10. No innovation. As Nobel Prize Laureate Edmund Phelps told Bloomberg News Aug. 2, “I’m not convinced that there’s going to be another wave of innovation in the offing.”
9. Speaking of innovation, the US is not getting the clever immigrants it used to. Remember that almost half of Silicon Valley during the tech bubble peak was Asian.
8. China will hold its own but its economy is too small to act as a locomotive for the rest of the world (maybe for Korea).
7. The US only can finance its nearly $2 trillion annual borrowing requirement if banks and households buy Treasury securities rather than riskier corporate securities or mortgages. If the rest of the economy starts competing with the Treasury for capital, interest rates will rise immediately and suppress economic activity.
6. The rest of the world is full up on US Treasury securities. Asia won’t dump its existing holdings (it would be the biggest loser) but will try to diversify out of dollars. That’s why the Euro is trading at the ridiculous level of $1.40. There won’t be enough Europeans left working in thirty years to pay taxes to cover the interest on newly issued long-term government bonds. But the Euro has diversification value against the dollar and its parity is exaggeraged. So revert to Point 5: the US is on its own financing the deficit.
5. The US consumer can’t get out of a hole. The bloggers have been all over the personal income data for June, which shows that household finances continue to deteriorate. I don’t need to reiterate what others have documented; see for example:
The U.S. Consumer’s Pain Will Continue Until 2010 by John Lounsbury
Personal Income and Savings: The Double Whammy by Tyler Durden
Where’s the Consumer? by Karl Denninger
4. American demographics look suspiciously like Japan’s in 1990, at the beginning of the “Lost Decade.” Japan’s elderly dependent ratio jumped from 18% to 26% over the 10 years; between 2010 and 2020, America’s will rise from 19% to 25%. In other words, a huge component of the labor force is nearing retirement. They have no savings to speak of and what they thought was their nest egg (home equity) just vaporized. Their savings requirements are bottomless. The combination of demographic and wealth shocks should produce a loop-de-loop in the “marginal propensity to save” such as we have never seen before, except, of course, in Japan.
3. More taxes are en route, to pay for health care, the interest on the federal debt, or whatever. No country ever taxed its way out of a rececession.
2. The rule of law has been severely weakened in financial transactions, through heavy-handed White House intervention into the bankruptcies of the auto sector, through mortgage renegotiation, and so forth.
And Dave’s Number One reason the recession will last forever is:
1. Barack Obama!
Bill Clinton, the last Democratic president, thought in effect, “Let’s get economic growth so I can tax it and pay for all my toys and games.” That was the “New Democrat” approach. Obama knows that if the economy crumbles and he’s the only one left with a checkbook, then everyone has to come to him. Where is the independent base of entrepreneurial business which the Republicans might use to to raise money against Obama? The banks, the hedge funds, the manufacturers, the municipalities, in fact everyone who is left standing in the economy is beholden to Obama. This is Chicago city politics writ large. Leave aside all of the individual things that Obama is doing that harm economic growth: Obama is the first American president (with the possible exception of FDR) to actually benefit from economic weakness.