Economy grows at slowest pace in 3 years

Quoth BusinessWeek:
The economy slowed to a near crawl in the final quarter of 2005, a listless showing that was the worst in three years. However, growth was respectable for the year and is expected to perk up again soon.

Gross domestic product clocked in at an annual rate of just 1.1 percent from October through December. That marked a loss of speed compared with the third's quarter's brisk 4.1 percent pace, the Commerce Department reported Friday.

Belt tightening by consumers, businesses and the government figured into the fourth-quarter's slowdown.

Well, you heard it here first:
Uh, oh! Look at that drop in growth rate from 2004 to 2005. There's never been a year in the past 35 years when that big a drop in the red line was not followed by a big drop in the blue line the same or the following year. This is particularly so when the blue line is as high above the red line as it is in 2004. Look at 1984-1985 for the closest precedent. So that suggests that the chances we'll drop to GDP growth at or around zero in the near future are excellent.
Where's Freddy Hutter? At the time (in late October) he said:
Sorry Stuart, but while your analysis would indicate zero growth, the usa is indeed in the middle of its business cycle and the critical mass is such that growth avg'g greater than 2% is guaranteed til 2006Q4
and later declared premature victory over the Q3 results. Q3 was already over at the time I made my prediction about "the near future":
Hey Stuart, Real GDP was announced at 4.1% this morning. I have been a proponent of sustainable grwoth thru 2006/2007. With respect to our disagreement on potential USA growth wrt Miles Data on Oct 25th when u said:

"We'll see who's right :-) Maybe driving and economic activity have become uncoupled recently, but I doubt it. (I'm not saying zero growth btw - I have no way to be that precise. I just think the growth rate is bound to drop pretty significantly for a while.)"

Are u ready to say "uncle"?!!

The New York Times adds:
The intensity of the economic slowdown, which reduced yearly growth to 3.5 percent from 4.2 percent in 2004, surprised many forecasters, who had expected a sharp pickup in business investment in the final months of the year to take up some of the slack in consumer spending. They had predicted an overall growth rate of 2.5 percent to 3 percent in the nation's gross domestic product, the broadest measure of goods and services produced in the United States.

"It is not so much surprising as baffling," said Ian Shepherdson, chief economist for the United States at High Frequency Economics in Valhalla, N.Y.

He should have been looking at this:

1.1%. Oh, I feel a terrible attack of Schadenfreude coming on....

Ok, all kidding aside, if the oil supply plateau continues flat and prices go up some more, this could well be the start of the peak oil economic ugliness.

Probably like you, when I first saw GDP +1.1% pop up on my screen I said: What? Error?

Remember, I'm the chap who said +2% H1 2006, flat H2 2006, recession thereafter, a month back.

Looking closer at the data there were some special factors in both directions but mainly skewing it down. It may well be revised up to +2% approx in a month's time, we will see.

The most important thing I took from the data was consumer slowdown - the evidence for that riddled the data, and I don't think that is likely to recover much soon, I'm feeling comfortable with my overall 1% official GDP growth over 2006. I would be feeling very uncomfortable with the mainstream 3.5% 2006 estimate.

It is interesting comparing these comments immediately prior to the release: p;siteid=mktw&dist
with those after it: p;siteid=mktw&dist p;siteid=mktw&dist=

Now, I am a sceptic on certain US economic stats, and GDP is an important one of those. My personal take is that GDP is overstated by between 1.5% and 2.5% compared with how it was reported in US 10+ years ago and how it's reported in Europe. Some others I respect think it is overstated by 3 to 4%!

By those measures the US could be entering recession now. I don't think that is true, even though it is what I predicted a year ago. I expect Q4 2005 GDP to be revised up to a little over 2% and Q1 2006 to come in (after revisions) at about 2.7%. Recession will be with the US economy within a year but I don't think it is here yet.

Why am I sooooo UNsurprised by a lacklustre economy? Afrter all, people are giving their money to Bush's friends just to stay warm and get to work. Also, the economy goes bad any time a GOP regime is in power, like since 1/20/2001 with or without an oil peak. The nearing oil peak only worsens matters or gives the Bush v.2.0 regime an excuse.

With or without cooking the books, a GOP regime always means the economy sucks for those who are not gazillionaires. It sucked under Reagan just as well as now. The oil peak only helps Republicans impoverish the middle class, which is their goal. Why anyone votes for these arseholes puzzles me to no end - and the Dems aren't much better. Why Bush won't talk about the oil peak is simply becuse he can't ever tell the truth about anything. I guess democracy itself wan't Y2K-compliant.

Or the early 1980's.
Or the early 1990's.
Yep, GOP presidents always reign over craptacular economic situations.
The report of the CBO analysing the effects of the hurricanes on GDP and unemployment that i posted on Oct 25th did forecast a 2005H2 slump and a rebound in 2006H1.

1.2% of the forecast growth was cutback due to the extreme trade deficit.  A trade deficit that defines "too healthy" an economy as americans continue to buy cheaper foreign goods (and oil & gasoline). Only a downward correction in the dollar will help that situation.

No credible economists are suggesting that this gdp report is a precursor to Recession.  Only the many defeatists at TOD are gloating today.  Many here must mature and learn that stats go up and down on a weekly, monthly, qtr'ly and even annual basis and it is important to watch the trendline ... not be consumed in absolute numbers.  Otherwise confusion reigns.

Unemployment will continue to drop thru 2006.  GDP, which until Q4 had a string of 10 qtr's at 3% or above, will resume its path in Q1 as the GOM rebuild of inftastructure, homes and contents continues.

Plan for a Recession at your own peril...

But even discounting oil prices, aren't we about due for a recession?  The expansion has been going on for what, four years now?  Wouldn't we be expecting a downturn about now?
We would have to analyze the occurence of recessions. 1990-1. 2000-2001. Currently you couldn't really say we were "due" for one until 2010. This is an economic subject of its own.

Personally, I have been expecting one for two years based purely on the price of oil. The fact that we haven't had one would lead one to re-appraise our analytical tools.

"What is different this time?"

We are in new territory.

The Clinton boom was an oddity.  Ordinarily, expansions don't last anywhere near that long.  That's probably why so many people thought it really was a "new economy."  Typically, cycles are much shorter than that.

As for why the economy has held up so well...I've heard two theories, both of which seem reasonable.  One is that the rise in price was gradual, not sudden like it was the last time we were in this territory.  So the economy had time to adjust.  

The other is that there's a difference between a supply shock and a demand shock.  According to this theory, what causes recessions are supply shocks - when suddenly, there's less oil than the economy is accustomed to.  What we've had until recently has been a demand shock - the world economy growing so fast that supply can't keep up with demand.  Since this is a result of healthy growth, it doesn't cause recession.  

According to the latter theory, Katrina could be trouble, because that actually reduced supply.

