Roads to recovery overlooked

Flickr photo by Matt and Bess.

Long-term interest rates plunged this week as any hopes for a V-shape recovery gave way to L-shape reality.

A 10-year Treasury auction drew three times as many bids as bonds offered, the yield to 3.3 percent from 4 percent last month taking mortgages under 5.25 percent. The best chance for a run back into the fours: a big break in stocks. Inflation bets sank with rates: oil broke $60 for the first time since April; gold is $912 vs. $980 in May.

Most of this sentiment shift has been follow-through from last week's trend-breaking job news; the rest more "L" data just like it: The Reuters/University of Michigan preliminary index of consumer sentiment fell in July for the first time since February, to 64.6 percent, compared with 70.8 in June. The Institute for Supply Management service-sector survey crept to 47 in June from 45, still short of growth-marking 50. The consumer-credit contraction slowed from a fatal -7.8 percent in April to -1.5 percent in May.

The "worry-campers" are well established in the fiscal trap, no-bottom housing, and credit crunch; and even those with growth hopes expect inflation interception.

Time to look outside the box. One of the oldest Wall Street lines: "It's never what you're looking for that gets you." Same for unexpected good-side outcomes.

Righties think that lefties believe all solutions come from government, and lefties think all righties are stuck in rigid rules of markets and invisible hands. Both overlook the strongest force of all: consistently unpredictable human adaptation to crisis. The bigger and more unique the crisis, the faster, bigger and more unusual our response. A global and electronic economy without referee or rules magnified this mess, but its unprecedented openness and flexibility will supercharge our reaction.

Especially in the U.S., the reaction to the post-Lehman financial meltdown was the soul of prudence: Stop spending and borrowing and save any nickel seen rolling across the kitchen floor. Neither the authorities nor wizards of industry seemed to have any idea what had happened, why, or what to do. So, go to the bunker.

The resulting shift in national savings is without precedent anywhere in modern times. From slightly negative in early 2008, we are now socking away 8 percent of income. If you're drowning in immense negative numbers, try an immense positive one: We're on track to save $900 billion this year, despite income diminished by unemployment. Keep this up for another couple of years, and the scary debt-to-gross-domestic-product ratio will be repaired even though GDP fell. ...CONTINUED

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