Worse Than the Recession

The Obama administration has engineered a "recovery" in name only.


When this column was written, the smart money was once again saying that the bad times were behind us. "Nearly seven years after the housing bubble burst, most indexes of house prices are bending up," David Wessel wrote in The Wall Street Journal in July. "Nearly 10 percent more existing homes were sold in May than in the same month a year earlier, many purchased by investors who plan to rent them for now and sell them later, an important sign of an inflection point."

In the summer edition of the house magazine for Markit Group Ltd., a credit-default swap pricing firm, Bruce Kasman, head of economic research at J.P. Morgan, explained why he believes the American economy will triumph over "persistent lacklustre growth." Kasman identified three hopeful trends: 1) "A competitive corporate sector that is willing to hire," 2) "Consumer behaviour has turned neutral," and 3) "Housing turns from drag to lift."

But in the battle for hope, it's no surprise that President Barack Obama has gained the highest ground. "The private sector is doing fine," the president intoned in June. That phrase was immediately controversial, but it had the rare distinction of sounding even worse in context than standing alone. Obama's real concern was for government employees facing "cuts initiated by, you know, governors or mayors who are not getting the kind of help that they have in the past from the federal government."

So is economic health returning? The short answer is no. The mortgage crisis has become so grave that some city governments are threatening to deploy their eminent domain powers to seize loans at high risk of default. Seven municipal governments, including three of the 50 largest cities in California, have declared bankruptcy. Wealth creation in America has become so difficult, and wealth destruction so common, that in many respects the recovery, which is not a recovery at all but a period of indefinite stagnation, has become worse than the "Great Recession" that allegedly ended in 2009.

The long answer is also no. A June Federal Reserve study revealed that the median value of pretax family income fell 7.7 percent between 2007 and 2010; during the same period, median net worth declined a whopping 38.8 percent, and mean net worth dropped 14.7 percent. The Fed's quarterly flow of funds reports have consistently shown flat household net worth since 2010. At $62.9 trillion in the first quarter of this year, household net worth is still almost $5 trillion below where it was in 2007.

As if having fewer dollars weren't bad enough, the dollars have been, according to the strict definition of the word, decimated. Consumer Price Index inflation has robbed the dollar of 10 percent of its value since 2007. With the interest rate on a savings account below 1 percent, saving money in the bank has come to mean losing your money, and not slowly.

Under those conditions, who would save? Nobody. According to the Bureau of Economic Analysis, the U.S. personal savings rate (disposable personal income less outlays), which briefly topped 6 percent in 2009, has averaged below 4 percent throughout this year and is now close to 3 percent. That rate was 10 percent as recently as the late 1980s.

Also headed steadily downward is the equity portion of real estate owned: Mortgage debt makes up 55 percent (and growing) of all real estate assets in America. Again, the long-term trend is even more frightening: In 1983 American homeowners had more than 70 percent equity stakes in their homes.

According to a July report from Bianco Research, aggregate personal debt has increased since the recession ended. Total credit-market debt is nearly $54 trillion. Public-sector debt has increased from $21 trillion to $24 trillion during that period—and as the Golden State cities of Stockton, Vallejo, and San Bernardino show, government bankruptcy is no longer something that only happens in Rhode Island, nor is it a figment of alarmists' imaginations.

Against this slow (and sometimes fast) dribbling away of wealth, we are supposed to believe the economy is improving because U-3 unemployment is "holding steady" at more than 8 percent, or because of a small spike in real estate settlements.

Don't believe it for a minute. It's a step in the right direction that lenders have finally increased the pace of foreclosures (according to RealtyTrac, foreclosures jumped 6 percent in the first quarter), but it will take many years to work through the backlog of distressed mortgages. The percentage of Americans even looking for jobs, let alone holding them, continues to fall, and the 80,000-a-month rate of private-sector job creation doesn't come close to keeping up with population growth.

There's something about old-fashioned print media that makes doomsday predictions all the more enjoyably awful. From Paul Erdman's The Crash of '79 and The Panic of '89 to the late libertarian leader Harry Browne's How You Can Profit From the Coming Devaluation through Nassim Taleb's recession appetizer The Black Swan, people still love to curl up with dead-tree visions of hell in a handbasket.

So here's my dire print prediction: By the time you read this, Americans will be feeling poorer than ever. And they won't be wrong.