1. You do not seem to be taking into account the large overhang of houses yet to be brought to market because of the foreclosure mess. You also do not seem to take into account the fact that the percentage of people who are able/willing to own homes will continue to decrease thus making the gap between homes already built and future demand larger still. People have been talking about this 6-12 month turnaround for the last year.
I do. The 6-12 month figure is for a bottom. Afterward, I expect home price increases to lag gains in national income for an extended period of time. That was the case for most of the 20th century, excepting the run-up prior to the Great Depression and the decoupling from fundamentals beginning in the late 1990s. Homes will return to serving as good places to live far more than speculative investments. From a macroeconomic standpoint, that is not a bad thing given all the leverage involved. Home prices circa 2006 had no basis in economic reality. If this housing bust is similar to some of the big ones that have occurred internationally, it might be another decade +/- a few years before home prices approach their frothy 2006 valuations. Fiscal consolidation/austerity could further delay that timeframe, as incomes would grow more slowly than would otherwise be the case and the unemployment rate would be higher than would otherwise be the case.
2. The economy is also looking at what our economy will look like as we enter into an age of "austerity". By that I mean that deficit spending and quantitative easing have continued to keep the economy at an unsustainable level. Not sure we can have real long term growth until we allow the economy to find it's real bottom.
I don't disagree. I've been considering starting a thread devoted to the topic of a looming age of austerity/simultaneous fiscal consolidation in many parts of the EU and the U.S. There is little doubt that there will be stiff headwinds against economic growth in such an atmosphere.
3. True. But this only gets worse as the administration will not allow us to get closer to balance. As this would mean a weak economy and hurt the president's re-election chances.
I agree that the President's re-election prospects would be hurt by a weak economy. Right now, I still believe his re-election is more likely than not, but things could still change should an economic downturn commence.
5. Not sure. There are competing problems with fiat currencies in the world. The Euro has huge problems with Greece, Portugal etc. Japan has a big problem with their debt. People can't buy China's currency. Finally you have the Fed in the market daily buying much of the new debt issued by the government.
Aside from the widely-publicized hazards in parts of the Euro zone, Japan is a looming problem. That Japan's population has far larger savings than the American population (per capita) is not reduce the gravity of Japan's escalating debt. That Japan is in the midst of population decline amplifies the looming problem. IMO, Japan's current Triple A rating is mostly a function of legacy, not structural underpinnings. I don't see Japan embarking on serious fiscal consolidation for perhaps at least several years and believe that its credit rating will ultimately be lowered.
6. Your 2.5% is consistent with what the PIMCO people talk about as the "new normal". The 2.5% may be correct, but we need to remember that the U.S. has largely exported it's manufacturing base. Thus the growth in jobs will largely come from the medical industry and service ( low paying) jobs. We have seen almost nothing in the last 20 years to support a return of higher paying manufacturing jobs in the U.S. That includes the stimulus which as PIMCO has called it a sugar high for the economy. Almost nothing which will help the economy long term.
My 2.5% figure is for 2011. I do believe that the growing public debt and enormous household debt will damp growth below levels experienced during the 1990s. As such, I strongly disagree with OMB's projections of 4% real annual growth through the medium-term. Those figures are too optimistic. As for the stimulus, I believe both the monetary and fiscal stimulus provided some boost to the real economy (short-lived), and may well have contributed to what appeared to be the start of a decoupling of stock prices from economic growth.
Early last month, I noted that since the economy bottomed out in 2009 Q2, nominal GDP has expanded at an annual rate of 3.9%. In contrast, the S&P 500 has increased at an annual rate of 23.3%. Both figures are through 2011 Q1. Since the end of 2009 Q2, nominal GDP has risen by 6.9%, while the S&P 500 has rocketed by 44.2%. In indexed terms, the S&P 500 is now 135% of the value of indexed nominal GDP.
Over the past year, the rate of divergence between the S&P 500 and nominal GDP growth has accelerated. The deceleration in economic growth and the end to stimulus may now have initiated a correction. Time will tell on that front.
