The economy is not going to recover anytime soon. I blame this largely on the derivatives market. The existing derivatives exceed the total GDP of the entire world. This is what has driven the credit/banking/investment market in the tubes because instead of depending on savings and rising incomes for capital formation and economic growth (the old fashioned method), the US economy and financial markets were totally and completely dependent on a steady supply of new credit to achieve acceptable nominal levels of growth. OK, so the unregulated derivatives “market” caused the credit crash. Now what.
Our GDP: In almost classical terms, US recessions in the post war period have been led by inventory corrections. The key character trait is “led” by inventory corrections. Absolutely classic stuff. But in our current circumstances we’re now supposedly 14+ months into the current recessionary interlude and it’s only in the last quarter that an inventory problem is now occurring. Certainly what began as a macro financial sector issue has hit the heart of the US manufacturing and service sectors dead center.
So the American consumer has adjusted for this recession by consuming less. The fact that an inventory problem is showing itself to us now suggests we have a ways to go before inventories and sales are back in alignment. We now know manufacturing and production is now in the midst of being cut hard. This will NOT help the hoped-for recovery. It’s probably no big surprise at all that consumption was weak. BUT the big surprise is: consumption was as incredibly weak as witnessed within a period in which consumer prices were actually falling, energy prices being the keynote poster child example of this phenomenon. Not even lower prices could spark consumption strength. Statistics clearly show in the post war period households have always used price weakness to increase real consumption. Always...until now. WHY???? It is clear that consumers are moving to increase their savings. I know I am. Our consumption dependent economy will not be vibrant during a period of increased household saving.
In very simple terms, households are increasing their savings at the expense of consumption. If this isn’t a crisis in general consumer confidence and household balance sheet and P&L confidence specifically, then I don’t know what is. Again, set against the Keynesian (fiscal and monetary “stimulus”) tsunami of the moment, are the powers that be pushing on a string relative to their desired borrow and spend influence on US households? Again, if that’s not what’s happening, then I am blind.
It’s becoming a good bet that even more radical stimulus from the Fed/Treasury/Administration is still yet to come as Keynesian policy measures so far have failed to produce desired results. The current stimulus package is going to be nowhere near enough to get the job done. Consider the proposed tax increases and the offset to the stimulus package is huge. The Fed/Treasury/Administration (the F/T/A) may be begging the banks who’ve received TARP money to lend, but households are telling us by the trend in these numbers that they are not necessarily willing borrowers, regardless of cost and availability of credit.