The National Association of Business Economics released a survey today where 90% of the economists stated the recession will end in 2009. The other 10% felt the economy will turn in the first quarter of 2010. All of the economists believed this will be a more tepid revival than most turnarounds due to the credit crisis.
While no one knows what the future holds, I find this to be overly optimistic for a few reasons. One, these economists are the same folks who didn’t see the credit crisis coming. And, once it hit, the general consensus was that it was confined to the subprime home market. Essentially, it is hard for me to trust the very people who were so wrong before the recession.
Secondly, I think the vast majority of economists and market pundits fail to understand what is really at stake. The market is telling us to delever. We have way too much debt. Currently, we have 50,000,000,000,000 (that’s $50 trillion) in debt at the consumer, corporate and government levels. That is almost 350% of our Gross Domestic Product (GDP). The GDP represents the size of our economy, which is currently $14,000,000,000,000. So we have 3.5 times as much debt as we do economic activity. The only other time this number even came close to this level was during the Great Depression. Even then, it never broke the 300% of GDP level. A healthy ratio of debt to GDP is 150%. This means we would need to dispose of $29,000,000,000,000 in debt. Even if we went to a 2 to 1 ratio of debt to economic activity, we have to bring our debt down $22,000,000,000,000.
As we reduce our debt, the economy is going to stagnate considerably since spending will be curtailed. Plus, the access to debt to purchase electronics, autos, and other items will be limited as the banks are also raising capital, instead of lending money. In fact, our economy before the recession was driven by debt. Specifically, Americans kept the economy booming by withdrawing equity from their homes. And, this train has left the station. Over 20% of Americans now owe more than their home is worth so home equity will not be a driver of our economy any longer.
Where is the economic growth going to come from now that debt is no longer a possible driver of the economy. Usually, economies grow from savings. Savings is invested in corporations, which produce goods and services, and the consumer has discretionary spending due to the savings. Now, we are faced with a situation where the savings won’t be reinvested into the economy, but the savings will be used to address current debt. That is not a growth driver. With a need to reduce our debt by $20 Trillion or so, that means we have years, not months, of sluggish growth. This is why deleveraging is so painful, and why it was during the Great Depression as well.
So I would agree that we may have seen the worst declines, but I don’t think we pull out of this any time soon. We will probably drag along the bottom for a while. I don’t mean to be a downer. I was cursed with the ability to be a hard core realist. I am also a history buff. Looking at the last time we accumulated this much debt (the Great Depression), it took years to whittle the debt down to a healthy level.