12-2008 From the Editor
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Sure, It’s Greatly Depressing, But It’s No Great Depression

By Tim Triplett, Editor-in-Chief
Most Americans are anxious about the state of our economy, and with good reason, but the doom and gloom on Wall Street should not color all our emotions. Though the current malaise may be depressing, another Great Depression it is not, said Parks Dodd, president of Aluminomics LLC, a research and advisory firm in Atlanta. An economist and university professor, Dodd spoke during last month’s MSCI Aluminum Division Conference in Las Vegas.

“Some might say this is reminiscent of the Great Depression, but let me dispel that myth. What we are going through now is nowhere near the Depression,” Dodd said. “Real output in the U.S. economy from 1929-33 fell by one-third. Today we are talking about a 2 percent drop. In the 1930s it took around 35 percent of GDP to repair the damage. Today the value of the proposed bailouts for our $14 trillion economy are in the range of $700 billion to $1 trillion—chump change compared to the Depression.”

The economy is suffering through a “savings shock,” which is a major obstacle to recovery, Dodd explained. Consumer spending drives more than 70 percent of U.S. economic growth. The nation’s savings rate declined from an average around 9 percent of income in 1990 to virtually nothing in recent years. Tapping their credit cards and the equity in their homes, which they assumed would appreciate forever, Americans went on a spending spree. The economy rode this wave of excess until the housing bubble burst and the credit crunch staunched the flow of capital earlier this year.

“Now if you’ve borrowed everything on your home and you’ve maxed out your credit cards, what are you going to do?” Dodd asked. Most people will react, perhaps overreact, by curtailing their spending and forcing themselves to save, which will have some unintended consequences.

“For 25 years we watched the value of our assets rise, so we did not need savings as we do now. If you assume that savings will increase by perhaps 5 percent, spending will decrease by that amount, and that is what will keep the economy down,” Dodd said.

Declining consumer spending promises to erode GDP next year by 0.2 percent at best, or as much as 2.2 percent at worst. 2010, still highly unpredictable, could see either a recovery or a further decline in the 2 percent range, Dodd estimated. “Growth in 2010 of 2 percent is optimistic. I tend to think that when households are rebuilding their savings positions, it will take more than a year.”

Ultimately, Dodd believes economies in the U.S. and other parts of the world will be bailed out by expanding exports to China as it transitions toward a consumer society. “We are approaching a period in which Chinese economic growth will be driven much more by internal consumption. This is going to underpin a pickup in world economic growth. When savings rates get back to desired levels here and in Europe, we won’t need the savings of other countries to finance our consumption. China has vast reserves of dollars that it could redirect back to its economy. Over the years, we have gotten goods and China has gotten paper; at some point they will need to turn that paper into goods.”




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