Don’t Bet on a Recovery

Reddit

It is astounding how many economists, government officials, and Wall Street strategists construe the current economic conditions as evidence of a bona fide recovery. It is a testament to the power of the rose-colored glasses handed out by our nation’s leading universities that such a feeling could be widely held despite the clear and present danger that compounds daily. The myopia leads us to enact policies that actually exacerbate our problems. The “remedies” are postponing, perhaps indefinitely, a true recovery.

The oracles who have described the nature of this imminent recovery do so based on their conviction that consumer spending is slowly returning to levels that existed prior to the recession. New data released today seems to support this view, with consumer spending up 0.5% in January.

However, missing from their analysis is any plausible explanation as to why consumers will be able to sustain such spending given the plunge in income and credit, and the lack of available savings. In fact, the same January spending report showed that personal income increased by only 0.1%, while the savings rate slowed to the smallest since 2008.

I would challenge those who fantasize about a consumer-led recovery to describe where the spending money will come from. Most consumers are tapped out, millions are unemployed, and home equity has been wiped out. The only reasonable thing for them to do is to pay down debt and sock away as much money as possible to rebuild their savings.

Beyond the question of “how” the spending could be achieved, is the deeper question of “why” such activity should be sought at all. Excessive spending, fueled by an insane housing bubble and catalyzed by reckless monetary and fiscal policy, was the reason that our current recession became unavoidable. Why would we want to go down that road again?

During the run up to the crash, excess spending had created economic distortions that have yet to be resolved. Too many resources, including land, labor, and capital, were devoted to servicing an unsustainable economic model in which Americans borrowed money to buy homes, products and services they really could not afford. In many cases consumer behavior was influenced by overly optimistic assumptions regarding real estate related riches.

However, now that the real estate bubble has burst, Americans are coming to terms with a more sober reality. Many have cut up their credit cards, dramatically reduced their spending, and have squirreled away as much money as they can. This change in behavior should necessitate a dramatic shift in the labor market as workers move away from jobs associated with consumer spending and toward jobs associated with real production, primarily for exportable goods.

The real problem is that monetary and fiscal policy designed to re-inflate the burst spending bubble is preventing this transition from taking place. As a result we are not creating the jobs we need to replace – the ones we have lost in mortgage servicing, home improvement, and real estate sales (which we never really needed to begin with). As these jobless remain unable to find alternative employment, our economy will continue to languish.

Some will argue that the new jobs created by government stimulus spending will provide the additional purchasing power necessary to revitalize consumer spending. There are two problems with this expectation. First, those jobs being “created” by the government are outnumbered by those being destroyed by government domination of resources. Second, even if it were possible for job growth to return, having hopefully learned from their mistakes, workers will be far more frugal with their paychecks than they were in the past.

Others hope that rising real estate prices will give consumers more confidence to spend. The reality is that housing prices are still too high and will likely fall further. But even if they did rise, consumers will still be reluctant to resume their shopping spree. Home equity extraction loans, which just a few years ago turned houses into ATMs, are now much harder to come by. When it comes to spending, it’s not just about confidence; it’s about cash.

The only possible way consumers can spend is if the government gives them the money. However, since the government cannot legitimately give money to one American without first taking it from another, the most likely means of doling out cash will be to run it off the printing presses.

That, in a nutshell, is our government’s plan for economic recovery. Print a bunch of money and give it to consumers to spend. This is not a plan for recovery but a recipe for disaster. Those betting that this program can succeed in putting together a healthy and sustainable economy simply do not understand the nature of their wager. The smart money is going the other way.

Regards,

Peter Schiff
for The Daily Reckoning Australia

Peter Schiff
Mr. Schiff is one of the few non-biased investment advisors (not committed solely to the short side of the market) to have correctly called the current bear market before it began and to have positioned his clients accordingly. As a result of his accurate forecasts he is becoming increasingly more renowned, and has been quoted in many of the nation's leading newspapers, including The Wall Street Journal, Barron's, Investor's Business Daily, and The Financial Times among others.
Peter Schiff

Latest posts by Peter Schiff (see all)

Reddit

Comments

  1. I’ll be betting on a disaster over the next few years especially when China crashes and burns.

    Reply
  2. totally agree Bargeass

    Maybe Australia didn’t enter into a recession in 2008/9. We only had some credit crunch associated bust ups in the finacial world (e.g. Allco & ABC). There appeared to be only a slow down in the real world.

    However, when China goes up all hell will break loose, it’d be the recession we had to have…

    Reply
  3. I agree with the above think that the only reason Australia has not been badly hit is that Rudd spent 10 years of surplus in 12 months, and the Chinese government is propping up falling exports by internal stimulus. Your average Australian home purchaser sees things otherwise and thinks this is a great time to go into massive debt for an average dwelling. The US will not be recovering in the foreseeable future. It needs to reorganise its entirely outmoded economic base. The Chinese economy is based on exports to the US. We are all in trouble.

    Reply
  4. YOUR LINE?

