09/09/09 London, England
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 impostor. 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…
Until tomorrow,
Bill Bonner
The Daily Reckoning
Sign Up for The Daily Reckoning e-letter and receive a chapter from the new Financial Reckoning Day... FREE!
We Value Your Privacy.
The Fed just indicated today that 11 of 12 regions have shown signs that economic activity has “stabilized” or “firmed.” Only one region (St. Louis) reported that it is showing small signs of life. One question: if the Feds inflate away their debt, is it also a good idea for individuals to wait for the inflation before paying off their debts?
Well at least I got here before Harry…
“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.”
__________________________________________
Genau. Unless at least a portion of this number includes the consumer that said chieu hoi and filed the Chapter 7. A dollar lost is a dollar gone, not borrowed, no longer extant, “pfffft”.
Factor that!
Agreed. People and businesses are strapped. We simply can’t return to an economy predicated on impulse buying and debt just by wishing.
From BB: “This is not a genuine recovery…it’s an impostor. A fraud. A recovery impersonator.”
Really? Than why is Beige Book showing stabilization just about everywhere? Why are job losses moderating quickly? Why is housing stabilizing? Why is manufacturing up?
Shall I go on?? Once again, just because you were right three years ago, doesn’t mean you’ll be right this time. As a matter of fact, each day that goes by, each report that comes out, makes your “prediction” look even more naive and foolish.
Harry – because they borrowed and then infused trillions into the economy.
It’s not real.
Unless we can borrow and spend forever, never having to pay the tab…
Harry said
From BB: “This is not a genuine recovery…it’s an impostor. A fraud. A recovery impersonator.”
Really? Than why is Beige Book showing stabilization just about everywhere? Why are job losses moderating quickly? Why is housing stabilizing? Why is manufacturing up?
Shall I go on?? Once again, just because you were right three years ago, doesn’t mean you’ll be right this time. As a matter of fact, each day that goes by, each report that comes out, makes your “prediction” look even more naive and foolish.
———–Stop being a parrot off the t.v. set and actually research and you will find, job losses are not moderating, people are falling off of unemployement because they are no longer eligible for it, it makes it ‘appear’ numbers are falling when in truth they are rising, millions of homes are getting read to be ‘underwater’ and the commercial real estate collapse is still coming, manufacturing ‘appears’ up, now that cash for clunkers is over, you will see that was a temporary imposter as well….nothing is stable, nothing, not even the dollar.
Harry is the worst kind of sinner – a Recession Denialist. (much like a global warming denialist).That said – I enjoy his contrarian contributions and the benign commentary he provokes from all of the above.
I am sure you do not believe what you write Harry, – but if you do – how do get around the fundamentals of consumer debt and the global nature of the current crisis
Who is going to get us out of jail?
Bill, you are right. I finally realized you have been right all along, and are right again this time. Yes this “recovery” is a fake one.
All my apologies
When people grasp, psychologists will tell you, they become juvenile. Hence, the other “Harry” on the board. Most here have serious, albeit misguided, dialogue. Then there’s the juvenile mind. Maybe we need a log in type situation for posting responses. Otherwise, this forum becomes a joke.
It was hurricanes that caused me to wake from my sleepy American dream. First was Isabel a few Septembers back. When the wind and rain was over there was a beautiful calm. The weather was warm and the air smelled clean and good. There were not too many trees down and it seemed we would all be fine. But the winds had piled the water up in the Chesapeake Bay. Silently, in the middle of the night, as the tide came in, the water rose seven feet above normal high tide and quietly damaged homes and businesses.
The next year Katrina did her worst and left all those people on roof tops waving bed sheets and waiting, waiting, waiting, for the government to save them.
I suspect we will have a replay of these events in the economy: Like Isabel, after it seems the storm has past and good times are here again the dark muddy tide of inflation will creep into our homes and businesses. Like Katrina, those who wait for the government to save them will be disappointed.
Those who survived Isabel prepared with sand bags and plastic or moved valuables up ahead of time. Those who survived Katrina got out early and/or were armed and prepared.
Harry Harry Harry……
Why is BB right?
I know a lot of people in this recession, who are on the ropes. Should the economy bounce back and we all prosper as a result, I would be elated. However, as we have seen, one can pay a huge price for over-optimism. In my view, reducing or eliminating household debt is the surest path to prosperity. By cutting out interest expense and building equity one can secure their future.
This site never posts my comments.
America has a SPRUCE GOOSE ECONOMY.
well, there ya go
Maybe it’s like stopping the car when a dog is chasing you, just to see what happens. And when you learn what happens, you go seeking a car wash.
The day of wreckowning has arrived,£2000 to part with your four wheelerred and dealerred bustrucket and anyone can sell “their” shares [wether they own them or not ]in the titanic economy before her bare stern goes up up and away and buy with the proceeds one of the few remaining slow lifeboats to china[they are only expencive when everyone wants one ,at which point money ceases to represent wealth and has to take its place in the queue behind the other recipiants of the caxTonyian con stants ,or they that can carry on believing in anything and sit it out and play abide with me on the harpo with their fellow marx and spendsir brothers ,whilst the water which they hoped would recede as surely as the moon goes overhead laps up arround their ankles on its way to a major naval engagement where they will lose their cutty sark.
At which point every chicken little that refused to cross the road will ask why, as they see the sky falling and realise that they have been seriously plucked, at which point they will realise that the Great Gordoni b of inkland was/is to economics what Tommy cooper was to magic.
I don’t know who is right about the economy, whether it is DR, or the mainstream econ.s on t.v. who only want to give us numbers, which don’t mean a damn thing to most people. I’ve lived most of my life in an area of the country where most jobs available were in manufacturing. In this tiny location factories built motors, ACs, furniture, fishing equip., tires, etc. Many of these jobs are now gone sent to Mex, China or God knows where. The jobs that replace these industries were banks, Wal-Mart, Target, Books-a-Zillion, hairdressers and various Gov. emp. Obviously, the new jobs rely on consumer spending and borrowing. The old ones were based upon production, which allowed folks to spend at the retailers and borrow from the banks and created a balance in production and consumption. Those days are almost gone here and what we are mostly left with is the consumption jobs. Does anyone who doubt the folks here at DR really believe there will be a recovery without production related employment to counter-balance all the consumption related industries? Here in AR the consumption related industries outnumber production related ones by a number I don’t know, but the fact is production is outnumbered, which is why so many ARs are poor. The StateGov is our largest employer and some of the most despicable people you would ever meet work for them. We have many small towns with almost zero crime rate, but they have 6-10 police officers working for them and are equipped with swat teams, which is just one example of the waste and over-employment in the Gov sector is out of control. How long do you think the Gov. and the banks can bleed us before this entire system comes tumbling down? I don’t know, but it doesn’t look good.
Phelps who can’t swim sounds like he’d make a good guest columnist here.
They don’t want to borrow…and banks don’t want to lend to them anyway.
Why should banks want to lend to anybody? Lending entails risk. Consider how much better it is to have the federal government simply give the banks money. No risk, plenty of profit.
On the other hand, what exactly is the point of having banks which don’t make loans? Isn’t that what banks are for? If they don’t make loans, are they still banks, or should we call them what they really are?
Parasites.