Despite the seemingly strong activity in the economy in recent months there is trouble lurking beneath the surface. Don’t get me wrong – we have a real recovery on our hands (see here), however, it remains fragile and largely driven by government intervention. Beneath the surface the balance sheet recession lurks.
As the housing bubble grew the US economy experienced an unprecedented growth in debt. This generated an imbalance as debt levels far outstripped disposable income. This environment was sustainable as long as asset prices continued to climb, however, once prices deteriorated debtors were left with an imbalance. As a result, a balance sheet recession ensued as demand collapsed under the weight of households who preferred to pay down debts rather than spend. The impact is magnified by corporations that cut costs (read, fire workers) as demand collapses and they attempt to protect margins. Real sustainable recovery cannot ensue until the indebted sector of the economy returns their balance sheet to a state of normalcy.
The government’s response to the crisis was massive and far more effective than most presumed. But it was not a cure. It was merely a temporary fix. The following updated sectoral financial balances diagram shows what has occurred over the last 15 years. It’s undeniable that the government response via huge deficits is having a positive impact on the private sector balance sheet:
(Figure 1)
The bright side is that things could have been much worse. Even better, we haven’t fallen for the fear mongering from the hyperinflation/USA is bankrupt crowd who are helping to cause so much destruction in the nations of Austeria. The problem is that this government intervention is not a cure. Aggregate household debt levels are still too high as evidenced by the debt:disposable income levels (see figure 2). This means we could still be several years from sustained private sector growth. As I like to say, the public sector is not yet ready to pass the baton to the private sector.
(Figure 2)
At the current trajectory it’s not unreasonable to assume that the balance sheet recession will last well into 2012 and potentially longer. While a 1:1 ratio is “sustainable” by my estimates, it would be comforting to see levels closer to the historical levels in the 80% range. If that is the case we could see the impact of the balance sheet recession persist far longer than anyone believes. The obvious upside risk is a dramatic improvement in the labor market. On the other hand, our government is now explicitly encouraging fiscal imprudence in an attempt to “keep asset prices higher than they otherwise would be”. This sort of policy has the very real potential to increase instability and turn recovery into bubble. Other exogenous risks (Europe, China, housing prices, etc) also pose substantial risks to the downside. For now, I think it’s safe to assume that the recovery will remain fairly fragile well into 2012, but given the size of the deficit and potential for labor market improvement we could see continued economic strength.
In sum, it’s clear that government intervention has been sufficient to defer the negative effects of the balance sheet recession. In the near-term, that is a net positive, however, the risks are substantial. If the balance sheet recession persists into 2013 or longer then the obvious risk is a substantial decline in the deficit. Austerity would almost certainly expose an overly indebted household sector and send the economy back into a tailspin. With the deficit projected to be $1.5T this year it’s comforting to know that we are not repeating the mistakes of Japan, however, it’s important that we not get too complacent as the balance sheet recession lurks underneath a seemingly rosy surface. ——————————————————————————————————————————————————
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Reply 02/03/2011 at 2:49 AM alexNice!
Is there any way to know which people are reducing their debt:income ratio? Is it fair to say that given the unbalanced nature of the recovery, the de-leveraging could also be unbalanced? It is quite possible that high income households (that haven’t faced reduced income) have largely reduced their debt, perhaps by selling the holiday home for example, whilst the majority of the population are still in trouble. Given the approximately 15% underemployment rate, many households have faced reduced income over the last few years, and many others would be facing wage freezes.
Could an unbalanced de-leveraging process delay private sector growth further than expected?
Reply 02/03/2011 at 4:00 AM KingPawnGood questions. This chart(bottom of the link page) is a bit old but it breaks down household leverage by income bracket. It shows different leverage paths: 1) The highest income bracket barely strayed from its historical debt to income levels 2) Middle income households went from debt to income levels of sub 100% to plus 150% levels. 3) the Lowest income bracket went thru a period of super leverage in the past decade to crazy levels(plus 200%)
Since the chart is old so it doesnt so how far households have deleveraged in the past 3 years. But the distribution of leverage is also consistent with the skew of unemployment towards lower income brackets as well.