Roger that. Good points.
I've noticed that the Fed has for the last twenty five years cut interest rates when a Republican president is going for reelection and afterwards, and raised them just before a Democrat is going for reelection and afterwards.
Despite this, or perhaps because of this, the economy does better under Democrats.
Is the Fed trying to get Republicans in the White House and it is actually aiding Democrats as a policy? Because it doesn't know what it's doing, or because it does?
We'll check back with you next quarter Freddy :-)
Ah, Freddy, your rose tinted spectacles are a wondrous item. I would wish to perceive the world as you do, please give me the contact details for your optician, he is truly magical.

I do agree with some of your sentiment: the Q4 2005 advance stats will probably be revised up to about +2%, there are special factors. But the US economy will be in recession, even on the current optimistic measure, within a year.

Unemployment may drop but so will employment, now there's a conundrum. How do you expect house prices and consumer spend to change?

Here's what they're saying behind the pay wall at the Wall Street Journal. The consensus is most reassuring, as is the use of such comforting adjectives as "perplexing," "puzzling," and "baffling."

Economists React
January 27, 2006 11:17 a.m.
After the economy navigated a brutal hurricane season to post robust growth in the third quarter of 2005, growth cooled considerably in the fourth quarter. Gross domestic product, the broadest measure of U.S. economic output, increased at just a 1.1% seasonally adjusted annual rate as free-spending consumers became more cautious and the gaping trade deficit continued to provide a drag on the expansion. For all of 2005, GDP growth averaged a 3.5% annual rate. What does the slowdown in the fourth quarter mean for the economy in the months ahead? Economists weigh in with their reactions:

* * *

In both its overall appearance and underlying detail, the 1.1% fourth quarter growth in real GDP ranks as the most perplexing report in memory. At face value, such weakness would seem to make it more difficult for the Fed to tighten monetary policy again. But the underlying details reinforce -- if not increase -- perceptions that much faster growth lies ahead. Nonetheless, the confusing and conflicting contradictions with other data make it difficult to be confident in any inferences about the outlook.
-- David Resler and Gerald Zukowski, Nomura Securities International

Consumer spending was actually a little better than expected, rising by 1.1% in the quarter vs. our forecast of +0.3%. I think more of the decline in auto sales was apportioned to the business sector (fleet sales) and less to the retail side than we expected. Housing posted a reasonable gain of 3.5%, but this was less than half of our assumed rise. The monthly source data pointed to a bigger gain, so this is a bit puzzling.
-- Stephen Stanley, RBS Greenwich Capital

The consensus was a bit optimistic but this is a big surprise. The softness against our 2.6% forecast is explained by two components, fixed investment and government consumption. The former rose only 3.0%, with equipment and software up only 3.5%. This is baffling, given the 19.5% annualized leap in the value of capital goods production and the 14.9% rise in shipments of core nondefense capital goods. We expect big upward revisions.
-- Ian Shepherdson, High Frequency Economics

While this was a disappointing report, there are signs of a very sharp rebound in GDP growth in the current quarter. First, much of the miss in fourth-quarter inventories is likely to spill over to the first quarter. Second, at least a partial rebound in defense appears likely. Finally, the ramp for consumption spending is even more favorable in the aftermath of the fourth quarter data. The bottom line is that we now see a very good possibility of 5%+ GDP growth in Q1 -- versus our prior estimate of +4.2%.
-- David Greenlaw and Ted Wieseman, Morgan Stanley

This report is the worst case scenario for the Fed and Mr. Bernanke and the new Fed Chair will be tested right off the bat. The economy is slowing, though clearly not as rapidly as the headline number would have you think. But growth rates in the 2.5% to 3% range should be expected. At the same time, inflation is slowly accelerating. The fourth quarter rate was above the FOMC's previously projected pace. With energy costs up, the Fed has to be concerned about inflation. I cannot see the term tame being used in the next statement.
-- Joel L. Naroff, Naroff Economic Advisors

The only thing that kept GDP growth positive at all was a massive build-up in inventories -- the largest increase in inventories since early 2002. Apparently businesses were caught off guard by the slowdown in demand, and have not yet slowed their production accordingly. Presumably, they will. All in all, this is an extremely worrying report. I've been bearish about economic growth in 2006 for a little while now, and this has just confirmed my worst fears.
-- Kash Mansori, Colby College

With vehicle sales now recovering, consumer and capital spending, as well as GDP activity, will be stronger in Q1. With inventories still very low compared to sales, inventory rebuilding could significantly strengthen Q1 growth. The underlying economy remained solid at year end, despite high energy prices, rising interest rates, and slumping vehicle sales. The Federal Reserve will still tighten next week and probably again in March.
-- Steven Wood, Insight Economics

Wall Street pundits will again try to spin the GDP numbers into a positive, but I believe that this is the beginning of an inevitable recession. ... In the future, those that can afford to pay the additional amount on their higher mortgage will have to "tighten their belt" and not spend as much money in the economy. Consequently, they will hold on to their car a couple of years longer, not frequent their local restaurant as often, and cut back on their overall spending.
-- Emanuel Balarie, Wisdom Financial

Growth will rebound in the first quarter. Car sales are expected to bounce back. Most companies will see little need to liquidate inventories. Defense spending will probably grow again. Also, because the fundamentals for capital spending and export growth are strong, we predict acceleration of growth for both categories of spending in this quarter.
-- Nariman Behravesh, Global Insight

Yesterday's durable goods orders data suggested a lumpy capital spending environment, but one that has improved more than the 4Q GDP data today suggest. Unit auto sales might never eclipse their Summer 2005 level for a very long time to come. However, unit sales in early 2006 appear to be above the 4Q 2005 level, and will make a positive contribution to consumption in 1Q. Most assuredly, government outlays are unlikely to shrink in the coming quarter. While we don't expect an reacceleration in trend demand in 2006, today's GDP data really seem to undercount current growth, and a 1Q 2006 rebound in measured GDP is quite likely.
-- Steven Wieting, Citigroup

With the housing market topping off, if not actually declining, growth is likely to be substantially lower in 2006 than most economists have projected. While the economy is currently experiencing healthy job and wage growth, the falloff in borrowing against home equity will depress consumption growth. Furthermore, wage growth is likely to spur the market's fears of inflation (especially in a context of slowing productivity growth). This would push mortgage interest rates higher, further depressing housing prices and residential construction. It is still too early to say that the housing bubble is deflating, but the evidence is certainly growing that the process may have begun.
-- Dean Baker, Center for Economic and Policy Research

This retrenchment in spending was generally foreseen, though economists weren't sure on the timing and magnitude. American shoppers have been the main engine of growth for the US and the international economy the last few years. But in the process, they have been spending far more than what they earned. All told, household debt has been increasing at an annual pace of nearly 12% in the latest quarter, the fastest pace in 18 years.
-- Bernard Baumohl, The Economic Outlook Group

