Market Crash Exposes the Wishful U.S. Economic "Recovery"

Last Updated Aug 8, 2011 3:09 PM EDT

For the past two years we've been in a "recovery" unseen except on Wall Street. It was built on the hope that all the unresolved issues from the mortgage meltdown would go away if we ignored them long enough. Now the reality of the economy has finally caught up with the markets.

The recession caused by the collapse of the mortgage-backed-assets ponzi scheme ended in June of 2009. Technically. That's when the U.S. GDP stopped shrinking and started growing. When that happened business and government declared a recovery. The chattering classes shouted the word like "Hallelujah" at a Baptist tent revival. But while religious fervor may lead to spiritual salvation it has no such effect on the economy.

The dark lining of the "recovery"
Oh, there were some good developments. Corporate profits and executive pay both increased, which was enough to make the stock markets go up. Unfortunately, profits based on cost-cutting measures are not enough something you can build on. Evidence of this was and is everywhere:

  • Companies and banks have not started investing or lending despite all sorts of government incentives to do so and are sitting on record amounts of cash. This is a smart thing to do if you're a company expecting bad economic times or a bank very concerned about its debt exposure.
  • The U-6 unemployment rate, which measures all those unemployed and underemployed, was at 15.4 percent in January of 2009. Today it is 16.3 percent.
  • The average amount of time it takes to find a new job: Nine months.
These and others have all persisted or increased because the problems that caused the economic meltdown remain unresolved. The difference between the outstanding loans and the shrinking value of the collateral assets must be accounted for in someway. While banks and the government have tried all sorts of accounting tricks in an attempt to make this not be so they have failed.

Domino effect: Europe, the U.S. -- then China
For a while, investors were willing to help the U.S. paper over this issue. Now insolvency is engulfing Eurozone nations. The reality of it there is making it increasingly hard to ignore the reality of it here. As a result, a lot of people now are trying to do as business did and build substantial cash reserves. Hence the markets for the past week. Should the desire for cash begin to expose all the fundamental problems in China's economy, there's is no telling how bad this will get.

It's fascinating to watch folks offer various explanation for the market convulsions that have nothing to do with this basic issue. A WSJ headline reads "Stocks Slide in Downgrade Backlash" as if the U.S. credit rating was somehow at fault. On the same page is "Treasurys Rally: Treasury bonds proved again that they are still a haven for global investors." If the downgrade really mattered, then Treasury yields would be going up, not down. As my BNET colleague Alain Sherter points out, the downgrade is far worse news for the EU than for the U.S.


  • Constantine von Hoffman On Twitter»

    Constantine von Hoffman is a freelance writer and writing coach. His work has appeared in outlets such as Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald,, CSO, and Boston Magazine.