Green Shoots and Great Subterfuge

Much has been made of supposed “green shoots” in the economic reports that indicate things are getting better. Banks actually made profits in the first quarter. Housing numbers are not as bad as they seem. New claims for unemployment came in lower than expected.

These are actual reports but are better seen as “spin” than as signs that things are turning around. Bank profits were based on silly things like this: Banks could repurchase their debt for pennies on the dollar and the difference between par and pennies is thereby booked as a profit even though they did not actually repurchase any of their debt.

New claims for unemployment are made weekly and the numbers are well known to be quite volatile. Economists are pretty much universal in their agreement that unemployment will continue to rise even after a recovery has actually begun. That is the normal pattern of every recession. The rate of unemployment can be expected to rise for at least a year and will probably reach 12%, if not higher.

Housing starts are the lowest they have been in the fifty years records have been officially recorded. Sometimes I think we might be better off without all of the government and private institutional reports telling us what is going on. The spin says most of the drop in housing was in multi-family, not single family units. Gee, don’t you feel better now!

One of the great questions I still wrestle with is whether we will have inflation or deflation. I believe the reality is that we cannot yet know the answer to that question. Some economists believe we need to encourage inflation to help debtors to be able to repay their debts. The pressure on prices is now downward because more people are inclined to save and fewer people are borrowing and buying. Housing, automobiles, and many other things, especially durable goods, are falling in price.

Niels Jensen believes governments worldwide will need to borrow at least to  33 Trillion Dollars because massive government borrowing has always followed banking crises. That is about fifty times the amount set aside by the original TARP bill. The massive borrowing will crowd out private sector borrowing and that will mean very slow economic growth in the private sector economy for at least the next several years.

Massive borrowing needs may mean high interest rates for savers, or it may mean that the slow economic growth will leave interest rates at low levels for years to come as we try to grow out of these problems while starving the economy of investment capital. Either result will not be good for the stock market.

The green shoots of the economy should have two words written on them: Caveat emptor!


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