from the hip

American newspapers, most notably New York Times, have now started to wonder why American consumers aren’t spending. And in the financial sector, stock brokers and real estate agents seem to expect that it will happen next week or so, judging from the advise they are giving. That really doesn’t seem very likely at this point.

Why do American consumers spend less?

Well. The financial system in the US is still not completely shored up. AIG just reported a loss of 25 billion dollars for the third quarter and will be receiving a 150 billion aid package. Fannie Mae lost 29 billion dollars. Circuit City is going down. Airlines are in trouble. GM and the whole American car industry is in deep trouble.

As for the overseas markets, most indicators are down there as well. Every time the numbers are revised, they get worse. Right now, according to Wall Street Journal, they indicate a deep recession in Europe as well. IMF (see figure) now assumes that 2009 will be worse than 2008 for the world as a whole.  For 2009   IMF predicts a decline in GDP in the advanced economies of 0.3 percent. If this happens, it will be the first time during the periode following the Second World War.  For the US IMF predicts a decline of  0.8 percent, and for the Euro-area 0.7 percent for 2009. So there will be little pull from overseas markets for American businesses.

Now, add to this that the banking system isn’t working, loans are hard to get, unemployment is on the rise and millions of jobs are threatened.  Consumer confidence is at the lowest ever.

Also, factor in a negative wealth effect. The positive wealth effects, the effect of people getting richer on paper when housing prices were rising, were key to the growth the last 5-7 years. Now this operates exactly in the opposite direction, and serves to limit peoples spending up and above the effects of other factors.

So, what does it mean?

So how likely is it that consumers will start spending in the near future? Not very. Let’s assume for a moment that consumer spending will continue as today for a while.

Consumer spending is down 30 percent on cars, and 3 percent on the average across all sectors. Consumer spending appears likely to fall next year for the first time since 1980. Perhaps by the largest amount since 1942.

If it stays the way it has been for the last three months for a full year, that means demand for goods and services from consumers in America will be down about 1200 billions. And, spending is still dropping. As well, demand from businesses is dropping. And, as I wrote above, demand from abroad is falling as well. And right now, American businesses have just barely started to adjust to these new numbers and levels. And this adjustment will mean more lay offs and more negative earnings reports. That is simply how it works. And it is hard to see any “quick fixes” that can act as a miracle cure and lift us out of this situation in the short term. Rather, the adjustments will have to work their way through the system.

As far as American consumers are concerned, I notice people using words like “lacking trust” or “fear” as reasons for the decline in consumption. These words suggest that consumers are driven by psychological factors, emotions, beliefs and sentiments. Such words, I think, are the wrong ones in this case. Right now, I think American consumers act very rational - markets are turbulent, times are getting harder, uncertainty is high, so the rational response is to buckle down, sit still and wait for the fog to clear up.

So, for the moment, and for a while, it is just going down, I think. We are nowhere near the bottom. I don’t think we will see new growth for at least 18 months.

That’s what I think.

See also:

• Yahoo Finance: Home values drop for 7th straight quarter
• New York Times: Best Buy Lowers Its Outlook for 2009
• Washington Post: Why GM Stalled
• Washington Post: Obama Asks Bush to Back Rescue of Automakers
• New York Times: A Town Drowns in Debt as Home Values Plunge
• Wall Street Journal: Indicators Across Europe Point to Deeper Recession
• New York Times: Jobless Rate at 14-Year High After Big October Losses
• Times:First full-year slump since 1940s, says IMF

When Saul A. Kripke published his thought in Naming and Necessity everybody was either furious, or exhilarated, or thoroughly perplexed (see also The New Theory of Reference - Kripke, Marcus, and Its Origins (Synthese Library) ). Naming and Necessity laid out a new way of thinking about the relation between language and the world. Kripke proposed the theory of direct reference, where a name “rigidly designates” its referent. That is, a name is a “tag” attached to its referent, with no descriptive content. Kripke also proposed an alternative theory for how names are transmitted, the causal theory of names.

It is somewhat interesting to view the words (names or tags) that are used on the current international crisis from such a perspective. Doing that, is becomes remarkable how the names used to denote this beast have changed over time.

It started out as the US sub-prime mortgage crisis. Then as is spread, it became simply the mortgage crisis, as it was now international. Then the credit crisis and the credit crunch. Then that changed into the banking crisis, and to underscore the fact that it is indeed international, the international banking crisis. Then, as other types of international financial institutions, eg. AIG, started to feel its impact visibly, it became the financial crisis.

Now, the naming used implies it has become an even more general crisis, affecting even more sectors of the economy. Thus, now we call it the recession. Some have even started to use the word depression, and started to build connotations linking it phenomenologically to the great depression.

