Depression Economics: America’s Economic Crisis

I have written many times in the last 12 months about this issue in the Business Analytics website at http://atomai.blogspot.com/. This interview from Paul Krugman in Newsweek gives us an insight into how deep is the ocean in the financial and credit crisis. If you look in page 2 of the interview Krugman talks about a $10 trillion (yes trillion with a “t”) shadow banking system that just went up on smoke. Hence, he argues that a $700 billion capital injection by the Federal Reserve and Treasury Department will be insufficient to make up for those $10 trillion. I agree with Krugman, but we need to consider that if we take into consideration the capital injection that have an effect in America’s economic crisis by other countries in Western Europe, Russia, China, and Japan. We are talking more than $3 trillion injected into the world economy when we take those capital injections into consideration. This still leaves us with an $7 trillion issue. The next issue is the valuation of those depleted assets, because it is the difference between the $7 trillion and the value of the depleted assets that are going to determine when we are going to touch bottom. I estimate that the minimum value of those assets will be about $3.6 trillion, and that is going to leave us with about $3.4 trillion that the international capital markets are going to deal with a combination of global stock market devaluations and injection of additional capital by central banks. The jobs program and other programs by president-elect Obama will have an effect on the economic crisis but it is too early to determine what that effect will be. If the administration of President-elect Obama injects into the economy $1 trillion through different programs, including a jobs program, we will still have $2.4 trillion to deal with. The bottom line is that companies need to prepare to cut 12% to 24% in additional expenses above what they have already trimmed. The role of cost-efficient business analytics decision-support systems at the operational level is going to become a cornerstone in the transformation of companies in how to increase the margin of profit with less resources.

The Krugman interview is at http://www.newsweek.com/id/171871/page/1