Some musings on the current economic state of play as I see it prompted by a piece by Roubini (for whom I have respect).

Posted here; http://www.project-syndicate.org/commentary/roubini39/English This piece provides a really quick skim over the headlines but for me the key point he makes is here (the rest is pretty incontrovertible stuff); Optimists argue that the global economy has merely hit a soft patch. Firms and consumers reacted to this years shocks by temporarily slowing consumption, capital spending, and job creation. As long as the shocks dont worsen (and as some become less acute), confidence and growth will recover in the second half of the year, and stock markets will rally again. There are a number of points to make in relation to what he terms here the optimists view. They are taking a short-term view and deluding themselves. When does a sticky patch become the precursor of the next stage of recession as previous recessions have demonstrated? See here for an analysis and comparison of the paths that recessions take. Notice the stepped pathways. Notice the reasons for that profile as Ill talk about below and also the timescale; this plays out over five to ten years. http://econ.tu.ac.th/class/archan/RANGSUN/EC%20460/EC %20460%20Readings/Global%20Issues/Global%20Financial%20Crisis%2020072009/Academic%20Works%20By%20Instituion/VoxEU/A%20Tale%20of%20Two %20Depressions.pdf First step down is caused by the liquidity issue. The ramifications of that working its way through the system cause a certain amount of lost production and economic disruption. We have seen much of this effect already. There are still some consequences to be borne but the reason that what we have seen so far will not be the end of it is for the simple reason that the causes of the liquidity and debt problems have not been solved. At all. The next step down is a demand-led economic contraction. This is largely a forced (hence inevitable) consequence of corporate, government and personal reactions to the requirements for debt reduction; we curtail consumption as far as possible and pay back debt. The nasty sidekick of this deleveraging activity is a lack of confidence in the future. And the third step down (hopefully to the bottom where there is no way but up) is caused by a breakdown of normal economic structures and processes in civil society. Widespread unemployment, failure of governments to react to the new social conditions, failure to ameliorate the economic troubles faced by most of society, failure to remedy the causes, further concentration of wealth and power at the top as the drawbridge is hoisted. Your basic nightmare scenario. Is this viewpoint a crank, extremist and conspiracy-theory-calibre delusion? No. Seen as a system, its more important to understand the state of economic, social and political flows and currents in order to understand the direction we are heading in rather than a view taken from isolated points of data. One does not get a great view of

the way forward through the sea when piloting a ship in a storm by relying on what one can see at the top of every wave; one relies on the analysis of the underlying metrics that science has provided to navigate the system. Radar, wind readings, satellite images and flow meters are of more use than a guy in the crows nest. Back to the article, As long as shocks dont worsen; they already are. Unemployment rising, commodity and energy prices rising, even with interest rates at all-time low, a major proportion of families are underwater. http://www.independent.co.uk/news/business/news/uk-families-under-most-financialpressure-since-the-depths-of-recession-2300029.html http://www.nytimes.com/2011/04/10/business/10view.html Consumption will not be rising except for the rentier class who have seen income rise thirty plus percent per year since the financial crisis started in 2007. Yachts and caviar and private security markets will be safe for awhile yet but consumer goods and housing etc are facing a five year low until any confidence can be regained. Five years because even then debt will only possibly be back to manageable proportions without default. And conditions are indeed worsening; government debt default in Iceland has happened, in Greece will happen and contagion will spread to Ireland, Portugal and possible Spain and Italy with the UK not immune. American debt levels are now being questioned in some quarters for the first time ever. Step Two is en train. And Step Threes seeds are poking their heads above the ground; Arab spring uprisings, civil disorder as the sovereign debt scenario plays out, more and more reactions to gross societal inequalities (its not just politics) in the Mid West and UK with taxation riots and protects will only escalate and become more disruptive and violent; how can they not be? The conditions against which they are protecting are not being changed, are not being addressed and in fact are getting worse. Roubini is right; the problems of debt, deleveraging, jobs, housing, deficits and lack of policy ammunition to fight the War against Depression are converging in a scenario that is eerily familiar from any analysis of the 1929 Depression. He cant afford to tell you these painful facts for fear of being criticised for bringing these conditions about by spreading a lack of confidence (its seen as unpatriotic to fail to support the confidence delusions of the government of the day) but I can. Sorry to be the messenger on this.