Crumbling Cornerstones of Middle Class Wealth
Last night, we went to an awards ceremony for the magazine publishing industry in Britain. Our title, MoneyWeek, had been nominated as “best weekly business magazine.”
It was a sparkling affair…with hundreds of attendees dressed in black tie and gowns. There were showgirls too – dressed in a pert ’20s style…somewhere between the Great Gatsby and the Ziegfeld Follies. Short, tight dresses with shimmering fringes…hats with feathers…the girls served champagne and did dance numbers.
“I see the publishers association has chosen a ’20s theme,” began the emcee. “What is wrong with you people? Don’t you know what came after the ’20s? The ’30s!”
It doesn’t seem like the ’30s…yet. Ask the man on the street and he will tell you what he’s heard on TV: the worst of the crisis is over.
According to Bloomberg: “Wall Street’s largest bond-trading firms say the worst may be over for investors in Treasuries after government securities posted their biggest first-half losses in at least three decades.
“The 16 primary dealers, which trade directly with the Federal Reserve and are obligated to bid at Treasury auctions, forecast the benchmark 10-year note yield will finish the year little changed at 3.58 percent, after rising from 2.21 percent at the end of 2008, according to a survey by Bloomberg News.”
Stocks will keep going up until 2010, says money manager John Dorfman. The “crisis management” phase is behind us, says Jeff Immelt.
But this only reminds us of…1930. Let us wake up the ghosts just so we can laugh at them:
“The spring…marks the end of a period of grave concern…American business is steadily coming back to a normal level of prosperity,” Julius Barnes, Head of Hoover’s National Business Survey, March 16, 1930.
“We are now near the end of the declining phase of the depression,” the Harvard Economic Review, November 15, 1930
In 1930…as in 2009…the average fellow thought the crisis had passed.
“Well…depression wasn’t so bad,” he said to himself.
Is it possible that the credit expansion that began after WWII and lasted until 2007…taking the debt-to-GDP ratio from about 150% to 360%…has contracted in the space of 24 months? Have the mistakes of the Bubble Epoque been corrected already? Are household balance sheets back in balance?
The markets continue their daily hum…
The Dow fell 81 points yesterday. Gold dropped $12. Oil traded at $69. And bonds fell a little – the 10-year yield rose back above 3.5%.
Meanwhile, the economy continues its work…correcting…paring…amputating…discarding…destroying the illusions of the bubble years…to bring things back in balance.
“Gloomy US consumers clip housing recovery,” begins a Reuters article. Another report, at MarketWatch, blamed the gloom on a “gloomier jobs view.”
Housing and jobs are the two cornerstones of American middle class wealth. If they can’t hold the weight of a building economy, there is little chance of a broad recovery in the United States…or Britain.
“Last week, I hosted a meeting of mortgage lenders,” continued last night’s emcee. “They got together all the mortgage lenders in Britain who are still in business. I felt sorry for the guy. All alone…
“Today, a guy goes into a bank and he says… ‘I’d like to talk to you about a loan…’ and the banker says to him, ‘Great…how much can you lend us?’
Net mortgage lending in Britain is the weakest it has been since they began keeping records in ’93. And today’s news tells us that the UK economy is shrinking faster than people thought. In the first quarter, the UK GDP fell by 2.49%.
In Britain as in America, the real economy is falling off just as investors, analysts, and commentators think they see a recovery. They think rising stock prices – US stocks are up 40% since March 9th – predict and precede a growing economy. Stocks, they say, “look ahead.”
People will believe anything. If stocks had been watching where the economy was going they never would have traded at such high levels in ’07. They clearly had no idea what was ahead. Nor do they now.
The images of the ’30s keep coming back. TIME has put Franklin Roosevelt’s picture on its cover, as if he were the man of the hour now.
Americans think they are confronted with a challenge, which…with proper leadership…they will overcome. Madoff has been locked up; now it’s just a question of beefing up those regulators so it doesn’t happen again. The stimulus packages have been set up; now we just have to wait for them to do their work. The Fed has done its part too; it’s just a matter of time until all that money and credit it put into the banking system turns up in the consumer economy.
And Obama…isn’t he just like Roosevelt? Isn’t he taking advantage of this crisis to help build a stronger…fairer…US economy?
If you read the papers you might think so. In The New York Times, Felix Rohatyn, has written a remarkable essay – remarkable in the sense that he has managed to take up 2/3 of a page without saying anything. To help him do so, he calls on the first Roosevelt, Theodore: “He insisted on government’s obligation to regulate the large new business aggregations not so much to address the inequalities of wealth as to police its potential distorting influence…to reinforce the new system, not weaken it.”
Mr. Rohatyn goes on to advise Obama:
The work ahead, he says, “will require difficult and painful actions, which can only come from a multi-year, bipartisan plan, led by the president and the Congress, with the support of business and labor.”
Blah, blah…blah… What he is urging on the nation is more central planning – with no idea how or why central planners will be better at controlling other peoples’ money than people are at controlling their own. And imagine the ‘plan’ that would have the support of politicians of both parties, business interests and labor; it’s bound to be a disaster – like all of Teddy Roosevelt’s plans.
But it’s the other disastrous Roosevelt that catches most looks. The one on the cover of TIME magazine. This was the Roosevelt who, with the help of Herbert Hoover, turned the correction of the early ’30s into the Great Depression. Rather than let the markets quickly correct the mistakes of the ’20s, he tried to put them in a straitjacket. And rather than let people sort out their own finances, he set up a huge bureaucracy to bring Mussolini-style central planning to America. That bureaucracy is still with us – including Fannie Mae, which was instrumental in creating the housing bubble…and the SEC, which was instrumental in camouflaging the risks of in the investment markets.
But there’s no point in going on about the two Roosevelts. TIME and the nation believe they were great heroes who practically single-handed saved the country from destruction. No use trying to tell them anything different.
So, instead…we will continue our lonely vigil – watching to see what mischief these clowns undertake next…and how we might protect ourselves…
What we see is this: the United States prospered in the 20th century not because of the Roosevelts, but in spite of them. The American economy was expanding… it was still young, strong, competitive and prosperous. The empire grew with economic power.
But the years ahead are not likely to resemble the post-Roosevelt years. America’s position relative to the rest of the world is weak and in decline. She is not a creditor, she is a debtor. She is not a low-cost competitor; she is a high-cost competitor. She no longer has a free and flexible economy; she has one freighted with central planners, regulators and busybodies.
There is a heat wave here in London. At least, that is what you would think if you listened to Londoners.
“I can’t take this heat,” said a friend yesterday. It didn’t seem that hot. Compared to Maryland in the summer, it seemed like a winter day. We checked the headlines:
“80 Degrees again tomorrow,” said one. “No relief in sight.”
The Daily Reckoning