Trying to Buy More Time

By Jonathan D. Miller

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Central bankers provide liquidity to ailing European banks and the stock market spikes off computer trading models. But some extra liquidity really only buys time (and maybe not much) in a world where governments are uniformly underwater and financial institutions inevitably must write down boat loads of bad assets, including real estate.

The past three years of finance maneuverings have all been about some version of “extend and pretend.” If we can hold out long enough, maybe economies will recover enough so we don’t have to recognize the extent of all our losses from bad loans and over-borrowing. But at some point pretending no longer works—especially in the face of now slowing (or at least not growing fast enough) economies. The last numbers out of China, though certainly not surprising, should give pause. The Asian powerhouse begins to sputter in the wake of the consumer washout in North American and Europe. The always hyped Black Friday numbers aside, Americans don’t have the wherewithal to sustain spending—not with 9% unemployment, stagnant to lowering wage rates, rising medical costs (did you get your new health plan numbers for 2012?), and abrogated pensions (only 14% of companies now provide defined benefit plans).   It’s even worse in Europe where the public employee sector is being savaged by government austerity programs (the UK looks like it’s headed for a double dip recession and even the strong continental players like Germany retrench). Let’s not even mention Spain, Italy, and Greece in the throes of the latest round of “hope-and-pray” fiscal gymnastics.

The story in China was that even if the rest of the world struggles, its economic engine would be stoked by a rising domestic middle class which would pick up any buying slack. But the Chinese factories slowdown halts that momentum, and it appears much of the recent wealth gains in the country have been consolidated by a few barons at the top of the government-army run food chain. Sound familiar or put another way should that be surprising? 2012 may be a very tough year for China.

At some point governments, banks, all of us will need to recognize our debts, write-down our portfolios, and re-style our lifestyles. In other words, we will all have to live within our means. It will be extremely painful with diminished lifestyles. Those folks facing foreclosures and bankruptcies already understand the harsh realities. But the delay game exercised by governments and bankers only puts off the day of reckoning for the rest of us. Maybe they can exercise a softer landing, but we are only fooling ourselves if we think we can avoid the inevitable.

In the mean time, the necessary spending cutbacks in government that politicians vociferously tout all lead back to significant jobs losses and compensation erosion. Any gains in the U.S. private sector have been offset by losses in government sector jobs. At the moment, those shrink-government policies are the biggest “jobs killers.” The next step will be to bring public sector pensions and benefits further in line with the private sector—good bye defined contribution plans, here come 401Ks followed by increases in public employee health care contributions. Europe experiences the same contraction only faster.

When the government has less to spend and bankers have less to lend it’s not a good scene. Enjoy that stock market spike while you can. 

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