Getting back to the straight and narrow can take a lot of time and effort. Especially after straying far off the beam without much care or sense. That seems to be what happened to the whole economy during the bubble years last decade.
For some reason, probably the combination of cheap credit and visions of easy riches, people went mad together. They borrowed and spent money until the whole financial system blew apart in a great big mess. Since then, picking up the pieces has been a rough task.
But even after the travails of the last five years it could take another five years before all the wrongs have been righted. That’s what Financial Analyst, Gary Shilling thinks. According to Shilling, the economy will slump for another five years.
That’s about how much more time Shilling believes it’ll take for households and institutions to pay down their debts. Moreover, this time is needed for assets to be rebuilt through a rising savings rate.
Shilling, and other economists, refer to this process of paying down debts and raising capital as deleveraging. In short, the amount of leverage in the financial system is being reduced. Overtime this will bring the economy’s debt in line with what it can reasonably support.
Low Growth and High Unemployment
Of course, when a whole economy pays down its debts in unison – like after a financial bubble blows up – its growth rate suffers. The new cars, fashionable clothes, fancy meals, and vacations charged yesterday, must be paid for today. The boost the economy got during the leveraging period becomes a drag on the economy during the deleveraging period.
Low growth and high unemployment are what Shilling expects for now…
“A 2 percent real GDP growth indicates that the unemployment rate will rise, chronically, a little over one percentage point per year.
“…This implies that the 7.8 percent rate in December would be about 8.8 percent in December 2013, 9.9 percent in December 2014, 11.0 percent in December 2015, etc.”
Shilling notes that politicians will resist rising unemployment rates, or else, they too, may lose their jobs. “No government left, right or center can endure high and chronically-rising unemployment so the pressure to create jobs will remain for the duration of deleveraging. And so will the huge federal deficits that result from the leap in federal spending and weakness in tax collections.”
In other words, while individuals and institutions are busy deleveraging, the federal government’s leveraging up its balance sheet with gusto. So far, aside from running up massive amounts of debt, the government’s scored a big fat goose egg for its efforts. Perhaps, if they keep it up, the economy will be so buried in government debt it never will be able to recover.
The Recession of 2013?
In the meantime, in addition to having to contend with a stagnant economy and high unemployment over the next several years, the typical family will also have to contend with rising costs. These costs won’t show up in the Bureau of Labor Statistics consumer price index. If you can believe it, the clever government number crunchers still think that because you can get a really cool laptop for $500, the cost of living is going down.
Of course, consumer food costs are going up. They went up in 2012 and are also expected to rise in 2013 and 2014. Increases in food costs result in decreases in discretionary spending, which restricts economic growth. But that’s not the only change in 2013 that’ll suck money out of the economy. Here’s what we mean…
By our own experience, medical insurance premiums have run up 36.24 percent from what we paid last month…back in 2012. Has the quality of our healthcare increased by 36.24 percent? We doubt it. But we’ll pay the inflated cost all the same.
What’s more, when President Obama’s “Affordable” Care Act kicks in next year, health insurance premiums will rise even more. According to Mark Bertolini, CEO of Aetna Inc., “health insurance premiums may as much as double.” Obviously, the care won’t be 100 percent better. We suppose the massive payment increase is just the cost of laundering premium payments through Washington.
But that’s not all that’s going up… Despite Vice President Joe Biden’s last minute heroics to avert the fiscal cliff, Social Security transfer payments rose about 2 percent. The tax increase will cost the average worker about $700 a year. Moreover, it will reduce household incomes by a collective $125 billion.
These reasons, among other things, are why the economy will slip into recession later this year. Make your plans accordingly.
Sincerely,
MN Gordon
for Economic Prism
