Better Than the Depression? Don't Kid Yourselves 24 comments
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I previously wrote about how we got into this mess here. A number of articles have since sprung up, comparing 1929 and the 1930s to now, and arguing that we shouldn't be that worried. Things will be tough, they say, but they won't be depression tough. I thought I'd go over a few of their points that I didn't find very reassuring.
A depression is unlikely for the reasons in the bullet points, according to the articles:
- With no deposit insurance, people lost around $140 billion in savings as about 9,000 banks failed in the 1930s. Today, by contrast, we have the FDIC. Of the bank failures so far, all insured deposits have been recovered, along with about half of people's uninsured deposits (and this figure could well rise).
FDIC is certainly helpful. But here are some potential problems. If more banks fail, as is expected, the FDIC will require more funds. Congress will, of course, recapitalize the FDIC. Meanwhile, all the bailouts (what's the total now? $7 trillion?) are putting a serious strain on the government's already stressed balance sheet. It's possible, and getting likelier with each new bailout (the latest $800 billion plan to buy mortgages, credit card debt, etc apparently doesn't even need Congress to pass anything), that the United States could itself go bankrupt. Our losses by way of currency devaluation can easily offset any benefits from deposit insurance.
Moreover, how much do Americans actually have in savings? The savings rate has been at historic lows, and has even been negative in recent years.
click to enlarge
It is true that capital gains are not part of the calculation. However, our markets have lost trillions of dollars. A lot of the money that went into the stock market rather than savings accounts in the last few years has evaporated. Far more Americans own stocks today than did in the 1920s. There haven't been very many capital gains on houses recently either.
Add to the low savings rate a massive amount of debt. Before the Great Depression, total debt was 260% of GDP. As of the end of June 2008, total debt was 356.5% of GDP. Before the U.S. fell into the Great Depression, it was a net creditor nation and ran trade surpluses. Today, we are the world's largest debtor nation, and are running trade deficits. We are also involved in two expensive wars, which was not the case in the 1930s (until World War II came along).
- Before the great depression, most households had only one wage earner. Today, on the other hand, most households have two wage earners. One spouse's paycheck makes the family's burden a little less as the other spouse searches for work.
Real wages have declined for years. In many cases it now takes two wage earners to adequately support the family. It certainly helps that one spouse still works, but it may not be enough for many families. Looking for work is becoming more difficult with each passing day.
- Before the Great Depression, there were no safety nets. Today, by contrast, in addition to FDIC, we have things like unemployment insurance, Social Security, Medicare, and private pensions.
That's true, but how long do these things last? Some states are already running out of unemployment insurance money. According to the National Employment Law Project, as of November six states don't have enough to cover a year of payments, eight states have about six months of reserves left, and five states have less than three months of reserves left - they are insolvent. As unemployment grows (remember, we're probably only at the start of this thing with regard to job losses), more states will experience trouble.
Those unemployment insurance trusts in trouble now are forced to borrow from the Federal government, which is itself running huge deficits. They are also considering decreasing unemployment benefits and increasing unemployment taxes on those still fortunate enough to be working. Both of these will curb consumer spending, resulting in more job losses. It sucks when the bad things reinforce each other.
Social Security and Medicare have been in trouble for years, but will probably continue to function. Social Security income will probably be taxed more.
Private pensions are worrisome. With businesses going bankrupt or being otherwise unable to pay benefits (which were under funded to begin with and have suffered more losses as stocks have crashed) to retired workers, the responsibility of paying pensioners falls on the Pension Benefit Guaranty Corporation [PBGC]. The entity was established by Congress in 1974 to protect pensioners whose employers cannot pay their pensions. It's supposed to protect around 44 million U.S. workers.
As pretty much all government agencies, the PBGC has been run by idiots. Early this year, it was estimated that the entity had a deficit of $14 billion. To make up for this shortfall, the PBGC doubled its stock allocation to 45% of its portfolio and added another 10% to such investments as hedge funds. I guess that plan didn't work very well. Sooner or later, the PBGC will have to be bailed out by the Federal government, have to lower benefits, and/or increase premiums for those companies (decreasing in number) that still pay it to insure their pensions.
So yes, we do have a safety net. It seems, though, that it has holes big enough for many people to fall through.
- Stocks have not declined as much in value as they did during the great depression. Foreclosures and the unemployment rate are not yet up to Depression era levels either.
That's true. But that's not an argument for why we won't have a depression. It only indicates that we're not there yet (and let's hope we won't ever get there).
- While the government at the start of the Great Depression did boost spending and brought emergency relief to companies and individuals, it also raised taxes, raised interest rates, and imposed tariffs on imports, starting a trade war that collapsed global trade. By contrast, our leaders have learned much from history. They have acted quickly with a stimulus package (and more to come), bailed out Fannie Mae (FNM), Freddie Mac (FRE), AIG (AIG), and Citigroup (C) (more to come), and have cut rates to historic lows (not much more to come).
Our leaders are idiots (I'm not claiming to be any smarter than them), and if our economy's health depends on them, we're probably screwed. The same people who got us into this mess are the ones who are in charge. Obama's appointees are cut from the same cloth, more likely to bail out their Wall Street friends than do what is right. Does it make sense to try to solve a problem caused by excessive borrowing by borrowing more?
While he may change his mind, two of Obama's big promises were protecting American workers from globalization (another Smoot-Hawley Act perhaps?) and raising taxes (on capital gains, and the rich).
