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The US Recession Is Not Over, But The Party Is

Economics / Recession 2008 - 2010 Oct 31, 2009 - 08:17 AM GMT

By: Andrew_Butter

Economics

Best Financial Markets Analysis Article“Technically” it’s over, perhaps, but that 3.5% annualized was entirely due to the government borrowing money and giving it to people to spend on things that will not generate long-term economic value:

Cash for Clunkers (1%) + $8,000 New Homebuyers (1%) + Government Spending (0.5%) + This and That (1%) = 3.5%.


To achieve that superb magic trick the government took on how much debt? I’m not going to bother with trying to unpick the deliberately obscure numbers, but if it was more than 1:1 I’d be very surprised.

And how did they get the debt? Well since no one wants to lend them any money these days, certainly not at the ridiculously low interest rates they pay, (and it’s not inflation risk potential buyers are worried about, it’s the trashing of the dollar and sovereign risk), they had to find someone else to lend them money.

Of course that was easy, the banks showed up at the Fed discount window with a load of toxic assets that no one has a clue what they are worth, and the Fed said:

 “OK I’ll lend you, lets see…how about 90% of face against that “security” (LTV = 90)? And just for you, since you have been so good, and you are obviously such a good credit risk, and since we used to party together down on the AIG shindigs to Las Vegas, now those were something hey!! Tell you what; I’ll let you borrow at 0% or thereabouts”.

Then the banks all trotted down to the Treasury and bought a load of Treasuries at 3.5%, and then they gave themselves huge bonuses for being so smart. Some of them were even smarter and put it in the stock market or speculated on oil.

And then the Treasury took the money and paid for a load of cars from the companies that they (effectively) own, plus the “housing stimulus” (which makes sense because unless there is a 50% bounce in house prices all those toxic assets that they bought are going to be worth zilch).

And look at that, the “Wizards of Washington” created gold out of TSE (treated sewage effluent); Alan Greenspan would have been proud, the “free market” works!!

Halleluiah!

Well I don’t know what you call it (racketeering and crony capitalism are words that come to my mind), but one thing it is not, is a strategy for achieving sustainable economic growth.

Lessons from my dad

I can trace my roots back in Burks Peerage to the Scottish nobles who kicked all the peasants off the land in the great “clearances” which explains why so many Americans have got some Scottish ancestry. And then the nobles had a big party; that lasted a few generations.

Similar theory to shipping all those jobs and manufacturing capability from America to the “New World” (cheaper peasants means more profit), and using the “savings” so the elite could “party”.

By the time I was born, the money was starting to run out, so what did they do? Well they borrowed, so they could “keep up appearances”.

That lasted for a generation or two; sadly my ancestors were apparently quite enthusiastic partiers, so pretty soon they had to go with one of two strategies, Plan A was to marry money (basically unlocking the brand value), or Plan B was to work for a living, which sadly was the strategy that my dad had to go with, having lost his estates when his half-mad uncle married the nurse (she was about 26, he was 83).

Anyway, lessons learned, my dad was a bit peculiar about borrowing money, and when he arrived in Abu Dhabi just before the oil boom he had all sorts of weird ideas; so when that money started flowing in he set up the Abu Dhabi Investment Authority which was like a big piggy bank (easy to put money in but extremely hard to get it out of, for example for parties).

Anyway, he had this really-really weird idea, something to do with “you never borrow money to have a party”, when you borrow that should be to invest in something that on its own can generate money to pay the loan back. That was a weird idea, my dad was a real party pooper, one of those guys that goes to a party, has one drink, and then goes home to bed (my mother used to despair (I’m personally more of my mother’s constitution)), but it might explain why ADIA is now one of the largest SWF in the world.

Fortunately America has lots of Nobel-prize winning economists who can prove beyond any reasonable doubt that my dad was a complete lunatic, which is something that I always suspected.

Or can they?

Perhaps what just happened was no different from a very indebted aristocrat with a great “brand”, desperately borrowing money from wherever they can find it, so they can “keep up appearances”.  And they sure have “appearances” to keep up, not least some pretty expensive wars to finance.

That all started in 1998 when they allowed the “shadow banks” to write $20 trillion worth of securitized debt (over the next ten years) to keep the party going .Now that game is over (and the debt is defaulting), they are borrowing on the promise that they will be able to tax the long suffering American peasants to service it, in the future.

The reaction to the “news” of the huge “bounce” in the American economy was that great bounce in the stock market, but it only took a day or so for the penny to drop.

I suspect that there may be quite a few pennies to drop over the next few years.

By Andrew Butter

Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2009 Copyright Andrew Butter- 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.

Andrew Butter Archive

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


Comments

Mo
10 Nov 09, 10:55
Dubai real estate

Hi Andrew,

I posted a question for you a few days back, but it wasn't posted for some reason.

I basically wanted to know your view on Dubai real estate given your experience in the region. What are the furture prospects of Dubai economy in general and the real estate market in partcular post the 50% crash. Is doing going to recover? Do you think the goverment will come up with a plan to increase demand and get rid of this excess supply?


Andrew Butter
11 Nov 09, 04:55
Dubai Real Estate Answer

Ref comment on Article14676

I'm writing an article on Dubai Real Estate which will probably get out in week or so, I also wrote something in my article on "The Seven Immutable Laws of Bubbles".

1: Yes Dubai will recover to the trend line it had pre-2004, the business case for Dubai makes sense, however that business case depends on trade and until world trade picks up Dubai will be in the doldrums.

2: The government won't do anything about real estate,(a) it can't (b) that's not it's style.

3: Their priority at the moment is dealing with the $80 billion of short-term debt that they (and their GSE's) took on over the past five years that needs rolling over.

4: The property market appears to be following a typical bubble/bust dynamic, prices are low; good time to buy if you have a reason to be in Dubai, if you can find anything decent, there is a lot of rubbish around because everything was developed in such a hurry.

5: A good way to do that is to buy notes from people who bought but the building got canceled.

5: A good bet now that I see is to buy Dubai Government debt, Abu Dhabi will never let them default, so that's a steal, better prospects against default than a AAA US Treasury, denominated in dollars, and fetching up to 12%.


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