U.S. growth prospects deemed bleak in new decade

[Denny Crane]

http://www.reuters.com/article/idUSTRE6021LK20100103

U.S. growth prospects deemed bleak in new decade

6:55pm EST

By Pedro Nicolaci da Costa

ATLANTA (Reuters) - A dismal job market, a crippled real estate sector and hobbled banks will keep a lid on U.S. economic growth over the coming decade, some of the nation's leading economists said on Sunday.

Speaking at American Economic Association's mammoth yearly gathering, experts from a range of political leanings were in surprising agreement when it came to the chances for a robust and sustained expansion:

They are slim.

Many predicted U.S. gross domestic product would expand less than 2 percent per year over the next 10 years. That stands in sharp contrast to the immediate aftermath of other steep economic downturns, which have usually elicited a growth surge in their wake.

"It will be difficult to have a robust recovery while housing and commercial real estate are depressed," said Martin Feldstein, a Harvard University professor and former head of the National Bureau of Economic Research.

Housing was at the heart of the nation's worst recession since the 1930s, with median home values falling over 30 percent from their 2005 peaks, and even more sharply in heavily affected states like California and Nevada.

The decline has sapped a principal source of wealth for U.S. consumers, whose spending is the key driver of the country's growth pattern. The steep drop in home prices has also boosted their propensity to save.

"It's very hard to see what will replace it," said Joseph Stiglitz, Nobel laureate and professor of economics at Columbia University. "It's going to take a number of years."

One reason is that U.S. consumers remain heavily indebted. Consumer credit outstanding has fallen from its mid-2008 records, but still stands at some $2.5 trillion, or nearly one-fifth of total yearly spending in the U.S. economy.

Another is that many of the country's largest banks are still largely dependent on funding from the U.S. Federal Reserve and the implicit backing of the Treasury Department.

Kenneth Rogoff, also of Harvard, argued that if the U.S. government ever "credibly" pulled away from its backing of the financial system, then a renewed collapse would likely ensue.

He cited government programs giving large financial institutions access to zero-cost borrowing as artificially padding their bottom lines.

"There's something of an illusion of profitability," he said.

 

[Denny Crane]

Obamanomics.

 

[Denny Crane]

http://www.bloomberg.com/apps/news?pid=20601087&sid=awoGuEcrPK2k

U.S. Treasuries Post Worst Performance Among Sovereign Markets

By Daniel Kruger

Jan. 1 (Bloomberg) -- Treasuries were the worst performing sovereign debt market in 2009 as the U.S. sold $2.1 trillion of notes and bonds to fund extraordinary efforts to bolster the economy and financial markets.

Investors in U.S. debt lost 3.5 percent on average through Dec. 30, according to Bank of America Merrill Lynch indexes, the biggest annual slide since at least 1978. The 10-year Treasury yield reached its highest level in six months yesterday before a Labor Department report next week forecast to show payrolls were unchanged in December after the U.S. economy lost jobs in every month since January 2008.

“The financial system has survived,” said Ray Remy, head of fixed income in New York at Daiwa Securities America Inc., one of 18 primary dealers that trade directly with the Federal Reserve. “Now the market has to deal with other issues like deficit spending, tremendous issuance, the weakness in the dollar. How significant is this recovery, and what happens when you take away some of the government stimulus.”

The yield on the benchmark 10-year note climbed to 3.84 percent from 2.21 percent at the end of 2008, according to BGCantor Market Data. The yield touched 3.91 percent yesterday, the highest level since June 11.

Two-year note yields rose to 1.14 percent from 0.76 percent.

‘The Big Gamble’

“I expect Treasury yields to rise 30 to 40 basis points across the curve in the first half of next year,” said David Keeble, head of fixed-income strategy at Calyon in London. “The end of the of the Fed’s quantitative easing program will hurt the market. We also have to cope with a lot of supply. It doesn’t get smaller.”

The 10-year yield will rise to 4.01 percent at the end of 2010, according to the median of 60 economists surveyed by Bloomberg News. The two-year note yield will climb to 1.96 percent, according to the median response in a separate Bloomberg survey.

