The Challenges Ahead

Watching news reports of the election aftermath in the US, it is difficult not to be moved.  One can feel the palpable sense of relief amongst so many Americans, and observers worldwide, at the impending change of presidency.

Yet the challenges ahead for the new administration are formidable.  Without even touching on geopolitical questions, and how the US should extricate itself from foreign battlefields, I thought I’d try and list a few facts and figures illustrating the scale of the current economic difficulties.

  • Under the Bush presidency, government debt has climbed from $5.7 trillion to over $10 trillion, and the annual budget deficit is forecast at over $1 trillion
  • Household debt now totals $13.9 trillion, almost exactly the size of the US economy
  • Between 2000 and 2007 the trade deficit rose from $380 billion to $700 billion a year
  • Over the same period the inflation-adjusted median incomes of 35-44 year-old age group fell from $69,000 to $67,000
  • Consumer spending, which represents 70% of US GDP, is falling for the first time in 17 years.
  • In 2004, the Tax Foundation calculated that 122 million Americans – 44% of the population – fall outside the federal tax system.  Many estimate that this figure has now risen to 50%
  • The S&P; Case-Shiller indices of US house prices show a decline of over 20% from the peak, with further declines almost inevitable

As the Russian joke goes, a pessimist is a well-informed optimist…but, without wanting to be either, you have to agree that it’s a sobering list. Particularly eye-catching are all the figures pointing to the decreasing earning power (and tax revenues) that support the debt pyramid.  Perhaps Obama’s most difficult initial task will be to manage the expectations of his electorate after the current euphoria has subsided.

In the markets, at least, things have returned to a more positive tone over the last ten days.  Equities have rallied up to 25% from their lows, credit market tensions have subsided a little, and the VIX indicator has almost halved from its peak.

The Morgan Stanley strategist Teun Draaisma, who successfully turned bearish at the end of 2007, and then called the peak of the bear market rally in the spring, has now moved firmly to the bullish camp.  His arguments, and a host of charts supporting them, are available at FT Alphaville.  Read the comments as well to get a feel for readers’ sentiment – which is pretty negative still (perhaps a contrarian indicator?).

And, to end on a humorous note, what could be better than this?  The New York Fed has hired a new Senior V.P. in bank supervision, Michael Alix, from…Bear Stearns!  As the ever-observant Yves Smith at http://www.nakedcapitalism.com/ pointed out, “Who would know better what was in the dreck pool that the Fed has parked over at BlackRock (she is referring to the $30 billion of Bear Stearns assets handed over to the fund manager in March, as part of the government-organised rescue) than the former chief risk officer? If Alix knows a few embarrassing things, might be wise to give him an incentive not to talk them up.”

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