Why the slump won't go away
By
Bill Bonner Oct 09, 2009
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This week the Australian central bank became the first to declare victory. It raised its key lending rate by 0.25% and gave a whoop, signalling an end to the slump. The European Central Bank vaguely threatened to raise rates too. But the Americans stayed in their trenches. New York Fed Governor Bill Dudley said that even though the economy is recovering, any rate hikes in the US will be over his dead body.
Then, word came that even Alan Greenspan thinks a recovery is underway. "This is what a recovery looks like," said the maestro. That settled the matter as far as we are concerned. Greenspan didn't see history's biggest financial bubble until it exploded in his face. In the following few words we undertake to show that Greenspan is as blind as ever.
"Great time for US consumers, America is on sale," says a YahooFinance piece. The "discounts are unbelievable", adds a blogger known as Frugal Rhode Island Momma. Across the nation, merchants no longer sell the merits of their products; they sell price. McDonald's advertises its "dollar meals". Hotel room rates are down 20% in the last year. House prices are down 30% since 2006. Sellers are offering bargains and they want buyers to know it. "Sold for $365,000 in 2006. Now $195,000," says a typical advertisement for a house.
Foreigners have noticed too. Colleagues in London say they're thinking of moving to Florida, where they will get far more for their money. The dollar falls; foreign purchases go up. Stocks, for example. In the first quarter, foreigners were dumping US shares. Now they're buying more than $100bn worth per month.
It's a deflationary world, at least that part of the world between the Rio Grande and the 49th parallel. Consumer price index inflation is negative and falling faster than at any time in 59 years. Households can only be induced to spend money by cutting prices. 'Cash for Clunkers' cut prices on new cars by about 20%. When it ended, so did auto sales. New house sales could be traced to a tax credit that cut the down-payment by at least 20%. That scheme is set to end in November.
Now the White House frets about jobs. Unemployment is meant to be a lagging indicator, but this time it seems to have dropped out of the race all together. Still, Congressional elections are coming up. Unemployed voters are surly and unreliable. So the Obama administration is considering a $3,000 tax credit to bribe businesses to hire them. If the typical employee costs his firm about $40,000, this effectively cuts the cost of labour by 7.5%. It's beginning to look more and more like the Roosevelt years. By the end of this year, all the jobs created during the bubble era – 2002-2007 – will have been eliminated, making it the first decade with no job growth since the 1930s. We're expecting a fireside chat any day.
Typically, big businesses cut workers in a recession. When the economy recovers, small businesses are quick to take them back. But this is unlike the typical post-war recession. This time, deprived of capital as well as customers, small businesses don't have a chance. Neither does a genuine recovery. The authorities still do not understand what is going on. They are used to fooling most of the people most of the time. They think they can dupe them again – with bail-outs and boondoggles. But real demand has vanished as households try to repay debt. That is not going to change anytime soon. Not while the federal government is sabotaging a genuine recovery.
Supplying cash-for-this and cash-for-that is expensive, especially when tax receipts are falling. The money has to come from somewhere. As it turns out, the feds borrow it from the very people who are trying to rebuild their personal balance sheets. Of the $1.6trn the US government will borrow this year, the biggest single lender is the private sector, chipping in $700bn. But instead of being put to use in a way that might stimulate a real recovery – providing credit for small business and consumers – it is taken up by the US government and frittered away.
The banks are happy to play along. They can borrow overnight money from the Fed at a rate of just one quarter of 1%, annualised. But lending to small business is hard, risky work. Why bother? The US Treasury will pay them 4% for lending back to the government, long term. This is practically free money to the banks. Both bankers and politicians end up ahead – with a bigger piece of the economy under their control.
Meanwhile, the real economy staggers. The US needs to create a million and a half new jobs a year just to keep up with population growth. There are 15 million people without jobs already, and a couple hundred thousand more unemployed each month. If this recovery continues long enough there won't be a single person left in America who still has a job.
Even if the economy could be stabilised, it will leave millions without jobs – more or less permanently. Add the people working reduced hours, and those who have been looking for work so long they are no longer counted, and their families, and you have a quarter of the population without money to spend. That's why this slump won't go away soon. As in Japan in the 1990s, we may have to live with this depression for the rest of our lives.
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