Amid all the euphoria in the financial press Friday after unemployment dropped to 9.4% one would have thought a miracle had happened.
Headlines and storylines announced recessions’ end. One pundit even announced a date. Obama’s stimulus was pronounced a success and on to other issues.
Well, for the recession to end and recovery of the sort hoped for requires consumer spending. Consumers account for 70% of economic activity. For consumers to spend they will have to borrow. They are not.
Consumers are worried about jobs, taxes, retirement, and education, among other things. Anxiety does not lend itself to the thought, ‘honey let’s go to the bank and borrow some money!’
Imagine you are a person or bank with money to lend. Banks are getting free returns on their capital with no risk. Why loan to a risky consumer who may lose their job when you can get a risk free return from the Fed or in sovereign debt?
Speaking of which, with federal borrowing rising to the moon as far as the eye can see, consumers will be crowded out of the lending line for a long time to come. See Japan, lost decade(s).
We can either finance government or we can finance the consumer, we cannot finance both. This means stagflation which means green shoots may turn into yellow weeds.
