freediver wrote on Jul 25^th, 2010 at 11:15am:


What happened, did you come to the conclusion, that the following scenario's would cause an economic decline?

"Let me out it this way, TRY REDUCING THE GLOBAL & AUSTRALIAN POPULATION by say 2-3% per year, for the next 80 years and you give me your scenario's of what you think will happen to the Global & Australian Economy?

Now, after that, also apply a 4-8% decline in Global Energy Production and then tell me, where you think we will be in 80 years? "

Just as the increase in Population & Cheap Energy were major drivers of Economic Growth over the last 80 years?

Monetary Policy Cannot Solve Current Economic Weakness

Well, Chairman Bernanke said a lot of things but the only part which was heard was just two words in one paragraph:

Of course, even as the Federal Reserve continues prudent planning for the ultimate withdrawal of extraordinary monetary policy accommodation, we also recognize that the economic outlook remains unusually uncertain. We will continue to carefully assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed to foster a return to full utilization of our nation's productive potential in a context of price stability.

I listened on and off to the Chairman's testimony. The market dived just hearing a brief window of honesty in hours of testimony looking at the economy through rose colored glasses. The famous Jack Nicholson line in the movie A Few Good Men rang loudly – “You cannot handle the truth”.

Most analysts covering the economy (such as myself) have been painting a picture of an economy slowing – the only difference between the analysts is the how dire the future will be. Universally, all admit the future is uncertain as in this weaken state – events that a strong economy would shrug off can now pull the rug out.

I suspect one of the reasons for the negative reaction to the Chairman's statement was they believed he was Superman. They believed the Fed can solve any economic crisis. They would be correct if this was the normal run-of-the-mill recession, but this Great Recession is different.
Link -
http://seekingalpha.com/article/216311-monetary-policy-cannot-solve-current-econ...
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Well, I agree with a few of the major assertions -
1) Monetary Policy & the US FED in particular, can not wave a magic wand & solve the current Economic slowdown!
2) Monetary Policy could & has solved many smaller, run of the mill Recessions!
3) There are many, who can not handle the truth, because it is outside the square.
4) THIS TIME IS DIFFERENT!

Economics & Financial Attacks (Cont)

Vulnerabilities Due to Persistent Economic Stagnation
Picking a bottom in financial markets is a popular pastime for investors and market analysts, but national security analysis should be more concerned with what happens once the bottom is reached. All falling markets find a bottom eventually. The Dow Jones Index may fall to 5,000 or even lower, but it will stabilize at some point. The important issue for the economy, and therefore national security, is what happens then? There seems to be an a priori assumption, or maybe just a large dose of wishful thinking, that when the markets bottom they will bounce back and quickly recover. This is certainly the mantra of “buy and hold” analysis

But what if markets do not bounce back? What if they go down and stay down?

But the evidence from bubble behavior shows that once we hit bottom, we should expect a prolonged and pernicious period at the bottom itself without any appreciable gains for years.
The implications of this for tax revenues, fiscal stability, U.S. economic power, and the ability of the U.S. to project hard or soft political power are daunting.

Market technicians refer to this as the “LUV problem” using the letters “L” “U” and “V” to denote types of market behavior following a collapse of the kind we are now experiencing.
Most optimistic and quite common in cyclical downturns is the V-shaped recovery in which the economy as a whole declines rapidly, hits bottom, and bounces back quickly to the former high level and beyond.
Also not uncommon is the “U” shaped recovery in which the economy or certain indices first fall, then remain at or near the bottom for an extended period before regaining their old highs.
The difference between the “V” and “U”, of course, is the time spent bouncing along the bottom, but investors in both situations are encouraged some rebound is in sight.

Which brings us to the last of our trio of market graphs, the “L” shaped recovery—which, in fact, means no recovery at all; at least not in any time frame in which the recovery is causally linked to the original decline. An L-shaped phenomenon represents a sharp decline followed by a prolonged and open-ended period of stagnation or malaise in which the recovery, when it does finally arrive, probably needs to be jump-started by some extreme event such as a war.

The most famous example of this is the Great Depression, in which the initial industrial contraction lasted 43 months (August 1929 through March 1933) followed by a weak recovery and a second decline of 13 months (May 1937 through June 1938) followed by a second weak recovery.

Another famous example of “L” behavior is the Nikkei 225 index of leading Japanese stocks traded on the Tokyo Stock Exchange. After reaching an all-time closing high of 38,915 on 29 December 1989, it dropped precipitously and reached an interim low of 14,517 on 30 June 1995—a spectacular decline of 63 percent in 4-1/2 years (Figure 1). But the story does not end there. After several rallies and new declines, the index ground down to other interim lows of 7907
on 2 May 2003 and then 7162 on 27 October 2008, a breathtaking 81.6 percent below the all-time high reached almost 19 years earlier

What the Depression, Nikkei, NASDAQ, and other similar episodes all have in common is that they were preceded by bubbles. The Depression and the Nikkei collapses both followed bubbles in real estate and stocks.
Bubble behavior shows up clearly in the preceding graphs and is characterized by a sudden rise from a previous low level, which feeds on itself until it achieves a hyperbolic spike followed by an equally violent downward break then a prolonged period at a relatively low level compared to the previous peak.

