A lot of the focus of the punditry is when we'll recover - personally I think it's a bit of a moot point. What I'm thinking through is not when, but what the recovery will be in America. I posted many of my thoughts in [The US Economic "Recovery"], but essentially a lot of cross currents are forming which should make for a very interesting 5, 10, and indeed 20 years ahead.
Much of the current recovery thesis is based on (a) government spending replacing private enterprise and (b) coaxing Americans back to their old habits. But I'd like to ask what are "old habits?" - most of us in our 20s, 30s and 40s know one reality; our context of history is very different than one who has a longer precedent to view. So let's take a few steps back and I will give you some insight on why I think we're not going to be going back to the binge we've just left for a long time, and why I appear to be so negative on any near term "recovery" relative to reaching anywhere near the potential of the economy. No we won't be at a -5% GDP figure quarter after quarter for years on end, but what will the "recovered" America look like?
There are many global structural changes happening slowly but surely [Do the Bottom 80% of Americans Stand a Chance?] which I believe will bring the standard of living (and wages) into more of an equilibrium across developed and developing countries. For humankind, that is a net positive, since many on the globe live in stark poverty, much of it based on nothing more than what mother they are born to, and in what country. But for those at the top of the totem pole, it will mean a harsh readjustment downward for many within the society.
I believe this is not a prediction, that in fact it has started in the lower rungs of society and it's been working up the food chain to the middle class. I won't go into my long term predictions for the country, but I believe we will be "forced" into a more European model (safety nets, healthcare, higher taxes) as job security is in a constant state of threat and as capital floods to the lower-cost countries safety nets, healthcare, higher taxes. It has to happen here eventually because many more pieces of our society will be subject to the forces of globalization (both good and bad) and demand protection for our living standard. This is a lot bigger than a "recession" - the recession is a symptom of the national disease.
Median wages have not increased (adjusted for inflation) this decade, and the stratification of wealth has become more concentrated in the top percentage than any time since the 1920s. Political dogma has thus far allowed this to happen as the citizenry has been busy pointing fingers at each other rather than looking at why these things are really happening. While the reasons could be debated, the facts are the facts. I believe the past decade, many in the country have been compensating for their lack of wage growth with leverage (borrowing). The house ATM was just the apex of a credit bubble that has been building for a long time and obviously peaked in the middle of this decade.
I'd like to present the graph below which shows the historical saving rate of Americans since the 1960s. (click to enlarge)
As you can see, Americans used to save. They used to act quite near our European and Asian friends
People keep asking when Americans will go back to their old ways, as if saving 0% or 2% is our old ways. Not really - that's our most recent ways. But let's peel back the onion.
In the 1960s, Americans typically saved in the 7.5% to 10% range. A bit below where Germany has been the past 15 years.
In the 1970s, Americans typically saved in the 8.0% to 12% range. A bit below where France has been the past 15 years.
Then something changed in the mid 1980s - call it culture, call it entitlement, call it lack of financial literacy - call it what you may. The reasons are immaterial for our purposes, we just care about the raw numbers. After being over 8% for just about all of the 1960s and 1970s, the savings rate has never hit that level since 1987.
Between 1987 and 1993, Americans typically saved in the 6% to 8% range.
Between 1994 and 2000, Americans typically saved in the 4% to 6% range.
Uncle Alan Greenspan's "easy money" policies (year 2k baby!), 9/11 easy money policies, 0% financing for cars, furniture, deregulation of financial institutions, crazy mortgage - all that marked 2001 onward. The above mentioned stagnation of median wages (inflation adjusted) for many in the bottom 2/3rds of the country also was a trademark of this decade. Jobs that were not outsourced could be "threatened" with such, wresting power away from workers - and inflation began to soar in health, tuition, all the normal culprits.
Our saving rate plummeted to 0-2% for much of the decade, famously dropping to a negative rate at the peak of the housing boom in 2006. Literally we spent more than we had as a nation of individuals.
