IPFS
The Eternal Depression
Written by Bill Bonner Subject: Economy - Economics USAYesterday was another exciting day on Wall Street. The Dow rose 131 points…and gold shot up $25 to a new record, $1043.
Investors must be pondering the future.
What will the future look like? No one knows. But investors thought they saw things they liked.
For one thing, there was the Federal Reserve governor from New York,
who told the world that there was no risk of a rate hike anytime soon.
Bill Dudley knows which way the wind is blowing. He said the Fed would
hold money policy loose “indefinitely.”
Indefinitely is otherwise known as “as long as it takes.”
But as long as it takes for what? Ah…as long as it takes until the economy appears strong again.
How long will that be? Ah…maybe longer than anyone realizes.
Yesterday, we were calculating how long it would take to get the
jobless number back down to ’90s levels…that is, around 5%. There are
now about 131 million jobs in the United States…and about 15 million
people who would like a job but can’t find one. Meanwhile, population
growth adds about 1.5 million new workers every year. That means the
economy has to grow at 1% (in real terms) just to stay even with
population growth. Currently, the economy is going in the wrong
direction – backwards. It’s losing jobs…maybe 3 million this year…and
maybe another 2 million or so before it finally stabilizes (who
knows?)…for a total of 20 million jobs down (about 13% unemployment) by
the time unemployment bottoms out.
Let’s suppose, by some miracle, the economy turns around…and begins
growing at 3% per year. That should be about 3 million new jobs per
year. Half of those, remember, are just to keep up with population
growth. So the other half – 1.5 million – gradually reduce
unemployment. Now, let’s get out the calculator…20 million divided by
1.5 million equals a little more than 13. By these numbers you can expect full employment again in 2022!
But what if the economy doesn’t grow at 3% per year? Ooooh…that’s
the problem, isn’t it? All the feds – and practically all other
economists too – are projecting a return to normal. They expect a
‘recovery.’ But what if there never is a recovery?
Heck, yesterday, the central bank of Australia said it was so sure
that everything was going well it raised its key lending rate by 25
basis points.
“Canberra says risk of serious retraction over,” The Financial Times reports.
But they get a lot of sunshine down under. Possibly, the heads of
the Reserve Bank of Australia got a little too much of it yesterday.
Australia is also a supplier of natural resources to China; possibly,
the sun burnt bankers failed to notice that China is a bubble.
Or maybe they failed to notice that China’s biggest customer is broke.
Right under The Financial Times’ article about Australia is the following headline:
“No sign of credit revival for US households.”
“The latest data from the Federal Reserve show consumer credit
declined at an annual rate of 10.4% in July – the fastest rate since
the crisis began two years ago.”
Yes, dear reader, Americans are shedding debt. They are cutting back. They are saving.
Another headline in The Financial Times tells us, “Holiday sales [are] set to fall.”
Hold on. Who makes all that junk that Americans buy for Christmas? And how can China buy more raw materials from Australia when it is selling fewer finished products to Americans?
Perhaps China is focusing more sales on the domestic market; we
don’t doubt it. But you don’t refocus the world’s second or third
largest economy in 12 months. It takes years. And you don’t get this
kind of rebirth without some kind of suffering. The big, old oak tree
has to fall down before the sapling can take its place. And when the
oak falls – it makes one helluva mess.
Meanwhile, President Obama is adding more gin to the party punch. He
says he’s considering ways to create more jobs without a new stimulus
program. Among the schemes under consideration is a $3,000 new job tax
credit.
Hey, why not! They had such great success with the Clunker tax credit…and with the first time house buyer tax credit.
Of course, when you pay people to do things, you can’t be too surprised
that they do them. And then, you can’t be too surprised when they stop
doing them after you stop paying them. Thus, when the Clunkers program
conked out in August car buyers stopped buying. And when the new house
purchase tax credit expires in November, don’t be surprised if house
sales collapse too. So, if the feds are going to pay people to hire
other people, they better be prepared to do it for a long time.
Which brings us back to our calculations. How long will it be before
this economy can walk without the feds clutching both arms? A few
months ago, we wondered how long it would take consumers to put their
finances back in order. Five years? Ten years? There are so many
assumptions required that the numbers barely make sense. Still, if you
think the total debt burden is headed back to under 200% of GDP, where
it was for most of the last century, that would require the elimination
of debt equal to about 160% of GDP…or more than $20 trillion worth. How
do you eliminate debt? Well, some of it simply disappears…through
defaults, foreclosures and bankruptcies. The rest is paid off. How? By
saving. Now, imagine that the United States could put an amount equal
to 15% of GDP to work paying down its debts. That’s savings and capital
formation of all types – corporate as well as individual. It ignores
government, which is going in the other direction. At 15% of GDP per
year, paying America’s private debt down to under 2 times annual output
is still about a 7-year project.
So, prepare for a long dry spell. In the best of cases, the American public has to stay on the frugality wagon for 7 to 13 years.
And in the worst of cases? Oh, well…that’s a different matter. The
aforementioned US government is desperate to short-circuit the process
of balance sheet repair. It is propping up the old tree every way it
can. Thus, the whole period of adjustment may take much, much longer
than it should. Instead of coming down with a crash, the limbs fall off
one at a time. At this rate, the whole process could take nearly
forever.
As the private sector eliminates debt, for example, the feds add it.
The deficits are scheduled – by the Congressional Budget Office – to be
monstrous, but controllable. Cash for clunkers, cash for houses, cash
for jobs – it adds up. But the CBO projections are based on very
optimistic assumptions, in which the economy ‘recovers’ quickly and
grows strongly. They do not take into account the real nature of the
slump. It is not a pause…it is a permanent change. The Obama
administration cannot, ultimately, prevent change. But it can slow down
the process so much that the depression begins to seem eternal.
Until tomorrow,
Bill Bonner
The Daily Reckoning
The Daily Reckoning
The Eternal Depression was originally published in the Daily Reckoning on 10/7/2009