The Great Correction intensifies…
The Dow rose on Friday. The dollar fell. Gold is back over $1,400. And the euro – the world’s most despised currency – is back over $1.40.
A chart circulates, supposedly proving that GDP is now back to where it was in ’07, after falling only 4% in the downturn.
We don’t believe it; they’ve juked and jived the figures.
None of the key components of US GDP have recovered. Housing starts, for example, are running at a million less than they were before the crisis began. Employment is back to the levels it was at 10 years ago – with 7 million fewer jobs than in 2007! Retail sales are going up – but they are still not at the level they were in ’06 or ’07.
So how could the overall economy recover, while the most important parts of it do not?
The real answer: the economy hasn’t recovered. And the Great Correction hasn’t gone away. Instead, the correction is like a hurricane sitting just off the coast. It took a swipe at land, and now, it’s back out at sea; its winds are picking up speed. It’s getting larger…stronger… It’s intensifying.
As we’ve said too many times, none of the problems that led to the crisis of ’07-’09 were corrected. Instead, they were twisted into awful new shapes. They’re still there – swirling around, worse than ever.
Approximately 73% of the economy comes from consumer shopping. So, in order for the economy to grow, consumers have to be able to shop, right? But how can they?
Properly adjusted for inflation, the average wage is lower today than it was in 1973. That’s right, almost 40 years of going nowhere.
Well, hold on…we know what you’re thinking: “What are you talking about? There were some great years for the US economy between ’73 and ’07.”
And you’re right. But they didn’t come from solid, real growth in consumer purchasing power. Instead, they came from two sources:
First, consumers borrowed more. Total debt went from about 150% of GDP to over 370%. The financial industry went wild, sending our credit cards to dogs and dead people…lending money to people without jobs or income…writing mortgage contracts with built-in fuses.
This was not healthy growth. It was not sustainable. It just took “growth” from the future and moved it forward. Want to know why the housing industry builds so few houses today? Easy. It already built today’s houses yesterday. Why is a credit-fueled boom not sustainable? It’s because credit markets go up and down, just like all other markets. When credit is cheaper, people borrow more and buy more. When credit becomes more expensive, they have to pay down their loans and stop buying so much.
Second, during the period ’74 to ’07 more people worked longer hours. The whole family went to work; not just the head of the household. And they worked more hours. This was proclaimed as a great era for women. They went to college. They got jobs. And they had families too. Now, they no longer supplement their husband’s salary. They’ve become equal partners in the household…often, senior partners. The lucky ladies; they get to work two jobs now – one at the office and another one at home!
Up until 2007, the feds could counteract every attempted correction by making more credit available at lower prices. But by 2006, the credit machine no longer worked. The private sector economy was saturated with debt. It couldn’t take any more.
Only the feds could still borrow freely – which they did. In ’09 and ’10, the US government borrowed ALL America’s savings – and then some. Since November of ’10, the Fed has simply been printing money – enough to cover 109% of the government’s borrowing needs during that period.
For the most part, households still can’t borrow…and don’t want to. Unless they are borrowing from the government. All the recent increase in consumer credit, for example, can be explained by the increase in student loans.
Consumers are in no position to borrow…and no position to drive a real recovery. They’re still nailing up plywood over the windows and moving the furniture to the second floor. They don’t have jobs. They don’t have credit. And their houses – which they might have borrowed against – are still sinking below the waterline.
Oh yes, the next big surge of ARM resets, recasts and defaults begins next month.
Pity the poor lumpenconsumer. He was in such a hurry to consume in the bubble years. Now he can’t consume at all. His income is stagnant. His net worth is falling.
And if that weren’t bad enough. The poor consumer’s costs are rising.
Take a look at this report from CNBC:
Cost of Living Hits Record, Passing Pre-Crisis High
One would think that after the worst financial crisis since the Great Depression, Americans could at least catch a break for a while …
A special index created by the Labor Department to measure the actual cost of living for Americans hit a record high in February, according to data released Thursday, surpassing the old high in July 2008. The Chained Consumer Price Index, released along with the more widely-watched CPI, increased 0.5 percent to 127.4, from 126.8 in January. In July 2008, just as the housing crisis was tightening its grip, the Chained Consumer Price Index hit its previous record of 126.9.
