David Rosenberg, Gluskin Sheff's star analyst, was early getting on the "frugality" bandwagon. The theory is that (a) this recession is different because it's driven by consumers, and to a lesser extent business, frantically "deleveraging," or cutting debt, after two decades of living beyond their means. A more typical, and briefer, economic downturn is one driven by too much inventory held by corporations. In that more common scenario, times get better once retailers have bare shelves, developers finally have rented the last square feet of excess office space, and manufacturers resume orders for raw materials they now longer have in surplus.
We don't buy the new "frugality ethic" because it's counter to a core impulse among residents of the world's biggest consumer economy. It's not just that old joke that shopping is America's #1 cure for depression, although there is something to that. It's that Americans are born acquisitors. They are fixated with "new" and with having more. Yes, the U.S. savings rate has miraculously emerged from negative territory and may well move from its currrent 5 per cent or so to the astonishing 12 per cent many forecasters see. But with an aging U.S. consumer auto fleet, Steve Jobs and RIM cranking out new must-have status symbol gadgets at an unrelenting pace, global airlines hankering for more fuel-efficient Airbus superjumbos, and the lion's share of Obama's unprecedented $787-billion (U.S.) stimulus package not kicking in until next year (liberals complained it was "backloaded," and Obama's poll numbers on economic management are sliding as a consequence), we can't help believing there will be robust times ahead. And that today's unusual frugality is not, as some are now saying, the "new normal."
Another current canard is that credit is still almost impossible to come by. Yet even in the peak of the global banking crisis, last fall, it was also evident that a lot of traditional borrowers did not want money, even with central bankers pushing their key lending rates practically to zero. Which strongly suggests corporate borrowers saw the consumer-economy collapse coming, triggered by the bursting of the epic U.S. housing bubble, and simply stopped expanding until consumers were healthy again.
In today's gloomy Globe report on the third straight month of declining bank lending, we see a silver lining a mile wide:
"Demand for credit is down because Canadian companies are sitting on very high inventories and are trying to sell them before taking out loans and ordering new products, said Toronto-Dominion Bank economist Grant Bishop.
“'This is consistent with the inventory pressures faced by manufacturers and wholesalers, and the ongoing rapid reductions in inventories,” he wrote in a note.
"While banks have tightened lending standards and raised prices on loans, the numbers appear to show something that will please policy makers: The evidence suggests the drop in demand for loans is a story not so much of lack of access to credit but lack of demand.
"In fact, bank lending to Canadian households rose 0.9 per cent in May from April, to $984.1-billion, as Canadians took out more mortgages and used lines of credit and credit cards.
"And while companies are cutting back on bank borrowing, they are making up for it by selling vast numbers of bonds into a newly welcoming market. The value of corporate bonds outstanding increased by $7.5-billion in May, a record advance, Mr. Bishop noted."
"Frugal" Canadian consumers are borrowing again, which means their more spendthrift U.S. cousins won't be far behind. And as for the "credit drought," business has found no difficulty raising billions of dollars in the bond market. Recall that North American corporations came into this recession with an atypical low level of debt. So any resumption in corporate borrowing - from banks or the bond market - along with cash hoarded from slashing dividends and surprising success in tapping a buoyant stock market these past few months, will be applied not to shoring up strong balance sheets but to expansion, new product development, and eventually to hiring - always the lagging indicator in a recession.
If the mid-term outlook is as bleak as consensus opinion holds, why the current upswing in M&A activity - huge deals like Xtrata's $68-billion (U.S.) offer for Anglo American? And why would software giant Oracle, a bellwether, be turning in profits that beat analysts' estimates and boasting record profit margins?
Oracle executives were more optimistic on Tuesday, saying customers are telling the company they need to move forward in implementing new projects to keep their businesses running.
For those begging to differ, address correspondence to Pollyanna, c/o Emerald City. I've been wrong before.
As we were saying
Howard Dean, on MSNBC's Countdown said, "One of the problems in the Senate is it becomes about the Senate instead of what's good for the country. The idea that 40 members of a determined minority can obstruct what 72% of Americans want is ridiculous. ... A health insurance plan without a public health insurance option is not health care reform."
Meanwhile, a major public-policy group claims inclusion of a Canadian-style government-administered health insurance option, as Dean and the Obama administration seek, would save Uncle Sam $1.8 trillion (U.S.) more than rival reform proposals.
Stuart Carlson, Milwaukee Sentinel, Universal Press Syndicate.
David Letterman: "President Barack Obama's approval rating" of "61%, which I thought was staggeringly high, has now dropped to 56%. ... So don't kid yourselves. Hillary could still win this thing."
For the purposes of this blog, the inception of the Great Recession in the U.S., the epicentre of the crisis, is taken as the start date for the global slump. The U.S. has been in recession since December 2007.