August 15, 2009

Sure, things can get worse

I remain in continual awe of "Tyler Durden" at the zerohedge econoblog, who is an amazingly fecund and trenchant analyst (pretty good adjectives, huh?) of the American economic and financial market scene. Durden (his nom de blogue borrowed from the main character in "Fight Club") does not simply repeat the same tired stats one can read everywhere, e.g., the American economy is 70% consumer spending, we borrow a lot from China, et cetera. By now everyone knows that stuff, and yet blogsters like Jim Kunstler simply use those stats over and over, dressing up the doomsaying with artistic, novelistic writing (entertaining, to be sure) and leave you about where you started.

Not so our man Tyler Durden. His latest Sunday reading (and like many who read his blog, I don't know when the man sleeps) undertakes an analysis of a question I was wondering about: given that U.S. society is now so economically stratified, with both wealth and income so heavily skewed toward a very small ultra-rich investor class, shouldn't any discussion of an American "recovery" take such obvious data points into account? That is, recovery for whom, and how? Tyler to the rescue:

It takes more than one reading, but it's all pretty much there. President Obama and his fearless band of economic tinkerers really have no good options at this point, and it relates to this stratification and imbalance within American society. Things are so messed up, due to the relentless "financialization" of the economy and the systematic destruction of the former middle class, that we've arrived at a point where the top 10% of the population (the Upper Class decile) and the Middle Class (the middle 50%) account for about 42% and 46% of all consumer spending, respectively. The poor (the bottom 40%) only account for about 12% of consumer spending. The Middle Class, however, carries about a 200% leverage of debt to net worth, substantially above the 130% national average, and about 50% of all of the net worth of the Middle Class is tied up in residential real estate, a declining asset base (versus 25% for the upper decile).

Add to these data the observation that it has been the middle and lower end of the residential real estate market that has been hammered most senseless by the economic downturn and you arrive at the salient point: it is really only that Upper Decile which is in any shape whatsoever to "resume" the American consuming orgy which drove the economy in its "boom" years (and made Asia the manufacturing colossus it was). The Middle Class is in deep debt, with heavy unemployment, and with its home ATM system (equity borrowing and re-fi money) completely on the fritz, as larger and larger percentages of Middle Class homeowners see their home values sink below the mortgage debt. The big Obama stimulus was simply palliative, designed to forestall disaster. The stimulus spending and all the bailout money (which began under Bush) do have the implacable effect of increasing the national debt and yearly deficits by trillions of dollars, and it becomes inevitable that at some point Congress is going to have to substantially raise taxes to deal with the deficits, if only to make debt service payments. Yet increasing marginal rates, much as I hate to admit it (being a kind of populist), will slam that Upper Decile where the only slack in consumer spending can be taken up, given the pathetic stratification we have allowed to take hold in this country over the last thirty years or so.

So there are really no good options, which is often where the Designers of Perpetual Motion Machines find themselves at the end of their efforts. The Middle Class feasted for a long time oncheap credit made possible by easy money flowing onshore from Manufacturing Asia and from the Petrostates. That much we know; it is now part of the American Economic Catechism. That game is over; we are fortunate that China and the other investors in Treasury obligations retain any interest at all in buying our mountains of debt, especially at the piddly rates of return available, but they have been captured to a large extent by the huge prior investments they have made in the dollar. But it is simply not realistic to think that the American Middle Class, having lost trillions in equity from the real estate debacle, and with their wages stagnant (a situation which has persisted for a decade), are going to rebound and begin sprees which fulfill their 46% of the national obligation to Buy Stuff to keep the economy going.

I always thought that the MBS (mortgage backed security) disaster, and the "toxic asset" problem generally, was not really the efficient cause of America's economic reversals. More a case of whistling past the graveyard, because if that's all it is, then a few simple fixes (TARP, TALF, some other acronym) would take care of it. Rather, I thought the MBS craze was sort of the final orgy before the lights were turned out. The Middle Class, struggling to survive in an economy that required ceaseless consumption and materialism to keep things going, were given the opportunity by Wall Street Banksters to Go All In, to hock it all, to take debt right up to that ceiling where it was just barely affordable based on income, and then way beyond. The fees and commissions were earned at the front end by Goldman Sachs, Merrill Lynch, JP Morgan Chase, Lehman Brothers, Bear Stearns, Countrywide, Bank of America, Washington Mutual. The pain was reserved for those who signed the promissory notes.

So that's now where we are: the Morning After the Party, and the floor is littered with empty bottles and there are plates of guacamole going bad and the sink is filled with dishes and there's a Repo team out front hotwiring cars. The Middle Class folks are tapped out, the poor were never much in the game to begin with, and the Upper Decile are simply playing games with all the taxpayer money they were given in an effort to swipe what's left. Bernanke's liquidity injections (money printing) have found their way into the stock market, but this isn't real prosperity and it will not endure past the end of "Quantitative Easing" (QE) which ends next month, according to Bernanke, because of all the "green shoots" in the housing sector (uh-huh, right). At some point we have to deal with the reality that the Recession may be "over" in the sense that GDP stops contracting, but that only means that the economy has reset at a substantially lower level of activity and prosperity. It does not mean a return to things as they were in mid-2007. Meanwhile, the banks are zombified with bad debts (held at unrealistic mark-to-fantasy levels to conceal the truth, FDIC is bankrupt, and the Fed and Treasury are scrambling desperately to keep the T-Bill auctions going (playing all sorts of games in the process) to hold the creditors at bay.

The situation is simply too tenuous to imagine that more rude shocks are not in store. It's indeed possible that in a year or so we'll see where we are now as the Good Old Days.

I think we're going to be stuck in the doldrums for a long time, until we recognize we can't get out of a gimmicky economy with more gimmicks.

1 comment:

  1. hammerud2:44 PM

    From what I have been hearing from various sources is that the economy is gimmicky because it is based on a faulty foundation, a Central Banking system using Keynesian economics. The result has been the tech bubble, the housing bubble, and a massive loss of wealth. The whole thing is a house of cards, and it is collapsing before our eyes. It is frustrating to me that we couldn't have avoided this, but we chose the foundation and are reaping the consequences. Perhaps a currency tied to something tangible would have restrained out-of-control government spending, but restraint isn't something our leaders relish.