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Structural Economic Problems More Worrying than Cyclical Ones

12:00 AM, Aug 13, 2011 • By IRWIN M. STELZER
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For many companies, this debt mountain is no abstraction, and the conversion of Uncle Sugar into Uncle Scrooge is a harsh reality. The government is a key customer of defense firms such as Lockheed Martin, health care firms such as Humana, equipment suppliers such as Dell—to mention a few on the list compiled by the Wall Street Journal. They and their shareholders will have to look elsewhere for growth. And those shareholders—the “rich”—also have to worry that the president is intent on raising their taxes. They just might make the second half of the year less happy than the first for Ralph Lauren, Tiffany, and other high-end employers of swarms of retail clerks. This will have a profound effect on the retail sector, which has been heavily dependent for much of its recent growth on sales at the luxury end. Indeed, we are witnessing the end of credit-fuelled consumerism. Fed chairman Ben Bernanke’s decision to keep interest rates low is putting pressure on bank profits, pressure they can do without as they confront the new risk of dealing with European banks whose books are loaded with IOUs from Greece, Spain, Italy, Portugal, and other not-so-solid borrowers, and whose reluctance to lend to each other is causing scary talk of a 2008-style freeze-up in interbank lending. Even if that fear proves unfounded, shrinking profits and new regulations will reduce the banks’ ability to lend—the words “credit crunch” are again heard in the land, especially from small businesses.

Meanwhile, consumers no longer can be counted on to borrow and spend as they did in past decades. Yesterday’s report that the Thomson Reuters/University of Michigan survey of consumer sentiment is at its lowest level since May 1980 is a warning shot across the bow of retailers who are counting on a big back to school season, and wondering how much to spend on inventory in advance of the Christmas shopping season. Combine that pessimism with consumers’ need to restore their balance sheets to something approaching pre-binge levels, and it is not unreasonable to assume that when the recovery comes it will not be consumer led. 

These are only a few of the underlying trends that will in the end matter more than share price gyrations: A mismatch of the unemployed and available jobs, the withdrawal of government purchasing power as a source of growth, and banks less able to lend and consumers less willing and able to borrow. These will be with us long after calm replaces panic on the world’s stock markets.

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