It goes on and on - the financial crisis. Now Bank of England slashes interest rates to a 53-year low. The Independent writes:

Interest rates were today slashed to a 53-year low to fight off recession - but fears were growing that hard-pressed homeowners would fail to reap the benefit.

The shock 1.5 per cent cut by the Bank of England’s Monetary Policy Committee (MPC) is the biggest move since March 1981 and brings rates to 3 per cent - last seen in 1955.

Stock markets were stunned by the size of the cut and experts predicted rates could reach an all-time low of 1.5 per cent by mid-2009 as the Bank desperately bids to ward off a prolonged slump.

Also, the European Central Bank cut interest rates by 50 basis points today and signaled another reduction was possible later this year. In Germany the no. 2 bank has decided to tap into the government rescue plan, and the government will propose tax breaks on car purchases to stimulate spending!

The bottom still seems distant.

See also:

• New York Times: European Banks Reduce Rates, Some Sharply
• Guardian: Shock as Bank of England slashes rates to 3%
• New York Times: Bleak Reports Keep Markets in Free Fall
• Guardian: Wall Street and London shares plunge

The US believes itself to be a - or perhaps even the most - technologically advanced country in the world. This is a myth, blatantly false. Internet usage, Internet speed, mobile telephone use, Internet phone speeds, and so on, are all among the many areas where the US is increasingly lagging behind the most advanced countries in the world. So is banking and financial services.

I am astonished by the lack of efficiency and the poor customer service of American banks. Here are some real life stories that really shock me, from banks that are all among the top 5 US banks. Here are the cases:

1. Electronic transfer between two customers in the same bank

A friend transferred 1200 dollar to my account. In Scandinavia, the money would have been on my account instantly, as it is a within-bank transaction. Here the bank took 24 to take the money out of my friends’ account, then printed a check and mailed it to me. So, 3 days instead of instantaneously. And unnecessary paper and mail service and postage, all of which, I am sure, customers pay for.

2. Electronic transfer between banks

I paid for something using Paypal. And there wasn’t enough money in my Paypal account, so Paypal withdrew money from my banking account, as they should. However, it took 4 days for this to be processed by the bank. Again, I guess, a check. In Scandinavia this would have taken 1-4 hours, as it is an interbank transfer.

3. Deposit lost by the bank

A friend of mine deposited 800 dollars in her bank. She got a receipt. After a few days she noticed the money weren’t there. She calls the bank. They could not find the deposit, but would investigate. Six weeks 5 long calls, talking usually to two or more people each time, she finally gets the 800 into her account. Now she finds that in two separate cases the bank had given her overdraft fees of 35 dollars that she would not have gotten had the money been where they should. Again she calls. Two calls later the fees are dropped. During this ordeal, the bank never contacted her - she always had to initiate contact.

Now - how it is possible to lose a deposit? How is it possible to not honor a customer’s receipt immediately? Why didn’t be bank get back to her quickly and fix it all? Who made the mistake here - the bank or the customer? It is simply the worst customer service I have ever heard about!

These tales, and others, are so shocking that I wonder how US banks can get away with it? Are American banking customers totally undemanding? Or are they ignorant - don’t know how things are done outside the US and what they should rightfully demand from a modern bank? Do regulatory agencies and consumer organizations not care? Are American businesses unconcerned with banking efficiency? And especially about the banks - do they not care about efficiency? Do they not care about customer service?

It’s easy to fix! Send some guys on a plane to study how it’s done overseas. Buy the software. Do the changes. Get with it! You are lagging by at least a decade!

Or do you just not give a shit?

The international credit crisis is bad news, of course. And bad for a lot of people. Still, there are some amusing things taking place as well. Like the story about the HUGE bank robbery that took place on Monday in the US, in Washington DC. Quite possibly the biggest bank robbery ever!!

When I first read the story of exactly how the US injected 250 billion dollars into the biggest American banks, I was stunned. Then, when I reread the story I started to laugh. I found it hilarious! What a move by the government. From one perspective a much needed infusion of capital, yet from another a highway robbery!

So here is the story, simply to good not to be distributed, courtesy of The New York Times:

Drama Behind a $250 Billion Banking Deal

The chief executives of the nine largest banks in the United States trooped into a gilded conference room at the Treasury Department at 3 p.m. Monday. To their astonishment, they were each handed a one-page document that said they agreed to sell shares to the government, then Treasury Secretary Henry M. Paulson Jr. said they must sign it before they left.

