I typically try to pass on to readers the best - in my opinion - of what I am reading to share the information. But after reading a lot sometimes the temptation is too much not to share my own view, for the two cents it is worth. I am not an economist and do not have any formal education in economics or finance and so this post is certainly not to be viewed as anything other than the views of another by-stander, though I hope from one who has followed the economy more closely than most other by-standers. So here I go:
I have read a lot of very convincing posts and articles on the need for austerity here in the U.S. to reduce government debt and the need for massive additional government spending to stimulate us back to growth. I have read equally convincing articles and blogs on deflation on the horizon and inflation, indeed hyper-inflation, on the horizon. I spend hours daily reading this stuff and find myself more confused than ever. One thing I do know is that fundamentals, economically, are messed up here in the U.S., in the EU, increasingly in China and - by default - in many other countries. The economy is global now and while some countries are not suffering like the EU and U.S., they nonetheless are not immune to what is happening. After looking at where all these countries stand, you certainly realize there is a very mixed bag of problems. So what do we do now?
I hear the arguments of those supporting massive stimulus. To them I must say we have already done that and, frankly, it did not work. It may have briefly brought us out of the recession and it may have helped to significantly stabilize a very volatile situation in our economy, but at the end of the day stimulus will not cure massive personal debt, housing problems more pervasive than we have ever seen and unemployment that simply will not go away. Stimulus, beyond stabilizing an economy on the edge of the abyss simply is not doing anything in this situation. Don't get me wrong, there may still be a need for stimulus here and there, but it is a bandaid, not a cure.
The other side of the coin is austerity. I am convinced from what I have read that the U.S. has spent massively but not to the point where it is a material problem. In other words, the extreme austerity measures being enacted in Greece and many other EU countries is not wise for the U.S.. Ireland is a prime example of how extreme austerity can lead to extreme recession. Our current debt levels in the U.S. are not a significant isssue at the moment, though they need to be addressed before our country's demographics push a host of folks onto Social Security and Medicare. In any event, government debt does not need to be the top priority at the moment, though it does need to be considered and dealt with in time. Again, I am not saying austerity in certain EU countries was not needed. Sovereign debt was becoming radioactive in certain countries so extreme measures were probably needed to renew confidence and keep banks supporting sovereign debt. Yet, the austerity will lead to significant recessions in the EU for years to come, which will certainly spill over to other countries, but perhaps this is the medicine they need.
The current course for the U.S. in my view is to have enough government stimulus or support to avert any melt downs but otherwise let nature take its course. We have years ahead, perhaps over a decade, where personal debt levels need to normalize, also called deleveraging. It is happening, but with unemployment, houses under water and the like, it will take a long time for folks to deleverage. We have a similar time period for housing prices to get normalized. Foreclosures are a significant issue for the next couple of years. Lenders are holding most REOs off the market, on a massive scale, and the market will take years to correct. The same goes for commercial real estate. I read a few months back that the U.S. has 50% more CRE than the second closest country. With 70% of our GDP from consumer spending, no wonder. Well, that consumer spending piggy bank (be it due to unemployment, housing prices down where folks have no money to take out of their homes or tight credit standards that are taking hold) is gone forever and CRE will face years of doldrums. The same issues hold true for retailers. Yep, 70% of the GDP is on hold for a long time to come. Years of debt reduction are needed to repair this situation.
The bottom line in my book is enough stimulus to keep the world from falling apart but not enough to build a new bubble or inspire more debt. Years are needed for us to correct to a sustainable level, probably over five and perhaps much more. It will be a boring half decade or decade financially speaking, the stock market will suck or be stagnate, housing prices will likely fall further, more businesses will fail or cut back, and we will not have a lot of fun, but we will survive and get back to a place where we can sustain our activity. This is my prescription for success. Not very exciting, is it?
Disclosures: None.