The take away is that we are in a three speed economy, not two as some have suggested. http://www.businessinsider.com/jonathan-wilmott-the-overleveraged-us-consumer-is-a-mytn-2009-12
Reply 02/03/2011 at 1:30 PM KantoGreat post. It is good to see a balanced view as opposed to “US is dead, Buy Gold” type of comment. Care to share the source of the data for Figure 2? Thanks
Reply 02/03/2011 at 5:00 AM MisthosGood analysis, so long as you take a sterile view of the world. But we don’t live in such a world.
We have integrated into the global economy a few billion people whose wages in my view, represent an extreme deflationary force on wages for workers in the West. And as US policymakers’ solution is to devalue the dollar by using the opposite of austerity policies, two worrisome trends emerge:
1)The developing world’s workers whose food costs are a large part of their wages increasingly feel squeezed, which will result in political instability.
2)The US Middle Class that relied on housing as a source of wealth will continue to see the value of things they own decrease, while the value of things they consume, increase, as their wages, well,. the ones lucky enough to find work, decrease. This too will result in political instability.
The FIRE Economy, a perversion of some sort of “full employment policy” instituted in many post-industrial economies with the aid of expansive fiat, was the one thing that policymakers tried to save. Can’t blame them, as it was the easiest to save. No factories to build, or ditches to dig, only keyboard strokes were required. But make no mistake about it. The FIRE Economy is extractive, not productive, and it too will end as all Ponzis end. And it will take the economy down with it.
Which will leave us with what? An already decimated manufacturing base, and a collapsed FIRE Economy.
It used to be that one nation traded one good for another, guns for spices, for example. What barbaric times. Today, one only needs a functioning Ponzi system of debt driven ever increasing asset valuations that create paper which is used to buy real things like oil.
But what do I know? Maybe we finally figured it out, and all’s well.
Reply 02/03/2011 at 5:49 AM nottpcWhat is funny is almost all deleveraging thus far has been via default, not Americans finding Jesus and purposefully changing behavior. Multiple pieces in wsj the past year showing default of debt is main driver even of the tiny delevering. The only people who seem to have changed their behavior are those who had no choice in the matter and have had credit cut off. So we are solving little and more importantly learned nothing. Even worse our drug dealer in chief is back handing out 0% down fha loans with fico scores greater than 520 while losses continue to accrue to taxpayer.
Reply 02/03/2011 at 6:08 AM SilalusWhile that’s a valid philosophical point, from a practical standpoint I’m not convinced it matters in the short or medium term.
Debt levels are down in households and corporations despite the behavor you (perhaps rightly) object to. Those 0% loans you refer to don’t seem to be increasing overall debt ratios, probably in large part because they serve to increase demand for products that are currently in surplus, which in turn prevents the private sector from continuing to cut production (read as: jobs) in the short-term. That salvages one part of the economy immediately in exchange for what I freely admit could be serious long-term issues.
With the free market currently placing human resources as inefficiently as it is, maybe it’s a choice of the lesser of evils. There are definitely long-term issues to be concerned about with household debt behavior, but I think almost anything would be better than having a large percentage of the population destitute and unproductive right now. That leads to social unrest and economic instability in every timeframe. There are lots of other issues that need to be resolved, but can anything really be changed, anything at all, without first fixing the labor market?
Reply 02/03/2011 at 9:10 AM Klaus Bohm…basically think, the view about a sustainable US economic recovery is a view through rose colored glasses. In reality, the US situation is grim, beyond repair. In the current global environment, it does not pay to be patriotic.
Remember the Obama appointed Deficit Commission (populated by US banking interests) reporting December 2010.
