It's Not a Recession, It's the New Reality

One of my greatest dissapointments with Obama has been his failure to utilize one of his greatest assets - Paul Volcker.

Volcker has been dead on accurate in his take on our present economic situation. Moreover, he is one of the very few individuals who can say that he stayed true to his principles and did what he knew was right when everyone else was saying otherwise. He took interest rates to the roof and took some serious grief for same but he kept true to himself and it worked. He did what he had to do and that, my friends, is what is lacking in this Administration (and do not even get me started on the last one, though I did vote for Obama, which is why I am ranting). We are not yet willing to do what is politically incorrect. We are not willing to do moves considered socialistic - as in nationalizing banks. Screw the politics in my opinion, we are in all out economic war here and we need to pull out the stops. If some major financial institutions need to go down, so be it. Get it over with and spend taxpayer money cleaning up the mess.

I read Friday that Obama was telling people that in the short term we need to spend some money to help the economy. Like buy a car or some other big expenditure. He noted that we need to pay down debt but nonetheless everyone needs us to spend some money to stabilize the economy.

I have not heard worse horse s*&^ in quite a while. U.S. households, despite losses in home values and massive job losses, are now saving about 5%, which is a major improvement over spending more than we make, which we were doing before this recession. It is a low savings rate compared to where we should be but it is a major improvement over where we were. AND HERE IS THE BIG POINT TO UNDERSTAND!!! We are now returning to a sustainable spending pattern. We are not going back to our old spending ways and, even if we wanted to, cannot do so. Our old spending ways were tied to rising home values - and the ability to tap into them for credit - and the willingness of banks to extend cheap credit to anyone who could fog a mirror. Guess what - those days are done. The new reality will be quite different. Quite different indeed.

So what commentators are discussing as a recession is in my view the new reality. We have returned to where we need to be. Actually, in my view we have a bit further to fall, but either way we are close to where we belong. Unless some miracle happens and millions of jobs are created next week for buyers that do not exist, the U.S. economy is returning to where it needs to be.

This is painful. We have way too many banks, restaurants, retail establishments and the like. We built up for an economy that simply does not exist. We now have to adjust down to reality. We are getting there but the real question is whether we have downsized enough yet. Personally, I think not. Yet, let's assumed we have. If we have returned to reality - to where we need to be - why would the economy take off from here? Why would the stock market continue its meteoric climb? Why?

When you figure out the answers you will understand where I am coming from.

Consider this very carefully. People in the U.S. were spending more than they were making. This was possible because of easy credit and rising home prices. Both those enablers are gone, so the consumers are, without choice, retrenching. Consumer spending was roughly 70% of our GDP. So what happens when 70% of GDP retrenches - you are seeing it.

So the question is whether (a) the retrenchment is done and (b) what happens even if it is done. I doubt it is done but let's assume it is. I still do not see the spending returning to where it was. People now have a new attitude, which is good. People want to live within their means and save for the future. After all, they just saw their retirement accounts roughly cut in half, so the baby boomers are desperately trying to save and make up for lost ground. I for one am maximizing my retirement take and I am turning 50 this year so I am taking advantage of the catch up withholding.

So the question is, do you agree with my view?.

Disclosures: None.

Comments

[Dave Wrixon:]

You are getting it.

When a majority of the citizens of the US also get, that is when, and only then will the crisis be over.

One of the biggest things Obama needs to get his head around is:

Dollar Reserves = Delinquent US Debt

China has realized this. Most of the US's other creditors are beginning to understand the problem. A solution is needed quickly to stop the Dollar pancaking. If that happens in the immediate, things are going to get a hell of lot worse. We will be back to Weimar Republic and perhaps the only way out for the US then will be to go back on the Gold Standard. Not that that would be as effective these days as it would have been nearly a century ago, but it could prove to be the only asset that US could credibly use.

The Germans initially backed the new currency against the Real Estate of the Country. Well, actually they didn't they just said that they did. It was a confidence trick but it worked. It is unlikely that they would have got away with it today.

What are the chances that present US currency will actually get scratched and super ceded with a Gold Backed currency? Well, if something serious is not done almost immediately to underpin the existing currency, like cut government spending, raising taxes or interest rates, I would put it at better than 50-50.

Apr 12 04:10 AM

[investor88:]

Agree its the new reality not business as usual.

Apr 12 07:44 AM

[User 233340:]

Yes, it's that simple. Just before the great Recession. The average family income was about $52,000 and the average home price was over $200,000. Income was supplemented by credit. Until homeowners are in the ratio of 30% housing expense to income we have no equilibrium. Income must increase or housing must go down. The latter seems to be what's happening.

Apr 12 09:06 AM

[ferguson:]

"Reality" is a many headed hydra. The "reality" of human life is that the future is not known with any degree of certainty because we have gained the capacity to change it. The technological revolution of the past 250 years has altered "reality" dramatically, including both extraordinary benefits and extraordinary dangers. The technological revolution of the next 100 is likely to do the same.

The real questions are: 1. whether we have the personal and political courage to act responsibly in dealing with the dangers; 2. whether we have the vision and leadership necessary to create (not just accept) a sustainable "reality;" 3. Whether we have the wisdom and restraint necessary to invest wisely and in the long term interest of life on earth rather than in pursuit of immediate self aggrandizement.

It is of interest that piracy has flowered on the high seas at the same time that it has flowered on Wall Street. I am not speaking particularly about the bankers and financial engineers who have responsible for the housing mortgage fraud, but about the whole culture that has allowed boards of directors, executives and employees to hijack corporate America and divert its productivity from owners (shareholders) to their own benefit.