Didn't globalization and wage pressures affect Europe just as much? Why did their savings rate not plummet just the same to compensate? In my opinion, part is culture (Germany/France versus UK) and part of it is workers protections. In the "socialistic countries" (the ones not recently named U.S.A.R) worker protections and unionism are high. It is very hard to fire, so companies are reluctant many times to hire. But once your "in" you're gold - sort of like public school systems and the teacher unions. So wage pressure is lower.
Contrast that to the more open UK, which has modeled itself after the US (while retaining safety social nets/healthcare for all that the US lacks); its saving rate has also plummeted and corporations tend to run more free with the ability to hire/fire much more readily than those countries on the mainland. That's part of the "flexibility" the dogma tells us is necessary to "react to globalization".
Now the interesting case study that supports my theory is Japan. They used to be very high savers with solid worker protections. But now they also have embarked on U.S. style worker rights where humans are commodities. I won't pretend to be a Japan expert, but the more I have been reading the past half year, the more I see they have adopted a lot of principles that make their corporations "flexible" over the past decade - i.e. huge influx of temporary workers, birth of a generation of working poor - i.e. similar to our service industry, huge growth in the income gap, pulling back benefits, et al. As we saw in [Oct 28: Pooring of Japan Too?]
- The 29-year-old laborer is one of a burgeoning class in Japan -- the working poor. The number of Japanese earning less than $19,610 a year surged 40 percent from 2002 to 2006, the latest data available, the government says. They now number more than 10 million.
- "It is unprecedented to see such a widening income gap in Japan," said Yoshio Sasajima, economist at Meiji Gakuin University in Tokyo. "Our society is definitely becoming a class society."
- In the 2000s, that was followed by a round of free market reforms that widened the disparity between haves and have-nots. (sounds vaguely familiar)
- A key to the growth of the working poor has been the explosion in temporary employment agencies, which allow corporations to take on labor without having to pay benefits -- and then unload workers at will. (sounds vaguely familiar) "Instead of hiring costly, full-time employees, companies are bringing in cheaper, part-time workers as part of their cost-cutting efforts," said Yasuyuki Iida, an economist at Komazawa University in Tokyo.
So as these "reforms" have taken hold in Japan (strengthen corporation, weaken worker), the saving rate has plummeted from 12% to 6%, and now from 6% to 2%. People try to maintain "old lifestyle" with "new compensation" which is less than old compensation (inflation adjusted) - hence savings deplete. Those are my theories, and of course they can be argued. Eventually I think as more U.S. workers become disenfranchised and lack of stability engulfs the working class as they compete with wage earners in developing countries, a major backlash will happen in this country and indeed others that have adopted the "dog eat dog" capitalism structure. Perhaps it's fruitless for workers, and most corporations will move plants to locales were labor is cheapest - I don't know. But it will prove to be a very interesting era ahead.
As Uncle Ben Bernanke sits here and destroys American savers (just imagine the 65+ crowd trying to live on these CD interest rates), the master plan is to return Americans to spenders so we can kick the can down the road. But what if Americans do what is best for themselves (save) and not for the "service based economy" (spend like drunken sailors)? What happens if we don't return to 0 to 2% saving rates but seeing the increasing lack of job stability and stock market shenanigans (where many of our retirement savings are), not to mention a country that should have anywhere from 1 in 4 to 1 in 3 people "underwater" on their homes by this time next year - turn back to our real "old habits"?
A 10% savings rate? Could it be possible? What would that translate to in real dollars?
We have about a $13 Trillion economy, with about $10 Trillion in private spending. (one could quibble the exact number, but it's within a degree of that and $10 T makes for a nice round number). A 10% savings rate very easily translates $1 Trillion in savings. A 8% savings rate translates to $800 Billion. Even a 5% savings rate translates to $500 Billion. All these numbers exceed the next stimulus plan on an annual basis, which means all the government would do is borrow from our grandchildren, layer more debt on them (that we need to eventually pay) to offset money from our "old economy model" (of the past 6-8 years) as Americans, in self preservation, move to the real "old economy model" (of the past 40 years).
