Debt Fixes and Recession: Not The Problem

A New York Times blog has taken the blatantly political position that debt limit or spending reduction "fixes" could be what tips the economy back into a recession. Think of the economy as a house in which the two elderly residents have been slowly asphyxiated by a gas leak. As they lie moribund on their living room floor, a tornado comes and destroys their house crushing the poor couple. They become casualties of the tornado, as reporters on the scene show. Got that? Does that make sense?

The demise of the American consumer sector was a long-time coming, and a confluence of forces were at work. The same Times blog reported that the 2008 Census data showed median household income actually fell in the decade to 2008. This is a fundamental, secular problem, working slowly and insidiously like a poisonous gas. With interest rates low and the housing bubble growing into the Goodyear blimp, consumers filled the gap with both secured and unsecured credit. The latter, as we all know, is especially toxic when it is supercharged with absurd fees of all kinds that bear no relation to the issuer's cost of funds and a normal profit margin.

The tornado raging through town was of course the 2008 global financial system meltdown, which destroyed consumer's residential equity, and subsequently turned a decade of stock returns into a big zero. This had a catastrophic effect on consumer balance sheets. Another unfavorable secular trend built into this period was the rise of the Chinese mercantile machine, into which U.S. corporations were only too happy to feed domestic jobs, which further hampered the real hourly earnings of workers who who were able to maintain their jobs.

The chart below, which comes from the Minneapolis Federal Reserve Bank's research presents an "autopsy" on the American consumer household:

Both the debt-to-assets ratio AND the debt-to-income ratios are still near their all time highs more than two years into a recovery! The current recovery is the weakest by far in terms of consumer financial measures. The current recovery is shown by the two tiny drops in the debt and income ratios. Typical recoveries are characterized by very sharp rebounds off the lows, driven by strong real fundamentals like rebounds in housing, autos, consumer goods or new orders. This one takes us into dark territory.

It was laughable when the stock market run began to see commentators trumpeting "consumers have repaired their balance sheets!" We also know from corporate earnings reports, conference calls, and the financial press that companies are still generally loathe to expand employment, and even a small bounce in temporary workers has flattened out.

Monetary policy has been out of bullets for a while. QE-V won't cut the mustard for this problem. Of course there have been repeated FedSpeak comments about "fiscal stimulus," while also talking about the need to tame deficits in order to placate the investor gods who brought us into this mess through the shadow banking system.

Fiscal stimulus--short of a New, New Deal--would have a marginal impact on the deep, and broad-based pain felt by millions of households, and embedded in the above graph. Both parties need to stop posturing and worrying about their own 2012 reelection issues: show some leadership, please!