Depression Continues Despite Optical Illusions and Happy Talk
Posted by Michael A. Kamperman on July 15, 2009
The global economic depression is not over, not close. Bank of America/Merrill Lynch replaced their market strategist and the new one has called an end to the recession. After the markets closed yesterday, there was jubilation over a much better than expected report from Intel. One talking head on the show Fast Money gleefully declared that Intel is indicating the recession is over. Funny, I must not have studied hard enough in my economics classes. I didn’t know that a near monopoly company that reports a greater than 15% year over year drop in revenues indicates anything good for the economy. Now I do know that some stocks are overvalued and some stocks are undervalued every day in the stock market. Having declining revenues that are still better than expected can be positive for the price of a stock. But declining revenues from the world’s premier microchip company with few competitors is not indicative that the depression is over. To think so because of the happy talk is to be tricked by an economic optical illusion.
Merrill’s old analyst David Rosenberg is not calling for an end to the economic malaise. To me he is one of the few economists out there that seems to really get it. He said “what I see is a forecasting community that continues to make predictions based upon linear data that have been completely interrupted by the secular change in the credit cycle. And I think because this is all so far beyond our own collective experience, the tendency has been to underestimate the role that asset deflation and debt repayment plays in the economy….The average FICO score today now is down to 690 after the borrowing spree of the past seven years. Yet to obtain a plain-vanilla 30-year fixed rate mortgage, the minimum score is 760. For a 15-year HELOC, it is 740. And, for a three-year auto loan, the minimum FICO is 720.”
Two corporate reports yesterday were much more telling about what is really going on in the economy. Martin Marietta said they saw a significant drop in orders for crushed stone to build and repair roads. The stimulus money is not showing up in shovel ready infrastructure projects and the states are cutting back. Yum brands lowered their outlook because of the weakness they see amongst the consumers in their two biggest markets, the U.S. and China. That’s right, in spite of the Chinese government’s stimulus money actually building shovel ready roads and bridges, the Chinese consumer is slowing down. As the consumer goes, so goes the economy. The consumers will continue to sit on their wallet as long as unemployment keeps rising and the ability to borrow money to buy a home or a car remains excessively tight.
Badtux said,
One thing this points out is the failure of the U.S. unemployment insurance system. If people had some assurance that if they became unemployed, their home and car payments would be taken care of, they would not be so reluctant to spend. But unemployment insurance in most states is a joke. For example, unemployment benefits were capped at something like $500 per month in Arizona last time I lived there, which would not have even paid the rent on my apartment.
As a result of the failure of the U.S. unemployment insurance system, if people see a possible period of unemployment coming up because of an economic downturn, they quit spending and instead start saving so that they won’t lose their home and car during that period of unemployment. That puts us into paradox of thrift territory, where individual thrift makes unemployment that much more likely. At this point, even if car and mortgage loans were available on the loose terms available pre-2008, I doubt we would see a serious uptick in demand — people are too worried about their own jobs to spend money on major purchases right now.
What this points out is that a social safety net is not only good for the working Americans who would fall into it during a recession or even a depression. It is also good for business as a whole, since it moderates the economic cycle by keeping consumers spending even if the economy appears to be in a downward cycle, by adding a measure of insurance that would otherwise be achieved by increasing their savings rates (and thus plunging us into paradox of thrift territory). No sane economist should oppose a reasonable social safety net — it is an excellent way to keep demand high even during recessionary periods, and thus an excellent way to prevent a recession from turning into a depression — but, sad to say, sane economists get little face time in today’s government and press
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–Badtux the Economics Penguin
Michael A. Kamperman said,
Many of the unemployed have been out of work over six months. Even with extended unemployment benefits many have recently and will soon lose their unemployment benefits. Washington needs to focus on job creation. I still think my idea to lower the retirement age for Social Security and Medicare to age 60, and to give all of the Social Security recipients a 20% raise is the best form of stimulus possible. It will lead to more spending and it will open up jobs for younger workers.
Badtux said,
Well, yes, but that (the unemployed not spending because they need a job) is a different issue. I was talking about the employed who are not spending now because they fear unemployment. If we had a social safety net that worked, with realistic unemployment benefits that would prevent financial disaster for the unemployed, the employed would not have shut off the spigot of their spending so abruptly. Instead they have shut off the spigot to provide their own “unemployment insurance” by saving instead.
In short, Keynes’ “propensity to spend” is being directly impacted by the poor social safety network here in the United States. While consumer spending is down in the nations of the EuroZone that have a robust safety net too, it is not down anywhere as far as here in the US, because people do not fear unemployment and shut off spending to provide their own “unemployment insurance”. For example, French consumer spending is off only by 0.1% in real terms over a year ago, while in the US consumer spending is off by over 10% over a year ago. To say that this is a major difference is an understatement.