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Why 95% of Traders Fail

U.S. Economy Forecast 2010, The Year of Severe Economic Contraction

Economics / Recession 2008 - 2010 Dec 14, 2009 - 04:06 AM GMT

By: Mike_Whitney

Economics

Best Financial Markets Analysis ArticleUpbeat reports in the financial media, belie the effects of the ongoing credit contraction. Massive injections of central bank liquidity have prevented the collapse of financial markets, but have done nothing to ease the deleveraging of households or stimulate activity the broader economy.


The crisis has stripped $13 trillion in equity from working families who now find their access to credit either cut off or severely curtailed by the same banks that received hefty taxpayer-funded bailouts. The fiscal strangulation of the millions of people who are no longer considered "creditworthy" is progressively weakening demand and spreading pessimism across all income levels. Growing public desperation was the focus of a special weekend report by Bloomberg News:

"Americans have grown gloomier about both the economy and the nation’s direction over the past three months even as the U.S. shows signs of moving from recession to recovery. Almost half the people now feel less financially secure than when President Barack Obama took office in January, a Bloomberg National Poll shows.

The economy is the country’s top concern, with persistently high unemployment the greatest threat the public sees. Eight of 10 Americans rate joblessness a high risk to the economy in the next two years, outranking the federal budget deficit, which is cited by 7 of 10. An increase in taxes is named as a high risk by almost 6 of 10.

Fewer than 1 in 3 Americans think the economy will improve in the next six months....Only 32 percent of poll respondents believe the country is headed in the right direction, down from 40 percent who said so in September." (Bloomberg)

The near-delirious optimism that followed the 2008 presidential election has fizzled in less than 12 months. While the policies of the Obama administration have improved Wall Street's prospects for record profits and lavish bonuses, ordinary working people continue to fight to keep their jobs and maintain their standard of living. Recent data show that household debt which surged during the boom years is being pared back at a historic pace. Household debt to disposable income has plummeted from 136 percent to 122 percent in a little more than a year, leaving many families with little to spend at the malls or shopping centers.

Severe retrenchment has triggered a shift towards personal thriftiness which is reducing economic activity and strengthening deflationary pressures. 2010 is likely to be even worse, as mushrooming foreclosures and commercial real estate defaults force banks to slash lending accelerating the rate of decline. This is from Bloomberg:

"Foreclosure filings in the U.S. will reach a record for the second consecutive year with 3.9 million notices sent to homeowners in default, RealtyTrac Inc. said. This year’s filings will surpass 2008’s total of 3.2 million as record unemployment and price erosion batter the housing market...

Foreclosure filings exceeded 300,000 for the ninth straight month in November, RealtyTrac said today. A weak labor market and tight credit are “formidable headwinds” for the economy, Federal Reserve Chairman Ben S. Bernanke said in a Dec. 7 speech in Washington. The 7.2 million jobs lost since the recession began in December 2007 are the most of any postwar economic slump, Labor Department data show. Unemployment, at 10 percent last month, won’t peak until the first quarter, Quigley said." (Bloomberg)

The Obama administration's $787 billion stimulus pushed GDP into positive territory for the first time in more than a year, but the maximum impact has already been felt. President Obama--under advice from his chief advisors-- has shifted his focus from soaring unemployment to long-term deficits. Additional stimulus will be no more than $200 billion, of which, a mere $50 billion will go towards jobs initiatives. At the same time, Fed chair Ben Bernanke will terminate the quantitative easing (QE) program which kept long-term interest rates low while providing financing for the housing market. When the program ends, rates will rise, housing prices will tumble, and liquidity will drain from the system. The end of QE coupled with dwindling stimulus ensures that economy will slide back into recession in the 2nd or 3rd Quarter of 2010.

Policymakers have decided to create conditions that are favorable to financial sector consolidation and the further privatization of public assets. The economy is being strangled by design.

Here's economist Mark Thoma explaining why consumption will not return to pre-crisis levels:

"For the immediate future and likely for much longer than that, slow consumption growth is expected. One way that could change is if the government implements a successful jobs program or uses some other means to increase household income (e.g. a payroll tax cut), and households spend rather than save the extra income..., but the political environment makes a jobs program or further fiscal policy action highly unlikely.

Similarly...the Fed is anxious to unwind its massive policy intervention, not extend it, so monetary policy is unlikely to help much either. Since monetary and fiscal policy authorities are unwilling to provide further help, slow growth is the best outcome we’re likely to get." ("Will Consumption Growth Return to Its Pre-Recession Level?" Mark Thoma, moneywatch.com)

Along with flagging consumption, economists Antonio Fatas and Ilian Mihov show why both investment and employment will not rebound in the way that many bullish analysts expect. By tracking the rate of recovery in the last 5 recessions, the two economists show that demand will remain flat for a prolonged period of time, precipitating a "jobless" and "investmentless" recovery. Their research supports additional stimulus to reduce the output gap and engage the labor force in productive activity. The administration's policies are the exact opposite of the majority of professional economists who believe that deficits need to increase to effect overcapacity and underutilization. Obama is deliberately steering the economy into a double-dip recession.

