US Economy Still on Runway as Recovery Won’t Fly

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This recovery is wonderful in every way, except the important ones. It is like a shiny new airplane. It has glossy aluminum wings. It has plush seats in the first class section. Trim stewardesses serve drinks. Movies are available on demand in all sections.

A majority of those polled by Bloomberg think things are great; 61% said they thought they economy had taken off and was flying high. Stocks are up. Commodities are up. And here’s another Bloomberg headline: “Global investors give Federal Reserve Chairman Ben S. Bernanke top marks…”

The recovery has won the approval of economists and the public. It has almost everything going for it. It just won’t fly!

Comes news this morning that the US economy is still on the runway. This report from the AP explains why:

“Consumers slashed their borrowing in July by the largest amount on record as job losses and uncertainty about the economic recovery prompted Americans to rein in their debt.

“Economists expect consumers will continue to spend less, save more and trim debt to get household finances decimated by the recession into better shape. Such behavior, though, is a recipe for a lethargic revival, because consumer spending accounts for 70 percent of economic activity.

“The Federal Reserve reported Tuesday that consumers in July ratcheted back their credit by a larger-than-anticipated $21.6 billion from June, the most on records dating to 1943. Economists had expected credit to drop by $4 billion.”

Hey, not bad…economists were only off by 430%. Consumers are paying down debt more than four times faster than they thought. Partly because they want to. And partly because they have to. They don’t want to borrow…and banks don’t want to lend to them anyway. Consumer credit is falling at a 10% annual rate, based on July figures. Credit card debt is going down at an 8% rate.

When they pay down a dollar’s worth of debt that is one dollar less in the consumer economy. But it’s also a dollar that is not borrowed. Where the consumer spent all his income two years ago…and borrowed more so that he could increase his consumption even further…now, he doesn’t borrow…and he doesn’t spend all his income either. Now, the money that used to pour into consumer spending leaks out.

As we reported yesterday, personal spending is dropping…the figures were down in four of the last six quarters – something that has never happened before, since they began keeping records in 1947. And the level of consumer spending is down 33% from a year ago – with discretionary spending now down to a level it hasn’t seen in 50 years.

Of course, that’s just what we’ve been saying. The great credit expansion began in 1945. It ended in 2007. Credit will contract for many years. One study, also reported here, suggested that consumers would spend 14% less – even after the economy was back on its feet. We estimate that the total level of debt must go down below 200% of GDP. If that’s correct, we need to pay down about $25 trillion of debt. That won’t be easy and it won’t be quick.

And it will mean high levels of joblessness for a long time. Already, two out of five working-age Californians are unemployed. The other three are working the shortest workweeks in history. No wonder; with spending dropping, sales are falling. So businesses don’t need so many people to make, ship, sell and service their products. Then, of course, when they lay off workers to cut expenses, the unemployed workers have to cut spending!

How is it possible for a consumer economy to grow when consumers are spending less money? Of course, it’s not. This is not a genuine recovery…it’s an imposter. A fraud. A recovery impersonator.

While the private sector is paying down debt, the public sector is adding debt at a ferocious pace – about $150 billion per month. Public spending isn’t the same as private spending. It is usually spending for things that people wouldn’t buy if they had a choice.

And it comes with a whole new risk attached – the risk that the feds will inflate their way out of debt rather than pay it off.

Government spending does not bring a durable, real prosperity. (If it did…think how easy it would be to make people rich; governments love to spend money!) It may look like a recovery. It may have shiny wings and spiffy-looking stewardesses. But it won’t fly.

The World Economic Forum has taken the United States down from the number one position. America is no longer the world’s ‘most competitive’ economy. That title goes to Switzerland.

Meanwhile, the US banking system is rated #109 in the world – just below Tanzania.

“More than one in four US banks announced an unprofitable quarter,” Strategic Short Report’s Dan Amoss tells us.

US banks became leveraged casinos during the bubble years. They’ve still got a lot of leverage…and are still trying to relive those glory days when players lined up to spin the wheel…and free drinks flowed by Niagara Falls.

Dan will certainly find the best way to play the downfall of US banks – after all, he did call the collapse of Lehman six months early – leading his readers to as much as a $200,000 profit. Look for regular updates on the banking industry from Dan in these pages…

“Keeping up with children is a full-time job,” said Elizabeth last night. “There is always at least one of them who needs help. Sometimes more than one.

“Sometimes I wonder if we shouldn’t devote ourselves more fully to helping them. That’s our main project, isn’t it? It’s the thing that is most important, isn’t it?

“So…shouldn’t we go to where they are…and give them advice…help them get their careers and families established? I mean, we’re in Europe. Our children are mostly in the US. Shouldn’t we go back so we would be available to help them? Maybe we should rent a house in Los Angeles and stay there until Maria’s acting career is on a more solid footing, for example. At least she’d have somewhere to go for Thanksgiving…

“The prevailing view in America is that children leave the nest when they are 18 or 21…and then, they’re on their own. But that’s not the view here in Europe. In Paris, I know lots of parents who stick with their children all their lives. They spend their vacations together. The parents buy an apartment for the children. They direct their careers…and pass judgment on marriage prospects. Not that the children always listen, but one generation is not left to its own devices. That’s why inheritance is such a touchy issue in France. People aren’t expected to make it on their own…they’re expected to get as much support from the family as possible…

“Sometimes I think we should take the same attitude. And we do to some extent. Still, I’m not sure the children would appreciate our help. I’m not even sure our help would really be much use. Sometimes they just need to make their own mistakes…

“Besides, we have our own projects…our own lives. I just don’t know what is best…”

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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Comments

  1. An update introduction to “1930s, 1970s and Today – Contraction, Expansion and Contraction?”

    “The United States stock market has just completed its best six months since 1933. From March 9 to Sept. 9, the Standard & Poor’s 500-stock index leaped by 53 percent.

