After the tumultuous economic crash of 2008 experts everywhere hailed 2009 as the year of recovery with many sighting greenshoots like weeds in an untended garden. GDP for 2009 declined for the second consecutive year - a feat not seen since the Great Depression. So we ask ourselves if 2010 is the year that the economy shows marked improvement. Our short answer is, no.
That does not mean that some cannot make a plausible case for solid recovery in 2010 - indeed the permabull financial press has been declaring a recovery since March of 2009. Some recent evidence lends some credibility to such claims such as rises in the index of leading economic indicators, a vigorous growth of GDP of 5.7% in 01Q10, and rising exports among other notable signs of sustained growth.
While on the face of it these improvements offer cautious optimism our opinion is decidedly against any recovery in 2010. In fact we believe that the USA is headed for another pronounced slump. Reasons vary for this case as well but one of the leading concerns is the decline of M3 money supply since fall of last year. The astute observer may object that the Federal Reserve stoppped publishing M3 statistics in 2006 - just in time for the many crises of 2007-08. While that is indeed true, it is not true that these numbers are not available in large measure due to the heroic work of John Williams at Shadow Government Statistics.
No economic recovery or growth has occurred in the face of declining M3 yet year over year contraction is hovering around 5%. Not only is M3 declining but so is bank credit which has contracted continuously for over 11 months - another unprecedented behavior. Some folks point to burgeoning corporate coffers which stand at over 1 trillion USD but the fact is that much of the money represents borrowed funds or cuts in capital spending due to lack of demand. There is no current evidence of any of that money being invested. In fact Zero Hedge reports that companies have cut back capital expenditures to ride out the economic storm. The cuts are so severe that they are eating into capital stock.
Now this is probably a good thing because so much malinvestment was encouraged by a profligate Fed which warped interest rates artificially low. But given that liquidation is in progress, economic growth is on hold.
Chronic high unemployment will also impede economic growth. Even though the bulk of unemployment is clustered in the lower income deciles the loss of purchasing power is still sufficient to drag economic growth and certainly enough to overwhelm state relief resources as has happened across the country already. In any event, an unemployment rate of 22% - as we have now - is not a recovery.
Looming on the horizon is FASB 166/167 which requires that companies pull their off balance sheet liabilities onto their balance sheets. Although FASB deferred this requirement for 18 months it is nonetheless a real concern which healthy and smart companies will want to address sooner rather than later with the result that investment - and hence growth - are also deferred.
We must note that the marginal productivity of debt is negative meaning that each new dollar of debt shrinks GDP. The private sector may be liquidating in places but the governments are accumulating debt in drunk sailor fashion. The additional debt will absolutely preclude economic growth.
Finally we should note the utter insolvencies of the banks. They have 1 trillion USD stored at the Federal Reserve - a phenomenon which is totally uncharacteristic of health. Whether the banks are purposely not lending credit or incapable of doing so for fear of collapse is another question. The bottom line is that they are not lending which means that the economy is not growing. A negative aspect is the huge overhang of bad mortgages both in the residential and commercial sectors, the latter possibly being worse than the former. In any event it hamstrings the banks many of whom should have gone out of business last year.
No, dear reader, the economy is not positioned to grow in 2010. Yes there may be another quarter or two showing growth but the fundamentals of the economy are stacked against sustained growth for this year. In fact we believe that the downturn will intensify in the 2d half of 2010. Hold on to your hats, voltatility in the markets is high and only growing higher.
Shadow Government Statistics