Along with the press, the media, and most of the political punditry, the Deficit Commission appears far more worried about government debt (deficit) than depression. As a result, their report includes a two-way strategy:
1. change the tax system in order to shift the cost function -taxes- for Wall Street and Corporations off finance, off industry, onto labor
1.a. cut social spending
This ensures as much of the government spending power as possible is available to bail out the inevitable collapse when it comes financially and to give subsidies to companies.
1.a. cut cost function -labor- lower wages by 20 percent by creating a depression (remember your concern about the potential, deflationary effect of the QE strategy)
Reason:
-to make the economy more competitive -the economy can earn its way out of debts -make more profits, pay more bonuses_stock options
Remember: the financial sector has a long history of ‘Pump’n Dump’ and its happening now. Most of the $600 billion government bail-out is reported to have gone abroad, into the BRIC countries"“Brazil, Russia, India, China, Third World countries, Malaysia.
Game Over – The rats jumping ship – Shrinking the US economy – setting up shop in BRIC-VILLE - USD_EURO kaputt – BRIC currencies on fire
Kind Regards
Reply 02/03/2011 at 6:30 AM ESAgree. Much of the stimulus money ended up in emerging markets and created bubbles there, dirving commodities higher. But most people in the US couldn’t care less about instability in the emerging markets, they only care about what happens in the US. They are only now strting to object since food is becoming too expensive. Of course, if emerging markets blow up US will also go right back into the recession. But it might or might not happen. And I am sure financial firms will find a way to capitalize on that. For financial indyustry volatility ( boom and bust) is good, this is when they can make the most money. Stable environment is boring and non-profitable for them.
Reply 02/03/2011 at 9:12 AM SilalusThat commission however also pointed out and discussed one glaring issue that you ommitted, as do many who bring up the same concerns and ideas you are. The costs of health care for an aging population is the two-ton gorilla in the corner, both for the private and public sector. No matter how the cost of health care is distributed, as it stands right now that cost will be too high for anyone to pay.
I can’t imagine a useful discussion of solutions to any long-term government spending or the greater long-term economic issues without discussing that. You have to include a solution for providing health care in the US economy or quite simply nothing will be enough.
Reply 02/03/2011 at 9:26 AM SilalusWow, I am sorry- reading your comment a second time I see that I completely misinterpreted it on my first look. I first read it as you summarizing those recommendations and promoting them or proposing them and now I realize you’re critiquing them as incomplete just as I am!
That’ll show me to read fast- please accept my apologies.
Reply 02/03/2011 at 9:29 AM james1:1 ratio is sustainable only if:
wages growth = interest on debt outstanding.
(haven’t seen anything like that probably… ever). Otherwise deleveraging has a much longer way to go. And if by chance wages reduction happens – it’ll blow this ratio again.
Reply 02/03/2011 at 7:22 AM In AccountingDeclining prices could help offset a lack of wage growth for some time. It wasn’t long ago that an entry level computer cost £2,000 and now you can get one for £350. Of course, prices cant go to zero…
Reply 02/03/2011 at 8:21 AM Chad S.In a “flows model”, such as MMT, the federal deficit is necessary to increase the net financial assets of the domestic private sector. However, the problem is this ignores the “stocks” of the economy, represented by assets, liabilities, and the productive value therein. The problem is that the Ponzi build-up in the private sector has not been restructured/deflated, only supported by the deficit, i.e. transferred to the public sector.
The deficit works in a cyclical way, but it does not deal with the structural/secular problems that will work to inhibit economic growth in the future. At some point, the total debt burden is too high to support with the income receipts (nominal GDP approximately) of the domestic economy.
Reply 02/03/2011 at 9:06 AM Steve BChad – your comment only applies to countries with fixed exchange rates, such as Euro countries. In the US, the ‘debt burden’ will always be supported, since the issuance of debt is nothing more than a monetary operation, and funds exactly nothing. The US should stop issuing debt immediately so the deficit hawks will sit in silence over this not so well known reality.
