There is much talk of an impending economic "recovery" these days. Over the past week, I've noticed a series of stories coming from sources as disparate as Simon Johnson over at Baseline Scenario, Tyler Durden at Zero Hedge, the LA Times and even Bloomberg that are all pretty much telling us the same thing, and it's best summed-up by Simon Johnson's post over at Baseline Scenario, today: "The Two-Track Economy."
The similarities of these stories--considering their varied sources--gives me great pause. To some degree, one could say I've had a bit of an awakening in the course of reading these pieces, or, at the very least, on a snarkier note, I'd call it "a lightbulb moment."
But, realistically, what are the odds of that really happening? (Heh. If you believe that, I've got a couple of bridges I'd like to sell you.)
Here's Johnson's clarity:
"The Two-Track Economy"
August 20, 2009
...are we seeing the emergence of a two-track economy: one bouncing back in a relatively healthy fashion, and the other really struggling?
Think about this in terms of individuals and the households in which they live. Some people have lost their jobs and are finding reemployment very difficult; many will exhaust their unemployment benefits soon. Others find that what they owe on their mortgages far exceeds the value of their home. And many find they have been cheated by financial products, particularly home loans and credit cards -- which is why we need effective consumer protection for finance, and in a hurry...
...The overall numbers on outcomes by groups can get complicated (here's a partial guide), but the simple version is: the top 10% of people are going to do fine, the middle of the income distribution have been hard hit by overborrowing, and poorer people will continue to struggle with unstable jobs and low wages.
Can the richest people spend enough to power a recovery in overall GDP? Perhaps, but is that really the kind of economy you want to live in?
Yes, Johnson talks of a recovery that will have absolutely miserable overtones for most of our society (i.e.: Main Street) for many, many years...perhaps even longer than that. But, the Wall Street folks (i.e.: the upper class) will continue to hum along.
Two days earlier, along the same lines as today's post, Johnson wrote this on his blog: "United States Inequality In The Recovery Period." In it, Johnson went into even greater detail on this line of thought:
United States Inequality In The Recovery Period
August 18, 2009
...There's a general assumption that, to whatever extent historically record-high inequality is present, it will almost certainly be gone post-recession. But what if it isn't? What if this recession, and the recovery, will cement inequality in the United States even further? From them:
Johnson then quotes a piece from the LA Times, ''The consumer isn't overleveraged -- the middle class is.'
'The consumer isn't overleveraged -- the middle class is'
Los Angeles Times
August 14, 2009
What's more, on the asset side, BofA Merrill says the middle-class has suffered more than the wealthy from the housing crash because middle-class families tended to rely more on their homes to build savings through rising equity. Also, the wealthy naturally had a much larger and more diverse portfolio of assets -- stocks, bonds, etc. -- which have mostly bounced back significantly this year.
And, more from Johnson...
There are a lot of moving parts going on with the interaction between the top percents and the middle class, inequality and collapse, but it isn't hard to see a story where the stock market picks up, housing is in decline for a decade, and we have a jobless recovery. I'm not sure how that would effect our quantitative measures of inequality, like the gini coefficient, but we could end up with much more inequality, and inequality that stings a lot harder than it did during the boom times.
Johnson then references a piece I must've read three times if I've read it once (and that was well before I read Johnson's piece tonight, too), from this past Saturday, by the folks over at--of all places--Zero Hedge. (NOTE: Johnson and Zero Hedge do not have a whole hell of a lot in common, politically.)
"A Detailed Look At The Stratified U.S. Consumer"
August 15, 2009
...It is probable that the dramatic increase in savings as disclosed previously, is an indication that at long last the richest 10% of America may be finally feeling the sting of a collapsing economy. Yet estimates demonstrate that even though on an absolute basis the wealthy are losing overall consumption power, the relative impact has hit the lower and middle classes the strongest yet again...
The main reason for this disproportionate loss of wealth has to do with the asset portfolio of the various consumer strata. A sobering observation is that while 90% of the population holds 50% or more of its assets in residential real estate, the Upper Class only has 25% of its assets in housing, holding the bulk of its assets in financial instruments and other business equity. This leads to two conclusions: while average house prices are still dropping countrywide, with some regions like the northeast, and the NY metro area in particular, still looking at roughly 40% in home net worth losses, 90% of the population will be feeling the impact of an economy still gripped in a recession for a long time due to the bulk of its assets deflating. The other observation is that only 10% of the population has truly benefited from the 50% market rise from the market's lows: those better known as the Upper class.
