Aware Brain

The past weeks have provided dramatic indicators to the direction of the economy. In many ways they are contradictory. While GM goes bankrupt, pending home sales increased. The Economist headline reports  “Don’t get too excited about some recent brighter economic news”, on the same day that The New York Times states that the inflation scare is overblown.

While the world waits for confirmation on the “green shoots” we covered last week, those les patient look inside the stories to try and determine a clearer picture. The huge elephant in the room, which has not changed since last year, is debt. Added together, the total liabilities in the US exceeds $50 trillion. This includes all of the US Government debt, corporate debt, and toxic assets held by both. Whomever ends up as the backer of this debt is immaterial, it is a liability to the production of the country. In February economist John Williams called the liabilities of the US “beyond any hope of containment”. In my blog post entitled “Too Big To Bail” I noted that the government was “still attempting to paper over the negative equity of these assets by printing even more dollars”. In the meantime, the printing process still continues, but there are signs that the short term fix may be overwhelmed.

To fund the debts acquired by printing more dollars, the government sells treasury notes at regular auctions. However, the size of the ballooning debt is exceeeding the ability of auction buyers to purchase them. U.S. Treasury debt auctions have become so frequent and so large as the budget deficit heads toward a record $1.75 trillion that their impact is beginning to extend beyond the bond market. A record $34 billion five-year note auction recently was met with what traders described as subpar demand, with the government forced to offer a higher yield to attract buyers. The government had to pay greater interest than expected on the long bond. That is worrisome because it could signal that it will become harder for Washington to finance its economic recovery plans.

If this continues, it supports the opinion of World Bank President Robert Zoellick he offered when he warned that fiscal-stimulus plans are insufficient to turn around the “real economy” and rising joblessness threatens to set off political unrest across the globe. “While the stimulus has given an impulse, it’s like a sugar high unless you eventually get the credit system working,” Zoellick said.

Intermittent lulls in the financial storm mean nothing if the underlying problem is not corrected. The recent fate of General Motors is an excellent example. Throughout the 80′s and 90′s GM was clearly in financial trouble, but maintained an appearance of viability as it occasionally introduced a promising model, or staved off a financial setback. However, the final result is a lesson in management; “Any organization that fails to sufficiently safeguard its means of self-correction and reform, that forsakes long-term investment for short-term gain, that piles up debt year after year, will eventually fail, no matter how grand its history or noble its purpose. If you don’t feel the tingle of national mortality in all this, you’re not paying attention.”

The Economist sums it up as follows: “A closer look at the detail of the latest figures suggests that there is a long way to go before recovery sets in.” Nouriel Roubini, an economist at New York University, suggests that recovery from recession was far from imminent, arguing that “it’s going to last another six to nine months”. Roubini goes one step further, noting that other economists are still suggesting a “doomsday” scenario, with continuing contraction for a long time to come, and thus even he could be considered as an optimist.

~ by Dave on June 1, 2009.

Posted in Uncategorized