We view the fourth quarter slowdown as a temporary development, one that reflected (1) influences of the August-September hurricanes and (2) ahuge swing in vehicle sales between 3Q and 4Q due to incentives. Indeed,vehicle sales were a big drag not only on consumption, but also on equipment investment. We do not believe this report will have a measurable bearing on Fed policy, especially with high frequency indicators from 1Q pointing to strong growth. The expectation is for the funds rate to rise to 5.0% by the May meeting.
-- Haseeb Ahmed, J.P. Morgan Chase

It never ceases to amaze me. All these incredibly smart economists (and I do think a lot of them are incredibly smart - just stuck in a paradigm with a blind spot). But every economic activity requires energy in proportion to the amount of it you do (in the short term), and when a critical part of your energy supply does this: somebody's planned economic activity somewhere has to be cut until efficiency measures can start to take hold. It wouldn't surprise me if Q1 is a bit better as the supply has bounced back somewhat from September/October. However, the summer driving season is going to be unhappy unless supply improves more substantially (I don't totally rule that out - we could get some window where most or all of this shut-in supply comes back and we bounce a little higher). I wonder if China felt a little bit of a chill too - maybe not, as the coal-machines probably just kept roaring and they aren't as car-dependent as we are.

In response to the assorted comments from our most learned and esteemed Economist comrades, I would really like to get a hold of whatever Ganja those boys happen to be smoking. I mean, I don't want to be a buzzkill, but...I mean...are they really serious?
What do you expect, they make their livings by being optimists.  
"Confidence men", in the literal sense of the word....

No wonders that historically, the can never see the forest for the trees.

I like to keep an eye on the trend in revisions of quarterly data.  The Q4 05 number under discussion here is the "advance" estimate meaning it is based on very little hard data.  As more real data from the Fourth Quarter become available in coming months, the estimate of Q4 05 gdp growth will be revised -- upward or downward.  If the revisions trend upward, it's a positive sign.  If the estimates trend downward...well.
It is interesting to note that in its release of Dec 21, the BEA revised DOWNWARD the estimate for the 3rd quarter to 4.1 percent ("final").  The Q3 05 "preliminary" number was 4.3 percent.  See  The "preliminary" estimate for Q4 05 comes in February and the "final" in March.
Hmm.  Not all of them are optimistic.

I would be expecting a recession soon, regardless of peak oil and energy prices.  People have been maintaining their consumption by borrowing against their houses and running up their credit card debt.  Clearly, that cannot continue forever, especially now that interest rates are rising.  And the expansion is now four years old; we're due for a contraction.

There may be a dead-cat bounce next quarter, but I think we're headed toward recession.  

President Bush and the Republican Congress will probably do everything they can to boost the economy this year, heading into the midterm elections. (More hand-holding with Saudi princes, no doubt.)  But I'm not sure there's much they can do.  The red ink seems to be scaring even Bush these days, so I'm not expecting any more tax cuts.  

I'm too lazy right now to give you the actual data, but there is a pretty consistent trend with a lag time for a recession some number of months after large energy (oil & gas) price increases. I'll try to back this up later with some research I've looked at but don't want to bother finding right now. I'm looking for a recession this spring. Of course, once it starts, it will be September or so before the actual announcement by the Fed -- the Official Powers-That-Be-- say it actually occurred.
Dave, see previous discussion of topic.
define recession.
First, I define recession as a contraction in GDP over some period, as the Fed does. Second, Stuart's modelling based on the dreaded VMT is not the only indicator of a recession as defined above. From Econbrowser (much respected James Hamilton) Talk of recession
Nine out of the ten recessions in the United States since World War II were preceded by a spike in oil prices....
Read it all.
Sorry, bad link. Here's the right one.

Talk of recession (August 17, 2005).


You are right. And there's also been much discussion on the various economics blogs of the meaning of the inverted yield curve and the degree to which it might predict a slowdown.
There used to be this definition of recession: "Two consecutive quarters of negative growth in GDP as expressed by the final GDP statistic". A depression used to be defined as 6 consecutive quarters of negative growth in GDP.

However, I have seen comment that the recession definition may have been 'tweaked' so I don't know what the official US definition might be today.

There have also been major changes to the calculation of GDP happening steadily since 1984. If these changes (that is, the current method of calculation) are applied to historic GDP statistics calculations the US has not had a recession at all since the very early 1980s ;)

However, every time there has been a significant increase in the price of oil over a relatively short timescale (I think a 50% increase over 18 months or less is approximately the measure used) the US has entered recession - as defined at the time - within 2 years. Every time the US Fed has increased interest rates 7 or more times consecutively a recession has followed.

By "every" I mean on all occasions over the last 60 years, no exceptions. Since both these conditions are in current effect it would seem reasonable to expect a recession soon and somewhat irrational to believe one will not happen.

There will, almost inevitably, be significant interaction between peak oil and recession. My big fear is that there is a relatively mild global recession throughout 2007 pushing peak oil back a little then, as the world begins to grow out of recession in late 2008 or perhaps 2009, the world runs into oil supply turning down post peak.

The "2 consecutive quarters" definiton is the one I use, however when I just checked quarterly data on the 2000-2001 "thing" - that event, which is commonly referred to as recession, doesn't meet the criteria. That is why I asked for a definition in the original comment. Grey.
The probable explanation is: they have subsequently changed the GDP calculation and applied it to prior statistics. Poof! The recession is gone, the logic is impeccable, current truth is the only truth, history is revised, reality continues. I did hint that all recent recessions were the figment of the deranged minds of those times. Subsequent analysis has shown them to be in error.

The Tao knows this.

Most of these manipulated economic statistics are designed to improve consumer confidence and keep people spending.  Consumer spending, mostly driven by increasing home appraisals, is what's driving the economy.  Period.

In real terms, our incomes have been dropping for years.  Groceries, fuel for transportation and heating have been going up, while our "raises" have barely been covering the increases in benefits - that's if we have any benefits.  Now the housing market is turning down.  Consumers and worried, scared, and out of disposable income - the jig is up, and all the phony statistics in the world are not going to cover it up.  As oil rises even further it's only going to get worse.  I don't think it's bad enough yet for people to change their fundamental assumptions about how much oil they use, but spending is going to drop significantly.  We'll see how that relates to demand destruction.

I expect the massive rebates the auto manufacturers offered have indeed sucked the pipeline dry, and that effected Q4, but I don't think they're coming back.  I think the economy is toast.

Three factoids to confirm this sentiment of Twilight's: 1) during the run-up in fuel prices in September and October, consumers made fuel purchases almost exclusively by credit cards; 2) minimum credit card payments are in the process of doubling as a result of pressure from the Office of Comptroller of the Currency (Dept of Treasury) and the Federal Reserve - over time, this will suck significant consumer purchase power out of the economy; 3) Bankruptcy filings have not dropped off to the extent expected, notwithstanding the leap in 2005.  I will now try to find statistical confirmation with citations and links of these assertions.
I can confirm the first two. Not seen data on recent bankrupcy rates, did know the change in legislation on bankrupcy caused a spike up prior to it taking effect (last October?), would be interested if you spot a source but don't feel you need to spend much time on that cos I'll probably see one soon enough.
I was expecting my credit card minimum payment to go up in October (after the new bankruptcy law went into affect).  Instead, it went down.  From 2% to 1%.  