Reply 02/03/2011 at 10:02 AM AnonymousBut Chad is correct that the deficit just allows the private debt Ponzi scheme to continue. So the private debt will for sure not be supportable at some point.
Investor X
Reply 02/03/2011 at 10:49 AM Cullen RocheYou could even argue that they’re encouraging fiscal imprudence. It’s a no consequences world….
Reply 02/03/2011 at 11:01 AM Chad S.Steve
I am referring to the aggregate debt burden, not the federal debt, and particularly the private debt currently serviced by the private national income and collateralized (mostly) by the private sector balance sheet.
Borrowing money to fund unproductive activities is not condusive to long term economic vitality. Eventually those activities fail to promote enough growth to justify the liabilities associated with them, and the credit deflation ensues. Here is where I make no distinction between private or public, because it eventually boils down to an asset allocation decision. Federal government is not immune to this, regardless if they are the monopoly supplier of the currency in a floating exchange rate system.
Reply 02/03/2011 at 11:41 AM Scott K.Cullen, Would you please comment on this blog posted by Jim Jubak. I believe he has this wrong, but I am still struggling to understand your approach.
“Last week a newcomer moved to the top of the rankings for the world's leading holder of U.S. Treasuries.
Used to be Japan, once upon a time. But Japan with holdings of $877 billion in U.S. Treasuries is now No. 3.
For a while China was the biggest holder of U.S. government debt. But now with $896 billion China has slipped to No. 2.
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icBrokerWidget('pragcap', 600, 55); Comments SSGreat thoughts. Thanks.
Reply 02/03/2011 at 2:49 AM alexNice!
Is there any way to know which people are reducing their debt:income ratio? Is it fair to say that given the unbalanced nature of the recovery, the de-leveraging could also be unbalanced? It is quite possible that high income households (that haven’t faced reduced income) have largely reduced their debt, perhaps by selling the holiday home for example, whilst the majority of the population are still in trouble. Given the approximately 15% underemployment rate, many households have faced reduced income over the last few years, and many others would be facing wage freezes.
Could an unbalanced de-leveraging process delay private sector growth further than expected?
Reply 02/03/2011 at 4:00 AM KingPawnGood questions. This chart(bottom of the link page) is a bit old but it breaks down household leverage by income bracket. It shows different leverage paths: 1) The highest income bracket barely strayed from its historical debt to income levels 2) Middle income households went from debt to income levels of sub 100% to plus 150% levels. 3) the Lowest income bracket went thru a period of super leverage in the past decade to crazy levels(plus 200%)
Since the chart is old so it doesnt so how far households have deleveraged in the past 3 years. But the distribution of leverage is also consistent with the skew of unemployment towards lower income brackets as well.
The take away is that we are in a three speed economy, not two as some have suggested. http://www.businessinsider.com/jonathan-wilmott-the-overleveraged-us-consumer-is-a-mytn-2009-12
Reply 02/03/2011 at 1:30 PM KantoGreat post. It is good to see a balanced view as opposed to “US is dead, Buy Gold” type of comment. Care to share the source of the data for Figure 2? Thanks
Reply 02/03/2011 at 5:00 AM MisthosGood analysis, so long as you take a sterile view of the world. But we don’t live in such a world.
We have integrated into the global economy a few billion people whose wages in my view, represent an extreme deflationary force on wages for workers in the West. And as US policymakers’ solution is to devalue the dollar by using the opposite of austerity policies, two worrisome trends emerge:
1)The developing world’s workers whose food costs are a large part of their wages increasingly feel squeezed, which will result in political instability.
2)The US Middle Class that relied on housing as a source of wealth will continue to see the value of things they own decrease, while the value of things they consume, increase, as their wages, well,. the ones lucky enough to find work, decrease. This too will result in political instability.
