Observations On The Aftermath Of The Artificial Recovery From Dean Baker
Dean Baker, Co-Director of the Center for Economic and Policy Research, has put together a simple yet comprehensive presentation on a topic Zero Hedge has discussed in the past: how the demographic shift in the US will mirror the spender-to-saver transformation of an aging Japanese society, and as a result lead to an accentuation of the economic crisis into the double-dip phase, should all the artificial, one-time stimulus actions be phased out. For all those who think that a "new normal" with unemployment straddling double digits for years to come will be conducive to growth, think again. And after today's failed referendum on Obama's healthcare policies, America's immediate future will be focused on two simple propositions: [yes/no] on stimulus and [yes/no] on Q.E. 2. Everything else will be smoke and mirrors.
The factors that will determine real economic growth, and not doctored GDP numbers will be the results of the following:
- A saving rate rising back to normal levels
- A continued decline in housing wealth
- Savings-encouraging demographics
- Limited consumption due to persistently high unemployment
- Limited investment due to excess legacy overcapacity
- Additional economic uncertainty due to overvalued currencies
Americans are shell shocked from the events of the past two years, and no matter the amount of propaganda or attempts to flood the system with cheap credit (which is not really working as banks refuse to lend out as much as before due to allegedly higher credit standards), the savings rate is going much higher.
As further bad news, the HELOC piggy bank is now shut down indefinitely: as Baker points out, "the housing bubble has only partially adjusted" for the following reasons:
- Real house prices are still 15-20 percent above long-term trend
- Vacancy rates are at record levels
- Continued high unemployment
- Flood of foreclosures (2 million a year)
- Factors temporarily supporting house prices will be removed
- Fed purchases of mortgage backed securities (March)
- First-time homebuyers tax credit (April)
- Tighter standards at Federal Housing Authority
- Tighter standards at Fannie and Freddie
Most notably, the demographic shift will take out even more money out circulation and into deposts.
- Baby boom cohort is in its peak saving years (ages 46-64)
- Defined benefit pensions are disappearing
- Most have little savings
- Median 45-54 -@$50,000
- Median 55-64 -@ $60,000
- Housing equity vanished with crash (Many underwater)
- Median 45-54 -@$30,000
- Median 55-64 -@$70,000
- Proposals to cut Social Security
- Seniors face large and growing health care expenses even with Medicare
Further complicating matters, the one certainty associated with the Obama regime, high unemployment, will persist:
The biggest problem facing new expansionary programs is that old excess capacity still has to be absorbed. After all, the "slack" in the economy is why the Fed is not raising rates. Or so they say.
- Retail, office, and hotels all hugely overbuilt in boom 2005-2008
- Capacity utilization in manufacturing 67.6 percent (Oct.) – near post-depression low
The dollar, whose traditional negative correlation with the market has now been completely obliterated, will also be a factor in light of the dollar's overvaluation against Chinese currencies.
- U.S. deficit with China is continuing to rise
- There is huge uncertainty over future exchange rates
All this implies to Baker that growth in the U.S. will certainly be sluggish in the future:
- U.S. economy likely to show weak growth for the next several years
- Possibility of further stimulus due to political pressure
Which brings us to the final point - is there more stimulus in stock? While this may well be suicide from a long-term debt funding perspective, economically it may make sense as America is now running purely on the fumes of the first stimulus floodgate release, which in turn was responsible for virtually all the GDP gains in Q3 and Q4. Absent new stimulus, watch out below (and even with new stimulus, at this point nothing in America's centrally planned economy is assured).
The Pros for a new stimulus:
- Slow growth and high unemployment are bad news for the Democrats in 2010 congressional elections
and 2012 presidential election
- Stimulus money can please key constituencies
- Stimulus money can also be tied to long-term goals (e.g. global warming, health care)
And the Cons, which we disagree with Baker on the premise that floating trillions in new debt will be manageable:
- Concerns over deficit/debt raise (unfounded) fears of declining future living standards and financial crises
- projected debt/GDP ratio for 2019 is just 67.8 percent
- low current interest rates suggest little fear in financial markets
- real U.S. deficit story is health care
- Stimulus will result in wasteful spending: bad news in the era of YouTube
Assuming there is some logic to the market, and it is still forward looking, one wonders whether it is looking forward to 2011 and the associated 20x P/E once the double-dip materializes, or to the post-sovereign debt repudiation sometime in the late teens. Or maybe, it is not looking anywhere at all, least of all forward, and is just thrashing about based on what the algorithm de jour says.