WHOEVER has won the US election, he will be reasonably assured that he will preside over an economy that is on the mend. Last weekend I spoke to someone who knows Obama well and is a big Democratic fundraiser in California. His assessment is that Obama knows that the economy is moving in the right direction but he also knows that the next president will gain credit and this is one of the factors driving him as he would be appalled if Romney took the economic plaudits.
Whether this is a fair assessment of the president’s state of mind, it is significant that the US economy, after a few years on the ropes, is recovering. One way to look at the last four years of economic policy in the US is that a battered, bruised and very sick economy has been nursed back to health by a central bank and a government that is putting growth first and is worrying about austerity later.
To achieve this, the central bank has kept interest rates as close to zero as possible in order to ease the severe deleveraging that has gripped the US since the property/credit bubble burst in 2008/9. In tandem, where low interest rates have not worked because the people have too much debt and the banks too much bad debt, the Federal Reserve has engaged in what is called “quantitative easing”, buying up collateral from the banks and giving the banks money in return.
This has allowed banks to clean up their broken balance sheets. This process is not over and this is the reason why American interest rates are likely to remain at historically low levels for a long, long time. In addition, the US government has run a massive trillion-dollar budget deficit pump priming the economy.
Despite these efforts, the recovery in the US has been considerably weaker than previous recoveries from recession. According to a recent study by the US Council for Foreign Relations comparing this recovery with previous ones, the Council concludes that:
“The current recovery remains an outlier among postwar recoveries along several dimensions, particularly those that relate to housing. The Federal Housing Finance Agency’s house price index declined in the first quarter of the year, after rising for two consecutive quarters. Consumers remain reluctant to take on new debt and the stock of debt is lower than it was when the recovery officially began”.
This reflects the vicious deleveraging which has had to go on as people try to pay back debts and companies do likewise. Of course, because in the US mortgages are non-recourse, people can walk away from their houses without being shackled with the debt personally. This is in direct contrast to the Irish situation where one mistake in buying a house at the top of a boom will condemn you to a life of debt servitude. In the US, this is not the case as the loan goes with the property not the person.
In fact it is the housing market and the evidence that it is stabilising in recent months, despite an earlier setback, which gives most cause for optimism. Looking at the way the economy works, it is almost impossible to have a sustained recovery if there is on-going negative equity and too much debt around the neck of the average person. In the US, the debt problem is sorted by non-recourse mortgages and the fact that people move about a lot. And, as the housing market stabilises, the negative equity legacy for those still in the same properties will ease.
The central role of housing in the economy was again reiterated by William Dudley, president of the New York Fed bank, who acknowledged some improvement in housing of late, but said, last week, that “credit availability remains “impaired” and argued that, overall, the pace of the broader US economic recovery has been disappointing.
He went on to say that the housing market is “a key impediment” to economic growth in US. But as we look forward, the key drivers of the housing market, income growth, employment and demographics are moving in the right direction.
However, this process of emerging from too much leverage, swinging to too much deleveraging and back to normal recovery has to be facilitated by economic policy. This is the responsible thing to do. Deleveraging is a long, slow difficult process as we know here and as the private sector pulls in its horns, unless the government keeps demand buoyant by spending, it’s hard to see how the economy can recover.
Contrast this American approach with what is going on in Europe. As noted, the Americans are putting growth first and worrying about austerity later. The fact that interest rates and long-term interest rates are at their lowest level for decades suggests that the financial market is broadly supportive of this stance.
If, for example, the dollar was about to collapse under the weight of printed money or the US bond market was going to fall off the much discussed “fiscal cliff’, bond yields would be much, much higher.
The bond yield or the long-term interest rate is only the short-term interest rate plus a risk premium for adverse future events. Obviously the general consensus in the US is that the government and the central bank are broadly doing the right thing in nursing the economy gently back to health.
In contrast, the EU, faced with broadly similar problems of too much inherited debt and consumers who are not spending, is opting for a policy of austerity first and growth later. This is forcing the EU economy into an entirely unnecessary recession. Policy is exacerbating the slowdown and in so doing practically guaranteeing the expansion of long-term unemployment.
