Doug Noland this week:
The U.S. Bubble economy has burst. I sympathize with those that would argue this is old news. But the probabilities are now high that GDP turns decisively negative during the second half - if it hasn’t already. Instead of the year-long Credit crisis showing signs of improvement or even stabilization, a further tightening of Credit Availability is taking hold broadly throughout the economy.
The so-called “subprime” crisis has, of late, invaded “prime” and “conventional” mortgages. This is a major additional blow for home prices and the economic support provided from built-up home equity. The securitization markets remain in shambles. Even corporate debt issuance dropped to a 5-year low in July. Meanwhile, the increasingly impaired banking system has sharply curtailed lending virtually across the board - to households; to students; and to businesses both small and large. Bank Credit is basically unchanged over the past nine weeks. And without sufficient Credit creation, the finance-driven U.S. “services” economy is an unmitigated bust. It is my view that this bust has over the past few weeks gained critical - and self-reinforcing - mass.
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I tend to view subprime as chiefly a “lower end” issue with respect to the real economy. And it is my view that the greatest - as well as least appreciated - Bubble Economy Excesses were at The “Upper-middle” to “Upper-end.” It is in The Upper-ends where years of Credit excess had the most pronounced effects on incomes, household net-worth, spending, and government revenues.
It was the at The “Uppers” where loose finance encouraged many to stretch to buy the expensive home, to lease the luxury vehicle, and to finance the upscale lifestyle - Credit creation that then further stoked the overall economy and asset markets. And it was the Uppers that enjoyed spectacular gains in income and financial wealth. It was the momentous changes in Uppers’ spending patterns that spurred enormous real economy investments in a multitude of new businesses and services - a great deal of this spending of the discretionary and luxury variety. It was the Uppers’ windfalls that encouraged state, local and federal governments to rapidly boost spending. These were the inflationary distortions that had a profound impact on the underlying economic structure - over years spurring the transformation to a “services”-based Bubble Economy.
It is my view that The Uppers are now in the process of being hit with rapidly tightening Financial Conditions. This year will see a historic decline in financial sector compensation, led by collapsing Wall Street bonuses and unprecedented layoffs throughout the financial services industry. This week also saw the announcement of major “white collar” job losses at General Motors, an employment trend that I expect to spread throughout the real economy. Many companies and industries must today respond to collapsing profitability (as Financial Conditions tighten and spending patterns and levels adjust), and there will be no alternative than to shrink “Upper-end” employment and compensation.
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And when it comes to states with huge exposure to Uppers, California and New York sit at the top of the list. Not surprisingly, both states are today in the grips of intense fiscal pressure. And with my expectation that economic prospects are now worsening by the week, it is not at all clear how California, New York and other states will deal with ballooning deficits. Drastic spending cuts and tax increases are inevitable to get budgets back somewhat in line with post-boom receipts. And this will prove one more problematic dynamic for the bursting U.S. Bubble Economy.
