See the Moment, Seize the Day (2/3)
The US economy is spiraling downward, and at its center is shriveled consumer demand, formerly driving 70% of America’s economy, now the starting point of the vicious cycle ravaging Corporate and Retail USA, and in turn, her economy.
Massive unemployment has set historical levels; December 2008’s 7.6% is a 16-year high and 2008 Economics Nobel Laureate Paul Krugman projects 10% by end-2009. 600,000 jobs were cut in January 2009 alone, totaling 3.7 million cuts since December 2007. At 7.6%, that’s about 8 in 100 workers, jobless; at 10%, one in ten.
After the Troubled Asset Relief Fund (TARP)’s $350 billion initial tranche failed to tangibly restore consumer lending and spending, more than ever, US banks refuse to lend, and people refuse to borrow, out of a primal fear of the unknown. Truly, now no one knows what will happen next.
See the Moment, Seize the Day (1/3)
The US debt-GDP ratio hit 69% ($10 Trillion) in September 2008, before the $750 billion (or Obama's $819 billion, about 5% of GDP) bailout. Her GDP stands at $14 trillion, with combined consumer and corporate debt comprising 123% and 140%, respectively, of that GDP. Faced with $59.1 trillion in Government liabilities (including unfunded Medicare and Social Security obligations) she is deeply in the red.
Great Depression II?
Rising unemployment (2.39 million jobs lost from December 2007-2008) will certainly increase consumer loan delinquency levels, already at 25% in May 2008. Corporate debt is looming as the next bubble to burst, projected at 23% delinquency by 2010. Is it the Great Depression II? September 2008 signaled the worst Balance Sheet recession in history, more than the Great Japanese Recession of the 1990s, where the fall in asset prices wiped out corporate demand equivalent to 20% of Japan's GDP.
Indeed, the US Financial System's Toxic Assets seriously undermine their balance sheets, preventing a return to normal lending. Worse, the US treasury announced in November that the $750 billion Troubled Assets Relief Program (TARP) would be used to stimulate spending and lending, not to absorb Toxic Assets. But Bernanke and Paulson were not straightforward, using $350 billion to recapitalize banks, propping up the Balance Sheets of their former Wall Street colleagues, instead of reinvigorating lending.
On the wonderment of Obama as to why TARP did not work (and the $819 – or is it $950 - billion bailout will fail), our Economist-President sagely stated “that the worst thing is for America not to do anything,” at Davos. Indeed setting, say a 50% floor price now for Toxic Assets, with the US Government guaranteeing the difference between that and the eventual price that the assets are disposed, would immediately restart banks’ lending. It would remove the Financial System's uncertainty, where the unknowns are unknown (per the Knightian Uncertainty perspective), where people are afraid to act because they don't see the floor.
Oscar for Most Prepared Country
It’s Oscar season, and the award for Most Prepared Country for the Global Meltdown goes to…the Philippines!
Fall of Empire
The Global Economic Meltdown has undermined once-powerful economies, illustrated by US woes: 2.8% GDP growth decrease by Q4, 2008, contracting 1.5% more in Q1, 2009; 7.2% unemployment rate, with 2.6 million lost jobs which Obama seeks to replace via infrastructure-oriented stimulus spending.
The US recession worsens despite remedial actions. GDP shrinkage continues as companies face less revenue from American consumers. Bailouts, like the $700-billion Troubled Assets Relief Program, and Obama's $819 billion package failed to restore consumer confidence. Distributed as tax rebates, households saved two-thirds and used the remaining to pay off credit cards.
The Fed faces a blank wall. Bernanke, in stimulating lending, dropped key interest rates to 0-0.25%. Yet loans - and spending - languish as recession-borne layoffs and belt-tightening induces a deflationary spiral.
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- Teodorico Haresco