    Excerpt from a DR Article…

    Others hope that rising real estate prices will give consumers more confidence to spend. The reality is that housing prices are still too high and will likely fall further. But even if they did rise, consumers will still be reluctant to resume their shopping spree. Home equity extraction loans, which just a few years ago turned houses into ATMs, are now much harder to come by. When it comes to spending, it’s not just about confidence; it’s about cash.

    Stillgotshoeson
    March 3, 2010
    Reply
  5. oops wrong spot… feel free to delet these 2 Dan

    Stillgotshoeson
    March 3, 2010
    Reply
  6. Shoes: “YOUR LINE? Excerpt from a DR Article…”

    Show me.

    Then I’ll show you (up).

    Biker Pete
    March 3, 2010
    Reply
  7. With Rudd the wrecker hard at work destroying the Australian economy we won’t even need to rely on the Chinese crash to sink the economy.

    Reply
  8. Here is a well known poem that is from the 1930’s depression, describing the behaviour of the politicians at the time:

    “Hoover blew the whistle
    Mellon rang the bell
    Wall Street gave the signal
    And the country went to hell.”

    All you have to do is cross out the names of the politicians from this 1930’s poem, and replace it with whatever currant politicians you want, and you have a new updated version of the poem for 2010

    Christina
    March 5, 2010
    Reply
  9. That is the saddest part about all this waste Barge. It is one thing to have an incompetent government, another to have to pay all of its debt when it has finished. I don’t really think people quite appreciate just how much and how long that is going to take.

    Reply
  10. And here’s an _Aussie_ poem, almost a hundred years old, to illustrate
    our eternal optimism:

    SAID HANRAHAN
    by John O’Brien

    “We’ll all be rooned,” said Hanrahan,
    In accents most forlorn,
    Outside the church, ere Mass began,
    One frosty Sunday morn.

    The congregation stood about,
    Coat-collars to the ears,
    And talked of stock, and crops, and drought,
    As it had done for years.

    “It’s looking crook,” said Daniel Croke;
    “Bedad, it’s cruke, me lad,
    For never since the banks went broke
    Has seasons been so bad.”

    “It’s dry, all right,” said young O’Neil,
    With which astute remark
    He squatted down upon his heel
    And chewed a piece of bark.

    And so around the chorus ran
    “It’s keepin’ dry, no doubt.”
    “We’ll all be rooned,” said Hanrahan,
    “Before the year is out.”

    “The crops are done; ye’ll have your work
    To save one bag of grain;
    From here way out to Back-o’-Bourke
    They’re singin’ out for rain.

    “They’re singin’ out for rain,” he said,
    “And all the tanks are dry.”
    The congregation scratched its head,
    And gazed around the sky.

    “There won’t be grass, in any case,
    Enough to feed an ass;
    There’s not a blade on Casey’s place
    As I came down to Mass.”

    “If rain don’t come this month,” said Dan,
    And cleared his throat to speak –
    “We’ll all be rooned,” said Hanrahan,
    “If rain don’t come this week.”

    A heavy silence seemed to steal
    On all at this remark;
    And each man squatted on his heel,
    And chewed a piece of bark.

    “We want an inch of rain, we do,”
    O’Neil observed at last;
    But Croke “maintained” we wanted two
    To put the danger past.

    “If we don’t get three inches, man,
    Or four to break this drought,
    We’ll all be rooned,” said Hanrahan,
    “Before the year is out.”

    In God’s good time down came the rain;
    And all the afternoon
    On iron roof and window-pane
    It drummed a homely tune.

    And through the night it pattered still,
    And lightsome, gladsome elves
    On dripping spout and window-sill
    Kept talking to themselves.

    It pelted, pelted all day long,
    A-singing at its work,
    Till every heart took up the song
    Way out to Back-o’-Bourke.

    And every creek a banker ran,
    And dams filled overtop;
    “We’ll all be rooned,” said Hanrahan,
    “If this rain doesn’t stop.”

    And stop it did, in God’s good time;
    And spring came in to fold
    A mantle o’er the hills sublime
    Of green and pink and gold.

    And days went by on dancing feet,
    With harvest-hopes immense,
    And laughing eyes beheld the wheat
    Nid-nodding o’er the fence.

    And, oh, the smiles on every face,
    As happy lad and lass
    Through grass knee-deep on Casey’s place
    Went riding down to Mass.

    While round the church in clothes genteel
    Discoursed the men of mark,
    And each man squatted on his heel,
    And chewed his piece of bark.

    “There’ll be bush-fires for sure, me man,
    There will, without a doubt;
    We’ll all be rooned,” said Hanrahan,
    “Before the year is out.”

    Whingeing has _always_ been with us, hasn’t it?! :)

    Biker Pete
    March 5, 2010
    Reply
  11. Wow, that’s a great poem Biker Pete!

    Christina
    March 6, 2010
    Reply
  12. “It drummed a homely tune”, gives him away, a cynical townie at best maybe a. Nothing so sweet as the pitter patter on a tin roof, nothing so awesome as the roar in a downpour. Maybe even a churchman who has done too many rounds.

