The New Normal: Dire Economic Straits


An interesting Bloomberg article by Sree Bhaktavatsalam suggests that Wall Street’s reflexive cheerleading is finally melting off as investors embrace painful truths, like the fact that the “new normal” is very slow economic growth and high unemployment as the world weans itself from its debt addiction.

That means we’re not going to see a sustained period of annual growth in the 3 percent range as we have for most of the past 30 years. Those halcyon days are gone. We’re going to spend the next decade sorting through the economic disaster that occurred during the failed presidency of George W. Bush.

Bill Gross, head of Pacific Investment Management Co. (PIMCO), has been warning of tepid growth and high unemployment all along and has been roundly derided for doing so by cheerleaders as diverse as former White House economic adviser Lawrence Summers and billionaire money manager Kenneth Fisher. Gross founded PIMCO, which has more than $1 trillion of securities under management, including the Total Return Fund, which was the world’s largest mutual fund at the end of 2010 with assets of $240.7 billion.

The new normal makes you really wonder what would have happened to the U.S. economy if not for the costly stimulus plans the Federal Reserve embraced during the 18-month-long recession that ended in June 2009.

It’s becoming more and more clear that the Fed averted a depressionGDP Chart at the end of 2007, by deferring some economic pain in exchange for the double-dip recession that’s now bearing down on us. It’s also becoming clear that automation and low-wage nations like China have destroyed jobs in the developed world and stolen them at a unprecedented pace the past decade, leaving many nations with some very unhappy and idle citizens.

They’re rioting now in Greece and England.

The Fed hopes to keep the economy’s head above water by holding the federal funds target rate – the nation’s benchmark lending rate – at a record low through mid-2013.  The current target is zero to 25 basis points – there are 100 basis points in a single percentage point.

The big problem with that low rate is that it leaves the Fed with no where to go if the economy needs more support. The Fed is running out of options and the Fortune 500 is still sitting on its piles of cash instead of putting people to work.

What’s the moral of the billstory for middle-class families of all this?

The lesson is that we need to be very wary of political candidates who were born rich and have never lived a day on ths planet without a financial safety net. It’s pretty clear that Bush was cavalier about the working-class suffering his policies created and the resulting economic instability.

If he had worked even one real day his entire life or known what it was like to go to bed hungry and troubled by the uncertainty of not knowing how he was going to buy food or pay the rent, we might not be in this mess.

How’s that for mission accomplished?