Steve Keen's Debtwatch No. 36 July 2009
It's the Deleveraging, Stupid
Gentleman, you have come sixty days too late. The depression is over. - Herbert Hoover, responding to a delegation requesting a public works program to help speed the recovery, June 1930
“The past may not repeat itself, but it sure does rhyme” Mark Twain
In the last six months, the phrase "Green Shoots of Recovery" has entered the economic lexicon. It appeared to some observers that the global recession was coming to an end, while Australia itself was likely to barely feel its impact.
I would be as pleased as anyone if these "green shoots" were true harbingers of a genuine end to the economic downturn--not because I would enjoy being wrong for the sake of it, but because my expectations for the future are so bad that I'd prefer to see them not come to pass.
Unfortunately, on current data I expect that "green" is a better description of the knowledge level of those making the optimistic predictions, than of the colour of any budding economic recovery.
Of course, it could be argued to the contrary that many of those making such optimistic forecasts are highly trained professional economists, and not merely market commentators who migh have a vested interest in putting a positive spin on the news. This is true--but far from being a reason to trust these forecasts, it is yet another reason to be sceptical of them.
Almost every holder of a PhD in economics who works for a formal economic body like the Treasury, the RBA or the OECD has been deeply schooled in "neoclassical" economics, often without knowing that there is any other way of thinking about how the economy functions. They think they are simply "economists", and anyone who objects to their analysis or models must be uneducated about economic theory.
In contrast, virtually all University Departments of Economics contain at least one economist who rejects neoclassical economics, and instead subscribes to a rival school--like Austrian, Marxian, Post Keynesian, or Evolutionary Economics.
These contrarian academic economists often disagree amongst themselves, sometimes vehemently--you couldn't get two more opposed points of view than Austrian and Marxian economics, for example--but they tend to be united in regarding neoclassical economic theory as pompous drivel.
There are probably many reasons for this dichotomy between University economics departments which almost always have a handful of dissidents, and official economics bodies like the OECD and Treasury that are almost exclusively staffed by neoclassical economists. But I suspect the main reason is tenure: universities offer it, while formal economic advisory bodies don't.
As a result, academic economists who "turn feral" and reject neoclassical economics can still teach and publish and hang on to their jobs, even if their neoclassical Department Heads wish they would go away. OECD and Treasury economists who do the same thing probably find their employment coming to an end--because they don't have tenure.
So anything published by a formal economic body like the OECD will be the product of a neoclassical economic model--and therefore, in my opinion and that of a sizable minority of academic economists, drivel (there was one exception--the Bank of International Settlements [http://www.bis.org] while Bill White [http://www.bis.org/about/biowrw.htm], a supporter of Hyman Minsky's "Financial Instability Hypothesis", was its its Economic Adviser).
Of course, disputes between academic economists don't matter in the real world, and most newspapers report the announcements of bodies like the OECD as statements of wisdom about the future--until, that is, a crisis like the Global Financial Crisis makes a mockery of the OECD's neoclassical fantasies.
And what a mockery. This was the OECD's forecast for the world economy in June 2007:
EDITORIAL: ACHIEVING FURTHER REBALANCING
In its Economic Outlook last Autumn, the OECD took the view that the US slowdown was not heralding a period of worldwide economic weakness, unlike, for instance, in 2001. Rather, a “ smooth” rebalancing was to be expected, with Europe taking over the baton from the United States in driving OECD growth.
Recent developments have broadly confirmed this prognosis. Indeed, the current economic situation is in many ways better than what we have experienced in years. Against that background, we have stuck to the rebalancing scenario. Our central forecast remains indeed quite benign: a soft landing in the United States, a strong and sustained recovery in Europe, a solid trajectory in Japan and buoyant activity in China and India. In line with recent trends, sustained growth in OECD economies would be underpinned by strong job creation and falling unemployment. (OECD Economic Outlook, Volume 2007/1, No. 81, June 2007, p. 7)
Yeah, right. Instead the global economy was already well into the greatest economic crisis of the last 60 years. The next two years tore the OECD's 2007 forecasts to shreds.
One might hope for some soul searching as a result of this--and hopefully some is occurring behind closed doors. But in a clear sign that the OECD hopes to see "Business as usual" restored in its modelling approach as well as the actual economy, its current Economic Outlook discusses the process of recovery from an economic crisis that it completely failed to foresee:
EDITORIAL: NEARING THE BOTTOM?
OECD activity now looks to be approaching its nadir, following the deepest decline in post-war history. The ensuing recovery is likely to be both weak and fragile for some time. And the negative economic and social consequences of the crisis will be long-lasting. Yet, it could have been worse. Thanks to a strong economic policy effort an even darker scenario seems to have been avoided. But this is no reason for complacency; the need for determined policy action remains across a wide field of policies...
In summary, it looks as if the worst scenario has been avoided and that OECD economies are now nearing the bottom. Even if the subsequent recovery may be slow such an outcome is a major achievement of economic policy. But this is no time to relax -- ensuring that the recovery stays on track and leads towards a long-term sustainable growth path will call for major policy efforts going forward. (OECD Economic Outlook, Volume 2007/1, No. 81, June 2009, pp. 5 & 7)
With its utter failure to see this crisis coming, why does anyone still take the OECD seriously? Probably for the same reason that people still generally obeyed the Captain of the Titanic after it had struck the iceberg: authority counts for a lot in a crisis, even if the person in authority actually caused it.
But it's also because it takes repeated failures before someone who asserts authority is rejected--one failure alone won't do. So rather like Napoleon in exile in Elba, the OECD is still taken seriously by economic commentators--as with Peter Martin's report ("Late in, early out of the downturn", SMH June 24th 2009):
AUSTRALIA is set to soar out of its economic downturn sooner and more sharply than forecast in the budget, according to forecasts from the Organisation for Economic Co-operation and Development understood to have the backing of the Australian Treasury.
The OECD says the local economy should shrink 0.3 per cent this year, less than any other OECD economy and far less than the contraction of 1 per cent that underlies the forecasts in the May budget.
Next year the economy should roar back 2.4 per cent, also above budget forecasts and more than any other OECD economy apart from those recovering from collapse in 2009.
The Treasurer, Wayne Swan, greeted the forecasts released overnight in Paris as evidence Australia was "outperforming every other advanced economy in the face of the recession".
The forecasts show Australia's unemployment rate reaching 7.9 per cent late next year rather than the 8.25 to 8.5 per cent range assumed in the budget.
