It’s “L,” not “V”!

While the pundits have kept telling us that the American economy is going to rebound strongly in the second half of this year, the retail sales and the initial unemployment claim numbers announced last week both nullified their claims. According to the statistics released by the U.S. government, the initial unemployment number jumped to 558,000, which was more than 543,000 as expected by most economists. The retail sales number was even more disappointing --- it contracted to negative 0.1% instead of 0.2% growth as most economists expected. What are these two numbers implying? It means that many Americans are losing their jobs and are afraid of being a layoff victim; therefore, they are holding off their spending.

Although it is obvious that the economy is not going to improve in foreseeable future, a lot of experts, or so-called “experts,” are projecting a possibility of a “V” shaped recovery is coming to town. I did not read every single article or commentary by those “experts,” but their reasons are mainly based on the “stability” of the credit markets and the American big banks. However, the meaning of “stability” is NOT equivalent to “recovery,” both in economical and literal sense.

Thanks to the U.S. government that used U.S. taxpayers’ money to rescue the investment banks because they are “too big to fail,” the American financial system is not getting any worse, for now. However, the fact that the banks are doing okay does not mean the economy is going to be okay. Think about it: How can an economy recover when 500,000 more people have become unemployed every month?

Also consider the statements released by the Fed chairman Ben Bernake last week. In general, he said that the U.S. economy has “stabilized” and he intended to keep zero Fed rate policy because inflation does not seem to be a present danger. He is also planning to reduce the amount for purchasing U.S. long term bonds, implying that the Fed is withdrawing its role to save the U.S. economy.

I remember I watched an episode of a U.S. TV show few years ago, not sure if it is a comedy or a soap opera tragedy, about a car accident victim who becomes a comatose patient with his parents sobbing by his bed side. When the agonized father asks the doctor about the condition of his son, the doctor tells him with a medical answer, “Your son is now stabilized.” I think this is what Bernake really meant when he used the word “stabilized.”

Think about it again: Why didn’t Bernake use the word “recovered?” If an economy really recovers, what should happen is a mild inflation when the demand for goods increases. This is a simple but universal condition for an economic recovery. However, he said that inflation is not pending. It only means the U.S. consumers are not buying goods as reflected in the declining retail sales number. The banks are safe because the government rescued them. They are now loaded with money to speculate again (see my previous columns on this blog). But economy is about the people, not the few big financial corporations. A true recovery can never become realized if people are losing their jobs and cut their spending.

What I am afraid is that the direction of the North American and European economies in the West is going to the follow a "L-shaped” path instead of a “V-shaped” path. What I mean is that the economy first sharply plummets and then stays low and stagnant for a very long time.

We have to realize that the economic boom from the last ten years was due to over-leveraging thanks to the low interest rate environment established by Alan Greenspan. The creation of Fannie Mae, Freddie Mac, subprime mortgages, commercial back securities, credit default swaps and receivable derivatives directly and indirectly made most people “rich” by making them become a property owner to own a property that they cannot really afford. After the bubble burst in 2008, all those leveraging processes are now deleveraged --- houses are foreclosed, house owners have to pay their debt and many more people lose their jobs. And do you think the problems that have been created in the last ten years could be resolved in only one year?

I think the economy in the West is like a comatose patient in vegetative state: It is not dead yet because the government intervenes to save the financial sector but neither is it alive because the unemployment will likely remain high. Do not expect the patient will revive any time soon. It will be lucky already if the patient does not end up dead.