The Vice-President is either misinformed, or lying, about the economy

Hard words - but I'm prepared to back them up.

Yesterday Vice-President Biden addressed the Brookings Institution in Washington DC, two hundred days after the passage of the American Recovery and Reinvestment Act. Amongst other things, he had this to say:

President Obama and I, when we entered office, we were in the midst of what I refer to as the Great Recession.

. . .

In the face of this mounting disaster, we, along with everyone in this room, knew action had to be taken, and we took action in three areas: First, we had to stabilize the financial system. We took the unpopular but necessary step of rescuing the banks. And now, although there's a long way to go, eight out of 10 of the largest financial institutions in America -- including Goldman, Morgan Stanley, American Express, as well as 16 smaller banks, have repaid the government in full, and I might add, at a $4 billion profit for the taxpayer.

Second, along with the Fed, we took action stabilizing the housing market, allowing responsible homeowners to stay in their homes, and we’re beginning to see the results of that. We just learned that new housing starts rose 10 percent in July, for the fourth straight month increase. Are we there yet? No. But we're moving.

Two hundred days ago, President Obama signed into law the third piece of our economic plan: the American Recovery and Reinvestment Act. And today there's a growing consensus: The Recovery Act is, in fact, working. Don’t just take my word for it. Analysts from Moody’s to IHS Global Insight, to the Economic Policy Institute and others all estimate the Recovery Act has created or saved between 500,000 to 750,000 jobs. As a matter of fact, some notable economists suggest the number is as high as a million.

Economists at Goldman Sachs believe that the package added 2.2 percentage points to real GDP growth in the second quarter of 2009, and estimate that it will add 3.3 percentage current -- points to the current quarter.

. . .

As Australia's Prime Minister, Kevin Rudd, said a couple of weeks ago, and I quote: "This is a case study in bringing the world back from the brink, and it was American leadership from President Obama that was the key." End of quote.

. . .

When all is said and done, we want to emerge into an economy that isn’t built on a bubble, but to rest on a firm foundation of innovative businesses, green energy, and a modernized health care system, providing good jobs in each of those sectors on the way. That's our vision, and that's the vision we're determined to fulfill.

. . .

If you look at the Recovery Act as a two-year marathon, we're at the nine-mile mark. We're just approaching the nine-mile mark. Two hundred days in, the Recovery Act is doing more, faster and more efficiently and more effectively than most people expected.

. . .

In the first 200 days we were about necessity. The next 200 days will be about possibilities. At the end of the day, these investments are about more than creating jobs -- they're about creating strong communities and a stronger economy. They're about renewing a sense of hope and possibilities.

. . .

The road ahead is going to remain very, very bumpy. There's going to be positive economic news and there's going to be negative economic news. But I believe it's going to be the three steps forward to one step back. That's the way recoveries work -- particularly in the last four decades.

We know, we are absolutely confident, we are on the right road to recovery. We're on a road to recovery in a way that we'll be able to sustain growth longer and more reliable, based on having created the circumstances where real jobs, that pay real wages, allow people to live middle-class lives, are growing and not diminishing.

The full text of Vice-President Biden's speech may be found at the link.

And you know what? It's all BS.

Let me say that again.

It's all BS.

How can I say that, you ask? It's very simple. The last few decades of US - and global - economic growth were built on a 'bubble', as VP Biden rightly points out. It was a bubble of consumer debt. As the indispensable Karl Denninger points out:

Population went from roughly 205 million to roughly 304 million [from 1970 to 2008], a 50% increase.

[During that same period] Outstanding consumer credit went from $128 billion to $2,525 billion, or a 1,973% increase - and this is only consumer credit, ignoring mortgages, financial firm credit, business credit, commercial real estate and of course government debt!

Why are we not seeing "robust" economic growth when we exit recessions? Why is there no real hiring going on? Why can we not have a robust economic recovery? Why are we are replacing good jobs with "McJobs" that pay half as much - or less? And more importantly, where did all the "so-called prosperity" really come from, especially from 1994 on?

In each and every instance of recession from 1970 onward we have "pulled forward" more and more demand and created fake "prosperity" through the creation of ever more debt that we have goaded consumers to take on. By doing so we have crippled the ability of the economy to grow, redirecting as much money as possible to a handful of people and firms (commonly known as "banks" and other "financial companies") instead of directing that effort and money into productive enterprises such as building cars, television sets and similar items.

THIS time though the recession didn't come from "ordinary business conditions"; it instead happened because the credit carrying capacity among both consumers and businesses hit the wall - they could no longer make the debt service payments and started to default.

It began with "subprime" mortgages but that was nothing other than the first "hiss" of trouble out of the pressure vessel as the structural integrity of the fraud-laced credit system, where "capacity to pay" became a bad joke, had begun to disintegrate.

We pushed the envelope of fraudulent credit creation and the sale of fraudulently-underwritten debt too far - and it blew up in our collective faces!

Rather than admit complicity in the myriad Ponzi-style scams that underlay all of the financial system for more than thirty years (or have it shoved in their face) The Fed and financial "wizards" along with The Bush Administration (who was responsible for and complicit in refusing to fix the fraud during the 00-07 timeframe) chose to try to sweep it under the rug with "yet more liquidity" and "yet more lending."