What is most striking is the enormous amount of time between the spike and the return to anything approaching that level. The Depression took over 10 years in terms of industrial production, although some markets including commercial real estate did not recover until the mid-1950s, 25 years after the 1929 crash.
The Nikkei has still not returned to its peak after 19 years.

What the U.S. has just experienced is the breaking of numerous bubbles in residential housing, credit card debt, consumption versus savings, growth in derivative products, growth in structured products, and the willingness of investors to use leverage and sell volatility in order to chase illusory gains.

These breaks are not characteristic of normal cyclical downturns of the type which occurred in 1990–1991 and 2001 or even the more severe downturn of 1973–1975.

We expect that the U.S. economy has entered a prolonged and steep decline that could reduce real GDP by 20 percent or more over the next several years with no immediate prospects for recovery.

Economics & Financial Attacks (Cont)

Link -
http://www.jhuapl.edu/urw_symposium/proceedings/2009/Authors/Rickards.pdf
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This article addresses a number of issues, but if I can go to the numerous bubbles breaking in the USA & elsewhere, as that brings us to THE central reasons for the existence of those bubbles & why they are breaking.

There are a few things to keep in mind at this point -
1) Population Growth = Demand Increase
2) The 50 year Rule = the average age, for Consumers Maximum Earning & Spending capacity.

Ok, now let’s go all the way back, back in time to about 1933, when the “worm” turned (so to speak) and the Global Fertility rate started to slowly increase.

Then, as WW2 ends in 1945, the worm really got active and gave birth to the greatest baby bump started, “in history”, now referred to as “The Baby Boomer Generation”.
That Boom continued, Peaking around 1956 (at just under 5 children per woman), before “officially” ending in 1964 and then started a long decline until today it stands at about 2.5 children per woman and it is still in decline.  

Now, back to the future!

As I said, the Consumers maximum Earning & Spending average age is 50 years old.

Ok, so let’s apply what we know, to the 50 year rule –
1933 - Fertility rates start to lift
1983 - Stock Markets begin to climb

The DOW, which had hovered around 1,000 points for about 20 years, started to climb & hit 4,000 points around 1994
   
1945 - Fertility Rates Take off (official Baby Boom starts)
1995 - Stock Markets take off, the DOW goes from 4,000 points to 11,722 points before 9/11 hits, sending stocks crashing to 7,286 and then rebounding again to 14,164.  


1956 – Fertility rates Peak, then start slow decline since.
2007 – Stock Markets Crash from their top of 14,164 in October 2007, to a low of 6,547 in March 2009, before rebounding again to 11,205 in April 2010 and it has since traded in a range between 9,700 to 10,450.

So, this is the Demand part of the greatest bubble in history.

Let's hope the crash was deliberate, for the sake of humanity. I very much doubt it though, considering I can't recall any governmental programs/policies being put into place that would back up that theory. I think the majority of us got carried away with the 'ME SYNDROME', and didn't or don't give a toss about future generations.

I think we've left it too late, since environmental history is a relatively new study and we don't have a great deal of expert factual material to look back on.

Anyway, there's still hope, if we change our ways immediately, or miraculously discover an alternative to oil, or both.

Investment Outlook
Privates Eye

I really do have a serious message this month, an adjunct to the New Normal that will likely impact growth and financial markets for years to come. Our New Normal, to repeat ad nauseam, is predicated upon deleveraging, reregulation and deglobalization, all of which promote slower economic growth and lower inflation in developed economies while substantially bypassing emerging market countries that have more favorable initial conditions.

In recent months, Mohamed El-Erian has added a developing corollary that emphasizes the lack of an appropriate policy response to what is a structural as opposed to a cyclical development, are constructively suggesting a way back to the old normal.

That return journey will be all the more difficult to accomplish, however, because of demographics, an influence that much like gravity is hard to see but whose effect is all too powerful. Demographics – or in this case population growth – is so long term in its influence that economists and observers are inclined to explain the functioning of economic society without ever factoring in the essential part that it plays in growth. Production depends upon people, not only in the actual process, but because of the final demand that justifies its existence. The more and more consumers, the more and more need for things to be produced. I will go so far as to say that not only growth but capitalism itself may be in part dependent on a growing population.

Capitalism, I would assert, thrives on more, more, and more, but not so well when there is less or an expectation of less.
This is not the Malthusian thesis, which maintained that at some point the world would run out of food to satisfy a growing population; it is an assertion that capitalism depends upon final demand and that if there ever comes a time when population growth slows, then the world’s most efficient economic system will be tested.

