Here is a very long piece on the U.S. economic outlook from Gary Shilling that rings true to me.

All this down economic news is making me strangely more bullish on Arizona. I expect Arizona will be one of the first economies in the United States to turn around, whenever that may be. If the economy is so dang blah in the rest of the United States when Arizona starts to grow again, Arizona will be a star even if it’s economic performance isn’t stellar.

On Deleveraging

As consumers borrow more and more money and spend it, they goose the economy with that extra spending on top of their spending of their normal income.

Now, however, consumers want to pay off some of their debts. That’s what deleveraging is, reducing your total debt.

That means consumers take some of their regular income that they would usually spend on stuff and instead spend it to pay off some debt. That’s good in the long run but in the short run, paying off debt takes money away from buying stuff and slows down the economy.

The Fed is keeping interest rates super low to spur the economy but it’s not working well because people don’t want to borrow more money even if the interest rate is zero, people want to pay down their debts.

When in (several?) years American consumers feel comfortable with their reduced level of debt, they may start to spend more of their income and that would boost the economy. If they then decided to take on new debt, that would boost the economy even more.

The good life and rapid growth that started in the early 1980s was fueled by massive financial leveraging and excessive debt, first in the global financial sector, starting in the 1970s and in the early 1980s among U.S. consumers. That leverage propelled the dot com stock bubble in the late 1990s and then the housing bubble. But now those two sectors are being forced to delever and in the process are transferring their debts to governments and central banks.

This deleveraging will probably take a decade or more – and that’s the good news. The ground to cover is so great that if it were traversed in a year or two, major economies would experience depressions worse than in the 1930s. This deleveraging and other forces will result in slow economic growth and probably deflation for many years. And as Japan has shown, these are difficult conditions to offset with monetary and fiscal policies.

The deleveragings of the global financial sector and U.S. consumer arena are substantial and ongoing. Household debt is down $374 billion since the second quarter of 2008. The credit card and other revolving components as well as the non-revolving piece that includes auto and student loans are both declining. Total business debt is down, as witnessed by falling commercial and industrial loans.

Meanwhile, federal debt has exploded from $5.8 trillion on Sept. 30, 2008 to $8.8 trillion in late August. Many worry about the inflationary implications of this surge, but the reality is that public debt has simply replaced private debt. The federal deficit has leaped as consumers and business retrenched, which curtailed federal tax revenues, while fiscal stimulus, aimed at replacing private sector weakness, has mushroomed.

Recovery Firing on One Cylinder

… in the typical post-World War II economic recovery, four cylinders fire to push the economic vehicle out of the recessionary mud and back out on to the highway of economic growth. At present, only one – the ending of inventory liquidation – is generating significant power. The other three – employment gains, consumer spending growth and a revival in residential construction – are sputtering at best.