The FIRE Economy, a perversion of some sort of “full employment policy” instituted in many post-industrial economies with the aid of expansive fiat, was the one thing that policymakers tried to save. Can’t blame them, as it was the easiest to save. No factories to build, or ditches to dig, only keyboard strokes were required. But make no mistake about it. The FIRE Economy is extractive, not productive, and it too will end as all Ponzis end. And it will take the economy down with it.
Which will leave us with what? An already decimated manufacturing base, and a collapsed FIRE Economy.
It used to be that one nation traded one good for another, guns for spices, for example. What barbaric times. Today, one only needs a functioning Ponzi system of debt driven ever increasing asset valuations that create paper which is used to buy real things like oil.
But what do I know? Maybe we finally figured it out, and all’s well.
Reply 02/03/2011 at 5:49 AM nottpcWhat is funny is almost all deleveraging thus far has been via default, not Americans finding Jesus and purposefully changing behavior. Multiple pieces in wsj the past year showing default of debt is main driver even of the tiny delevering. The only people who seem to have changed their behavior are those who had no choice in the matter and have had credit cut off. So we are solving little and more importantly learned nothing. Even worse our drug dealer in chief is back handing out 0% down fha loans with fico scores greater than 520 while losses continue to accrue to taxpayer.
Reply 02/03/2011 at 6:08 AM SilalusWhile that’s a valid philosophical point, from a practical standpoint I’m not convinced it matters in the short or medium term.
Debt levels are down in households and corporations despite the behavor you (perhaps rightly) object to. Those 0% loans you refer to don’t seem to be increasing overall debt ratios, probably in large part because they serve to increase demand for products that are currently in surplus, which in turn prevents the private sector from continuing to cut production (read as: jobs) in the short-term. That salvages one part of the economy immediately in exchange for what I freely admit could be serious long-term issues.
With the free market currently placing human resources as inefficiently as it is, maybe it’s a choice of the lesser of evils. There are definitely long-term issues to be concerned about with household debt behavior, but I think almost anything would be better than having a large percentage of the population destitute and unproductive right now. That leads to social unrest and economic instability in every timeframe. There are lots of other issues that need to be resolved, but can anything really be changed, anything at all, without first fixing the labor market?
Reply 02/03/2011 at 9:10 AM Klaus Bohm…basically think, the view about a sustainable US economic recovery is a view through rose colored glasses. In reality, the US situation is grim, beyond repair. In the current global environment, it does not pay to be patriotic.
Remember the Obama appointed Deficit Commission (populated by US banking interests) reporting December 2010.
Along with the press, the media, and most of the political punditry, the Deficit Commission appears far more worried about government debt (deficit) than depression. As a result, their report includes a two-way strategy:
1. change the tax system in order to shift the cost function -taxes- for Wall Street and Corporations off finance, off industry, onto labor
1.a. cut social spending
This ensures as much of the government spending power as possible is available to bail out the inevitable collapse when it comes financially and to give subsidies to companies.
1.a. cut cost function -labor- lower wages by 20 percent by creating a depression (remember your concern about the potential, deflationary effect of the QE strategy)
Reason:
-to make the economy more competitive -the economy can earn its way out of debts -make more profits, pay more bonuses_stock options
Remember: the financial sector has a long history of ‘Pump’n Dump’ and its happening now. Most of the $600 billion government bail-out is reported to have gone abroad, into the BRIC countries"“Brazil, Russia, India, China, Third World countries, Malaysia.
Game Over – The rats jumping ship – Shrinking the US economy – setting up shop in BRIC-VILLE - USD_EURO kaputt – BRIC currencies on fire
Kind Regards
Reply 02/03/2011 at 6:30 AM ESAgree. Much of the stimulus money ended up in emerging markets and created bubbles there, dirving commodities higher. But most people in the US couldn’t care less about instability in the emerging markets, they only care about what happens in the US. They are only now strting to object since food is becoming too expensive. Of course, if emerging markets blow up US will also go right back into the recession. But it might or might not happen. And I am sure financial firms will find a way to capitalize on that. For financial indyustry volatility ( boom and bust) is good, this is when they can make the most money. Stable environment is boring and non-profitable for them.