The government may say on Jan. 8 that payrolls were unchanged in December, according to the median estimate of economists in a Bloomberg News Survey. The unemployment rate rose to 10.1 percent from 10 percent, according to a separate survey.

President Barack Obama is borrowing unprecedented amounts for spending programs. U.S. marketable debt increased to a record $7.17 trillion in November from $5.80 trillion at the end of last year.

“This is the year of the big gamble,” said Michael Cheah, who manages $2 billion in bonds at SunAmerica Asset Management in Jersey City, New Jersey. “It’s about restoring confidence. Nobody knows whether confidence is enough by itself. But we have seen how a lack of confidence has allowed the Japanese economy to be uninteresting for two decades.”

Banking, Autos

Japanese government debt has returned 20 percent since 1999 after rallying 90 percent in the 10 prior years as the bursting of bubbles in the nation’s real estate and stock markets led to 20 years without significant growth for the economy or financial markets. Japan’s Nikkei 225 stock index fell 44 percent since 1999.

Treasuries have risen 82 percent in the past decade as collapses in the markets for stocks, real estate and risky debt assets have led investors to seek guaranteed return of their assets. The S&P 500 declined 24 percent in the past 10 years to 1,115.10.

Bailouts of the banking and automotive industries from the Obama administration, and the Fed’s decision to hold interest rates near zero through all of 2009, have helped bolster asset prices.

‘Likely Loser’

The Standard & Poor’s 500 Stock Index rose 24.5 percentage points this year compared with a 3.5 percentage point decline in Treasuries. The gap in performance is the most since at least 1978 and contrasts with the 52 percentage point advantage Treasuries achieved in 2008 when they climbed 14 percentage points and the S&P 500 plunged 38 percentage points.

Yields on investment-grade debt fell on Dec. 30 to within 2.85 percentage points of yields on government securities of similar maturity, the narrowest gap since April 2008, according to Merrill bond indexes. The yield difference was 6.56 percentage points in December 2008.

The 3.5 percent drop in Treasuries is the most this year among G-7 countries, followed by U.K. gilts, which lost 1.7 percent and Canadian debt’s 1.5 percent slump, Bank of America- Merrill Lynch bond indexes show. Holders of Italian debt gained the most, adding 8.1 percent.

‘Likely Loser’

Treasuries of all maturities lost 2.4 percent last month through Dec. 30, their worst performance since January, according to Merrill indexes, after a report showed the U.S. economy shed fewer jobs than forecast in November.

“Massive government intervention through conventional and unconventional means restored the animal spirits of the market,” said Colin Lundgren, head of institutional fixed income for RiverSource Institutional Advisors in Minneapolis, which manages $93 billion in fixed-income. “The likely loser in all this is Treasuries.”

The gap between U.S. 2- and 10-year yields, a barometer of the health of the U.S. economy, steepened to a record this month as investors bet an accelerating recovery will fuel inflation and hurt demand during unprecedented government debt sales.

Inflation Outlook

The yield curve widened to 2.88 percentage points on Dec. 22, from 1.45 percentage points at the start of the year. It was at 2.70 percentage points yesterday.

The U.S. sold a record-tying $118 billion in notes this week. The government sold $2.109 trillion of notes and bonds in 76 auctions in 2009 after selling $922 billion in 2008.

Fed Chairman Ben S. Bernanke has cited a tame inflation outlook as a reason for keeping the target rate for overnight loans between banks at a record low zero to 0.25 percent. Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, show the improving economy may change sentiment and spark further bond declines.

The gap between yields on Treasuries and TIPS due in 10 years, a measure of the outlook for consumer prices, expanded to 2.44 percentage points on Dec. 29, the widest since July 2008. It was 2.41 percentage points yesterday.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net.

 

[Denny Crane]

Shades of Jimmy Carter.

"the biggest annual slide since at least 1978. "

 

[barfo]

Obamanomics.

