It’s only a “Modest Depression”

Sky is black with chickens coming home, and Fed looks weak or lost

| Aug 13, 2010

News of a sharply weaker economy combined with policy vacuum to produce the lowest mortgage rates ever recorded, briefly 4.25% for the highest-quality loans (at rollout in 1944, the first GI loans were pegged at 4.00%, but with a couple of discount points). The 10-year T-note crossed under 2.70%, well into the range of the panicked winter, 2008-2009.

All data were poor, notably new unemployment claims rising back toward 500,000 weekly, but the killer lay in trade statistics. Our June deficit versus the world shot up by $10 billion to $54 billion. GDP is based in part on sales, but the “P” portion depends on whether Americans bought stuff produced here or overseas; since we bought a great deal more from overseas than assumed in the first Q2 GDP estimate of 2.7% growth, April-July GDP will soon be revised to only 1.0-1.5%. Guesses for Q3, momentum lousy going in, run zero to 1%.

In a tale of overflight domestic and foreign, the sky is black with chickens coming home, dropping eggs and other things on expectant, upturned faces.

The Fed looks weak and lost, as late as ten days ago Perfesser Bernanke insisting on the Fed’s forecast for 3%-plus GDP growth this year. It did muster the courage to buy new Treasurys as mortgages on its balance sheet are extinguished by refinance, but that’s a net-neutral effort. Tuesday, before the trade data shattered its forecast: “The pace of economic recovery is likely to be more modest in the near term than had been anticipated.” How modest is more modest? Is this the Modest Depression?

Last year two camps of observers and policy advocates argued: the V-recoverists, and the flat-bottomed-U grumps. The yolk-drenched former insist that the economy is in a mere “soft patch,” but we better get on with more stimulus, budget be damned, and “jobs programs.” The flat-Us are pleased in a depressing sort of way, but the dominant portion (business, market, and political Rights) think the solution is to get government out of the economy — this after the greatest market failure of all time.

The anti-gov-grumps claim that uncertainty about new regulation has frozen businesses. Maybe, a little. The NFIB small-business survey found that 73% of respondents thought this a bad time to expand; of those, 66% said a weak economy was the reason, and only 16% cited the “political climate.”

Employment is weak because sales are lousy, not the other way around. Sales are lousy because the nation’s households are scared, more than half unsure about their ability to sell a home, and if so for what.

However, employment is weak for another reason. The onset of “jobless recoveries” in 1992 coincided exactly with the rise of Asian export machines. We have allowed ourselves to be fleeced — skinned — by trade management, the offensive version of defensive “protectionism.” The US is the only nation on earth not to manage trade. China’s July trade surplus hit $29 billion, all of it sold to us. Along with goods, these predatory exports send to us China’s wage structure, killing jobs here.

“Managed trade” takes many forms, but currency manipulation is central (cultural/governmental resistance to imports is as important). China this week cut the yuan to its value before its promise let it rise in June. The guy most plastered with chicken by-product: helpless Timmy Geithner, our yuan negotiator. Act like a patsy, get treated like a patsy — the prior two Administrations every bit as much at fault.

It’s not just US vs. China. A deepening global slowdown has set off a scramble for net-exports. Germany’s Q2 GDP soared at a 9% rate, its exports supercharged by a $1.30 euro undervalued by one-third relative to its uber-productivity. The rest of Europe, shackled to a vastly over-valued euro, was GDP-flat. Germany borrows for 10 years at 2.39%, Ireland at 5.32%, and Greece at 10.46%. Not sustainable.

In this extraordinary week, the White house has been silent. Quite the election year, neither party with platform or clue.

Commentary by Louis S. Barnes on mortgage, credit and business trends will appear periodically in Boulder Reporter. Lou is our credit-market oracle and will offer updates Fridays, written in the voice of a bond trader overdue for his martini. No fluff, no blue-sky predictions, afflicting partisans of all affiliations, real-time right-now news. Learn more about Lou at Premier Mortgage Group.