Reply 02/03/2011 at 9:12 AM SilalusThat commission however also pointed out and discussed one glaring issue that you ommitted, as do many who bring up the same concerns and ideas you are. The costs of health care for an aging population is the two-ton gorilla in the corner, both for the private and public sector. No matter how the cost of health care is distributed, as it stands right now that cost will be too high for anyone to pay.
I can’t imagine a useful discussion of solutions to any long-term government spending or the greater long-term economic issues without discussing that. You have to include a solution for providing health care in the US economy or quite simply nothing will be enough.
Reply 02/03/2011 at 9:26 AM SilalusWow, I am sorry- reading your comment a second time I see that I completely misinterpreted it on my first look. I first read it as you summarizing those recommendations and promoting them or proposing them and now I realize you’re critiquing them as incomplete just as I am!
That’ll show me to read fast- please accept my apologies.
Reply 02/03/2011 at 9:29 AM james1:1 ratio is sustainable only if:
wages growth = interest on debt outstanding.
(haven’t seen anything like that probably… ever). Otherwise deleveraging has a much longer way to go. And if by chance wages reduction happens – it’ll blow this ratio again.
Reply 02/03/2011 at 7:22 AM In AccountingDeclining prices could help offset a lack of wage growth for some time. It wasn’t long ago that an entry level computer cost £2,000 and now you can get one for £350. Of course, prices cant go to zero…
Reply 02/03/2011 at 8:21 AM Chad S.In a “flows model”, such as MMT, the federal deficit is necessary to increase the net financial assets of the domestic private sector. However, the problem is this ignores the “stocks” of the economy, represented by assets, liabilities, and the productive value therein. The problem is that the Ponzi build-up in the private sector has not been restructured/deflated, only supported by the deficit, i.e. transferred to the public sector.
The deficit works in a cyclical way, but it does not deal with the structural/secular problems that will work to inhibit economic growth in the future. At some point, the total debt burden is too high to support with the income receipts (nominal GDP approximately) of the domestic economy.
Reply 02/03/2011 at 9:06 AM Steve BChad – your comment only applies to countries with fixed exchange rates, such as Euro countries. In the US, the ‘debt burden’ will always be supported, since the issuance of debt is nothing more than a monetary operation, and funds exactly nothing. The US should stop issuing debt immediately so the deficit hawks will sit in silence over this not so well known reality.
Reply 02/03/2011 at 10:02 AM AnonymousBut Chad is correct that the deficit just allows the private debt Ponzi scheme to continue. So the private debt will for sure not be supportable at some point.
Investor X
Reply 02/03/2011 at 10:49 AM Cullen RocheYou could even argue that they’re encouraging fiscal imprudence. It’s a no consequences world….
Reply 02/03/2011 at 11:01 AM Chad S.Steve
I am referring to the aggregate debt burden, not the federal debt, and particularly the private debt currently serviced by the private national income and collateralized (mostly) by the private sector balance sheet.
Borrowing money to fund unproductive activities is not condusive to long term economic vitality. Eventually those activities fail to promote enough growth to justify the liabilities associated with them, and the credit deflation ensues. Here is where I make no distinction between private or public, because it eventually boils down to an asset allocation decision. Federal government is not immune to this, regardless if they are the monopoly supplier of the currency in a floating exchange rate system.
Reply 02/03/2011 at 11:41 AM Scott K.Cullen, Would you please comment on this blog posted by Jim Jubak. I believe he has this wrong, but I am still struggling to understand your approach.
“Last week a newcomer moved to the top of the rankings for the world's leading holder of U.S. Treasuries.
Used to be Japan, once upon a time. But Japan with holdings of $877 billion in U.S. Treasuries is now No. 3.
For a while China was the biggest holder of U.S. government debt. But now with $896 billion China has slipped to No. 2.
