Thursday, February 19, 2009

The Tipping Point

About nine years ago Malcom Gladwell wrote a book called The Tipping Point. It's all about how little problems can grow into big disasters, much like epidemics of disease. At some point a problem which at first appears to be a manageable reaches the tipping point - a point at which the entire situation gets completely out of anyone's control and a very bad outcome is virtually assured.

I think all the rescue plans and stimulus packages governments around the globe have announced can be understood in terms of the economy's tipping point. If you study the major depressions of history you find that at some point along the economic decline people loose hope in their futures. This is always noted in the popular press of the time. Once hope is lost the depression is assured because businessmen don't want to invest or hire and consumers don't want to buy. So you want to avoid reaching this sort of economic tipping point at all costs.

The primary function of all these rescue packages is to keep our economy away from that tipping point. Yes, they will have real economic effects, although people disagree a lot about the magnitude of any economic stimulus they will generate. But the real role of these rescue plans is to prevent the economy-wide pessimism about the future. For if people fall into such a pessimistic funk it will take a long time for economic recovery to set in.

So I think all the debate about whether rescues will work or not misses a much more important question. Instead we should ask whether they give people hope that we can avert disaster and climb back upon the road of economic growth. I personally think they will.

10 comments:

Anonymous said...

Dear Carl:

with all of the massive lay-offs, do you not think that we have reached the tipping point? Even if you are lucky enough to have retained your job, you will think twice before going out to spend.

I think what the US and the world needs to go thorugh is a rationalizing of credit. The US had too much and was wasteful with it, we can not continue with our old ways of spend now, think later.

Rick B.

Susannah said...

You might want to review the Gallup polls, they keep a tally of the daily polls for the past year on a graph. I've been looking at these since last November, and I really think that tipping point might have already been reached. It's at http://www.gallup.com . It's all about the jobs, IMO.

Dimitris said...

I personally think they won't. The massive layoffs and the ensuing contagion will almost certainly inflict a devestation in household budgets, to the point that lump-sum checks of $500 will do nothing to reverse.

But I agree that the main issue here is to look for a new equilibrium, a new point where expectations will coordinate. This cannot be provided by an external agent (cf. the stimulus plan), I'm afraid. But then again, I did not (yet) prove this theorem.

Anonymous said...

Hi Carl - This is a great point. Several other people I follow have made similar statements. Psychology was so bad in the late 1930's that the federal government actually created some office to publish positive economic propaganda to try to help end the depression. And the current negativity since the election has bothered me greatly. Obama ran on hope. But I think he's pulled the rug from under many people by all of the negative talk. Congress and the media aren't helping matters either. So I think we are nearing the tipping point. -- Jeff

Anonymous said...

Worse, yet, fate has conspired to give us a president who has no interest in preserving the previous economic system. The country's need to come up with "stimulus" spending has given this president cover to encourage and sign off on a massive wealth redistribution scheme. As producers begin to see that this shift will be continuous throughout the next four years (at least), how can hope be maintained among the most productive of our society? How many will begin to resist through whatever means available?

Anonymous said...

Deflation has been more common than is thought. Simplistic, but a good read:

http://en.wikipedia.org/wiki/Deflation_(economics)

I enjoy this blog, Thank you Carl

Anonymous said...

your words: "So I think all the debate about whether rescues will work or not misses a much more important question. Instead we should ask whether they give people hope that we can avert disaster and climb back upon the road of economic growth. I personally think they will."

Gann once said: "Do not buck the trend. Never buy or sell if you are not sure of the trend according to your charts and rules."

Your last sentence as it is written it's pure wishful thinking..unless you want to bring more arguments to it. I'll be glad to hear them. MC

Anonymous said...

I think the tipping point has been here and gone. We're on the other side of it now. Doesn't mean there can't be a bounce in the markets and the mood, but we've reached the 'dark side'. People aren't purchasing much of anything. China is closing/has closed textile plants that once served American companies. Car companies can't give them away. People are--holy mackerel--saving money instead of going further into debt.

The real downturn began in 2000. That's when the tipping point really took place. The years since are what you could call a 'false recovery' based on an insane interest rate policy and the last, great inflating of the credit bubble. No jobs, paper profits dominated.

Humpty Dumpty is not going to be put back together. The ship has sailed. The population, worldwide, has pulled in its horns after over 20 years of high times. The party is over, the foundation is made of jello, and it will take some time for the system to face the facts, at least publicly. Right now, our (ahem) leaders are still trying to reinflate the popped bubble and restore a boom mentality. It's just not that easy.

Responsible parties may, of course, disagree, but I believe that's due more to wishful thinking and an optimism that belies the facts.

As I've said before, sometimes all the news and the usual media clues to a turnaround are false indicators. This happened during the 90s and also the last five years. Manias and busts take much longer to play out than more typical mood/market rallies and pullbacks. This will likely take years to sort out.

I have no credentials, of course, so what do I know? But it seems that every economist, analyst and commentator that got everything right so far just might still know what they're doing. They seem to differ now only in stating just how disastrous the current situation is.

Dead cats bounce. We're about due, and should exceed the previous 924 bounce. But we have more downside to cover down the road before this systemic reset is done with us. We're unwinding the greatest bubble in history and the mood has turned to that task.

Trading doesn't really need a view that long, so in a way, it's somewhat irrelevant to the task at hand.

Thanks, Carl, for allowing opposing views. As with everything, time will tell. And I do hope you're the one who is right, for all our sakes!

John M

Anonymous said...

So everything is bout the "tipping point"?

Well, let me tell you : if the were only the USA that had rouble, i'd agree...But do you realize what is looming across the world ? And especially in Europe ?

If Eastern europe default, there will be no more european banking system.
- Yersterday, the german government passed a law allowing the State to nationalize any german banks at any time, even without their consent ! That's expropriation.
- The UK has ordered the bank of England to print money to fight the downturn and inflation (sic??)
-the bank of Austria have lent to eastern europe more than 70% of Austria's GDP.
-In all the EU, governments have promised to inssured all the deposit up to 100.000 euros...problem, that was only promises but but don't have the money to keep them, none of them.

- If the banking system collapses, Ireland , Spain, Italy will be the first to default.
-the EU don't have a FED, it doesn't even have "European bonds"
- The IMF is broke and can't help.
-French carabean island are in rioting for one month now...and social unrest will soon reach France itself.
- China had a growth of 0% last quarter
- Japan is collapsing
- Brasil lost 650.000 jobs in January alone

And that's only a couple of "news" that come to my mind...
Everyone can conclude what he wants of course...

Balsamo

Anonymous said...

Carl
your bullish bias is taken
i how ever do not think the stimulus packages are the right thing to be doing and while from a cyclical perspective i do think we are coming towards a low in terms of stock prices , i think the stimulus packages are only coincidental .what this tells me in simple , the government is panicing and once the stock market does bottom which is sooner rather then later for now we will get a rally and that will improve social mood and give them hope , this will then be credited to the stimulus package which in truth will have nothing to do with it .
then we get the after effects which will be higher taxes and wage inflation and overall higher interest rates which will also be the effect of the massive deficits
which will become the next major problem . this will bring social mood back down again ( bigger mulit year picture ) what all of this is doing is setting the stage for hyper inflation .
joe