That's some deep analysis, Denny. Now please explain how Obama caused the collapse of the housing bubble.

The decline has sapped a principal source of wealth for U.S. consumers, whose spending is the key driver of the country's growth pattern. The steep drop in home prices has also boosted their propensity to save.

"It's very hard to see what will replace it," said Joseph Stiglitz, Nobel laureate and professor of economics at Columbia University. "It's going to take a number of years."

barfo

 

[Denny Crane]

Clinton inherited the S&L collapse and turned it around. Reagan inherited the absolutely shitty economy that Carter left him and turned it around.

What Obama has done is to spend $trillions on anything but stabilizing home prices, encouraging lending, encouraging job creation, etc. His administration is into ideological gains at the expense of gains that benefit people of all walks of life. The banks were made whole at the taxpayers' expense, only to use that money to buy other banks and become bigger banks. Yet the banks aren't lending but to few people and are dumping real estate in vast quantities that further drive down the price of real estate.

The economic stimulus package he claimed would save jobs hasn't done so, while the amount of money spent clearly could have created near 7M jobs, and the cash flow from those jobs would help people remain solvent and pay their mortgages. Instead, there's > 10% unemployment instead of the 8% he promised, and there's another 7% who are underemployed or who've given up looking altogether.

The government is borrowing at unprecedented levels that is drowning out the ability of the private sector to borrow. There's only so much to lend.

The longer this goes on, the more these problems become difficult to overcome. It's not surprising that people show their lack of enthusiasm and optimism, given that we have 3 more years of flailing and failing to come. For all his smarts, Obama's looking incompetent.

So much for analysis.

To answer your question, barfo, Obama may not have caused the collapse of the housing bubble, though the Democrats were almost exclusively to blame for it. Things were pretty good before Pelosi became speaker, and have been shit since. And Obama has done nothing to keep the economy from crash landing.

 

[yakbladder]

Really, Denny?

I think that Obama was put into a situation where so many things were already so far beyond saving that some people essentially threw a Hail Mary hoping for some turn-around.

There's only so many things you could try at his level and, no, tax breaks have never been the answer.

Until you level out the international playing field and stop with all of this free trade crap you won't be able to sustain a market for more than twenty seconds before someone finds a way to do it cheaper elsewhere. Your other alternative is exactly the direction we are heading which is to become essentially the poorest of first world countries looking to produce whatever we can at pennies per day because we're too afraid of the smallest modifications to our "free market economy".

 

[maxiep]

Even Krugman acknowledges that the economy's outlook appears bleak. Of course, while it's said that we all have to agree on the facts, his opinion on what needs to be done is absolutely fucking crazy: http://www.nytimes.com/2010/01/04/opinion/04krugman.html?ref=opinion

 

[maxiep]

For the record, Kevin Murphy is the smartest person I know. For those that don't understand the impact of "Obamanomics" as Denny calls it, this article is as dead-on as they come.

http://online.wsj.com/article/SB10001424052748703278604574624711732528426.html

Uncertainty and the Slow Recovery
A recession is a terrible time to make major changes in the economic rules of the game.

By GARY S. BECKER, STEVEN J. DAVIS AND KEVIN M. MURPHY

In terms of U.S. output contractions, the so-called Great Recession was not much more severe than the recessions in 1973-75 and 1981-82. Yet recovery from the latest recession has started out much more slowly. For example, real GDP expanded by 7.7% in 1983 after unemployment peaked at 10.8% in December 1982, whereas GDP grew at an unimpressive annual rate of 2.2% in the third quarter of 2009. Although the fourth quarter is likely to show better numbers—probably much better—there are no signs of an explosive take off from the recession.

We believe two factors are behind this rather tepid rebound. An obvious one is the severe financial crisis that precipitated this recession, with many major financial institutions receiving large bailouts from the federal government. The confidence of bankers and venture capitalists has been shattered, at least for a while, and it will take time for them to recover from the financial turmoil of the past couple of years. The household sector also faces a difficult period of financial retrenchment in the wake of a major collapse in home prices, overextended debt positions for many, and high unemployment.