As of last week, the leader of the pack is"”the envelope, please"“the New York Fed, which holds the Federal Reserve's Treasury bills, notes, bonds, and TIPs. (TIPS are Treasury Inflation Protected Securities.) As of last week the Fed's System Open Market Account held $1,108 billion in U.S. government debt. (That's $1.108 trillion if you prefer.)
And the Federal Reserve isn't done building that portfolio. It's still buying Treasury debt"”about two-thirds notes with four-year to 10-year maturities"”as part of the second program of quantitative easing and it is also buying about $30 billion a month to reinvest the interest from its portfolio.
By June, when the current program of quantitative easing is due to end, the Federal Reserve will hold about $1.6 trillion in U.S. government debt, or about as much as China and Japan hold now combined.
Which is kind of scary when you remember that the Federal Reserve will have to shrink its balance sheet one day. That will mean managing the sale of some part of the world's largest portfolio of Treasuries without sending interest rates shooting up (and the U.S. dollar shooting down) as buyers demand higher yields if they're going to swallow all that debt.
That sale should be especially tricky since there's no evidence that the other big holders of Treasury debt"”China, for instance"”are eager to add to their already large portfolio holdings.
Great thoughts. Thanks.
Nice!
Is there any way to know which people are reducing their debt:income ratio? Is it fair to say that given the unbalanced nature of the recovery, the de-leveraging could also be unbalanced? It is quite possible that high income households (that haven’t faced reduced income) have largely reduced their debt, perhaps by selling the holiday home for example, whilst the majority of the population are still in trouble. Given the approximately 15% underemployment rate, many households have faced reduced income over the last few years, and many others would be facing wage freezes.
Could an unbalanced de-leveraging process delay private sector growth further than expected?
Good questions. This chart(bottom of the link page) is a bit old but it breaks down household leverage by income bracket. It shows different leverage paths: 1) The highest income bracket barely strayed from its historical debt to income levels 2) Middle income households went from debt to income levels of sub 100% to plus 150% levels. 3) the Lowest income bracket went thru a period of super leverage in the past decade to crazy levels(plus 200%)
Since the chart is old so it doesnt so how far households have deleveraged in the past 3 years. But the distribution of leverage is also consistent with the skew of unemployment towards lower income brackets as well.
The take away is that we are in a three speed economy, not two as some have suggested. http://www.businessinsider.com/jonathan-wilmott-the-overleveraged-us-consumer-is-a-mytn-2009-12
Great post. It is good to see a balanced view as opposed to “US is dead, Buy Gold” type of comment. Care to share the source of the data for Figure 2? Thanks
Good analysis, so long as you take a sterile view of the world. But we don’t live in such a world.
We have integrated into the global economy a few billion people whose wages in my view, represent an extreme deflationary force on wages for workers in the West. And as US policymakers’ solution is to devalue the dollar by using the opposite of austerity policies, two worrisome trends emerge:
1)The developing world’s workers whose food costs are a large part of their wages increasingly feel squeezed, which will result in political instability.
2)The US Middle Class that relied on housing as a source of wealth will continue to see the value of things they own decrease, while the value of things they consume, increase, as their wages, well,. the ones lucky enough to find work, decrease. This too will result in political instability.
The FIRE Economy, a perversion of some sort of “full employment policy” instituted in many post-industrial economies with the aid of expansive fiat, was the one thing that policymakers tried to save. Can’t blame them, as it was the easiest to save. No factories to build, or ditches to dig, only keyboard strokes were required. But make no mistake about it. The FIRE Economy is extractive, not productive, and it too will end as all Ponzis end. And it will take the economy down with it.
Which will leave us with what? An already decimated manufacturing base, and a collapsed FIRE Economy.
It used to be that one nation traded one good for another, guns for spices, for example. What barbaric times. Today, one only needs a functioning Ponzi system of debt driven ever increasing asset valuations that create paper which is used to buy real things like oil.
But what do I know? Maybe we finally figured it out, and all’s well.
