“ US growth accelerates...”

“ US growth accelerates...” announces the International Herald Tribune.

Right there in black and white. And it must be true.

The newspapers wouldn’t lie, would they?

And, the economists who fiddle the numbers for the US government wouldn’t hit a false note on purpose, would they?

But how is it possible for the economy to go right back to Bubble Era growth rates after taking only a couple percentage point off of US GDP?

We all know it was a credit bubble, right?

We all know it couldn’t last, right? We all know, too, that the fuel for that growth – bubbly gases coming out of the banks and the real estate sectors – has disappeared. So where is this growth coming from?

On Friday morning, the stock market got excited about the stronger-than-forecast growth numbers, along with news that Ben Bernanke would be around for another four years. The Dow rose more than 100 points. But by the afternoon, investors were asking questions again…

If the economy really is recovering, maybe the feds will reduce their stimulus...

If the economy really is heating up, mightn’t it melt all that money and credit frozen by the depression? Doesn’t that increase the odds of inflation – and higher rates from the Fed...?

If the feds tighten, won’t the US economy fall back into the second part of the W-shaped recession... just like Paul Krugman says?

By the close of business the Dow had lost 53 points, which makes us think the final push to the bottom has come. Even good news can’t stop it.

When 5.7% growth – after the worst slump since the ‘30s – doesn’t get investors excited, there’s something wrong.

Wait a minute...

“The biggest lift to economic activity,” continues the New York Times report, “came because businesses ran down their stocks of unsold goods at a much slower rate than earlier in the year...”

In other words, the ‘growth’ came because businesses restocked their shelves at a faster rate. So, there’s more on the shelves to buy. Hmmm. Wonder if it will sell...?

The only way you could have real, sustained growth is with a recovery in employment – and earnings.

Looking at it broadly, Americans were earning a certain amount of money in 2007. Then, they discovered that much of what they were doing was not worth doing.

They were building houses for people who couldn’t afford them, for example. And they were spending money that was ‘taken out’ of their houses. At the peak, a substantial part of US GDP – and virtually ALL the growth – came from these sources.

That money has disappeared. People aren’t getting paid to build houses that no one will buy anymore. And shops aren’t selling to people who pay with money from mortgage equity extraction. They’ve already extracted so much that there’s nothing left. Or less than nothing. Many homeowners have net negative equity.

What does this mean? It means that people are earning less, borrowing less and spending less. What else could it mean? A substantial part of the economy, 2003-2007, was fraudulent – in which excessive consumer credit masqueraded as real purchasing power. That part of the economy has gone away.

So should that portion of the GDP. In theory, GDP should go down and stay down until new industries, businesses, and jobs are found.

America’s president proposes a tax credit to businesses that take on new employees. We never met a tax cut we didn’t like. This one is no exception. It lowers the cost of labour, making it easier to hire and pay people. So far, so good.

But is Mr Obama proposing to cut government spending also? Not really. He’s pretending that the feds can have their cake and eat it too... that they can forgo the income given up by the tax credit... and yet, still spend it.

How is that possible? It’s not. It’s the feds’ old shell game. It won’t do the economy any good because the resources represented by the tax credit can’t be in two places at once. They can’t be available to the employers and be available to the government too.

But 10% unemployment tells us that wages are too high. They should fall – along with stock prices and housing prices. But it’s hard to cut wages. That’s the real secret to the Keynesian’s fiscal stimulus. Government spending causes inflation... which lowers wages surreptitiously.

Everybody likes fiscal stimulus. Economists like it because it makes them look like they know what they are doing. Politicians like it because it makes it look like they are doing something to help the masses. And the masses like it because they believe them! Finally, even employers like it because it reduces real wage costs.

Trouble is, inflation doesn’t work very well in a real depression. The Fed increases the monetary base. Congress showers boondoggles over the nation. But the money moves likes molasses.

*** The median price of an existing house sold in 2008 was $196,600. In 2009, the price fell to just over $170,000. But this seems to have brought out the buyers. At $170,000, reports Floyd Norris in the NYT, the housing market corrected all the way back to 1997, adjusted for inflation. Twelve years’ worth of real pricing gains have been wiped out.

But when people realised they could buy at ’97 prices, they stepped up to the plate. A total of 4.6 million houses changed hands last year – 5% more than the year before.

The real problems were in the new housing sector. Only 373,000 new houses were sold last year – fewer than in any year since 1963. Prices sank, but not quite as much as in the used house market.

New houses, of course, are not the subject of repossessions. You can’t foreclose a mortgage that hasn’t been written yet. This permitted the housing industry to control sales and prices – at least to some extent. While repossessed houses flooded the used-house market and drove down prices, builders must have held back inventory waiting for better prices.

What will happen in 2010?

Most likely, the inventory of unsold houses... along with the ‘hidden inventory’ of houses that owners would like to sell... will probably continue to hold prices down.

One way or another, the average house has to go down to a level where the average owners can afford it. Where that level is, we don’t exactly know, but it’s probably lower than today’s prices.

Remember, millions of homeowners are underwater.

Some of them will drown. Others will get out through the windows... leaving the house to sink, along with the housing market.