By Stephen Lendman
In late 2009, former Merrill Lynch economist, now with the Canadian firm, Gluskin Sheff, said the following:
"The credit collapse and the accompanying deflation and overcapacity are going to drive the economy and financial markets in 2010. We have said this repeatedly that this recession is really a depression because the (post-WW II) recessions were merely small backward steps in an inventory cycle but in the context of expanding credit. Whereas now, we are in a prolonged period of credit contraction, especially as it relates to households and small businesses."
Summarizing his 2010 outlook, Rosenberg highlighted asset deflation and credit contraction imploding "the largest balance sheet in the world - the US household sector" in the amount of "an epic $12 trillion of lost net worth, a degree of trauma we have never seen before," even after the equity bear market rally and "tenuous" housing recovery likely to be short-lived and illusory with a true bottom many months away.
As a result, consumer spending will be severely impacted. "Frugality is the new fashion and likely to stay that way for years," highlighting a secular shift toward prudence and conservatism because households are traumatized, tapped out, and mindful of a bleak outlook. It shows in new consumer credit data, contracting $17.5 billion in November, the largest monthly amount since 1943 record keeping began.
Surprisingly, only people over age 55 have experienced job growth. All others have lost jobs, can't get them, and for youths the "unemployment crisis (is) of epic proportions." In addition, there's a record number of Americans out of work for longer than six months, in part because the "aging but not aged" aren't retiring, and those who did are coming back, of necessity, to make up for wealth lost.
Rosenberg stresses that for a sustainable recovery to begin, the ratio of household credit to personal disposable income must revert to the mean and reach an excess in the opposite direction. In the 1950s, it was 30%. Today its 125%, down from the late 2007 139% peak, with a long way to go taking years, and when it's over, another $7 trillion in household credit will have to be extinguished.
Until he retired in 1992, Robert Farrell was a highly respected Merrill Lynch market strategist and theorist, best remembered for his "10 Market Rules to Remember." Number one was that "markets tend to return to the mean over time." Number two was that "excesses in one direction will lead to an opposite excess in the other direction," and number nine was that "when all the experts and forecasts agree -- something else is going to happen."
According to a November National Association of Business Economics (NABE) survey, 48 top economists expect the US economy to grow 3.2% in 2010 even though the job outlook is bleak. Overall, they're so optimistic that only 15% want more stimulus, 40% said leave the present package in place, and the other 45% want the amount approved but not spent cut because it's not needed. At the same time, according to Investors Intelligence, market sentiment is at the highest level since December 2007, shortly after equities peaked, headed down, and world economies began to crator.
In his January 5 commentary, David Rosenberg notes that "Sentiment is wildly bullish....almost every survey is overwhelmingly constructive," yet reviewing 2009's market performance in the face of economic fundamentals "almost wants to make you believe in the tooth fairy." He explained that "small business (still faces) a credit quagmire," there's no housing recovery, and household spending is retrenching and hunkering down for the long haul.
The latest US nonfarm payroll report provides more confirmation. Although the headline number was a modestly anemic -85,000, Rosenberg called it "horrible" because its details showed consistent weakness. As a result, he estimates a more accurate "465,000" December decline, based on what's occurring at the small company level "where the trend in orders, output, sales and employment" has been dismal.
Importantly, economic sectors sensitive to the business cycle actually "cratered" in December, "which flies in the face of the overwhelming view that this recession has fully run its course." Also disturbing was that while "temp help" gained 47,000 jobs, its fifth straight increase, full-time employment "plunged" 647,000 last month, a clear sign that no one is hiring, especially small businesses that do most of it.
The reason headline U-3 unemployment held steady at 10% was because the labor force plunged by 661,000, the sharpest (discouraged worker) decline in nearly 15 years. The broader U-6 unemployment is 17.3%, and economist John Williams (shadowstats.com) calculates it more accurately at 21.9% by excluding manipulated changes for more valid figures. He estimates about 500,000 December job losses, not the sanitized U-3 number. He also says that a "major double-dip downturn should be obvious by mid-year."
According to Tax Commissioner Cory Fong:
North Dakota has been able to weather the economic crisis. "While other state governors and legislatures are looking for ways to raise revenue through raising taxes and cutting services, we just came through a historic session of funding both our important priorities and substantial tax relief....The winners are families, businesses and the State of North Dakota," because it's unique in one important respect.
It's the only one with a state-owned bank (The Bank of North Dakota - BND) that sustains its distinctiveness and strength. As a result, it had the nation's lowest unemployment rate of 4.1 at year end 2009 and created jobs throughout the crisis.
Established in 1919, it's been a "credit machine" ever since, according to financial writer Ellen Brown, delivering "sound financial services that promote agriculture, commerce and industry," something no other state can match because they don't have state-owned banks.
With one, BND "create(s) 'credit' with accounting entries on (its) books" through fractional reserve banking that multiplies each deposited amount magically about tenfold in the form of loans or computer-generated funds. As a result, the bank can re-lend many times over, and the more deposits, the greater amount of it for sustained, productive growth. If all states owned public banks, they'd be as prosperous as North Dakota and be able to rebate taxes and expand public services, not extract more or cut them.
Brown explains that the BND:
"chiefly acts as a central bank, with functions similar to those of a branch of the Federal Reserve," that's neither federal or has reserves as is owned by major private banks in each of the 12 Fed districts, New York by far the most dominant with Wall Street's majority control and a Fed chairman doing its bidding.
