Headed To Recession?

Well it didn’t take long for the stock and credit markets to vote on the efficacy of American economic policy. Judging by today’s massive stock market sell off, coupled with the steady decline of bond rates, the vote is clearly a negative one. The markets are giving us the collective thumbs down. Evidently sentiment is gathering behind the notion that the economy is weak, that we have no leadership, that we have no corrective policy, and that the risk of another recession is rising by the hour. To make matters worse there is an epidemic of economic incompetence worldwide, not least in Europe where the leadership seems determined that we need a re-run of 1937. Because, presumably, the first time through was such a thrill.

I cannot locate a positive sign at the moment. The news is that bad.

What I find most extraordinary is that people seem only now to be waking up to this realization. For those of us not blinded by ideological faith based judgements, the signs have been legion for months that the economy was headed into stagnation. The malaise set in a while back. That only now analysts are pointing to income inequality as a problem amazes me. Anyone looking at personal consumption to drive the economy was deluding themselves. First, most households never experienced the upside which was asymmetrically distributed towards the top wage earners. Second, most households used debt to maintain the illusion of progress. Third that debt was often secured against a home that is now no longer worth anywhere near what it was. Fourth, wages are stagnant, stagnant, stagnant. Fifth, most households are, therefore, forced to save in order to retrench their balance sheets. So, sixth, most households are not going to spend until they feel safely beyond the debt crisis. Thus there is no broad based upswell to be seen in consumption. It existed only in the minds of those analysts who ignored the nature and depth of the crisis. That small part of our economy inhabited by the better off is humming along. Those bonuses are back. Banking and its feeder system is alive and well. But the real economy is rotting.

Inequality has come home to roost. Welcome to the new economy.

Meanwhile no one is doing anything to stop the rot. So we should be under no illusions.

Clearly the markets aren’t.