Recovering from economic missteps requires significant time and effort, especially when the journey has strayed far off course. This scenario mirrors the experience of the entire economy during the bubble years of the last decade.
Fueled by cheap credit and the allure of easy wealth, many individuals collectively lost their grip on fiscal responsibility. They borrowed and spent recklessly, ultimately leading to a catastrophic failure in the financial system. Since that collapse, the recovery process has been arduous.
Even with the challenges faced over the past five years, experts, like Financial Analyst Gary Shilling, predict that it could take as long as another five years to fully rectify these economic imbalances. Shilling suggests that a prolonged slump may characterize the economy during this period.
This lengthy timeline is necessary for households and institutions to effectively reduce their debt and rebuild their assets through increased savings.
Economists, including Shilling, refer to this process of paying down debts and increasing capital as deleveraging. Essentially, this means that the financial system is gradually reducing its overall leverage, which will ultimately align the economy’s debt level with its realistic capacity for support.
Low Growth and High Unemployment
However, when an entire economy simultaneously undertakes debt repayment—especially after a financial bubble bursts—the growth rate inevitably suffers. The luxuries such as new cars, trendy apparel, and extravagant vacations previously purchased on credit now require payment in the present. Thus, the economic boost experienced during the leveraging phase transforms into a burden during the deleveraging phase.
Shilling anticipates low growth and increased unemployment rates in the near future. He notes:
“A 2 percent real GDP growth indicates that the unemployment rate will rise, chronically, a little over one percentage point per year.”
“…This implies that the 7.8 percent rate in December will escalate to about 8.8 percent in December 2013, 9.9 percent in December 2014, 11.0 percent in December 2015, etc.”
Shilling further emphasizes that politicians will be motivated to combat rising unemployment, fearing for their own positions. “No government, regardless of political alignment, can withstand persistently high unemployment rates, which means the pressure to create jobs will remain throughout the deleveraging process. This will also lead to substantial federal deficits caused by increased government spending coupled with declining tax revenues.”
In layman’s terms, while individuals and institutions work on deleveraging, the federal government is aggressively expanding its own balance sheet. Thus far, the government’s quest for economic recovery has resulted in a staggering accumulation of debt, yielding little to no tangible benefits. There are concerns that if this trend continues, the country may become so burdened by government debt that true economic recovery will be impossible.
The Recession of 2013?
As families navigate a stagnant economy and rising unemployment in the foreseeable future, they will also encounter increasing living costs. These inflationary pressures may not be fully reflected in the consumer price index reported by the Bureau of Labor Statistics. Surprisingly, government analysts maintain that a new laptop selling for $500 signifies a decrease in the cost of living.
In reality, consumer food costs are rising, having already increased in 2012 and expected to climb further in 2013 and 2014. Higher food prices will lead to a reduction in discretionary spending, further hampering economic growth. However, this is not the only factor impacting household finances in 2013. Consider these additional costs:
For instance, individual experiences show that medical insurance premiums surged by 36.24 percent in just a month between 2012 and 2013. Has the quality of healthcare improved by that amount? Likely not, yet consumers must absorb these inflated costs.
Moreover, with the implementation of President Obama’s “Affordable” Care Act next year, health insurance premiums are anticipated to rise even further. According to Mark Bertolini, CEO of Aetna Inc., some premiums could potentially double. Clearly, the care will not be proportionately improved; this dramatic price increase may simply reflect the cost of laundering premium payments through government channels.
In addition to this, despite Vice President Joe Biden’s last-minute efforts to prevent the fiscal cliff, Social Security transfers have increased by roughly 2 percent. The accompanying tax increase is projected to cost the average worker approximately $700 annually, contributing to an overall reduction of household incomes by an estimated $125 billion.
These factors, among others, suggest that the economy is poised to slide into a recession later this year. It’s wise to plan accordingly.
Sincerely,
MN Gordon
for Economic Prism