This seems increasingly obvious, but it is worth repeating. There are many reasons the economy remains slow—the mess in Japan, the worries over debt problems in Europe, bad weather, the weak balance of trade with other nations, and on and on—but the bottom line is that we are emerging from decades of insidious debt growth and we’re trying to deleverage.
Most American citizens and their households are trying to get rid of debt and bring their finances into order—and, in far too many cases, trying to avoid a foreclosure on their underwater homes. American government at all levels is trying to reduce expenses and climb out of debt spirals. And American business, if not mired in debt, is all too aware that there aren’t enough financially strong customers out there to build a lasting recovery. So they have no basis for hiring more employees; they can only wait to see if sustainable sources of demand will develop.
Who, after all, is going to be the first to start spending his or her money? Virtually no one has the money to spend, and all of us are waiting for a meaningful source of income to develop. In the face of that, we see only the likelihood of further cutbacks. Our incomes are being trimmed, or the threat is in the air, almost constantly.
There are minor exceptions. The cost of gasoline has declined a bit, leaving us with a bit more disposable income. The cost of shipping, as a result of lower fuel costs, has also declined, resulting in lower food costs. The June Consumer Price Index actually fell by 0.2%. But when food and energy costs were removed, the index rose by 0.3%. This demonstrates how far the cost of food and fuel fell during the month.
Of course, this could change very quickly, so we have no assurance that lower food and fuel costs will persist and affect spending in the coming months. Indeed, we have very few assurances of anything at all right now, and recent consumer confidence surveys are reflecting the resulting confusion and negativity among consumers.
None of this is very difficult to understand. It seems to indicate that we’re simply going to have to slog our way through the deleveraging process. It will take time. Much more time than Mr. Bernanke and the rest of the Federal Reserve Board seem to have expected. And further, we should revise our sense of what recovery will really look like. (And this, I think, is one of the most important things being overlooked by most analysts.) We’re not heading toward an economy that—TA DA!—looks like the return of our most recent years of prosperity.
We’re not going to see home values rising at a furious pace, for example. We’re not going to see the inevitable goofs in home purchases—overestimating values, anticipating rapid inflation rises, taking on mortgage programs that backfire on borrowers—easily smoothed away by inflation. And buying a home won’t become the kind of profitable sport that we watched on late-night television programs and talked about at cocktail parties.
It is, and will remain, a sober time. And if we think we should trim away the consumer’s ability to participate in rebuilding our economy—with cuts in income and services, especially as supplied to the poor, to children, and to the elderly—we are simply not looking rationally at the current state of the economy. If we want money to go straight into the economy, we should extend jobless insurance a bit. Simple as that. If we want to make the process of deleveraging harder and worse on the economy—possibly leading to a downturn that makes the last one look easy—then we should continue to do all we can to raise the expenses of borrowing and trim away people’s ability to get financial help in our society.
In the 1930s, FDR explained how banking works in his weekly fireside chats. Without such leadership, we simply don’t have a population that understands what we are going through and why we have to make the difficult choices that are needed in order to expedite deleveraging.
by: Bill Fisher
