B y Monte Meyers —A 3.5% growth in GDP has been announced.  However, everything that still functions in the US now runs on government bail-outs and guarantees via deficit spending and monetization of the debt…just flat creating money out of thin air by printing it.  We are in the midst of a “media-called” recovery being propelled artificially by a massive and unsustainable fiscal and monetary stimulus.  Without this “stimulus,” all manner of the economy would come to a screeching halt.

So, as in Charles Dicken’s story, “please, sir; can I have some more?”  I think government bail-outs and guarantees will be necessary forever…or until the boat sinks.  Who would have thought we would ever see…Government Motors?  We have bought into a perpetual Money Pit, not only with GM, but with all manner of what makes this country, and the world, for that matter, run.

We just surpassed the 100 trillion dollar mark in unfunded entitlement programs, from Social Security and Medicare to VA pensions.  There is no way in hell the US can ever fund those entitlements, even if we have an impossibly fast return to a very high GDP growth in the United States and tax the citizens to the point of revolt.  These programs are indexed to inflation, so we cannot inflate away that debt.  Besides, we are mired in a liquidity trap, where the velocity of money is low (banks are slow to lend) and interest rates will be headed for the sky. Inflating the money supply is not possible under those circumstances.

Our financial system now closely resembles the definition of a boat: a wood-lined hole in the water into which you pour money.  (Boat owners will know what I mean)  So far, 124 banks have failed this year.  The FDIC deposit insurance fund is gone, while the number of “problem banks” poised to fail is over 400, with some predicting the failure of over a thousand banks during the next two years.  Regulators are bracing for hundreds of small and medium-size banks to collapse in the coming months. 

And this stock market rally?  There are no fundamentals to support it.  Stocks are trading at 27 times earnings? The only thing driving it is the anticipation of a return to an illusionary exuberance and a greedy attempt to recoup loses from the crash. It is the greed to recover the losses that will ultimately cost the average investor even more in losses. As the advance continues the greed sets in and people wish for more and more of an advance as they hope to further recoup their losses. Our loss-aversion fears are so powerful that they override our logic circuits. We tend to ignore economic reality because we are emotionally anchored to our homes and values based on boom-era prices that were an illusion, and thus, temporary. It’s like holding on to a favorite stock long after it has tanked.  “Anyone who hasn’t learned by now that there’s almost no relationship between the Dow and the real economy deserves to lose his or her shirt in the Wall Street casino.”

Housing has bottomed?  Get real.  Home prices are down 34% from their 2006 peak, and, in fact, prices need to decline another 15 to 20% just to return the normal trend–line.  Sure, home sales and prices are up a bit lately, but new foreclosures are up more than new home sales, with only 10% normal sales; the rest were foreclosures and short sales.  90% of all new home loans are either backed, subsidized, or guaranteed by the US government-which means you, the taxpayer, have been paying people to buy cars and houses. What do you think the numbers would be without the soon-to-end $8000 first time buyer tax credit and the Cash for Clunkers program?  And much of that was fraud, according to a recent Fed audit. The prime mortgage cure rate (the percentage of loans where people who have fallen behind in their payments manage to get back up to date) has declined from an average of 45% during 2000-2006 to the current level of 6.6%.  In addition, Alt-A cure rates have dropped to 4.3%, from an average of 30.2%, and subprime is down to 5.3% from an average of 19.4%.  As these Alt-A and ARM’s reset over the next two years and raise loan payments 50 to 80% on houses people are already under water on, we are going to see most homeowners just walking away.

The recession is over?  Have you ever heard of a recovering economy with declining house prices and rising unemployment when 70% of GDP is consumer-driven?  During the Great Depression, people who gave up looking for work, and those working less than they would like, were counted as part of the official unemployment numbers. If we used that same criteria today, the real US unemployment rate is 17 percent.  This figure (U6) is the Bureau of Labor Statistics’ most complete measure of unemployment, and offers better historical perspective on the severity of our current crisis than the currently used U3 of 9.8% from the BLS. Those companies showing quarter profits are doing so from cost cutting, mostly from lay-offs of workers and store closings.  Retail is dead. You just cannot have a sustained recovery without growth in consumer spending. Period.

The recent uptick in consumer spending has been accompanied by a 25% drop in the savings rate. Wages are stagnant. Spending your savings and borrowing more does not equal a recovery.

Consumers are not buying anything not subsidized by govt handouts or guarantees, as I said when I started his piece.  If you think the future is going to be larger than the present, then you are in for a rude awakening, because life as we know it is going to fall apart.  And I am an optimist.

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