The Outlook
I read today that Moody’s suggests a new recession has about a 40% chance of occurring in the foreseeable future. I think that’s a bit high. The problem we have at the moment is that our elite is doing everything in its power to diminish growth. Moody’s says that policies will chip about 1.7% off of GDP growth next year. That I agree with.
Nothing in the recent spate of numbers suggests great strength. I cannot detect anything lurking in the weeds capable of jump starting robust growth. The great dead hand of low demand coupled with continued debt pay down by households dominates any countervailing positive movement. The lack of a coherent job creating policy, and the very real prospect that bitter politics will preclude such a policy anyway, will stop the recovery in its tracks.
Businesses are flush with cash, but are not expanding because they see no demand for their products.
Wages have been pummeled by the recession and were weak going into it anyway. Workers have been the butt end of productivity growth and have watched profits soar while being told they are at constant risk of dismissal. Consumers are fearful of the future and are holding back.
The housing crash exposed the growth – what growth there was – of the past few years as a total illusion. Debt is only a justifiable long term support for growth as long as wages keep its repayment within decent limits. Beyond such limits it becomes a time bomb that will eviscerate swathes of the economy and will create lingering after effects that take years, if not decades, to mop up.
The banks are still weak. They are now laden with sovereign debt. No one seriously believes that they are stable. Their dependence on gambling profits remains high. Their capital is stronger, but they resist true reform.
Europe is gripped by a fever of incompetent politics. The peripheral nations like Spain and Portugal are being asked to bear the brunt of poor decision making and improper policy by the central nations like Germany and France. The flood of cheap money – the core of the current crisis – perverted relative productivity within the Euro zone. No one cared until the crisis erupted. Now the obnoxious moralizing from the center diverts attention away from the culpability: the system was rigged. The failure to solve the problems is epic. It could lap across the Atlantic and erode our banks.
European failure means that trade will not be an elixir either. Indeed the world economy is slowing down as the emerging nations are all entering rougher patches.
So there is nothing to provide sufficient power to lift America out of stagnation.
Thus the economy looks stuck in a growth pattern of around 2%. Maybe 2.5% next year. With the majority of the variance from that level likely on the downside. Not a 40% chance of a new recession. But not a negligible chance either. We are well and truly stuck and thus vulnerable to any storm that crops up.
That is not a happy place to be. But it is where we are.
