Here's a contrarian view on why economic recovery isn't in the cards. Unlike the last Century's experience, the American "consumer" is broken (this isn't reflected in the vast bulk of economic modeling/projections). How broken? The best exploration of this that I've found is from Elizabeth Warren (here's a video of her presentation on the topic before the crisis, worth watching in its entirety). The top line is that the American consumer, prior to the financial crisis, was already fragile due to:
- Stagnant incomes. Median per capita income has stagnated for 30 years and is now headed lower. The only increase in household income came from adding the income of a spouse (that typically gets less than the male income earner). The value generated by mighty productivity increases over the last thirty years was routed to the financial markets (aka casinos) and not shared with American workers.
- Increased fixed expenses. The costs and amount spent on variable consumption have fallen (clothing, food, autos, etc.) over the last thirty years -- which puts the lie to the "over consumption" charge. Instead, the median cost of housing, health, and the costs of work (childcare, two cars, etc. brought on due to a need for sending two people to work) have skyrocketed with very little improvement in the quantity or value of the goods/services received.
- The entry ticket to the middle class has skyrocketed. This is due to the costs of education. Instead of publicly subsidized education (k-12 used to be sufficient for entry), we now have 6 years (pre-school and college) that are directly charged to the American family. Those costs have ballooned into budget breakers.
The Consequences of Fragility
The driver of this fragility is that 75% of a typical American families budget (not counting education costs of kids) is dedicated to fixed expenses. This means that the loss a small as 10% in a family's income would be sufficient to force failure. Combine this fragility with increasing income volatility and even the slightest shock will set off a wave of extreme frugality and mushrooming financial failure at the household level. In the past, we were able to hide this fragility through increased debt/bubbles. That's over. We've already taken on as much debt (375% of GDP right now, and still climbing) as we can acquire and the banks are hoarding the bulk of federal cash infusions to paper over their insolvency (almost all of the toxic assets from last fall's debacle are still in place, and more are en route from commercial real-estate). What follows from the recent shock is almost guaranteed:
- retail sales will stagnate/fall as far as the eye can see. This is backed up by recent numbers. Sales fell in July 2009 and deflation appears to advancing. Household savings (read debt servicing) is on the rise.
- home sales/prices will continue to decline on a long trek to affordability. Again, the numbers appear to be trending in this direction.
- bad feedback loops will form -- low sales means less work, less work means more frugality/failure (as household wink out financially) which means lower sales. The second wave of the primary feedback loop appears to be forming.