Ali’s blog

Mostly quant stuff with occasional digressions

Rough times ahead

Posted by alifinmath on January 2, 2008

An assessment from Schiller:

Robert Shiller, Professor of Economics at Yale University, predicted that there was a very real possibility that the US would be plunged into a Japan-style slump, with house prices declining for years.

Professor Shiller, co-founder of the respected S&P Case/Shiller house-price index, said: “American real estate values have already lost around $1 trillion [£503 billion]. That could easily increase threefold over the next few years. This is a much bigger issue than sub-prime. We are talking trillions of dollars’ worth of losses.”

I believe his assessment is correct and most people who have a feel for macroeconomic phenomena will probably agree, though they may quibble about extent and duration. It’s important to understand that such phenomena are not mere aberrations of an otherwise smoothly functioning system, but are part of the warp-and-woof of modern finance capitalism, and symptomatic of its inherent volatility, which — if anything — is becoming ever more pronounced with time. The system is inherently unstable.

Behind this increasing instability is a weakening hegemon that is ever more dependent on financial inflows as its productive capacity declines and its imperial commitments become ever greater. And the boom-and-bust cycles — whether dot-com or housing — reflect a weakening junkie’s dependence on short-term speculative boom-and-busts to sustain himself.

What can we say with a fair measure of confidence? There will be a “sluggish” economy for several years; there will be little or no job growth — and what there is will be at the low-wage low-skill end (there will be a continuing hemhorrage of good jobs overseas); and the housing market will remain depressed. And China will go from strength to strength (albeit with its own acute problems of environmental degradation, inflation, and growing social unrest).

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