Friday, December 4, 2009

Animal spirits flash update

“Animal spirits” or confidence levels are projected to continue to rise sluggishly toward zero in about 2012 with relative stabilization of the unemployment rate, which is forecast to rise for another ten months to ~10.5 percent.


A close-up shows this recovery will resemble the jobless recovery of the last decade in basic shape.


The government appears to be “grinding to a halt,” as an acquaintance put to me recently, as lobbyists strangle any progressive legislation.  The Presidential election of 2012 is likely to occur in an America so fractured as to be almost unrecognizable.  “Polarized” does not adequately describe the splitting-up of the electorate that is occurring, to the joy of the money interests invested in maintaining the status quo.  Everyone, from Paul Krugman to Ron Paul to Dick Cheney, will be blaming their own special demons for the mess, when the real demon is the one in the mirror, and the fact that Americans don’t trust government and hence don’t know how to govern themselves.

There is little chance of negative real GDP growth in the coming year.  I forecast sign only.  Coming off a big bottom we may get big percentage changes but simply looking around tells you the economy is very sick.  U6 unemployment is near 20 percent.  About 40 percent of measured unemployment is over 27 weeks.  And then there are another several million of marginally attached workers who would like to work but haven’t actually looked for work in the past four weeks.


The big waves of residential mortgage resets coming in the next several quarters will not be kind to housing or households.  I note in passing that this recession forecasting model has forecast the last two recessions in real time, a year or more ahead.  As you can see from the chart, it was flashing red in 2006, well before the crisis.

The current collapse of effective demand results from excessive inequality in income and wealth.  The lower income classes were lured into debt beginning about 1980 to try to keep up with the upper income classes.  Wall Street pumped and dumped the housing bubble.  Home-equity debt pushed consumption to over 70 percent of GDP, far above long-term trend level of mid-60s percent.  Consumption as a percentage of GDP will fall, and government will be politically unable to replace it with government investment spending.  The failure of demand will forestall housing price reflation, and the debt deflation plaguing the weaker banks will continue.  A secondary, more severe collapse of demand may occur at the end of this cycle around 2013-2014.  Many fear war will be the solution chosen to mobilize the people.

The United States of America is a fiscal basket case.  It is time for the government to start practicing triage, taking care of those whose lives are truly being ripped apart by the profligacy of the past thirty plus years. 

Some KISS (keep it simple, stupid) proposals:

  • Take the cap off the payroll tax immediately and lower the flat rate for all employees.  Yes, this is a tax increase on the highly compensated, but hey, it’s a flat tax, and every good neo-con can get behind a flat tax, right?  The cap is currently at about $120,000.
  • Provide a livable poverty-level stipend to the unemployed.  I am seeing middle-class families in my community simply dropping into destitution—running out of money—when just one working spouse loses a job.
  • Pass a health bill.  If you haven’t watched Michael Moore’s “Sicko,” you should, whatever you think of him, just to see what it’s like in developed countries other than ours.  PBS also ran a revealing series on this.  America is rightly being viewed as a barbaric place by many outside.  People with socialized medicine tend to measurably healthier than we are, and are generally happy with it.  The level of propaganda we’re exposed to in-country is astounding.  The bottom line is that as with the collapse of the Soviet empire, the collapse of the social contract in America is likely to have profoundly negative health consequences.
  • Get out of Afghanistan. 


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