US outlook for 2011: why the goforits are completely wrong

“Look – over there….help is at hand!”

The US media set is once more full of recovery rhetoric. But America is beginning to rival the EU in its level of denial.

The short-termism of the American business community is now beyond parody. Less than enthusiastic about Ben Bernanke’s drip-feed QE strategy, last week the Republican Party used a Mexican burn on President Obama in order to get him to extend George Bush’s upscale tax cuts. The quid pro quo for this (not that the GOP needed one) was for there to be no cut in Federal spending. So the bottom line of is that the US now has the worst of all worlds: a growing debt, less revenue – and no real evidence that any of middle and upper-middle class or corporate America are in the mood to revive the economy by spending.

Ever since, however, soi-disant experts throughout the West have been falling over themselves to call this a ‘game-changer’, the new cliche for coming out of defence to score in galloping style. Tom Stevenson of Fidelity Investments wrote this in the London Daily Telegraph at the weekend:

‘….the outlook is clearer in the US than almost anywhere else in the world. Not for Americans the fiscal austerity that will make 2011 a chilly year in Britain. Not for them the sovereign debt worries afflicting Europe (although the $900bn increase in the US’s deficit as a result of last week’s measures will come back to bite it at some point). Nor do they face the inflation concerns hanging over China and other emerging markets.’

The assumption behind this confident prognosis is that both American consumers and corporate finance directors are straining at the leash to spend their cash piles. This didn’t happen during QE1, and the situation is much worse today than it was then. But the prevailing media stance over there is to get behind the product. Respected American financial website Saving to Invest told it’s readers a year ago that

‘The good news is that it seems that most economists are predicting that 2010 will be a good year for the economy and markets building on gains in 2009. Only time will tell what eventuates, but the outlook entering 2010 definitely seems much better than it looked going into 2009’

Well, the markets are sort of OK, but anyway it’s been obvious for years now that the world’s bourses consist almost entirely of wide-eyed optimists who can, nevertheless, be sent spiralling into a pit of despair by the news of a lost house sale in Anchorage Alaska. Neither of these is true of ordinary Americans these days: I’ve never heard so much cautious pessimism in the States as exists at the moment. It has been a fault common to all Free Marketeers throughout the decade that you can model what the mass market will do: they were wrong a year ago, and they’re wrong now.

Models are usually constructed by folks who know nothing about human packs and their emotions. Very much in this tradition, Michael Cloherty of RBC Capital Markets told the media last week that “The rise in Treasury yields reflects that the economy is doing better, and that takes the risks of double-dip recession out of the picture.” A statement by somebody still unable to grasp that the real recession never went away has to be bollocks. Let me try and put some flesh on that insult.

“One risk is that home prices are likely to fall further in 2011 which will temper consumer spending,” said Richard Berner of Morgan Stanley’s New York office. This is about as close as any goforit would go last week along the road of “Er, hang on a minute here”. Many people in the West have a home as their main (if not only) asset. As over half of them think prices will tumble next year, and 30%  are worried about job loss, another credit splurge – even among the relatively well-heeled – is unlikely. It didn’t happen during Britain’s QE, nor during Bernanke’s QE1, so it’s hard to see why a stimulus at a fifth of the original level (plus a tax-cut extension) should do it now. Lest we forget, hardly anyone in private America is going to be any better off come New Year’s Day.

The President having decided to forget about the deficit, I’m forced to refer readers back to my post of early July, when I tried to make clear why a consumer boom in the US would only widen its trade gap. Opponents of that view point to China’s serious inflation problem, but this is a false hope: the Beijing jackboot is being vigorously applied to the problem, and it will anyway be a long, long time before Chinese products are anything other than vastly cheaper than their American equivalents.

Lowering UK export costs merely makes the US less of an asset in itself. As Gregg Easterbrook observed in his masterly Reuters analysis of last week, US corporates are hardly likely to chuck money at a depreciating America. More likely is that Chinese and Arab sovereign funds will pile in. Gregg also asks ‘why [US corporates would] innovate in hopes of future profit when systemic fiscal irresponsibility by both parties means either the United States will become a stagnant mega-Japan, or steep tax increases will be the only way out when panic sets in?’ Why indeed.

