Smith Faculty Opinion Article
The 30 Seconds Outlook
November 1, 2009
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“It is a painful thing to look at your own trouble
and know that you yourself and no one else has made it.”
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| — Sophocles, 496-406 B.C. |
The current de-leveraging cycle arising from the financial and economic
crisis may have implications far beyond today if the case of Japan is our
destiny. In the 1990s Japan’s massive asset bubble collapsed causing a credit
and banking crisis that still survives. The steps taken by the Japanese are
eerily familiar—zero interest rates, growth in the central bank’s balance sheet,
and huge fiscal stimulus. The results have been economic deflation, enormous
government debt, government enabled “zombie” banks, and continuing reduction in
the former trend of economic growth. While the U.S. response was much more rapid
and aggressive it was still too late to preempt the Fed’s failure in keeping
interest rates too low for too long that created too much debt in the system.
So where might this situation leave the U.S. and investors? Some data will
shed unwelcome light on financial markets and the economy. First, reported
earnings after write-offs on the S&P 500 Index represent a price-earnings ratio
of 140—the highest in history. Second, consumer spending accounts for about 70%
of GDP, but consumers are more engaged in de-leveraging than spending in
reaction to the stimulus. Third, the Labor Department estimates it will take 86
months (2016) for the 9 million jobs lost to return to pre-crisis levels.
Fourth, Congress is planning a 12.5% increase in 2010 spending and cares not
that “. . . you can only sustain deficit spending policies (whether by
government or private debt acquisition) if GDP grows faster than debt and that
growth has to come from the private sector, not government transfer payments, or
the deficit percentage and impact will grow faster than GDP.” (Denninger,
Seeking Alpha, 10/23/09). Fifth, the price of gold has increased nearly fourfold
since 2001 primarily due to growing lack of confidence in the U.S dollar as the
reserve currency--since March the U.S. Dollar Index has fallen 30% annualized.
Sixth, the lack of availability of bank credit has destroyed huge numbers of
small businesses and their roles as engines of innovation and job growth.
Seventh, total credit market debt (public and private) as a percent of GDP has
risen from about 150% in 1980 to 380% today.
John A. Haslem
