Monday, August 9, 2010

The "New Normal"

PIMCO has been saying that the economy is in a "New Normal" whereby the world economy will grow slower, be more regulated, have higher unemployment and continue to deleverage.

Earlier in 2010, when the cyclical rebound was in full swing, the New Normal was derided.

Bloomberg in January had an article featuring critics of the New Normal:

Christopher Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ in New York, who pegs potential growth at 2.6 percent. “We’ve had financial-market crises and big workforce changes before, and growth has pretty consistently come in around 2.5 percent over the past 50 to 60 years.”

I won't profess to know what the economy will do over the next 50 to 60 years. It is indeed possible that growth could come in around 2.5% or even better. What I do know is that the past 50 to 60 years have featured an incredible debt buildup, especially the second half of that period. If we do grow at 2.5%+, it will be not be fueled by bubble credit. That 2.5% will need to be based on a more sustainable and more efficient foundation.

The jist of Pimco's new normal is that the bubble credit that fueled growth the past few decades is over. The de-leveraging will lead to slow growth for at least 3 to 5 years. This is not your normal post WWII recovery (if it is indeed a recovery).

Is it normal that:

1) Nearly 3 years after the recession started, the unemployment rate is near 10%?
2) That trillions of dollars were used (wasted?) on quantitative easing (QE)?
3) That house prices and stock prices are 30% below their peak AFTER a one year rebound?
4) Interest rates are at zero and will likely remain there for an extended period?
5) Annual deficits are measured in TRILLIONS!? We used to shudder at a $200 billion deficit.
6) One year in to the recovery, we are contemplating a second trillion dollar QE?

And yet, despite these (and numerous other proofs), much of Wall Street plugs in typical 2.5% growth for the next few quarters and years, as if things are the old normal.

The debate about the New Normal will likely be resolved soon. Perhaps the economy will grow at 2.5%+ the next few quarters (I don't believe it will), but it likely will not be in the old normal way (where the recovery is self-sustaining). It would be based on more of the same short term solutions that will, at best, buy a little more time. The public is growing weary of these short term band-aid solutions that bankrupt the future for dubious short term gains (hence the Tea Party and plummeting Obama ratings). I believe that the November mid term elections may be very big this year, perhaps similar to November 1994.

Are Obama/Bernanke going to try to pull a few rabbits out of the hat the next few weeks in an effort to avoid a double dip and shore up the prospects for the Democrats? I believe that the American electorate is getting suspicious of the never ending stimulus, and this may lead to even greater voter anger in November. However, Obama seems to be in his own world right now, and sticking to his liberal agenda, despite the fact that US is not a liberal country.

Ultimately, another 2008 crash is coming, once the New Normal becomes the consensus, and we realize that all the gimmicks are not addressing the underlying cause of this mess (too much debt). Just not sure when that happens, but it is likely to happen around the same time as the public anger rises to a peak.

1 comment:

bbc said...

Hey Adil,
Great post! I look forward to more during these crazy days.