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Why the "Green Shoots" of Economic Recovery will Not Happen Anytime Soon

Economics / Recession 2008 - 2010 Jun 27, 2009 - 10:15 AM GMT

By: Kevin_Geary

Economics

There is much talk about "green shoots" of recovery in the economy. They are more like weeds growing through the cracks in the concrete, as far as I can see.


We have an economy here in the US that was based on 70% of GDP being consumer-driven. Slowly but surely, the greatest manufacturing economy in the world destroyed itself by outsourcing its real source of strength, which was making things others wanted to buy. We have now become a consumer society, and the whole premise of the government stimulus is based on the idea that the consumer will magically re-appear with his or her open wallet stuffed with credit-cards and willing to borrow again at usurious interest rates and buy imported goods that fall apart or poison them (usually made in China, with no quality control) in order to get us back to the status-quo ante.

This simply is not going to happen. It might in 10-15 years, if and when people have forgotten about the collapse of 2008-9. But it isn't going to happen this year or next. The whole stimulus plan and the whole premise upon which it is based is just a chimera.

Consumers cannot get credit because the banks aren't lending. Borrowers cannot get mortgages unless they have such high credit and so much cash that they could buy the home outright and even then, according to many mortgage brokers I speak to, the deal can still stall at the last minute, just before closing. The banks are not lending because they know the situation: they themselves still have far too much bad debt and are therefore hoarding money against further losses and toxic debt collapses, rather than lending it. If the banks really thought that the economy was on the way to recovery, they would be opening the floodgates to borrowers. But they aren't doing that because the unspoken elephant in the room is the toxic asset time bomb; the bad mortgages that are set to explode in 2010-2011; the ever increasing credit card defaults, which have not yet reached a peak, and the general uncertainty about what will happen in the next six to twelve months.

So banks aren't lending; consumers cannot get credit, and they aren't spending in the face of the biggest asset crash anyone has experienced since the Great Depression, and the foreclosures and job losses they see all around them every day.

As I have written before, what if the world stops spending? (http://www.marketoracle.co.uk/Article8905.html )
Japan's economy is collapsing with massive price drops, collapsing sales and exports. Europe is fast beginning to catch up with the US in the massive layoffs, collapsing banks and assets, and collapsing economies of Eastern Europe, with profound political and societical implications, as has already been hinted at with the European parliamentary elections, and increasing hostility in many countries towards foreigners within their midst. Attacks on Romanians in Northern Ireland for instance, are just a tip of an iceberg that is rapidly disintegrating. Europe after all, for all its trumpeting of its union, has seen in the past a move towards xenophobia and right-wing extremism when the economy starts to deteriorate markedly, as is rapidly happening today.

We need to seriously consider the implications for the US and the world if consumerism fails to revive. I cannot see it reviving for a very long time. There is no incentive anywhere to spend money, except on absolute necessities, like food and clothing and shelter. Cars will only be purchased when an old car gives up and a new purchase becomes a necessity. Even then, people are looking to second-hand one or two-year-old cars rather than buying a new one.

There is little hope of a return to the numbers of new car purchases that existed even a year ago, for Toyota, Honda, Nissan, GM, Ford or Chrysler. The best that can be hoped for is maybe a return to 50-70% of the previous market share, and there seems little chance of that in the near future..
Consumers here and world-wide have become savers not spenders, despite terrible interest on savings. They are paying down debt (where they can) and are avoiding taking on new debt entirely and they are being assisted in this by the banks who have virtually destroyed their customer base by shrinking credit limits and hiking interest rates.

I have yet to meet or hear from a single person this year who has had an increase in their credit availability. I have heard from countless people, even those with superb credit, who have had their credit limits cut drastically or their interest rates increased to usurious levels for no apparent (to them) reason. This is happening everywhere; in the US, in England, in France, in Ireland, etc. It has become ubiquitous and is as prevalent now as the relentless offerings of ever-increasing credit availability were, just a year or so ago.

There will be no recovery (based on a consumer - driven surge of acquisitions) any time in the near future.

Given that, what real recovery is there, or can there be from a "stimulus" that simply won't restore the rampant consumerism-driven economy that we had?
This is why the whole idea of "green shoots" really is just the weeds amongst the concrete slabs of stagnation and deflation.

By Kevin Geary

kevingearyart@npgcable.com

Kevin Geary is an artist who lives in Sedona, Arizona. He was the youngest political cartoonist on the Financial Times at the age of 19. He had his first one man show at 20, opened by the prime minister of Great Britain, Harold Wilson. He has had over 60 exhibitions of his work; has work in several major museums, including the National Portrait Gallery in London, and his work has sold at major auction houses, such as Christie's, in London, Whyte's in Dublin and Doyle in New York.

He has followed politics, history and economic history for many years, and has also written about it elsewhere online. He predicted this depression long before it happened, timed the collapse of the stock market in June last year, long before it happened, and his stock picks have often been very accurate. The four stocks he picked on January 1st, 2009 to do well (Amazon, Apple, Baidu and Google ), are all up from the beginning of the year. He does not offer specific public advice about stocks, but he has written from time to time about long and short term trends in the political and economic realm.

© 2009 Copyright Kevin Geary - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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