Daily Investment Interpretations

November 15, 2008

2008-11-15:  Something has just occurred to me. The deflationary recession we're experiencing right now has no parallel in living memory other than, possibly, the Great Depression... and there are major differences between this downturn and that one. (I just read that this decline appears to be accelerating.) Dr. Krugman's hope is that the incoming administration will be bold enough to turn conventional wisdom on its ear in order to arrest this death spiral. But if they're not bold enough, then what? Also, no living economist can have had hands-on experience with a deflationary depression. I know that a lot must have been written about it, but when you're dealing with a once-in-a-century event, experienced experts are hard to find. (Only six months ago, some of our leading stock market pundits were predicting a turnaround at least in the stock market, if not in the economy, by the second half of this year.) Dr. Krugman is honest about not knowing what's coming. (See today's blogs: Brad Setser is scaring me and Macro policy in a liquidity trap wonkish.) We'll have to play it by ear, but I'm not prepared to assume that we're out of the woods. For one thing, the federal government has used up $290 billion of its initial $350 billion in bailout monies, and I'd be surprised if Secretary Paulson hasn't let it be known that he'll be back for the other $350 billion within the next few weeks. (Of course, this new money will be used to help individual mortgage holders rather than banks.)
    In the meantime, one might get the impression that every porker on Wall Street is lining up at the trough. I read yesterday that American Express is requesting permission to convert to a bank so that they can apply for all that delicious money. Of course, GM is seeking $25 billion (a paltry pittance compared to $700 billion, no? yes?) Do you think that GE might be close behind GM, followed by a gaggle of mid-sized multinational corporations with gigantic trick-or-treat bags, flanked by their Congressional representatives?
    What about our national debt? Will all these bailouts bankrupt us?
    I can't answer that question, but here's where we stand on our national debt as of six weeks ago:

    Our national debt has been higher during and just after World War II, but it's getting up there. (It might be worth noting that if our GDP drops during this recession, that would have the effect of boosting the ratio of GDP to national debt.)