It would not have been as disconcerting to hear Vice President Joe Biden acknowledge that the Obama administration "misread how bad the economy was" if he had used the present tense. Biden's candor on ABC's "This Week" is likely to find itself walked back by various administration representatives in the coming days, but I think the comment is a telling indication that the White House's fiscal guys still see this recession as a catastrophe averted, rather than one still in the process of developing.
As an independent business owner, there is nothing I'd rather see than an economy on the mend, but that's not the reality I see stretching ahead over the next few years. The private sector is still trying to untangle itself from the ropes -- and we're just starting to see state governments and the nonprofit industry grapple with serious revenue shortfalls. And with another $40 to $70 trillion remaining to bleed out of the current global system (compare that to the $14 trillion GDP of the United States, and wince), we've still got a ways to go -- and few signs that the policymakers are inclined to act.
Here's a micro story: I've now spent eight weeks with two groups of unemployed workers in the Richmond area, focusing on helping almost 100 people regain their footing in this economy. These groups skew older, white and more educated -- people at the peak of their earning power, who now find themselves nearing retirement with 401k plans slashed (or cashed to pay the bills) and almost no easy opportunities. This snapshot mirrors what I'm hearing from other markets around the country, and my sense is that come 2011 these displaced workers are going to find themselves making $20-40k less than they were making in 2007. If they're working at all.
Nassim Taleb, who has drawn attention for his book Black Swan and for his anticipation of this global economic unravelling, said last week that we're "in the middle of the crash".Taleb, who came to prominence for his early warnings about the
dangerous practices at financial institutions, instead directed the
discussion toward the big picture, voicing his concerns about the
direction of the economy and public policy. "The system is very
fragile. You may have green shoots or whatever you call them . . . but
you're still in a world which is breaking, and that world should break.
Nature breaks anything that's too big," he explained. As finance became
increasingly reliant on exotic products and high leverage ratios,
complexity grew far beyond what regulators could understand or should
have allowed.
As a result, there is excessive leverage in too many parts of the
world; Taleb estimates that $40 trillion to $70 trillion globally needs
to be deleveraged. The United States annual GDP is approximately $14
trillion. Until the financing problem is solved, it's going to be
difficult to resume normal, healthy growth. "We're in the middle of the
crash, so if I was going to forecast something, I know it's going to
get worse, not better . . . You're going to have much less leverage in
the system."
But Taleb is not convinced the process is fully underway. Rather
than working off debts, he says the government is looking to inflate
asset prices through stimulus plans.
Taleb's concerns echo those of John Robb, a global analyst whose doom-and-gloom scenarios toy with my own penchant for hyper-realism. Today, Robb pointed me in the direction of Ambrose Evans-Pritchard's latest demoralizing piece in the Telegraph:
The Centre for Labour Market Studies (CLMS) in Boston says US unemployment is
now 18.2pc, counting the old-fashioned way. The reason why this does not "feel"
like the 1930s is that we tend to compress the chronology of the Depression.
It takes time for people to deplete their savings and sink into destitution.
Perhaps our greater cushion of wealth today will prevent another Grapes
of Wrath, but 20m US homeowners are already in negative equity
(zillow.com data). Evictions are running at a terrifying pace.
Some 342,000 homes were foreclosed in April, pushing a small army of children
into a network of charity shelters. This compares to 273,000 homes lost in
the entire year of 1932...
...What is so disturbing is that governments have
not even begun the spending squeeze that must come to stop their countries
spiralling into a debt compound trap.
French president Nicolas Sarkozy, with a good nose for popular moods, says: "We
must overhaul everything. We cannot have a system of rentiers and social
dumping under globalisation. Either we have justice or we will have
violence. It is a chimera to think that this crisis is just a footnote and
that we can carry on as before."
Evans-Pritchard concludes:
We are moving into Phase II of the Great Unwinding. It may be time to put away
our texts of Keynes, Friedman, and Fisher, so useful for Phase 1, and start
studying what happened to society when global unemployment went haywire in
1932.
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