Then I thought maybe January, which was the deadline.  Nope.  Still 1%.  (Which is ridiculous, IMO.)

I love your posts, Agric.
More! More!! Encore!!! <claps hands happily>
The main point of "The Oil Factor", by Stephen Leeb, is that the economy is not disturbe by rising oil prices until the yoy increase is ~80%, which causes a fever, and the fever does not get better until the yoy increase declines to 20% or less. On this basis, the increase is not high enough to cause a problem.
Housing market looks a bit squiffy too:

From Calculated Risk. Priceds (this is of new homes) peaked in September: they dropped in October, again in November, and again in December. The average price actually has dropped 10% in three months! That rather has the look of a trend, doesn't it? If we're hitting peak oil and the tipping point at the end of the housing bubble at the same time, does that mean inflation, or deflation?

My take is a housing crash could do enough economic harm that oil prices might actually drop as demand drops faster than supply.

That last sentence was key. I can verify that your brain is working correctly.
Indeed, I think the economic response to high energy prices, house price collapse, increasing unemployment etc will reduce oil demand by a larger amount than geological depletion reduces supply.  Oversupply will result is falling oil prices.  I expect to see $40 oil before the end of the decade.
See? That proves that Julian Simon was right. Oil is just another commodity, and after Global Warming and planet destruction set in, it's "price" will plummet to $0.

Of course, if someone dies for oil in the interim, that is a high price to pay, as some accountants might admit, and then Matt Simmons wins his bet against Tierny regarding the highest "price" paid for oil between now and then.

I do not know much about economy but if you have a house price collapse, increasing unemployment and general economical mayhem would it then not be possible that you have both inflation and $200 oil giving an inflation adjusted price of $40 that you can no longer afford?

That is falling oil prices in inflation adjusted money do not necessery equal the ability to buy the same ammount of oil as you used to do.

That's what I mean.  $40 inflation adjusted, it may be $200 in the dollars of the day but from where we are today the value could easily fall by a third or more due to demand destruction exceeding geologically driven supply declines.  

$40 (2006 dollars) oil in 2009 after 10% global economic downturn is not cheap oil.

There were three recessions in the seventies, during which the price of oil rose 9x in nominal terms. The price never declined yoy during the period.
Not that I'm an economist, but what oil demand would go away in a recession?
The oil previously used driving to work by people who no longer have jobs.  The oil previously used to heat the houses of people who have had to move in with their parents.  The oil previously used by factories that make goods (and by the trucks that move goods) that people can no longer afford to buy.

And, of course, the less extreme versions of all those:  people with less income (for whatever reason) drive less, turn down their thermostats, buy less stuff, etc.

But during previous recessions has the demand for energy gone down after the recession has started? Has this happened?
Yes. Very good question. Has demand fallen in previous recessions?

Or, does the slack simply get used by other countries that are slowly extracting themselves from their parasitic relationship with the United States? In effect, does China simply focus more on its home market? Cheaper oil means potential for growth in developing countries. Perhaps we are trending away from a horse and cart model, where the tired ole consumer mule (USA) pulls the world's economic cart, into a see-saw model where cheap oil allows China's economy to rise while ours collapses. Maybe the price remains stable, or even rises because, hey, we are at peak after all, and because the up and coming nations are only too willing to grow without our permission.

It is important to note that we often do not allow for new economic models because our national ego is so huge it lolls about our collective shoulder like a Macy's Thanksgiving Day float. It is easy to see how this came about. The old annoying saw that states, "when the US sneezes, the world catches cold," says it all. We USED to be the be all and end all on the planet. But we may have reached a new peak -- peak importance. Maybe we are in decline in terms of economic relevance. Maybe we are on the bumpy plateau just before plunging relevance where we try to reestablish our bull monkey importance by fomenting wars, but the respect destroyed to get the respect returned is now negative. Bad EROEI, politically.

The real proof of this will come when the recession hits and oil prices do not plunge, but remain the same, or even rise. Can't wait to hear the economists blather on when that happens. My guess is they will blame Clinton.

Yes, demand fell quite noticeably after the 1980 oil shock for much longer than the actual supply disruption. Also, in the 1998 Asian currency crisis and the 2001-2002 tech-crash period, demand dropped significantly also.
The drop in US demand after the 1979/80 Iran related oil price shocks had more to do with measures taken in response to the '73/74 oil embargo(and peak US production): The Energy Policy Conservation Act of 1975 enacted the CAFE standards so that by time of the Iranian oil workers strike in 1979 large improvements in US transportation fuel efficiency were on stream.  Moreover, the first oil shock virtually ended the use of oil as a source of electrically transmitted power, with the revved up nuclear program of the 1970's providing significant "alternative energy".

Did demand drop because of higher prices? Yes, but!  Demand dropped because the government intervened in the market, supporting fuel efficiency, and demand dropped because substitutes were available for a significant portion of the demand.

I believe it is reasonable to expect that this time the main response to higher prices of oil will be... higher prices for oil.    

In my view, prices dropped after 1980 because supplies increased from the far north - the north slope, the north sea, and siberia. As I posted above, in the seventies, while supplies were constrained causing prices to climb 9x and causing three recessions, the price never declined yoy.
Actually, I recall reading a post here on a correlation between an area's income and vmt. Granted, there was much discussion about additional variables, but the trend seemed to be that the less money you have, the more you drive. Lemme give you an example. Where I live, the city is built up and real estate has skyrocketed ($500,000 for an average 4 bedroom house). In addition, there are not enough roads for all the cars, so a 20 mile morning commute will take an hour. There are smaller towns to the South, formerly VERY rural (Think one grocery store and no Walmart!). These cities have become overnight boom towns, since a person can buy a 5 bedroom house for $250,000. The catch? A 50 mile commute to the edge of the big city.
One would think that living there is not a logical choice. However, they can't build the houses fast enough.
That sounds like Phoenix, Az.

Have you seen that chart which shows that GDP would actually have been negative since 2000 (except for 2003 I believe), if it wasn't for inflating housing values?

If you can find it, it sums up our "economic situation" quite nicely.

I saw one that showed that all the GDP growth for the last five years can be explained by the increase in public and private debt in the U.S.
actual job growth can be accounted for by growth in public sector jobs.
The upshot is that the triumph of Republican-conservatarian economic policy consists of an expansion of government jobs financed by loans from the Communist Peoples Republic of China.
As far as a housing market crash, bring it on! With an average wage being only $25,000/year and houses costing a quarter-million, only an idiot could imagine it being sustainable. In Chicago, a PARKING SPACE can cost $37,000! And that's in the not-yet yuppified South side. Areas I call "bulletproof snowsuit country" have condos costing a quarter million and WAY up. At $37,000, a parking space for your car is a bit much, even if you live aboard said car as a homeless person. You'd have to make a decent wage to be homeless legally!

