Guest Post: There Will Be No Recovery

Posted on by

Submitted by Jesse of Le Café Américain

“The banks must be restrained, and the financial system reformed, and balance
restored to the economy, before there can be any sustained recovery.”

Often a closing comment from our blog, essentially this is what Robert Reich is saying in his recent essay on the economy.

The median wage must generally increase for consumption to resume, and for this to happen the heavy taxes of the financial sector and the oligarchs on the real economy must be lowered significantly in proportion to its size.

There is reason for pessimism that this can happen voluntarily. I have come to the conclusion that there is a pathological drive in some small portion of the population to acquire and control and devour rather than consume, even to their own destruction.

The law sets limits on the speed on highways to protect the many from the reckless and willful behaviour of the few. That we ought not to set limits on the banking system is a remarkable bit of speciousness.

There are obvious questions of how to limit, and how to detect and prevent and prosecute violations, but few can argue that not regulating traffic is the best solution to the difficulty of the task. The comparison of highway regulation to economic commerce and financial transactions is more valid than obtuse. And there are many Wall Street bankers guilty of at least manslaughter in this most recent episode of reckless defiance of the common good for the sake of personal profits.

The comparison of this latest epidemic of bad economic behaviour is strikingly reminiscent of the Gilded Age at the end of the 19th century and the Roaring 20’s. As you may recall both periods were followed by economic dislocation and a world in flames.

Why we allow this sort of bestial behaviour to ravage the many, in the mistaken support of ‘free markets,’ where nothing these people touch can remain free and effective and efficient for long, is truly an accomplishment of propaganda and those blinded by ideology.

Robert Reich
When Will The Recovery Begin? Never.
Thursday, July 09, 2009

The so-called “green shoots” of recovery are turning brown in the scorching summer sun. In fact, the whole debate about when and how a recovery will begin is wrongly framed. On one side are the V-shapers who look back at prior recessions and conclude that the faster an economy drops, the faster it gets back on track. And because this economy fell off a cliff late last fall, they expect it to roar to life early next year. Hence the V shape.

Unfortunately, V-shapers are looking back at the wrong recessions. Focus on those that started with the bursting of a giant speculative bubble and you see slow recoveries. The reason is asset values at bottom are so low that investor confidence returns only gradually.

That’s where the more sober U-shapers come in. They predict a more gradual recovery, as investors slowly tiptoe back into the market.

Personally, I don’t buy into either camp. In a recession this deep, recovery doesn’t depend on investors. It depends on consumers who, after all, are 70 percent of the U.S. economy. And this time consumers got really whacked. Until consumers start spending again, you can forget any recovery, V or U shaped.

Problem is, consumers won’t start spending until they have money in their pockets and feel reasonably secure. But they don’t have the money, and it’s hard to see where it will come from. They can’t borrow. Their homes are worth a fraction of what they were before, so say goodbye to home equity loans and refinancings. One out of ten home owners is under water — owing more on their homes than their homes are worth. Unemployment continues to rise, and number of hours at work continues to drop. Those who can are saving. Those who can’t are hunkering down, as they must.

Eventually consumers will replace cars and appliances and other stuff that wears out, but a recovery can’t be built on replacements. Don’t expect businesses to invest much more without lots of consumers hankering after lots of new stuff. And don’t rely on exports. The global economy is contracting.

My prediction, then? Not a V, not a U. But an X. This economy can’t get back on track because the track we were on for years — featuring flat or declining median wages, mounting consumer debt, and widening insecurity, not to mention increasing carbon in the atmosphere — simply cannot be sustained.

The X marks a brand new track — a new economy. What will it look like? Nobody knows. All we know is the current economy can’t “recover” because it can’t go back to where it was before the crash. So instead of asking when the recovery will start, we should be asking when and how the new economy will begin. More on this to come.

Print Friendly, PDF & Email


  1. Doc Holiday

    This is the era of Les Enfants Perdus — and our society is lost (primarily) because of the corruption of The Bush Coup — there is no denying that fact.

    It may be true that the damage done by Bush can be connected to previous administrations and ageless policy faults, but The Bush Journey has undone the spirit of America by allowing our financial system to implode. Perhaps this process was done in the name of conservative politics, maybe patriotism but without doubt, the abuse of absolute power and the absolute corruption that exists is systemic and the Multi-Trillion Dollar problems un-fixable.