When seen against the pragmatic discretion deployed by US policy makers, Europe’s rigid, ideologically-driven approach encapsulated in the “fiscal compact”, must seem like an economic suicide pact. Europe has 25 million unemployed and short-term interest rates in the core are negative. If that doesn’t scream at you the need for a fiscal expansion in the eurozone, I don’t know what does! Today, as the new president in Washington contemplates the future, he can at least be reasonably satisfied that the economy will be moving slowly in the right direction for the first time in five years. Is there any European leader that can similarly look forward towards what Churchill described as the “broad sunlit uplands”? Well who’s fault is that?
David McWilliams’ new book ‘The Good Room‘ is out now from all bookshops.
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The point that sticks out like a sore thumb is the difference between recourse and non recourse mortgages, this is the main issue in my opinion, this is not to say that if Irish mortgagors had the option to walk away from indentured servitude that they would, owning your home is a pre-programmed requirement in the Irish, we also have the major issue of Financial wrongdoing / recklessness which should not go unpunished so, maybe we in Ireland need a hybrid solution somewhere between Recourse and Non Recourse solutions whereby the Banks share some of the pain, in other words… Read more »
Actually, in the United States, residential mortgage loans are FULL recourse in 40 of the 50 States.
And, for what it is worth, and I can explain fully if you would like, the Fed’s actions are very dangerous, emptying its bullets and making it unlikely they will be able to begin a cycle of leveraged growth again should a recession occur.
The US made a big mistake; they should have brought back the Home Owner’s Loan Corporation instead of jamming people into high LTV low rate mortgages which will result in negative real returns and potentially massively negative nominal returns.
Max Keiser would be in complete disagreement with you David regarding the US currency and bond market. He repeatedly states that both will crash. As it is, one of you will have to be badly mistaken and which one should be revealed within the next year / 18 months or so.
I am obviously living on a different planet than David. In my world the American economy is not recovering. The American economy is dead in the water. It cannot recover. [using that word ‘recover’ in the sense of returning to the infinite monetary growth model of recent decades] How can it recover? How can aggregate demand, required for a real recovery, return to a nation that has off-shored its industrial base and exhausted domestic credit to bankruptcy? Also…the intention behind austerity cannot be recovery. That must be case; any thinking person can see austerity cannot produce recovery…in the sense of… Read more »
I really wonder where your great confidence in this supposed recovery in the US is coming from. The US has debt of $16 trillion and if you added in the unfunded social obligations such as medicare and pensions the figure is over $100 trillion. They are adding to this with an annual deficit that is approaching $2 trillion and are buying up around 70% of their own debt because the yield is way too low for a country that is basically insolvent and nobody else wants their bonds. This is direct monetization of debt and is generally seen in banana… Read more »
The USA has this Hugh mountain of dept and it is parking this Hugh mountain to one side and it seams like what they do next is one Hugh gamble ,surly the dept mountain is going to expand.
Will this not make things much worse further down the road.
The Irish government would surly follow this,if allowed by Europe or maybe if they can burrow money on the open markets.
Ireland is trying to be something it’s not and why? Vested intrest ,the golden circle of the vested intrest will stop at nothing to protect what’s there’s past ,present ,future.
Mr McWilliams, on your vision of the eurozone (never say ‘Europe’) I agree, but ‘American economy moving slowly in the right direction’? Are you kidding me?