Whatever weed these condo developers are smoking, I'd love to try some. It must be that PCP-laced stuff. Probably PCP-laced jimsonweed, not grass. Smoke some of that weed developers smoke, and do a tank trip (a la Altered States) and you'll get the mother of all drug trips. Sounds like a good way to spend a Sunday! :) Just don't try it aboard your car in your deeded parking space! Is this with housing prices nuts or what?

Relative to income I'd say that housing prices in USA are comparitavely low. In my home country prices for a condo in the capital are in the range of $40-50K with average incomes no higher than $3-4K per year.

If there is a housing bubble, it is a global housing bubble. If you ask me there is simply too much money sitting around that seeks for a place to go. Prepapare for inflation, not deflation, that's my bet...

US Housing prices are very variable. In some 'hot' areas they are ludicrous ($750,000 for smallish houses in San Diego) but in other areas you can buy similar houses for not much over $100,000 (Galena and Quincy in Illinois, for example).  Those that have very high prices now have increased rapidly over the last 5 years and will tumble significantly soon. The more reasonably priced areas may barely decline.

Your comment on a global housing bubble as a result of excess liquidity is spot on. Both Australia and UK housing have declined ahead of the US this time round but the decline has been very much a soft landing rather than a crash. Should things continue fairly stable that is what I would expect for the US, but I don't expect stability to be around too much longer.

Stuart, did you just use the word "squiffy?"
One entry found for squiffed.

Main Entry: squiffed
Pronunciation: 'skwift
Variant(s): or squif·fy  'skwi-fE
Function: adjective
Etymology: origin unknown

Anglicism, I guess.
I love it. But please, what exactly did you mean? Remember, you could be defining this for future generations.
Watchin BBCA again, no doubt.
"squiffy" is a widely understood UK term for a bit drunk (short of the fallen over, lying in the gutter stage). It's coinage was more 1950s to 1970s than current.
you still hear it on building sites in uk occasionally:)

cant say I ever heard it come out of the mouth of a scouser though ;)

A "scouser" is someone from Liverpool.
(For those totally confused, I grew up just across the River Mersey from Liverpool, but left the UK for California in 1988).
As you suggest, the bursting of the housing bubble could indeed cause oil prices to drop. Demand, defined as purchasing power, would drop more quickly than supply under those circumstances, reinstating a situation of excess capacity temporarily. Lower nominal prices would result, but not necessarily greater affordability for ordinary people whose purchasing power would probably fall more quickly than prices would, resulting in a price increase in real terms.

A collapse in the housing market doesn't just affect home owners either. Think about the knock-on effect on the US economy of the government trying to bail out Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), or alternatively refusing to do so. A bail out would be staggeringly expensive - dwarfing LTCM or the S&L debacle I would guess - but the alternative would be chaos. Either way the economic impact is in uncharted waters. Combine the impact of that with a stock market crash, which I would argue is right around the corner, and a deflationary depression worse than the 1930s doesn't seem so far-fetched.

The demand destruction that would inevitably result could leave us with excess oil capacity for quite some time, especially considering that other consuming countries are likely to be entering a deflationary phase concurrently. The Chinese housing bubble is starting to burst, leaving them to follow in the footsteps of Japan. Japanese banks have yet to face the worst of the consequences stemming from the aftermath of their bubble 15 years ago. The surplus they had available to burn through before really having to face the music, combined with the strength of their export markets courtesy of the US consumers of last resort, has postponed the real day of reckoning for Japan. That day of reckoning is proably quite close now. I don't know much about India, but I'd be willing to bet that the aftermath of extreme irrational exuberance would affect them and their oil consumption as well.

Existing homes have a similar pattern. December volume is down about 3% on last year and prices have been dropping since October.
From the economic grounds troops at a "major" private company located in the Midwest (read no company news reported to media or stockholders).

My company posted a 6% decrease in 4th Qtr sales compared to same store sales last year. My company is seasonally-based and makes most of it's profits from Christmas sales. I have been there almost a decade and have always posted a positive increase until this year.

We will be reducing head count in my area of around 50 people by 10 in the next month after downsizing the same over last year.  My team will shrink from 8 people to 3.

Attrition has been the buzz word for the last 3 years.

How many other companies are copying this scenario?  Friends at a major Telecoms company located in the same city report the same.

It's not just housing where you can hear the long, slow hiss as the air leaks out.

I'm working a temporary job with a company that has huge orders in 2006. These orders are the direct result of government contracts and the natural disasters in 2005 . The workforce the company has assembled is about 40% temporary workers. This decision, to use temporary workers, could be seen as just "business as usual:" Exploit an available workforce to increase profits (And oh yes, in this geographic area we are indeed exploitable, high unemployment has been the norm here for years) Or, is the temp worker aspect just a matter of company seeing limited growth in the future and protecting it's profits from anticipated unemployment claims?
Much of this latest boom cycle has been a direct result of higher profits from FDI abroad (Foreign firms in China account for over 50% of its exports) and well-placed tax havens:  

Tax havens (see Setser on Dark Matter a.k.a. "transfer pricing")

Labor arbitrage: Cheap labor in China and developing countries.  Roach is one of the few economists that dares to use the term "labor arbitrage," even though everyone knows it is happening.  See

Environmental arbitrage: China is fast becoming a massive polluter.  A clean environment costs money.  Lax standards attract FDI, much as NAFTA in Mexico did and still does.

Tax arbitrage: China has offered very handsome tax breaks for FDI firms, so much so that indigenous firms are complaining loudly.

Put all this together with U.S. credit being extended to the max , low interest rates, and savings down and you have a recipe for disaster when energy costs seriously begin to rise.

In short, the world economy may be functioning well in the short-term, but its serious imbalances do not need much to push it over the edge.  If we are at or near peak oil, more be said.  The first half of this year will be very bumpy.  Then the fun begins.

I just did a little table of "family" or "household" gasoline costs at current ($2.50/gal) prices.  There are a lot of folks north of $5000 a year:

Gas can be a pretty big bite, depending on what cars you set yourself up with.  I could see this as the whole reason for the consumer slowdown.

What affect does gas prices have on the GDP?

When gas prices have a large increase, is that reflected in the GDP?

The same question for Retail Sales?   Isn't the higher the gas, the higher Retail Sales?

I know that they are both adjusted for inflation, but what happens if the gas increase is a lot higher than inflation?

GDP is every transaction?  So the difference would be in the multiplicative effects of the customer purchase, if any.  At one extreme, a dollar spent at a restuarant would pay rent, wait staff, cooks, food suppliers, etc., etc.

I guess the dollars and cents question is how much downstream economic activity follows gas purchases, relative to (say) Christmas shopping.

For what it's worth though, I think it may be more the psychological effect of the bite, and a wake-up call on the low levels of consumer savings.