While financial institutions have been propped up with zero-rates, myriad lending facilities and boatloads of Fed liquidity, the real economy continues to on a downward path. As households rebalance accounts and increase savings, the signs of distress are becoming more apparent. In Europe, the ECB and IMF have begun to use the financial crisis to wrest control of the budgets of deficits-plagued nations to apply business-friendly austerity measures. The economic meltdown--that was generated by overleveraged banks trading dodgy investment paper--is now being used to assert corporate/bank control over sovereign nations. Greece, Ireland, Iceland, Ukraine, Latvia, Lithuania, Portugal and Spain are all presently in the crosshairs of neoliberal restructuring. Surely, the same policies will be applied within the United States under the guidance of supply-side economist and chief advisor to the president, Lawrence Summers. Thus, in 2010, economic contraction will continue to force state and local governmnets to lay off millions of more workers while public assets and services are made available at firesale prices to private industry.

Debt deflation and deleveraging will continue into 2011, while foreclosures, personal bankruptcies and defaults continue to mount. The public's frustration with ineffective government policies, is likely to change from pessimism to rage on short notice. The prospect of social unrest or sporadic incidents of violence can no longer be excluded.

By Mike Whitney

Email: fergiewhitney@msn.com

Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.

Mike Whitney Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments


21 Dec 09, 20:47
housing

What makes this opinion more than a guess? The housing bubble burst, but how do you know that prices have not yet reached their bottom? Consumers are not as likely to spend, but what if business gears up for exports and meeting new energy and technology needs? What if the markets have adjusted to the losses and now we are returning to a period of growth?


George Orwell
17 Apr 10, 15:26
Economy

The job market never recovered from the 2001 recession even through the public was lead to believe so. The has been "0" job creation over the last ten years. Wages have been stagnant for at least 20 years. 40-50 years ago one

man working could support a wife, several children, a house, a car, pension,

health care and live a comfortable existence. This was the norm. The standard of living in the US is in decline since not even two people can accomplish this today. You can put aside all the mathematics, graphs and charts. It does not

take a genius to see what has happened and in only a few decades. The recent

economic decline (2007-2010) only shows a short period of time where the

decline has accelerated and made it evident to the eye.


Dave Montieth
26 Apr 10, 08:53
Economy

The economy continues to frustrate in the job market. Most people really are more concerned with what is happening in their own lives than the larger economy. Big government is NOT the answer in the US. Hopefully we will find our way back the old fashioned way, entrepreneurs, opportunities and hard work.


Texan 122
26 Apr 10, 14:27
Illegal Immigrants

Illegal Immigrants all need to be deported and all foreign aid cut off to their country.

Are we a country ruled by law and/or we a country ruled by man.

Founding of American was based on rule of Law not Man.


Sitting Bull
26 Apr 10, 19:09
Turtle Island

Yes, white skin, all illegals including you europeans should be deported !

and give texas back to the mexicans


PJ
26 Apr 10, 20:21
give texas back to the mexicans?

If Mexico owns Texas than Spain owns Mexico. One 19th Century land claim is as good as any other. You picked a great name "Bull"


MoralMoney
26 Apr 10, 20:49
Severe Economic Contraction?

It's almost May and I'm still waiting for this "severe economic" contraction. In the meantime, I'll just make a pdf of this page as a prime example of conservative overreaction to the government spending that repeatedly has shown to work during every recession since (and including) the great depression. Here's a clue: political ideology is not economic theory.


John
27 Apr 10, 04:25
recession

Haha Many economists continue to be desperately wrong about this recession. I remember when the stimulus was initially proposed many economists predicted hyperinflation and a double-dip recession. Where is it?


double dip
05 Jun 10, 20:53
John in april

John check it out the W forming now. 300 points down on Friday, breaking 10,000 Just the begining of the failed attempts of spending our way out of problems.


Jose
04 Sep 10, 13:06
texas

If Texas belong to mexico today , then the Mexican from Texas would be crossing to the USA looking for jobs anyway.


Peter spade
06 Oct 10, 04:12
My share what U.S. can do

US can do

1.) Keep it Made in America so more jobs will open

2.) Open tourism

1.) lower down rates on flights so foreigners can visit US and spend their money "inside" US

2.)Lower down toll taxes, so more US people can visit other states and take vacation there.

3.) Still no job at your US and European country?..look for a job in ASIA. ASIA is booming now, money is there. Many companies in ASIA are looking for english speaking workers. plus its cheap to live in parts in ASIA, so you can bring your family. Another idea, do some sacrifice, work in ASIA then send your money back to your country. It better to have a job than no-job at all.specially if you have mouths to feed and bills to pay.

just sharing :)


Road Dogg
07 Nov 10, 08:50
The Great Gold Buyback!

Precious Metals have begun to rise. And the biggest/largest precious metal in public hands is Gold. Ironically, SOMEONE is buying it back from us is large numbers, and even giving us a great price for it. When the dollar crashes and the economy is in the tank, we the people will not even own this precious metal.


MoralMoney
09 Nov 10, 15:54
Still Waiting....

Still waiting for this to happen. Dow is up 8.8% on the year. It was Obama that had you worried, wasn't it? It's okay. You can admit it. You know, even Greenspan had to admit in front of congress that his faith in Ayn Rand and unregulated markets was completely misplaced.


Shaker
07 Dec 10, 10:54
Economy

The only way to increase the US economy is to set up the their own companies instead of outsourcing to other countires, need to establish manufacturing companies so that people will have the jobs and no need to pay from the government fund to the jobless..

1. See no dropouts from the school

2. Avoiding child labour and make a law.


telsa21
07 Feb 11, 08:18
Economy

It doesn't make sense to spend more money if you are broke, just like our country! Obama's stimulus packages just put us further in a hole. What we should do is save, and try to get out of dept, not create more. We need to cut spending, but unfortunately nobody whats to sacrifice anything until they have to. Too many spoiled and greedy americans are going to ruin our country for good some day!


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