I don't know if this is the outcome - I am a saver by nature so I don't understand how many people live the way they do. I don't know how their "sentiment" will change or if they will repeat old mistakes in the near term. I'd like to think they would be scared straight after seeing what is happening now and a saving rate re-emerges nearer to historical norms. That would be a very healthy long term situation, but a horrible one for an economy which has been transformed to rely on spending over our heads. I do know a great many Americans are retiring (or trying to) with little to no savings - and what many had was in their homes, which are falling in value for the first time nationally since the Great Depression.
I wonder how these people will "spend" at previous rates when they will struggle just to subsist. I continue to believe that even at 0% interest rates, many people, with depleted savings simply won't want more debt at any cost; they will be too busy trying to rebuild balance sheets depleted by a decade of global forces/bad behavior. Which leads to my gloomy view of any economic recovery that rekindles images of the middle part of the decade. I don't think a Japanese style decade plus hangover is out of the question.
If I am correct, consumer discretionary items will continue to suffer far deeper and longer than the pundits and hedge fund thesis algorithms currently posit. I do not believe these pundits and PhD programmers at hedge funds understand the median wage in America is about $30K (meaning half make less). Many declaring impending recoveries probably make this wage in a month. There are two Americas, and the punditry does not live on Main Street. Unfortunately the non punditry portion of 2 Americas need to drive this economy.
If I am correct, my bearishness for retailers (non-grocery, non-essential) will last much longer than those who run up said stocks on "early cycle" thesis, as they will do repeatedly in 2009 (as they have done prematurely multiple times in 2008). We are overbuilt in America - in almost everything; "right sizing" will be a long, painful process and those who dream this all gets solved in "6 months" due to easy money need to look back at our history. Remember, our country has SIX times more retail space, per capita than any other nation. If we take $800 Billion to $1 Trillion of spending (8 to 10% savings rate returns) out of the economy and into personal savings on a permanent basis - what do you think happens to a lot of that space? Will we approve 2 year, $800 Billion stimulus plans every 24 months to offset this? (kick the can forever?)
The case against me? Within 6-12 months, companies suddenly decide 6-8% wage increases are the new 3%. Or the US consumer will be back to their overspending ways and the small rebound in savings rate (2%ish) will retrace back to 0% or negative. The irony is that is not a positive outcome - it's just kicking the can of an eventually down the road. Which is what we specialize at; and our government is encouraging it.
- The good news for retailers reeling from the holiday sales season is that 2008 is almost over. The bad news: The fallout in 2009 could be worse. This year's retailing slide -- when stores were forced to cut prices to convince wary consumers to spend -- promises to have a lasting impact on the way the retail industry operates. Many retailers are rethinking how they do business, as others prepared for a large number of bankruptcies and store closures.
- Other retailers are saying they will trim inventory and reduce the number of suppliers. That, in turn, will cause a ripple effect, prompting a number of weaker manufacturers, small brands and underfunded fashion labels to fail. New retail formats and concepts stores are likely to be curtailed in the coming year.
- "We will have a lot fewer stores by the middle of 2009," says Nancy Koehn, professor of business administration at Harvard Business School. "It's happening very, very quickly because of the financial crisis and the recession." Analysts estimate that from about 10% to 26% of all retailers are in financial distress and in danger of filing for Chapter 11.
Unfortunately we don't have great outcomes either way - it's either take the pain now and re-adjust back to the "old" consumption patterns, or kill savers who acted responsibly while force feeding debtors to take on more... so that we can have the next consumer crash down the road 3-6 years - instead of now.
Until then - we'll stay in denial talking about how things will go back to "normal" in "6 months" as the federal government saves us.