Is end-of-the-recession optimism misleading?
BusinessWeek’s August twenty-four cover blares : “The Case for Optimism.” As mags and papers hemorrhage ink in their cheerleading for a supposed end to the recession, it kind of feels like time to take a step backwards and ask if these are just “feel-good” features, or if there’s any substance to the concept that “the worst could be over,” the recession is done, and “green shoots” are putting down roots in key places. Ultimately, it kind of feels like disbelief is in order, as the rousing hopefulness neglects to say some harsh realities.
To start with, while many have observed the jobless rate has fell, they seem less inclined to identify that the reason is because the work force shrank. This is standard smoke-and-mirrors stats : as folks lose extended unemployment benefits, they are filed as “discouraged” and are not counted in the “headline” unemployment number. Unemployment has fallen by 267,000 to 14.5 million, while job has fallen by 155,000. The labor force dropped by 422,000 as “discouraged workers” dropped off the statistics count, implying the jobless rate fell because folk dropped out of the work force, not because they were given roles.
Added to this, structural unemployment is climbing. The amount of folks who have been out of work longer than half a year rose by a record 584,000 to 5,000,000, accounting for at least a 3rd of all unemployment for the 1st time on record. And then, there’s the upsetting fact that everybody appears to can’t remember : we want to create 130,000 roles a month solely to stay even with population expansion. So while “only” 250,000 roles were lost last month — never mind a huge piece of work was linked to the “cash for clunkers” giveaway — we are still 380,000 jobs short of a return to a positive work scenario. And we need much stronger expansion to get back to lower unemployment. According to the Industrial Policy Institute, the state wishes to make 7,000,000 roles to revisit pre-recession work levels. Naturally, the recession extends beyond unemployment ; in fact, so does the bad news.
The interest on all of the debt the state is taking on to bail out financiers and “stimulate” the failed credit-bubble model of growth will place a drag on expansion far into the future. At the end of March of 2009, Bloomberg let slip that “The US regime and the Fed have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year.”
This amount “works out to $42,105 for every person, girl and kid in the USA and 14 times the $899.8 bill of currency in circulation.” the state’s G. D. P was $14.2 trillion in 2008. Even with today’s dirt-cheap interest rates, the government spends over $400 bn. a year on interest. If IRs rise, the interest could soon approach Pentagon spending ( $707 bn. a year ) or Medicare and Medicaid ( $742 bn. a year ). Given the general trend of this piece, it virtually does not need to be said, but I will say it anyway : IRs are prepared to rise. There’s nothing fancy here — even the Federal Agency financial consultants understand this.
As the Looking for Alpha blog notes, “In a 2003 paper, Thomas Laubach, the US Fed’s senior economic expert, worked out the result on long-term IRs of rising economic holes and surging state debt The study is damning because Mr Laubach was the Federal Agency’s economic guru at the time, going on to become its senior economic expert between 2005 and 2008, when he stepped down. As a consequence, the doubling in rates is the US central bank’s own prophecy.
All of a sudden , the positive feedback / runaway debt eventuality looks not just credible but unavoidable : if interest on the nation’s debt rises as tax cash plunge, then the sole way to pay the interest is to borrow more, increasing the interest due. 5 % is widely considered unsustainable, and Argentina defaulted when its hole hit three % of GDP. And what about paying it back? Well, tax money are tanking.
Government money is at its lowest level since the Depression, and most states are on the verge of bankruptcy. Since they can not be manipulated like unemployment, tax cash and sales taxes are much more correct measures of commercial activity. Raising taxes is politically dangerous, leaving just one other way to keep on funding debt spending : print and borrow.
It also doesn’t help that accounting and reporting rules are still not completely clear. The US monetary markets remain a hall of mirrors in which accounting tricks can create billions in profits. In this context, it’s worthwhile to recollect Citicorp’s ghost profits in March, which launched the stock exchange rally.
Talking of accounting, reporting, and tax money, it’s worth pointing out that commercial Real Estate is in jeopardy. Even fancy accounting may not save banks when the tsunami of bad CRE loans hits in the approaching months. Anybody need a faded-glory, half-empty, money-losing mall or three? Part of the downfall in commercial real estate lies with consumers. While many researchers have assumed that consumers are retrenching for a few months till the economy turns around, the reality looks to be that they’re changing generationally.
Consumer credit ( rotating and non-revolving ) dropped at a 4.9 % annualized rate in June, double the predicted pace, showing that consumers are heavily shifting toward saving. Total excellent consumer credit in June was $2,485 bill, $70 bn. less than the $2,556 bn. in June of 2008. This is a major, systemic change : in the decade of credit-fueled wealth, consumer credit grew each month like clockwork. $70 bn. isn’t much, but it is the beginning of a trend which fundamentally dooms consumer-based, over-leveraged economies like the US to years of ( at best ) meager expansion. This move toward saving is not really surprising. For many consumers, their significant investment — housing — still shows few appearances of turning around. No collateral ( as in, no housing equity ) implies consumers can’t borrow extra money, even if interest stays at absurdly low rates ( and it will not ). Maybe statistically, the recession is “getting less worse,” but that isn’t the same as setting the foundations of powerful, sustainable recovery in jobs, tax earnings and consumer collateral.
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