Wednesday 25 August 2010

If this is true then the US (and the UK for that matter) is doomed

I was reading the BBC article “US existing home sales drop to 10-year low” which was discussing the 27.2% fall in US existing homes during July compared to June. Of course the government were blamed because they ended tax credits designed to boost home sales. I could today talk about why the government are even in the market trying to boost sales when it should be a free market that is not manipulated. But I won’t because I came across a couple of quotes from Carey Leahey at Decision Economics which concerned me greatly. These were "I think [the July figure] is just suggestive of an economy that is definitely slowing down" and "unfortunately, it is a situation where we can't have a meaningful recovery without a meaningful consumer recovery, and we can't have a meaningful consumer recovery without a recovery in housing."

I am amazed that an economist could even sprout nonsense like that. I am just an Average Joe and even I can see that a meaningful recovery would be based around producing value added goods and services. It most certainly is not based around a system where you rely on inflating asset prices followed by selling on to the greater fool.  I think that is called a Ponzi scheme and past history suggests that these never work out well.

If this is what people are depending on for a recovery then the US and the UK are doomed. Don’t they realise:

- They already have a zero interest rate policy. You can no longer make interest payments cheaper allowing the asset portion of the mortgage repayment to be inflated. The greater fool can therefore not pay more than the previous greater fool.

- The greater fool in a lot of instances no longer has a job. Just have a look at the Shadowstats chart that I show today and particularly the SGS Alternate data set. This uses a pre-1994 unemployment method and adds an SGS estimate for long term discouraged workers (who are not included in official figures) to the U6 unemployment figures. This presents an estimate for true unemployment at nearly 22%. Remember during the Great Depression US unemployment “only” rose to 25%.

- The greater fool that is still working is scared that his job might be outsourced to a low cost economy so that his company can save a buck. He’s therefore hanging on to what little money he has.

- The greater fool has already borrowed to the limit with his student loan, his maxed out credit cards plus his personal loans. He can’t get more credit.

- The greater fool might just have realised that property prices do not always go up.

Sure the government and other agencies might be able to role the dice and resuscitate the terminally ill patient again by taking some unconventional measures such as printing money (Quantitative Easing). But no matter what anybody says in my opinion that would not be a sustainable recovery and would be certain to fail as we are seeing with their last attempt. The only question would be when. I just can’t understand why these “experts” can’t see the futility of their efforts.

Finally what an Economist is even doing suggesting that this is the requirement for a meaningful recovery is beyond me.

As always do your own research.

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