    There will be many economists who will go back to dog-ear'd textbooks and bring up the glimmer of hope as they mis-use the prospect of another jobless recovery (which may occur in 6 months) — but as they fly that limp patriotic flag of surrender, the reality is that the vast amount of jobs lost, are not coming back anytime soon and that there is no hope on the horizon for at least a decade.

    The jobs of the near future are no different than the jobs of today and the major problem in this, is that fewer jobs will be available for a greater supply of unemployed people, who will grow increasingly hopeless and then desperate.

    Are the jobs of the future to be found at auto plants, in building homes, in servicing derivatives, by daytrading, to clean windshields at the gas station, to operate elevators in discount malls, in delivering newspapers or various jobs that continue to fall into the obsolete zone, where outdated inefficiency eradicates the connection between productivity and GDP output.

    Bottom line, this recession is in the early stages and will painfully unfold into something very new and something that will be looked back on as the post-internet recession, where the efficiency of corruption brought America to its knees. I fully anticipate that The Obama staff will do its part to build upon the Bush Foundation and talk BIG about CHANGE and then as with Bush, bullshit people to a point where they surrender to the fact that the future is hopeless and that there is no recovery ahead!

    Full Disclosure: I'm too burned out to edit this…

  2. My Reference Frame

    The new economy will begin when people STOP believing economic health is based on consumer spending. Yes, the numbers may show that from a gross point of view but without production and savings, as implied in the article (people have to have money first to be able to spend it) no economy is on sound footing. Increase the production of valuable economic goods and services, don't immediately consume them all, and eventually the economy will not only recover but will thrive.

  3. scepticus

    "The X marks a brand new track — a new economy. What will it look like? "

    Negative nominal rates perhaps? That would distribute the mullah where it's most needed pretty quickly, and take the pressure right of public finances while simultaneously reflating the economy.

  4. joebek

    It seems possible that 2007 will be the high point of human civilization at least from a GDP perspective. In addition to the weight of demographics, there has been a real turn in progressive opinion against GDP and population. It seems possible that the world has begun a NEW PROGRESS which will take world population down by 90% and world GDP by 99%. Before getting too agitated by this, one might consider that this would still leave a world population and prosperity great than that at the time of Socrates and Plato. Still if the progression is too rapid it might dampen enthusiasm.

  5. kackermann

    There is a solution, but it would take guts – something the US does not have anymore.

    If the government were to mandate that all transportation is to be electric in 6 years, and that all new power generation must not produce greenhouse gasses, then we would see economic activity the likes the world has never seen.

    We actually have all the technology to pull it off. We can do it this way, or we can ramp up for war.

  6. NOTaREALmerican

    Re: The law sets limits on the speed on highways to protect the many from the reckless and willful behavior of the few

    However, what percentage of the population completely resents – angrily resents – "speed limit laws"?

    There's something ELSE at work in `merica, and it's NOT just the pathological oligarchy. The US was ruined with the civil-rights movement, it will NEVER recover from this.

    Pre civil-rights, the Democratic Party controlled the dumbasses (i.e., the statistical majority) through its union surrogates. This allowed the normal human dumbass meanness and hatred to be directed at "the wealthy". The result was the Democrats could moderate "the wealthy" using the fear-of their dumbasses and in return the dumbasses prospered.

    The civil rights movement allowed the Republicans to wrestle control of dumbasses away from the Democrats by focusing the dumbass's (tiny) brains on "those people". They are STILL focused on "those people". The dumbasses would rather see their own future destroyed in the vain hope that the Republicans will eventually “help them get EVEN with those people”.

    History is really JUST how the oligarchy controls the teaming masses of dumbasses and pits them against each other. Mao knew this, and fascists of all stripes (aka Republicans) instinctively know this. Socialists can’t admit (publicly) that dumbasses even exist, just as Libertarians can’t admit the oligarchy always wins.

    The US is doomed. You'd be much better planning on how to get out instead of how to fix the unfixable; the dumbasses are out of control in `merica, and pending crack-up won't be pleasant.

