El-Erian: U.S. Economic Conditions ‘Terrifying’

[marmar]

(Bloomberg) Pacific Investment Management Co.’s Chief Executive Officer Mohamed A. El-Erian said U.S. economic conditions are “terrifying” given that the nation is coming out of recession.

The odds of the U.S. returning to recession are one-third to half, El-Erian said in a Bloomberg Television interview with Betty Liu.

The economy in the U.S. expanded less than previously estimated in the third quarter, reflecting a drop in inventories that points to a pickup in growth as 2011 comes to a close.

Gross domestic product climbed at a 2 percent annual rate from July through September, less than projected and down from a 2.5 percent prior estimate, revised Commerce Department figures showed today in Washington. The median forecast of 81 economists surveyed by Bloomberg News called for no revision. Excluding stockpiles, so-called final sales climbed 3.6 percent, the most since last year’s fourth quarter. ............(more)

The complete piece is at: http://www.bloomberg.com/news/2011-11-22/pimco-s-el-erian-says-u-s-economic-situation-terrifying-as-growth-slows.html#

[FarCenter]

1. We are in a period analogous to the Long Depression 1873-1896

So a repeated sequence of week recoveries and recessions within the overall period of economic malaise is to be expected.

Note that US Treasuries are yielding about what British Consols yielded over a couple of decades.

http://en.wikipedia.org/wiki/Long_Depression

[happyslug]

2. And what ended the "Long Depression" a massive inflationary period

The "Free Silver" Movement of the 1870s till 1896 was a demand by Farmers (Most Americans still lived on the farm till after 1910, the 1920 Census if the First US Census showing more people living in Urban areas then Rural Areas) for inflation. When the US reformed its internal currency in 1857, the US main a point to keep the Value of Dollars at the traditional value of $20 to an ounce of Gold, AND that a silver dollar has just under one dollar in Silver in it (And the rest of the Silver Coins had the same RATE of Silver).

Now, do to the massive California Gold Finds on 1849 onward, the real value of GOLD dropped in the 1850s, it took more gold (or dollars given that the Dollar was kept at $20 to an ounce of Gold) in 1857 to buy the same items as it took in 1847, just ten years earlier. This inflation to the boom of the 1850s which included a massive expansion of the US Railroad System.

By the time of the US Civil War, the inflation caused by the Massive influx of gold from California had run its course, thus the US had to revert to Paper money and Silver Coins during the Civil War (And Silver Coins disappeared by 1862, so everyone was using paper, even for three cents items, the only coin to stay in circulation was the Cent which after the Civl War was supplemented by the then new Nickel).

Congress wanted the US to return the Value of the Dollar to $20 to an ounce of Gold as soon as possible after the Civil war and did so, it is believe this decision lead to the Long Depression, i.e to rapid retirement of Civil War Debts so to get the Value of the Dollar back to $20 to an ounce of gold.

Contrary to the movies, Gold finds in the old West were rare after California and when discovered quite small. On the other hand Silver was being found and mined throughout this period, so much silver came on the market that the value of the Silver in a Silver Dollar had dropped from just under a Dollar in 1857 to about 55 Cents by the 1870s.

I go into the above to show why the Free Silver Movement came about. The Free Silver Movement was for the Government to mint more Silver Dollars and put them into circulation so that inflation would kick in. Wall Street opposed this for it would put pressure on the price of the Dollar in terms of Gold, i.e. lead to 1-2% inflation, which almost all economist today consider good for any expanding economy, and the US Economy was expanding in the late 1800s, much more then the amount of gold was expanding to fill the need for a medium of exchange (Thus massive deflationary pressure in the 1870s, 1880s and 1890s).

Thus the reform elements in the US rally around the Free Silver Movement as a way to inflate the economy and give it a kick to get going.

Now, after 1896, huge Gold Finds were made in Australia and South Africa (not as big as the California Gold finds of the 1850s, but more massive the the "Gold Rushes" of the 1870s, 1880s and 1890s in the US. The Gold Find in the Yukon around 1900 was also a factor but smaller then the Australia and South Africa gold finds.

The significance of these late 1890s Gold Finds was that for the first time since the 1850s you had inflation, do to the massive amount of New Gold entering the Market place. The US Dollar was still $20 to an ounce of gold, but like the 1850s, what an ounce of gold purchased by 1900 was less then it could buy in 1890 do to this inflation.

My point is the Long Depression ended with a massive long term Inflationary period caused by the Gold Finds in the Yukon, Australia and South Africa in the 1890s. At the time this was noted, for while "Free Silver" would remain on the Democratic Platform in the election of 1900, the campaign quickly became one of opposing imperialism

Please note we are talking of a inflationary period where inflation was less then 3% per year, but that was a huge improvement over the deflationary period of the Long Depression. It was this inflation that finally ended the Long Depression, just like the Great Depression first half was ended by FDR's inflating the value of the Dollar from $20 to an ounce of Gold to $35 to an ounce of gold in 1934, AND then the second part of the Great Depression ended with FDR's massive spending on domestic projects in the 1939-1940 period.

[FarCenter]

3. Besides the finds, the 1890s also saw the development of cyanide leaching

This allowed lower grade deposits to be profitably mined.

http://en.wikipedia.org/wiki/Gold_mining#Cyanide_process

But I think that your analysis is generally agreed to be correct. Which is also why folks who want to go back to the gold standard are pursuing a completely impractical aim. The gold standard leaves the quantity of money subject to the vagaries of mining discoveries and mining technology for a single resource. If one wishes to tie money to resources, it would be much better to tie money to a basket of commodities.