The Depth of This Recession

The other day I was chatting with an acquaintance who is also looking to buy their first home. And their assessment was that the home prices would begin to go up around next summer. All I wanted to say to them is that they are naive. I doubt the housing market will turn around until 2011-2012. It though will stabilize far sooner than that. But "stabilize" only means stop going down and not increase.

And one would ask why? The reason is that the basic underlying fundamentals are not in place and will not be in place for a long time. And these fundamentals include positive growth in economy and job market. There is nothing to sustain increasing housing prices.

In the meantime, some economists are asking why this recovery would be any different from the past recessions. Well, I have only two words for them - China and India. During the past recessions, US did not have any serious competition - for both skills and resources - from any other similar-sized nation in the world. But both India and China have cheaper costs and higher skilled labor market. Sustainable recovery may occur but may not positively affect American people.

The State of the State

Several incentives have been doled out to jump start the US economy. These include the multi-billion dollar stimulus packages, cash-for-clunkers program and other local stimulus packages. Lot of the stimulus cash has not yet been spent so the impact of this has not worked through the system. But most of these are short-term incentives. These are meant to jump start the US economy with the hope that overall consumer spending (main driver of the economy) will begin working at normal pace before the effect of these short-term stimulus packages run out.

The Federal Reserve has at this point put all of their cards on the table. They do not have any substantial tools left in their hands.

All of these have created smaller shoots of recovery only to be crushed by the larger problem with the economy. These smaller signs of recovery are not leading to sustainable path to recovery. The latest one being just last week, when some numbers implied that things were better. And of course, Wall Street has a tendency to make a trend out of a single data point. Consumer spending should inch up at this time of the year due to back-to-school shopping. But even that does not seem to have materialized.

The chronic problem with the US economy is lack of job creation. The unemployment numbers are substantially underestimating the reality as many people are underemployed and are not counted in the numbers. At the same time, these consumers have lost a substantial chunk of their retirement savings and home values. And so the vicious circle continues.

Any expectation of either China, India or any other nation pulling us out of this recession will not materialize. The principle reason here is that they just do not have the purchasing power needed to not only pull out their respective economies from doldrums but also help the US. Unless of course the US Dollar falls so low as to substantially increase their purchasing power. But such a dramatic fall in the US Dollar would mean substantial and permanent contraction in the US economy and that would be disastrous.

The Economy, Afghanistan, G-20, IMF, China, et al

Just a few points about all of the above not necessarily in any specific order.

Well, we continue to hemorrhage jobs. No change there. And of course, this does not include those who have either stopped searching for jobs, are underemployed or working part-time.

G-20 was not much of a win for President Obama. G-20 agreed to contribute over a trillion dollars to IMF. But if past history is any indication, IMF have not really performed (specially in today's world where everything is and should be performance-based). Many of the developing nations whom IMF "helped" in the past, have to some extent as a backlash turned far to the left. I am not sure what is going to change there. It may just mean money down the drain and more corruption. Not only that, IMFs' excessively stringent requirements for austerity have caused great pain and suffering for the people in the nations being "helped".

And of course, this will not be real money. But SDRs. SDRs are akin to printing money without printing money. This means a potential to cause inflation in the receiving country.

And last but not the least, these are promises. How much money will actually be contributed remains to be seen. Only time will tell.

The world (Or the G-19) seem to want business as usual. That means Americans should continue buying and China should continue financing those purchases. Or as a guest was saying on the local NPR station that the Chinese sold America poisonous toys and candies (melamine in milk-based) and America sold China toxic debt and so we are even.

But I think at least from American consumers' standpoint that behavior is history for the time being (and may be a very long time being). It is high time that the US consumers stop buying "stuff" for the sake of buying stuff and provide stimulus for themselves by saving more for the future.

In the meantime, Chinese are concerned that all the stimulus that the US is providing is going to make their trillions worthless. Well, few things to ponder here.

1. Nobody (including the US) forced China to hold all their reserves in US Dollars. Whatever happened to diversification!!!
2. China for many years have artificially kept their currency under-valued so that their exports would be cheaper (aka dumping). This helped the Communist government create jobs for rural billions and prevent them from being restless and agitate for more democratic rights. Now, of course the situation is unraveling.
   

And to top it all, President Obama has pledged more troops to Afghanistan. I agree more with Vice President Biden who fears Afghanistan becoming a quagmire as Iraq did. I think we should get out of Afghanistan and stop pouring $$$ and American life. Whether OBL is caught or not is a moot point. This is specially true since we the Americans do not need OBL to destroy us. If the last few months are any indication, we are perfectly capable of doing that with our own greed and stupidity.

Well, that's all for now. Write to you again soon.