U.S. Economy Not Out of The Woods

by James & Miel on April 27, 2009 · 0 comments

Hi All,

It’s Monday. Over this last weekend I was having coffee with our neighbor Derek enjoying the nice weather. Our neighbor was of the opinion that the economy was going to get better in the next couple of months. We like Derek, so I didn’t want to flatly contradict him. However, dear reader, please don’t think good times are right around the corner. There are plenty of reason to suspect that we are at in for at least 6 more months of recession.


First, the banking sector is still very weak. I’m not an expert, but I suspect that the results of the treasury’s “stress test” will reveal that a significant portion of the banking industry will require additional capital. In addition, the FDIC has been releasing a steady stream of press releases indicating smaller banks are going into receivership. This month alone has seen 9 more (1).

Second, unemployment figures are likely to remain bleak. Depending on how you calculate it, last month saw between 749,000 and 633,000 jobs lost. If the USA Today’s survey of economists is correct, then we’ll be seeing an increase in those numbers for April (1). More likely than not people will stop spending as much, live frugally, and get creative just to stay afloat.

Third, Federal economic policies are unsustainable. So far, Bernake and Paulson have been dumping billions of dollars into the banking system. Congress recently passed a huge omnibus spending bill designed to inject billions into the economy. All of this, unfortunately has been funded by borrowing. As a result, the national debt stands at nearly 11 trillion dollars (1). All this borrowing means the Feds can only keep up public sector demand for so long, ultimately demand will need to come from the private sector.

Fourth, private sector demand will be hindered by the need to deleverage. In 2008, the NY times reported that an average U.S. household owed $117,952 (1). Total US corporate debt in quarter four of 2008 was something like 7.1 trillion (1). These figures are coming down, but ultimately demand is probably only going to pick up after private sector debt is reduced. This will take some time.

Okay, so, what does all this imply for building wealth? Well, my wife and I are probably going to focus on bonds for next few months. For example, I’ve taken what disposable income I’ve had and put it into my ROTH IRA. When I get the $3,000 needed, I’m going to buy into the Vanguard Total Bond Market Index fund (VBMFX). Bank weaknesses, unemployment and the need to deleverage all mean a recovery is probably months away so its not the time to take on added financial risk.



Edit: Henry Blodget disagrees.

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