In 2011, we’ve already experienced 11 bank failures, and while this is not an alarming number, if it continues through the year, we’ll see close to 140 more bank failures. Those figures are disconcerting, as they reflect the continued inability of our banks to survive the present economic crisis.
While some economists view positive signs in economic data as indications of a cure in progress, we take a different view.
To demonstrate, let’s look at the reporting of AOL, which recently posted increased net profits, with greatly reduced revenues. Clearly, this is evidence of managerial decisions to cut costs, trim expenses and reduce spending, resulting in an accounting plus, but a sales and marketing decline, a condition faced by most of the nation’s companies today.
This voodoo reporting, while beneficial for purposes of Wall Street and raising the stock price, means, ultimately, that the American public continues to retract its spending, cutting expenses in fear of loss of employment. As the public holds back in spending, we will continue seeing a retraction of manufacturing. Presently, companies are building inventory, but that too is a case of mystery numbers. For much of 2009 and 2010, companies held back on production, laying of thousands of workers. Now, needing inventory to sell, they’re producing smaller quantities, but reporting increases, again, to make the company look positive in bad times.
While many believe the economy is stabilizing, we should look to the massive increases in commodity costs, with gasoline over $3 a gallon on average, and average food costs increased over 23%, the public is suffering. Beef, for example, has risen 97% in costs, making it very difficult for the American public to purchase this stable of the American diet.
So where is this going? Well, our concern is that the economy is poised on a hair trigger, and that the slightest little event, whether domestic or international, could cause a collapse. We, as economists and consultants, continue to view the economy as being in a technical state of Depression; a call we made in 2007. But other economists disagree.
In fairness, they may have a point. However, their view of positive growth seems poised to reverse, and perched upon the edge of a cliff. If the economy does recover, unimpeded, we’ll still see stagnant sales for perhaps as long as a decade.
For true recovery of the economy, there must be a constant, broad flow of funds into the banking system from a functional securitization market. That remains low, down to $110Bn from $750Bn only three years before. Until that market is repaired and confidence restored, credit will remain tight and investors will hoard cash and precious metals or other assets. Without that flow of funds, jobs are not created as small companies will not get started.
Our outlook is not pessimistic. In fact, we see the glass half full. The problem for us is there’s so much more to do in order to fill the glass. Now let’s get started!