Welcome to the New Ickonomy

By Jon Markman

This just in: The folks who told you last year that there would be no recession, and early this year were saying there might be a just a mild recession, are now saying there definitely won't be a depression.

This time they might finally be right, technically, in a squeaker. But it sure won't feel that way, as a downturn that has already destroyed the savings and livelihoods of hundreds of thousands of Americans is growing more pervasive by the hour, and every attempt by the government to make things better is making things worse in ways that most of us can barely imagine.

The environment is growing so hostile to jobs and capital -- as layoff and bankruptcy rates rise to multidecade highs -- that I need to coin a fresh name for our era. So let's call it the New Ickonomy.

The distinguishing feature of the New Ickonomy is the virtually unprecedented way that all asset classes, economic classes, industries and regions are now correlated with each other. It's about 90%, the highest since at least 1974, according to one study, which means for investors and job seekers alike there is nowhere to hide.

All together now

You've heard the bromide that says you can survive anything with a diversified portfolio? It's perilously untrue in the New Ickonomy, as financial, utility, technology, energy, drugs, steel and real-estate stocks are down 56%, 34%, 45%, 43%, 28%, 69% and 49%, respectively, this year. If you don't believe it, ask the president of Harvard University, who announced this week that her school's well-diversified, $37 billion endowment was preparing for "unprecedented" losses that would lead to cutbacks in financial aid, construction and school programs.

The concept of a near depression sounds shocking only if your historical perspective doesn't stretch back far enough. Since 1940, the United States has gone through 10 recessions, or about one every seven years. But data from the Economic Cycle Research Institute show that from 1790 to 1930, there were 35 recessions, about half of which deepened into depressions (essentially severe, prolonged recessions). The fact that we haven't had a depression since the 1930s, in other words, is an anomaly in U.S. history -- not the norm.

We're about 300,000 job losses away from the worst of the 1991 recession, which is one month's total lately, and about 1 million losses away from the worst of 1982, which could be reached by February. Meanwhile, service job losses alone are already worse than a level last seen in 1974.

Negative feedback loops, which start slowly and gather speed, are now the only conveyor belts working overtime in the world today. The terror of the New Ickonomy might have started with banking and homebuilding, but their toxins spread quickly to technology (fewer banks need fewer computers), commodities (fewer homes need less lumber) and manufacturing (fewer floors need less carpeting). The terror may have started in the U.S., but it has spread to China, Europe and Latin America. The terror might have started with lower-income people losing their homes to foreclosure, but it has spread to corporate tycoons such as Sheldon Adelson of Las Vegas Sands (LVS, news, msgs) losing billions in stock holdings bought on credit, the superrich losing tens of millions of dollars on land, stocks and yachts bought on credit, the middle class losing middle-management jobs ranging from high finance to automaking, and the poor losing jobs ranging from restaurants to construction. The terror might have started with equities, but it has moved on to bonds, oil, timberland and private equity. The terror might have started as something happening to someone else, but it has moved on to affect virtually everyone, everywhere.

Magic is illusion

Bulls contend that prompt government action and a flood of money from central banks will prevent these negative feedback loops from spinning further out of control, and they believe credit markets are already thawing. Yet those views really depend on a measure of what child psychologists call "magical thinking," or nonscientific causal reasoning, for they aren't supported by facts.

The notion that a money dump by the Federal Reserve and European Central Bank will cure everything has its origins in what economists call the Marshallian K. This is essentially the ratio between nominal gross domestic product and the money supply. If the economy is pumped with more dollars by the Fed than is required by businesses and households to function at a normal pace, then the excess is expected to find its way into risk taking and thus the capital markets. A high Marshallian K, as we are said to have now after a year of extreme money creation, is supposed to juice the stock market. It's sort of the Lotto effect: If a middle-class family suddenly had an extra $1 million to spend after winning the lottery, it's expected to go blow it on extra goods, services and investments.

Yet that isn't happening, as I explained in part last week, because the new money is just filling in craters where an asteroid hit world debt markets and because it is being stockpiled like cords of wood in anticipation of a deepening credit freeze.

Continued: The money pit

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