The chairman of JPMorgan Chase, Jamie Dimon, was receptive, saying he thought the deal looked pretty good once he ran the numbers through his head. The chairman of Wells Fargo, Richard M. Kovacevich, protested strongly that, unlike his New York rivals, his bank was not in trouble because of investments in exotic mortgages, and did not need a bailout, according to people briefed on the meeting.

But by 6:30, all nine chief executives had signed — setting in motion the largest government intervention in the American banking system since the Depression and retreating from the rescue plan Mr. Paulson had fought so hard to get through Congress only two weeks earlier.

What happened during those three and a half hours is a story of high drama and brief conflict, followed by acquiescence by the bankers, who felt they had little choice but to go along with the Treasury plan to inject $250 billion of capital into thousands of banks — starting with theirs.

What a story! Has anything like this ever happened before? This must be the biggest tale in the modern history of banking!

Iceland, which is currently in an economic meltdown, will be getting  help from its Nordic neighbors. The Danish newspaper Politiken writes that:

Iceland’s Prime Minister has been in contact with his Nordic counterparts ‘for some time now’, according to Prime Minister Anders Fogh Rasmussen, and Nordic help may be on the way to the beleaguered Icelanders.
The prime minister’s comments came as the benchmark Icelandic index, which has been closed for business for some days, reopened and plummeted a full 76 percent. Trade in Iceland’s three largest banks, which have been taken over by the state, remain suspended.

Elsewhere in the paper, Politiken reports that Iceland will be receiving a borrowing facility for 500 mill. Euro from the Danish national bank. The Norwegian newspaper Dagbladet, on the other hand, reports that the loan is 400 mill Euro, and that the borrowers are Denmark and Norway, both with 200 mill.

See also:

• Times - Iceland secures €200m from Norway, Denmark
• New York Times - Iceland Turns to Neighbors to Prevent a Collapse

The international financial crisis has lead to a spur of initiatives world wide. And now we have had the US rescue plan, with 700 billion USD. In an unprecedented move, the German government has unveiled a €500 billion ($679 billion) rescue plan to shore up the banking system after Sunday’s emergency summit of euro zones nations, where leaders agreed to guarantee new bank debt and inject capital to unfreeze money markets and restore confidence in the financial system. Der Spiegel reports:

The German Finance Ministry said Berlin’s plan includes a €400 billion financial market stabilization fund to guarantee loans and €80 billion to recapitalize the banking sector through the government taking stakes in banks.

An additional sum of €20 billion is also being set aside as a provision to cover losses, according to a statement from the Finance Ministry.

“We’re taking rigorous action to ensure that what we have experienced doesn’t get repeated,” Chancellor Angela Merkel told a news conference.

This is, of course, great news. The German packet is alone almost as large as the US packet. And that begs the question: Is the US packet big enough?

See also:

• New York Times: U.S. Investing $250 Billion in Banks
• Times: President Bush poised to follow UK with $250bn seizure of bank stakes
• New York Times: Stock Slump Imperils Putin’s Effort to Pump Up Russian Wealth, and His Legacy

I started writing about the credit crisis in the US and the possible international consequences of that crisis a long time ago. But writing about it gave me a strange feeling. Obviously I was writing about something that interested just a very few. And, equally clear was the feeling that I was writing about something nobody really wanted to hear about. Also, I strongly felt back then, something which major actors in the financial world as well as governments and central banks were more or less in denial about.

I am not happy to have been right. I am not happy that this crisis so far has turned out to be every bit as serious as I and a relatively small number of other people wrote back then. On the contrary, it is sad. Of course.

Today I feel that perhaps it is that unwillingness to see, to listen, to take the right measures at the right time, that has turned what was once a credit crisis in the US, originating in flawed valuation of the so called sub-prime mortgages, into the wild international beast we today speak of as the international financial crisis. Today governments all over the world fight against this crisis. And we have seen, I should think, that the crisis is not due to the price of oil, and that it cannot be solved by interest rate cuts. And a large number of financial institutions, from Lehmann to the Royal Bank of Scotland, have fallen victim to the crisis. At first there was no response. Then there was too little too late, as the Dainish Bank, for instance, noted. And now it is pure panic.

But now the fight is very much an uphill battle. Much time has been lost. And in this case lost time translates into lost confidence. That confidence must, of course, be restored. But it will take time. And even when the confidence in the international financial system has been restored, the battle will not have been won. There will also be serious shake outs in many sectors of the economy, will large companies failing and new winners emerging. And the global recession we are facing will not be over until consumers start increasing their spending again.

I fear they will not do so for quite some time.