And to add insult to injury, the segment of housing that has been impacted most adversely in the current downturn, is lower and middle-priced housing: that traditionally occupied by the lower and middle classes. The double whammy joke of holding a greater proportion of net wealth in disproportionately more deflating assets is likely not lost on the lower and middle classes.
Yes, the wealthy aren't exactly going to have to worry about our "new normal," are they? (See: "America's bumpy journey to a new normal.")
Then again, the wealthy don't really have to worry too much about working or unemployment benefits vaporizing. (See "Weekly Unemployment Claims Increase, Workers Exhausting Extended Benefits.")
The wealthy don't have to worry about health insurance (See: 85% of the other diaries on this blog right now.)
The wealthy don't have to worry about things like foreclosures continuing to escalate, either. (See: "MBA Forecasts Foreclosures to Peak At End of 2010.")
And, we all know the wealthy don't have to worry about those weekly paychecks, either, now do they? (See: "Why The Austrian, Keynesian, Marxist, Monetarist and Neo-Liberal Economists Are All Wrong.")
Why The Austrian, Keynesian, Marxist, Monetarist and Neo-Liberal Economists Are All Wrong
Served by Jesse of Le Café Américain
August 20, 2009
US Personal Income has taken its worst annual decline since 1950.
This is why it is an improbable fantasy to think that the consumer will be able to pull this economy out of recession using the normal 'print and trickle down' approach. In the 1950's the solution was huge public works projects like the Interstate Highway System and of course the Korean War.
Until the median wage improves relative to the cost of living, there will be no recovery. And by cost of living we do not mean the chimerical US Consumer Price Index.
The classic Austrian prescription is to allow prices to decline until the median wage becomes adequate. Given the risk of a deflationary wage-price spiral, which is desired by no one except for the cash rich, the political risks of such an approach are enormous...
Boldface type is diarist's emphasis.
So, I ask: Just who will benefit from a credit-less, revenue-less, jobless "recovery?" On what planet do these people that talk of a "recovery" in the next few months spend most of their time?
It sure doesn't look like this is a recovery in the Progressive Democratic sense of the word.
Yes, the political risks of the so-called recovery as it's being teed-up for us now...are enormous...
UPDATE (w/BREAKING NEWS):
And, here's another breaking story, relating to the loss of 59% of the pension fund equity investments over the past decade throughout our society.
The true extent of this downturn is just now coming to the surface, and it is going to play out for decades, IMHO...
...the equivalent of a double-deck headline over at Bloomberg right now...these losses relate to, perhaps, the lion's share of our middle class...this is a MUCH bigger story than it may, at first, appear...
Pension Plans' Private-Equity Cash Depleted as Profits Shrink
By Jason Kelly and Jonathan Keehner
Aug. 20 (Bloomberg) -- U.S. pension funds contributed to the record $1.2 trillion that private-equity firms raised this decade. Three of the biggest investors, state pensions in California, Oregon and Washington, plunked down at least $53.8 billion. So far, they only have dwindling paper profits and a lot less cash to show the millions of policemen, teachers and other civil servants in their retirement plans.
The California Public Employees' Retirement System, the Washington State Investment Board and the Oregon Public Employees' Retirement Fund -- among the few pension managers to disclose details of their investments -- had recouped just $22.1 billion in cash by the end of 2008 from buyout funds started since 2000, according to data compiled by Bloomberg. That amounts to a shortfall of 59 percent. In total, they haven't reaped a paper gain from funds formed in the past seven years.
The wisdom of those investment decisions hangs on the remaining value private-equity firms assign to companies they snapped up in 2006 and 2007, during the peak of the buyout boom. For the California, Oregon and Washington plans, that figure totaled $15.8 billion at the beginning of the year.
While some investors say they're confident the private- equity industry's traditional practice of taking over companies will pay off, others have been shaken by a credit contraction that froze deal-making, eroded the value of the assets on private-equity firms' books and prevented them from cashing out in public share sales.