Beware of False Hopes on the Economy
Though nice to hear, optimism may be unwarranted, thanks to debt, lost jobs, and consumer fear
Is there light at the end of this very long tunnel of a recession? Government spokespeople, keen to encourage confidence, say there is (their metaphor is "green shoots"). Many private business people concur. Let's do a reality check.
Our recession is not of the garden variety type that occurs when businesses, having overinvested, cut back, or when the Federal Reserve hikes interest rates to slow the economy and contain inflation. This one, unusually, was triggered by an enormous financial crisis in which people could not get credit to buy things and businesses could not borrow and spend. The shadow banking system of investment banks, hedge funds, money market funds, etc., which accounted for vast chunks of credit, just broke down. The conventional banking system also sustained massive losses from securities and to this day remains exposed to other bad loans that will limit its ability to lend in the years ahead.
The unique danger in any recession induced by financial crises (according to a study of 14 such recessions by economists Carmen Reinhart and Kenneth Rogoff) is that they entail much higher unemployment—an average increase in the jobless rate of 7 percentage points, compared with an increase of 4.7 percentage points in more normal downturns—and a much longer recession, one that lasts an average of 4.8 years. On this count, we are still only halfway in the tunnel. The sequel today includes trillions of dollars of losses in the stock market and the housing market, representing the most extensive evaporation of wealth since the Great Depression. And the excessive debt or leverage remains. Household debt, for example, is at 134 percent of disposable income, so Americans are increasing their savings and paying down debt. The savings rate has gone from 1.2 percent of disposable income last year to an annualized rate of 6.9 percent today. The effect of this is that every percentage point of extra saving leads to a corresponding cut in consumption spending of roughly $60 billion to $70 billion.
Labor income is squeezed. Firms are cutting wages, benefits, and work hours—even after a massive reduction in head counts that led to a drop in wages and salaries of 4.7 percent in the 12 months that ended June 30. That's the largest decline since records began in 1960. And the stimulus monies? Households saved close to 80 percent of the tax cuts.
We've also had to face a continuing decline in home prices, the largest asset in the balance sheet of the average American family. Despite the government's inadequate attempts to reverse the trend in foreclosures, which damage the market so badly, prices have dropped an average of about 30 percent to date, and some estimates, such as one from Goldman Sachs, are that home prices will drop another 10 to 15 percent. Home foreclosures in July shot up almost 7 percent from June and were 32 percent greater than in July 2008.
A recent report by Deutsche Bank titled "Drowning in Debt" estimates that within two years, the number of homes that are underwater—that is, where the mortgage exceeds the value of the home—will rise to a depressing 48 percent of the roughly 51.6 million homes that have mortgages. This would be nearly double where they are today. It's not hard to understand why buyers aren't buying and builders have slashed residential construction by over 70 percent. Simultaneously, banks have reduced access to credit cards and home equity lines of credit for about 1 in 5 U.S. borrowers in the past six months.
The metrics show that all the drivers of the previous boom—consumers, housing, and easy credit—are in reverse gear and will stay that way as a drag on the growth of the economy even when it moves technically out of the recession.
The most important signal of any recovery is an increase in employment. We are not likely to see that soon for a number of reasons. Before hiring new workers, companies will increase the hours of temporary workers and move workers they kept from part time to full time. Had employers not been forced to reduce the workweek to slightly over 33 hours, we'd have another 3 million out of work now. Equally disturbing is that the number of people out of work 27 weeks or longer has reached a record 5 million, suggesting that job losses have been caused by structural changes in the economy that may be permanent.
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Reader Comments
Logistics globally under a trail of deceit is our demise....
I stand behind the leader of our corporation, but really have no empathy for Congress..or as I call them "Desperate Damn Housewives on the hill.....
What has effected our economy is summed up in the movement of goods, and freight brokers....people really know nothing about what a freight broker does. They are mere "Industry of Thieves" and their is a book out also on this. WAKE UP NEWS PEOPLE WHILE YOU SLEEP AND EAT...OUR WORLD GLOBALLY AS WELL AS NATIONALLY IS SUFFERING AT THE HANDS OF THE ELITE...This is our demise...as top Ceo's will scratch their lug nuts and wonder what the hell happened, as they back pocketed millions and vacation in Marcos Island, Florida...Everything in trucking has everything to do with government....what is going on...why our industries are leaving us, our jobs are gone, our houses are empty as the new homelessness is a lady who wears diamonds...but was forced out of business do to corruption, fraud, theft of services and above all else...NO TRANSPARENCY OR ACCOUNTABILITY...Taxpayers pay dearly for this too....in military loads that are moved and Fema loads....