See also:

• Financial Times: The week that panic stalked the markets
• Wall Street Journal: EU Writes Menu of Options
• Financial Times: UK to inject £39bn into banks
• Politiken: IMF frygter finansiel nedsmeltning
• Politiken: Eurolande klar med finansiel redningsplan
• Times: Royal Bank of Scotland under state control
• Guardian: Europe follows Brown plan for survival as EU bank bail-out plan is agreed
• Dagbladet: Europeiske land vil samkjøre krisepakker

While the economic downswing is still making itself felt in the US, it is now also hitting several European countries hard. And inflation is soaring, and hit a record high of 4.1 percent last month.

“There’s no obvious trigger for strong economic growth in Europe until the end of 2009,” says David Owen, chief European economist at Dresdner Kleinwort in London. “Massive [financial] imbalances need to be worked out, and the corporate sectors in many countries remain in a substantial deficit.”

Consumer confidence for the euro area has fallen to negative 29.7, the lowest it has been since 1993. And the news about the plunge in factory orders in Germany, led to the following comment, reported in the New York Times:

“It now looks likely that the euro zone will be the first major economy to fall into recession,” Jonathan Loynes, the chief European economist for Capital Economics, wrote after the report of sagging orders in Germany.

Great Britain

Royal Bank of Scotland, Britain’s second-largest bank, recently posted its first loss in 40 years after taking a £5.9bn hit from the credit crunch. And Barclays, the third-biggest bank, took a fresh £2.8bn write-down. Also, the price of houses are dropping rapidly, according to Guardian

the Halifax said house prices last month were 11% down on a year earlier - the first double-digit decline since its monthly healthcheck of the market was first published 25 years ago.

House prices back to 2006 and still falling, says Times. And new housing orders are down 33%. And, of course, home repossessions surge.

Business groups and City analysts warned that deep and rapid cuts in the cost of borrowing would be needed next year to pull Britain out of its first recession in more than 15 years. House prices are falling more rapidly than they were in the property crash of the late 1980s and early 1990s

It would seem a possible recovery in Britain will not be aided by increased consumer spending in the short term!

Recession in Germany?

Spiegel online writes that the German economy may have shrunk in the second quarter, according to early reports, and that the outlook for industrial production isn’t lively. Germany could slide into recession, and the German economy may have shrunk by around one percent. They also note that:

German factory orders were down by 2.9 percent in June from May, and orders from abroad for German goods plunged by 5.1 percent. Production at German factories rose by 0.2 percent in June — less than expected

Spain in deep trouble

Portugal, Italy, Greece, and Spain all face severe challenges. In Spain, the imploding domestic housing market has pushed the unemployment rate to 10.7 percent. The number of bankruptcies in the building sector is exploding, and one third of the job losses stems from the construction sector. As well, the housing market is stalling. The inflation is about 5 per cent.

The US

The credit cruch is still being felt, and so is the reversal of the wealth effect and high oil prices. In addition to bad news from the banking sector, Fannie Mae, Freddie Mac, Indy Mac, and so, in the latest sign of the deepening troubles, G.M. recently reported a second-quarter loss of $15.5 billionfollowing a loss of $8.7 billion reported earlier by Ford. Car sales are dropping, especially sales of American cars.

Guardian notes that:

The US mortgage finance empire Freddie Mac yesterday predicted the worst housing slump since the Great Depression as it set aside $2.5bn (£1.28bn) to cover credit liabilities caused by delinquent loans and foreclosures.

And in New York Times, Peter S. Goodman recently wrote (August 1) that “More Arrows Seen Pointing to a Recession”.

Overall

Pretty gloomy still. The most positive piece of news is the slight drop in oil prices. But still serious signals of a slowdown of growth and possibly recession both in Europe and the US.

A number of indicators for the Swedish economy tells a tale of a national economy that faces severe challenges. The Swedish Consumer Confidence is at its lowest lowest for over 15 years, a new report from the National Institute of Economic Research (KI) shows.

Also, the earninigs of one of Swedens leading banks, Nordea , are tumbling. For the April to June quarter, Nordea, the largest bank in the Nordic region, reported a 15 percent drop in net profits to 693 million euros ($1.1 billion) from 816 million a year earlier.

“Signs of slowing international economic growth particularly in the United States and in large parts of Europe, are becoming increasingly apparent,” the group said in its statement. The Nordic economies have so far been relatively resilient in the face of the international slowdown, but the uncertainty has gradually increased.”

The Macro Consumer Confidence Index, which measures consumer confidence in the Swedish economy, continued its decline in July and is currently at its lowest level for 15 years. 57 percent of households held the opinion that the Swedish economy has deteriorated over the last 12 months, up from 43 percent in June.