Now that Wall Street is drinking the kool aid of recovery and dreaming of glory times past, Main Street and Joe American would be wise to avoid the party. Yes, the worst of the recession is probably behind us, but that doesn’t mean we’re on the fast track back to where we were economically.
The US has collectively lost $13 trillion of wealth in the last two years, but much of that wealth was created on artificially cheap capital. If capital and risk had been priced properly, without the government artificially setting the interest rates too low (thanks Greenspan!) and the over leveraged speculators manipulating prices, the economic bubble would not have occurred.
Without the bubble, real estate would have followed long-term trends and grown in value somewhere between 2%-5% per year. According to some respectable and mostly reliable economists, it may take at least 10 to 15 years for housing in some markets to reach the prices seen a few years ago, which coincidentally enough, is right in line with the traditional growth rate.
The economic hangover we’ve collectively felt the last two years is from several years of drinking too much cheap capital, leading us to believe our economy is stronger and better looking than it actually is. So what does this mean? It means, unless we get drunk again on another cheap bottle of capital and over leverage ourselves, economic growth is going to closely match the rate of inflation plus population growth (the historical growth rate since 1945).
What we’ve been experiencing is a correction (i.e. sobering up) to normal valuations/prices based on historical trends. Therefore a recovery will only be a return to growth in the economy of an annual rate of somewhere between 2% and 4%, not a quick return to the drunken, overvalued days of a few years ago.
What has America learned from this debacle and the tech one before it? Unfortunately, probably not enough, but hopefully we can recognize when we’re getting drunk a little earlier next time and stop drinking before we go home with the ugly person at the end of the bar (economically speaking that is).
A full recovery to the prices and valuation peaks from 2007 will take some time, which should be preferred by everyone, because a fast recovery will be just another bubble waiting to burst. We’re a mature capitalistic economy that should expect growth at rather conservative rates. So kick back a little, grow moderately, and enjoy life without the worry of an economic hangover.