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“The recession ended in June”: Dennis Kneale
In the world of finance, perception often drives reality. If you think things are fine, you tend to be willing to go into debt, drawing demand from the future into the present. If you think things are on a downswing, you tend to save, drawing demand from the present, and putting it into the future. So there is some amount of elasticity in a market, through debt. The amount of elasticity is questionable, however. At what point do people simply have no credit left with which to draw demand from the future? And at what point do people have enough savings so saving more really doesn’t push any demand into the future?
The problem is a difficult one, and one that’s easy to miss. Many economists only focus on one side of the issue, seeing more consumer debt, or more government owned debt, as the “solution” to current demand problems. The general thinking is that drawing on future demand will actually increase future production, and hence the debt will never need to be repaid, in a sense. That future increases in production will easily cover the cost of the debt, and the debt itself, leaving the balance sheet open for more borrowing in the future.
And to some degree, there is no doubt this is correct. The problem is: to what degree? At what point do people draw so much demand from the future that increases in productivity simply can’t keep up? At what point are people consuming 24×7, and simply cannot consume any more? This is where we often make our mistake, because we simply can’t know what the future of productivity looks like.
And, in fact, this appears to be what’s happening in the US right now. The Government is trying to drive more demand through more borrowing, but there is so much demand drawn from the future that there’s little hope any level of productivity gains will ever be able to pay the debt off. When we reach this point, the solution is simple: bankruptcy.
How are the underlying factors in the current economy? There are a lot of factors in play right now; The Market Ticker provides a list:
- Right now, the banks are raking in profits based on the radical difference between being able to borrow money at 0% and loan it at 5% (for mortgages) and 30% (for credit cards). What will their balance sheets really look like when the interest rate at the Fed’s window increases, even a slight bit?
- The $8000 home buyer’s credit is still in effect, and is in fact being expanded. We won’t know the real state of the housing market until this credit is taken out of the equation.
- The FHA is still underwriting mortgages at 3.5%, and with the $8000 house buyer’s credit, at $0 down. Again, this distorts the market, and the distortion won’t go away until the FHA runs out of money (which appears to be coming up real soon now—or the FHA is going to require a bailout).
- Cash for Clunkers still hasn’t completely shaken out.
- The Dollar is now being used to “carry” trades. This means the Dollar is now being used as a temporary holding pen for value, rather than being seen as a longer term store for value. The Dollar is following global “hot money spots,” and when these unwind, the Dollar will unwind as well. We don’t yet know the impact of this unwinding.
- Declining consumer confidence and outstanding credit. The Market Ticker has a chart here you can explore.
The stock markets are actually following the cost of the Dollar in an inverse relationship, with all of the recent gains being on the back of the declining value of the Dollar. Again, Market Ticker provides us with a nice chart.
Whiskey and Gunpowder has another chart showing another side to this problem. When you draw demand into the present through debt at a higher rate than you can increase production, you eventually have to “roll” the debt over. This is like using one credit card to pay another credit card off. An interesting indicator is the amount of debt that needs to be “rolled” in the nest short period of time.
There is a massive amount of Government debt that needs to be “rolled” in the near future. Other factors to consider:
- Unemployment is worse than what the headline “mainstream” media is reporting.
- We are likely on the edge of a commercial real estate meltdown.
- GM is fudging their numbers, simply saying the aren’t going to report for about three months out of 2009, and that while they expect better numbers coming up, lowering their guidance (yes, that’s right, read the original article at NewsBusters—it’s a real headscratcher)
- The ratings agencies are starting to rate bank’s trustworthiness strictly on their own merits. Apparently, for the last year or so, the credit rating agencies have been adding government backing into the bank’s credit ratings. There are some signs this is ending, which could mean a massive devaluing of their holdings.
- There is some indication the markets were within a “hair’s breadth” of a total meltdown at the end of October.
- The trade deficit keeps jumping, although the Dollar is weakening. This is a contrary sign, indicating the US economy is weakening.
One thing that is probably propping the market up is the widespread adoption of Sharia banking.
Since 2000, the Islamic banking industry has grown 1000 percent from $100 billion to over $1 trillion in assets, and continues to grow at an alarming rate. This growth is in spite of financial chaos in the western banking system during the last two years. -August Review
Overall, there’s still no sign we’re in any sort of “recovery.” The fundamentals are all just wrong at this point.
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