NY Gov. Cuomo now thinks it is time to look at storm surge barriers, but Mayor Bloomberg refuses to “stop the waves”. European firms such as Holland’s Arcadis, and its UK subsidiary Halcrow presented plans in 2009 for the CH2M plan, refused then. Halcrow worked on a similar barrier in St. Petersburg, Russia, completed in 2010. We have 2 transatlantic examples of the self-destructive suicidal criminal negligence of the physical economy over decades. Sandy was a man-made disaster same as New Orleans! Here is the other : It’s Economic Reconstruction, Stupid! Nov. 7, 2012 (EIRNS) — German industry orders fell… Read more »
penury I really wish Mr David McWilliams assessment of US growth (07.11.2012) was well founded. Alas I fear otherwise. He, together with Economic and Political Establishments everywhere are determined to adhere to the belief that this present crisis is fundamentally due to Fiscal and Bank failure. This is a flawed analysis. It is certainly true there are enormous Financial and Debt difficulties and that Bank Abuses and Miss-Management contributed greatly to the crisis; but these are symptoms rather than the root cause of the calamitous situation of today. The Economic and Political Lobby appear to believe Economic Activity is centred… Read more »
Here is what is really going on right now in the US and EU. Austerity and Hyperinflation Nov. 7, 2012 (LPAC) — While preparations for war on Syria abruptly accelerated with Obama’s re-election, so did Nero’s preparations for a confrontation with the lame duck Congress over drastic austerity. The Washington Post Wednesday morning reported Democratic Congressional sources to the effect that Obama would confront the House leadership on a take-it or-leave-it policy of entitlement, defense, and domestic cuts combined with selective tax increases. The party sources said Obama was ready to veto anything else that came from Congress intended to… Read more »
Assuming that this is correct, I hope that this recovery is an improvement on the last one, that turned out to be a property bubble, or even than the previous one to that, which turned out to be a stock market bubble (Enron, WorldCom, dot com, ) , or even the one before that (financial deregulation – Insider trading, junk bonds, etc).
D15 Taxi Driver, The concept that production has overtaken demand is an extremely interesting one. IMHO it is not given the serious consideration it deserves. Many prattle on about consumer demand so much and yes when I see people queueing overnight for the latest I-gadget it does make me wince in disbelief. However these are merely discretionary demands and not needs at all. – The things we mostly need in Western economies are, at the moment, in plentiful supply (That’s not to say we should take them for granted!) It’s now just become a matter of scale – Public or… Read more »
Hi,
I must be on a different planet to you David. This article is like the captain of the Titanic saying if we go faster we will get to America before the boat sinks!
The article is pure nonsense. The reason the US gets away with printing more money and not having to deal with the negative consequences is because the buck is the worlds reserve currency backed by the US military.
America on the mend my arse!
The USA and the European Governments are socializing debt, when we all know that the only way forward for the benefit of the Society, would be to force the Banks, to fix the problem they have created. If you rob a bank and you are caught, you end up in jail. But if the Banks rob entire Nations as it is the case, it’s wrong that the ordinary citizens are expected to pay. . Banks have the real power, and politics doesn’t make the slightest difference. Most of the politicians, apart from posturing, are afraid to fight them, and unwilling… Read more »
I have just had an interesting thought on some of the comments above . Politicans and bankers seem to be the main cause of our ills. How much money do they really need ??? I was thinking if we could sit down with all these people and actually ask them How much money do you actually want to go away and allow somebody else to try and fix the mess we are in. It would be cheaper in the long run to actually remove the gobsh*tes from the equation. Real sustainable growth will be found in increased food production,wind energy… Read more »
50 million are without medical insurance and the official umenployment rate is not under 8 percent as official figures spew. The country is 16 Tn in debt and probably double that Matt Cooper is in New York licking ass and McWilliams is doing the same here. This is Alice in Wonderland fascist propaganda and only an idiot could read it without laughing. Especially when most of article paraphrases their heroes. Boy you Irish really need to cop on. You are being doped and not just with fluoride The yanks are committed to increasing defence expenditure as they have done over… Read more »
David, Is it April 1st? You don’t honestly believe that the US economy is recovering, surely. Have they got to you? Do you think the Dow or S&P 500 is going up? Look at them in terms of Gold or Industrial Metals or Commodities or Agricultural, Crude Oil, they have been crashing since the year 2000. It only looks like increasing in terms of dollars because of inflation due to money printing. In the US, real unemployment from shadowstats U6 is 22.5% and rising. Real Inflation is 10%. All the money printing will cause much higher inflation. if not hyperinflation,… Read more »
In the main Davids blogs allow we non-economists to blather away postulating all sorts of ideas. And in the main those postulations are neither here nor there. This particular piece nails the mans flag to the mast. Without pretty competent economic knowledge it is not possible, IMHO, to comment. It is a very clear call which I hope is right for the good of mankind and in which I hope that Europe gets away from dogmatic, self serving Furrylugs economics. No more Hairy Ears. Europe is presiding over the destruction of a whole generation. Old people in charge making decisions… Read more »
Good morning
I could not disagree more with David this morning about this Article and I am curious as to how you came to the conclusion that the U.S is recovering..?
