Economy: Déjà Vu all Over Again
Stephen Roach who has been a bear on the economy for some time, tells us how the bursting of the housing equity bubble is similar and different to that for the dot com collapse. The similarities related to how the bubbles occurred and then burst. The main difference is that this time the effects may be more wide spread.
From bubble to bubble – it’s a painfully familiar saga. First equities, now housing. First denial, then grudging acceptance. It’s the pattern and its repetitive character that is so striking. For the second time in seven years, asset-dependent America has gone to excess. And once again, twin bubbles in a particular asset class and the real economy are in the process of bursting – most likely with greater-than-expected consequences for the US economy, a US-centric global economy, and world financial markets.
When the dot-com bubble burst the wall street optimist were telling us how contained the effect would be. The broad S&P index fell 49%, the US economy went into a recession, slowing down the global economy. Well here we are again, with the spin masters telling us its well contained even as there are clear signs of the effects of spillage into the credit market as a whole.
Seven years ago, the spillover effects played out with a vengeance in the corporate sector, where the dot-com mania had prompted an unsustainable binge in capital spending and hiring. The unwinding of that binge triggered the recession of 2000-01. Today, the spillover effects are likely to be concentrated in the much large consumer sector. And the loss of that pillar of support is perfectly capable of triggering yet another post-bubble recession.There has been a decrease in business capital spending and the rise in GDP is now about 2%, down from an average over the previous 3 years of 3.4%. This in the face of robust consumer spending. It is consumer spending where the next shoe is likely to drop. The reason is quite simple. People have been using equity in their house to finance their spending.
Equity extraction from rapidly rising residential property values has squared this circle – more than tripling as a share of disposable personal income from 2.5% in 2002 to 8.5% at its peak in 2005. The bursting of the housing bubble has all but eliminated that important prop to US consumer demand. The equity-extraction effect is now going the other way – having already unwound one-third of the run-up of the past four years. In my view, that puts the income-short, saving-short, overly-indebted American consumer now very much at risk – bringing into play the biggest spillover of them all for an asset-dependent US economy. February’s surprisingly weak retail sales report – notwithstanding ever-present weather-related distortions – may well be a hint of what lies ahead.Of course this comes at a time when business is complaining that it is too much government regulation that is hurting business. They want Sarbanes –Oaxley gutted, they want more cheap labour let in to the country, etc. Gordon Gekko: “Greed is good.” All political-economic systems have their bad characteristics. With unfettered capitalism it’s the greed. The drive is for profits and high share prices on the stack exchange. In this paradigm that is all that matters. What happens to the yokel who is holding stock, mutual funds etc doesn’t matter. The market could crash tomorrow and the movers and the shakers for the most part would escape with millions even though they would complain of the “hit” they took. But as most of us know the markets are not the economy. The part of the economy that matters to 99% of the people is the ability to get a job, have shelter, and eat. But the captains of unfettered capitalism only worry about the political consequences of a decline in the overall economy. They don’t give a damn about the human costs, which I suspect will be large this time.
America is going through a time when the sheeple are being told and believe that yes folks you can get something for nothing. You can cut taxes and see government revenues go up. Federal debt doesn’t matter. You can run an empire on debt. And so forth. And the leaders feel that the US is too important for anything bad to happen to it. Just creating your own reality devoid of first principles will make everything ok. We have always been led by people with business ties. After the great Depression the business ties were moderated by a conscious and a clear understanding of the human costs of excessive greed and lack of business accountability and responsibility. Those days are gone. We are once again returning to the “Gilded Age” where the middle class is shrinking and the country’s wealth is concentrated in the few. There are no ethics just blind greed accompanied by cries for more and a whining that what ever regulation is left is too much. Business and profits are much more important than people who can be replaced by cheaper versions from over seas.