The Trouble with Recession Averages

by: Paul Kedrosky December 02, 2008    
Paul Kedrosky

Paul Kedrosky

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Consider the following lovely chart (via Barry, via Financial Philosopher). It's cute, and helpful-ish, but it also points to one of the problems with all the current chatter about how long the average recession runs. Scan it first, and my commentary follows.

In looking at the above chart you could argue that we have a cluster of recession duration data, and an outlier (the Depression). In the preceding case the use of an overall average makes sense. Recessions are the thing, so let's average those durations and not get sidetracked.

You could also, however, argue that we have a bimodal distribution, with one average duration for downturns unrelated to the long-term credit cycle, and another longer duration for small-sample downturns representing unwinding of said cycle. I lean toward the latter view, and thus think most of this discussion of recession durations is unhelpful and not nuanced.

As a reminder, the following is the U.S. long-term credit cycle chart (from SocGen):

deleveraging

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This article has 4 comments:

  •  
    Dec 02 02:39 PM
    The last chart of Total US Debt as a % of GDP says it all.

    Even though Debt vs GDP went way up in the 30's as the Depression hit and the Government poured money onto the problem, we manufactured our way out of it from WW II through the roaring 50's and 60's bolstered by cheap and abundant domestic oil.

    Now, we manufacture next to nothing, we import 70% of our oil and even though we have a recession (depression?) influenced price now on oil, as soon as there is any uptick in the economy that cheap oil will be a dream once again. Plus all the entitlements like Social Security, Medicaid, Medicare, VA benefits, pensions, etc. will continue to grow for the next 20 years.

    Oh yeah....almost forgot the 8.5 trillion dollars and counting we are on the hook for the bankster bailout not to mention the 500 billion-1 trillion dollar stimulus that is coming Jan 22 of next year.

    You can simply forget about "growing our way out of debt". Real, sustainable, tangible growth is dead for perhaps a decade, if ever. There is just too much debt to unwind.

    Default is the only option. In other words the U.S. is bankrupt....insolvent, even more so than any of the banks or consumers or car companies it is desperately and futily trying to save.

    All this money being printed and thrown at the problem is nothing more than a Kabuki Dance to hoodwink the American people that the government is not simply sitting on its hands doing nothing when the government already knows that the jig is up.

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  •  
    Dec 02 03:06 PM
    There is actually another alternative to default...we can inflate our way out of it which appears to be the government's new approach. Sorry, $10 trillion in debt is a meaningless figure without some sort of purchasing power index to understand it. $10 billion in 1930 would have been an extraordinary figure - today its trivial in govt finance terms. I am reminded of the skit in the Austin Powers sequel that drove home that point.

    Mind you it can cause some short term severe pain as in the hyperinflation of the 70s, but it can wipe out the value of debt which, with the exception of TIPS, are generally not inflation indexed. Question is, who gets to be the new Paul Volcker lol since Paul is joining the inflation team. There are no easy answers, but given a choice between a depression, a period of hyperinflation to wipe out the value of debt, or a massive default and shattering of all faith ind ebt forever, I choose hyperinflation. Granted, I am a net debtor at this stage of my life lol, so works for me!
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  •  
    Dec 02 03:29 PM
    Debt as a percentage of GDP is an incomplete (and misleading) picture.

    A better measure is net worth, or debt as a percentage of net worth. U.S. net worth, last I looked, was north of $50 trillion. Meaning, for the financially challenged, that U.S. has $50 trillion left over after subtracting debt from assets. More than $150k for each man, woman and child in the U.S. Hardly insolvency.

    Another better measure is debt to annual income.

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  •  
    Dec 02 05:29 PM
    Unless you have access to the newly printed money, presently sitting in the corrupt bankers vaults, hyperinflation is a fast tract to the poor house for the majority of Americans. Yes, you will owe less, but you will also buy much less and lead a subsistence life.

    I think the most likely scenario then is the collapse of capitalism and its replacement by something that might take into account the needs of the masses instead of the elites. Just a thought...
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