A little scepticism in this report would have been appreciated, given the OECD's track record--and if a political journalist had written the report, that might well have occurred. But it was written by an economics correspondent, and most of them have--like the OECD's economists--been schooled only in neoclassical economics, and don't know how flimsy the theory itself is (there are exceptions here, like Brian Tookey whose book Tumbling Dice is an excellent critique of neoclassical economics). So we get a report like this trumpeting good times and green shoots, with no irony (Peter Martin was far from the only one to present the OECD's views without any scepticism--see also "Earth-destroying bomb defused - just" by Michael Pascoe [http://business.smh.com.au/business/earthdestroying-bomb-defused--just-20090625-cxj7.html] or Glenn Dyer at Crikey "That’ s no green shoot, that’ s Australia in full bloom: OECD" [http://www.crikey.com.au/2009/06/25/thats-no-green-shoot-thats-australia-in-full-bloom-oecd/]).
Clearly it will take a few more economic failures before the OECD faces its Waterloo.
To be fair, official economic bodies and their uncritical fans were not the only source of "green shoot" euphoria. A large part of this feeling that the worst was over also came from the global experience of a recovery in stock markets from their recent lows. In addition, Australia had a near unique dose of greenery when unemployment remained remarkably benign, and it avoided the popular definition of a recession by recording growth in real GDP in the March 2009 quarter (real GDP rose by 0.4%, having fallen by 0.5% in the preceding quarter).
Let's look first at the Stock Market.
The Dow has indeed had an impressive rally, from the low of 6547 on March 9 to the peak of 8799 on June 12--a rise of 34% in under a quarter of a year. This has led to many of the usual suspects proclaiming that the bear market is over, and a new rally is underway. Comparisons with 1929 are, of course, unjustified...
On closer inspection, reports of the death of the bear market are somewhat exaggerated.
Firstly, though the index has rallied by 34% from its low, it is still down 40% from the all time peak of October 2007.
Secondly, rallies like this came and went ad nauseam in the early 1930s, until the market hit rock bottom at 41.22 points on July 8th 1932--89% below the September 3rd 1929 peak of 381.17.
The biggest such rally occurred very soon after The Crash in 1929, starting on November 13th 1929 when the market was down 48% from its September peak. It then rose almost 50% from its low in under 6 months--and it was this recovery that inspired Hoover's Oval Office gaffe.
But the market had only recovered half of what it had lost when the rally ran out of steam--a 50% fall followed by a 50% recovery still leaves you 25% below where you started from--and the inexorable slide of the Great Depression dragged the market down with it.
This current rally took a lot longer to start than its 1929 cousin, though it began from a comparable bottom (55% below the peak versus 48% below it in 1929), and it still has to go on for much longer and drive the market much higher to match its antecedent--let alone to proclaim the 2007 Bear Market is over (note also that Eichengreen and O’ Rourke, using global data, argue that the current decline is far worse than in the Great Depression, with global markets down 50% on average 12 months after the crisis versus just 10% down after 1929--see Figure 2 in http://www.voxeu.org/index.php?q=node/3421).
Meanwhile, in the Real World...
Though the stock market was providing some good cheer in the USA (at least until last week), the real economy continued to disappoint. To get an idea of just how bad the downturn has been, and how little inkling of it that conventional economists had, consider the Economic Report of the President, prepared by the US President's Council of Economic Advisers (http://www.whitehouse.gov/administration/eop/cea/]), in 2008 (http://www.gpoaccess.gov/eop/2008/2008_erp.pdf) and 2009 (http://www.gpoaccess.gov/eop/2009/2009_erp.pdf).
The 2008 Report made the following forecasts--note in particular the "forecast" that unemployment would be below 5 percent between 2008 and 2013.
The 2009 Report, submitted to Congress and the incoming President in January of this year, made a mockery of the 2008 Report but still drastically underestimated the severity of the downturn: it forecast that unemployment would peak at 7.7% in 2009, growth would remain positive for the next five years.
Despite the frequency with which numerous economists who failed to anticipate the Global Financial Crisis continue to report sightings of "green shoots of recovery", the actual economic data continued to be grimmer than even their most pessimistic revised forecasts.
The clearest evidence here is that the Federal Reserve's "stress tests" for its Supervisory Capital Assessment Program assumed that even under an adverse scenario, unemployment would be below 9 percent by mid-2009. It is currently 9.4 percent (see http://4.bp.blogspot.com/_nSTO-vZpSgc/Siv54tjgl3I/AAAAAAAAGPo/7HhtUF998Q0/s400/unemployment+projections.png):
The tapering process that is built into neoclassical economic forecasts (see http://www.phil.frb.org/research-and-data/real-time-center/survey-of-professional-forecasters/2009/survq209.cfm) is not evident in the data to date.
Deleveraging and Economic Breakdown
The reason that most economists continue to underestimate this downturn is because (a) the downturn is being driven by deleveraging from literally unprecedented levels of private debt, and (b) the neoclassical theory of economics, which dominates academic and market economics alike, ignores the role of private debt in the economy.
The reason that I anticipated this crisis four years ago is that I reject the mainstream "neoclassical" approach to economics, and instead analyse the economy from the perspective of Hyman Minsky's "Financial Instability Hypothesis", in which private debt plays a crucial role. In our credit-driven economy, demand is the sum of GDP plus the change in debt. If debt is low relative to GDP, then its contribution to demand is relatively unimportant; but if debt becomes large relative to demand, then changes in debt can become THE determinant of aggregate demand, and hence of unemployment.
That is manifestly the case in America today. Under the stewardship of neoclassical economics in the personas of Alan Greenspan and Ben Bernanke, the growth in private debt has not merely been ignored but has actively been encouraged, in the dangerously naive belief that the private sector is being "rational" when it borrows.
This apparent indictment of the private sector as therefore "irrational" is in fact really an indictment of neoclassical economics for abuse of language. What neoclassical theory means by the word "rational" is "able to correctly anticipate the future"--which is the definition, not of rationality, but of prophecy.
There is nothing "irrational" about being unable to predict the future--it is fundamentally uncertain, while modern economic theory hides from this reality just as Keynes's contemporary economic rivals did in the 1930s when he wrote that:
I accuse the classical economic theory of being itself one of these pretty, polite techniques which tries to deal with the present by abstracting from the fact that we know very little about the future. (Keynes, "The General Theory of Employment", Quarterly Journal of Economics 1937)
Instead, in the uncertain world in which we live, the private sector necessarily speculates about the future--and some of those speculations will be wrong. The role of regulation and government economic policy should be to confine those speculations, as much as is possible, to productive pursuits rather than gambles about the future path of asset prices--a pasttime that has always in the past led to Ponzi asset bubbles.
