It has been exactly 10 years since the disintegration of Lehman Brothers. Perhaps the most important collapse in modern U.S. history, the Lehman debacle has had lasting effects on the global economy, with the lack of U.S. wage growth in the past decade the most noteworthy.
Wage growth had been at over 4 percent in real terms in January of 2009 before falling off a cliff. Wages actually declined in real terms in the following three years and floundered in former U.S. President Barack Obama's final term. Real wage growth has never really returned to its previous levels. So why is U.S. President Donald Trump touting wage growth during his tenure?
If you cannot improve economic data that measures the economic health of the country, do the next best thing, change the data. Trump has begun to quote sources, including the Atlanta Federal Reserve, when it comes to wage growth that differs largely from the actual real wage growth numbers. Current wage growth is nominally up 2.7 percent, with the consumer price index at 2.4 percent. This means, in real terms, wage growth is nearly nonexistent. In response to these less than stellar numbers, Trump's Council of Economic Advisers has come up with interesting reasoning.
The council says that these numbers do not reflect reality; specifically, Trump's brain trust thinks that things like social security benefits and fringe benefit increases on the job should be incorporated into wages. This is a new take on the wage growth number. "Once these adjustments have been incorporated to better reflect the actual experiences of workers, real compensation growth over the past year has been substantially higher than that observed in headline wage measures," the White House said. If you make the goal bigger, you'll score more, surely.
So in short, U.S. wage growth has never really recovered, now a decade after the Great Recession. This has led to a depletion of U.S. household assets and the inability of the average household to weather an economic downturn. Unfortunately, it looks like the said downturn is in the cards. I predict a precipitous recession that will begin with emerging markets and spread first to China and later Europe. Ultimately, this global recession will land on the U.S.' doorstep and the world may experience a recession that will be far more difficult to recover from, not that the global economy has recovered from the 2008 recession as it is.
Turkey's central bank met today and as I write this column nearly two days before the announcement, I would like to take a stab at where I think the bank will end up and where I think it should end up. The bank has made clear its intentions far more clearly than it has in the past. A rate hike is almost certain. So the question is how much of a hike is in the cards? Market experts have predicted a major hike, in the ballpark of 500 basis points. Such a hike would most benefit short Turkish bonds but may do little to benefit the average person.
Argentina's recent rate hikes have done nothing to calm worries about the future of the country and while Turkey's economy and fundamentals are far stronger than Argentina's, concerns about the future of the economy may not necessarily be related to interest rates. There are more fundamental issues that need to be addressed, and I fear tightening an already very tight credit market will lead to an implosion of the real economy. My recommendation would have been to address structural issues first and foremost but absent that a modest rate hike will have to do for now.
Whatever I think the bank should do, the reality is it will do what it thinks is right. At this stage, I believe the central bank will raise rates by 225 basis points, bringing the headline interest rate to an even 20 percent. Whether or not that calms the nerves of investors enough or whether it further spooks already worried investors, remains to be seen, but I do not expect a major recovery in the currency whatever the central bank does only because the world is in the midst of major emerging market de-levering.
Just as we look back to a decade before, 10 years from now I fear the global economy will have changed in ways that I cannot possibly predict; however, I am less than optimistic about where the world is heading.