Thursday, November 5, 2009

Private-sector led recovery now beginning



In the absence of any private-sector led demand over the past year or so, gauging the economy based on Government money flows was relatively easy because that was the only factor to consider.

But since gov't tends to to "prime the pump" (by restoring non-governmental incomes and savings via spending) over long periods of deficit spending, there comes a time when private sector demand begins to grow on its own.

I think we are reaching that point.

In one sense this makes the job of forecasting the economy a bit more complicated because gov't "involvement" in terms of the percentages of gov't spending, deficits and such, relative to GDP, actually start to shrink. Rather than being the "money pump" that it has been, over time the government becomes more of a siphon as more fiscal drag is applied. (Tax revenues increase in a growing economy faster than the gov't can spend them.)

However, we are nowhere near a level that would concern me at the present time and deficit spending is likely to continue for a while. Moreover, private sector savings are still relatively high and if job growth resumes, private sector wages will rise.

In addition, from a psychological perspective a private-sector led recovery represents a huge potential positive. That's because most people, including our policymakers, are fundamentally opposed to gov't involvement in the economy even if it is there only to sustain output and employment at the most base levels.

On the other hand, demand and employment that is being driven by the private sector would get people excited and they would start to view the recovery as sustainable whereas they saw the government's contribution as unsustainable (even though it could have been sustained for as long as our leaders wanted it to be.)

So if my assessment is correct, we could now get into a "sweet spot" in the market as so many skeptics begin to throw in the towel on their bearish outlooks.

Admittedly, one very important set of supports (the gov't) may begin to ease off, but the private sector's own momentum will take the baton for now, which for most people, will look like a welcome relief.

Enjoy the ride!


6 comments:

Elliott Wave Trader said...

My comment is.. Peter Schiff! now he is laughing at you.

googleheim said...

Of course Peter Schiff is laughing, he is a 1/2 wit.

1st screaming tsunami is one thing.

2nd Peter then runs out with the pre-tsunami tide, looking a coral objects and flopping fish. Peter Schiff screams " see I told you, now put your money in foreign currency and stocks"

3rd tsunami comes, U$D spikes while foreign currencies drop 50% like their stocks.

Peter Schiff is schiff-los - > german for without a boat !

We all know Peter Schiff pacifica fund got nailed last year.

MortgageAngel said...

I love goog.

Mike Norman said...

Me too!

TomatoBasil said...

Won't it be necessary for Obama/Congress to reshape the mortgage funding system in the country so that when the Federal Reserve ends it purchases of agency bonds,
a new and better system than the failed Fannie and Freddie will replace it? I can't imagine a bank willing to buy preferred shares in them again after the government nationalized
those last year. The Wall Street Journal reported that the Chinese stopped buying US Agency mortgage bonds in 2007/2008
(http://blogs.wsj.com/chinarealtime/2009/09/17/china-keeps-buying-treasurys-confusing-nationalists/). 360+ mortgage banks (mlimplode.com) have gone under since 2006/07
and the government has made no effort to rebuild a new system. The making home affordable program is a cork in the dam. **ALL** Fannie Mae and Freddie Mac funding &
debt reissues have been purchased/funded by the Fed and US Treasury in the last year or so. The amount of mortgages outstanding continues to shrink (http://www.federalreserve.gov/releases/z1/Current/z1r-2.pdf).
Maybe we will get some small incremental growth again.. and end to the fall, but until the largest source of credit to the American consumer is fixed and grows again...Its hard to
believe that we are going to return to a normal... recover.

Matt Franko said...

Goog: that must have been the Elliott Wave that got him!

TB: My only hope is that eventually the market will perceive that housing prices have stabilized/firmed (Mike has chronicled how starts are half of what is normally required for typical US household formation) and unemployment has stopped rising (may be still a ways off) then at that point non-govt capital will start to flow back into the MBS market.