The end of July usually marks the quietest time of the year for markets. Big-shot bankers are away from trading desks, loading up for August in the Hamptons — in the old days to kick sand at 98-pound weaklings, today to compete for most-obnoxious conduct on a beach with a cell phone.
This year isn’t so quiet. The slowdown beginning in May is now more trend than air-pocket, and every new data point matters. This morning’s news of sub-par 2nd Quarter GDP (+2.4%, half by inventory accumulation) has hit stocks and helped bonds and mortgages. On Monday jumpy markets whipsawed after “New home sales soared 24% in June!” turned out to be a minor bounce from a deeper hole, May revised to a 53% drop from April.
June orders for durable goods were forecast to rise .5% (core), but fell .6%. The Conference Board’s index of consumer confidence plunked to 50.4; in prior recoveries averaged over 100, at bottoms of prior recessions, 72. The Fed’s July “beige book” was distinctly softer than June, but insisted that economic activity continued to “increase.”
A national consensus is now deep and broad: we have borrowed too much, we must stop new borrowing, and must pay back our debts. We must “deleverage,” right now.
That’s not a new concept on the right, among gold bugs, or the “Austrian school” loons, but the whole center agrees. But to find certified leftie Roger Lowenstein in the Sunday Times making the same argument? Unprecedented in US political economics.
The foundation for this consensus is the three fright charts run everywhere: total US debt $55 trillion, 3.5 times GDP; household debt 125% of household income; and US Treasury debt soon to pass 100% of GDP. A few Krugmanites advocate more Treasury borrowing and stimulus spending, but nobody argues for more private borrowing.
Except me. Not a lot, but enough credit to support businesses and asset values.
Deleveraging mob dogma recites the amount of debt, but never its cost, structure, or security, and the mob has no plan. The first flaw in that approach: a prudent person can carry a lot more debt at 5% today than at double-digit rates throughout the ‘70’s and ‘80s, the baseline in the fright charts. Levels of debt are large, but payments relative to income are today within long-term historical norm.
Risky debt (to borrower and lender alike) is unsecured. The more collateral you can post, the more sensible the debt. Today’s household assets are $68 trillion, even after the loss of $7 trillion in the value of homes (Fed Z-1, B.100), versus total liabilities of $14 trillion. A $54 trillion net worth ain’t bad. Household assets — wealth — have far out-paced the growth of debt: total household assets in 1980 were $14 trillion, which inflation has doubled, but total 30-year growth has been 457%.
We’ll soon have $10 trillion in Treasury debt, plus $14 trillion owed by households, and another $10 trillion in state, local, and business debt, but how do we get to this terrifying $55 trillion? Have to add a mountain of financial-market paper, almost all self-carrying and self-canceling versus financial assets.
Treasury debt is dangerous because of its permanent call on tax revenue to pay interest, crowding out other spending, necessary and not. Household debt tends to extinguish itself: into middle age we add assets and debt, and on the way to Happy Acres we downsize and reverse the process.
While the mob has us in this deleveraging choke-hold, the economy cannot grow out of debt, and prudently leveraged assets are falling in value. The mob responds: we must raise our savings rate! Clients say to me, “Save? From what? My family is break-even after cutting all that we can.” And the unemployed are notoriously poor savers.
The worst of deleveraging dogma is the absence of end game: How much debt are we supposed to pay down, while not taking on any new? What is the target, and why? How will we know when we’re done? How to get from here to there in a flat economy?
No answer. None at all. Self-imposed dead end.