Much as it pains me to pass any praise Slick Willy’s way, Bill Clinton eschewed any form of giveaway nonsense, instead cutting federal spending in order to reduce the deficit, and create confidence that America would in the future be worth more, not less. After Reagan and Dubya, I’m astonished that the GOP retains its reputation for fiscal responsibility: it is ill-deserved. Barack Obama has now joined their ranks: just another elected and spineless politician prepared only to dance, rather than face the music and dance.

From Day One of the start of meltdown (late 2007) the whole strategy of zero rates and outrageous levels of bank bailout has been proved wrong. In one taxpayer splurge alone – Hank Paulson’s mystical $800 billion SOS of 2008 – Wall Street simply pocketed the dosh, and carried on paying bonuses. Zirp and QE1 in turn merely allowed large US multinationals to deliver effortless profits to fat shareholders. Hardly a Dollar has gone to emerging businesses, and almost nothing was spent at retail. As I’ve written now to the point of everyone’s extreme boredom, the chief result on both sides of the Pond has been to deprive a huge market of retired Silvers – folks largely devoid of debt – of money to spend  in the economy. But as ever, the banks came first, Zirp allowing them invest in Treasuries and rebuild their balance sheets. The inbred selfishness of it all beggars belief.

Little or nothing has been invested in diversification, new plant, new research staff or some degree of practical and realistic of mortgage debt relief for the less than hopeless cases. All the US elite has done is grumble about Yuan valuation – entirely justified, but no subject for a considered recovery policy. Bizarre as it seems to write this, the American governmental and banking Establishment is beginning to rival the EU for directionless, clueless economic and fiscal pain avoidance. Not only will the ‘game-changer’ not succeed, it doesn’t deserve to succeed.

13 thoughts on “US outlook for 2011: why the goforits are completely wrong

  1. A needless pop at ‘Free Marketeers’ – you’ve got a bee in your bonnet about them and misattribute US actions to them. Richard Berner is no free marketeer, so why use him to ‘flesh out your insult’?

    Ron Paul, the ultimate Libertarian, has repeatedly stated the pessimistic case of what is happening in the USA and has been backed up consistently by Mises Institute bigwigs like Thomas E Woods and fellow travellers like Peter Schiff.

    The Austrian School have predicted this crisis every step of the way, literally every single step, and the denouement they predict is on its way.


  2. ZIRPing hasnt allowed banks to rebuild their balance sheets.
    Its allowed them to rebuild their cash flow statements.

    Thats a very very big difference.

    The underlying problem is they’ve lent massive sums of money to people who are very unlikely to pay it back, the treasurey switch has allowed banks to cover the early defaulters, but if the property market falls by another 20%, the defaulters will overwhelm the giovernments ability to back stop them.


  3. Didn’t QE allow them to rebuild balance sheets?

    ”but if the property market falls by another 20%, the defaulters will overwhelm the giovernments ability to back stop them.”

    Only if everyone in negative equity defaults. There is a lot of people holding many 100’s% paper profits on their property assets. These people probably hold their houses as homes rather than get rich quick type investments!


  4. Louis,
    Mises has described a lot of unavoidable consequences of flawed economic policies since 1945. This article from 2005 is one of them: . It starts off thus:

    “What is the link between fascism and socialism? They are stages on a continuum of economic control, one that begins in intervention in the free market, moves toward regimentation and greater rigidity, marches toward socialism as failures increase, and ends in dictatorship.”

    I’m not the only person who thinks that socialist infection across Europe and the US has engineered the current state because it provides them with cover for ever bigger government, more control, higher taxes and eventually, a seige economy, ie: totalitarianism, probably fascism.

    Gordon Brown is either mad or he was travelling along that road as Chancellor/PM. I sees no sane explanation for him allowing the unprecedented credit bubble to happen in Britain. It was always going to end in tears. The trick he and his fellow travellers have played is to blame the crises onto others, when in fact they were simply instruments of his negligent policies.


  5. TRT
    Thanks for that. I’m obviously being thick here, but surely if you take government bailout/depositor money at 0% and invest in gilts at 3%, even by the bizarre accountancy practices of the banksters, your assets will have immediately increased as well as your cashflow? That is, the Feds buy your negative assets and let you rebuild with positive ones – a sort of ‘six-pointer’?
    Either way, the toxic debt thing is still valid and something I keep on forgetting. Cf Eurobanks of course, the Yanks have been honest. All things being relative.


