Economy is changing, not recovering
It's year five of "The Great Correction," and there's still a ways to go.
Government is not like science or technology – where we build, intentionally, on past experience to create something that becomes better and better over time. Instead, it is rather like an evolutionary development…that often ends with extinction.Skip to next paragraph
Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning (dailyreckoning.com).
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Since America’s modern social welfare democracy is not the product of enlightened rational, accumulated decision-making, America’s leaders will be unable to re-design it for the new conditions it faces. Instead, this social welfare democracy will face extinction – like dinosaurs and Neanderthal man…and all previous forms of government…all previous forms of paper money…and all previous monetary systems.
In other words, don’t expect the US government to reduce its deficits and bring its finances under control voluntarily. It will take a crisis…and maybe even a revolution.
Let’s look at the financial situation more closely. As near as I can tell, the Great Correction continues, much as we thought it would. This is “Year 5” of the Great Correction. There is much more to go.
A Great Correction is very different from a recession. It is not a pause in an otherwise healthy economy. Instead, it is a change of direction…an adjustment to new circumstances (similar and related to the adjustment needed in government itself). After 60 years of near continuous credit expansion, the economy is finally deleveraging…reducing credit in the private sector.
To give you one small indication of the kind of adjustment that is taking place, let’s look at some good news. US manufacturing is finally picking up. For the first time in 10 years, more people are now joining the manufacturing labor force than leaving it. Of course, this is just what you’d expect. Labor costs are going down. At the margin, America’s competitive position is improving.
But this is not, as the media has advertised, “proof” the economy is recovering. Far from it. It is proof that the economy is not recovering at all. It is going in a different direction…and responding to a different set of circumstances. Much of the last 10 years was spent in bubble territory. During that time the economy was losing manufacturing jobs, not gaining them. The economy is not now “recovering” to the bubble conditions of 2005-2006. It is moving on.
And it’s a good thing. Who would want to go back to an economy that destroyed real jobs in manufacturing while creating phony, unsustainable jobs in finance and housing? Now the economy is simply doing what it should do: it’s adjusting to new conditions. Unfortunately, it will take time. You don’t shift the world’s largest economy overnight. So, the rate of joblessness is likely to remain high for many years as the transition takes place.
The other major feature of the Great Correction is the weakness of the housing industry. This too is perfectly predictable. The nation has too many houses – and they’re still too expensive. The figures show that about one in four homeowners is underwater. And there is no reason to think he’ll come to the surface any time soon.
The latest S&P/Case-Shiller numbers show the housing market seems to be entering a second dip. Once homeowners realize this, they are likely to also come face to face with their grim choices. They can default. Or they can wait it out – paying more for housing than the going rate. Many will choose to default, bringing housing prices down further. Some won’t have a choice: they won’t be able to meet mortgage payments.
Housing and jobs are the twin pillars of household wealth in America. The papers are full of stories about what happens to people when these pillars give way. High unemployment rates have lowered household income and forced people to take jobs at salaries far below their peaks. A record number, 43 million, of Americans now depend on food stamps. Children are moving back in with their parents – even adult children. And tax receipts are falling. At the local and state level this is causing havoc. The feds can print money. But California, Illinois and New Jersey can’t. And between the 50 states there is something like $2 trillion worth of unfunded pension obligations.
So far, all of those things were expected. It is a Great Correction, after all. Also expected – but still not fully appreciated – was the reaction of the US government and the Fed. When the crisis began, we calculated that it would take about seven years to bring debt levels in the private sector down to where a new period of genuine growth could begin.