Lately the Mainstream Media and Mainstream Economists have been bombarding us with the "happy talk" that IF there is a recession, then it will be short and shallow. Just today, Barrons released its latest "Big Money Poll" of institutional investors, the majority (55%) of whom believe the worst is over for stocks. In addition, an even larger majority believe the Fed's actions to date will be enough to improve the economy by next year. So, even at this late date and with all of the credit problems that have occurred so far, there are only a few forecasters on the "fringe" who are predicting something worse than a mild recession (if any recession at all). Of those few in the reality-based camp are: Nouriel Roubini, the most bearish of well-known economists, who sees a "U-shaped recession" (as opposed to a short, shallow 'V'-shaped recession); author Michael Panzner who sees Financial Armageddon (the title of his book); and of course EWI who, like me, are predicting a severe economic depression.
Anyone reading this in the future has to understand that in the current "marketing-based pseudo-economy", reality and honesty are strictly out of fashion. There is tremendous peer pressure among economists to cede to the permanent optimism camp. Anyone who wants to be featured in the Mainstream media cannot afford to be labeled a "perma-bear" for fear of being left in the corner to play by himself. Clearly, Faux News "reporters" (Infotainers) working for Rupert Murdoch, are by far the biggest bag of liars this side of Stalin-era "Pravda"; however, even CNBC Infotainers come to work wearing pom-poms and cheerleader outfits, ready to spin every story into a sugar-glazed pile of dumbed-down bullshit.
To what extent this “happy talk” from the leading networks is a result of pressure from Corporate advertisers vs. public demand for sugar-coated news, will be subject of much debate when this charade ends. My own sense is that at this time in history, the public at large has no stomach for true “reality-based” news, because it’s too depressing (i.e. realistic). The only place these topics are discussed openly is right here in the blogosphere.
Back to the topic at hand: IF one could find an economist who didn't have his head shoved up his ass so far he thinks it’s night, then this objective economist would undoubtedly consider the current litany of economic issues to be THE WORST COMBINATION OF FACTORS to come together at any point in U.S. history. Since this crisis first got really rolling last summer with the sub-prime meltdown, things have only gotten much worse, not better.
Below is a reality-based status update on the major issues we are facing - issues that apparently most economists seem to think are no big deal:
1) Negative Savings Rate:
This is the FIRST TIME in U.S. history that the savings rate has gone negative during an expansion. In addition, the last time the savings rate went negative was during the last depression i.e. as people pulled down their savings to buy dog food (not for their dogs). Entering an economic slowdown with an already-negative savings rate is sheer suicide - it means households have no economic buffer and the slightest financial problem can bring bankruptcy.
2) Housing Collapse:
Even I am tired about hearing about the housing collapse, yet suffice to say it's getting a lot worse not better; and as one would predict, it's starting to drag the entire economy down with it. Just this week consumer confidence hit a 26 year low.
There is a steady flow of bad news about the housing sector and for those gluttons for gory details here is the best source of information about the worsening crisis.
3) Credit/Banking crisis:
Also unprecedented in U.S. history is a major credit/banking crisis starting BEFORE a recession. Normally, credit crises are precipitated BY recessions (i.e. as bad loans pile up from the economic slowdown). Not this time - this time we are already well into a credit crisis and on top of that we are now going into recession, which will only massively accelerate bank losses. Meanwhile, round one of the crisis started last year with the big bank and brokerage firms. These big banks and brokerages securitize most of their assets and are required to mark-to-market on a regular basis in tandem with the credit market fluctuations. Smaller banks by contrast, hold most of their loans directly on their balance sheets (unsecuritized), so those losses are taken over a longer period of time in the form of continually increasing write-downs.
The FDIC already predicts over 100 banks will fail in the coming year, and that’s putting on a “happy face”. Imagine what they are really predicting…
4) Unprecedented public and private debt levels on an absolute and relative basis
Combined debt for all levels of government, businesses and consumers is roughly $50 trillion. If you add-in the unfunded liabilities from Medicare and Social Security, that adds about another $50 trillion. Altogether that’s $100 trillion - or $330,000 for EVERY single American!!!
I hope the Chinese take Mastercard…
5) Massive Trade Deficit:
This country is no longer competitive, so we just keep borrowing, which gets us back to point number (4)
6) Two Never-ending Wars:
Two extremely expensive wars (occupations – call them what you will) in Iraq and Afghanistan – neither of which has any prospect of ending
7) Energy Crisis:
This week oil hit $119 a barrel and, as I wrote here, the only thing that will stop it from going higher is a major recession.
8) Commodity inflation with slow growth
In the ‘70s they called this Stagflation, but that term is not really appropriate, because wages are not rising as they were back then. So today’s situation is far worse for average Americans – it’s higher prices in combination with lower wages - I call it Decimation…
9) Fed is out of ammo
Short of printing physical money, for the time being, the Fed is out of action. As I indicated, Bernanke has done yeoman's work propping up lenders, but in a credit deflation, there is only so much he can do. Once credit collapses, then they will look to print hard currency. Needless to say, at that point the gap between rich and poor in this country will get much smaller - but not because the poor will be getting any richer…
That's the reality check update for April 2008. Either I am completely full of bullshit and making this all up, or the average economist out there is completely out to lunch. It's hard to imagine so many being wrong and so few being right at this juncture, but that's often what happens at critical turning points in history.