  6. “…the chief result on both sides of the Pond has been to deprive a huge market of retired Silvers – folks largely devoid of debt – of money to spend in the economy.”

    John, this article in the Telegraph today adds weight to your opinion about interest rates:

    I remain of the view that one of the principle reasons why Brown dropped IRs to 0.5% was to minimise his embarrassment if streams of over-mortgaged/over-borrowed voters defaulted prior to the election. There seems to be no sound reason to continue with them now.


  7. True, its helping, but only by a tiny amount.
    The US wants to borrow about a trillion dollars this year right?
    With a 3% spread between US Fed and US T-Bond, that means bank profits from the scheme are limited to $30bn, before their costs.
    Now, dont get me wrong, thats a collosal amount to you and me, but compared to the bank bailouts, its nothing.

    I dont know enough about the size of the US banking industry to go further, but if we use the UK.

    Well, the UK is borrowing about £130bn, if we use the same spread, we get £3.9bn of free support to the UK banking Industry.
    The Government has bought £40bn of shares in Lloyds.
    Just Barclays has liabilities in excess of £1 Trillion.

    True, Balance sheets have improved, but they’ve improved from 6 million feet undwater, to 5,999,999 feet under water.
    Or such was my understanding anyway.


  8. We’re agreeing I Think, in that we were never told how bad things were. My former Halifax (HBOS) Mole told me that Daniels went white when he saw the sheer depth of their debt hole. The repair is still being exaggerated: RBS’s exposure to Russia is mind-boggling.


  9. I concur with most of your points, and let me add an American twist.

    The lack of leadership on fiscal issues is stunning to many of us in the US, and the recent “Bush Republican” Senate vote for this absurd tax bill is just another example. No one wants to take away the punch bowl…

    While I cannot speak for everyone, from my observation, the “Tea Party” movement consists of a lot of middle class Americans who see the end of the game being a financial chaos. The religious right is present, but the main thrust is to drive toward fiscal sanity. The media here tried to paint a very unflattering view of the Tea party movement, but its more aligned to concepts than party (although many of the middle class R’s are fiscally conservative). The Independent voters understood the message and the last election is some hope that we can start the real debate, which I think you will see pick up with rigor come January.

    While QE2 is pumping dollars in, there is a belief that this is driving investors into stocks as they seek some ‘real’ yield. My opinion is they may get a quarter or so out of this bubble – but investor sentiment is too relaxed and too many analysts are bullish. Leading to the inevitable pop of this newly Fed manufactured bubble. Bollocks is right. US corporations have squeezed their employees such that many are now exhausted and quitting, so I don’t think you’ll see the corporate performance in 11 as they have gotten about as much productivity gains as they are going to.

    One of the major issues for American business is the utter chaos in regulation, lack of decision making on taxes related to Obama Care and a myriad of other bills that authorize the Executive branch to write regulations. This is causing partial and real paralysis. Unemployment taxes are very high on small business, so no one wants to hire as laying someone off can be the economic equivalent of leaving the torso of the employee to sit in their chair.

    The average citizen is presently oblivious to the wrecking ball of the US debt, which will have horrendous consequences even if we try to do something about it.

    So to summarize, I see some fiscal prudence coming, but I am not yet optimistic that it will change the debate in time to avoid the consequences. A few more ticks up in interest rates should help, so please help us out by not buying US bonds!


  10. ST
    Brilliant input, thanks so much. I think Huffpost’s continuing ridicule of the Tea Partiers does them no favours. The main issue in common I see between the States and here is this neo-fascist unwillingness by either Establishment side to come out of their respective polemic nut-houses and engage in real debate. Over here, those who call themselves Progressive really mean ‘I’m right about everything, and everyone else is evil and/or stupid’. The other commonality, however, about which you are so right, is the sheer lack of admin competence being applied to everything from data interpretation to execution – cf for example Obama’s attempted mortgagee bailout. Ours was designed to help 40,000 and helped (count them) 792. The fear that nobody knows what the hell they’re doing is now seriously disturbing my sleep.

    Good luck and thanks again JW


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