President Obama and his administration made a critical error after having won in November by refusing to stand up and take these scammers on face-to-face.

He decided to instead continue and even accelerate the scam!

It can't and won't work because the underlying issues have not been resolved and the bogus debt has not been forced out and defaulted - it remains clogging up the system, destroying the ability of the credit-intermediation system to function properly.

Period.

Folks, the facts are impossible to ignore. We are in this recession because consumer and business borrowing capacity hit the wall. We have removed almost none of that outstanding credit from the top to today, as this chart shows (which I have printed here an endless number of times!)

We have taken a measly 4.5% off the maximum outstanding credit amount (incidentally reached in January of this year) to date. 4.5%! That's nothing - it is absolutely insufficient to return the system to normal functioning and restore sound economic growth - we need five times or more that much contraction!

The bad news folks is that we will get that contraction, and if The Government and Fed do not force it to happen "voluntarily" we'll get double that much - as much as a 50% decrease in outstanding credit - coupled with a deflationary credit collapse.

The small crack in the market the last few days is a warning: The fraud-laced game is about up and we are running out of time to do the right thing.

Stop listening to the media idiots - they have not and will not discuss this facet of the crisis because doing so means admitting that their corporate parents are a huge part of how we found ourselves in this mess, along with all the advertising they've stuck in your face for the last 30 years to "go on, buy now, pay later!"

But irrespective of whether CNBC talks about it or not the mathematical reality of credit capacity as it relates to both population and earnings capacity is a mathematical reality. No amount of magical handwaving will change it, leaving us with only two choices: we either force the bad debt out into the open and default it, thereby shrinking both the balance sheets of banks and consumers (at the same time) or we continue to try to "press our bets" and take the risk of a second credit-system dislocation that will be far worse than what we experienced last fall and this spring.

There's more at the link. Emphasis in bold print is Mr. Denninger's.

Folks, right now consumer spending (that's you and I, and what we pay out of our pockets each month) makes up approximately 70% of US economic activity. To put it another way: seven out of ten dollars spent in the US every day, or week, or month, comes out of our wallets and bank accounts. The credit crunch means that we're simply not spending it any more - and that cripples our economic activity as a whole. Not only ours - it affects the whole world. As David Lynch points out in an article in USA Today:

The world economy entered the current crisis in a badly lopsided condition, with the American consumer borrowing massively to buy products from Chinese and European manufacturers who happily socked away all their extra cash while producing more than their home markets could absorb. Now, pressed by rising unemployment and the need to rebuild shrunken household wealth, the American shopper is tapped out.

The consumer's retreat is making itself felt around the world. The first six months of this year, Americans bought $18 billion fewer German-made goods than during the same period in 2008. For German factories, that meant the loss of more than 35% of their U.S. orders. It was the same story for Japan, which saw $31 billion worth of sales vanish — 42% of its total.

Major auto-producing countries weren't the only ones to feel the chill. Chinese factories shipped almost $21 billion fewer goods to the U.S. during the first half of this year than during the same period last year. And with consumers still confronting several years of paying down debt and repairing their balance sheets, many economists say the world confronts a permanent shift in economic drivers.

"The world is going to be adjusting for years to slow growth from the U.S. consumer," says economist Kenneth Rogoff of Harvard University. "The U.S. consumer has been the engine of world growth for the last quarter century; that engine has stalled."

There's more at the link.

So, all Vice-President Biden's optimism can be seen to be resting on a false foundation. Stimulus-package spending did no more than replace consumer spending for a brief period earlier this year. It succeeded in staving off the inevitable: but it can't continue, because the US Government can't continue printing (and spending) money it doesn't have. Sooner or later, it has to rely on the US consumer to start spending again: and most consumers are in debt up to their eyeballs, and sinking rapidly.

D'you want to know what I, personally, am doing about this? I'm liquidating assets, and driving down my indebtedness. I've just sold my house, aided by a significant boost to its value as a result of renovations carried out after my house fire last year. The profit I've made will pay off the last of my car note, and a couple of other debts, leaving me with a debt load of no more than 6% of disposable (i.e. net, after-tax) income. I'm comfortable with that.

I won't be buying another house for the immediate future. When I do, it'll be after the next round of house price decreases - which is coming, as sure as the night follows the day. Just look at how commercial properties are beginning to suffer the same foreclosure problems as residential properties have done for the past couple of years. There's another hammering coming to the property market, my friends. I'll try to find something to buy next year, when I expect prices will have dropped at least another 30% from current levels, and I'll be able to snap up a bargain. Until then, I'll be renting a property for roughly the same amount each month as I was paying on my note.

I think we should all be ultra-cautious about taking on new debt (particularly unsecured debt), and pay down our existing debt as far as possible, and ensure we have sufficient reserves to cope with unexpected financial crises. If you don't have at least six months' expenditure saved in a reserve account, now would be a very good time to start working towards that goal. To get there, I'd strongly suggest cutting out most, if not all, discretionary expenditure, and selling any assets you can do without.

I have a feeling that the financial chickens that Karl Denninger outlines with such clarity and authority are about to come home to roost. When they do, I want to be able to make chicken pie with them, instead of having to dodge, duck and dive to avoid their droppings!

Peter