Floyd Norris of the New York Times wrote a very interesting article in that newspaper this past Saturday. He pointed out that since the 1950s when the Government started keeping track of debt levels in this country, debt growth has never been as slow as it was in the second quarter of this year.
He went on to explain that the private sector debt actually fell, also a first in over half a century, while Federal Government debt soared, a fact we all know to be true.
The facts and figures he displayed say a lot about what the U.S. economic recovery is likely to look like. The Government is the only major source of growth at this time in our economy. The entire stimulus is emanating from Federal Government borrowings and that stimulus is filtering down into the private sector through one-time Government sponsored incentives to individuals to purchase homes and automobiles.
The other broad economic sectors of our economy – consumer, non-financial and financial business – are engaged in balance sheet restructuring, which is equivalent to being in a retrenchment mode.
For years, or better stated, for decades in this country, both consumers and corporations drank the Kool-Aid of borrowing to spend, believing that all asset prices would logically rise over time and rising debt levels were a healthy way to live. Unfortunately, that was a pipe dream, and the day of reckoning has come.
Despite the severity of the recession, the costs of many things have not fallen. Tuitions for college continue to rise. Gasoline vacillates in price but for sure it is higher that just a few years ago. Food prices seem to continue to rise. The only give-away prices are in areas where the Federal Government is promoting a big sale – auto and housing. What will happen when the big sale is over?
The recession appears to have ended and that is good news. Productivity improvements in the private sector have been impressive and that is also good news, IF you currently have a job.
But to get a recovery that is meaningful and strong and sustainable, the private sector, NOT the Federal Government, needs to be the driving force. A Government led recovery will be anemic and will peter out in no small measure because there will simply not be the appetite or the ability to support endlessly rising Federal budget deficits.
When net borrowing in the private sector starts to grow again, that will be the sign that health is coming back into the economy. It is difficult to predict when that will happen, and until then, unemployment will remain high and revenue growth will remain sluggish.
Patricia W. Chadwick has had more than 35 years of investment experience. She is the founder and president of Ravengate Partners LLC, a consulting firm that provides advice on financial markets and global economics.