Commentary

The Lost Decade Ahead

“The worst is behind for the economy, and we’re on the mend,” was the quote of the week, and it came from David Katz, chief investment officer of Matrix Asset Advisors. (Katz was interviewed for a piece on Bloomberg.com this morning.) This wonderful summation regarding the state of the economy came on the heels of today’s employment figures. A mere 247,000 jobs were lost last month, almost 80,000 less than Wall Street economists predicted. And, magically (I use this term because the Labor Department’s calculation methods are highly suspect), the unemployment rate fell one tenth of a percent, to a still unhealthy 9.4 percent.

It seems to the quote-worthy few on major financial websites that the nasty effects of the implosion of the largest credit bubble (and the financial crisis that followed) are no longer rippling through the American economy. The recession, which started in December of 2007, is apparently about to end. They point to any economic figures that top abysmal expectations, and talk of the shocking performance of the stock market (the Standard & Poor’s 500 is up 47 percent from the low of 666 registered on March 9) in order to justify their claims.

But, the latest figures on the economy (fewer job losses and improved car and home sales) and better than expected profit reports conceal the fact that the real problems that could cripple America’s future economic growth are not only being ignored, they are getting worse. The US economy needs to shift away from debt-fueled consumption, toward saving and the investment in productive assets. This is not happening. I read a great newsletter article on Comstock Partners’ website (thank you Naked Capitalism for finding this amazing piece). It explains that overall debt to GDP will continue grow in the wake of the credit bubble’s collapse. The article points out that as consumers are increasing their level of savings, the federal government is dramatically increasing the level of public debt as politicians enact massive stimulus plans and bailout packages.

From Comstock Partners:

…over the past decade (when we believe the secular bear market started) the total debt in the U.S. doubled from $26 trillion in 2000 to just over $52 trillion presently (peaking a few months ago at $54 trillion). This consists of $14 trillion of gross Federal, State and Local Government debt and $38 trillion of private debt. We expect the private debt to continue declining in the future as the deleveraging of America unfolds, while the government debt will very likely explode to the upside as the government tries to slow down the private deleveraging by helping out the entities and individuals in the most trouble with debt (such as over-extended homeowners).

The folks at Comstock Partners also point out that the excesses induced by the credit bubble will dampen business investment and decrease wages in the years ahead.

Here’s a more detailed explanation from the Comstock newsletter:

Other problems we have in the U.S. that will exacerbate the deleveraging are excess capacity, unemployment rates skyrocketing (putting a damper on wages), credit availability contracting, and dramatic declines in net worth. The attached chart (follow link above) of capacity utilization is self evident that excess capacity in the U.S. has just dropped to record lows with the manufacturing capacity dropping to under 65% and total capacity utilization is just a touch better at 68%. It is very hard to imagine corporations adding fixed investment at this time. With unemployment rates close to 10% and rising, it is unlikely that wages will grow anytime soon.

Due to the continuing buildup of public sector debt and the excess capacity created over the past few years, Comstock Partners believe that we are following in the footsteps of Japan – and I couldn’t agree more. The American economy may face its own “lost decade,” marked by stagnant economic growth, falling investment and wages, and a stock market that experiences dramatic swings as it travels on the road to nowhere.

Please note: there is another fantastic piece from the Financial Times (also mentioned on Naked Capitalism) that compares current American economic policy with Japan’s when it tried to revive its economy in the 1990s, after the collapse of equities and property prices.

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