You really need to read "Shadow Government Statistics":
You'll find links to specific aspects top right of that page, the direct link to GDP is:

A few relevant quotes:

Due to a lack of good-quality hard data, the "advance" GDP report is little more than a guesstimate. The BEA comes up with three estimates of growth, a high, low, and most likely. The numbers then get re-massaged so that the reported growth rate is moved closer to whatever the economic consensus is expecting. There actually is a belief at the BEA that there is some value to economic consensus estimates.

For net debtor nations such as Guinea-Bissau and the United States, GDP usually will show the stronger growth than GNP, since the outflow of interest payments does not get charged against economic activity. For this reason, the United States switched its primary reporting from the GNP to the GDP in 1991.

As emphasized earlier, the lower the inflation rate that is used to deflate the GDP, the higher will be the resulting inflation-adjusted growth.

Based on my analysis of the GDP/GNP revisions and redefinitions over time, over-deflation and economic reporting as published before later political corrections, reporting of real GDP growth at present is overstated by roughly three percent per year against a more realistic, pre-Pollyanna Creep period.

You should also read about the CPI:

Although GDP uses a different inflation measure, called the "GDP deflator", it is based on the "Core CPI"

The concept of looking at the "core" rate of inflation-net of food and energy-was developed as a way of removing short-term (as in a month or two) volatility from inflation when energy and/or food prices turned volatile. Since food and energy account for about 23% of consumer spending (as weighted in the CPI)

Further good reading about CPI here:

Gas and energy price increases are factored out of the GDP deflator and CPI Core figures.


I sure hope that you are backing up your links onto a removable media (from your computer).

You always seem to have links to everything.


I grab things now and then, but I actually have made a statement of impermanence ;-)

Thanks for the 'heads up' RickD, I haven't for about 6 months, it will be on my to do list for this coming week.

I really must organise my many thousands of links and upload important subsets as an online files for people to download and use. If anyone here has already devised a convenient way of doing this I'd appreciate suggestions.

Check out

Description follows.  You could have a "public" list of folders that you send TOD people to.  Plus you don't have to worry about backing them up.

"Favorites, or bookmarks, can be extremely useful in providing quick and easy access to web sites you visit regularly, or web sites where the web address cannot easily be remembered. The problem is that you may build up several sets, one at work, another at home, and another on your notebook. This can be frustrating if, for example, you find and bookmark a web site at home and need to access it at work. It can also be an issue if you have to use another computer, maybe a friend's, or when in an Internet Café.

With My Browser Favorites you can manage favorites online, allowing them to be accessed wherever you have an Internet connection, whether that's at work, at home, on a notebook, or in an Internet Café.

All you need to do is register. It's very quick and very easy, and above all its FREE! "


Notice also that you upload your favorites if using IE.
Thanks, will check it out
OK, I bow to the technical detail in your response (and your site), but I'm really digging back into something else.  Many sources seem to be riding on old knowledge.  Look at that fragment:

"Since food and energy account for about 23% of consumer spending"

Is that true at $2.50-3.00 gas?

I'm sure the numbers will catch up on this, but I think something big happened, that as yet is unquantified.  What number should replace 23%?

And of course what psychological effect did that have on the consumer?

Various of the other inflation measures (that is, not "CPI Core") reported by the US govt do include food and energy costs but they are fiddled in other ways. The so called 'headline rate' ( I think that now means C-CPI-U rather than the previously used CPI-U ) does include energy and food. In December 2005 the YoY figures were:
CPI-U      +3.4%
C-CPU-U   +2.8%

John Williams' articles date from from around September 2004, I think the oil price was about $40 then, gas maybe around $1.70? He calculates that CPI-U is inderstated by about 2.7% st that time. You will probably need to trawl thoroughly through the BLS site to find some info on exactly how the CPI etc figures are calculated, they seem to hide such info well but it is probably there somewhere!

I think I want something collected by survey rather than modeled.  We know the median income is around $50K.  We know the average family drives 21K miles.  We know the average car gets 23 mpg.  That says 4.5% of gross income goes to gasoline - if you are average/average/average.

That seems high to me, so I need surveys that will tell me about what car choices people at the various income levels have made over the few previous years, and how that affects them now.

People at lower income levels should have the most efficient cars, but we enter a fuel crisis with the cars we have (to paraphrase the defense department).

5% seems a reasonable overall average to me, what is your maybe problem with it? It may exclude people without cars which, almost inevitably, will be in poorer US population subsets.
Well, that was 4.5% of gross income ... which means it is an even bigger bite of after tax income, and a huge percentage of retail purchases.

I'm thinking people would restructure before it got that big ...

Think further, harder. How might they restructure given their current situation and mindset? It is probably less easy than you might think.
The pendulum of my own optimism and pessimism swings a bit.  Sometimes I hope many people have reduced their gasoline consumption, and sometimes I think they too many are "boiled frogs" oblivious to what they are paying, and certainly I know that some who are aware are trapped by car loans, leases, etc.

Actually, I think I'm not going to try to call this one ... I'll wait for survey data (or similar).

Very interesting, Odo.

Amazing how simple calculations speak volumes!

Price for 95 octane unleaded here is $4.63/US Gal.
;-), do you happen to know your region's average family driving distance and mp ... ah, almost said mpg ... should I ask l/100km?
I do about 10,000 km per year. Don't know about the regional statistics.. WAG it at 25,000 km. I have the smallest BMW 316 @ 106 HP (I know its not the best kpg, but I value the preceived idea of BMWs quality and quiet for the buck.) Never figured kpg. Liters/hr gage is usually around 8 for mostly short highway runs at 100 kph, 15 klicks to the nearest mall type shopping center or 40 klicks to the airport, rest is walking or a train sometimes. Car travel figures to apx. 31 miles/gal. 55 Euros to fill the tank. The avg cars around seem slightly old but smaller or equal power, but usually driving a lot faster than me. Therefore average mpg is probably roughly equal or lower than mine. A lot of cars do seem to stay parked all week and split for some relatively close weekend destination, usually a family farm or home in a nearby town. We have good train service between major cities, but small towns off the mainline are not served well by any form of public transport. EspaƱa.
Do not forget that a stalling
economy is not just an American
phenomenon. Here in NZ, the economy
has many of the same the symptoms
-gross imbalance in the trade
account, stalled or falling house
prices, rising unemployment and of
course rising energy costs. The UK,
Australia.....dozens of countries
are caught in the same boat. We
should anticipate demand destruction
thoughout the western world, leading
to reduced international trade for
many regions. That is likely to lead
to further contraction of economuic
activity in all nations that do not
have secure energy supplies.

The other aspect nopboody sems to
have mentioned is the completely
idiotic nature of GDP anyway. An
increasing GDP figure is a measure
of how quicly a nation is destroying
its own environment and the planet
in general. GPI, Geniune Progress
Index indicates that western
societies have been going backwards
since about 1975!!

