Hello Everyone,

Last Thursday I had the pleasure of attending a fundraiser in Chicago hosted by President Obama for Senate candidate Alexi Giannoulias. As he always does, when the President shook my hand, his first words were “How’s Penny?” Penny Sebring is my memorable wife, for those few of you who don’t know.

I awoke the following morning with the predictable regret that all of us have felt – what I “should have said” to the President in the few minutes he sat across the table from me. (I talk regularly with some of his top aides, but not to him these days.)

I should have simply said, “Mr. President, you are doing a remarkable job. Thank you.” As many of you know, that is how I have consistently felt. It is the counter narrative to prevailing conventional wisdom. It is the antidote to the social contagion of the negativism of many, the obstructionism of the organized opposition, and even the pickiness of some of his long-term backers.


As my long-time readers also know, I find athletic analogies useful, hackneyed though they may seem. With this president, we have witnessed a classic swing in “momentum” – the sportscasters’ favorite explanation for most every change of fortune during a game. It is the

mysterious social contagion that wafts through the stands, silencing the crowd when its team is losing ground.

Such is the President’s current predicament. He inherited the immensely complicated and difficult conditions that inevitably led to high unemployment – conditions that have been decades in the making – stretching over multiple administrations.

When thinking about the economy, markets, and politics, we all know that there are multiple factors that influence outcomes and establishing causation is impossible, despite our thirst for definitive answers.

Therefore, it seems to me that one important factor, but not the only one, leading to slow growth and high unemployment is our society’s pervasive, deep, and long-standing “addiction to debt,” which I’ve written extensively about before. Consumers are now engaged in the healthy process of shedding debt and building savings. It will take time. For this reason, among others, unemployment will come down only slowly, regardless of insistent demands to the contrary.

I did say just that to the President last week. He agreed. But, no politician dare say so in public. I wish he would.

We permitted the economic underbrush, to switch metaphors, to grow dry and unattended for decades. The sub-prime mortgage bubble was simply the careless campfire that ignited the conflagration. No matter how “angry” we are, nor how characteristically impatient we are, it simply takes time for healthy vegetation to grow back. Weeds grow quickly. Trees take time.

Incessant and hypocritical demands by “small government” advocates that the federal government “create jobs” – while simultaneously “keeping its hands off” our free enterprise system, avoiding further stimulus, and reducing the public debt – cannot accelerate this process. Sorry.

So, the prevailing highly contagious narrative – that we should be “disappointed” by or even down right “angry” about President Obama’s “performance” – holds little sway with me.

I would speculate that the momentum in this game will shift – and the cheers of the crowd that inevitably accompany it will return – only when the unemployment rate takes a decided turn for the better. I’ve pointed out before that President Reagan faced low approval ratings when unemployment neared 11% in the early 1980s. No matter what the politically-active economists or the legions of pundits say, no one can tell when the unemployment rate will be materially lower.

And, there is precious little the federal government, regardless the party or non-party in power, can do to make it happen tomorrow or to sustain it. May I have the temerity to add that there is something in me that hopes – however faintly – that the House is returned to Republican control, with Tea Party backing, in November. Perhaps only then will the electorate come to understand, in time for the 2012 elections, that no party can perform magic.

Uncertainty and Savings

There has been a good deal of talk lately about “uncertainty” as a root cause of the slow recovery. The implication is that there are periods of time where there is economic “certainty.” Or, that certainty is a normal state. In August, for instance, Senator Richard C. Shelby, Republican of Alabama, blocked recent-Nobel-laureate Professor Peter A. Diamond’s nomination to the Federal Reserve board, saying, “I do not believe that the current environment of uncertainty would benefit from policy decisions made by board members who are learning on the job.” Professor Diamond’s qualifications aside, what catches my eye is the phrase I’ve underlined. Senator Shelby evidently thinks there are times when we live in an environment of certainty.

As our son, Peter, who ably manages investments for our family and others, points out – many of those who single out uncertainty as today’s economic villain mean that they want certain policies that are favorable to them, or what I would call “selective certainty.” For some, certainty in tax policy only means maintaining the tax cuts for the top 2%, not letting them expire. Of course, letting them expire would also produce “certainty” – at least until tax rates change again, which they certainly will.

The important point here is that all aspects of our lives, unfortunately, are inherently uncertain – and that’s why we all need to save. We have all been told incessantly that we have to save for “retirement and our kids’ education.” We are seldom told that we also have to save purely for the “if in life,” to borrow the apt slogan of a large insurance company. We are currently relearning this lesson, the hard way.

It is understandable how we got in this financial pickle. We lived through about twenty-five years of nearly-uninterrupted prosperity. And, every time there was a blip, we bounced back quickly, frequently aided and abetted by bi-partisan or non-partisan government policies demanded by impatient and starry-eye voters. This created the illusion of certainty. Ever onward and upward. As a result, we saw little reason to save and saw little risk in borrowing.

Let’s take a look at recent trends in consumer debt and consumer savings rates. That’s where we find good news. Longer term, but not immediately. Since consumer spending accounts for as much as 70% of GDP, decreasing debt and increasing savings hinder consumption and dampen growth. Since we seem to have been living beyond our collective means for a very long time, we have to return to earth sometime. And, that time appears to be now – having been triggered by the 2008 financial crisis.

Consumer Debt

Revolving consumer credit (virtually all incurred via credit cards) climbed rapidly over the past four decades. From 1968 to its peak in 2008, it grew at almost an 18% average annual growth rate, from about $1 billion to about $990 billion. This is a staggeringly high rate during a period when the other principal factors that could affect those totals grew much more slowly; annual inflation averaged less than 5% and the population grew at about a 1% rate during that time.

It is also interesting to examine how relentless the growth in this proxy for credit card debt has been. Over these 40 years, from 1968 to 2008, such debt has declined for 3 or more consecutive months only once every couple of years. Only once – in 1980 during our last major financial crisis – did it decline longer – for 7 straight months. But, things have been very different since 2008. From its peak in December of that year, the aggregates have declined 19 of the last 20 months, through August 2010, the latest numbers available.

Consumers have started to return to sanity – willingly or not.


In a similar vein, Americans have begun to rebuild their savings after a nearly three-decade decline.

As the following chart indicates, personal savings rates were negative during the Great Depression, spiked during World War II, were in the 7-12% range for much of the next 30 years, then began a long descent after the severe recession ended in the early 1980s and the long period of seeming prosperity began, returning to negative territory in 2005.






The next chart makes the point even more starkly.








In the last couple of years since the crisis, savings rates have predictably made a major turnaround. In the second quarter of this year, they approached 6%.

These two trends – less borrowing and more saving – are “bad” for the economy – in the short term. But, they have to be healthy for it in the intermediate to long term.

And, even if we were to quarrel with that, there isn’t much any president or any congress can do about it. These forces are just too great, the factors too complicated to be long controlled by mere mortals. We’ll just have to be patient – as un-American as that may seem.

When the economy does better, I would suspect that, miraculously, so will President Obama’s approval ratings. He will get his momentum back.

Please, as always, pass it on.


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