Thursday, May 08, 2008

The Recession is not over - by a long shot

I've been saying that the Recession is only beginning and that there are no real indicators that it is ready to turn around any time soon. Paul Krugman agrees with me. He looked at the details behind the recent GDP report for the end of the first Quarter of 2008
— and it’s much weaker than the headline number suggests (and MUCH weaker than the previous quarter, even though the growth rate was the same.) It’s not just that final sales fell, so that the economy grew only because of inventory accumulation. If you look at consumer spending, purchases of goods actually fell substantially. Only service purchases rose — and much of that was housing and medical care. As Michael Mandel at Business Week has pointed out, those aren’t “really” consumer decisions: housing “consumption” is largely imputed rents on owner-occupied homes, and medical care is mostly paid for by insurance.
Vincent Del Guidiee reports in Bloomberg that what spending there has been has been based on increased credit card debt, and
By category, revolving debt such as credit cards rose $6.3 billion during March and non-revolving debt, including auto loans, increased $9 billion for the month, according to the Fed's statistics.
But consumers can't sustain that. They can't make the credit card payments.
Overdue payments at the six largest U.S. credit-card lenders reached the highest since November 2004, according to data compiled by Bloomberg. An average of 4.11 percent of loans were at least 30 days late in February and March, according to reports filed by American Express Co., Bank of America Corp., Capital One Financial Corp., JPMorgan Chase & Co., Citigroup Inc. and Discover Financial Services.
So consumers reduced the spending they chose to make on goods, leaving merchants with more unsold goods in the warehouse. What goods consumers did buy were largely purchased on high-interest credit cards that consumers are having greater difficult paying.

As I've said before, this is a consumption-based recession. Consumers do not have enough money to increase consumption. George Soros has a new book out, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means and he was discussing it on the Diane Rhem Show this morning. He describes a three-decade bubble that has been based on the dollar as the world's reserve currency.

This corresponds roughly to what I have observed - that workers have not gotten a real pay raise since 1970 so that all increased expenditures by consumers since then have been based on first - the non-working spouse going to work, second - the increased use of credit cards and debt by consumers, and third - the use of home equity as a resource to borrow against. During this same period, all the rewards for increased productivity have gone to the wealthy who do not spend it on consumption.

Soros also points out that this period has been characterized by deregulation of financial institutions and markets along with easing of credit. Soros also says that the deregulation has been a result of the mistaken assumption that economics uses - that markets tend to move towards equilibrium. Instead, he says, deregulation of financial institutions invariably causes extreme boom-and-bust cycles.

The Dot.com bubble was one, as was the housing bubble. But Soros says that there has been an overall bubble that has encompassed those bubbles, and the overall bubble is what is now coming to its end. If this is true, then the fiscal and monetary solutions that mitigated the dot.com and housing bubbles will not work this time.

Since the Fed has already lowered interest rates so low that no further lowering will have any effect other than to increase inflation, Soro's explanation may be a good one. Unfortunately, that means that the American economy is going to be restructured to meet new demands, and that means time and disruption.

I am describing what he said this morning on Diane Rhem. I have not yet read his book, although Barnes & Noble have already charged me for it. Unfortunately I do not recall his solutions. But I present this because it confirms my belief that this recession is going to last a while. As usual, the optimistic statements from the Bush administration are not to believed. It will NOT be resolved this year or next.

The next few years are going to be difficult ones economically. Until workers start getting real wage increases, all the financial manipulations are going to go for nought. They are primarily ways of spending tomorrow's income today, and now we are seeing that much of what we were spending and depending on repaying tomorrow isn't going to be there to make payments from.

One final comment - the conservative free marketers will propose giving more money to banks and businesses so they can create more jobs. But this is a Recession caused by a shortage of consumption, not by a shortage of investment. There is plenty of money for investment! Businesses are cash-rich - and have been since 2001 - because they have too few good opportunities for investment inside the U.S.

The current Recession - the worst since the Great Depression - is in part a direct result of the union-busting that has been permitted since Reagan broke the Air Traffic Controller Union. This has had the result of shifting all the profits from increased productivity from workers to the investors. Since the workers need income to act as consumers, the economy is damaged when workers don't share in the increased productivity of businesses where they work.

There is no quick way to solve the current economic problems. The economy is going to have to be restructured before there is a turn-around. That's going to take a while. Years.

The bill for the Reagan Revolution has come due, and its a big one, with no benefits for anyone except the very wealthy who mostly inherited their money instead of earning it.

4 comments:

sbvor said...

Richard,

Paul Krugman and The Old York Times can fantasize all they like, but:

It is increasingly unlikely that we are currently in a recession.

Get some objective and quantitative facts, reliable economic forecasting and some much needed perspective here:
================================
The Recession of 2008 That Wasn’t?
================================

Richard said...

All of that blather misses the important point. Where is the consumption demand going to come from to maintain the economy at its current levels, let alone cause it to increase?

70% of all demand is consumption, and the remaining 30% is mostly investment and some government demand. The investment will be for replacement of worn out capital, but new investment will be dependent on foreseeable increases in consumption, and that just can't happen until workers start getting more income.

For at least three decades the income created by increased productivity has gone to the wealthy and super-wealthy, who contribute a negligible amount to consumer demand.

In the meantime the consumers have had to find additional sources of spendable money. First it was the second worker in the household, then it was extended credit and the flood of credit cards we have seen. After that it has been withdrawing homeowner equity which morphed into the housing bubble when normal equity growth proved inadequate to keep the fiction of growth continuing.

Payment for the work and additional productivity of labor, the bedrock of consumption in a thriving economy, hasn't been part of the system for three, almost four decades. The current economic travails are just the easily anticipated occurrence when all the tricks used by the fed to pump up a poorly structured economy run out.

This is the Latin American economic model, and Latin America is not particularly noted for its strong economies, great middle classes, or its stable democracies. China is making economic progress by building a thriving middle class. America is in the meantime destroying its middle class while financializing the overall economy.

Look back in a year and even the conservatives and wall street bankers will admit we are in (by then, were in) a Recession. It will still be going on, and they won't be able to support the blather you refer to. The evidence is all there right now, but they and you simply don't want to see it.

Instead you and they are putting up a smokescreen of financial blather to hide from the truth. The truth is tht the conservative revolution is in the process of destroying the American economy as we knew it, and the current recession is just one more - clear and strong - signal that we are in trouble.

That's the perspective you are missing.

sbvor said...

Richard,

1) Once consumers figure out all this fear mongering from the media was grossly exaggerated, they will regain their confidence and resume their spending. And, just as The Conference Board predicts, the economy will continue to grow throughout 2008 and there will have been no recession at any point in 2008.

2) Here are some of the facts which shoot down your class warfare arguments.

3) Here are the quantitative facts regarding wages and the Middle Class:

A) Inflation Adjusted Hourly Wages (for the working person).

B) Continuously Compounded Annual Rate of Change in Inflation Adjusted Hourly Wages (for the working person).

Comparing pre-LBJ to post-LBJ, there was a slight slowdown in (continued positive) inflation adjusted wage growth from roughly 1965 to 1997. Blame the tidal wave of Federal Entitlements imposed by LBJ in the mid 1960’s, starting with Medicare and Medicaid.

But, trends have been improving since 1997 (after Republicans took control of Congress in 1996). Will the positive trends continue if Dims control both houses of Congress AND the White House. No, they won’t. But, the media will, as usual, lie and distort. And, the terminally gullible will, as usual, believe every word of it.

Next unsubstantiated smoke screen?

sbvor said...

P.S.) I’ve heard this bogus argument often enough that I devoted a blog entry of my own to dispelling the myth.