    Reply
  13. Well, yes, Hartigan was both, Ross. But his relatives (of whom I’m one) took up pastoral properties in the heart of some of the least hospitable country in WA… . The account I’m writing about the properties they bought from Alexander Forrest, Surveyor General (and Twiggy’s great, great uncle) has a chapter featuring that branch of the family tree.
    Here’s a more up-to-date attempt:

    We’ll All Be Rooned Again
    Biker Pete 1947 –

    “Don’t bet on a recovery…”
    Pete Schiff in March intoned
    “Americans are unemployed!”
    “We’ll all be rooned!” he groaned.

    Kris Sayce is sure we’ll all be poor
    as interest rates progress
    ignoring auction clearance rates
    reported in the press.

    Dan Denning claims the banks are doomed
    just like their US mates
    “Collateral is down!” he notes
    (With rising interest rates?!!)

    Vitaliy, winding back the clocks
    notes Chinese stats are faking.
    With trillions sitting in reserves?
    More than the Yanks are making…

    Bill’s view? It’s changing thru’ the years
    “Gold won’t increase your riches…
    and coffee clerks decline your ‘rands
    those goddamn sons-of-bitches!”

    Across the globe the bubbles bloom
    in gold and real estate
    but bears are prowling hungrily
    for bubbles to deflate…

    And history is contrary…
    Are governments to blame??!
    The more we wish for things to change
    The more they’ll stay the same…

    ————————————-

    (And yes, I too have changed my name.
    Should probably keep my day job… .)

    Biker Pete
    March 6, 2010
    Reply
  14. Don’t let the flock bring you down BP but beware of flying too close to that peculiar Westralian sun.

    A future that values liberty and takes down big government might not be a bad thing, like your relatives having maybe having had more life at the edge than those enclosed in suburban loungerooms.

    Reply
  15. One thought that I incline to is that “standard of life” and “quality of living” are actually very different things – Though many people confuse them I suspect? :)

    Reply
  16. You must be kidding right? All signs point to up, not one indicator anywhere in the world has shown any real signs of impending doom in the last 6 months. Greece and Duvai were the scariest and they barely registered a blip. I respect DR but I think a serious decline (e.g.global depression) in Australia, let alone the world is nothing short of wishful thinking.

    It also gives some of your readers false hope that they can benefit from others misery, it’s just not reality

    BlueSteel
    March 9, 2010
    Reply
  17. I cannot help but think that house prices are being gloablised, and as a result they show price characteristics similar to the stock market.

    For example, a stock that has a bright future, like Google, will generate a much higher price earnings ratio (PE Ratio). This is because the market expects good things in the future.

    Similarly, if houses show this characteristic, then the outrageous lack of afford-ability in Australia may be driven by the markets outlook for the future. Also, keep in mind, if you are abroad, then investing in Australian property may be considered attractive because you will also get FX gains. This foreign demand increases total demand & goes some way toward explaining why the median house price to median income rations are very high in Aus (that and the first time buyers grant).

    So, if we speculate as to why the afford-ability of houses was remarkably consistent many years ago & why it has only recently gone crazy in certain places – I would suggest it is the impact of globalization combined with the impact of giant money in search of a return (sovereign wealth, hedge funds etc).

    Then the next question of sustainability – well, if you ask whether house price afford-ability can stay at record high, it is the same as asking if Google can sustain its high PE ratio. And the answer for property is YES, prices can be sustained at a highly affordable level & they can even go up if the drivers remain in place (demand for commodities)

    Yes it will have some dire consequences for our children, unless they are handed down a house – and it will adversely impact society as a whole. This is not good, but neither is is something that will stop the price of housing from going up even more if the price of commodities keeps going up.

    Reply
  18. “Yes it will have some dire consequences for our children, unless they are handed down a house – and it will adversely impact society as a whole.”

    Used to worry about this kind of thing. Our kids would not be as well-educated, they’d be unable to cope with rising prices, etc. Waste of time. These fears were unfounded. Our kids can pay _cash_ for houses… .

    Wiggins’ recent article describing ‘The Youth Bulge’ presents more realistic potential issues for the west. When you look at those stats you start to realise how fortunate even our most disenfranchised kids living on the margins in Australia really are. We Aussies really have it made. When did whingeing start to erode our ‘She’ll be right, mate!’ attitude, I wonder…?!~

    Biker Pete
    March 21, 2010
    Reply
  19. The unfolding Chinese story will be one of the top five this year.
    There is something suspect about Chinese growth figures, but surely China needs the US customer as much as the world needs China. If the US gets a cold, so do Asian exporters.
    The subject of infrastructure comes up. China has done well with its infrastructure investments, partly because its needs were universally obvious, partly because it earned the foreign exchange to finance them. (that means buying planes, turbo generator sets and reactors it cannot make itself) The only reason infrastructure gets publicly built and paid for is that the private sector cannot get a satisfactory return from it. Yes, as Khruschev put it, politicians want to build you a bridge when there isn’t any river. We have a few examples of that sort of thing even here.

    Reply
  20. I met a crew last Winter who were destroying a perfectly good bridge (according to their own admission) and replacing it with one no better (over a small creek out bush). Apparently creating jobs.

    Reply

Leave a Reply

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au