I want to ask the news people to go ask Congress where in the CFR's does it state that Logistics Guru's can even be BIG BANKERS? Where is the protection of banks THE FDIC? "Conduit of Funds" is a far cry from BIG WALLSTRIP BANKERS....take this globally and in trade, as remember Bush did open up many borders, and their is our stimulus leaving our country in thin air, thru Logistics...ummm...THE MOB RUNS THIS GIG!! Madoff doesn't have anything on this gig, as this is perhaps the biggest mob ran scam we will see in our lifetime...and pyramid scams in sales is totally illegal by the way....I truly know so much, as I do nothing but watch....I believe that those who have a fax and phone will be our demise, even in the sun as sunlight is a great disinfectant, but the world truly does sleep while the wolves fiest!! By the way creating solar panels has to be moved...well the big belly bankers will make all the revenue once again on that one...freight brokers....I'd really like to get the dream team together and bring in the IRS globally, and have a national law suit on anti-trust laws being broken as well... then play a country tune backwards so people can get their homes back, their jobs back and their lives back!!
SHOW ME IN THE FEDERAL LAWS WHERE FREIGHT BROKERS HAVE ANY RIGHTS TO BANK OR BE BIG BANKERS OR ANYONE MANDATING AND REGULATING THEM, AND I WILL EAT MY PANTIES? The news truly needs to wake up along with the rest of the world....your laggin in knowledge and truth!! Corruption and Greed is our demise.....if we fail to support the base of the statue of liberty she surely would collapse, if we fail to support the base of our economy..(the working class of people) we will surely collapse.....Are we not seeing this? Sure we are...and it all has to do with regulations, lack of regulations, freight brokers LOGISTIC GURU'S
RESPECTFULLY OF COURSE.........
Caps on lawyer pay in a free market economy??
Maybe I'm biased, because I've seen really great former classmates get into Ivy League law schools that cost a bundle to attend, but as for the question as to "Why should any lawyer earn more than, say, $1 million per year?," it just seems odd to cap the pay of lawyers.
If they take on enough work to make a bundle, then so be it. In large firms, they are working an insane number of hours, and it is well known that many lawyers suffer burnout after a while. Many stay in long enough to re-pay their $100K plus student loans, bank a little money, and then get out and do something else.
There has to be some incentive to go through the torture of 4 years of undergrad as poli-sci majors listening to often far far left-wing profs (depending on your school's culture, of course), then three more years of law school. If someone earns a million after all that, then more power to them.
Many lawyers do excellent work, and there's a need for them in the areas of intellectual property, environmental law, and healthcare. Also, more are becoming interested in animal law, as well, which is nice to see (enough with the animal abuse already, America! grrrrrrrr).
As far as charging too much for some types of legal work, isn't a lot being done by paralegals these days? That's what I've been hearing, at least.
We need to instill more realistic earning standards
One of the key areas of very critically needed reform that our economy seems to be heading towards is the area of income distribution.
In third world banana republics--where the economy is tightly controlled by a few rich oligarchial families and overall economic growth is fairly stagnant--the stereotypical scene is a great big white house of the rich at the top of the hill, below which is a mass of poor peasants holding pitchforks and lighted torches, aboutt ready to storm the hill.
A CORP PRESIDENT'S SALARY USED TO BE 200X AVERAGE WORKERS SALARY
A great strength of America has been the strong, solid middle class. A division of the American workforce used to show that the great majority of Americans made solid middle class incomes. A small percentage of entrepreneurs and talented managers who managed to reach the upper echelons of corporate America earned large incomes equal to perhaps 200 to 300 times the average worker's salary in his company.
So the president of a Fortune 500 company, where the average worker made, say, $40,000/year, the president of the company might make $8-12 million per year. But now the top 10% of our country make obscene incomes.
Right now, top corporate salaries and bonuses far exceed the standard of 200 - 300 the average worker's salarly. Indeed, bonuses are now being given, regularly, to Wall Street traders equal to $100 million and more!
Lawyers regularly charge $500 - $1000/hour. $1000 can buy you a quality plasma TV. Madness.
While half of all Americans are making minimum wage or just slightly more, with insufficient medical insurance and other basic benefits, we have an elite group who need to learn that the era of unconstrained feeding from the cornucopia is over.
A recent Wall Street Journal article pointed out that partners at elite law firms--who made yearly incomes of millions of dollars--were willing to take only a 4% pay cut to protect jobs in their law firms. Faced with either lowering their billing rates to try to increase business or cut back on the hours worked by associates vs taking a larger pay cut, these law partners opted to take only a 4% pay cut. At the same time, they sharply cut back on the hours worked by associates and they curtailed the hiring of new lawyers.
This recession has to teach these lawyers that they are charging and earning too much money, They need to charge less money to try to increase demand of their services. And they need to protect their best associates, since these people are future of the law firm.
And these lawyers have to learn that it is possible to live on less than millions of dollars per year. Why should any lawyer earn more than, say, $1 million per year?
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