Factors Aligning Against the Boom Cycle

5. A Growing Schism Between the Haves and Have Nots

The plight of the economically important lower- and middle-income consumer has worsened considerably over the last five years. This reflects sluggish job growth, nascent inflationary pressures, and limited growth in real wages. In addition, tax policy has favored the well-to-do. This has accelerated the decline in the relative position and the overall economic role for the low- and middle-income strata.

6. The Consumer Is Spent Up, Not Pent Up

Responding to an unprecedented loosening of monetary policy, consumer installment and mortgage debt climbed ever higher during the last recession. This happened for the first time in modern economic history. Durable expenditures as a percentage of GDP have never been higher; for example, housing ownership has never been as broad. As a result, the debt-to-disposable income has risen by almost 50% over the last nine years (to 132%).

7. The Twin Deficits of Destruction Pose Structural Problems

The current account and trade deficits are unprecedented in size, and this limits the ability of our government to engineer a recovery through fiscal means. Ongoing geopolitical instability translates into large and protracted financial demands, and this will reactivate the debate regarding guns and butter.

In summary, monetary and fiscal policy has a limited ability to revive the economy as it has in the past. In addition, there are no asset classes that are likely to produce a new wealth effect for consumers.

This is particularly troubling given the massive twin deficits and overextended U.S. consumer. Over the next several years, aggressive monetary and fiscal actions would be required to catalyze lackluster growth. If these tools were used to the degree that is necessary, inflation forces would begin to percolate and bubble to the surface, leading to a vortex of blahflation -- a period of blah economic growth (slightly above stagnating growth) coupled with rising inflation.

The U.S. is addicted to easy credit, low interest rates, foreign capital and federal deficits. Rising prices for stocks and housing have masked an unhealthy consumer that spends too much and saves too little. The U.S. economy is like a drug addict who needs ever stronger doses to achieve a high and the financial system now needs dangerous does of stimulus just to keep growing. Withdrawal will be unpleasant, and risks either recession or inflation.