The "New Normal" and Us
by Jonathan Rosenblum
July 10, 2009
The "New Normal" Economy and Us
Let me make a few things clear at the outset. First, Yated Ne'eman is not seeking to replace the Wall Street Journal as a source of economic news. Second, I am not an economist nor the son of an economist. Indeed I know next to nothing about the dismal science. (My other qualifications for the presidency are available upon request.)
Not that it would make much difference if I were an economist. One of the most astounding things about current worldwide recession is how few of the world's most distinguished economists saw it coming. Robert Samuelson offers two reasons for the profession's failure in this regard: a general downplaying of the importance of financial markets and low interest in economic history, as opposed to beautiful mathematical models. Many economists had succumbed prior to the crash to the illusion that they now possessed all the tools necessary to ensure that there would never be another major economic downturn.
One of the few economists, who did get it right was Nouriel Roubini.
Roubini was born into an Orthodox Iranian Jewish family and has held a number of senior economic positions in the United States government. He is currently a professor of economics at New York University. From 2005 on, Roubini mapped out with startling accuracy the coming crash. His increasingly dire warnings that the U.S. housing bubble would soon burst and drag the American economy down with it earned him the sobriquet "Dr. Doom" from the New York Times.
Fortunately, Roubini is no longer predicting the end of the world as we know it. Unfortunately, he is considerably less optimistic about the short-term recovery of the American economy than many other prognosticators. While the latter see the United States emerging from the current recession towards the end of this year, Roubini forecasts continued negative growth through 2009 and only very feeble growth through 2010. Even after growth resumes, unemployment will continue to rise for some time, at least if the patterns of previous business cycles holds. Thus only in 2011 will unemployment peak.
Roubini also predicts that the recent Wall Street rally will fall into the pattern of bear market rallies, and be followed by another precipitous drop. An old Wall Street saw goes, "A bear market does not end until all the hogs have been slaughtered."
More important, than the timing of the recovery, however, is Roubini's emphasis on the need for a new structure for the American economy. "We've had a model of growth based on over-consumption and lack of savings. And now that model has broken down because we have borrowed too much," he writes. That reliance on easy credit, based in large part on skyrocketing housing prices, fueled the go-go years. As Roubini puts it, "Too much of our human capital was involved in financing the most unproductive form of capital, meaning housing." He foresees another 45% drop in home prices.
Another factor that allowed the United States to go on borrowing and living beyond its means was the world's faith in the dollar, and the vast investment of foreign reserves in United States bonds and Treasure notes. That confidence is ever diminishing as the United States' deficit grows by leaps and bounds to unprecedented heights. The threat of runaway inflation down the road, if all that monetized debt is not successfully soaked up by the Federal Reserve when the recovery commences, makes foreign investors wary of locking themselves into U.S. Treasury notes. Higher corporate tax rates to finance the immense deficit, and the corresponding decline in corporate profits, will also make the United States stock market far less attractive to foreign investors. Inflation triggered by previously unfathomable deficits causes interest rates to rise, which leads in turn to weaker consumption and slower growth rates than we have become accustomed to in recent decades.
Roubini's forecast of an economy considerably different than that most of us have known for the past quarter century was shared by the author of another economic newsletter I recently received from an extremely savvy investor. That newsletter emphasized psychological factors and common sense over mathematical modeling.
Since early 2007, American consumers have suffered a $15 trillion dollar loss in net worth. The impact of that blow has resulted in a massive change in attitudes to spending and saving. In recent decades, American consumers saved little and borrowed much. That borrowing was covered by ever appreciating home value. Now we are witnessing a dramatic reversal of attitudes towards saving. Savings rates are rising rapidly and consumption is down. Government tax rebates meant to stimulate the economy were largely hoarded by taxpayers fearful about the future.
Higher savings rate and reduced consumption, the newsletter predicts will lead to a "new normal" of lower growth rates – the author predicts around 2%, as opposed to the 3.5% prior to the crash. Slower growth means smaller profit margins and lower returns on assets. In particular, risk assets – stocks, high-yield bonds, and commercial and residential real estate – will be far less attractive and riskier.
THE FOREGOING, OF COURSE, is pure speculation, and moreover speculation being quoted by one who has no independent expertise with which to evaluate the information. But if the "new normal" foreseen by Roubini and the newsletter does materialize, it will have immense consequences for the Torah community – not all of them negative. For years many in our community have been living lives of conspicuous consumption well beyond their means. To the extent that the reduction in easy credit forces retrenchment and living within one's means, it can only be beneficial from a ruchnios point of view.
Other consequences, however, will be much harder to deal with. The vast network of educational and chesed organizations created in the last 20-25 years, in both the United States and Israel, has been largely supported by those who have acquired vast wealth in relatively short spans of time. Real estate and stocks were two of the biggest sources of that wealth, and they are precisely the areas predicted to be most sharply reduced in the "new normal." Many individuals will continue to acquire great wealth in these areas, but their numbers will dwindle, and the size of those fortunes are likely to be smaller and the period needed to obtain them greater.
These areas, particularly real estate, also happen to be ones in which guts and the ability to win the confidence of lenders are far more important than a formal education. As a Satmar Chassid once told me, "Education is fine for earning a living, but irrelevant if you want to make serious money." But as the numbers of those making serious money declines, those merely making a living will have to bear a larger responsibility for communal institutions, including those in which their own children learn. Those seeking jobs in which to earn a living will find themselves entering a job market in which there are fewer jobs and thus every more intense competition for each available job. Resumes, including education, will be ever more crucial in many sectors of that job market.
If we are worthy, Hashem has the means to take care of all our needs, communal and private. Who could have predicted how so many post-war immigrants who arrived in America with nothing to their names and lacking any command of English would make fortunes manufacturing items about which they knew nothing – e.g., costume jewelry, men's sportwear – for people about whom they knew little? Or that their children would earn even greater fortunes in real estate? Yet it happened. And it will happen in new unexpected ways if Hashem wills.
But at the same time, it behooves us as a community to begin thinking seriously about some of the implications of the new economy that may emerge from the current crash and to begin planning for an uncertain future.