In contrast, BND is a public bank, 100% owned by the state, operating in the public interest and those of the state. It "avoids rivalry with private banks by partnering with them." Local banks do most lending. "The BND then comes in to participate in the loan, share risk, buy down the interest rate and buy up loans, thereby freeing up banks to lend more. (One of its functions) is to provide a secondary market for real estate loans, which it buys from local banks. Its residential loan portfolio is now $500 to $600 billion" in a state with around 700,000 people and thriving.
Its function in the property market helped it "avoid the credit crisis that afflicted Wall Street when the secondary market for loans collapsed in late 2007 and helped it reduce its foreclosure rate....(Its other services) include guarantees for entrepreneurial startups and student loans, the purchase of municipal bonds from public institutions, and a well-funded disaster loan program." When the state didn't meet its budget "a few years ago, the BND met the shortfall."
In sum, state-owned banks have "enormous advantages over smaller private institutions....Their asset bases are not marred by oversized salaries and bonuses, they have no shareholders" demanding high returns, and they don't speculate in derivatives or other high-risk investments. As a result, BND is healthy with a 25% return on equity, paying "a hefty dividend to the state projected at over $60 million in 2009" and well over five times that amount in the last decade, so it begs the question why other states don't operate the same way. If enough of their residents demanded it, they might and not suffer the way nearly all of them are today, two notably - California and Michigan.
California - A State in Crisis
Conditions are so bad that rumors suggest a future bankruptcy that would be unprecedented if it happens, but a more likely worst case scenario would be default. Either way is the same if on all state obligations, and in 1975, New York city was on the brink with its lawyers at the State Supreme Court filing a bankruptcy petition on October 17 and police cars standing by to serve papers on the city's chief creditors, the banks.
At the last moment, it was withdrawn after the United Federation of Teachers used union retirement funds to back city loans and saved the day. At the time, few knew the danger or what it meant. Today many states face the same bind with California most significant because of its size. As a nation, it would rank 8th economically in the world, so a default would affect the entire country, and perhaps other states would follow.
On November 18, 2009, the Legislative Analyst's Office (LAO), California's Nonpartisan Fiscal and Policy Advisor issued its "2010-11 Budget: California's Fiscal Outlook," showing the following:
- a $20.7 billion "budget problem" from late November to when the Legislature enacts its 2010-11 state budget; addressing it will require painful choices besides ones already adopted;
- LAO cites "failed budget solutions responsible for" the current crisis; as a result, a huge deficit hole must be plugged and an even bigger one coming in 2012-13 when local government loans must be repayed pursuant to Proposition 1A (2004); federal ones as well in 2011;
- "In the coming years, (additional) major state spending programs will have to be significantly reduced," and new revenues added as little help from Washington is expected; and
- LAO sees a continuing budget problem of around $20 billion "for years to come," saying "as the nation goes, so goes California."
In US politics, an old saying in presidential races (no longer true) was that "As Maine goes, so goes the nation." Economically, perhaps as California goes, the nation follows, given the state's importance and deep distress. It's real unemployment rate way exceeds 20%, by some measures third worst in the nation behind Michigan and Oregon.
Some other disquieting facts are as follows:
- US households are burdened with the most severe poverty, joblessness, hunger, homelessness, and level of foreclosures and threatened personal bankruptcies since the Great Depression - with no planned relief measures to help;
- the National Academy of Science calculates 47.4 million Americans, 15% of the population, impoverished in 2008; the true number is much higher since the government's income threshold is $22,000 for a family of four, an amount way inadequate throughout urban America where even half again as much is too little;
- the US Department of Agriculture reported that a record 49.1 million people lacked dependable access to food in 2008;
- a new Brookings Institution-First Focus study reported seven million more food stamp recipients in August 2009 than a year earlier, the number reaching 36.5 million under the Supplemental Nutrition Assistance Program (SNAP);
- a January 2, 2010 New York Times article reported a surge in food stamp demand with six million Americans receiving them saying they have no other income - no welfare, no unemployment insurance, no pensions, no child support, no disability pay, and no other form of help;
- an Archives of Pediatrics and Adolescent Medicine reported study said about half of US children will rely on food stamps during some portion of their childhood; for black children, the figure is a shocking 90%; and
-- another study showed less than half of college students graduate on schedule, and most who quit or temporarily drop out, do so for economic reasons; in addition, graduates face bleak employment prospects in the worst job market in decades.
Nonetheless, in his upcoming State of the Union address, Obama is expected to repeat his post-China trip message that fiscal austerity (meaning sharp social spending cuts) is necessary to cut the public debt. In other words, bankrolling Wall Street, health insurers, the drug cartel, other corporate favorites, and war profiteers will continue while working Americans won't be helped during the greatest economic crisis in their lifetimes, a protracted one that will last years.
Looking ahead in 2010, the state of the nation for most people is dire and worsening, and 2011 looks no better. City mayors are on the front lines dealing with it. So are governors at their state levels, but increasingly they're getting less help from Washington from an administration with priorities leaving them out and the millions they serve, on their own and out of luck.
Stephen Lendman is a Research Associate of the Centre for Research on Globalization. He lives in Chicago and can be reached at firstname.lastname@example.org. Also visit his blog site at sjlendman.blogspot.com and listen to the Lendman News Hour on RepublicBroadcasting.org Monday - Friday at 10AM US Central time for cutting-edge discussions with distinguished guests on world and national issues. All programs are archived for easy listening.