The danger today, as opposed to prior deleveraging cycles, is that the deleveraging is being attempted into the headwinds of a structural demographic downwave as opposed to a decade of substantial population growth. Japan is the modern-day example of what deleveraging in the face of a slowing and now negatively growing population can do.

Prior deleveraging periods such as what the U.S. and European economies experienced in the 1930s exhibited a similar demographic with the lowest levels of fertility in the 20th century and extremely low population growth. Things did not go well then. Today’s developed economies almost assuredly offer substantially less population growth than the 1.5% rate experienced over the prior 50 years. Even when viewed from a total global economy perspective, population growth over the next 10–20 years will barely exceed 1%.

The preceding analysis does not even begin to discuss the aging of this slower-growing population base itself. Japan, Germany, Italy and of course the United States, with its boomers moving toward their 60s, are getting older year after year.

And while older people spend a larger percentage of their income – that is, they save less and eventually dissave – the fact is that they spend far fewer dollars per capita than their younger counterparts. No new homes, fewer vacations, less emphasis on conspicuous consumption and no new cars every few years. Healthcare is their primary concern. These aging trends present a one-two negative punch to our New Normal thesis over the next 5–10 years: fewer new consumers in terms of total population, and a growing number of older ones who don’t spend as much money. The combined effect will slow economic growth more than otherwise.

PIMCO’s continuing New Normal thesis of deleveraging, reregulation and deglobalization produces structural headwinds that lead to lower economic growth as well as half-sized asset returns when compared to historical averages. The New Normal will not be aided nor abetted by a slower-growing population nor by cyclical policy errors that thrust Keynesian consumption remedies on a declining consumer base.
Link -
http://www.pimco.com/Pages/PrivatesEyeBillGrossAugust2010.aspx
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New Normal = New Paradigm

As you would guess, I agree with the basic thrust, but there are also additional factors to consider, such as Peak Energy, Debt & Climate Change, to name a few!

Beyond the Limits to Growth (cont)

At the End of Abundance, on the Verge of Decline
Our starting point for future planning, then, must be the realization that we are living today at the end of the period of greatest material abundance in human history—an abundance based on temporary sources of cheap energy that made all else possible. Now that the most important of those sources are entering their inevitable sunset phase, we are at the beginning of a period of overall economic contraction.

Limits to Growth foresaw this inflection point nearly forty years ago. But the world failed to heed the warning; as a result, adaptation now will be much more difficult than would have been the case if growth had been proactively curtailed decades ago. Global leaders now face the need to accomplish four enormous tasks simultaneously:
1. Rapidly reduce dependence on fossil fuels. We must do this to avert worse climate impacts, but also because the fuels themselves will be more scarce and expensive. Ending our reliance on coal, oil, and natural gas proactively with minimal social disruption will require a rapid redesign of transportation, agriculture, and power-generation systems.
2. Adapt to the end of economic growth. This means reworking, even reinventing, our existing economic system, which functions only in a condition of continuous expansion. Banking, finance, and the process of money creation will all need to be put on a new and different footing.
3. Design and provide a sustainable way of life for 7 billion people. We must stabilize and gradually reduce human population over time, using humane strategies such as providing higher levels of education for women in poor countries.
But even in the best case, this objective will take decades to achieve; in the meantime, we must continue to support existing human populations while doing a better job of providing basic services for those at the bottom of the economic ladder.
We must accomplish this in the context of a nongrowing economy and with a shrinking stream of resource inputs, and we must do it without further damaging the environment.
4. Deal with the environmental consequences of the past 100 years of fossil-fueled growth. Even if we cease all environmentally destructive practices tomorrow, we still face the momentum of processes already set in motion throughout decades of deforestation, overfishing, topsoil erosion, and fossil-fuel combustion. First and foremost of these processes is, of course, global climate change, which will almost certainly have serious impacts on world agriculture even if future carbon emissions decline sharply and soon.

Each of these four tasks represents an enormous challenge whose difficulty is multiplied by the simultaneous need to address the other three. The convergence of so many civilization-threatening planetary crises is unique in our history as a species.

Limits Are Unavoidable
Here’s a real-world example: Over the past two centuries, human population has grown at rates ranging from less than 1 percent to more than 2 percent per year.

In 1800, world population stood at about 1 billion; by 1930 it had doubled to 2 billion. Only 40 years later (in 1975) it had doubled again to 4 billion; currently we are on
track to achieve a third doubling, to 8 billion humans, around 2025. No one seriously expects human population to continue growing for centuries into the future.

In nature, growth always slams up against nonnegotiable constraints sooner or later.
Here is another real-world example. In recent years China’s economy has been growing at 8 percent or more per year; that means it is more than doubling in size about every 9 years. Indeed, China consumes more than twice as much coal as it did a decade ago—the same with iron ore and oil. How long can this go on? How many more doublings can occur before China has used up its key resources—or has simply decided that enough is enough and has stopped growing?