This time, with government policy driven by neoclassical economics and its deluded attitudes towards the future, policy has actually encouraged the private sector to borrow to indulge in two giant Ponzi Schemes--the stock market and (belatedly) the housing market. It has gambled with borrowed money that share and house prices would always rise faster than consumer prices.
That gamble worked for some decades, but it then failed--in 1987-89. Had the Greenspan Fed not intervened then to "rescue" Wall Street, there is every possibility that the US would have experienced a mild Depression then--mild because the level of debt was lower then that at the time of the Great Depression (165% in 1989 versus 175% in 1929), and crucially because the rate of inflation then was high (5% in 1989 versus 0.5% in 1929).
The lower level of debt would have meant that less deleveraging would have been required to return to a predominantly income-financed economy in 1989 than was required in the 1930s, while high inflation would have meant a lower likelihood of deflation during the Depression itself, and possibly that inflation alone could have eroded the debt burden. It still would not have been pretty--certainly it would have been worse than the 1983 recession, when unemployment as it is currently defined peaked at 10.8 percent.
But what we face now will be far worse, because deleveraging from the now unprecedented debt level of almost 300% of GDP will drive America into a Depression that could easily be deeper than that of the 1930s.
This is already becoming apparent in the data, as economic historians Barry Eichengreen and Kevin O’ Rourke have pointed out (see "A Tale of Two Depressions" at http://www.voxeu.org/index.php?q=node/3421):
To sum up, globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimise this alarming fact. The “ Great Recession” label may turn out to be too optimistic. This is a Depression-sized event.
The comparison of unemployment rates (which Eichengreen and O’ Rourke didn't make) bear this out: using the current OECD definition of unemployment, this downturn is well ahead of the 1979 recession even though unemployment started from a lower level; and using the much broader U-6 definition (see www.bls.gov; http://www.bls.gov/news.release/empsit.t12.htm), which is more strictly comparable to the NBER definition used during the Great Depression, unemployment now is as bad as at the same stage of the Great Depression, and increasing as rapidly.
Deleveraging is already extreme: the most recent flow of funds data shows that private debt is falling rapidly and therefore subtracting from aggregate demand rather than adding to it. As noted in earlier Debtwatch Reports, in the modern debt-dependent economy, changes in the demand financed by changes in private debt are strongly negatively correlated with the unemployment: when debt's contribution to demand falls, unemployment rises.
The turnaround in debt growth in the USA is unprecedented in the post-WWII period. Even during the 1980s and 1990s recessions, debt continued to grow both in nominal terms and as a percentage of GDP. Now debt is falling at arate of almost US$2 Trillion a year (which equates to 14 percent of GDP).
This is why the crisis exists, is so much worse than the official economic forecasters expected, and will continue and be much deeper than they currently believe: the crisis is being driven by deleveraging, and neoclassical economists do not even include private debt in their models.
As noted in earlier Debtwatch Reports, there is a very strong link between the rate of growth of debt and unemployment: when debt grows more quickly, unemployment falls; when debt grows slowly or falls, unemployment rises.
This is not because debt is a good thing, but because our economies have become so debt-dependent that changes in debt now have a far stronger influence on economic activity than do changes in GDP.
The US Government is attempting to "pump-prime" its way out of trouble by public-debt-financed deficit spending, which raises three further issues:
this so-called Keynesian remedy can work when private debt levels are relatively low, and government policy to attenuate private speculation is strictly adhered to (see my 1995 paper Finance and Economic Breakdown);
however, in our rampantly speculative economies, this policy has only worked when it has re-started the private debt binge, resulting in rising debt levels over time;
this can't happen this time around, because all sectors of the private economy--businesses both real and financial, and households--are already debt-saturated. There is no "greenfields" group to lend to, as was possible in 1990 when household debt was a "mere" 60% of GDP, and the derivatives market in finance had yet to explode; and finally
the scale of the private debt bubble os just too big to be countered by substituting public debt for private debt.
This last point is evident in the data. Even though the US government has thrown the proverbial kitchen sink at government spending, the increase in public debt (which adds to aggregate demand) is more than counteracted by private sector deleveraging (which subtracts from aggregate demand):
Total US Debt is therefore falling. Though in the long run this is a good thing--we must return to a non-debt-dependent economy and once we have gotten there, stay there--the transition will be as pleasant as Cold Turkey is for a heroin addict.
“Gentleman, you have come sixty days too late. The depression is over.” - Herbert Hoover, responding to a delegation requesting a public works program to help speed the recovery, June 1930
“The past may not repeat itself, but it sure does rhyme.” Mark Twain
In the last six months, the phrase "Green Shoots of Recovery" has entered the economic lexicon. It appeared to some observers that the global recession was coming to an end, while Australia itself was likely to barely feel its impact.
I would be as pleased as anyone if these "green shoots" were true harbingers of a genuine end to the economic downturn--not because I would enjoy being wrong for the sake of it, but because my expectations for the future are so bad that I'd prefer to see them not come to pass.
Unfortunately, on current data I expect that "green" is a better description of the knowledge level of those making the optimistic predictions, than of the colour of any budding economic recovery.
Of course, it could be argued to the contrary that many of those making such optimistic forecasts are highly trained professional economists, and not merely market commentators who migh have a vested interest in putting a positive spin on the news.
This is true--but far from being a reason to trust these forecasts, it is yet another reason to be sceptical of them.
Almost every holder of a PhD in economics who works for a formal economic body like the Treasury, the RBA or the OECD has been deeply schooled in "neoclassical" economics, often without knowing that there is any other way of thinking about how the economy functions. They think they are simply "economists", and anyone who objects to their analysis or models must be uneducated about economic theory.
In contrast, virtually all University Departments of Economics contain at least one economist who rejects neoclassical economics, and instead subscribes to a rival school--like Austrian, Marxian, Post Keynesian, or Evolutionary Economics.
These contrarian academic economists often disagree amongst themselves, sometimes vehemently--you couldn't get two more opposed points of view than Austrian and Marxian economics, for example--but they tend to be united in regarding neoclassical economic theory as pompous drivel.
There are probably many reasons for this dichotomy between University economics departments which almost always have a handful of dissidents, and official economics bodies like the OECD and Treasury that are almost exclusively staffed by neoclassical economists. But I suspect the main reason is tenure: universities offer it, while formal economic advisory bodies don't.
