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The Great Shift Ahead
Perspective on the News
Monday, March 19, 2012
Ed DeShields

Despite the increasing chatter of hope for the economy, it’s hard to be encouraged if you consider the serious structural issues facing the U.S. and European economies.

Everyday now we are told the U.S. employment picture is improving.  The media tells us the economy is getting better while the stock market continues to rise.  However, beneath the surface the medium and long-term picture for the economy is actually worsening both here and abroad.

There are some very dangerous signs brewing: the world economic growth is slowing, inflation is up significantly, and interest rates are at record lows. Low interest rates spur economic growth but long periods of low rates and money printing almost always results in rapid inflation igniting higher interest rates and eventually slowing the economy.  Rapid inflation is now our greatest threat.

I’ve spend the last four weeks, heads down, making a personal plan to avoid what I am certain will become an economic calamity here at home within the next year – maybe two at the outset.  But like Noah, I still have some remaining preparations for my Ark – so to speak.  If I’m wrong then people will scoff – but so be it.  If I’m right, I’ll weather the storm.

At home, our gross domestic product (GDP) growth is not going to be that robust over the next several years.  This is an election year so the age of austerity will be delayed until next year.

Then it will be severe.

If you want to get a clear picture of what is ahead for the U.S. you can simply look to Europe.  Our nation’s structural problems mirror what is to be.

Greece officially defaulted on its debt.  Finally.  It is unlikely that their creditors (which are mainly large European banks) will see more than 10% of the money loaned to Greece.   Pick up any newspaper and you’ll see the horrible depression the country is in.  Greece’s unemployment rate continues to rise, hitting a high of 20% already.  Children are becoming orphans because their parents can no longer support them. 

Spain refuses to agree with austerity budget targets set by the European Central Bank. Unemployment rates are now 23%.  Italy’s unemployment rate sits at an 11-year high of 9.2%.   Both Ireland and Portugal’s unemployment rates climb ever higher with both reaching 14.4%.

Voters in Ireland will be going to the polls to decide if they are going to accept austerity measures.  How do you think they will decide?

Look at the numbers below.  These are the youth unemployment rates (ages 16-24) across the European Union as of January 2012:

Greece: 51.1%
Spain: 49.9%
Portugal: 35.1%
Italy: 31.1%
Ireland: 29.6%

The European Union is headed for a deep recession because their underlying structure that can no longer support economic prosperity. 

And, we’re not far behind. 

For the three months ending January of 2012, consumer spending fell flat when compared to 2010 (source: U.S. Commerce Department).  That should have been an up-swing period given the period represents the holiday shopping season.  Consumer spending was flat because personal income was flat while inflation is lighting up gasoline and food prices.  And, in January, inflation-adjusted real disposable personal income actually fell 0.1%.

Disposable personal income fell two of the last three months. Year-over-year, it was up only a tiny 0.6%.

But look.  Something else is happening – just like in Europe about a year ago. 

For January 2012, the consumer savings rate started to fall from 4.7% from 4.6%.

So how can our gross domestic product (GDP) and economic growth resume here in the U.S. when consumer spending is 70% of GDP and real disposable personal income is falling?

It can’t.

Oil prices are the wild card that eats away at our dismal disposable income ability.  Don’t get me started on oil price increases.  You can feel it at the pump any time you fill your car.

In February, manufacturing in the U.S. slowed 1.7% from January’s level.  New orders for goods to be delivered in the future, fell 2.7% from January.

There will be no economic growth in the U.S. this year.  Any news of such is a Wall Street sucker’s rally with the purpose of bringing investors back into the stock market before stock prices decline again.   

Our biggest fear should be that our policy makers will repeat the mistakes made by their European counterparts and be unable to stop this demise before it’s too late. 

About Ed DeShields

Last article: Whose Morning Is It?

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