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Kevin Harrington, managing director at Clarium Capital Management LLC, summed up the present economic situation in an interview with Bloomberg News: “If we have a recovery at all, it isn’t sustainable. This is more likely a ski-jump recession, with short-term stimulus creating a bump that will ultimately lead to a more precipitous decline later."
It's not just the banking system that's in trouble either. The stock market is beginning to teeter, as well. Bernanke's quantitative easing (QE) program has provided enough liquidity to push equities higher, but he's also created another bubble that's showing signs of instability. According to Charles Biderman, CEO of TrimTabs Investment Research, the Fed's bear market rally has run out of gas and company insiders are headed for the exits as fast as they can.
The economy cannot recover without a strong consumer. But consumers and households have suffered massive losses and are deeply in debt. Credit lines have been reduced and, for many, the only source of revenue is the weekly paycheck. That means everything must fall within the family budget. The rebuilding of balance sheets will be an ongoing struggle as households try to lower their debt-load through additional cuts to spending. But if wages continue to stagnate and credit dries up, the economy will slip into a semi-permanent state of recession. Washington policymakers--steeped in 30 years of supply side "trickle down" ideology--are not prepared to make the changes required to put the economy on a sound footing. They see the drop in consumption as a temporary blip that can be fixed with low interest rates and fiscal stimulus. They think the economy has just hit a "rough patch" between periods of expansion. But a number of recent surveys indicate that they are mistaken, and that "This time it IS different". Working people have hit-the-wall. Consumers will not be able to lead the way out of the slump.
It no longer makes any sense for people to spend more than they can afford, nor is it possible. US households doubled their debt in the last seven years to nearly $14 trillion. The massive borrowing binge fueled economic growth and pushed assets--particularly housing--steadily higher. But the spending-spree was only possible because of low interest rates, lax lending standards and deep-pocketed trading partners who were only-too-eager to purchase boatloads of US securities, bonds (Fannie and Freddie) and Treasuries. Now conditions have changed; funding has dried up and central banks and foreign investors have limited their purchases to Treasuries. Consumers are left to fend for themselves in a hostile environment where both jobs and credit are scarce.
The US consumer no longer has the capacity to bounce back and generate sufficient demand to produce positive growth. According to McKinsey Global Institute, Homeowners withdrew "$2.3 trillion in home equity loans and cash-out refinancings between 2003 and 2008." Most of the money was spent on personal consumption. Where will the money come from now that home equity has gone negative? The Obama administration will need a second, third and fourth stimulus just to fill the gaping hole left by the collapse of the housing market.
The Fed and its allies in the corporate/financial establishment, have killed the Golden Goose. After Obama's stimulus runs out, consumer spending will again sputter and the economy will slide back into recession. As personal consumption declines, U.S. markets will become less attractive to foreign exporters. There will be no need to continue trading in dollars.