Is a depression imminent?

Is there a depression coming?

The US census bureau released statistics for the trade balances updated till October, 2008. In a trend that started a few months ago both US imports and US exports continue to decline. Imports declined by $2.7 billion and exports by $3.4 billion compared to September of this year. Since the US is the largest consumer of goods in the world and exports a fair bit of technology, the consequences of such a trend (if prolonged) are worth considering.

Imports falling is a sign of a combination of declining income, declining credit and negative public sentiment about the economy. The domestic US market is fuelled by debt. Without credit there is no potential for consumers running up debt which in turn implies that you can’t save demand by borrowing more. This trend is likely to continue and will impact countries like China and India negatively taking down national incomes.

Exports falling is a sign that the current credit crisis is finally beginning to affect good businesses and spreading to other parts of the world.

The key here, in my mind, is the potential for a negative feedback loop in both the US domestic market and vis a vis exporters to the US (particularly China and India).

Normally you would never be in a situation that is so far from equilibrium. But boom bust cycles have been a constant of modern market economies. This time round one had the option of easy and fraudulent credit coming to the "rescue" and inflating the bubble even further. But with immediate bailouts running out of steam and election fever in India and Obama fever in the US soon to be over I expect the next big slide to begin within the next 6 months.

Tighten your seat belts and short the market more often than not.

Dec 12, 2008

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