Where Are We in the Recovery?

Nowhere near where we should be.

Recall that this is a balance sheet recession. That is, we stopped spending and expanding because we ran up too much debt.

Every corporation in the land is going to cut back so it won't go bust. That's called a balance-sheet depression because what they are trying to do is make sure that they are not going to go bust and they will do anything to get rid of costs, to get rid of debt in order to survive.

The recession stops and expansion begins again when the fear of default and collapse subsides. Now consider the following chart borrowed from Rolfe Winkler's recent excoriation of the ever-dim Paul Krugman.

Before we recover, we will need to reduce our debt burden.
Clearly, we've yet to even begin to go in the right direction. Any recovery now will be anemic at best because the money we could spend on expansion will instead be spent on ever greater debt payments.

Now check out this graphic borrowed from Mish's most recent post wondering when interest rates will start to rise.

Fed interest rates and unemployment.
What this shows is that the Fed has been encouraging borrowing by continually reducing interest rates over the last 15 or so years. The corresponding leap in debt shown in the first chart is no surprise. However, now that interest rates are at 0.25%, there's nowhere left to go. The debt payments that are strangling us are not doing so because of the interest charges.

That's when you're in real trouble.

Think of it in your own life. Imagine having a mortgage payment so large that you can barely purchase necessities. Now imagine that the interest rate on your mortgage is 0.25%. Now imagine that you had to take a pay cut (this corresponds to the drop in tax revenues for the government and the drop in sales for corporations).

Being the responsible type, your immediate response would be to vote in a monstrous new entitlement program giving everyone health care, right? (Sorry. I got off track and jumped into B-Daddy's favorite topic.)

So where are we in the recovery? Still going in the wrong direction and perhaps about to accelerate.