What is funny is almost all deleveraging thus far has been via default, not Americans finding Jesus and purposefully changing behavior. Multiple pieces in wsj the past year showing default of debt is main driver even of the tiny delevering. The only people who seem to have changed their behavior are those who had no choice in the matter and have had credit cut off. So we are solving little and more importantly learned nothing. Even worse our drug dealer in chief is back handing out 0% down fha loans with fico scores greater than 520 while losses continue to accrue to taxpayer.
While that’s a valid philosophical point, from a practical standpoint I’m not convinced it matters in the short or medium term.
Debt levels are down in households and corporations despite the behavor you (perhaps rightly) object to. Those 0% loans you refer to don’t seem to be increasing overall debt ratios, probably in large part because they serve to increase demand for products that are currently in surplus, which in turn prevents the private sector from continuing to cut production (read as: jobs) in the short-term. That salvages one part of the economy immediately in exchange for what I freely admit could be serious long-term issues.
With the free market currently placing human resources as inefficiently as it is, maybe it’s a choice of the lesser of evils. There are definitely long-term issues to be concerned about with household debt behavior, but I think almost anything would be better than having a large percentage of the population destitute and unproductive right now. That leads to social unrest and economic instability in every timeframe. There are lots of other issues that need to be resolved, but can anything really be changed, anything at all, without first fixing the labor market?
…basically think, the view about a sustainable US economic recovery is a view through rose colored glasses. In reality, the US situation is grim, beyond repair. In the current global environment, it does not pay to be patriotic.
Remember the Obama appointed Deficit Commission (populated by US banking interests) reporting December 2010.
Along with the press, the media, and most of the political punditry, the Deficit Commission appears far more worried about government debt (deficit) than depression. As a result, their report includes a two-way strategy:
1. change the tax system in order to shift the cost function -taxes- for Wall Street and Corporations off finance, off industry, onto labor
1.a. cut social spending
This ensures as much of the government spending power as possible is available to bail out the inevitable collapse when it comes financially and to give subsidies to companies.
1.a. cut cost function -labor- lower wages by 20 percent by creating a depression (remember your concern about the potential, deflationary effect of the QE strategy)
Reason:
-to make the economy more competitive -the economy can earn its way out of debts -make more profits, pay more bonuses_stock options
Remember: the financial sector has a long history of ‘Pump’n Dump’ and its happening now. Most of the $600 billion government bail-out is reported to have gone abroad, into the BRIC countries"“Brazil, Russia, India, China, Third World countries, Malaysia.
Game Over – The rats jumping ship – Shrinking the US economy – setting up shop in BRIC-VILLE - USD_EURO kaputt – BRIC currencies on fire
Kind Regards
Agree. Much of the stimulus money ended up in emerging markets and created bubbles there, dirving commodities higher. But most people in the US couldn’t care less about instability in the emerging markets, they only care about what happens in the US. They are only now strting to object since food is becoming too expensive. Of course, if emerging markets blow up US will also go right back into the recession. But it might or might not happen. And I am sure financial firms will find a way to capitalize on that. For financial indyustry volatility ( boom and bust) is good, this is when they can make the most money. Stable environment is boring and non-profitable for them.
That commission however also pointed out and discussed one glaring issue that you ommitted, as do many who bring up the same concerns and ideas you are. The costs of health care for an aging population is the two-ton gorilla in the corner, both for the private and public sector. No matter how the cost of health care is distributed, as it stands right now that cost will be too high for anyone to pay.
I can’t imagine a useful discussion of solutions to any long-term government spending or the greater long-term economic issues without discussing that. You have to include a solution for providing health care in the US economy or quite simply nothing will be enough.
Wow, I am sorry- reading your comment a second time I see that I completely misinterpreted it on my first look. I first read it as you summarizing those recommendations and promoting them or proposing them and now I realize you’re critiquing them as incomplete just as I am!
That’ll show me to read fast- please accept my apologies.
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