The July U.S. News and World report was entitled, “The post recession money guide.” Periodicals often reflect consensus. Before stories reach print in magazines, they have been thought about a while and reflect what most are thinking. As I paged from story to story, I was surprised at how much the consensus opinion expressed by U.S. News conflicted with my own.
They offered a post recession period finance guide. The first assumption here is that the recession will be over soon. The recession may well find a nominal bottom, but there may not be a significant recovery any time soon.
Consumers have to consume less, save more, and service debt. That is not the combination for economic growth and the economy will most certainly fall short of the growth assumptions used in the Obama administration’s budget.
The last unemployment report was 9.5 percent. But, according to David Kohl, Corn and Soybean Digest economist, if you add in worker’s whose unemployment benefits have run out that will now go on welfare, the real unemployment rate is 16.5 percent.
I think that you could take it another step further and factor in the reduced productivity of the employed workforce who have reduced hours to conserve more jobs and the real-real unemployment rate is closer to 20 percent.
Not as far from the 24.9 percent recorded in the Great Depression. Unemployment has not peaked yet. Job loss is still extrapolating and when it stops, it’s not going to recover in leaps and bounds, but with uneven gains, fits and false starts.
U.S. News wrote about the end of traditional retirement. Some of that advice I agreed with like to stay safe, sell stocks. The demographic Baby Boomer bull market is over. Baby boomers will be pulling money out, not putting money into the market.
One analyst retorted that this was a great time to be young and getting started. Go figure. America and Americans have been living beyond their means for a long time now on the next generation’s money and the reality is that a hard adjustment is taking place.
That adjustment will weigh most on young people. I’m not going to pay the national debt, my kids and grandchildren are. George W. doubled the national debt and Obama is extrapolating that trend. It’s more fun to spend money than it is to pay off debt.
You have to have an education to get a job to have some income to get a credit score to buy a home. All of that is going to get more difficult. The period of low taxes that we just went through was part of living beyond our means. They cannot support the debt being accumulated on revenue produced from the old tax base.
The next problem is that supply-sided economics works to a degree. If you raise tax rates, economic growth is depressed and you do not get a linear increase in tax revenue. Closing the gap between expenses and revenue would require raising the top tax rate to 60 percent. Investment would subsequently collapse.
In 2008, every American household owed about $90,000 in federal debt. Projections that I believe to be too optimistic, forecast that debt rising to $155,000 over the next decade. In 2005, Americans had 59 percent equity in home values. Today, they have 41 percent and declining. The degree of debt being assumed relative to assets is the most worrisome number.
China is not going to bail the world economy out. It appears in relatively good shape, but is not a large enough engine to pull the world economy yet and looks are deceiving.
Per capita GDP in China is only $2,000. While that is multiplied by its massive population it still only represents $1.7 trillion in total consumer spending in 2007, compared to $12 trillion in the U.S.
Beijing has sustained growth this year with massive stimulus spending and crazy levels of lending but unemployment there still grew by 20 million people. I believe that Beijing delayed, but did not necessarily prevent, the eventual recession in China from occurring.
Too many people think the economy is near some kind of bottom. Even if it is in terms of price it won’t be in terms of time. I think that we are nearer to 1930 than 1932. The DOW retraced 50 percent of the 1929 crash in 1930 before falling to its bottom. They were optimistic about the 1930 rally, too.
The 1930s saw protectionism and we are seeing protectionism grow today. While they talk about guarding against protectionism, most actions occurring today are protectionist. Protectionist pressure will build and someplace, sometime, it will blow up.
If you don’t think history repeats itself, remember how Republicans blame FDR for the Great Depression and Obama for this one.
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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