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Last year, gas prices soared to unprecedented levels. In their wake, food and other prices followed suit, putting increasing pressure on private household budgets. However, inflation was still surprisingly modest. This year, with energy prices much lower, inflation is still edging up while wages and home values are contracting. So far, consumers have responded with saving up what they can while those with debt had to increase credit servicing. It sounds like the private households are expecting more of a squeeze. The numbers reveal that credit keeps on contracting not only from households that save but also from banks that are reluctant to lend. Because the fundamentals were off, I had maintained that a recovery (as in “getting back to and above previous levels”) is impossible despite the misguided, large scale stimulus packages and $1.5 trillion in purchases of mortgage backed securities. Over 15% of the entire economy’s output (GDP) has been invested or is under way. However, the downward pressure is obviously so strong that a substantial increase in steam is needed to reverse the trend. Sure enough, unemployment is edging up and has passed 12% in California. As unemployment moves up consumption contracts. Hence, I expect the numbers of the third quarter to be sobering and those of the fourth to be dreadful.

But all around me, everybody seems back to normal. Am I misreading the signs? Nothing has changed; nothing has been fixed, nothing has been addressed other than trillions that have been buried in the banking system’s bad bets. A.I.G. may be “stable”, so it is made believe, but without addressing any of the problems other than patching them with money, the fundamentals have gotten from awful to worse. Shady credit today is shadier than a year ago. The good part is that the prime rate is cheaper than last year. However, that does not help consumers or businesses much. The banks are those that have increased the spread to make more and build reserves for upcoming losses on their commercial and private loans. Although the Fed’s rate and the prime rate remain low, 10-year and 30-year treasury bonds have silently edged above prime. In other words, commercial and consumer credit will become more expensive and put inflationary pressures on already weakened economies. By all means, if the contraction does remain within single digit numbers, the West is still incredibly rich. However, the social groundswell is building with an increasing number of idle men. 

I pointed out in earlier articles that gold broadly acts as a warning indicator ahead of recessions. By that measure gold is warning. The reason why it is not much higher today is that money flowed into the stock market in a large scale, which is back to levels of insanity. After so much wealth had been destroyed by the crumbling housing and stock prices one may wonder where all the money is all of a sudden coming from to drive stocks that high. It doesn’t come from housing, that’s for sure, and it does not come from private savings accounts or from businesses with empty vaults. You can add 1 and 1 together by comparing the increases with the $1.5 trillion mortgage backed securities that had been bought by the FED: the taxpayer money went straight into the casino of speculation. If anything goes wrong, we will have a great awakening. I don’t put my bets on a recovery that is just around the corner, not yet. Gold isn’t either. The “recovery” is too marginal for the economy to be anywhere near safety.  

On my search for industries that would support a sizable recovery, I haven’t come across one other than the banks that continue their financial casino ever more boldly than before the crisis that they had unleashed. The automotive industry won’t drive growth. That would amount to wishful thinking. Thus, their supply chain will remain subdued. The numbers coming in from transportation are not exactly encouraging. Housing starts and construction may be up a tick but it won’t grow back anywhere near to where it was before the recession started. Recreation, travel and publishing are still suffering and a broad shift has taken place from opulent brands to value. The evidence points at an undeniable shift in consumer behaviour.

Meanwhile, all seems normal, and bank reform is just talk. It feels like the culprits have long been forgotten and the only losers are the working families that will have to foot the bills of the government. While all signs point at a further contraction of the economy, all talk seems to be directed at the marginal recovery around the corner. Gold does not put its bet on expansion. I don’t either.

H.R. Tschudi, economist and entrepreneur, Vancouver