I know hopeless addicts who have a better chance of Recovery than the U.S.
I respect you David and was very sorry I had to miss Kilkenomics…..But America RECOVERING ?!!!
C,mon !!
I will post more later
Have a great day
Barry [RR6]
Vortex Thought
This is a hole .
Dante’s Inferno gave some heat .
Is that all the choices we have left ?
“Obviously the general consensus in the US is that the government and the central bank are broadly doing the right thing in nursing the economy gently back to health.”
Not obviously at all. The underlying assumption there is that ‘markets’ set the interest rates.
They don’t in a floating exchange rate non-convertible system.
So you can draw no conclusion other than the Fed wants interest rates to be low. And therefore they will be low.
David is obviously still caught in the nether world of Kilkenomics (he is defintely having a laugh with this one!) Explain this http://market-ticker.org/akcs-www?post=213692 and have a listen to this http://trimtabs.com/blog/2012/11/07/bidermans-daily-edge-obama-will-be-worst-fiscal-president-ever-unless-he-changes/ The US is on course for another recession in 2103, http://www.streettalklive.com/daily-x-change/1305-recession-probability-100.html HFT activity has skewed the stock market out of all recoginiton (p/e ratio, risk , profits etc – meaningless). The Dow Jones and S&P are at historic highs and are heading for historic Falls. Channel stuffing is rife across all manufacturing sections. Housing recovery – where ???? Student loans – the next bubble to pop. pensions funds that cannot… Read more »
Morning, This is my first post. I have been reading David’s articles for a number of years now without ever feeling the need to comment until now. David, do you honestly believe that America is recovering? China is buying oil from Russia and has put in place a new trade agreements with a number of other major players such as Japan. For the first time in their history they are buying oil and other goods using gold and not the American dollor. Where will all these surplas dollors end up? I reckon the will flood back into America over the… Read more »
Jaysus, Hold your horses there lads! All the article is saying is that the US economy was being nursed back to health after nearly been destroyed by Bush/Greenspan/Wall Street. The palliative is low interest rates and expansionary fiscal policy. And I don’t think rates are being kept low by the Fed as much as they reflect the “the liquidity trap” which is driving down the price of money. Savers mightn’t like it, but there it is and the fall in the US current account deficit suggest that the US is financing more of its own largesse than used to be… Read more »
Together with the vote on Childrens rights which are more likely an attack on the traditional family structure come this comment on EU policy also aimed at the traditional family structure.
http://www.thedailybell.com/28268/Now-EU-Seeks-to-Ban-the-Family
Bush will be lucky to last the next four years in office.
A couple of questions: somebody mentioned The Fed buying US treasury bills. Is this not like the Japanese Postal Savings Bank buying Japanese debt for the last twenty years? And with a yield that is still only, what, 2%? 3? And without a military or oil denominated in Yen to back it all up? And what’s wrong with QE? It sucks if you are saving cash or are about to retire, but its also a great way to eliminate debt. I’ve seen that idea proposed here in the proxy form of Ireland leaving the Eurozone, and I don’t believe the… Read more »
hmmmmm and which truth is that i wonder?
http://www.zerohedge.com/news/2012-11-09/usa-seen-europe-next-greece
You’d wonder who all this trillions of debt is ultimately owed to?
Better to just cancel all debts worldwide and start again.
AMAIA EGANA was a fifty three years old woman from Barakaldo, Spain, who TODAY KILLED HERSELF, jumping from the balcony of her fourth floor apartment, after opening the entrance door of her home, to Court Officials with an EVICTION ORDER because she was behind in the repayment of her home-mortgage. Two weeks ago a 54 years old man from Granada, hung himself from a tree, after suffering the same humiliation. In Spain alone 500 HUNDRED FAMILIES DAYLY are thrown out from their homes, to satisfy THE GREED OF CORRUPT BANKS, BONDHOLDERS, AND FINANCIAL ELITES. Since 2008, 350.000 FAMILIES HAS LOST… Read more »
Panic over lads, we spoke too soon.
