Economics

World Economy Set to Shrink for First Time Since 1940s

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In a bleaker assessment than those of most private forecasters, the World Bank predicted Sunday that the global economy would shrink in 2009 for the first time since World War II.

The bank did not provide a specific estimate, but bank officials said its economists would be publishing one in the next several weeks.

Until now, even extremely pessimistic forecasters have predicted that the global economy would eke out a tiny expansion but had warned that even a growth rate of 5 percent in China would be a disastrous slowdown, given the enormous pressure there to create jobs for the country's rural population.

The World Bank also warned that global trade would contract for the first time since 1982, and that the decline would be the biggest since the 1930s.

Whole IHT story.

And things ain't so rosy according to the International Monetary Fund, either. From a Wash Post story:

Some fear that nations in Western Europe such as Austria, Ireland and Spain—believed to have graduated from IMF lifelines decades ago—may soon require bailouts, taking funds that would have been spent on poorer nations. It could also prove difficult to raise more money from hard-hit countries including the United States and Britain, where politicians and citizens may decide that charity begins at home.

"I'm worried about what happens when you see that a Greece or an Ireland that might need bailouts," said Simon Johnson, an MIT economics professor and former IMF chief economist. "Where is the money going to come from?"

More here.

Reason's complete bailout/stimulus coverage here.

NEXT: Who Watched the Watchmen? Lots of People.

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  1. Raivo Pommer
    raimo1@hot.ee

    Obama Strategie

    Viele Investmentexperten machen jedoch die ersten sechs Amtswochen der Regierung Obama f?r die Eintr?bung ihres Aktienmarktausblicks verantwortlich. “Die Latte der Erwartungen lag zu hoch”, meint der unabh?ngige Marktstratege Doug Peta. Zu viele Menschen h?tten gehofft, dass die neue Regierung “einen Zaubertrank zur L?sung unserer Probleme zur Hand haben w?rde”, sagt er. “Das war unrealistisch.”

    Vorschl?ge f?r ein Gesetzespaket zur Ankurbelung der Wirtschaft l?sten ein Kursfeuerwerk bei Infrastrukturaktien aus. So schoss etwa die Aktie des Baumaschinenherstellers Caterpillar von den Markttiefs im November 2008 bis Anfang Januar 2009 um 39 Prozent nach oben, st?rzte seitdem aber wieder um 43 Prozent abw?rts.

    Viele Investoren hatten gehofft, dass Obama die L?sung des gr??ten Problems der Wirtschaft und des Aktienmarktes angehen werde: die Kreditkrise. “Dies erwies sich als falsche Hoffnung”, sagt Brian Reynolds, leitender Marktstratege bei der WJB Capital Group. Nach seiner Meinung “kann die Regierung die Krise nicht aufhalten”.

  2. I guess I chose the wrong Depression to quit my job.

  3. Well, all those people burning American flags the past few years got their wish.

  4. We’re all one paycheck away from having to huddle in tents in Obamavilles.

  5. From the second article:

    Despite the United States’ position as the epicenter of the crisis, investors are flocking to U.S. Treasury bills and the dollar, squeezing developing nations out of global credit markets.

    A horrible result of Obama’s massive spending is its effect on the bond market. Instead of investors loaning money to underdeveloped countries where paving over dirt roads would do wonders for the economy and public health, they are funding bridges to no where in America.

  6. Sigh, we’ll just have to roll up our sleeves and fix this mess. I guess I’ll be planting a victory garden next week.

  7. Obamavilles

    Heh heh. But no, they “inherited” this mess, remember?
    Evidently this administration believed they would get to start tabula rasa.

  8. We just need a “smart government”.

  9. This is why we’re now starting to see civil unrest breaking out on the periphery of Europe, and it’s only going to get worse as the year goes on. Most of the rest of the world is taking it in the shorts even more than the United States is.

  10. …the United States… where politicians and citizens may decide that charity begins at home.

    Are we talking about the same “United States” here?

  11. jtuf,

    A horrible result of Obama’s massive spending is its effect on the bond market. Instead of investors loaning money to underdeveloped countries where paving over dirt roads would do wonders for the economy and public health, they are funding bridges to no where in America.

    Obama’s spending and subsequent borrowing should raise US rates, not lower them. If anything, the fact that we have to borrow so much more money, should help emerging markets by comparison. What this really shows is that emerging markets really are dependant on the US consumer. Some people thought the whole “decoupling” concent changed that, but currently the markets say otherwise.

  12. Domoarrigato, I agree that emerging markets are very dependent on the US, but I think they were starting to become more self-sustaining before the US economy tanked. China and India have a huge middle class now that they did not have two decades ago. This means producers can sell at least some of their oversupply to domestic markets. It’s worth noting that while China’s and India’s growth has slowed, they still are growing. I’m not sure what you mean when you say, “help emerging markets by comparsion”. Please elaborate on that. How will they be helped and what are you comparing to?

