Another Independent Economist Predicting Depression 2012

[AvidFan]

http://www.kansascity.com/2010/03/12/1809132/depression-is-coming-soon-olathe.html

Depression is coming soon, Olathe economist predicts

By MARK DAVIS

The Kansas City Star

“I hope I’m wrong, but … the stage is set for some difficult times in urban America,” Bill Helming said.

And to be honest, he’d be good with that. Nobody wants to live through an economic depression marked by a beaten-down stock market, a jobless rate at 12 percent, widespread debt defaults and a deflationary price spiral that takes the economy down with it.

Yet we’re on our way, says Helming, a widely respected agricultural economist who lives in Olathe. His new book, “What Goes Up Eventually Comes Down,” lays out the dismal forecast.

“I hope I’m wrong, but I’m trying to be as much of a realist as I can,” Helming said in an interview. “The stage is set for some difficult times in urban America. There’s nobody that’s going to be left out of this.”

Helming has had dark visions of tomorrow before. For example, when the stock market crashed in October 1987, Helming feared the worst.

“We’re heading for a recession we haven’t seen the likes of since the 1930s,” he told The Star at the time.

Helming saw summer 1990 as the onset of “the most serious deflationary recession we’ve had in over 50 years.”

He declared outright in November 1992 that the nation’s economy had entered a depression. And July 1994 reminded him of “what happened in the early 1930s.”

We know now he was wrong. That doesn’t keep his or others’ dire forecasts from attracting attention during hard times.

A depression remains in the economic forecasts of author Harry Dent Jr., and deflation figures strongly in the views of economist Gary Shilling and technical analyst Robert Prechter.

Gloom and doom never really goes away, as if in good times we want reminders not to overdo it. But predictions of a sharp depression are clearly outside the mainstream of economic forecasts today.

Talk of depression had rattled markets a year ago, for example, when Harvard economist Robert Barro put the odds at 20 percent. Recently, he set them “close to zero” for 2010.

Most economists expect a weak, slow recovery — but a recovery all the same.

Bubbles don’t burst

Helming makes his case for what he calls a “modern-day depression” in his 195-page, self-published book.

We’ll see a sustained drop in the prices of just about everything, from stocks and real estate to wages and commodities. Some of that is happening now.

Helming argues that much more lies ahead. He said decades of easy credit and increasingly widespread use of debt — by governments, companies and consumers — have inflated the economy and the price of nearly everything to unreasonable heights.

“We borrowed our way to prosperity, and that has never in history been sustainable,” Helming said.

In short, we’re living in an economy packed with bubbles.

But in Helming’s forecast, bubbles this big don’t burst. They deflate.

It will take years, difficult years, to deflate prices, unwind excessive debt and stabilize the overblown economy, he said. It will take a depression. Think of Japan’s lost economic decade of the 1990s, he said.

Helming is clearly right about one thing. Few Americans know what it’s like to live through a depression. And that’s one of the conditions that he says brings them on.

We’re really riding an inevitable cycle of decades-long economic booms followed by shorter but painful busts, Helming notes. The latest boom began in 1940, on the heels of the Great Depression.

We have seen 11 recessions since then, by Helming’s count, but these were merely interruptions. After each recession, the boom returned and did so typically in about a year.

We became convinced that the boom would always return because, as far as we know, it always had. Complacency brought on more debt, more spending, consumption and bubbles and, in 2008, the bust.

“It’s already playing out, but it’s going to play out much more dramatically,” he said.

Eyes of the storm

As bad as the last two years have been, Helming says the most difficult stretch starts later this year.

By 2012, unemployment will climb to 12 percent from the current 9.7 percent. Add in discouraged workers or those who are underemployed and Helming sees 32 million, or 20 percent of the work force, suffering from a lousy job market.

Houses will lose half the value they had in 2006, he said, adding that they’re already down by a third.

The Dow Jones industrial average, currently above 10,600, likely falls below 4,000 and possibly as low as 1,500 or even 500, he said. Little wonder that Helming’s advice is to dump all your stocks by the end of April.

Cash will be king, so you’d want to own federally insured bank deposits, U.S. Treasury debts, and only the best corporate bonds and annuities.

Get a good alarm system, too. Helming notes that many families at least fed themselves during the Great Depression because they lived on farms. We’re mostly urban now, and he expects riots.

Though falling prices may sound good to consumers, persistently falling prices can be bad for the economy.

The pain is worst for those who owe a lot of debt. But as their burden becomes too great, the pain spreads to those owed the money because they won’t be getting it back.

For example, falling home prices and foreclosures have hurt homeowners and lenders alike. Helming’s forecast sees that happening with debts of all kinds, public and private.

Where’s the proof?

For all its numbers and graphs, Helming’s book is short on proof that he is right this time.

He offered three reasons his earlier predictions fizzled.

World trade grew more than he’d expected.

The technological boom created jobs he hadn’t counted on.

He also hadn’t appreciated the impact that baby boomers would have on the economy as they reached a spending peak in the 1990s and 2000s.

“That’s something that clearly bought more time,” Helming said.

Many other economists say government support of credit markets avoided a depression. Others say debt’s burden can be dealt with gradually by saving more as a nation without wrecking the economy.

Those who don’t expect a severe depression have the same problem Helming faces.

They can’t prove we won’t have one.

On the plus side, it's 12 deg C in the UK today and it looks like Spring is here!

[catmandu]

It's amazing how at any point in the economic cycle you can roll out the "experts" who will tell you that interest rates are going up/down, house prices are going up/down, shares are going up/down. Might as well just ask them the likely direction of an elevator.

[Ben from Dover]

From an economists perspective I think this guy is probably spot on. What is is saying is how it would play out if left alone. However the last 2 years have shown us that things will not be left alone.

Government will expand the money supply and inflate. This will avoid depression and we will see medium / high inflation in the over-all cost of living over the next 10 years. Apart from house prices which have already had their inflation.

[Mikhail Liebenstein]

In short, we’re living in an economy packed with bubbles.

But in Helming’s forecast, bubbles this big don’t burst. They deflate.

It will take years, difficult years, to deflate prices, unwind excessive debt and stabilize the overblown economy, he said. It will take a depression. Think of Japan’s lost economic decade of the 1990s, he said.

I'm not so sure about this bit.

Japan has its own stability licked due to high saving ratio and stable society - so the populous don't mind a bit of deflation, it just re-enforces the notion that saving is wise. The true net debtor in Japan is the organisation that prints money, so if it get into trouble it can just magic some new Yen into the world.

Sustained deflation in the US and UK would be a disaster and lead to total economic collapse, riots etc There would be a huge chain reaction of bankruptcy.

Given that sustained deflation isn't therefore a policy option, what's the alternative?

New ink cartridges anyone?

Edited March 15, 2010 by mikelivingstone

[Mikhail Liebenstein]

From an economists perspective I think this guy is probably spot on. What is is saying is how it would play out if left alone. However the last 2 years have shown us that things will not be left alone.

Government will expand the money supply and inflate. This will avoid depression and we will see medium / high inflation in the over-all cost of living over the next 10 years. Apart from house prices which have already had their inflation.

Edge think my last post reached the same conclusion as yours above.

The natural course of events will not be allowed.

[CokeSnortingTory]

It's amazing how at any point in the economic cycle you can roll out the "experts" who will tell you that interest rates are going up/down, house prices are going up/down, shares are going up/down. Might as well just ask them the likely direction of an elevator.

I believe that "economists" should be renamed as "tipsters".

http://www.freeracingtips.co.uk/