Recovery a Hoax

Traveling through Europe the last couple of weeks brought a closer insight in the economic development underway.

Meanwhile the US Dollar has fallen in an opposed direction compared with stocks, gold, and the rest of the commodities. The Fed has openly sacrificed the world’s reserve currency on the altar of “recovery.” But, the big question is, did they get what they paid for? Or did they get a stupid deal? Time will tell.

Some 7 million Americans and over 12 million Europeans have lost their jobs since the recession began. Tens of millions more have taken pay cuts or have been forced to work shorter hours. In California, and Spain according to one article, less than three in five working age residents have a job. What happens to all these people? Where do they fit into the economic recovery?

“I want to be clear,” President Obama told CNN last Friday, “that probably the jobs picture is not going to improve considerably -- and it could even get a little bit worse -- over the next couple of months.”

The housing picture is still depressing - unless you're a buyer. Many homeowners are underwater. Many bought at the top of the bubble. How many of them can afford an up to 400% increase in their mortgage payments? How many of them will be willing to pay? Not many. That's why a new wave of foreclosures is coming. And that's why house prices are likely to keep going down; the supply is going to increase, while the demand from willing and able buyers probably will stay unchanged.

In the decades before 2007 consumers weren't earning more money, nevertheless, they kept spending more and more money. How did they do it? By borrowing. Without this borrowing the economy would not have grown.

And now, consumers aren't borrowing anymore. Consumer credit is going the other way, shrinking rather than growing.

"Consumers slashed their borrowing in July by the largest amount on record as job losses and uncertainty about the economic recovery prompted people to reduce their debt.”

"Economists expect consumers will continue to spend less, save more and trim debt to get household finances that were decimated by the recession into better shape. Such behaviour, though, is a recipe for a sluggish revival, because consumer spending accounts for 70 percent of economic activity.”

"The Federal Reserve reported that consumers in July ratcheted back their credit by a larger-than-anticipated $21.6 billion from June, the most on records dating to 1943. Economists had expected credit to drop by $4 billion."

That’s enough proof that consumers are paying down debt more than four times faster than the fed thought, because they want and probably forced to. They don't want to borrow, on the contrary banks don't want to lend to them anyway. “Consumer credit is falling at a 10% annual rate, based on July figures. Credit card debt is going down at an 8% rate.” Consumers are saving not spending credit lines are contracting not expanding, while government debt levels are exploding in a hyper-inflationary way.

A dollar's worth of debt that is paid down is also one dollar less in the consumer economy, and also a dollar that is not borrowed. Where the consumer spent all his income two years ago, and borrowed more, which increased his consumption now, he doesn't borrow, and he doesn't spend all his income either. Meaning, the money that originally went into consumer spending is now equally reduced.

The feds are trying to counteract this major trend. “This year, they're borrowing $1.7 trillion. Consumers won't borrow; but the feds are borrowing for them!
So far, “the feds have put at risk about $13 trillion in order to counteract the downturn. This is about equal to the amount that Americans lost in the crash. But while the crash wiped out $13 trillion in housing and stock market wealth, the feds have no obvious way to put the money back. Banks were easy to re-flate. Bankers and federals are tight with each other; they're happy to share out the taxpayers' money. But getting money to the consumer is a different matter. The banks don't lend and the consumers don't borrow.”

Of the $13 trillion the feds have put at risk, very little has actually made its way to the consumer economy. Result: no new boom in consumer spending, no new boom in hiring, no new boom in production or profits.

A recovery without jobs and profits will be difficult, perhaps even impossible. But just wait and see!

In the current marketplace inflation is the story. In an effort to revive the go-go economy of the bubble era, the feds and central bankers are adding to the money supply. They will continue doing so until inflation rates go up. They make no effort to hide their intention. In other words: They openly warn the Chinese, the Japanese and all other creditors of the USA be prepared to be robbed off.

At this stage the problem with inflation is that there is none. Consumer prices are falling in China, Europe and America. Because the feds are pumping the money supply as hard as they can. David Rosenberg an economic analyst reports in the New York Times, “that the monetary base rose at a 141% annual rate over the past four weeks. But the money fails to reach the real economy. The money supply figures that relate to actual cash in people's hands called in economic terms M1, M2, and MZM (Money with Zero Maturity) - are shrinking, at -28%, - 4.9% and - 6.2% respectively, because the banks don't lend and consumers don't borrow.”

In short, the feds' money goes into cool bank vaults and hot speculative trades. “When it tries to find its way to the consumer, it gets lost.” As Rosenberg explains it, “the transmission mechanism has broken down. We live in a bust economy, not a boom one. In a bust, consumers cannot borrow. They have nothing to borrow against. Both their wages and their assets are going down. Who would lend to them under those conditions? Not a bank that almost went broke itself 12 months ago.”

And even if consumers had access to credit, they wouldn't take it. Consumers too, almost went broke a few months ago. Instead of saving money during the boom years, they spent it, or speculated with it. Then, when the bust came in 2008, they realized that they were 10 years closer to retirement with little money saved. Now they have to make up for that lost decade, by cutting spending and saving as much money as they can. Tourism last August was down 40% compared to a year before, which wasn’t a good year either.

"US consumers are cutting back, and where they are not cutting back, they are scaling down. This new cycle is all about 'getting small' and this is deflationary.” Even Millionaires See the Benefits of Budgeting in accordance to last Saturday’s NYT.

"Not only are the rich trading down, even Beauty Products Lose Some Appeal During Recession. According to the NPD Research Group, total sales of department store beauty products are down 7% from year-ago levels.” Women apparently are opting for the 'natural look' - "some people are selectively replacing higher-priced items with cheaper products from drug stores and discount stores."

Moreover this year only, already 94 banks in the US have gone broke. "Concerns persist that banks may be insufficiently capitalized to deal with a further deterioration in economic conditions," explains an OECD report.

Estimates by the International Monetary Fund this year put potential write-downs for continental European banks at €750 billion, while the European Central Bank estimates put the figure at €440 billion for euro area banks.

Anyhow don’t count with an economic turn for the better in this recession, which already can be qualified to become a Great Depression in the not too distant future it will stay amongst us for many years to come. Anyone even Ben Bernanke telling that the recovery is on its way is a wishful thinker.