Osborne and King have arrived on their white stallions to save the day.
“Has Treasury magically cut debt by £35bn”
http://www.bbc.co.uk/news/business-20270002
I was worried there for a minute.
What do you think of this sleight of hand, cooldude, Tony, et al?
Merkel Defends Her “Destroika” Policy at European Parliament Nov. 8, 2012 (EIRNS) — Yesterday there was a debate with Angela Merkel at the European Parliament. She gave a fully utopian speech, saying that sooner or later the European Treaties should be changed in order to allow the EU institutions to intervene more in national budgets, and trying to appease the Parliament by calling for “more democratic legitimacy” of EU institutions. Many MEPs confronted her, even harshly, with the effect of the Troika measures on subject countries. One person called it “Destroika.” She responded that she wants countries to make structural… Read more »
I was reading from the web page Tony Brogan sent in his last post. http://www.globalresearch.ca/bankers-have-seized-europe-goldman-sachs-has-taken-over/27872 . In his book: “Bankers have seized Europe: Goldman Sachs Has Taken Over”, Dr. Paul Craig Roberts says the following: “We find the banker-controlled European Commission demanding that European labor bail out the private banks by accepting lower pay, fewer social services, and later retirement. The European Union, just like everything else, is merely another scheme to concentrate wealth in a few hands at the expense of European citizens, who are destined, like Americans, to be the serfs of the 21st century”. After he suggest… Read more »
It might also be worth pointing out that all this talking about QE (money printing) is extraordinary in itself. A country only prints money if no one will lend it any, either at all, or at a faintly reasonable interest rate.
With the exception of the periods of the world wars, any major country even hinting at printing money should set off klaxons everywhere and send us running for the proverbial bomb shelters.
No US recovery seen here Dave from Denver… Avoiding The Fiscal Cliff = QE To Infinity There is no reason to expect that renewed efforts at federal budget deficit reduction will result in anything more than the usual smoke and mirrors, further increasing, not reducing, long-term U.S. sovereign-solvency risk. In reality, the U.S. economy has not recovered, and no recovery is pending. Consumer liquidity remains severely impaired, and broad business activity continues to falter anew. As a result. the actual federal budget deficit going forward will be much worse than the relatively rosy numbers being used as the basis for… Read more »
More from dave from Denver The truth is that not only will the fiscal cliff scenario be kicked down the road like the proverbial “can” (anyone know if that’s supposed to be a beer can or a soda can? Maybe a can of beans?), but the increasing chasm between expenses and revenues will have to be filled with even more Treasury debt issuance. Tautologically, this means more QE. More QE means even higher prices for gold and silver. The reason more QE will be needed is the same reason the Fed has continued and expanded QE since its inception in… Read more »
Meeting in Malahide
bloggers get together in the upper room at Duffy’s pub a stroll from the Dart Station
7.30 tonight Sat
Meet with Philip, Dorothy Jones and Tony Brogan
I have only got time to read the article now. I am sceptical about the official statistics. There has been a lot of “change” implemented on the measurement of economic activity since 1982. Check John Walter Williams, for statistics measured in the old fashioned (serious and objective) manner. Here is an interesting article that I seen this morning. I figured I would add it, as it covers the topic of debt deflation in a very prosperous country, that also happens to have extreme debt levels, and which is expected to bailout out the others. Is the debt deflation scenario now… Read more »
Wakey wakey David. Freedom of speech is a great thing isn’t it?