As a result, academic economists who "turn feral" and reject neoclassical economics can still teach and publish and hang on to their jobs, even if their neoclassical Department Heads wish they would go away. OECD and Treasury economists who do the same thing probably find their employment coming to an end--because they don't have tenure.
So anything published by a formal economic body like the OECD will be the product of a neoclassical economic model--and therefore, in my opinion and that of a sizable minority of academic economists, drivel (there was one exception--the Bank of International Settlements while Bill White, a supporter of Hyman Minsky's "Financial Instability Hypothesis“, was its its Economic Adviser).
Of course, disputes between academic economists don’t matter in the real world, and most newspapers report the announcements of bodies like the OECD as statements of wisdom about the future–until, that is, a crisis like the Global Financial Crisis makes a mockery of the OECD’s neoclassical fantasies.
And what a mockery. This was the OECD’s forecast for the world economy in June 2007:
EDITORIAL: ACHIEVING FURTHER REBALANCING
“In its Economic Outlook last Autumn, the OECD took the view that the US slowdown was not heralding a period of worldwide economic weakness, unlike, for instance, in 2001. Rather, a “ smooth” rebalancing was to be expected, with Europe taking over the baton from the United States in driving OECD growth.”
“Recent developments have broadly confirmed this prognosis. Indeed, the current economic situation is in many ways better than what we have experienced in years. Against that background, we have stuck to the rebalancing scenario. Our central forecast remains indeed quite benign: a soft landing in the United States, a strong and sustained recovery in Europe, a solid trajectory in Japan and buoyant activity in China and India. In line with recent trends, sustained growth in OECD economies would be underpinned by strong job creation and falling unemployment.” (OECD Economic Outlook, Volume 2007/1, No. 81, June 2007, p. 7)
Yeah, right. Instead the global economy was already well into the greatest economic crisis of the last 60 years. The next two years tore the OECD’s 2007 forecasts to shreds.
One might hope for some soul searching as a result of this–and hopefully some is occurring behind closed doors. But in a clear sign that the OECD hopes to see “Business as usual” restored in its modelling approach as well as the actual economy, its current Economic Outlook discusses the process of recovery from an economic crisis that it completely failed to foresee:
EDITORIAL: NEARING THE BOTTOM?
“OECD activity now looks to be approaching its nadir, following the deepest decline in post-war history. The ensuing recovery is likely to be both weak and fragile for some time. And the negative economic and social consequences of the crisis will be long-lasting. Yet, it could have been worse. Thanks to a strong economic policy effort an even darker scenario seems to have been avoided. But this is no reason for complacency; the need for determined policy action remains across a wide field of policies…”
“In summary, it looks as if the worst scenario has been avoided and that OECD economies are now nearing the bottom. Even if the subsequent recovery may be slow such an outcome is a major achievement of economic policy. But this is no time to relax — ensuring that the recovery stays on track and leads towards a long-term sustainable growth path will call for major policy efforts going forward.” (OECD Economic Outlook, Volume 2007/1, No. 81, June 2009, pp. 5 & 7)
With its utter failure to see this crisis coming, why does anyone still take the OECD seriously? Probably for the same reason that people still generally obeyed the Captain of the Titanic after it had struck the iceberg: authority counts for a lot in a crisis, even if the person in authority actually caused it.
But it’s also because it takes repeated failures before someone who asserts authority is rejected–one failure alone won’t do. So rather like Napoleon in exile in Elba, the OECD is still taken seriously by economic commentators–as with Peter Martin’s report (“Australia’s downturn to be shorter than expected”, The Age June 25th 2009):
“AUSTRALIA is set to soar out of its economic downturn sooner and more sharply than forecast in the budget, according to forecasts from the Organisation for Economic Co-operation and Development understood to have the backing of the Australian Treasury.
The OECD says the local economy should shrink 0.3 per cent this year, less than any other OECD economy and far less than the contraction of 1 per cent that underlies the forecasts in the May budget.
Next year the economy should roar back 2.4 per cent, also above budget forecasts and more than any other OECD economy apart from those recovering from collapse in 2009.
The Treasurer, Wayne Swan, greeted the forecasts released overnight in Paris as evidence Australia was “outperforming every other advanced economy in the face of the recession”.
The forecasts show Australia’s unemployment rate reaching 7.9 per cent late next year rather than the 8.25 to 8.5 per cent range assumed in the budget.”
A little scepticism in this report would have been appreciated, given the OECD’s track record–and if a political journalist had written the report, that might well have occurred. But it was written by an economics correspondent, and most of them have–like the OECD’s economists–been schooled only in neoclassical economics, and don’t know how flimsy the theory itself is (there are exceptions here, like Brian Tookey whose book Tumbling Dice is an excellent critique of neoclassical economics). So we get a report like this trumpeting good times and green shoots, with no irony (Peter Martin was far from the only one to present the OECD’s views without any scepticism–see also “Earth-destroying bomb defused — just” by Michael Pascoe or Glenn Dyer at Crikey “That’ s no green shoot, that’ s Australia in full bloom: OECD”).
Clearly it will take a few more predictive and policy failures before economic journalists realise that with the global financial crisis, neoclassical economics–and hence the OECD–is facing its intellectual Waterloo.
To be fair, official economic bodies and their uncritical fans were not the only source of “green shoot” euphoria. A large part of this feeling that the worst was over also came from the global experience of a recovery in stock markets from their recent lows.
The Dow has indeed had an impressive rally, from the low of 6547 on March 9 to the peak of 8799 on June 12–a rise of 34% in under a quarter of a year. This has led to many of the usual suspects proclaiming that the bear market is over, and a new rally is underway. Comparisons with 1929 are, of course, unjustified…
On closer inspection, reports of the death of the bear market are somewhat exaggerated.
Firstly, though the index has rallied by 34% from its low, it is still down 40% from the all time peak of October 2007.
Secondly, rallies like this came and went ad nauseam in the early 1930s, until the market hit rock bottom at 41.22 points on July 8th 1932–89% below the September 3rd 1929 peak of 381.17.
The biggest such rally occurred very soon after The Crash in 1929, starting on November 13th 1929 when the market was down 48% from its September peak. It then rose almost 50% from its low in under 6 months–and it was this recovery that inspired Hoover’s Oval Office gaffe.
But the market had only recovered half of what it had lost when the rally ran out of steam–a 50% fall followed by a 50% recovery still leaves you 25% below where you started from–and the inexorable slide of the Great Depression dragged the market down with it.