The second factor is less obvious, but possibly also of great importance. Liberal Democrats won a major victory in the 2008 elections, winning the presidency and large majorities in both the House and Senate. They interpreted this as evidence that a large majority of Americans want major reforms in the economy, health-care and many other areas. So in addition to continuing and extending the Bush-initiated bailout of banks, AIG, General Motors, Chrysler and other companies, Congress and President Obama signaled their intentions to introduce major changes in taxes, government spending and regulations—changes that could radically transform the American economy.

The efforts to transform the economy began with a fiscal stimulus package of nearly $800 billion. While some elements served the package's stated purpose and helped to soften the recession's impact, the overall package was not well designed to foster a speedy recovery or set the stage for long-term growth. Instead, the "stimulus" was oriented to sectors that liberal Democrats believe are deserving of much greater federal help. This explains why much of the stimulus money is going toward education, health, energy conservation, and other activities that would do little to soak up unemployed resources and stimulate the economy.

In terms of discouraging a rapid recovery, other government proposals created greater uncertainty and risk for businesses and investors. These include plans to increase greatly marginal tax rates for higher incomes. In addition, discussions at the Copenhagen conference and by the president to impose high taxes on carbon dioxide emissions must surely discourage investments in refineries, power plants, factories and other businesses that are big emitters of greenhouse gases.

Congressional "reforms" of the American health delivery system have gone through dozens of versions. The separate bills passed by the House and Senate worry small businesses, in particular. They fear their labor costs will increase because of mandates to spend much more on health insurance for their employees. The resulting reluctance of small businesses to invest, expand and hire harms households as well, because it slows the creation of new jobs and the growth of labor incomes.

The administration also indicated early on that it would take a different approach to antitrust policy, reversing a 30-year trend toward more consumer-based interpretations of antitrust laws. Likewise, the installation of a pay "czar" in Washington is scary, even though his activities are so far confined to companies that received substantial bailout assistance from the Treasury. Perhaps as a next step, Congress will decide that executive pay is too high generally and levy special taxes on bonuses, or impose other controls over executive compensation—as the British and French have done. Congress is also considering major new regulations on consumer financial products.

In its efforts to combat the financial crisis and recession, the Fed created over $1 trillion of excess reserves at banks through various bailout programs and open market operations. When banks draw on these reserves for loans to businesses and households, there is a potential for the money supply to grow rapidly, possibly producing a substantial inflation. How hard the Fed will fight inflationary pressures through open market sales and other actions that raise interest rates is a significant source of uncertainty about future inflation and about the potential for monetary policy tightening to choke off the recovery.

The uncertainty about monetary policy has important political dimensions as well. The Fed now faces greater political pressures than at any other time in the past quarter century, as seen from the grilling the Senate Banking committee gave to Fed Chairman Ben Bernanke in deciding whether to approve his reappointment. These pressures may intensify greatly if, and when, future Fed actions to restrain inflation conflict with politicians' desires to prop up housing and the major government enterprises enmeshed in housing finance.

Even though some of the proposed antibusiness policies might never be implemented, they generate considerable uncertainty for businesses and households. Faced with a highly uncertain policy environment, the prudent course is to set aside or delay costly commitments that are hard to reverse. The result is reluctance by banks to increase lending—despite their huge excess reserves—reluctance by businesses to undertake new capital expenditures or expand work forces, and decisions by households to postpone major purchases.

Several pieces of evidence point to extreme caution by businesses and households. A regular survey by the National Federation of Independent Businesses (NFIB) shows that recent capital expenditures and near-term plans for new capital investments remain stuck at 35-year lows. The same survey reveals that only 7% of small businesses see the next few months as a good time to expand. Only 8% of small businesses report job openings, as compared to 14%-24% in 2008, depending on month, and 19%-26% in 2007.

