'Green Shoots' of Recovery? Don't Fall for the Media's Economic Triumphalism

By Joshua Holland, AlterNet. Posted June 22, 2009.

And there are ominous signs that the worst is yet to come. Most disturbing is the "shadow inventory" of foreclosed homes that are not on the market, either because investors are holding out for better times or, more commonly, because banks don't want to take losses on their balance sheets, as they must do when a sale is made at a loss.

The Christian Science Monitor notes that "only 30 percent of foreclosed homes are currently on the market, meaning that some 500,000 sit vacant across the country, part of a vast 'phantom inventory' that the market has yet to grapple with."   

As if that weren't enough, "option ARM" loans -- with very low interest rates for the first few years which then "reset" higher -- were popular during the boom. People figured they'd score a place, hold onto it for a few years and then have no trouble selling it down the road for a handy profit. But now many of those homeowners are unable to sell, and a million of them will face steep increases in their monthly payments over the next four years -- with about 750,000 resetting in the next two years alone. Susan Wachter, a professor of real estate finance at the Wharton School of Business, told Bloomberg News that as rates reset, it "will drive up the foreclosure supply, undermining the recovery in the housing market. … The option ARMs will be part of the reason that the path to recovery will be long and slow."   

Other Shoes to Drop  

Gas Prices:  

They're up by more than 60 percent since the end of 2008, and it's likely to get worse. Crude oil prices have doubled during the same period, and the cost of refined gasoline appears to be lagging behind that of crude oil because demand has been low -- down globally by 2.6 million barrels per day over last year -- and oil stocks are high. As the economy starts chugging along again, demand will increase, and prices are likely to continue to rise. Most analysts expect the price of crude oil to increase by as much as 40 percent (from around $70 per barrel now) over the next year. The New York Times reported that "the national jump in prices, far larger than the normal seasonal increase, is pulling billions of dollars from the pockets of drivers. It threatens to curtail a modest recovery in consumer spending on items like apparel and electronics."  

Risk of Inflation:  

So far, firms and households have stopped buying, and that has kept inflation in check even as the Fed and other countries' central banks are pumping money into the system.  But, according to Nouriel Roubini, "if central banks don't find a clear exit strategy from very easy monetary policies that have led to the doubling or tripling of the monetary base in the U.S. alone, eventually inflation and/or another dangerous asset and credit bubble will ensue when the global economy gets out of this severe recession" (the "monetary base" is the amount of cash in circulation combined with commercial banks' reserves at a given point in time).   

The amount of public debt has gone through the roof and will continue to do so in the foreseeable future. Deficit spending is necessary when consumers and businesses tighten their purse strings, but there are consequences -- spiraling public debt. Policymakers may be tempted to "inflate their way" out of the problem -- inflation decreases the real value of the dollars one owes to other parties.

Krugman dismisses fears of inflation as ideologically grounded fearmongering, noting that in past recessions policymakers have deemed the strategy too painful to pursue. But as Roubini notes, "Inflation may indeed become the path of least resistance for policymakers, as it is easier to run the printing presses and cause inflation than it is to implement politically difficult tax increases or spending cuts."  

Rising Interest Rates:  

So far, fears of a massive run away from the dollar as the world's reserve currency or of foreign investors fleeing the U.S. market appear to be overstated. "Talk that foreign central banks will diversify out of their dollar and Treasury holdings is so far just talk," Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi, told Bloomberg News. "The worst financial crisis since the Great Depression is still ongoing, and foreign investors and central banks still have a safe haven demand for U.S. Treasuries."  

See more stories tagged with: green shoots

Joshua Holland is an editor and senior writer at AlterNet.

Liked this story? Get top stories in your inbox each week from AlterNet! Sign up now »