Highly Disappointed

One of my greatest dissapointments with Obama has been his failure to utilize one of his greatest assets - Paul Volcker.

http://online.wsj.com/article/SB123940537361509771.html

Volcker has been dead on accurate in his take on our present economic situation. Moreover, he is one of the very few individuals who can say that he stayed true to his principles and did what he knew was right when everyone else was saying otherwise. He took interest rates to the roof and took some serious grief for same but he kept true to himself and it worked. He did what he had to do and that, my friends, is what is lacking in this Adninistration (and do not even get me started on the last one, though I did vote for Obama, which is why I am ranting). We are not yet willing to do what is politically incorrect. We are not willing to do moves considered socialistic - as in nationalizing banks. Screw the politics in my opinion, we are in all out economic war here and we need to pull out the stops. If some major financial institutions need to go down, so be it. Get it over with and spend taxpayer money cleaning up the mess.

I read yesterday that Obama was telling people that in the short term we need to spend some money to help the economy. Like buy a car or some other big expenditure. He noted that we need to pay down debt but nonetheless the everyone needs us to spend some money to stabilize the economy.

I have not heard worse horse s*&^ in quite a while. U.S. households, despite losses in home values and massive job losses, are now saving about 5%, which is a major improvement over spending more than we make, which we were doing before this recession. It is a low savings rate compared to where we should be but it is a major improvement over where we were. AND HERE IS THE BIG POINT TO UNDERSTAND!!! We are now returning to a sustainable spending pattern. We are not going back to our old spending ways and, even if we wanted to, cannot do so. Our old spending ways were tied to rising home values - and the ability to tap into them for credit - and the willingness of banks to extend cheap credit to anyone who could fog a mirror. Guess what - those days are done. The new reality will be quite different. Quite different indeed.

So what commentators are discussing as a recession is in my view the new reality. We have returned to where we need to be. Actually, in my view we have a bit further to fall, but either way we are close to where we belong. Unless some miracle happens and millions of jobs are created next week for buyers that do not exist, the U.S. economy is returning to where it needs to be.

This is painful. We have way too many banks, restraurants, retail establishments and the like. We built up for an economy that simply does not exist. We now have to adjust down to reality. We are getting there but the real question is whether we have downsized enough yet. Personally, I think not. Yet, let's assumed we have. If we have returned to reality - to where we need to be - why would the economy take off from here? Why would the stock market continue its meteroic climb? Why?

When you figure out the answers you will understand where I am coming from.

Consider this very carefully. People in the U.S. were spending more than they were making. This was possible because of easy credit and rising home prices. Both those enablers are gone, so the consumers are, without choice, retrenching. Consumer spending was roughly 70% of our GDP. So what happens when 70% of GDP retrenches - you are seeing it.

So the question is whether (a) the retrenchment is done and (b) what happens even if it is done. I doubt it is done but let's assume it is. I still do not see the spending returning to where it was. People now have a new attitude, which is good. People want to live within their means and save for the future. After all, they just saw their retirement accounts roughly cut in half, so the baby boomers are desperately trying to save and make up for lost ground. I for one am maximizing my retirement take and I am turning 50 this year so I am taking advantage of the catch up withholding.

So the question is, do you agree with my view?.

Disclosures: None.