Bond giant PIMCO CEO Mohamed El-Erian seeexcessive contractual liabilities as one of our big economic problems.
I worry that, absent a dramatic change in policies in America and Europe, things will get worse before they get better. I fear that, given this possibility, it would then take years, if not decades, to repair the underlying damage done to economies, jobs and people’s lives around the globe.
We are here because of the interactions of three distinct, yet inter-related forces: poor economic growth, excessive contractual liabilities, and disappointing policy responses. The result is that western economies are getting trapped by the lethal combination of an unemployment crisis, a debt crisis, and mounting fragilities in the banking sector.
Too many institutions owe too much in debts and entitlements. The poor economic growth is in part due to high oil prices and high prices for other commodities. Jeremy Grantham's Peak Everything argument suggests our slow growth period will be long lasting. So the size of needed debt defaulting is gigantic.
In Grantham's December 2011 newsletter he says the continued slow growth we are seeing is par for the course of what he's expecting.
Sadly, I feel increasingly vindicated by my “seven lean years” forecast of 2½ years ago. The U.S., and to some extent the world, will not easily recover from the current level of debt overhang, the loss of perceived asset values, and the gross financial incompetence on a scale hitherto undreamed of.
Separate from the “seven lean years” syndrome, the U.S. and the developed world have permanently slowed in their GDP growth. This is mostly the result of slowing population growth, an aging profile, and an overcommitment to the old, which leaves inadequate resources for growth. Also contributing to the slowdown, particularly in the U.S. and the U.K., is inadequate long-term savings. As I write, the U.S. personal savings rate has fallen once again below 4%.
Grantham and El-Erian are ahead of the curve in understanding the depth of our problems and the poorer long term prospects we face. The party's over. Most people need to raise their game (more skills, try for better jobs, be willing to move for career opportunities, work harder) to keep their current living standards. Think about your options. How can you better equip yourself for hard times?
New York Times economics writer David Leonhardt points to an interesting aspect of our current economic downturn: some categories of consumer spending have fallen to levels not seen for 10 to 20 years.
But the real culprit — or at least the main one — has been hiding in plain sight. We are living through a tremendous bust. It isn’t simply a housing bust. It’s a fizzling of the great consumer bubble that was decades in the making.
It is good that Leonhardt makes reference to the decades long unhealthy trend in debt accumulation that got us where we are today. The end of the private debt binge has drastically cut into consumer spending.
The auto industry is on pace to sell 28 percent fewer new vehicles this year than it did 10 years ago — and 10 years ago was 2001, when the country was in recession. Sales of ovens and stoves are on pace to be at their lowest level since 1992. Home sales over the past year have fallen back to their lowest point since the crisis began. And big-ticket items are hardly the only problem.
Decades of rising consumer debt, a huge housing bubble, and persistently high oil prices have made the current economic recovery the weakest since World War II. Steve Keen asks "Dude! Where's My Recovery?". Good question.
But what Leonhardt advocates as a policy response does nothing to address underlying causes.
A more promising approach could instead offer a tax cut to businesses — but only to those expanding their payrolls and, in the process, helping to solve the jobs crisis.
Tax cuts for expanding your payrolls? Seriously? Those businesses that happen to already have plans to expand their payrolls would get a tax break. The incentive would be too small to make a big difference. So the vast bulk of the benefits would go to hiring that would have happened anyway. How is this a cost effective use of the taxpayer dollars?
His next proposal is telling: He really doesn't know what to do about our economic predicament (just like me btw) but wants government to do something. For those on the political Left economic problems demand policy responses. They need government to be efficacious in managing the economy.
Leonhardt advocates for more research. Even if that'll help in the long run it'll have no impact in the next 3 years and probably little in the next 5 or 6 years.
Along similar lines, a budget deal could increase funding for medical research and clean energy by even more than President Obama has suggested.
How about some root causes? We have too much consumer debt and government debt. That's a root cause. How about more bankruptcies to discharge some of this debt? Then there's Peak Oil. Sorry, its drag on the economy is going to grow with or without better energy policies. Get used to declining living standards. Then there's another root cause in the labor market: America's declining competitiveness due to demographic changes causing skill levels to decline. Well, the horse is out of the barn and isn't coming back. Though with better immigration policies (e.g. skills-based requirements) we could slow the decline in labor quality.
We need policies that reflect the deep long term nature of our problems and no attempted tricks to jump-start our return to business as usual (BAU). Fact is, BAU ended years ago and it is not coming back. Only in 2008 did the financial markets run out of capacity to paper over the depths of our economic problem as rising debt ceased to be a viable way to hide America's decline in competitiveness.
The NY Fed says the decline in discretionary services spending has been especially severe.
The pronounced weakness in personal consumption expenditures (PCE) for services has been an unusual feature of the 2007-09 recession and the slow recovery from it. Even in 2010:Q4, when real PCE increased at a relatively robust 4.1 percent annual rate, real PCE on services rose at only a 1.4 percent rate. This weakness has been especially evident in “discretionary” services (to be defined below), which fell more in the recent recession than in previous recessions and since have rebounded more sluggishly.
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The drop in discretionary services expenditures in the last recession was much more severe than in previous recessions: the nearly 7 percent fall from the peak is more than double the percentage decline in the early 1980s recession (the previous “champion” in this dimension).
Debt-burdened consumer, suffering higher rates of unemployment and underemployment and cuts in compensation, naturally have cut out optional expenditures. They have to husband their diminished resources in order to spend on essentials. They've got more cutting to do.