Change We Can't Escape
The US government risks making this slump last forever...
PRESIDENT OBAMA is adding more gin to the party punch, writes Bill Bonner in his Daily Reckoning.
He says he's considering ways to create more jobs without a new US stimulus program. Among the schemes under consideration is a $3,000 new job tax credit.
Hey, why not! They had such great success with the Clunker tax credit...and with the first time house buyer tax credit. Because of course, when you pay people to do things, you can't be too surprised that they do them.
And then, you can't be too surprised when they stop doing them after you stop paying them.
Thus, when the Clunkers program conked out in August, car buyers stopped buying. And when the new house purchase tax credit expires in November, don't be surprised if house sales collapse too.
If the feds are going to pay people to hire other people, in other words, they better be prepared to do it for a long time. Which brings us back to our calculations.
How long will it be before this economy can walk without the feds clutching both arms? A few months ago, we wondered how long it would take consumers to put their finances back in order. Five years? Ten years? There are so many assumptions required that the numbers barely make sense. Still, if you think the total debt burden is headed back to under 200% of GDP, where it was for most of the last century, that would require the elimination of debt equal to about 160% of GDP...or more than $20 trillion worth.
How do you eliminate debt? Well, some of it simply disappears...through defaults, foreclosures and bankruptcies. The rest is paid off. How? By saving. Now, imagine that the United States could put an amount equal to 15% of GDP to work paying down its debts. That's savings and capital formation of all types – corporate as well as individual. (Let's ignore government, which is going in the other direction.) At 15% of GDP per year, paying America's private debt down to under two-times annual output is still about a 7-year project.
So, prepare for a long dry spell. In the best of cases, the American public has to stay on the frugality wagon for 7 to 13 years.
And in the worst of cases? Oh, well...that's a different matter. The aforementioned US government is desperate to short-circuit the process of balance sheet repair. It is propping up the old tree every way it can. Thus, the whole period of adjustment may take much, much longer than it should. Instead of coming down with a crash, the limbs fall off one at a time. At this rate, the whole process could take nearly forever.
As the private sector eliminates debt, the feds add it. The deficits are scheduled – by the Congressional Budget Office – to be monstrous, but controllable. Cash for clunkers, cash for houses, cash for jobs...it all adds up. But the CBO projections are based on very optimistic assumptions, in which the economy recovers quickly and grows strongly. They do not take into account the real nature of the slump. Which is not a pause...but a permanent change.
The Obama administration cannot, ultimately, prevent change. But it can slow down the process so much that the depression begins to seem eternal.