The time has come to take another hard look at the moribund American economy. In his monthly newsletter The Heart of the Matter, John Hussman asserts once again that the U.S. is entering recession. I have cited Hussman before, most recently in Desperation, Not Recovery, In Jobs Growth, because he is an honest man. In so far as saying there will be another reversal of the "growth" America has had since mid-2009—you are excused if you missed it—Hussman feels compelled to defend his views by reviewing some basic observations about where we stand. Such reviews are welcome, albeit rare.
Lost in this debate [about how to fix the economy] is any recognition of the problem that lies at the heart of the matter: a warped financial system, both in the U.S. and globally, that directs scarce capital to speculative and unproductive uses, and refuses to restructure debt once that debt has gone bad.
Specifically, over the past 15 years, the global financial system — encouraged by misguided policy and short-sighted monetary interventions — has lost its function of directing scarce capital toward projects that enhance the world's standard of living. Instead, the financial system has been transformed into a self-serving, grotesque casino that misallocates scarce savings, begs for and encourages speculative bubbles, refuses to restructure bad debt, and demands that the most reckless stewards of capital should be rewarded through bailouts that transfer bad debt from private balance sheets to the public balance sheet.
Our economic problems go far beyond a dysfunctional global financial system, but Hussman sees this aspect of our decline as central. See my posts This Time Really Is Different, and the Part II follow-up. Hussman runs an investment fund, so it natural for him to see the misallocation of capital (the casino) as the most important aspect of our economic failures. But let's move on.
What is central here is that the government policy environment has encouraged this result. This environment includes financial sector deregulation that was coupled with a government backstop, repeated monetary distortions, refusal to restructure bad debt, and a preference for policy cowardice that included bailouts and opaque accounting. Deregulation and lower taxes will not fix this problem, nor will larger "stimulus packages."
This is an important point. Hussman is taking a shot at the standard political solutions offered up by liberals (stimulus packages) and conservatives (deregulation and lower taxes).
The right solutions are to encourage debt restructuring (and to impose it when necessary), to strengthen capital requirements and regulation of risk taken by traditional lending institutions that benefit from fiscal and monetary backstops, to remove fiscal and monetary backstops and ensure resolution authority over institutions engaging in more speculative financial activities, and to discontinue reckless monetary interventions that encourage financial speculation and transitory "wealth" effects without any meaningful link to lending or economic activity.
By our analysis, the U.S. economy is presently entering a recession. Not next year; not later this year; but now. We expect this to become increasingly evident in the coming months, but through a constant process of denial in which every deterioration is dismissed as transitory, and every positive outlier is celebrated as a resumption of growth.
To a large extent, this downturn is a "boomerang" from the credit crisis we experienced several years ago...
To me, this last part is the heart of the matter. Denial is common in human affairs and manifests itself in a myriad different ways. Bullshit is as American as Motherhood And Apple Pie. But we Americans have, in some sense, entered a new Age of Denial, especially with respect to our precious economy.
It seems that denial has become a full-time job for pundits, for "expert" economists, for politicians and (I suspect) for beleaguered "consumers" who still hope for a bright future. Although I have often characterized mainstream media cheerleading as mere propaganda, and that's a correct view of it, at bottom there is something else going on. I asked Google News to give me links on "U.S. recession 2012" and got one relevant hit. That's right—one hit. It was the Christian Science Monitor's Recession in America? 10 questions assessing the threat.
In a nutshell, what's the risk of a US recession in the next year?
The risk of recession is real, but most forecasters don't see it as the likeliest scenario. The United States has some forward momentum. Consumer spending has been rising modestly, the housing market shows some signs of healing, and bank credit conditions have been improving.
So even though the International Monetary Fund (IMF) expects the eurozone to experience a recession in 2012, it has pegged the US economy to grow at a 2.1 percent pace this year and 2.4 percent in 2013.
The big risk is eurozone uncertainty. If things play out badly, with Greece or other nations falling out of the monetary union, the recession there could become deeper and spill over into the global banking system – much like the collapse of Lehman Brothers deepened the financial crisis in 2008.
The alert reader will immediately see that the idea of a U.S. recession in the next year is brushed aside unless there is a large spillover from the European debt crisis. So even if we do have a recession, we'll know who to blame. Warren Buffett took up this theme in the Associated Press article Warren Buffett says odds of a U.S. recession 'very low'. (I found this article doing a regular Google search.)
Speaking at the 25th anniversary dinner of the Economic Club of Washington late Tuesday, the billionaire investor said he sees the odds of a renewed recession as "very low."
An alarmingly weak May jobs report last week sent financial markets tumbling and has led economists to lower their forecasts for U.S. economic growth this year.
While downplaying the risk of a recession, Buffett said that all bets could be off if the effects of Europe's financial crisis were to "spill over in a big way."
Thus we see active denial at work. For some background on where we stand in terms of GDP, which is commonly used to signal growth or recession, see my recent posts Changing The GDP Number — It's Not Illegal and the update The American Economy Sucks.
To review, a recession in the U.S. is dismissed out of hand unless contagion from the eurozone brings us down. We Americans are off the hook. After all, everybody knows that Europe is fucked up, but we're A-OK here in the Greatest Country On Earth, even if economic "growth" is not quite as robust as we'd like to see. This is classic denial, which as I mentioned above, manifests itself in many strange ways.
There is little more one can say about America's new Age of Denial regarding its economic prospects. Denial is psychologically simple—some undesired thing is not happening!—even though it is often very hard to detect, for denial hides behind the Mask of Reason.
But simple denial explains a lot of what happens and will happen in the United States. And it also explains, as I touched on yesterday, why blogs like this one have a diminishing effective reach over time—until things blow up again, as they inevitably will. And then DOTE will be popular again.
Bonus Video — Aimee Mann, It's Not