John Rubino’s Optimism

John Rubino

John Rubino has an excellent post dealing with three major problems that are still unresolved in our economy. These problems, in my opinion, ensure that our economic condition will drag on for years, or collapse into another Great Depression. My guess is that the latter is the more likely outcome.

His second problem, dealing with zombie consumers, is the one most likely to trouble frantic Keynesians. As described by Mr. Rubino:

And the economy is likely to be stuck with at best subpar growth until the private sector’s deleveraging, or debt-shedding, process is complete. In Japan, that took the better part of 15 years. It was no quicker during the Great Depression. Certainly, households have made some progress lately, but this still looks to be in its early stages. While debt as a percentage of after-tax income has fallen from its peak, it remained at year end at about 120%—well above the 89% it averaged in the 1990s.

The Keynesian system has no role for debt in its simplistic model, a primary reason why no Keynesian saw the economic crisis coming. Likewise, they have an overemphasis on the the importance of consumption in economic growth and well-being,. Rubino’s quote above is true, but devastating to those of Keynesian leanings. Instead or recognizing the debt problem as the crucial factor, Keynesians believed it unimportant or at least of secondary importance to consumption. Thus, they believe the solution to economic recovery is to increase consumption. Hence governmental policies of stimulus and more easy credit and debt — more of the poison that caused the illness.

Where I disagree with Mr. Rubino is with his benchmark from the 1990s. His suggested benchmark was never reached before the 1990s. Hence, I would argue it is no benchmark in the sense of being proper, normal or sustainable. A century of US history suggests that the 1990s were wildly out of line with respect to prior levels of consumer debt.  The 1990s appeared sustainable only because the credit bubble was still expanding. Debt supported life styles and spending that could not be supported by incomes. The still-growing credit bubble also enabled the unsustainable debt levels of the 1990s to be sustained.

There is no historical basis for believing that the 1990s consumer debt levels were normal. Historical relationships between consumer debt and income suggests that the 1990s represented excesses.  Mr. Rubino is not optimistic regarding our future. Yet I think he is regarding the necessary reduction in debt levels. His belief that consumer debt is only 30% from sustainable levels is questionable.

Nevertheless, his website is one of my favorites as is his analysis.

Tags: Credit Bubble, John Rubino, Keynesians