  7. Economic Perspectives from Kansas City

    What do these reports have in common? They provide powerful evidence that the federal government is not doing enough to help the "real" economy. As Sam Gompers famously responded when asked what workers wanted–"More!"—our nation's state and local governments, households, workers, and poor need more help, now. We have tried the Reagan/Paulson/Rubin/Geithner "trickle down" approach of targeting relief to Wall Street, but the only thing trickling down is misery. The only way to stop the downward spiral is to substitute trickle-up policy—and even if nothing trickles-up, at least we will have helped those most in need.

    I have already outlined a comprehensive recovery package so will here simply summarize four policies that would bring immediate relief.

    Read more here:

  8. Ether_Snake

    Sorry, had some problems posting my comment.-

    Two things need to be done:

    1- Stop job losses. This means addressing the trade deficit head-on. There is NO other way to half job losses.

    2- Look at what the average American spends most of his income on.

    It goes, in this order: Housing, Transportation, Food, Insurance/Pensions. Everything else is meaningless.

    When markets tank as they have recently, in a relatively "free" market, it simply means that a balance is attempting to return. This is precisely why house prices have been falling (rightfully so), why fuel cost fell, etc. It's basic common sense.

    Also, notice that what Americans spend most of their money on are absolute necessities where they have practically NO choice. This means that an extremely significant part of America's income is vacuumed, not SPENT.

    This has a direct impact on the economy's health; an economy is stimulated as people spend their money freely; out of CHOICE, not NEED.

    Again, common sense. But instead you've thrown hundreds of billions of dollars into a black hole.

    To fix the US economy; stop throwing jobs away to the biggest protectionist nation in the world, and help Americans lower their obligatory spendings by letting house prices stabilize and invest in renewable energy, massively.

  9. Besar

    Many comments here are pretty pessimistic, with reasonable logic backing them up. But what we need in this economy is innovation. We need things that make life easier for everyone. We are the 3rd most technologically advanced country in the world. And the rest of the top 10 most technologically advanced countries in the world, commulatively do not even have one third of our population. I am a naturalized American but there is no other country I would want to be in, during this global crises, than the US.

  10. Francois

    "They provide powerful evidence that the federal government is not doing enough to help the "real" economy."

    That is the understatement of the year. Simple back-of-the-envelope calculation show that for every dollar spent for Main Street, the Federal Govermin et al. (Fed, Treasury etc.) spent 306 for Wall Street.

    With such an astonishing disparity, is it any wonder that the good times are rolling again on Wall Street while we get royally screwed?

    What is even more astonishing is that the pitchforks and torches haven't fly yet.

    But it is only a mater of time: Obama has already sacrificed the 1st stimulus package at the altar of bipartisanship and discarded the need for a 2nd one.

  11. Avl Guy

    Unrelenting Debt Unwind is setting the stage for us to decipher the outlines of a 'new' financially sustainable and environmentally-sound economy.

    It’s not pure happenstance that this recession has bested the 1973-75 recession in depth. It’s generally accepted that the three recessions between 1973-1982 were part of a larger Structural Economic Transformation that involved shifting the GDP of a (then) 200 million-person nation that, pre-1973, possessed a sturdy and proven manufacturing base and talented workforce that could operate on a Pay-As-You-Go basis without depending on using excessive amounts of household debt to buy groceries, clothing and to secure medical care; that could save 8% of their earnings; and which could put 20% down on a car and on a house.

    By 1982 when the recent (and now deceased) 25-yr Bull market in stocks began, the structural shift in the economy was about completed. Most of those mfg workers had been kicked to the curb & the nation’s mfg base kicked overseas. A huge nation then began the unwise ‘experiment’ of coupling wages & salaries to the undertow forces of globalization, while attempting to be a Service Economy of Knowledge Workers. And also attempting to be a nation with a GDP 70% driven by debt-enabled 'Consumer Spending'. This GDP model required households to incur more debt each succeeding year to make the household budget ‘work’, culminating in the unwisely ‘vaunted’ Creative Class that were simply glorified Walking Junk Bonds using debt to buy lofts and to patronize wine bars and urban art galleries; all enabled by excessive household debt leverage. This Creative Class were certainly nothing to be admired exalted or emulated.

