Sometimes John Robb makes so much sense he makes me want to get off the grid as fast as possible. His latest contrarian post argues very succinctly that economic recovery is not around the corner; things are too fragile.
The driver of this fragility is that 75% of a typical American families budget (not counting education costs of kids) is dedicated to fixed expenses. This means that the loss a small as 10% in a family's income would be sufficient to force failure. Combine this fragility with increasing income volatility and even the slightest shock will set off a wave of extreme frugality and mushrooming financial failure at the household level. In the past, we were able to hide this fragility through increased debt/bubbles. That's over. We've already taken on as much debt (375% of GDP right now, and still climbing) as we can acquire and the banks are hoarding the bulk of federal cash infusions to paper over their insolvency (almost all of the toxic assets from last fall's debacle are still in place, and more are en route from commercial real-estate).
Robb's diagnosis? Retail sales will not recover in the near future, which will continue a spiral that will drive down home prices and drive up unemployment -- which will drive down retail sales even more, and so on.
From where I sit, Robb's leading argument makes sense. We recently sat down to look at our own family budget to discover that essentially 80% of what we spend is fixed -- and not easily discarded. When I was growing up, trimming around the edges of our lower middle income family budget could create sizable savings in expenses; not anymore.
I'm not sure how I feel about his following argument -- the one that maps out the impact of this loss of budget flexibility. The potential fallout is pretty huge, but I'm also aware that there is a huge amount of wealth (imaginary and otherwise) being pushed around the board just out of our sight. Presumably, to keep the world economy from going to the dogs Robb sees howling at the door.