I still think this chart suggest we are very near a recession/high unemployment. Each of the last 4 price spikes in oil have been followed by high unemployment.

I'm not seeing your charts. Is it just me(and my system)? I know I gave you instructions how to do this yesterday, so I feel responsible. I'm just getting a placeholder where your image is.
Same here.  I can't see them either (IE 6.0).


I don't see them, either.  (Firefox 1.5)

I suspect the problem is where you are uploading them.  You need to find a different site to host your images.

Thanks for mentioning that you can't see the chart. Your instructions yesterday worked well. I hosted the chart on my blog, maybe that is why I can see it and everyone else can't. I'll try to find another place to host it.
Don't obsess over seeing the actual charts.  I know what shawnott says here is more true than the Pope knows he's Catholic.  I'm just a high tech migrant worker that follows the most lucrative design and construction opportunities.  It corresponds inversely to the western world's economy.  When the western economy goes to hell, I go to Saudi Arabia 'cause they just finished filling the coffers and can afford to pay me for a couple of bum years coming up while they gear up for the next bull run and build anything they want at reduced cost, because of the lesser demand for construction services and process equipment in the outside world.  When SA starts dropping prices, I know its time to get ready to migrate west again.  I can head back and skim the cream off the top of the high cost design-construction contracts and clean up for couple of years there.  Its almost like SA is planning things that way.  I can tell you just by looking at my passport stamps that, just after high oil, the west is on the heading down track on the big slide.  But if you really don't believe me, go ahead... have a look.
Interesting article here:

No mention of the Iranian oil bourse, but he does think the U.S economy is headed for big, big trouble.

Yes. As I have mentioned before, these are two separate topics. If someone, like myself, thinks the IOB is pure conspiracy, it does not tell you anything about their feelings on the future of the US economy or prospects for the role of the dollar.

There is some excellent, informated, and documented discussions on all sides of the issue of the US economy. There are world class economists who are very pessimistic. I have not made up my mind, but do think that these points can be substantiated beyond mere speculation.

But the IOB fear is without grounds and without any support in the mainstream economic community.

For those of you who think that markets are efficient, have an infinite depth, and currencies are absolutely and truly fungible should look at the case of Long term Capital Management, where losses of $4.6 billion threatened to bring down the entire financial system

At the beginning of 1998, the firm had equity of $4.72 billion and had borrowed over $124.5 billion with assets of around $129 billion. It had off-balance sheet derivative positions amounting to $1.25 trillion, most of which were in interest rate derivatives such as interest rate swaps. The fund also invested in other derivatives such as equity options.
This undermines the claim of efficient market theorists that markets must converge instantaneously to efficient prices because of the action of rational investors who will immediately take advantage of pricing anomalies in markets. Markets are not perfect devices - they consist of people entering into contracts based on expectations. When unexpected events depress confidence, investors panic and reason goes out the window. When this took place in 1929, the stock market crash that followed led to the Great Depression.

Ironically, this characterization of the Efficient Market Hypothesis (EMH) is contradicted on the very Wikipedia page devoted to that topic:

"It is a common misconception that EMH requires that investors behave rationally. This is not in fact the case. EMH allows that when faced with new information, some investors may overreact and some may underreact. All that is required by the EMH is that investors' reactions be random enough that the net effect on market prices cannot be reliably exploited to make an abnormal profit. Under EMH, the market may, in fact, behave irrationally for a long period of time. Crashes, bubbles and depressions are all consistent with efficient market hypothesis, so long as this irrational behavior is not predictable or exploitable."

Hence the claim quoted by Rajiv: This undermines the claim of efficient market theorists that markets must converge instantaneously to efficient prices because of the action of rational investors who will immediately take advantage of pricing anomalies in markets is a false and misleading description of the Efficient Market Hypothesis.

Halfin is right about the EMH. However, there is more to question in Rajiv's post.

My point was that the dollar faces many huges risks, but the Iran Bourse is not one of them. How is the EMH related to this in any way?

Human herding behaviour makes investors' reactions far from random. It is really quite predictable, in a qualitative sense at least. Efforts to quantify it are interesting but unproven in my opinion, although my mind remains open on the issue. For more information on the subject google 'socionomics'.
I would like to see a plot of K over time.  That is, fit US or global production to a Hubbert model, and get the K for every year since 1950.

This is similar to the last vertical line on your "stability" plots.

Then try extrapolating K vs. Time.  Maybe this will give a good estimate of the "ultimate" K value.

Same thing with recoverable reserves.

As long as the current status quo continues, US economy will continue to "grow" at twice the rate of the rest of the world for the time being.

Reason is simple: we don't produce almost anything material in this country. The source of growth for the last couple of decades has been the services sector. As long as services, intelectual property etc. do not require (or require minimal) natural resources their "growth" is constrained just by the internal demand which is set to also grow. We simply import (largely on credit) everything we really need, circle growing amounts of paper inside and call that "economy".

If those symbols on papers become too expensive or the byrocracy of keeping track of it becomes too burdensome people will skip that system and start bartering services and giving away cultural products for free.
If you do have a methodology to predict GDP better than current methods, such as by measuring miles traveled, then that is a significant advance. One question is whether miles are predictive for GDP or merely proportional to GDP - that is, are miles traveled "this quarter" predicting GDP "next quarter", or instead are they proportional to GDP this same quarter.

If they are predictive then that's a big step forward and you could get rich off it. The Chicago Mercantile Exchange,, runs a betting market the morning before the GDP is announced. This last week, the market predicted that GDP growth would be announced as 2.7%. That is closer than the economic consensus (which was 3 point something) but of course far higher than the actual value of 1.1%. If your miles-traveled model gave you a reliable indication that the conventional wisdom were wrong, you could play this market and make a real killing.

If the miles-traveled relation is merely proportional rather than predictive, then it is not so helpful because in general you will not know the miles traveled in the 4th quarter any sooner than you would know the GDP figure. So it would give you no advantage.

In this case, you had miles-traveled in the 3rd quarter being flat or down from the previous year, while GDP was way up. Then in the 4th quarter, GDP was nearly flat. So that does look predictive, at least in the sense that GDP could be forced to revert back to its miles-traveled proportionality, once it moves slightly away from the usual relationship.

It would be interesting to go back and look at quarterly GDP announcements, comparing them with the most recently available (at the time) miles-traveled figures, and see how close you could come to predicting GDP. Then, ideally you would compare that with consensus expectations of what GDP would be and see if your model were better; but unfortunately it will probably be hard to go back and find out what those expectations were. The CME GDP betting market data would be one source of expectations, but unfortunately that only goes back a year or so.

From the Washington Post:
"Americans' personal savings rate dipped into negative territory in 2005, something that hasn't happened since the Great Depression. Consumers depleted their savings to finance the purchases of cars and other big-ticket items.