The regular CPI, which has already been at a record for a while, increased 0.5 percent, the fastest pace in 1-1/2 years. However, the Fed’s preferred measure, CPI excluding food and energy, increased by just 0.2 percent.
Bottom line: The cost of living for Americans is now above where it was when housing prices were in a bubble, stock prices at a record, unemployment low and consumer confidence was soaring. Something has gotta give.
Bill Bonnerfor The Daily Reckoning
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010.
Approximately 73% of the economy comes from consumer shopping.
Well, more correctly, 73% of the economy GOES TO consumer consumption. (Not COMES FROM).The rest goes to Government consumption and to investment by business and government.
It (GDP) gets created by government and industry .
And why shouln’t most of the GDP GO TO consumption? That’s why we create stuff, to consume it and enjoy it. Some we invest in long-lived assets to consume in the future and to create future goods and services. It’s ultimatly ALL about consumption.
If there is no hope for a consumer-driven recovery then there is no hope for a recovery at all.
Consumption is the raison d’etre for the economy to exist.
Thank goodness I am here to explain this.
Why else would we have GDP if not to consume it?
So of course, Consumption drives GDP. It could not be otherwise.
I think, therefore I am.
(Unless I’m not thinking, usually that’s when I’m posting.)
Reckon on that, Bill.
Thank you Mr. Bonner for the great article. Quite right, something has to give – one cannot have their wealth bled away indefinitely without a concession. I think we as a nation are headed to a much lower standard of living. We will live on less, spend less, and perhaps thankfully obtain less credit.
Maybe with this fall in financial status will come a healthier lifestyle, closer family and religious ties. The big question is…will our government accept the permanent loss of the spendthrift middle class and change as well?
Hey investors friend, what in the world is the point, or more precisely, so what? Why don’t you loan me a couple hundred thousand so I can go on a Charlie Sheen bender and let it GO TO some consumption.
Today, housing is in the dumpster. Food prices are soaring as are gasoline prices. And Gallup says that real unemployment numbers are back to 10.3% not the 8% number libs were praying (if libs pray) for. The budget battle continues and we still need huge tax, regs, and spending cuts. We need an energy policy which will use our domestic resources in oil,gas, coal, shale , with fracking if necessary and the building of safe nuclear plants. Obama and his Dem ilk cannot provide that. He is neither a CIC or a CEO. 2012 cannot come too soon for all Americans, investors ,business people or workers or not.
I hear you! That’s why you need to read the upcoming book from Tom Friedman. This magnum opus is tentatively called “Reform.”
“writing mortgage contracts with built- in fuses”
Bill Bonner at his best.
Stocks just soared again after the US Fed and G7 printed more prosperity !
Printing pressed full speed ahead.
Who needs reality anymore?
None of this is reality driven. GDP, Inflation index, unemployment figures, etc, etc. All adjusted and finessed to support the perception that we are doing better than we are. We have entered the age in America when pundits and “experts” can say whatever they please, without fact checking, without accountability. If Mark Twain were alive today he would have already moved out of this country for the sake of his own sanity.
The problem is the 73% figure as stated in this commentary. Consumer spending, which includes the ‘service industries’ is NON-PRODUCTIVE use of capital. GDP could also (and must) include tangible goods produced for export. That is how ‘fresh money’ is brought into the economy. Without export, money simply sloshes around domestically until it is skimmed into extinction by government taxation and concentrated by importing businesses such as Wal Mart and Exxon Mobil. Government spending is no more than redistribution, and when it exceeds the domestic revenues, it contributes to either external borrowing or massive printing. In either case, whatever wealth is left in the economy is siphoned off and accumulated by a small group of ‘influential’ individuals.
The US is experiencing this at the moment; and the outcome isn’t going to be pretty.
No enomony can exist on 73% consumption.
Surely it has to produce something and export something.
Digby Green, think about how much the Earth has ever exported off this planet and you will realise the absurdity of your position.
Someone DOES produce something. Then it is consumed. That is why we produce things… to consume.
So if we are forced to undergo some sort of GOP driven ‘austerity’ won’t that put the economy even deeper in the hole? What about the relative distribution of wealth, doesn’t that play a role in consumption?
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