The optimism and goodwill that greeted Barack Obama's swearing-in was palpable in Washington and across the world. Wall Street, however, was concentrating on the economic quagmire he inherits. It knocked 5% off the S&P 500 the worst inauguration day performance ever.
The worst recession since the Second World War...
No wonder. Unemployment is rocketing: last year saw 2.6 million jobs lost, the most since 1945. Consumers, rattled by the ongoing fall in house prices, and constricted by tighter credit, seem finally to have decided to rebuild their tattered savings. December's retail sales were 9.8% down compared to the same month last year, even though petrol prices have plummeted. In short, domestic demand has "collapsed", said Northern Trust. With GDP now contracting at an annual rate of 5%, the US is on track for "the most severe" recession since 1945.
For now, the spotlight is back on the banks, with Bank of America posting its first loss since 1991 and Citigroup losing twice as much as expected. Banks have become reluctant to lend because they "are staring down the twin barrels of a shotgun", said Tony Jackson in the FT. "Old problems of rancid assets remain, and the new ones of recession are kicking in." Nouriel Roubini of New York university estimates that US banks will lose $1.8trn by the end of the crisis; with capital of only $1,400bn, they are "effectively insolvent".
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America is working on a new plan to bolster banks' capital positions and encourage more lending by dealing with the toxic assets on their balance sheets. But it's hard to see banks upping lending significantly given the economic outlook and now that households and companies are cutting back, it's not clear who, if anyone, is going to want to borrow.
...could turn into a slump
The worry now is that the recession could morph into a deflationary slump. Falling prices prompt consumers to spend less in the expectation of even lower prices. That reduces spending, overall demand and prices further a vicious downward cycle. An overall trend towards deleveraging as the economy works off its debt load personal, company and national debt in the US is 350% of GDP is a key element of this cycle. The effects are everywhere consumer prices excluding food and energy have been falling at an annual rate of -0.3% over the past three months, unemployment is set to reach 9% and consumers, shocked by the decline in their disposable income, are likely to spend 2%-3% less every year for the next two to three years, estimates David Rosenberg of Merrill Lynch. So the slack in the economy is going to increase for some time, putting downward pressure on prices. As Capital Economics put it, a "pernicious debt-deflation" looks "dangerously close".
One in six don’t know who will inherit their pension
Review: The Hut, Little Jumby – fun and sun off Antigua