    So here we are in 2009, the unwise experiment of a GDP 70% driven by Debt-Enabled Consumer Spending has ended for this ponderous nation of 300+ million persons.
    Debt Unwind is irrepressible and is using deflation and recession to force an Involuntary Structural Economic Transformation upon us.
    Unlike last time, our white-collar Economists, academics and leaders are slow – perhaps loathed – to admit we’re in a structural change with no ‘Recovery’ back to some comforting ‘normalcy’ of a GDP 70% driven by spending..
    There will be no ‘L’-shaped ‘Recovery’…only more of this ‘L’-shaped DESCENT until Debt Unwind deposits us somewhere on an economic landscape akin to the bumpy floor of a crater.
    Then the groping begins.
    We can stupidly try and re-animate the debt-fueled consumer spending model (this is the path chosen by Obama, Bush, Geithner, Paulson, Bernanke, Greenspan, et al).
    Or we can pursue a frugal Pay-As-You-Go model, and a Local Production and Local Service Delivery economic model where we make that which we consume and keep wages & prices for goods & services in a sustainable equilibrium with nil usage of debt leveraging…ala life pre-1973.
    For the latter, we must LEAD our Leaders.
    Obama is too beholden to banks & Wall Street & Harvard ‘Blue Chips’, and to advisors like Summers & Geithner, a Goldman-Sachs lackey, to grasp any of this on his own.

  12. CEO

    That 306 to 1 ratio of Wall Street to Main Street subsidy as a powerful sign that our system is broken. It is gard to find any form of consensus in our pluralistic society, but we can almost be sure that the vast majority of people in america today believes that the tie between wall-street and politicians in particular, and between oligarchs and politicians in general, must somehow be untangled for the country to move forward. And then one could address the various main isues facing us – healthcare reform, education, consumption vs production, jobs, environment. Until the day politicians are forced to stop taking contribution from businesses and wall street, america would be trapped in an endless spiral of patching our problems with band-aid and contradictions.

  13. Davos

    Lets start talking about the 2-5 trillion DEFICIT that will destroy what is still standing of the economy.

  14. Ether_Snake

    If the debt-fueled economy is restarted, it won't even last more than five years before it crashes harder than it did this time.

    Fool me once. Shame on you.
    Fool me twice… can't get fooled again!

  15. Hugh

    I wrote somewhere else recently that it would take a stimulus of about $1.2 trillion a year for 2 years with a 90/10 split between spending and tax cuts to create some 13.8 million jobs which I calculated would be needed by the beginning of 2011. My main assumptions were that only 2 million more jobs would be lost this year and I made no assumptions at all about job losses in 2010. My excuse for this was that I wasn't sure what the Obama Administration would do between now and then. It probably won't do much but worsening conditions (and poll numbers) could at some point force Obama's hand.

    Again this is something of a theoretical exercise since we are already 6 months into the 2 year timeframe.

    Now while $1.2 trillion in stimulus spending is a lot of money and it really needs to continue into 2011 and beyond, it is far less than the last figure of $6.788 trillion given in the last 10 months by the Fed and government to bailout the financial system.

    Initially funds could be used to support state and municipal budgets as well as education and some infrastructure projects. But as I have been advocating for a while now and other commenters have said here, the country needs a policy to re-industrialize in a sustainable, less carbon and energy utilizing way. It is of the utmost importance that stimulus be used to take us somewhere we want and need to go.

  16. Big Picture Trader

    If the comments blathered about by commentators on this blog are any indication, we're doomed.

    Yves, keep up the great work. Seems like most of the people here simply don't have the stomach for what's coming.

  17. ComparedToWhat?

    Yves linked earlier, via Mark Thoma, to this NYT Economic View column by Robert Frank.

    Rather than relying on mechanical analogies like automobile traffic, or fantasizing about "a brand new track" (since I live in the boonies I read that at first as "a brand new truck"), we're better off re-evaluating complex systems we've created in light of what we know about complex systems in nature. And here I would encourage all to include pre-industrial humans.

