Another Great Depression Coming Soon?

Mark Davis of the Kansas City Star reports, Depression is coming soon, Olathe economist predicts:

Pray that Bill Helming is wrong — again.

And to be honest, he’d be good with that. Nobody wants to live through an economic depression marked by a beaten-down stock market, a jobless rate at 12 percent, widespread debt defaults and a deflationary price spiral that takes the economy down with it.

Yet we’re on our way, says Helming, a widely respected agricultural economist who lives in Olathe. His new book, “What Goes Up Eventually Comes Down,” lays out the dismal forecast.

“I hope I’m wrong, but I’m trying to be as much of a realist as I can,” Helming said in an interview. “The stage is set for some difficult times in urban America. There’s nobody that’s going to be left out of this.”

Helming has had dark visions of tomorrow before. For example, when the stock market crashed in October 1987, Helming feared the worst.

“We’re heading for a recession we haven’t seen the likes of since the 1930s,” he told The Star at the time.

Helming saw summer 1990 as the onset of “the most serious deflationary recession we’ve had in over 50 years.”

He declared outright in November 1992 that the nation’s economy had entered a depression. And July 1994 reminded him of “what happened in the early 1930s.”

We know now he was wrong. That doesn’t keep his or others’ dire forecasts from attracting attention during hard times.

A depression remains in the economic forecasts of author Harry Dent Jr., and deflation figures strongly in the views of economist Gary Shilling and technical analyst Robert Prechter.

Gloom and doom never really goes away, as if in good times we want reminders not to overdo it. But predictions of a sharp depression are clearly outside the mainstream of economic forecasts today.

Talk of depression had rattled markets a year ago, for example, when Harvard economist Robert Barro put the odds at 20 percent. Recently, he set them “close to zero” for 2010.

Most economists expect a weak, slow recovery — but a recovery all the same.

Bubbles don’t burst

Helming makes his case for what he calls a “modern-day depression” in his 195-page, self-published book.

We’ll see a sustained drop in the prices of just about everything, from stocks and real estate to wages and commodities. Some of that is happening now.

Helming argues that much more lies ahead. He said decades of easy credit and increasingly widespread use of debt — by governments, companies and consumers — have inflated the economy and the price of nearly everything to unreasonable heights.

“We borrowed our way to prosperity, and that has never in history been sustainable,” Helming said.

In short, we’re living in an economy packed with bubbles.

But in Helming’s forecast, bubbles this big don’t burst. They deflate.

It will take years, difficult years, to deflate prices, unwind excessive debt and stabilize the overblown economy, he said. It will take a depression. Think of Japan’s lost economic decade of the 1990s, he said.

Helming is clearly right about one thing. Few Americans know what it’s like to live through a depression. And that’s one of the conditions that he says brings them on.

We’re really riding an inevitable cycle of decades-long economic booms followed by shorter but painful busts, Helming notes. The latest boom began in 1940, on the heels of the Great Depression.

We have seen 11 recessions since then, by Helming’s count, but these were merely interruptions. After each recession, the boom returned and did so typically in about a year.

We became convinced that the boom would always return because, as far as we know, it always had. Complacency brought on more debt, more spending, consumption and bubbles and, in 2008, the bust.

“It’s already playing out, but it’s going to play out much more dramatically,” he said.

Eyes of the storm

As bad as the last two years have been, Helming says the most difficult stretch starts later this year.

By 2012, unemployment will climb to 12 percent from the current 9.7 percent. Add in discouraged workers or those who are underemployed and Helming sees 32 million, or 20 percent of the work force, suffering from a lousy job market.

Houses will lose half the value they had in 2006, he said, adding that they’re already down by a third.

The Dow Jones industrial average, currently above 10,600, likely falls below 4,000 and possibly as low as 1,500 or even 500, he said. Little wonder that Helming’s advice is to dump all your stocks by the end of April.

Cash will be king, so you’d want to own federally insured bank deposits, U.S. Treasury debts, and only the best corporate bonds and annuities.

Get a good alarm system, too. Helming notes that many families at least fed themselves during the Great Depression because they lived on farms. We’re mostly urban now, and he expects riots.

Though falling prices may sound good to consumers, persistently falling prices can be bad for the economy.

The pain is worst for those who owe a lot of debt. But as their burden becomes too great, the pain spreads to those owed the money because they won’t be getting it back.

For example, falling home prices and foreclosures have hurt homeowners and lenders alike. Helming’s forecast sees that happening with debts of all kinds, public and private.

Where’s the proof?

For all its numbers and graphs, Helming’s book is short on proof that he is right this time.

He offered three reasons his earlier predictions fizzled.

World trade grew more than he’d expected.

The technological boom created jobs he hadn’t counted on.

He also hadn’t appreciated the impact that baby boomers would have on the economy as they reached a spending peak in the 1990s and 2000s.

“That’s something that clearly bought more time,” Helming said.

Many other economists say government support of credit markets avoided a depression. Others say debt’s burden can be dealt with gradually by saving more as a nation without wrecking the economy.

Those who don’t expect a severe depression have the same problem Helming faces.

They can’t prove we won’t have one.

Before you go out to purchase an alarm, guns, ammunition, or some razors to slice your wrists in light of Bill Helming's dire warnings, the world isn't half as bad as he thinks.

Importantly, world trade has drastically improved since 2008. The latest figures from the Netherlands Bureau of Economic Policy Analysis showed that world trade volume expanded by an unprecedented 4.8% in December 2009 from the previous month, and in the fourth quarter of 2009, world trade was up by 6.0% from the third. That is a new high in the series of trade momentum, which starts in 1991.

But the debt overhang in the US and other developed nations is what concerns many economists and ordinary citizens. This is especially true when you factor in future pension obligations. Then the real debt crisis seems enormously crippling.

However, there is some good news worth noting on the non-governmental debt burden. Marc Pinsonneault, economist at the National Bank of Canada recently wrote about how US nonfinancial debt growth lowest ever:

To financial markets, massive U.S. federal deficits and consequent debt piling is a concern. As today’s Hot Chart shows (click on image below), it might be reassuring to know that despite an annualized 12.6% increase in federal debt in Q4, domestic nonfinancial debt rose 1.6%, the lowest growth rate since at least 1952. This growth rate does not exceed CPI core inflation, a rare occurrence outside inflation spikes. This slowdown in domestic nonfinancial debt growth is due to the deleveraging that is taking place in both the household sector, and the business sector. In the latter case, debt has decreased in each of the last three quarters, the first such sequence since the beginning of the 1990s, when businesses struggled with a record indebtedness in a recession period. The combined debt of businesses and households declined an annualized 2.4% in Q4, the biggest drop on record.

While there are many economists who still see a double-dip in the cards, including Chris Thornberg of Beacon Economics, others are cautiously optimistic, saying we have escaped the worst case scenario.

My own thoughts on this is that we have escaped the worst case scenario, but we are in for a long, tough slug ahead. The forces of deflation and inflation are playing themselves out, leaving financial markets wishy-washy. I still think stocks are the best asset class and that corporate spreads will come in further in 2010, but my buddy who trades currencies is right, this is a great environment to be selling volatility.

I am, however, less enthusiastic on private markets, especially commercial real estate which is the next bubble to burst, hammering many banks in the process. And it's not just banks. Many pension funds invested enormous sums in commercial real estate through direct equity stakes and mezzanine real estate debt. They too are going to get hammered.

So while I am cautiously optimistic and try to focus on the little good news percolating up from the global recovery, there are still many significant challenges that lie ahead. Is another Great Depression headed our way? Let's all pray and Bill Helming is wrong — again.