The Commerce Department reported Monday that the savings rate fell into negative territory at minus 0.5 percent, meaning that Americans not only spent all of their after-tax income last year but had to dip into previous savings or increase borrowing.

The savings rate has been negative for an entire year only twice before _ in 1932 and 1933 _ two years when the country was struggling to cope with the Great Depression, a time of massive business failures and job layoffs."


I saw that.  The lowest savings rate since the Great Depression?  That don't sound good.

If the economy does turn sour, a lot of people are going to be very ill-prepared for it.

Yep. And hey, it looks like the government is broke, too:

U.S. Treasury Secretary John Snow issued a warning recently that the U.S. Government is on the verge of collapse - as the statutory debt limit imposed by Congress of $8.184 trillion dollars would be reached in mid-February - the government would then be unable to continue its normal operations. Considering the current total U.S. debt stands at $8.162 trillion dollars, once the official debt ceiling ($8.184 trillion) is reached, the U.S. government's credit abroad (its borrowing power) is gone. Those countries (mainly China) who presently keep America afloat by holding U.S. Treasury Notes, will most likely no longer continue doing so.

This is routine. Congress sets a debt ceiling. The Treasury borrows up to the ceiling. Congress raises the ceiling. It been happening this way for years.
It's OK though: there is a 'global savings glut' of which 75% is being loaned to keep the US government, economy, $ and consumer afloat. The US is doing the world a favour by spending all their money. There is no reason to expect this will ever end since everyone on this planet thinks that americans are really nice people and deserve to have all their money to spend.
It will go on as long as foreigners want to ship us more stuff than they want shipped to them. Or, in other words, as long as US return on investments are more attractive, considering safety as well as rate, than investments elsewhere.

Of course you are right, but it won't get you anywhere. I tried responding to this line of discussion with logic as well. Apparently it is too much fun to just throw around the same old assertions and any information that gets in the way is discarded.

I think you need to read jkissing more carefully ;-).  He says "as foreigners want to ship us more stuff" ... OK fine, that covers us for the short term ... but how long will it be before the Chinese domestic consumer market dwarfs our own?
No, I agree with him entirely, as I do with your point that the codependence could be temporary. I said the same thing a few days ago:

I have never claimed that the willingness of others to invest in the US is permanent, or that the heavy dependence on these flows of funds won't end in tears.

My objection is to the inaccurate treatment of the debt as charity that could be easily withdrawn on a whim. My linked comment above makes the exact claim that you do regarding the role of the Chinese consumer market.

I am not sure the Chinese domestic market will ever dwarf that of the US, but neither do I think dwarfing is required to stop the flow of funds. I do agree that it is impossible for the US to continue to consume at current rates forever.

As I have frequently said, there are many ways to view the current imbalance. A lot of people smarter than me say it is going to end in disaster for the US. I don't dispute them. But I do think it is important to build a logical and accurate platform for the argument.

OK, I missed the "backstory" to that comment.  I'd say a long term change, and the US going the way of europe in 50 or 100 years (as a strong economy, but not the strongest), is the most conservative bet right now.  Recognizing of course that the asians could take some wrong turn themselves.

On the other hand, I look at the housing bubble (safe to call it that now), a full year of negative savings rate in the US, and climbing energy prices ... and I wonder (as a long-shot) how fast things could change.  Could an "American Economic Flu" hasten a shift in wealth?

(I'm not sure how far the term "logic" applies in making such fuzzy statistical projections.  I certainly have no equations to back them up.)

I agree with everything you have said. I tend to look at the future in three rough scenarios:

  1. The US exercises some discipline and manages to grow its way out of the current predicament.

  2. It does not and eventually does take a major economic hit (possibly buffered by a one time inflationary action)

  3. Something else we can't see happens

The probabilities I assign to each fluctuates depending on the news, my mood and other factors.

I do feel very certain that an unwinding of current positions by Asian (or oil exporting) holders of US bonds could not be done in the short-term in a way that is not mutually destructive. Right now I hold that China would be hurt worse. But I do think this is changing.

My guess is that this economic mutually ensured destruction will hold the house of cards together much longer than many others do.

My probabilities for your outcomes have been relatively stable for about 18 months now:
  1. < 5%
  2. 15%
  3. > 80%

There are too many imbalances (by which I mean mostly economic) and the tightrope is now very, very thin and high. A mis-step or significant event and literally almost everything could come tumbling down. A failure at one point will almost certainly cause multiple systemic failures throughout.

I don't think the effect will be instantaneous, I expect a stepped economic collapse as attempts to mitigate result in brief stable plateaus, but I could be wrong - there is a risk that it will all happen very fast.

My guesstimate is that there is a 20% to 25% probability of it beginning in 2006, growing cumulatively each year thereafter by a similar risk = 40% to 50% in 2007 etc.

I am probably a bit more optimistic than you are, but have no reason to think that you are not right, although I hope not.

I do agree with this:

"There are too many imbalances (by which I mean mostly economic) and the tightrope is now very, very thin and high. A mis-step or significant event and literally almost everything could come tumbling down. A failure at one point will almost certainly cause multiple systemic failures throughout."

There are certainly enough imbalances that it is easy to map out a pathway to a crash.

I still think it is to the advantage of all parties concerned that the current situation drag on for a while. I think China in particular has a lot to lose if it all goes up now. China is about halfway through a remarkably successful effort to rebuild the power of their nation, which is a long-term project. Developing country economies are more volitile and fragile than developed countries - and China is no different. However, I do think this could change in the future.

My assessment is that if the current imbalance is shattered in the next five to ten years, no one benefits. After that, perhaps China could build a stong enough base to intentionally pull the rug out from under the US. But ten years is a long time and a lot could happen.

I agree with you but have an important proviso. Though it is not currently advantageous for any particular country to help pull the rug from under the current economic system that may very well change as circumstances change.

China would probably like another 10 years, perhaps more, of approximate economic status quo before they challenge US economic supremacy. Apparently they expect peak oil to happen around 2012. Now, should it come sooner they will have a dilemma: is it more in their interests to keep the status quo or to encourage an economic depression to reduce energy demand which will probably impact China significantly less than US?

Besides, I expect events to precipitate dramatic change well before that dilemma needs resolution. :-((

Both china and india are indeed fragile, and in many ways. Their internal ecomomy is building, but they still, and for some time to come, critically depend on exports to employ many millions that would otherwise be on the street creating unrest instead of goods. Also, their lack of democracy is another vulnerability - few would have predicted how fragile the USSR was. And, their successful one-child policy has both created a sever women shortage and simultaneously brought about the worst (highest) old/young ratio the world has ever seen. Imagine each young person, mostly male, trying to help two aging parents without any safety net.
China and india share energy protectionism, among others - both are afraid to pass on world energy prices to their citizens, reducing energy conservation (badly needed in both) as we approach/pass peak oil. Either or both economies might easily stumble before approaching the US gdp.
Huge college loans eating up salaries.
This is a very interesting article ( I would say that this is another evidence of shrinking economy.