather than spent. 

The details of a new stimulus package will soon be discussed in Congress and the White House.  We should forget about trying to balance the budget, and go with a huge public works program.  The nation is in need, and quick and powerful action is necessary to bring us out of this trying period. 

China Shows Signs of Slowing

After years of hyper growth, averaging close to 10% a year, the great engine of growth that is China, is faltering. A series of government reports released over the last few weeks indicated that China’s exports are moderating. Real estate construction projects are being suspended. Consumer confidence is in decline. And many factories in southern China are closing, putting tens of thousands of migrant laborers out of work. Another sign, orders for Christmas from the Western nations, were down 20 percent this year. Big retailers and toy marketers are gloomy about the upcoming holiday season sales.

Newly released data suggests that nearly every sector of the economy is slowing and credit is tightening. While few economists expect China to fall into recession, analysts are forecasting the worst growth in more than a decade, with the economy expected to expand by as little as 5.8 percent in the fourth quarter this year, down from about 11 percent in 2007.

5.8 percent growth would be welcomed in any of the developed nations today; most all of the west is looking at declines in GDP for 2009. But for China, a moderation of this magnitude, spells trouble. China’s huge population is still largely rural, with hundreds of millions of farm laborers still stuck in medieval farming methods. The high growth generated over the last ten to twenty years in China has been the ticket for millions of these folk to make their way to the cities and find work in the burgeoning factories that lead China’s export industry.

A slowdown of the growth rate raises fears of political unrest within the Communist Party, so they are taking strong steps to keep the growth rate as high as possible. The government is preparing a large economic stimulus package, pushing new infrastructure projects, offering aid to exporters and searching for ways to prop up the nation’s severely depressed stock and real estate markets.

Domestically, there are also signs of a slowdown: Auto sales have plummeted this year. Air travel is in decline. Property sales have dried up, and weakness in the property market is hitting the makers of steel, cement and glass. “There is a nose dive in real estate construction in south China and east China, the two real estate boom areas,” said Yang Dongsen, a cement industry analyst at Merchant Securities. The real estate slowdown is expected to affect retail sales, which for the last few years had been lifted by new-home buyers purchasing appliances, decorations and other household goods.

It does not help that China’s stock markets have also collapsed, after a stunning rise in 2006 and 2007. Share prices in Hong Kong are down about 50 percent, and the Shanghai composite index has fallen 67 percent this year, wiping out nearly all the gains it had made in the previous two years.

These data do not necessarily spell doom for China’s growth, but they do point to a period of economic adjustment that they must navigate. The west and the east are, to a large degree, joined. They depend on us for demand for their factories, and we depend on them for supplying us with inexpensive goods. The developing markets in Latin America are, themselves, dependent on China for purchasing their raw commodities, such as iron ore and petroleum. The downturn in Europe, Latin America and America is too severe not to be felt in the China. As much as they would like to be insulated from our economic problems, the interdependence is unavoidable. It will probably be some time before China will be worried about inflation and growth that is too fast.

What Currencies are overvalued and Which under Valued

From our friends at Economy.com we learn of a new international currency comparator: The IPod inedx.  From their table below Australia, Indonesia, Canada, and Korea are selling the IPod for less than $140.  Argentiana, Brazil and Russia over over $250.  This index gives you a good indicator  of which currencies may decline in the future and which are more likely to rise.

>Just what we needed: A way to track shifts in global purchasing power that fits in your pocket. And is less greasy & caloric than the alternative...

Australia is the cheapest place in the globe to buy an Apple iPod, highlighting just how far the currency has plunged since July. The CommSec iPod index shows that Australia is the cheapest place of 62 countries to buy an Apple iPod 8gb nano music player when measured in US dollar terms.

The value of the iPod index is to highlight implications of currency changes and country relativities.

In other words, it's an update of The Economist's Big Mac Index. If you're clueless, all it takes is a common good or service that's sold in identical form the world over. The local price is simply converted to a common currency (typically U.S. dollars, though I wonder for how long?) and you can see who's living how high, in relative terms. Pretty neat.<

Perhaps this is a little better than the Big Mac Index.  It's more currency, and it reflects relative currency valuation more precisely than the Big Mac.  After all, the Big Mac takes a lot of locally prices labor and vegetable prices, as well as local rents.  The IPod is made in America and shipped, whole, to each country where it is sold.  To me, this makes it a more pure reflection of local currency value.

The Thin Line Between Recession and Deflation

There is no longer any debate about the U.S. entering a period of a declining economy.  Everyone who watches the leading indicators had been expecting a recession since the beginning of the year.  Finally, in the third quarter, it came.

Nor is there any debate about the global slowdown.  It's not that the United States controls the rest of the world.  It's just that the same things that have pushed us into recession are also affecting the rest of the world: overextended credit based on loose credit standards, and a growth spurt based on the loose standards.  As is almost always the case, growth spurts go too far, too fast, and have to be brought back to earth and consolidate before taking off again.  I think it will be some time before the emerging markets take off again, but they will, eventually.  Just not any time soon.  This is also true of the United States and Europe.  We will resume our growth, eventually.   But there is going to be some time before we are ready to sustain more growth.

And therein lies a problem.  With everyone declining at the same time, we can go too far to the downside and experience deflation--a spiral to the downside that frightens economists.  Depression, which is the companion of deflation, is not something anyone who knows would want to see.  There is nothing uplifting about suffering for years, where entire economies collapse under the weight of falling demand, falling employment and falling production.  Recessions are a necessary adjustment to a period of excess.  Depressions are not necessary, but they can happen if the economy isn't handled well.

A recession could see unemployment in the U.S., for example, reach 7% or 8%.  A depression could see 25%.  There is no comparison, though, between this set of numbers.  The level of suffering under a depression is much more than, say seven multiplied by three or four (7% x 3 = 21%).  From depression come revolutions and war, as scape-goats are sought and found.  Demagoguery rules when things look hopeless, and those afflicted by unemployment and despair are easily swayed into despotic politics. It happened in post WWI Germany, when the onerous provision of the Treaty of Paris pushed Germany into the arms of Adolph Hitler.  It has happened in Argentina where bad conditions led to the fascism of Juan Perón.  This specter could easily be duplicated in many of the emerging markets if things get bad.  The democracies in South East Asia, for example, are too fragile to handle a period of major deflation.

These conditions make it exceptionally important that the American, Japanese and European economies be handled properly during the downturn.  The burden falls on these three regions because it is demand from the large economies that drive production and growth in the smaller ones.  During this time we cannot look for strictly balanced budgets.  Deficit spending, if done on public projects that are needed and useful (roads, bridges, schools, etc.), can go a long way in reducing the ill effects of unemployment and help keep consumer spending up.  Longer unemployment benefits, veteran help for college and home loans are other measures that were especially effective after WWII that saw the return of more than a million soldiers and sailors to the economy.

We will have our hands full for most of 2009.  Most of the predictions I see point to a possible end of the recession by the third quarter of next year--if things go well.  One thing about deflation: it can be stopped by printing enough money.  But, the balance between enough and too much is sometimes hard to find.  And that task, in my view, will be the defining test of our next President.  Go too far, and we have hyper inflation, which, in its own way, is as bad as deflation.  Not go far enough, and we have deflation and depression.  It's a thin line between these poles.  I hope for a wise President and an equally wise Congress to keep the proper balance on this line. 

Even though there will be plenty of skeptics who think "wise President" and "wise Congress" are oxymoron terms, I disagree.  There are times when it appears that way, but I think when things get bad, there is a tendency of Americans to pull together.  We will certainly have this test to pass in the coming year.