Going Broke in America

Details

Published on Friday, 20 July 2012 15:35

Written by Bill Bonner, Founder and President, Agora Inc.

Hits: 656

Some things are normal and predictable... like the idea Americans are going broke. It's the Fed's reaction, though, that doesn't make sense.

Markets never know anything. But they are always discovering. Yesterday, they didn't find out much.

Dow up 34. Gold up $9/oz.

The markets were relieved, according to the Financial Times, by "positive earnings announcements." The day before they had been relieved by "improved U.S. housing starts."

Housing starts were up. But, alas, sales were down. From Bloomberg:

Sales of previously owned U.S. homes unexpectedly declined in June to an eight-month low, showing the recovery in residential real estate will take time to develop.

Purchases decreased 5.4 percent to a 4.37 million annual rate last month from a revised 4.62 million in May, figures from the National Association of Realtors showed today in Washington. The median forecast of economists surveyed by Bloomberg News called for a 4.62 million pace.

Slower job growth, stricter lending standards and competition from cheaper distressed properties may be impeding the market even with mortgage rates at all-time lows. The drop in home values since the last recession has also left some homeowners owing more than their property is worth, limiting their ability to relocate.

"It's difficult for people to sell their homes when they're underwater," Christopher Low, chief economist for FTN Financial in New York, said before the report. "The trend since the bottom in mid-2010 has been generally upward, it's just a very slow recovery."

We might have added that it's tough for people to buy houses when they're broke. And the evidence tells us that people in America are getting broker. That's what happens when your basic costs rise and your income doesn't.

Corn and soybean prices are hitting new records. Crude oil is getting more expensive too. From Reuters:

The most expansive drought in more than a half century intensified this week and stretched further into major farm areas of the western Midwest where crops had largely been shielded from the harsh conditions that decimated yields further east.

The moderate drought in parts of eastern Nebraska, northern Illinois and much of the top corn and soybean state Iowa was downgraded to a severe drought in the past week, climate experts said Thursday, and forecasts showed little relief in sight.

Prices of both corn and soybeans soared to all-time highs on Thursday, with corn climbing more than 50 percent in the past four weeks alone due to the worsening drought, squeezing ethanol and livestock producer margins and chilling export demand.

Meteorologists are calling it the worst drought since 1956.

All in all, nothing has changed. The economy is still struggling. And the feds are still pretending they can make it better. But as long as we're in this deleveraging phase -- with the private sector working down its bad debts and bad investments from the bubble years -- the punky economy is going to continue.

Europe is in recession already. The U.S. may be too. Here's more from Bloomberg:

The index of U.S. leading economic indicators fell more than forecast in June, a sign the U.S. economic expansion is slowing.

The Conferences Board's gauge of the outlook for the next three to six months decreased 0.3 percent after a revised 0.4 percent increase in May, the New York-based group said today. Economists projected the gauge would drop by 0.1 percent, according to the median estimate in a Bloomberg News survey.

Retail sales unexpectedly declined in June for a third straight month, indicating that slow progress in job creation is holding back consumer spending, which accounts for about 70 percent of the economy. Federal Reserve Chairman Ben S. Bernanke said July 17 that progress in reducing unemployment is likely to be "frustratingly slow."

"The economy is losing momentum," Robert Dye, chief economist for financial services company Comerica Inc. in Dallas, said before the report. "It is not a definitive sign of impending recession but a sign that this economy is underperforming. My expectation is that we will continue to underperform for the remainder of this year."

Losing momentum? It probably never had any momentum to lose.

But remember, a period of deleveraging is normal and predictable. What is not normal are the feds' desperate efforts to stop it. Where those efforts lead nobody really knows...

... but probably not anywhere you want to go.