http://whokilledjohnfkennedy.blogspot.ie/
Oettinger Lashes Out Against U.K., France Nov. 9 (EIRNS)–Germany’s member of the European Commission Günter Oettinger lashed out against the governments of the United Kingdom and France yesterday, saying in Brussels that he is less concerned about Greece than about the British and the French. Referring to British Prime Minister David Cameron’s firm intent to insist on deep cuts in the European Union budgets, and referring to the tide of anti-EU sentiments in Britain, Oettinger said that the Brits “seemed to have lost their mind” to an extent that one would have to wonder if they still wanted to be… Read more »
The Tremonti Effect on Glass-Steagall Nov. 9, (EIRNS)–Former Italian Economy and Finance Minister Giulio Tremonti’s aggressive campaign for Glass-Steagall has the effect that now, whenever he is on talk-shows, he wins over every opponent. Thus, on Wednesday on the popular “Porta a Porta” talk show on Raiuno, Tremonti forced all participants, both pro- and anti-Obama, to acknowledge that Obama has failed in the most crucial reform, that of reintroducing a Glass-Steagall-like banking separation. Tremonti recalled that President Bill Clinton, in 1999, repealed “the glorious Banking Act of Franklin D. Roosevelt, an act that was copied everywhere in the world,” and… Read more »
Unfortunately David’s most deluded article yet. I read this and immediately thought of the lucky fool. They guy has the one trick and it works, and works, and it keeps working and he makes a name for himself but then one day he losses it all. Bang. The trick was just that, a trick that was lucky that it fitted in with the movement of the times. Readers of Black Swan/Fooled by randomness will be familiar with the idea. I think David needs to step back, reanalyse what is happening. Can it be he has been fooled by his conditioning?… Read more »
Jaysus You are not doing very well with this article Davido and all the negative comments provoked you to bless us with thy presence. I’m not surprised boy and think you need to pull your fine finger out. Put your notebook down, stick you head out the window and get some of this nice November air into you and clear the head It sounds like you are worrying more about predicting the future than dealing with the present. You are absolutely right to state that the future is guesswork and by suggesting that the US is in recovery tells me… Read more »
I was wondering if you had seen Gerard Celentes blog Re debt . It really has a good blog on Irish debt transfer onto the citizens backed by Europe. I know we have heard it all before but its an interesting presentation on the issues. Worth a look.
1923 was the year German Hyperinflation took off attempting to pay Versailles WWI debt while the economy was at the same time suppressed. The famous 100 billion Reichsmark notes for a cup of coffee : &filetimestamp=20100329160515 be very sure are not forgotten. Without bank separation as Haldane of the BoE has repeatedly called for, these efforts are doomed. Weimar Hyperinflation, Here We Come Nov. 10 (LPAC)–“The Bank of England has just crossed the line into straight government financing,” the {Telegraph}’s Assistant Editor Jeremy Warner wrote today. In an alarmed note reporting on the Bank of England’s decision to transfer $56… Read more »
Will the New Archbishop of Canterbury support Glass Steagall The new Archbishop of Canterbury, who heads the Church of England, might very well support a Glass Steagall type banking reform. The former Lord Bishop of Durham, Justice Welby, who this week was elevated to head the 80 million strong Anglican Church, is a most unique candidate and just might bring fire and brimstone to the City of London. http://laroucheirishbrigade.wordpress.com/2012/11/10/will-the-new-archbishop-of-canterbury-support-glass-steagall/ In a recent speech to financiers in Zurich Archbishop Welby cited a the “Dog and Frisbee” speech of the Bank of Englands advocate of Glass Steagall, Andrew Haldane. He call for… Read more »
China Sees Dim Future For U.S. Under Obama Nov. 10 (LPAC)–A People’s Daily opinion piece by a Yang Ziyan on Friday asked, “Can Barack Obama help U.S. out of troubles?” and gives the only possible answer — not likely. “Since Barack Obama took office, the U.S. economic situation has been deteriorating…. Obama will face the problem of `no money available’ first after winning the re-election. Reducing expenditures is not a good method because it will cause serious economic recession…. The economic problem is never merely related to economy but includes complex political factors…. Considering the amount of debt and opposition… Read more »
David: You write: “Of course, because in the US mortgages are non-recourse, people can walk away from their houses without being shackled with the debt personally. This is in direct contrast to the Irish situation where one mistake in buying a house at the top of a boom will condemn you to a life of debt servitude. In the US, this is not the case as the loan goes with the property not the person.” First you put your finger on the exact core of the problem (which I have been trying to point out on your blog since I… Read more »
Sean Fitzpatrick character axed from Anglo the Musical after complaints from his lawyers!
You really couldn’t make it up.
It looks good though.
http://www.rte.ie/ten/2012/1110/anglomusical.html