Veg on the FOOL writes a last post.
I asked him to stay and I hope he does.
It is a good post and I wanted to share it
PS. he is from Belgium
Mish
Here goes - from Veg:
==============================================================
It's different this time and believe me it really is. Not the economy stupid, but the circumstances we're in.
And most of us here, know what the differences are, but it never hurts to summarize them one more time.
Let's return to the beginning of 2001.
The first difference
The US is in a recession but this time the recession isn't caused by a restrictive monetary policy that is necessary to counter inflation. Something that has been the case for all the recessions over the past 50 years.
The event that triggered the recession was a sharp fall in investments. The business investments had anticipated growth already far too much.
The government tried to compensate the retreat in capital investments, by drastically reducing the interest rate and by a tax cut. Unfortunately even after the recession the Fed kept performing interest rate reductions and that is the second difference.
Households who make out 70 percent of GDP, save nothing and happily pile up debt.
Households are worriless and live in an illusion of wealth thanks to a still very high valued stock market and ever increasing real estate prices.
And they do not repent. The tax repayments must have left their wallets quickly and the low interest rates (home equity loans) allowed them to consume the increases in the (vulnerable) value of their equities.
A recession where households saved less and borrowed more makes the third difference.
The recession was mild and a feeling of “the worst is only postponed” sneaks into my mind. A recession makes imbalances disappear but here the imbalances only increased.
That's a fourth unusual element.
The deficit on the current account is a reflection of the low national saving rate. A deficit that continued its ride from 3,9 % to 5,7 % of GDP. Even despite a drop by 30 % of the dollar against a basket of 30 other currencies (since 2001).
The considerable depreciation of the dollar was accompanied by an almost insignificant increase of prices of imported products and services. Exporters took the difference on their account.
The ever mounting deficit of the current account, the depreciation of the dollar and the stability of import prices together, form the fifth difference.
Two thirds of the 3,7 percent of the annualized US growth in Q3 comes from less saving. The saving rate was about 0,4 % of disposable income and can hardily be seen as a solid base for future growth.
A fourth difference with previous recessions.
(yep, the fifth is somewhat the same as the third, but I need to cheat a little to find ten differences ;)
Since the end of the recession of 2001, real incomes have risen only by 2 %. The average income increase during the three years that followed all six recessions that preceded 2001, was 10 %. All this while household spending rose three to four times as fast as the real income rise.
That's difference number seven.
We all know this cannot be a neverending story and at a certain point in time, the courageous US consumer will need to slow down. Then the economy will gradually shift from a credit driven economy to a saving driven economy (although personally I consider the “credit driven” aspect a characteristic of modern capitalism and foresee a worldwide crisis of the capitalistic ideology).
Less consumption means less GDP and as we've seen that in recent years there has been an abnormal spending behavior, the impact could be more severe than many assume.
The drop in GDP is written in the stars and the bond market anticipates already. The long term interest rate lowered since June, and this while AG introduced short term interest rate hikes. An eighth difference.
Households have also purchased a lot of durable goods in recent years. They have greedily accepted the free lunches (credit) offered by many companies. Hereby they have strongly eaten into future demand.
In past recessions the purchase of durables was postponed rather than activated.
A ninth difference.
Can we still rely on the government to perform some delicious deficit spending to stimulate demand? With the challenges we face, an aging population and detoriating health care expenses, this tactic is highly improbable (apart from the defense spending) and if used would ultimately lead to even bigger problems.
Nor the government, nor the Fed, have a lot of ammunition left.
The tenth difference.
Okay, let's quit the enumerating now and comment a little. All the differences are interrelated and therefore every difference seems to boil down to the same.
But that's exactly the main point!
The Fed and with them many economists and financial analysts, remain optimistic and see a long period of reasonable growth and rising inflation that will painlessly wipe out the imbalances.
The relative rest that reigns today feeds the belief in this scenario. And why should we worry, now that the biggest problems have been averted.
They even presented us a nice job report, the S&P is doing well and the VIX-index shared in the shots of optimism.
This is a huge illusion. A superficial illusion that denies the underlying phenomena and the economical, historical and psychological laws.
The present silence only hides the imbalances and the longer stability stays, the bigger the chance of a miscarriage.
But how bad can it be. Different scenarios are possible, from a bad outcome to an apocalyptical one.
All of the scenarios have similarities. One of them is that the dollar will continue to depreciate and another is that the saving rate will increase again and debt levels will retreat.
Beyond any doubt these trends will reduce consumption. However other elements will join in and determine whether this recession will be a commonly bad one or a really bad one.
Will the business environment invest?
I guess not. If consumption falls back then the business environment will anticipate. Today we notice still weak investment activity and important inside selling.
Can we count on the government?
Only an increase in the deficit (spending minus taxes) can help the economy.
The most obvious probability is that the US will keep stimulating its most important and frugal economy sector (=war economy). But here the only long term advantage of this economy lies in the successful seizing of the wealth of this globe.