    Robert Frank makes the point that some innovations can make an individual more likely to reproduce but at cost to the success of the species. Maybe he's been reading ZeroHedge on high frequency trading? Or thinking about our bloated financial sector? Or the consequences of fossil-fueled development?

    "Fractal: a word coined by Benoit Mandelbrot in 1975 to describe shapes that are "self-similar" — that is, shapes that look the same at different magnifications."


    On recommendation of Michael Pettis I'm reading Devil Take The Hindmost: A History of Financial Speculation by Edward Chancellor. Full of oddities and quotable quotes, Chancellor walks the reader down a rocky path from tulip mania to the late-90s tech bubble which was inflating as he wrote. If you need a bit of perspective on the current mess, you could do worse.

    Chancellor is not a fan of the efficient markets hypothesis. He's willing to dig into historical records to see what really went down. He's also willing to enlist the perspectives of Hayek, Minsky and Mises in order to evaluate The Maestro.

    Not to minimize the scale of the current debacle, but I take heart when AEI regular Chris Whalen comes out swinging against regulatory capture, and institutions that are too big to fail and too big to manage. Comparing Whalen's remarks to lawmakers to testimony of Jamie Galbraith is enlightening; there really is common ground on which meaningful reform can be accomplished.

  18. Brick

    It seems like we have a society of low quality throw away consumer goods bought by consumers whose wages are constrained compared to the upper echelons of society and who have an attitude of buy now and worry about it later. It is quite clear that corporate governance is geared with certain priorities in mind and this can only accelerate the disparities. It appears to me that top members of firms have the following priorities.
    1) Maximise your own wage, pension and benefits.
    2) Maximise the share holder's returns.
    3) Maximise profit by ensuring products have a limited life expectancy.
    4) Ensure you meet all the regulatory requirements
    5) Be environmentally friendly
    6) Look after the lower workers
    7) Ensure you don't damage the economy.
    By limiting top wages in line with average wages in the firm( 20x average maybe) you change those priorities significantly. By regulating on minimum guarantee lengths you start to address the throw attitude. Neither of these things stand a chance of being implemented even on a gradual basis even though it would help demand in the economy and give a better balance. Roll on the next boom and bust cycle as the flaws in current capitalism fail to get addressed.

  19. Matthew Tripp

    The wheel of Buddhist terms poster Velcro modular wall mural game. Doctoral dissertation for philosophy, title: The Interpenetration of Buddhist Practice and Classroom Teaching.

    PARASITIC SPECIES INFESTATION alien robot telescope spaceship: audiobook first few tracks are good, PALE BLUE DOT as we transition to a knowledge based global society

    as computing power increases exponentially and ubiquitous web enabled sensors allow for immersion in context relevant buddhist or ethics perspective, national broadband plan… augmented reality sociology subject index and table of contents Chinese military intelligence genius clones life energy word abacus sustainability transmission measurement context mapping is me Google for EXTINCTCULTURE please let me know what you think about this topic (FOLDING@HOME and BIONIC software's, engineering 450 million new species to make deserts habitable or telepathic ecosystem maintenance) autodesk inventor prototyping software for genetics use the audio book list on to build course of life coaching training young orphan people to be CIA certified ethical hackers download free at because if the current post world war 2 education system was meant to produce factory workers (not critical thinking curriculum video from best teacher nationally then teachers answer questions and do research while the kids watch, pause for Q+A, the videos podshifter software for iTunesU ) how much worse is this continuation of using the bible koran instead of critical mass ecosystem dynamics physics logistics?

    google for flashcard database

    subliminal education psychological profiling HDTV

    MIT OCW designing your life. The art of war flashcard deck, wikipedia article audio book the 48 laws of power… RAW stem cells movies: Eagle EYE, Minority Report, (gps and audio recording + all video survelance to DVR on web for all probation and parole ankle monitors, put more people on them and use software to monitor them, the probation or parolee pays for the ankle monitor and then gives it back to the probation office then the next probation pays for it again, thus buying another one) broadcom is makeing new version of these chips every two months now GPS + Bluetooth + WiFi + FM combo chip)
    audio + video security DVR in juvinile prisons with audiobooks streaming leave the headphones you buy behind for the next inmate

    web 2.0 directories: and USE THE TAGS cloud, also and SHARE

Comments are closed.