Tuesday, January 27, 2009

Prosperity is Not Just Around the Corner

From David Rosenberg, Chief Economist for Merrill Lynch:

"My sense is that many clients are totally underestimating the extent of the trauma that exists on the household balance sheet from this credit collapse and asset deflation,” said Mr. Rosenberg.

In a report that came the same day as widespread layoff notices, Mr. Rosenberg said: “We now have 30 per cent idle capacity in the manufacturing sector, which we've seen only one other time in the past five decades. That means that spare capacity in the economy is now so big that it would take six years of 4 per cent real GDP growth or alternatively three years of 5 per cent real growth just to get the economy back to full employment.”

The market's rapturous celebration of a dip in housing inventory shows that too many believe "prosperity is just around the corner". It was the housing bubble which fueled what little economic growth there was, from 2001-2007. The collapse of this bubble, and the resulting loss of equity and jobs, will leave the U.S. consumer deep in the hole for a long time. The permanent scar will be a lack of confidence in an ever-improving American standard of living. We have had two spectacular bubbles crash in less than a decade and economies just don't bounce back from that in short order. Couple this with an erosion of the social safety net, under the mantra of "shared sacrifice", and the U.S. consumer is going to become a lot more like their savings-minded counterpart in East Asia.

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