  13. Obama’s spending and subsequent borrowing should raise US rates, not lower them. If anything, the fact that we have to borrow so much more money, should help emerging markets by comparison.

    I’m not sure how raising the cost of capital for everyone is going to help the developing nations, domo, but I have a lot of respect for your economic insights. Could you elucidate?

  14. I agree that emerging markets are very dependent on the US, but I think they were starting to become more self-sustaining before the US economy tanked.

    See, I think this is a bit contradictory. They can’t be “self sustaining” if they can’t continue to grow while the US is in the toilet.

    jtuf and R C Dean: To clarify my vague point about helping emerging markets. What I meant to observe is that if emerging markets were truely decoupled from the US economy, and the US had a huge need to borrow, that emerging markets borrowing rates wouldn’t rise by as much as those for US did. Essentially the market would see the US as a comparatively worse risk than emerging markets than it had been in the past. In fact, the opposite has happened – US treasury rates are super low, even in the long end. The dollar is strengthening, not the opposite. Plus even long dated inflation expectations are very muted. This says that the market no longer believes in “decoupling.”

    jtuf’s original post stated that Obama’s borrowing and spending has “squeezed” emerging market borrowers. My point is that, while they are being squeezed, it’s despite Obama’s spending, not because of it.

  15. The scenario I’m looking at is that low Treasury rates and a strong dollar are both a reflection of a world economy that still considers the US currency and obligations to be the last (relatively) safe harbor for paper.

    How long that can continue is anybody’s guess. It depends both on how much damage Obama does in terms of building obligations and inflation into our currency and budget that are unsustainable, and how strong the psychological attachment to paper as opposed to other (read: specie) safe harbors might be.

  16. R C Dean,

    How long that can continue is anybody’s guess. It depends both on how much damage Obama does in terms of building obligations and inflation into our currency and budget that are unsustainable, and how strong the psychological attachment to paper as opposed to other (read: specie) safe harbors might be.

    I consider long dated inflation premiums to be considerably undervalued. I don’t see this as necessarily bullish for gold going forward. The same way that stock market declines usually precede declines in the real economy, run ups in gold usually precede actual inflation. Right now, regular treasuries are benefiting from enormous liquidity premium, which TIPS do not get (being very illiquid). For the real investor, they represent very good value compared to regular treasuries.

    Gold, on the other hand, has roughly doubled in value over the last three years. I read some good literature that reckoned large bull markets preceded roughly an 8 year period of inflation. Crude back ‘o the envelope calculations say that a halving of purchasing power over 8 years is roughly 9% inflation. I don’t think such a scenerio is impossible or even unlikely, though I see it as a high end estimate, and see no reason to expect inflation higher than that at present.

  17. domo:

    Hmm. You’re a little more optimistic about inflation than I am. I’m still believing the projections of a deflationary economy through this year, with inflation coming on next year.

    What worries me about the inflation is that the Fed seems to be trying to solve the wrong problem, or at least solve it with the wrong tools. The Fed seems to think the current deflationary cycle is a product of inadequate money supply, when it really seems to be a product of low velocity.

    The Fed is pumping money into a system that already has plenty; when that excess supply starts moving, I think we may see double-digit inflation. And that’s before the monetized debt is factored in.

  18. Hmm. You’re a little more optimistic about inflation than I am. I’m still believing the projections of a deflationary economy through this year, with inflation coming on next year.

    Yeah, no surprise there, I think we’ve discussed this before. FWIW, predictions of 9% inflation hardly put me in the doveish camp! I think inflation could be slightly negative next year, probably closer to flat – for two years maybe. We’ll see inflation after that, but I stick by my levels: we’ll see!

    What worries me about the inflation is that the Fed seems to be trying to solve the wrong problem, or at least solve it with the wrong tools. The Fed seems to think the current deflationary cycle is a product of inadequate money supply, when it really seems to be a product of low velocity.

    Well, yes. Only there isn’t much they can do to directly stimulate velocity. Velocity has dropped off because demand for goods has, and because saving has increased. The idea behind supersizing the monetary supply is to provide enough cash for the people who want to save, while still accomadating people who want to spend. The classicists would tell us that Velocity*Monetary Base= Domestic product. So a decrease in Velocity can be countered by an increase in supply until such a time as velocity picks back up.

    The Fed is pumping money into a system that already has plenty; when that excess supply starts moving, I think we may see double-digit inflation. And that’s before the monetized debt is factored in.

    If the Fed does nothing to remove the liquidy, you are spot on. However, I feel there is little reason to be overly fearful of that at present. The measures Bernanke has put in place – particularly paying interest on overnight reserves – shows a credible committment to removing the liquidity at an appropriate time.

  19. It would be really interesting if we could get statistics on the growth or shrinkage of the world’s black market economy.

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