America’s new Age of Austerity starts now

Denials, delays will deepen the impact

" ... tighten your belts, America’s new Age of Austerity is already here, today. There I said it. I admit it. And you better too. Prepare now. Could be like the 1930s depression austerity."

By PAUL B. FARRELL

You’ve seen the warnings all across the major newspapers about a global slowdown. But why no warnings of austerity dead ahead? Why? America’s still deep in denial. We prefer happy talk to the truth. No, nobody will get honest about austerity till after the elections. Then it’ll hit hard. 

Wake up. You were warned: America’s new Age of Austerity is already here.

Till the elections, nobody else will tell you the truth about what comes with this slowdown: Plan on classic economic austerity. Maybe not austerity as deep as the euro zone’s Spain and Greece. Yet maybe deeper than the 1930s as Nobel economist Paul Krugman writes in his new book, “End This Depression Now.”

Yes, America’s already in a depression. Wake up America, to a long bear market, a recession cycle, to austerity where everything slows down, income, jobs, retail, global trade, and market returns. Listen to the latest warnings just last week:

·        Wall Street Journal warns “New Signs of a Global Slowdown … Weak reports in U.S., Europe and China suggest economies are slipping in sync.” Yes, a global economic slowdown is “in sync.” Not just a typical summer market dip. Not even a double-dip recession. But a dark long scenario we’ve all been fearing. And with it, deep, dark austerity.

·        Los Angeles Times warns: “Europe’s woes put drag on world growth … even powerhouse Germany may be faltering.” Not just the euro zone, “but reports of economic trouble are turning up in China, India, South Africa, Brazil and elsewhere.” Austerity is here.

·        New York Times headline fans the flames of a metastasizing global contagion: “China’s Output Slows Sharply: Ripples Feared. Nationwide real estate downturn, stalling exports and declining consumer confidence.” Yet China was totally predictable. A few months ago our headline read: “World Bank warns: China is a ticking time bomb.” Now, kaboom.

·        Foreign Policy: Yes, austerity’s coming, and maybe with it, a new president: “Five World Events That Could Swing the U.S. Election” headlined the latest Foreign Policy. And any one could also totally alter the trajectory of a economic slowdown or recovery. Polls show jobs and the economy are the “most important issue for them in choosing a president.” But those five global “events” could send the economy and the election “careening along a very different path than the one it’s traveling down today: Iranian showdown; European nose dive; Chinese economic slowdown; domestic terrorist attack; and an “Unknown Unknown,” an unpredictable Black Swan killer.

Austerity is so predictable, so obvious, yet we chose hype and denial.

Nothing new? No, nothing really is new, just denied, ignored, dismissed, avoided. Which is why we all need constant reminders. Why? From a basic psychological and behavioral-economics perspective, we need to wake up.

First, our world is full of constant hype and happy talk: Wall Street’s reports, rhetoric and pitches are known to be upbeat 99% of the time. Washington politicians and corporate CEOs are equally suspect.

But the real reason most of us need constant reminders is that we’re gullible, distracted, forget and, unfortunately, we all really do want to believe the world full of good people telling us the truth. But sadly, 99% of the time they’re likely manipulating us.

So let’s look back at some earlier warnings that this slowdown was coming, of bears, recessions and a new age of belt tightening a-u-s-t-e-r-i-t-y that some warn can extend till 2020 and beyond. Listen:

·        BusinessWeek: “It’s as if 2008 never happened,” warned a BusinessWeek editorial last year. Why? So predictable from a market cycle perspective. Truth is, another meltdown is a natural, welcomed and essential part of the cycle, in order to complete what the 2008 meltdown triggered — 2008 failed to reform Wall Street. And since necessary corrective action did not happen, the next crash will likely be worse than 2000 and 2008 combined.

·        InvestmentNews: “Top advisers see very slow growth in 2012.” Last year that headline was screaming at us. Some advisers said it far worse, saw “very slow, measured growth for two, three years.” Remember, these pros aren’t happy-talking naïve investors, they’re not just some Wall Street hustlers and Washington politicos covering their election rears. This report came from inside the world of professional financial advisers.

·        Meltdown Sweepstakes: Back in 2009 my headline read, “Wall Street’s 2012 meltdown sweepstakes.” Just one year after the meltdown: 30 public warnings, that Wall Street was fighting too much, driving the bus in the wrong direction: “Here is what’s happening: History is repeating itself. Wall Street’s soul-sickness is setting up a new meltdown. Dead ahead. Be prepared.” Yes, I said “dead ahead” back then. Traders think fifteen minutes is an eternity. But for long-term strategists, analysts and futurists, “dead ahead” can mean years. Read my June 3, 2008 column reporting on20 loud warnings of a crash coming, 20 warnings over eight years.

·        Seven Lean Years: Back in mid-2010 my headline read, “Seven lean years: No recovery till 2016,” a review on Jeremy Grantham’s prediction: “The idea behind ‘seven lean years’ is that it is unrealistic to expect to overcome the several problems facing most developed countries, including the U.S., in fewer than several years.” Grantham’s firm invests $100 billion of retirement funds, he can’t afford mistakes. He warned, expecting a quickie recovery was unrealistic: “The negatives are likely to hamper the global developed economy.”

Warning: Till 2020, expect slow global growth, plus deep austerity

Back in mid-2011 I reported on one of economist Gary Shilling’s scariest ever Insight newsletters. He’s been a respected Forbes columnist for decades, saw a recession starting in 2012. Because “much of the excesses and financial leverage built up in past decades, especially in the financial sector globally and among U.S consumers, remain to be worked off.”

Why? In a large part because of the Fed and Treasury’s failed “attempts to bail out the nearly collapsing U.S. private sector” just made matters worse by focusing on banks not jobs.

Then in one chilling section Shilling summarized his nine key reasons why investors better prepare for “Slow Global Growth in Future Years.” Get it? Not just prepare for a temporary, double-dip recession in 2012. But a deeper depression-style slow-growth likely till the election of 2020.

Seriously, listen closely, and commit Shilling’s “9 Causes of “Slow Global Growth” to memory, along with a 10th one that now seems obvious:

·        Savings vs imports: More and more consumers are shifting from a 25-year borrowing-and-spending binge to a saving spree. This trend will spread across the globe. And American consumers will import less from nations dependent on exports for economic growth.

·        Deleveraging: Financial deleveraging is already reversing economic trends that financed much of the world’s recent new growth.

·        Government spending: Developed countries in Europe and others are moving toward fiscal restraint, spending less.

·        Regulations: Increased government regulations and involvement in major economies worldwide will reduce innovation, increase economic inefficiencies.

·        Commodities: Declining commodity prices will further cut consumer spending by commodity-producing nations across the world.

·        Protectionism: Nationalism and protectionism will also slow, possibly eliminate, economic growth throughout the world.

·        Housing: Excessive inventories and reduced interest from investors will continue to suppress America’s already weak housing market.

·        Deflation: Deflation will cut spending as buyers wait for lower prices, negotiate harder, demand big discounts.

·        Local revenues: State and local governments across America are losing revenues, cutting services.

·        Elections: But perhaps most of all, impacting everything, the extreme, accelerating irrationality driving our angry political wars will further undermine an already stagnant economy, until a 1929-style crash takes down the markets and the economy.