This current rally took a lot longer to start than its 1929 cousin, though it began from a comparable bottom (55% below the peak versus 48% below it in 1929), and it still has to go on for much longer and drive the market much higher to match its antecedent–let alone to proclaim the 2007 Bear Market is over (note also that Eichengreen and O’Rourke, using global data, argue that the current decline is far worse than in the Great Depression, with global markets down 50% on average 12 months after the crisis versus just 10% down after 1929–see Figure 2 here).
Meanwhile, in the Real World…
Though the stock market was providing some good cheer in the USA (at least until last week), the real economy continued to disappoint. To get an idea of just how bad the downturn has been, and how little inkling of it that conventional economists had, consider the Economic Report of the President, prepared by the US President’s Council of Economic Advisers, in 2008 and 2009.
The 2008 Report made the following forecasts–note in particular the “forecast” that unemployment would be below 5 percent between 2008 and 2013.
The 2009 Report, submitted to Congress and the incoming President in January of this year, made a mockery of the 2008 Report but still drastically underestimated the severity of the downturn: it forecast that unemployment would peak at 7.7% in 2009, growth would remain positive for the next five years.
Despite the frequency with which numerous economists who failed to anticipate the Global Financial Crisis continue to report sightings of “green shoots of recovery”, the actual economic data continued to be grimmer than even their most pessimistic revised forecasts.
The clearest evidence here is that the Federal Reserve’s “stress tests” for its Supervisory Capital Assessment Program assumed that even under an adverse scenario, unemployment would be below 9 percent by mid-2009. It is currently 9.4 percent. The tapering process that is built into neoclassical economic forecasts is not evident in the data to date.
Deleveraging and Economic Breakdown
The reason that most economists continue to underestimate this downturn is because (a) the downturn is being driven by deleveraging from literally unprecedented levels of private debt, and (b) the neoclassical theory of economics, which dominates academic and market economics alike, ignores the role of private debt in the economy.
The reason that I anticipated this crisis four years ago is that I reject the mainstream “neoclassical” approach to economics, and instead analyse the economy from the perspective of Hyman Minsky’s “Financial Instability Hypothesis”, in which private debt plays a crucial role. In our credit-driven economy, demand is the sum of GDP plus the change in debt. If debt is low relative to GDP, then its contribution to demand is relatively unimportant; but if debt becomes large relative to demand, then changes in debt can become THE determinant of aggregate demand, and hence of unemployment.
That is manifestly the case in America today. Under the stewardship of neoclassical economics in the personas of Alan Greenspan and Ben Bernanke, the growth in private debt has not merely been ignored but has actively been encouraged, in the dangerously naive belief that the private sector is being “rational” when it borrows.
This apparent indictment of the private sector as therefore “irrational” is in fact really an indictment of neoclassical economics for abuse of language. What neoclassical theory means by the word “rational” is “able to correctly anticipate the future”–which is the definition, not of rationality, but of prophecy.
There is nothing “irrational” about being unable to predict the future–it is fundamentally uncertain, while modern economic theory hides from this reality just as Keynes’s contemporary economic rivals did in the 1930s when he wrote that:
“I accuse the classical economic theory of being itself one of these pretty, polite techniques which tries to deal with the present by abstracting from the fact that we know very little about the future.” (Keynes, “The General Theory of Employment”, Quarterly Journal of Economics 1937)
Instead, in the uncertain world in which we live, the private sector necessarily speculates about the future–and some of those speculations will be wrong. The role of regulation and government economic policy should be to confine those speculations, as much as is possible, to productive pursuits rather than gambles about the future path of asset prices–a pasttime that has always in the past led to Ponzi asset bubbles.
This time, with government policy driven by neoclassical economics and its deluded attitudes towards the future, policy has actually encouraged the private sector to borrow to indulge in two giant Ponzi Schemes–the stock market and (belatedly) the housing market. It has gambled with borrowed money that share and house prices would always rise faster than consumer prices.
That gamble worked for some decades, but it then failed–in 1987–89. Had the Greenspan Fed not intervened then to “rescue” Wall Street, there is every possibility that the US would have experienced a mild Depression then–mild because the level of debt was lower then that at the time of the Great Depression (165% in 1989 versus 175% in 1929), and crucially because the rate of inflation then was high (5% in 1989 versus 0.5% in 1929).
The lower level of debt would have meant that less deleveraging would have been required to return to a predominantly income-financed economy in 1989 than was required in the 1930s, while high inflation would have meant a lower likelihood of deflation during the Depression itself, and possibly that inflation alone could have eroded the debt burden. It still would not have been pretty–certainly it would have been worse than the 1983 recession, when unemployment as it is currently defined peaked at 10.8 percent.
But what we face now will be far worse, because deleveraging from the now unprecedented debt level of almost 300% of GDP will drive America into a Depression that could easily be deeper than that of the 1930s.
This is already becoming apparent in the data, as economic historians Barry Eichengreen and Kevin O’ Rourke point out in “A Tale of Two Depressions”:
“To sum up, globally we are tracking or doing even worse than the Great Depression, whether the metric is industrial production, exports or equity valuations. Focusing on the US causes one to minimise this alarming fact. The “ Great Recession” label may turn out to be too optimistic. This is a Depression-sized event.”
The comparison of unemployment rates (which Eichengreen and O’ Rourke didn’t make) bear this out: using the current OECD definition of unemployment, this downturn is well ahead of the 1979 recession even though unemployment started from a lower level; and using the much broader U-6 definition, which is more strictly comparable to the NBER definition used during the Great Depression, unemployment now is as bad as at the same stage of the Great Depression, and increasing as rapidly.
Deleveraging is already extreme: the most recent flow of funds data shows that private debt is falling rapidly and therefore subtracting from aggregate demand rather than adding to it. As noted in earlier Debtwatch Reports, in the modern debt-dependent economy, changes in the demand financed by changes in private debt are strongly negatively correlated with the unemployment: when debt’s contribution to demand falls, unemployment rises.
The turnaround in debt growth in the USA is unprecedented in the post-WWII period. Even during the 1980s and 1990s recessions, debt continued to grow both in nominal terms and as a percentage of GDP. Now debt is falling at arate of almost US$2 Trillion a year (which equates to 14 percent of GDP).
This is why the crisis exists, is so much worse than the official economic forecasters expected, and will continue and be much deeper than they currently believe: the crisis is being driven by deleveraging, and neoclassical economists do not even include private debt in their models.
