There will be no recovery on either side of the Atlantic, because none of the vital conditions are present.
For a healthy recovery you need three things: banks willing and able to spread inexpensive money around among the younger company growth sectors; consumers with the money to consume; and currency stability sufficient to remove much of the uncertainty from exporting.
As for banks, there is first of all the question of ‘willing’. A new Study in the US from the Center for Community and Economic Development shows that banks remain loathe to take risk: even healthy businesses struggled as banks called in lines of credit, or declined to bankroll reasonable prospects for development. Banks being more thoughtful about their loans is good, but as usual there’s no middle ground between prudence and insanity. Precisely the same situation pertains in the UK: despite endless political threats, genuine ground-floor risk lending is almost extinct.
On the other hand, after the trust meltdown of 2008-9, most sources now show that merger and acquisition lending has leapt back up again. Reuters notes today that ‘Banks are increasingly aggressive about providing capital for M&A’. Leveraged lending for the first quarter of 2011 in the U.S. rose a whopping 92% from the same period the previous year.
So Big is willing to lend to Big. No change there, then.
As to ‘able’ further down the scale, there’s a very good piece at Zero Hedge this morning. This is to say the least a patchy site, but some contributions are outstandingly well-researched. The latest one looks at the US and focuses on repackaged debt collateral – lest we forget, there is even more madness going on with salami-chopped debt packaging and interest rate derivatives than there was before 2008.
The Slog has posted endlessly about the disaster that will one day exist where the commercial property sector now is in the West – the biggest horror stories being in Britain, European Russia, and the US. The ZH piece shows how commercial mortgage backed security (CMBS) sector is doing in the States, and the short answer is ‘terribly’. Many banks – some of them very big indeed – could be overwhelmed by a CMBS collapse – and as long as the loan-failure rate does no better than getting ‘less worse’, once Ben Bernanke turns off the QE tap, that’s a very real possibility. The commercial property sector in the UK is even in an even more dire state.
US Banks in danger of failing are put on what the Fed calls ‘the Watch List’. This is a stubbornly large list – and banks are spending more time on the Watch List than previously. Distress at many banks remains high, and these banks will still be in a position of heightened risk until they either boost capital, improve performance, or both. Either way, they don’t have money to stimulate young businesses.
So, small would lend more, but it is still stuck with a capitalisation issue. (So are the big guys, they just refuse to accept it.)
And so to consumption.
Western capitalism has been largely retail consumer driven in the last two decades. It is a potty idea – that buying things from shops who often buy from importers can be good for the national economic health – but of course everyone feels better and better for all that ‘therapy’. The problen is that the import bill runs up a bigger and bigger national debt. And we wind up paying for that in taxes, service cuts and falling wages. (See the Slog piece from earlier this week for the overwhelming evidence of this).
Yet until that model changes, if governments are broke and banks are selfish, consumption is vital to recovery. But it just isn’t going to happen: citizens are paying off debt, worried about unemployment, doing part time rather than nothing, and accepting lower wage rates. Governments are accepting less and less of the responsibility for keeping household costs under control. Either the model changes to one of growing more of our own food – alongside making and exporting more of our GDP – or recovery is impossible, and slump is probable. This is unvarnished common sense, and there is no escaping it.
Finally, to make those exports add up to more than a hill of beans we require a currency relatively free from flux – one that reflects our real GDP worth and outlook, while not rising so much it makes us uncompetitive. I would argue that, in the mad world of market speculation we inhabit in 2011, that is near-impossible for any currency – and completely out of the question for Sterling. When the currency derivatives sector is bigger than the physical exchange market, you know any chance of currency valuation sanity has left the building.
The most likely currency scenario for the UK is for the Pound to gain long-term against the euro, but fall in its overall global value. Given where we buy our raw materials (elsewhere) and largely sell into (the EU) that is the worst of all worlds. A collapse in the EU’s output following banking collapse would, of course, collapse us too. As the Coalition displays zero awareness of this almost inevitable outcome, we must assume that it will come to pass.
As for the Dollar, this too is bound to continue yo-yoing up and down, as QE trails off, US debt rises, US rates eventually go up, but their exports continue to go down, government closes down, elections take place, and derivative sectors remain out of control.
There simply is neither the will nor the economic conditions to support stable Dollars and Pounds. And that is th final nail in the coffin of the long-awaited, jobless recovery.
So at the end of all this tiresome debate between denialist bankers, ignorant politicians, trade union bullies and Bourse goforits, my conclusion remains just as clear and simple as it has been since early 2009: THERE NEVER WAS A RECOVERY, AND THE RECOVERY IS GOING TO TURN INTO A SLUMP. We will not come out of that slump until the way business gets financed is radically reformed, the cost of welfare is drastically reduced, the export marketing strategies of our two countries are completely rethought, banking speculation is heavily regulated, and our currencies sink to a realistic long-term value.
I am going to try very hard not to write about ‘the recovery myth’ ever again. It is a fruitless and boring debate covering the discussion of alternative outcomes when, to those of us who live in the real world, there is only one.
In the meantime, over here in the UK we are forecast to have a weekend of uninterrupted blue skies and heat. So we can forget the whole damn mess until Monday. Hurrah!
Related: Brave faces alone aren’t going to cut it without brave ideas.
The Slog 