    “But the gain over that period, which began when stocks reached their nadir in March, was not enough to offset the losses recorded in the previous six months. Not since 1932 had the market suffered a half-year period as bad as that one” (Floyd Norris, Around the World, Stock Markets Fell and Rose, Together, nytimes.com, September 12, 2009).

    “In an essay for the Encyclopedia Britannica, Christina Romer, now chairman of the Council of Economic Advisers, argued that the 42 percent increase in the money supply from 1933 to 1937 was the main driver of recovery. A tightening of money supply after the Fed ordered an increase in bank reserves in 1936-37, not just the cut in spending, explains the slowdown of the economy at the outset of Roosevelt’s second term” (Steven Mufson, For Insight on Stimulus Battle, Look to the ’30s, washingtonpost.com, February 12, 2009).

    “Analysis of the 1936-1939 period is instructive. Many people believe that the Fed erred by tapping on the monetary brake during 1936-1937, and that if policymakers had simply kept the money flowing then the US economy would have avoided the 1937-1939 collapse (the depression within a depression). However, the collapse of 1937-1939 was the INEVITABLE consequence of the fact that the preceding economic rebound had no real foundation. The rebound was based on monetary inflation and increased government spending, rather than on increased private investment in projects that made economic sense. It was therefore a foregone conclusion that any slowdown in monetary and/or fiscal stimulus would soon be followed by a collapse. The only question was when. If the stimulus had been maintained for an additional year or two then the ensuing collapse would have been even more devastating; and if policymakers had attempted to make the stimulus never-ending then the US dollar would have been destroyed” (Steve Saville, The Inflation Process, 321gold.com, September 1, 2009).

    Expansion between the Contractions

    “[The] blue chip indexes [are] at 12-year lows… The only other 2 times that saw the S&P or DJIA at 12-year lows over the past century were 1932 and 1974. In hindsight, both instances turned out to be the “buying opportunity of a lifetime”” (James Stack, Investech Financial Update, investech.com, March 6, 2009).

    “As the U.S. economy slid into recession in 1974, the Fed again reversed course to ward off an even deeper recession. Indicators show a renewed monetary expansion that lasted into the late 1970s. The Bernanke-Blinder index from late 1974 into 1977 indicates that monetary policy was strongly expansionary. This expansion was not reflected in high inflation initially, consistent with a partial rebuilding of real balances … and the well-documented fact that inflation only occurs with a delay (see Nelson 1998)… Around 1978, the monetary stance turned slightly contractionary, becoming strongly contractionary in late 1979 and early 1980 under Paul Volcker, as inflation continued to worsen. Once again, the monetary policy stance provides an alternative explanation for the genesis of stagflation” (Robert B. Barsky, University of Michigan, NBER, and Lutz Kilian, University of Michigan CEPR, A Monetary Explanation of the Great Stagflation of the 1970s, fordschool.umich.edu/rsie/workingpapers/Papers451-475/r452.pdf, January 27, 2000).

    This article argues that the stock market booms and economic expansions of the 1930s and 1970s, that is, after the ‘Hoover’ recession of 1929-33 and the ‘Bush’ recession of 2007-2009 respectively, are the best historical templates to view the future.

    But in a reversal of the 1930s, the future contraction will ‘rhyme’ with the ‘Hoover’ recession – longer and deeper than the ‘Roosevelt’ recession. History suggests that the severe stage of the future contraction will occur in a Republican administration.

    Economic and Financial Imbalances can only be addressed in a future Great Depression

    “In sum, the Fed thought it had learned the lessons of the 1930s, but it had not learned the lesson of the 1920s, that allowing asset prices to soar to absurdly leveraged heights could lead to a financial collapse as the need to repay loans forced sales that drove prices lower, resulting in the need to repay more loans, and so on and so on” (Floyd Norris, Failing Upward at the Fed, nytimes.com, February 27, 2009).

    “There are two major things that could go wrong – the commercial property mortgage market and stimulus spending which could cause a bubble. Years of loose monetary policy has fuelled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump than generally understood.

    “Throwing billions of stimulus dollars at the banks is unlikely to produce a healthy economy because households are broke. At best, it may only lead to a temporary pickup in growth. Stimulus packages around the world are ultimately going to cause more damage than they prevent. These packages have simply delayed the coming downturn, and by adding significant numbers to the massive debt bubbles of the world’s nations, will ultimately make the downturn worse than had governments not injected massive amounts of money into the economy.

    “When the (current) debt bubble bursts, the world will enter a serious downturn. The bailout is much bigger than the dot-com and real estate bubbles which hit speculators, investors and financiers the hardest. When the ‘Bailout Bubble’ explodes, the system goes with it because neither the US President nor the Federal Reserve will have the fiscal fixes or monetary policies available to inflate another bubble” (Ernest Kepper, Equities: What’s on the horizon, 321gold.com, August 21, 2009).

    Reply
  2. I go with this watcher7. The difference in my view however is in the turn of events to be unleashed on the funny money USD. This short term debt bubble that is denominated in USD and balance sheet sourced from the US/UK/AU but invested offshore into bubble assets will likely, when subject to a deflaionary driven deleveraging & investor redemption, drive events. Financial engineering imperialism in reverse will be an ugly thing. It is being brought down due to unsustainable current account deficits nullifying endless non asset inflationary USD money printing induced hegemony beyond bordered economies.

    Reply
  3. I am in trouble with my wording and lack of revision again. I meant CAD’s finally nullifying the ponzi scheme of fuelling spiralling money printing that does not get recorded in bodgy CPI basket measured terms but does spike the disasterous asset price inflation as watcher 7 notes in past events.

    Reply
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