Gluskin Sheff’s Rosenberg: Aftershocks From 2008 Still Rattle Economy

Thursday, 02 Aug 2012 08:26 AM

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The U.S. economy suffers today from the aftershocks of the 2008 meltdown, which was the financial equivalent of a major earthquake, said David Rosenberg, chief economist and strategist at Gluskin Sheff.

Those aftershocks are hampering broader economic recovery.

"This wealth collapse was the equivalent of an earthquake measuring 7 or 8 on the Richter scale, and earthquakes are followed by aftershocks, which is exactly what has provided the biggest hurdle for the post-recession healing phase we have been in for the past three years," Rosenberg wrote in a Financial Times commentary.

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

Median household net worth collapsed 39 percent from 2007 to 2010, which is a "depression statistic," Rosenberg said, citing Federal Reserve data.

Baby boomers nearing retirement are adjusting to lower standards of living, while consumers are tightening their belts and are demanding less, opening the door to a period of ultra-low interest rates, bond yields and returns in capital markets, Rosenberg added.

"So the era of the aftershock is what we are in and what we will probably stay in for years to come," Rosenberg said.

Other experts have pointed out that the U.S. economy risks contraction, especially once the Fed's stimulus money drains from the financial system and no longer props up the economy and its stock markets.

"The gravity of weaker growth will most likely overcome the levitational effect on equity prices from more quantitative easing, particularly given that equity valuations today are not as depressed as they were in 2009 or 2010," New York University economist Nouriel Roubini wrote in a recent Project Syndicate column. Quantitative easing is a Fed stimulus tool whereby the U.S. central bank buy bonds from banks, flooding them with liquidity to encourage investing and job demand.

"Indeed, growth in earnings and profits is now running out of steam, as the effect of weak demand on top-line revenues takes a toll on bottom-line margins and profitability," he added.

"A significant equity-price correction could, in fact, be the force that in 2013 tips the U.S. economy into outright contraction. And if the U.S. (still the world’s largest economy) starts to sneeze again, the rest of the world — its immunity already weakened by Europe’s malaise and emerging countries’ slowdown — will catch pneumonia."

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.



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