I think I have heard this song before. In fact, I have sung it. The choir is ready for the chorus, but the soloists keep coming up with more verses.
Reality is still real, but the reality is that a lot of behind-the-scenes manipulation has taken place to keep the Big One at bay. People who have dropped out of the labor force are living on the federal government's ability to borrow money. That is what has dropped the number of people actively looking for work to close to 6%. Shale oil and fracking have stimulated the energy sector, created fear in the Saudis and OPEC, and driven down the price of gasoline. No one really anticipated how big a development that would be four years ago.
The economy is like a patient who can't breathe on his own, but he is still alive. Those of us standing around the bed are not sure how much longer this can go on. Salerno shows a chart of U.S. Household Net Worth as a percent of GDP -- that is, the ratio of Household Net Worth to income, which is at an all-time high of around 475%. Most of this is asset inflation from the stock market and home prices. People who own their homes and have money invested in equities may well "feel" wealthy. Salerno is skeptical:
In sum, I do not expect that the ratio will rise much above 500 percent — Americans have just not saved enough since 1995 to have increased their real wealth from 3.5 times to 5 times their annual income. Nor is there much reason to expect a plateau anywhere near the current level. Once interest rates begin to rise — and rise they must, whether as a result of Fed policy or not — the end of the asset price inflation will be at hand. The result will be another financial crisis and accompanying recession. The Fed and the Administration will no doubt attempt to bail and stimulate their way out but given the still dangerously enervated state of the financial system and the real economy, it will be like dosing a horse that has already been overdosed to death. Thus my forecast for the U.S. economy one year to two years out echoes that of Clubber Lang, the villain in the movie Rocky III. When questioned about his forecast for the forthcoming fight against Rocky, Lang replied, “Pain.”Of course, the Krugmans of the world will tell the gloom-and-doomers that they have been wrong before. We know that. We also know they only have to be right once to be right.