As noted in earlier Debtwatch Reports, there is a very strong link between the rate of growth of debt and unemployment: when debt grows more quickly, unemployment falls; when debt grows slowly or falls, unemployment rises.
This is not because debt is a good thing, but because our economies have become so debt-dependent that changes in debt now have a far stronger influence on economic activity than do changes in GDP.
The US Government is attempting to “pump-prime” its way out of trouble by public-debt-financed deficit spending, which raises 4 further issues:
- this so-called Keynesian remedy can work when private debt levels are relatively low, and government policy to attenuate private speculation is strictly adhered to (see my 1995 paper Finance and Economic Breakdown);
- however, in our rampantly speculative economies, this policy has only worked when it has re-started the private debt binge, resulting in rising debt levels over time;
- this can’t happen this time around, because all sectors of the private economy–businesses both real and financial, and households–are already debt-saturated. There is no “greenfields” group to lend to, as was possible in 1990 when household debt was a “mere” 60% of GDP, and the derivatives market in finance had yet to explode; and finally
- the scale of the private debt bubble is just too big to be countered by substituting public debt for private debt.
This last point is evident in the data. Even though the US government has thrown the proverbial kitchen sink at government spending, the increase in public debt (which adds to aggregate demand) is more than counteracted by private sector deleveraging (which subtracts from aggregate demand):
Total US Debt is therefore falling. Though in the long run this is a good thing–we must return to a non-debt-dependent economy and once we have gotten there, stay there–the transition will be as pleasant as Cold Turkey is for a heroin addict.
Paul N,
In Australia commercial banks can exchange their deposits at the Reserve Bank for cash, on demand. Their deposits at the Reserve Bank are (obviously) a lot less than the total deposits outstanding to their customers. This is quite different to the situation you describe for Belgium.
So for people worried about money printing, they should stop using this confusing term and worry instead about the creation of commercial bank deposits at the Reserve Bank. (Also known as “power money”).
The Reserve Bank can create power-money by buying assets from commercial banks or lending to commercial banks against collateral. From the RBA site it looks like a lot of different types of assets are now valid collateral, so there is lots of scope to create power-money. This seeming loosening in criteria inflates the power-money supply but not permanently if those assets turn out to be OK.
If on the other hand the RBA creates power-money by purchasing dodgy assets such as loans that may default that is a real concern. If they create power-money by lending against dodgy collateral, and the bank they lend to is in danger of bankruptcy that is also a real concern.
In my opinion however even if these things occur and have a permanent inflationary effect, it will not lead to net inflation because total credit destruction (and therefore spending power destruction) is going to vastly outstrip creation of power-money, as Steve’s theory explains.
That is, unless our currency collapses a la Iceland’s. Anyone care to guess what would happen then? I read that CPI is 12% there at the moment (but consumption is plummeting) and wage inflation around 9%. I also read that house prices are plunging at double-digits in inflation-adjusted terms, but that could mean steady prices in non-inflation-adjusted terms. Perhaps they will meet in the middle so that the house price to income ratio returns to the long-term mean?
Paul A
Apropos nothing in particular. Enjoy “Pitch ‘n’ Putt with Joyce ‘n’ Beckett” at http://www.youtube.com/watch?v=p856CfM64w8
Hi Steve and others,
What do you think of Nassim Taleb’s solution? Convert debt into equity.
http://www.ft.com/cms/s/0/4e02aeba-6fd8-11de-b835-00144feabdc0.html
His whole premise is what you have been saying. It is about the debt.
‘elliottwave’,… i rarely post on this forum as i am not qualified to do so, and prefer to learn as much as possible but we are all entitled to our views and entitled to express those views but i see no point in continuing to hit other people over the head until they agree with you [ a very antipodean quality, some would say virtue, so i am certain that this post will not stop you ] i subscribe to elliottwave [ewi] Bob Prechter and your views are almost diametrically opposed to his when it comes to views on gold from an elliottwave perspective.i realise that there are different schools of elliottwave but prechter has a fascinating 40 page booklet for complete novices like myself in which he has a fascinating chart of history price performance of gold for very recession and depression since 1792 of which there have been many , he makes the point that only once since 1792 has gold made anyone any money if you compare the starting price for gold at the beginning of each recession and depression with the price of gold at the end of each recesssion /depression , only once in in over 200 years according to his data and chart has gold returned a profit for anyone during a recession and depression if we compare starting and finishing prices for gold , that once was in the recession of 1970’s when gold came off the gold standard ‚based on the starting and finishing price of recession in 1970’s returned a spectacular 90 % , the only time ever in over 200 years , the average return being 0 % [minus 4 % allowing buying/selling fees]based upon starting finishing prices gold for each individual recession/depression. still having said that , according to prechter and ewi gold has finshed a huge five wave rally from 2001 and is now likley in an abc correction ‚prechter makes the point that gold did not do as well as other metals so did not fall as hard , prechters wave count silver/ gold to go lower ‚but who really knows ? good luck with your gold as i don’t like to see other people miss out on what they really want.always good to look at things from a different point of view.happy to be wrong if i can learn .
marcus7
Gold is money, to ask if it has made a profit doesn’t make sense. Money is not an investment. For example if you own a $100 does that make you a profit? No, it $100 and that’s how it will stay, it won’t suddenly become $150. You can exchange it for other forms of money and hope to make a profit on the exchange, but that’s about it. Gold is the same.
hbl (@July 11th, 2009 at 6:03 am) -
thank you for the link (and my apologies for forgetting to thank you earlier). it was a very interesting and to me useful read. i look forward to your (and other’s) take on bezemer’s paper.
btw, rob parenteau has a guest post on it today at naked capitalism (which is what reminded me that i owed you a “thank you”).
http://www.nakedcapitalism.com/2009/07/guest-post-anticipating-financial.html
With full awareness that this might just be more grist to the mill, and feed the conspiracy theories, I see on zerohedge today an interesting article showing how comex gold futures have been allowed to be settled by GLD ETF shares instead of the physical commodity since 2005, and that GLD ETFs (from prospectuses) need not hold any particular physical quantity. This theoretically allows gold contracts/ETF shares to be used in a manner similar to classical bank credit creation (the same is not the case for silver, interestingly enough). My apologies to those who are sick of this line of discussion, but I thought that if zerohedge thinks fit to run it — and since it actually references facts from comex rather than pure conspiracy — it might be of interest to others here: http://www.zerohedge.com/sites/default/files/The%20Alchemists.pdf
Cheers,
Bill.
