Zero Hedge afforded a lot of space to a guest post by Contrarian Investor, a post which I found enlightening, brilliant, iconoclastic and spot on. I lavish these encomia on this piece because it agrees with me. The essence of the CI analysis can be stated simply: we're not getting out of this recession by the same means which put us in this recession; that is to say, we're not going to borrow and spend our way out of it. (Double click on the chart to see the right hand side if truncated in your browser.)
The authors of the study deliver this news: American consumers, that durable engine of the world's prosperity, are up on blocks]'. News for the Chinese: we've gone Chinese on your ass. We're saving money now. We're not using credit cards. We're not borrowing. We're done. Get used to it.
Now it's true that we've arrived at this enlightened, spiritual, non-materialistic, gewgaw-detached state through a rather rude path. We're broke. The reason we're not offloading pallets of flat-screen TVs at the loading ramp attached to our 12-car garages is that we ain't got no money anymore. The nurturing, misting spray of trickle-down turns out to have been a thirty-year old Elephant taking a piss on us. Since the days of Ronnie RayGun, we've been engaged in a group orgy of magical thinking - if we just get rid of unions, manufacturing, real jobs, education and the tax base, we can turn everything over to a gang of wealth-conjurers on Wall Street who can shuffle the debts around and make everybody rich without working. Those who want to do something can learn to make lattes or run a tanning salon, but your real wealth will reside, like you, in your house.
Now how could a program like that fail? Maybe this way: we built up household debt beyond the point where our shitty incomes from our crap jobs and zero savings could sustain it. Then a minor tremor and the entire edifice falls down on our heads. That's the slope above to the right and downward: the diminution in household debt as a percentage of GDP. Americans are getting out from under household debt in any way they can: by being foreclosed upon, by defaulting on credit cards, by cutting back expenses, even (gasp) by paying off their debts. And since unemployment is sky high and wages are actually falling, one can imagine that it takes prodigious effort, and considerable change in habits of consumption, to produce the simoleons to actually make such a thing happen. The CI guys think a range of 70% of GDP is "reasonable" as the new baseline, but they admit they're trying not to be alarmist. Regression to the mean of 53% seems more reasonable (if inconceivable just a couple of years ago), and that implies tons and tons of further deleveraging and deflation in asset prices. Stuff like the Dow Jones, the S&P and your house.
The mainstream, cheerleading economists, such as Paul Krugman (or his Doppelganger), think that the end of the recession, ipso facto, will bring back the "surge in spending" the economy so badly needs in order to "recover." In the first place, the recession "ended" because the government borrowed and spent a lot of money on our behalf. This can be demonstrated quantitatively. Since GDP counts the positive entry of government spending but does not subtract the borrowing necessary to fund it (a credit without a debit; that is, Fantasyland), the feds can say the "recession" is over and number-fixated mainstream economists, who have not looked out their windows at the row of "For Sale" signs on every lawn, think it's all good. Once they see a positive GDP number for a quarter, the recession ends for them and they confidently await the consumer spending to come roaring back, restoring everything to the Old Normal.
This, however, is the New Normal, the economy which exists after RayGun zapped us in the balls with his loony-tunes economic theory, which, in turn, was solely a cover story and pretext for reducing top-margin tax rates on the oligarchs who supported that idiot and the "ideas" in his microgram-sized brain. A primary Axiom of Analysis in the Waldenswimmer world is that one must not analogize between factual situations which are factually dissimilar. In 1965, Americans bought clothing which was 95% Made in America; in 2009, Americans buy clothing which is 5% American-made. In 1965, General Motors was the largest corporation in the world; today, it is looking for its latest government hand-out in order to remain on life support. Instead of a workforce which knows how to mount a flywheel on a 409 Pontiac, we're learning how to make a dry as opposed to a wet cappuccino, and leave the complicated stuff to the Japanese and Germans. Thanks, Reagan, you treasonous bastard.
So the American consumer is not going to come roaring back, not today, not tomorrow and not the day after that. The Contrarian Investor compiled the charts; in the other recessions in the post-War period, the consumer led the way, beginning to ramp up spending even before the recession officially ended. In this case, spending continues to decline even as the recession ends. People don't spend what they don't have when they can't borrow it, and the house-as-ATM era is over. If the Deutsche Bank analysis is correct, by 2011 half of all American houses will be underwater in terms of mortgage. So if Reagan and his "theoretical" heirs, such as Bush I & II, are expecting a normal "recovery" this time, it cannot be led by the 95% of Americans who suffered as a result of their cruel, radical capitalism. That 1-3% who made out under Reagonomics are going to have to do it. So get to work, Fat Cats! Get on down to CostCo and Wal-Mart, grab an aircraft carrier-sized shopping cart, and start spending all that money those low tax rates left you with! We're counting on you. It's your patriotic duty, and we know how much patriotism means to you.
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