Get ready for a decade of joblessness. Unemployment in the US is going to stay high, a trend that economist David Levy, chairman of the Jerome Levy Forecasting Center, calls the "New Abnormal".
Let's get this in perspective. In the US, more than seven million jobs have vanished and they're not coming back. Economists are saying that while unemployment is now at 10%, it may dip down to 8% over the next decade. Putting it another way, it will be another 10 years before unemployment returns to acceptable levels.
We are seeing a vicious cycle. Without more jobs, US consumers will not increase their spending. Without that spending, businesses will not start hiring. And then there are the banks. Small and midsize businesses can't get bank loans. That impedes their expansion plans, constrains overall economic growth and stops them hiring.
This means that while there might be a recovery of sorts, it won't feel like one for many Americans. And that's why the share market rally has to be taken with caution. The stock market does not reflect what's going on in the real economy. The main reason the share market has continued to rise since March, with nothing in the real world to support it until recently, is that a lot of the Government's rescue money never made it through the pipelines to the borrowing public but simply went into stocks. The time will come when the money is actually needed in the real economy, and when it makes its exit the cards will come tumbling down. The effect will be exacerbated by investors seeing how feeble the recovery is and realizing how overbought stocks are. And another market crash would be just the trigger needed to set off another economic downturn. Things, though, are already so bad for a lot of Americans that they'd hardly be able to tell the difference.
It's a point taken up by economist and former Clinton main man Robert Reich in his blog.
"If Wall Street is back on top, the everyday lives of large numbers of Americans continue to be subject to overwhelming trauma, chaos and disruption,'' Reich says. "It is commonplace among policymakers to fervently and sincerely believe that Wall Street's financial health is not only a precondition for a prosperous real economy but that when the former thrives, the latter will necessarily follow. Few fictions of modern economic life are more assiduously defended than the central importance of the Street to the well-being of the rest of us, as has been proved in 2009. Inhabitants of the real economy are dependent on the financial economy to borrow money. But their overwhelming reliance on Wall Street is a relatively recent phenomenon. Back when middle-class Americans earned enough to be able to save more of their incomes, they borrowed from one another, largely through local and regional banks. Small businesses also did. It's easy to understand economic policymakers being seduced by the great flows of wealth created among Wall Streeters, from whom they invariably seek advice. One of the basic assumptions of capitalism is that anyone paid huge sums of money must be very smart. But if 2009 has proved anything, it's that the bailout of Wall Street didn't trickle down to Main Street. Mortgage delinquencies continue to rise. Small businesses can't get credit. And people everywhere, it seems, are worried about losing their jobs. Wall Street is the only place where money is flowing and pay is escalating. Top executives and traders on the Street will soon be splitting about $25 billion in bonuses (despite Goldman Sachs' decision, made with an eye toward public relations, to defer bonuses for its 30 top players)."
The bottom line is that 2010 will not be much better, not if you live in the real economy. There is no demand, and without demand, there can be no real recovery.
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