The question is not whether we spent too much money or borrowed too much. The question is what we borrowed for and what we spent it on. If we had borrowed and spent it on energy efficiency, education and infrastructure, we would be in great shape. Instead we spent it on fat cats, 20,000 square foot houses, $50,000 weddings and $100,000 vacations.

The "new reality" should include a new definition of "The Wealth of Nations."

Apr 12 09:16 AM

[sjgold:]

i agree 100%, what happens next "after" a "new" prosperity (inflation will seem benign and even welcomed in the short term this year) kicks in will be the real problem. We have "too much stuff" and if left alone will take a few years to burn off. With the massive QE coming to finance "more stuff" that nobody will want will just cause massive monetary inflation. There is no way around it.

Apr 12 11:54 AM

[geewow:]

Craig, you speak to logic and common sense. This has been my view, and the view of many others for some time now. I realized this at the end of 2007, when I pulled all my money from the stock market. I was done with it, at that point. I have hunkered down economically, and have been trying to explain it to those I am close with. Many within that group just have not really felt the pain yet, but have realized that saving more is required. This economy has more space between where it is now, and the ground. Unemployment, underemployment, and those who gave up and can't find anything is at 15% and it will climb. Even with the temporary stimulus hiring, new college graduates seeking work will out pace the former. Remember, as people spend less, we will eventually see empty shopping center buildings. That impact will be felt just as is a still pond is disturbed with a single pebble being thrown into it. You have good sense. Keep writing about it.

Apr 12 02:00 PM

[Bobco23:]

I believe I have the answers to your questions.

1) No.
2) No.
3) No.

The world has indeed changed, and given my above answere, it's going to change for the worse.


On Apr 12 09:16 AM ferguson wrote:

> "Reality" is a many headed hydra. The "reality" of human life is
> that the future is not known with any degree of certainty because
> we have gained the capacity to change it. The technological revolution
> of the past 250 years has altered "reality" dramatically, including
> both extraordinary benefits and extraordinary dangers. The technological
> revolution of the next 100 is likely to do the same.
>
> The real questions are: 1. whether we have the personal and political
> courage to act responsibly in dealing with the dangers; 2. whether
> we have the vision and leadership necessary to create (not just accept)
> a sustainable "reality;" 3. Whether we have the wisdom and restraint
> necessary to invest wisely and in the long term interest of life
> on earth rather than in pursuit of immediate self aggrandizement.
>
>
> It is of interest that piracy has flowered on the high seas at the
> same time that it has flowered on Wall Street. I am not speaking
> particularly about the bankers and financial engineers who have responsible
> for the housing mortgage fraud, but about the whole culture that
> has allowed boards of directors, executives and employees to hijack
> corporate America and divert its productivity from owners (shareholders)
> to their own benefit.
>
> The question is not whether we spent too much money or borrowed too
> much. The question is what we borrowed for and what we spent it on.
> If we had borrowed and spent it on energy efficiency, education and
> infrastructure, we would be in great shape. Instead we spent it on
> fat cats, 20,000 square foot houses, $50,000 weddings and $100,000
> vacations.
>
> The "new reality" should include a new definition of "The Wealth
> of Nations."

Apr 12 02:51 PM

[conceptwizard:]

We are absolutely on a new playing fiels and most people won't have a choice anyway, economics will force the changes. The dollar is changing as well as it is insolvent. The G20 meeting enacted the following.
Following the 2009 G20 summit, plans were announced for implementing the creation of a new global currency to replace the US dollar’s role as the world reserve currency. Point 19 of the communiqué released by the G20 at the end of the Summit stated, “We have agreed to support a general SDR allocation which will inject $250bn (£170bn) into the world economy and increase global liquidity.” SDRs, or Special Drawing Rights, are “a synthetic paper currency issued by the International Monetary Fund.” As the Telegraph reported, “the G20 leaders have activated the IMF's power to create money and begin global "quantitative easing". In doing so, they are putting a de facto world currency into play. It is outside the control of any sovereign body.

This is the beginning of the end of the Greenback on a world stage. The countries of the world know this and are implementing changes.

In May of 2007, Canada’s then Governor of the Central Bank of Canada, David Dodge, said that, “North America could one day embrace a euro-style single currency,” and that, “Some proponents have dubbed the single North American currency the ‘amero’.” Answering questions following his speech, Dodge said that, “a single currency was ‘possible’.

In June of 2008, before he was Treasury Secretary in the Obama administration, Timothy Geithner, as head of the New York Federal Reserve, wrote an article for the Financial Times following his attendance at the 2008 Bilderberg conference, in which he wrote that, “Banks and investment banks whose health is crucial to the global financial system should operate under a unified regulatory framework,” and he said that, “the US Federal Reserve should play a "central role" in the new regulatory framework, working closely with supervisors in the US and around the world.”.

I believe its time to remove our heads from the sandpile.

Apr 12 11:25 PM

[fredissy:]

Your view is right on, friend. We have quite a way (down) to go yet. When the average house price is 2 to 2-1/2 times the average wage, we will be about there.

Apr 12 11:27 PM

[sfk:]

i agree, i think the more growth -> more credit -> more growth cycle is broken, and it wont spin as fast as it did before, things will slow down from here

Apr 21 04:40 AM

[sfk:]

the question is, how DO you safe for your retirement knowing the markets will never return to what they were? :)

Apr 21 04:41 AM