The unprecedented wealth destruction in the U.S. caused by the 2008 recession resembles an earthquake of 7 or 8 on the Richter scale and the country is still reeling from its aftershocks, says David Rosenberg, Chief Economist and Strategist at Gluskin Sheff.
From 2007 to 2009, median U.S. household net worth collapsed 39 percent and “this wealth collapse was the equivalent of an earthquake measuring 7 or 8 on the Richter scale,” Rosenberg wrote in an editorial in the Financial Times on Thursday.
He added that “earthquakes are followed by aftershocks, which is exactly what has provided the biggest hurdle for the post-recession healing phase we have been in for the past three years.”
While the full impact from this wealth destruction has yet to be felt, Rosenberg says the U.S. is already in the era of the “aftershock” as frugality emerges as the “new and lasting fashion.”
Consumer behavior and patterns will undergo “profound and enduring changes” that will prove to be disinflationary and foster a prolonged period of “ultra-low interest rates, bond yields and expected returns in the public capital markets.”
Yields on 30-Year Treasurys could plunge to 2 percent, a level unseen since the early 1940s, he predicts, from 2.61 percent on Wednesday.
Baby Boomers Bust
Suffering the most will be baby boomers, who are now entering their mid-60s and who are at the “epicenter” of this collapse in net worth. Already, household net worth per capita is 15 per cent or $100,000 shy of where it was five years ago and ultra-low interest rates are punishing those who save in bank deposits or money market funds.
“The median age of the boomer is 55 going on 56 and retirement is the darkness at the end of the tunnel,” Rosenberg said. “The trend towards second jobs, do-it-yourself, private labels, dollar stores, maintaining your existing vehicle, downsizing property needs, cocooning and frugality will continue unabated.”
“Indeed, the recession may well have ended in June 2009, but the problem is that there was no recovery to speak of,” he said.
Fiscal Policy Ambiguity
Another uncertainty that will weigh on the U.S. consumers and businesses is fiscal policy.
A host of tax breaks expire on December 31 and automatic spending cuts go into effect at the end of the year. President Obama and his fellow Democrats have proposed extending the tax cuts for everyone except those making more than $250,000 in annual income while Republicans advocate extending the tax cuts for everyone.
“Nobody knows what their effective tax rate is going to be next year so they cannot plan,” Rosenberg said. “When you model that uncertainty in economic terms, you end up with higher liquidity ratios in business and rising savings rates in the personal sector. This damps spending growth and spending is what gross domestic product is all about.”
- By CNBC's Jean Chua.