The dollar depreciation
A lower dollar will not solve the current account deficit. Combined with a resurgence of the savings rate in the US, I can see less import and a reduction of the current account but as imports are now at 152 % of exports, the US also needs more export.
In normal circumstances a lower currency stimulates exports but in our global economy the rest of the world will experience immediately the negative effects of the US consumer's changing behavior and consequently will unlike J6P, adapt swiftly and reduce spending which I consider a normal behavior.
The Chinese and Indian markets aren't sufficiently consumer driven and the overall purchase power isn't big enough to compensate the falling Western consumption. That'll take another decade at least.
For all this, it's unlikely that investments, government deficit spending and dollar depreciation will soften the next-postponed-recession.
Just as in the nineties the positive interactions led to an exuberant phase, this time the negative interactions will lead to a reversed exuberant phase.
The paradigma that saving is superfluous in a credit driven society is pure vanity. Vanity that comes before the fall.
I stick to the asset-, debt- and price deflation, even considering the excess liquidity in the market and rising commodity prices.
The rising commodity prices remind us of the seventies and the stagflation. In those years the environmental factors were inflation sensitive and inflation was running away already before the increase in commodity prices.
Over the past 24 years the environmental factors have been deflation sensitive and I see no change yet and a dollar depreciation will only be an accumulative deflationary element for the rest of the world.
Some say, that the Fed will cause inflation no matter what. Helicopter money, printing presses, monetization, … noises all around us. The open question is can they do it?
I find it quite clear that when they do it, we won't have inflation but dollar-hyperinflation served with a South-American sauce, because it will trigger the loss of confidence in the currency. It's insane to spice the recipe “reserve world currency” that way.
You find all of this improbable. A stress-test that is irrelevant.
In Fortune they published a stress-test in 2003. The question was whether the rally was able to take some hurdles. The test of improbable situations gives us some interesting information.
The first improbable situation was a drop of 10 % in the value of the dollar (it's minus 12 % now), the second one was an oil price of $ 35 (we're at $50 now) and the third was a divergence between the S&P-profits reported and their tax profits (until 1997 there was no difference, in 2000 the divergence was huge, in 2001 we returned to normality and today the reported profits are 50 % higher than tax profits).
Improbable! What is improbable?
We all wonder what will do it? What will be the trigger mechanism?
This brings me to the final issue: the “negative brand value” of Bush.
He who analyses the numbers of Wal-Mart must notice that their sales figures in Germany have dropped. A drop unseen in history. In Q3-2004 Coca Cola sold 16 % less in Germany. Mc Donald's, Gap, Disney and Marlborough show the same pattern. In a quasi stable smokers-market Marlborough sales dropped 25 % in France and 19 % in Germany.
And this isn't the result of a stagnating European market.
It happens without the excessive noise the United Staters made about the French products back in the pre-war Iraqi phase, but it simply happens.
Over the past four years my attitude towards the US changed but hope was still there. The voter made a mistake and all was going to get back to normal after November 2th.
Since November 2th hope is gone. It was no mistake!
I don't have to fool myself anymore and I better confess that I have become anti-american.
I boycott American products actively and I have become reluctant in appearing on this board.
Last week I read the (Dutch) book, The Jewish Messiah, by Arnon Grunberg wherein a German boy Xavier was going to save the Jews from their horrible past (a very provoking book). After a failed circumcision, he lost a ball. He saved it as a relic in a bottle of water and called it King David.
I couldn't help it, my thoughts wandered off to another King David, the messiah of the ultra-conservative middle class in jesusland.
Unfortunately they didn't put that ball in a bottle of water.
Perhaps one more thought on US democracy as our leading form of Western ideology.
In the seventies our leaders set a goal. The goal that all poverty had to be banned from this globe by the end of the millennium. We made no progress at all. In 2000 they set a new goal by which now all poverty must be reduced by half in 2015. What a nonsense!
We have accepted poverty and promoted it in two ways. First by accepting capitalism as the only road to salvation and secondly by promoting US democracy. In fact we have done no more than accept the inevitability of poverty in the name of protecting our way of life. Western subsidies and protectionism are only derivatives of that attitude.
The promotion of US democracy envisages only one goal and that's safeguarding the Western way of life. Wasn't it George Bush Sr who said that he didn't go to the Rio Conference because the American way of life was not negotiable and wasn't it Bush Jr. who refused to sign the Kyoto treaty? Their civilization is the best and it's a right and a duty to promote and impose it all over the world. Each attempt or initiative to block that road is hostile. The US is the biggest obstacle for structural changes in this world.
The US democracy promotion is no more than the spreading of “polyarchy”.
Polyarchy is no more than the leadership of a limited group, where participation of the majority is restricted to the possibility to chose their leaders amongst competing members of that elite. An institutional definition of democracy or better a procedural definition.
The essential privilege of the dèmos is not decision making but election. In a classical democracy the representatives are chosen to execute the decisions of the voters, while in a procedural democracy the representatives are mandated to take decisions. It's the legitimization of inequality.
So that ought to do it, I guess.
Maybe one day, things will go better, see ya then.
Veg. |
