ROSENBERG AND THE “ARTIFICIAL RECOVERY”
In this morning’s note David Rosenberg has some good thoughts on the state of the recovery and why he sees H2 headwinds. More interestingly though, he discusses why the recovery has been largely artificial:
“What most economists are missing in their second half recovery prospects is the huge amount of fiscal withdrawal coming out way. And this retrenchment is ongoing at the state and local government levels where the muni bond bears earlier this year totally missed the situtation….
Indeed, this 2009-2011 recovery and cyclical bull market has been as artificial as the 2003-2007 expansion. That last one was fueled by financial engineering in the financial sector. This one is being underpinned by unprecedented government intrusion in the credit markets. As of this quarter, your government has replaced the private sector as the largest source of outstanding mortgage market and consumer related credit. So not only is the USA turning Japanese in many respects, it is also now resembling China where the government also redirects the flow of private sector credit.”
That’s life during a balance sheet recession. With the private sector in saving and debt paying mode government has been forced to step in and bear the burden. Get used to it. This “artificial” economy is far from making an exit. And if austerity comes in the next few quarters as Rosenberg sees then “extended period” might become something closer to resembling “permanent period”. Any economic downturn at this juncture has the potential to prolong the balance sheet recession.
Adversity is the GREATEST of all opportunities.
Why dose everyone avoid it like the plague.
It is what brings out the best in people, restores real values and responsibility.
Or is our goal to be fat, lazy and dependent on government for everything?
NO you are exactly right, we need to be more like Stalin and
Let them starve.
Got it
Rosenberg has referred to this in the past as state capitalism. Lets assume this for the moment. This developed as a means to cushion the impact of withdrawal of private capital from credit/debt creation and reduced household debt: both as debt deflation. So the government has come in to replace private debt deflation with government debt inflation.
Lets accept for the moment that the government (aided by the Fed central bank), rescued the financial system, at least for now. One can then draw the conclusion that state capitalism has served not only to cushion economic decline that came in 2008, but to save the banking system, with that system’s involvement in credit creation haing been largely replace by government credit creation.
Financial instability has now, as a result, been shifted to the government (evidence of this abounds in Europe). Austerity obviously will make matters worse, so the government isn’t really able to pull back much, at least in the US. So . . . as stated above, this condition will remain for an extended period of time.
Europe is evidence that a financial and economic system that relies on continuing infusions of debt simply to maintain status quo, is reaching its end. It may be that this is being played out in the US in slow time, even if the idea of bankruptcy here is absurd. The financial crisis in 2008 proceeded the decline of the ‘real’ economy. Today we have financial instability at the same time that we are witnessing a turn down in the global ‘real’ economy, such that the conditions today may reflect vulnerabilities that did not exist in 2008, with results that may, over time, be worse.
So if banks cant supply credit because they are insolvent and by implication incompetent, then I don’t see the difference if the govt steps in and supplies credits instead.. The incompetence may (or may not) be any greater, either way someone supplies money to the economy.
It is less a matter of whether the credit/debt is public or private, but why the need for the never ending infusion of credit/debt to keep the system of imploding. What so many miss is not the extent to which the global economy is dependent on credit/debt but why it is so dependent. Understanding this takes a historical perspective, which boils down to this: the need to substitute debt for income. As US jobs went overseas, and as neoliberal capitalism replaced welfare state capitalism beginning in the late 70′s, privatization and de-regulation ensued. Along with this was the globalization of capital in search of recapturing profits that were in decline. Reducing inflation back then required a dramatic reduction in wages (and weakening of labor in the US) in order to reverse declining profits. This is where Volcker came in, to reduce inflation pressures by seeing to it that wage growth ended. Thus we also got free trade heightening capita mobility, thus the notion some time back of the ‘race to the bottom’ as evident in the search for reduced cost of production by locating where wages were very low. Consequently, incomes fell in the once manufacturing powerhouse: the US. As production increased dramatically in poor and developing countries, especially China, markets for the goods were needed. To offset declining income in the US, debt was necessary to replace it, to lift up consumption in the face of overproduction. This created the trade imbalances that provided liquidity to fund the credit/debt creation, as China sent its surplus dollars back to the US buying Treasuries and mortgage bonds.
Rosie is feeding the popular “central planning” myth a little too much in this piece in my opinion. Americans have this false perception that the govt has always been on the outskirts of involvement in the housing market and markets in general. That’s total nonsense though. For instance, look at the GSE’s over the last 30 years. The govt has always been involved in the housing market to a huge degree:
The notion of ‘free’ markets free of government intervention is ideology, not fact. It’s never existed and never will. (The recent notion of a few of central planners is too ridiculous to comment on.) Take a look at agriculture for an example of government involvement in markets.
The issue is not whether government intervention should occur or not (hell, deregulation is a form of intervention: changing the rules of the game to benefit private interests at the expense of the public), but the kind of intervention, where it takes place and who benefits and who doesn’t. Anyone who argues that government intervention is the source of all economic ills is mistaken. It is these same rascals who ignore the overwhelming evidence that government intervention has benefited corporations above all else, often at the expense of the public good.
100% agree Don.
Cullen:
That chart is worth a post on it’s own.
I had never seen the absence of Fannie/Freddie in 2004 laid out so starkly before. I knew that FHA was almost completely dormant in that period (a much longer period, actually).
What were the Fannie Freddie constraints?
David Rosenberg
Has more to say about the US debt ceiling
http://watch.bnn.ca/#clip491619
Rosie is a perma bear economist. As an investor, he is useless.
Successful investors trade the tape, not their opinions. Who cares about Rosie’s opinion – the market certainly doesn’t!