No Real Recovery In Sight

We are in quite the fix.  According to some experts the 3.5% growth in GDP last quarter (July-September) is proof that all is now well.  Unfortunately most of that growth was driven by very temporary government spending.

For example, key to last quarter’s growth was a 22.4% increase in car sales, a consequence of the government’s temporary Cash for Clunkers program.  This increase in car sales accounted for 42.0% of the entire quarter’s growth!

Consumption as a whole (which includes auto sales) grew at a 3.4 percent annual rate.  Take out the auto sector and consumption grew at only a 1.0 percent annual rate.  For more details see here.

Since the Cash for Clunkers program is now over, and disposable income continues to fall (because of continued job losses and declining wages and hours), next quarter is bound to show quite limited growth at best.

The sad reality is that the government’s response to this crisis has been far from adequate.  Most of its direct stimulus spending, hundreds of billions of dollars,  has been designed to be short-term in nature.  It has spent far more, trillions of dollars in fact, to save the financial system.  But again it has made no attempt to ensure that the money would be used to promote a fundamental restructuring of our economy.

It might be comforting to know that Lloyd Blankfein, Goldman Sach’s chairman and chief executive, believes that he is doing “God’s work,” but the fact is that the financial system we saved with our tax dollars continues to refuse to make loans.

Look at the following two tables taken from a blog post on Mish’s Global Economic Trend Analysis.  The first table shows that “Total bank credit is in uncharted territory at -5%. The series has never gone below 0 before.”

So what are banks doing with the money?  The second table shows that that the money is piling up as excess reserves.



Why aren’t banks lending?  Mish’s blog post provides the following four answers:

1) There are no credit-worthy businesses that want to borrow.

2) Consumers are tapped out and do not want to borrow.

3) Banks are scared to death of pending commercial real estate losses, credit card losses, residential real estate losses, home equity lines of credit losses, and losses in general.

4) Asset prices are simply too high (and banks know it) and the securitization market has dried up

While all of the above are probably true, the post concludes that “Number three above is the most critical one.”

The “bottom line” here is that our economy remains weak and far from any serious recovery.  And it will remain that way unless we get far more aggressive government action to ensure a meaningful increase in jobs that pay a living wage and produce needed goods and services.

1 thought on “No Real Recovery In Sight

  1. I was just wondering, as an expert on the Chinese economy, how do you see the situation in China? the unbroken growth pattern displayed by the Chinese economy looks quite incredible in light of the collapse of demand for its exports and the very high export dependence of that country. Do you think that Chinese growth is sustainable or is it rather a credit/state spending bubble what we have seen in China in the last year or so, that is about to crash soon?

    Thank you for your answer.


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