The weak economy is far and away the most prevalent reason given for why the next few months is "not a good time" to expand, but "political climate" is the next most frequently cited reason, well ahead of borrowing costs and financing availability. The authors of the NFIB December 2009 report on Small Business Economic Trends state: "the other major concern is the level of uncertainty being created by government, the usually [sic] source of uncertainty for the economy. The 'turbulence' created when Congress is in session is often debilitating, this year being one of the worst. . . . There is not much to look forward to here."

Government statistics tell a similar story. Business investment in the third quarter of 2009 is down 20% from the low levels a year earlier. Job openings are at the lowest level since the government began measuring the concept in 2000. The pace of new job creation by expanding businesses is slower than at any time in the past two decades and, though older data are not as reliable, likely slower than at any time in the past half-century. While layoffs and new claims for unemployment benefits have declined in recent months, job prospects for unemployed workers have continued to deteriorate. The exit rate from unemployment is lower now than any time on record, dating back to 1967.

According to the Michigan Survey of Consumers, 37% of households plan to postpone purchases because of uncertainty about jobs and income, a figure that has not budged since the second quarter of 2009, and one that remains higher than any previous year back to 1960.

These facts suggest that it was a serious economic mistake to press for a hasty, major transformation of the U.S. economy on the heels of the worst financial crisis in decades. A more effective approach would have been to concentrate first on fighting the recession and laying solid foundations for growth. They should have put plans to re-engineer the economy on the backburner, and kept them there until the economy emerged fully from the recession and returned to robust growth. By failing to adopt a measured approach to economic policy, Congress and the president may be slowing the economic recovery, and thereby prolonging the distress from the recession.

The authors are economists at the University of Chicago. Messrs. Becker and Murphy are also fellows of the Hoover Institution of Stanford University. Mr. Davis is also a visiting scholar at the American Enterprise Institute.

 

[Denny Crane]

Really, Denny?

I think that Obama was put into a situation where so many things were already so far beyond saving that some people essentially threw a Hail Mary hoping for some turn-around.

There's only so many things you could try at his level and, no, tax breaks have never been the answer.

Until you level out the international playing field and stop with all of this free trade crap you won't be able to sustain a market for more than twenty seconds before someone finds a way to do it cheaper elsewhere. Your other alternative is exactly the direction we are heading which is to become essentially the poorest of first world countries looking to produce whatever we can at pennies per day because we're too afraid of the smallest modifications to our "free market economy".

I thought that either Bush or Gore was facing a depression in the making, whoever was elected in 2000. Yet somehow, the economy turned around very quickly after tax cuts and other fiscal measures were put into place. It was so strong that it stood up to the 9/11 attacks and the huge jolt that followed for the travel, airlines, shipping, and resorts businesses, etc.

Yet this president's philosophy is "never let a good crisis go to waste" and they're milking it for every dollar they can spend. They're scaring you (apparently) into believing the kind of spending they're doing (in mass quantities) is somehow worth it, but get this:

If they spent the TARP money on what it was supposed to be for - bailing out the banks...

And spent the $800B so-called stimulus money on funding startup companies, they could have funded 32,000 companies with $25M in funding. That's enough to create 100-200 jobs per company for 5 years. 100 x 32,000 = 3.2M jobs. 200 x 32,000 = 6.4M jobs. 6.4M with guaranteed employment for 5 years, working on new ventures that would generate huge quantities of (national) intellectual capital in the form of new inventions, patents, and some fraction of those companies becoming self sustaining for the long haul.

That's as many as 6.4M families less likely to default on their mortgages.

That's enough companies to spin up 8,000 high tech ventures, 8,000 green energy ventures, 8,000 manufacturing ventures, and 8,000 real estate ventures. Enough to get bi-partisan support, perhaps to 100% of all the senators and congressmen.

If only 10% of those companies succeed, the investment would pay for itself manyfold.

Instead, we've dug ourselves a deeper hole that's got every economist (astrologer) worth his or her salt pessimistic about the future.

But hey, they filled a few potholes and are spending a lot of money to get Democrats reelected this fall, so it can't be all bad, right?

Read the last article maxiep posted.