Obama aides change their rhetoric on economy (The two faces of the Obama Regime)

AP on Yahoo ^ | 3/15/09 | Philip Elliott - ap

[NVDave]

OK, so let’s talk “extremely long term fundamentals.”

On the long-term fundamentals of the US economy, I have this to say:

For the last 10 years, growth in consumer spending has been driven by easy debt. The growth of wages was stagnant, and the employment recovery from the 2002/2003 recession/bear market was really pretty mediocre by long-term standards. Consumers spent wildly, but with OPM.

Now the bill is coming due, and going forward, bankers will no longer be lending so freely to consumers. The Baby Boomers do not have the time necessary to use the compounding action of the market to recover their losses; they now must start saving cash in liquid, safe vehicles for their retirement. This will pull a bunch of money away from consumption.

Since consumption was 70% of the US GDP, and will likely be declining to no more than 66 to 65% of GDP going forward as a result of consumer savings and frugality, coupled with a decrease in easy credit... I expect some of the fundamentals of the US economy to change, long-term. For example, I don’t expect the US auto market to achieve 16+ million units per year going forward for quite some time to come. We’ve got oodles of cars available out there. The US auto companies and the US Congress keep assuming that if they could just get “by this rough patch, that Detroit will recover....”

No, they won’t. They have a lot of excess capacity for the auto market going forward in the days of tougher credit.

Same deal with housing. We have a glut of housing in the US, and absent a big burst of economic growth resulting in wage growth to support sustainable ownership of this housing, there’s not going to be a big burst of new homeowners, especially as the Boomers retire and down-size their real estate holdings.

The long-term issue in debt deflations is that prior levels of growth that were propped up with credit are not achievable again on the basis of fundamental growth for years. That’s what led me to go to cash in 2007, not some market timing signal. The #1 “red flag” I saw in 2007 was the number of people who were defaulting on mortgages from the very first payment out to the sixth month of the mortgage went off the historical charts. In other words, people were taking out debt that had no intention or ability to repay. That this was happening in real estate was classic sign of the end of a credit expansion.

We’ve been through debt deflations before, so they’re long-term cyclic patterns in western economies. Somewhere, some moron at the Harvard Business School started this idiotic assumption that we could never again experience debt deflations because a) we had them in the past, but now b) economists were oh-so-much-smarter than they were before.

When I read Fisher’s 1933 paper on debt deflations, every symptom of “the debt disease” he lays out is with us today, yet economists keep wanting to dance around these issues while quoting Fisher’s contemporary Keynes, who was writing some of the prescriptions for dealing with a debt deflation. Today this is, to say the least, at least as humorous as watching someone stalk around with a .416 Rigby in their living room at the same time the person in question refuses to admit that there’s an elephant sitting there. If there is no debt deflation, then why are we flinging so much money into the economy, which would be inflationary.... but we’re not seeing a) any inflation or b) any calls for withdrawal of the stimulus, and c) we see calls for MORE stimulus?

So going back to our safari hunter in the living room analogy, our hapless nimrods are firing hither and yon, making a riotous and glorious noise... but aiming rather closely on either side of this elephant they refuse to admit exist in the room. If there were no elephant, why keep missing so closely?

The long-term history of credit expansion is repeating. We (along with Japan and Europe) are dealing with a convergence of long-term credit cycles and demographics. Japan, Europe and the US are going to suffer the economic double-whammy of the draw-down of Boomer consumption as well as increased medical costs, pay-go/pension liabilities and reduced tax income from the rapidly aging Boomer cohort.

Going forward, we have some very long-term fundamental issues that, while not insurmountable, become steady, persistent headwinds for the economy for many years to come.

That long term enough for your consideration?

[alecqss]

I would not even read the screed. This is ridiculous.

I say this. Russia’s economy fundamentals are weak - economy is fully dependent on one sector, decreasing population, high rate of diseases among people in the work age, low rate of investments, undeveloped law and protection, etc. However, there was a lot of money to make there just a year ago and probably will be in some future.

It’s different things.

If you are fundamentally strong - meaning your heart, lungs, kidneys and immune system are healthy, then it does not mean you never catch cold or an infection. It means you are unlikely to die from it. But at any given time you just might be sicker than a person with impaired health - just because you are under weather and the other guy is not.

And that’s it w/respect to fundamentals.