Hi Steve, BTB and others.
Whats up with Gold Man Sachs?
http://news.bbc.co.uk/2/hi/business/8149762.stm
Are we being extreme sensationalist and in the process sulk into doom and gloom mentality and are following a cult as accused by others?
Or are we being conned?
I cannot believe that what is wrong is somehow working. It is not supposed too and on the contrary correct itself. But somehow all this nonsense is working and it seems rather mild and not as bad as we have expect it to be.
Are we really skewed that we expect the worst which is not playing out? Last year when all the US banks and auto industries were failing I thought what we expected was starting to realize. Now it seems like a different story.
Also, Australia seems to have suffered too little and is doing very well considering the consumption declines and job losses or are the ABS stats and housing stats cooked up?
I dont think the housing stats are cooked up because in Sydney the demand is real and massive and lets not kid ourself here. Banks are lending like before and more people are borrowing as much as before to buy. Of course the stimulus is working as long as its there.
I just dont get it but i prefer not to read some silly article that its all cooked up.
Its true we can see the MSM trying every bit to promote the Green Shoot Recovery concept. But on the same token are we possibly doing the reverse and dismissing some valid cases.
For example I have seen extreme if not mad suggestions to sell your house and be debt free to survive this downfall.
What if my debt is reasonable say between 100 to 200K. Of course I might have overpaid 40% given the market I purchased in but at least there is shelter for the family and I am not at the mercy of Landlords who are ruthlessly and ever increasing their rents, and renting might work out more expensive so as to minimize my potential losses (which by the way has not happened so far?). Also, note that I have the luxury of staying in my own home and do not have to wait for 10 to 15 years to buy when my debt is manageable. If it was 400 to 500K I would say your suggestions should be taken seriously.
In short I don’t think some suggestions out here are sensible or realistic. If i am wrong please explain.
scepticus
those are some interesting points. so are you in equities? with the deflating pressures steve is talking about its hard to imagine 40 PE’s due to risk premium needed. goldman sachs currently seems strangely immune to these pressures.
joshua
“But somehow all this nonsense is working and it seems rather mild and not as bad as we have expect it to be”
This is difficult for me and presumably many however ….
It’s a characteristic of historic bubbles that they are most manic (read: steepest price increases) right before the fall.
Many people have lost their shirts to bubbles over history by getting in near the top. I seem to remember fisher was discussed on this blog for just that ? http://en.wikipedia.org/wiki/Irving_Fisher#Stock_market_crash_of_1929.
Rents –
In America vacancies are increasing, rents are dropping – very different situation but the ABS released data recently saying Australia had 800,000 vacant dwellings… I imaging the real figure is much higher due to mechanisms like Neg Gearing. I think the rent problem is a symptom of the price bubble/regulations and will resolve itself with the former.
Risk management –
“Also, note that I have the luxury of staying in my own home and do not have to wait for 10 to 15 years to buy” — True but if the price crash comes as seems inevitable you may have to wait “10 to 15 years to sell”. There is nothing wrong with that as long as you are not forced to sell.….
TrainWreckEscapeArtist
“True but if the price crash comes as seems inevitable you may have to wait 10 to 15 years to sell”
If you are an investor maybe you should be concerned, however if you are living in the only house you own and have a manageable debt why would you sell in fear of potentially not being able to sell in a depressed market lasting 10 to 15 years? This is absurd?
It makes sense to alarm potential home buyers not to enter the property market now because of inflated house prices. But it makes no sense for people to sell their homes so as to save potential losses.
I have just explained a case where half the debt is paid off and is manageable. Ok so the buyer paid 40% more so he should sell and rent because he overpaid for it a few years back?
People circumstances might be different. What if I got the house at 200K and now it is valued at 450K. I have an outstanding debt of 200K (assumed I paid only interest) so I should sell my house because it could drop from 450 to 250 and avoid potential losses (in this case from the current price)? If everyone follows this trend demand for rental property will increase and rents would increase and we would be at the landlords mercy.
In that case why purchase anything lets not buy anything because the price of it might fall few years down the line? Just follow the path of self renunciation.
As a non economist on this blog reading ahs been a revelation to me. I also wonder though with the plentiful supply of stats and articles relating to ‘direction’ of economic policy (and politics)can someone please identify perhaps (excluding national accounts)what they believe are the MOST RELEVANT STATS WHICH MIGHT POINT TO AN ECONOMY’S DIRECTION. I do not expect agreement (which in iteself is great)BUT perhaps for someone like me there appears to be a great deal of contradictory data (excluding mass media you know what)from month to month, including the economists world wide who, like those who predicted the ‘GFC’confuse the heck out of me ‘daily’!!Please help!
tommyt
of the 11 economists in the world who predicted the crisis they seem to be fairly evenly divided between those who expect inflation and those who expect deflation. So even though they all predicted the crisis half are personally going to take a financial drumming as the crisis unfolds.
The only way to avoid this is to sell your soul to Goldman Sachs and make up the rules as you go along so they suit your trades.
tommyt,
The stats I find to be the most important is the property price index created by Nigel Stapledon. Like the US, Australia has experienced an unprecedented increase in property prices, starting from 1987 and then rapidly increasing since 1996 (the same time as the US).
The bubble peaked in March 2008 and has been deflating as a national average since then. The health of the banking and financial industry are predicated upon property prices stabilizing or even increasing further. Steve has made a prediction of a fall of 40% in property prices. I think that it is likely to fall even more in the most bubble-inflated areas.
Unemployment, falling consumption, paying down debt, property price deflation and falling prices will feed into each other and lead to a damned lot of misery as seen in the US.
I don’t think that the economic disaster will occur until property prices start to deflate rapidly. Until then, this recession seems to be fairly mild on the surface.
Joshua, I agree with much of what you have said in your most recent two posts. It’s certainly a valid view that somebody comfortable with their mortgage (at today’s currently very low rates, as well as potentially much higher rates in the future) could just be satisfied with their situation and concentrate on paying down their debt.
Actually, I am sympathetic to this view because I think it is ridiculous this obsession with the “worth” of one’s home — we don’t need to constantly validate our decisions on furniture and cutlery and who knows what else we buy, so why your home?
I think Shiller is spot on about so much — and I think he’s spot on about increasingly middle class westerners wrapping their self esteem in price movements of their assets.
