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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

November 11, 2009 at 10:15 AM

Why is this recession different, and other big reset questions

Top of the News: A reader asks, what’s this reset people keep talking about? Business cycles happen. So what’s different now compared with the aftermath of other recent recessions?

Obviously no one knows the full answer. During the worst of last year’s meltdown, many expected a consequence to be a large-scale reordering of business and even society toward a more sustainable, less bubble-dependent arrangement. That may happen, although at a slow pace thanks to the Fed pulling us back from Depression. A rescued Wall Street is back to its risky habits, so another crash is possible.

Several factors make this recession special and full of discontinuity. A big one is the speed and depth of job losses, surpassing all post-World War II recessions, and containing elements that point to a very long recovery. Another is a much weakened position of many American households and companies because of record debt that will take a long time to unwind. Americans are poorer as a result of the crash and wealth creation more difficult except for the rich. Income inequality is still high. Average wage-earners struggle.

China is solidifying its trajectory to becoming an economic superpower in a way not seen before — and it holds trillions in American debt and dollars. Formidable competitors are everywhere. America’s pre-eminent position in the world is under pressure from this, as well heavy debt, deindustrialization, the vast expansion of money by the Fed, costly wars, unprecedented dependence on foreign oil and unprecedented reliance on, and power of, the too-big-to-fail financial sector.

Throw in the slow moving but real costs from resource scarcity and competition — especially for oil — and from climate change. All this points to secular, rather than cyclical forces. Sure, life goes on. But we shouldn’t expect the kind of bounce-back experienced in recoveries of the past half century. Indeed, the expansion of the 2000s was built on a bubble, not reality. Wages stagnated — Americans seemed to be doing OK because of home equity loans, unreal rises in house prices and credit cards.

So it’s a reset, whether America chooses to build a new, productive economy, invest in 21st century infrastructure, boost its R&D, improve education, etc. — or not. Whether Americans choose to accept this reality or not. Most of the lobbying money wants to continue business as usual. The real question is how painful the reset will be.

The Midweek Briefing: Treasury Secretary Tim Geithner said today the administration supports a strong dollar, even as it continues to decline. Some speculate the White House really wants the currency to fall to, among other things, make American exports more competitive.

Unfortunately the weakening dollar brings many downsides. One is the growing “carry trade,” a risky strategy where investors borrow cheap dollars to buy assets, commodities, oil and foreign equities. The carry trade is one of the big drivers of the U.S. rally — based more on a speculative move thanks to cheap dollars rather than the fundamentals of the U.S. economy. American equities are less expensive for foreign investors than they have been in years. (Another is the potential upside for multinational companies from a recovery in other nations).

The sum of all fears, of course, is that the dollar will collapse, an anxiety increased by central banks buying more gold and moving out of dollars. It probably won’t happen (yet). But every notch the dollar falls makes dollar-based assets worth less — that would be almost everything Americans own.

–A Purdue scientist has a fascinating new theory to calculate the pay of American CEOs, using thermodynamics to determine “fair pay.” His bottom line: The CEOs of the 35 largest Fortune 500 firms are paid 129 times their “ideal salary” to essentially help the companies be sustainable.

Other data show the ratio of chief executive compensation to that of the lowest employee salary has risen from about 40-to-1 in the 1970s to as high as 344-to-1 in recent years. It’s remained around 20-to-1 in Europe and 11-to-1 in Japan.

–Another list. America’s best-performing cities at job creation is led by Austin. Olympia makes 7th, Seattle-Bellevue-Everett 17th and Tacoma 21st. Poor performers: Yakima, 83; Phoenix 93; Las Vegas, 107; Tallahassee, Fla., 129.

–As China and Germany sprint ahead on green tech, General Electric plans to close its only plant in America that makes solar panels. Meanwhile, Evergreen Solar, which received a $58 million in state aid from Massachusetts, said it will stop assembling solar panels in the Bay State, sending the jobs to China. Race to the bottom?

Today’s Econ Haiku:

Junior will be back

Too bad Killinger stayed on

And brought his team down

Comments | More in Macro/Big picture, Midweek Economic Briefing, Outlook

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