The voices of the economic pessimists seem to be drowning in the flood of good news. Business is upbeat and all bets are on a recovery. As a prime example, Ford is ramping up production. I would love to tell you that I was wrong all along and that it was all just a glitch. I had pointed out in my earlier reports that a decline is not linear but goes down two steps and up one step only to shrink for two more steps, etc.

The Chinese seem to be leading the way out of the ditch. It is the Chinese that are currently holding the trump cards to a recovery. Europe, America or Japan are hopelessly over-leveraged and credit continues to shrink while the savings rate is edging ever higher. Domestic demand in these areas can not recover over and above marginal gains because of a shift in paradigm from free-wheeling credit to examining borrowers with the microscope, essentially eliminating a quarter of the market in potential consumption. Instead, the West can expect further declines because they stubbornly refuse to shift from partying without bounds to living within their means and help its population to do so as well. They prefer to “stimulate” demand that was excess demand in the first place. What’s wrong for the West might be right for China, though. The yellow giant has come to realize that their dependency on exports was unsustainable and that they need ramping up domestic demand. In other words, they are trying to bring a billion people into the rat race. That will bring fourth a massive creation of wealth and also ample pressure for Democracy in China. On the other hand, Chinese investments will be focused more on China, which might translate into the deficits of the rest of the world being harder and more expensive to finance. However, to get China to where it is today took 30 years. Switching on domestic greed within a society that believes largely in the communist faith won’t come over night either. It will take a generation but it might be enough to give the rest of the world a little bit of a rope for years to hang on, so they don’t fall deeper into the chasm. To dress everybody the same is over and done with in China; business is king. I am looking forward to a Wild West Bonanza that hopefully spills over to the West, in particular in its smart economic approaches. Yet, the Chinese won’t be dumb enough to run trade deficits like the West. They will put their cards into their own manufacturing infrastructure.

While we anxiously wait for the Chinese rescue plan to work, we have a couple of problems at home. Firstly, you may remember that I had mocked at the low official estimates in regards to the economic decline in the U.S. The numbers just didn’t add up. Sure enough, the revised estimates that had been published without any fanfares turned out to be more than three times worse. However, because we are told that there is nothing to worry with a recovery just around the corner, nobody took note. Because of that, nobody seems to put one and one together to conclude that the $800 billion stimulus package U.S. would only be good for half the tax, if it were 100% effective that is. At the same time, it seems to escape economists that the U.S. states are busy cutting their budgets by margins that offset the ill-fated and ineffective stimulus package. Hence, the West is standing at the chasm with its eyes closed. Secondly, wealth is still being destroyed by a continuous slide of housing prices. In Idaho, for example, the decline of the average home value has now reached 40%. This is not surprising in light of the decline in employment that cut through most non-farm industries, led by double digit declines in mining, construction and manufacturing. Similarly, in the Canadian Yukon, residential housing permits are down almost half. Logically, Yukon’s construction industry takes a beating.

While shareholders had some good times during the last few months, they will get a wakeup call rather sooner than later if the numbers of the budget cuts start adding up. I had earlier warned that the airline industry is in for a crash landing. The summer numbers are sobering. Declines of up to 30% or more are reported throughout the tourism industry from Italy to Alaska. American carriers report solid double digit declines in revenues and a pullback in business travel. Even Cathay Pacific, the Asian airliner, reports almost 5 % less travellers. They are all engaged in capacity reduction. Unfortunately, a grounded airliner still comes in at a cost of $2 million a month for its scrapped value alone. The U.S. Federal Reserve claims that credit is easing. However, with so many industries in trouble, it seems more like the drowning swimmer taking a breath between crushing waves. To be sure, the so called TALF program, which was supposed to ease the banks’ troubles by up to a trillion dollars was silenced to a trickle of a few billion bucks because banks were not interested to provide credit to those that shouldn’t get it. Meanwhile, the stress on commercial credit is building up fast. The only U.S. measure that really seems to work is its $1 billion cash-for-clunkers program, which ramped up demand by a couple of hundred thousand cars, misleading Ford into believing that demand will grow significantly in the second and third quarter. The program has now extended the government’s life-line for the car industry by another $2 billion. We’ll see how many of those that could have taken advantage of the program, but did not, would now do so.  

I would love to declare it a loss. However, the fundamentals indicate that much more prudence is necessary and that the current euphoria that is going on might lead us to digging the whole deeper. The good part is that the belief in good times prevents governments from implementing ever dumber programs that will ultimately enslave entire generations to the debt of their follies.

H.R. Tschudi, economist and entrepreneur, Vancouver