What a shame, because if people were not so pre-occupied with the price of their homes, then perhaps policy could more easily move away from supporting bubble prices (for the benefit of the middle class, and supposedly the economy) towards helping the more marginalised people who have been hurt so much by the house price bubble (and consequent rental affordability crisis) in this day and age where politicians have stopped leading and are rather lead by opinion polls.
Having said that, I can understand somebody taking a decision to go underweight residential property (that’s essentially what anybody who sells or has the finance to buy but does not is doing) — that’s pretty much what I am doing.
In my view, especially at a time like now, there is a very significant difference between being able to comfortably meet all living costs (including mortgage repayments) and having all other non-superannuation equity in a home, and being able to meet all living costs (including rent) and having significant resources which are liquid and immediately at your disposal.
Nobody here needs reminding of the risks that our economy confronts. And even if the tentative positive signs turned out to be sustainable — which I consider unlikely (the China situation is very interesting!) — we have been bombarded with messages that we confront the most serious economic problems in almost a century!
As they say, a recession is when you know somebody who loses a job, depression is when you lose yours (perhaps all of them, seeing as many families are depending on several incomes to meet their living costs). So that comfortably meeting of living costs could change quickly. And having liquid assets allows greater flexibility in response to difficult situations.
With regard to rental demand, it’s worth keeping in mind that even if many sell and begin renting, that home has not been destroyed — it’s just a reshuffling of the deck chairs (either another owner occupier moves out of the rental market, or an investor buys and adds it to the rental property supply).
This is worth remembering in some of the agent comments published of late about the loosening rental market supposedly due to boosted FHBs moving out of the rental market. That can only be a factor if they are moving into properties that were already built but unoccupied — because building data has been weak until now –which is likely. But it also will be due to people moving back in with family as they become unemployed or underemployed. Either way, there’s no positive in it for the realestate industry.
Hi Steve, this is my first post, after reading all of the comments. Thanks for digging this up! It’s good to see something tangible that shows what is driving the current economic state — the deleveraging. I’ll have to read more of your posts.
The one thing I don’t understand is, what is stopping Bernanke from simply going out and buying stuff with fiat? However much debt there is, it can be made small with a Fed purchase of enough size.
Of course, there will be hardship involved in getting that debt to a manageable size. But also opportunity for some.
The “enough size” involved is at least 25 times the increase in fiat money that Bernanke has injected to date, and he has to give it to the borrowers rather than the lenders. Both of those are extremely unlikely to happen.
I think it depends on the alternatives. I don’t think those in power in the US would risk a large segment of the population going hungry and being out of work — it’s a threat. I would expect at the least, enough fiat to be injected if necessary to keep these people doing something and able to have the basic necessities, even if the jobs amount to digging holes and filling them back up again.
we_have_kangaroos,
What’s occurring in the US at the moment is a growing human disaster. Those belonging to the hungry and unemployed are those who have little to no power and as such, are unlikely to be a threat to power. The US probably has the worst social welfare state in the West — this barely helps the disadvantaged during the good times, let alone the bad.
The capitalist class war that the rich has been fighting successfully against the middle and working class in the US over the decades has ensured that the rich can dismiss the needs of the disadvantaged with impunity. In fact, as your friendly neoclassical economist will say, labour market interventions such as social welfare causes further unemployment, so the poor are better off being stripped of all help altogether — for their own good.
Steve, in case you’re still reading this…
According to federal reserve’s own statistics of consumer credit (the G.19 report). We have only
seen a SMALL drop in consumer debt.
http://www.federalreserve.gov/releases/g19/current/
Q3 2009 was the peak at 2.582 trillion. It has
since dropped to 2.519. It’s a drop but a small
drop.
I don’t see how you’re getting these charts
showing huge deleveraging. That’s not what
the federal reserve data shows.
At the rate we’re going, it will be a very
very SLOW deleveraging process.
Hi George Orwell (an interesting moniker at this time),
The data in the USA is as confusing as Australia’s has become–but in the opposite direction.
I use the the US Federal Reserve’s Flow of Funds data, which includes both level and rate of change tables. The level data is showing just the small dip you specify–but the rate of change data shows the huge drop in my charts.
The growth data is stored in the file gtab2d.prn, and the respective figures from there for the last quarter are:
Total Debt = +1,367,900
Household = –151,810
Mortgage = –5,220
Business Total = –28,280
Corporate = 140,620
State Govt = 108,410
Federal Govt = 1,439,570
Financial Sector = –1,791,750
Total Private = –1,971,840
On the other hand, as you note, the level tables indicate that private debt has fallen only marginally.
And on the other Aussie hand, the reverse pattern is true in the Australian data. The RBA noted that there had been a 0.1% increase in private credit in the last month, while the aggregate private debt level was shown to have fallen by +40 billion last month!
There is an explanation in the RBA Notes that this was due to a reclassification, but …
Anyway, I deliberately refrained from making any comment on the Australian data because of this disparity, while the automatic sums in my database produced the aggregate change in debt data from the USA’s growth figures. As a sole operator, I haven’t had the time to go and check this out–if I had the staff of a statistical agency or Treasury to help me, it would have been a task delegated to them immediately.
In the Australian data, while the last month’s figure is a wild card, the rate of deleveraging seems to be running at about 4% p.a. from the previous months’ data, which corresponds to the rate achieved during the 1890s Depression. This is equivalent this year to a 6% deduction from aggregate demand–since debt is roughly 1 2/3rds times GDP.
On the “in case you’re still reading” front, I am flat chat with a new subject (Behavioural Finance) on top of everything else I’m trying to do, so I don’t have the time to write as much as before, or to read posts as deeply. But my mornings start with reading the posts here as best as I can, and I must say that I’m still impressed with the standard of discussion.
Thank You Steve for the response. I think we may see an acceleration in the consumer debt reports. The G.19 report.
You may be aware that Obama signed into law a credit card reform bill. The banks have since started raising the minimum payments and fees and cut credit limits.
It will take a while for that to work itself into the economy. Lower credit limits means that consumer will spend less and will be forced to pay a bigger minimum payment.
Although this report is quite gloom and doom, I think the economy is slowly starting to pick up. At least from the point of view of self storage industry, there are positive signs that things are picking up and there are better years ahead. From the recent decrease in interest rates, and increase in consumer spending, small businesses should breathe slightly easier soon. I’m not saying we should just sit back and wait for the money to roll in, but I don’t think we should sink into depression and have sleepless nights over the economy.
Thanks Eric,
I think the government rescue has succeeded in starting another bubble–though I think it will not last as long as the previous one. I’ll write a post about this shortly, using the Flow of Funds data.