Supposing Obama won't follow through on these potentially destructive policies, what's he going to do? More bailouts, more government spending, and the like? I hope it makes everything all better. But will it? (And what's to prevent other countries from putting up their own tariffs and walking away from trade treaties)?
The system is clogged. Consumers can't borrow anymore. Their credit lines are maxed out, and they owe more on their mortgages than their houses are worth. Banks are now wary of lending, and there's a good possibility they don't really have any money left to lend. An estimated 72% of our economic activity comes from consumer spending, much of it with borrowed money. That percentage will shrink, and not because of growth in other areas of the economy.
It's plain that we don't manufacture very many things anymore. Cars are one of the few major things that we do produce here. But sales are plummeting. The troubled big three employ around 355,000 American workers. Ten percent of U.S. workers, however, are employed in a related industry (suppliers, dealers, local businesses, media companies that depend on auto advertisements, etc). Either the big three automakers go bankrupt, and an estimated 5.5 million jobs are lost over the next two years (estimated by GM, so the real number will hopefully be much smaller), or the government pays their expenses (because sales sure won't pay for them) and we have zombie car companies.
As the banks have lined up, so have the automakers. The homebuilders are right behind them with their hands out. Who's next? Bailing these companies out prevents others from taking their place, because of too much supply. Japan, which kept its banks from failing by stuffing them with money, still hasn't recovered from its housing bubble. It's taken 20 years.
It all comes down to this: the more bailouts, the more the government has to borrow. The more it borrows, the more likely it will go bankrupt and/or the dollar will collapse. All the current solutions aim to return us back to business as usual. If they succeed, we'll have a small boom, as fake as our last boom, and then another, more painful bust.
Some, like famed investor Jim Rogers, argue that if we stop trying to prevent the collapse - stop bailing out the gamblers, the irresponsible, and the incompetent at the expense of those who saved and followed the rules, we will have a major recession from which we come out stronger. Pain is inevitable. Taking it later rather than now will be far more painful. South Korea, for example, let its corporations fail in its last financial crisis. Now it's one of the world's fastest growing economies.
I don't know who's right, but things look grim no matter how one looks at them. I hope Ben Stein is right and there's only a few billion dollars worth of troubled assets out there.
It will soon be time to start shorting long term Treasuries (TLT). The ETF just made a new 52 week high. It seems that interest rates will have to rise, either because of attempts to lower the coming bout of inflation or because of a collapse in bond prices. U.S. government bonds are pretty much the only asset class that has held up during the crisis. Sooner or later its bubble will burst too.
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This article has 24 comments:
Oil prices put us in this mess - not bad loans. I don't know about everyone else, but compared to May-September I now have $140 more a month now that gas prices have dropped. That's $140 more to spend/save as I like (that may have been the unfortunate difference where people could pay or not pay their mortgage) and put back into the economy. As long as oil keeps around historic averages and the American people don't panic and stop spending (sending us into a quicksand vortex that has already begun) we can climb back out of this recession.
The more people panic, the less they spend. The less they spend, the more companies that go out of business. The more companies that go out of business, the more people lose jobs - AND - the more money the government loses (as stated above in the article). Get the idea?
The quicker the United States comes up with an energy solution, the quicker we get out of a recession and start creating new jobs and also saving money (and our planet). Self reliance is key for this nation - UNITED WE STAND!
------------------
czechyoself.com
On Nov 26 09:02 AM czechyoself wrote:
> We are so screwed. Check out this movie: zeitgesitmovie.com
>
> ------------------
> czechyoself.com
Money it seems, has lost it's mistique. What is a dollar really worth???
It appears to me, that the excesses of the past 25-30 years have finally caught uo to us. The economic clock has to be reset. Valuations have to come back in line with salaries and pay. We have gotten way ahead of ourselves on the cost and ability to pay concept, on a global level. It appears that we naeed a "time out".
yawn. another doom and gloom piece. boring.
the author is one of those who is dissatisfied with EVERYTHING and apparently is terribly unhappy with obama as prez. according to hobbes, there is NOTHING obama can do that would be satisfactory. according to hobbes there should be NO BAILOUTS OF ANYONE. want to see a depression? there ya go.
we KNOW what will happen if the govt does NOTHING (a depression. a severe depression), what we don't know is what will happen if we try to stem the damage. i will have to go with the UNKNOWN on this one, hobbes.....
On Nov 26 09:19 AM sieraromero wrote:
> It is suprising that so many experts[ the same ones who said we couldn't/wouldn't
> get to the point where we are now] completely rule out the possibility
> of a depression. The real economic problems have not even surfaced
> yet ! Many people are even saying that (IF) we drop into a recession
> that it will not be a long one. People who listen to the talking
> heads are going to get burnt badly.
On Nov 26 09:35 AM User 111929 wrote:
> I think we are on the brink of a depression. In all my years of watching
> this economy, as well as others, I haven't seen anything with so
> many negatives.
> Money it seems, has lost it's mistique. What is a dollar really worth???
>
> It appears to me, that the excesses of the past 25-30 years have
> finally caught uo to us. The economic clock has to be reset. Valuations
> have to come back in line with salaries and pay. We have gotten way
> ahead of ourselves on the cost and ability to pay concept, on a global
> level. It appears that we naeed a "time out".
This author is so busy cursing the darkness, he's forgotten what a candle even looks like, much less how to light one.
Reread your history: en.wikipedia.org/wiki/...
You now have the opportunity to prepare yourself and your family, if you so choose, to minimize your chance of suffering massive setbacks during this time.
It is great to continue to be optimistic! But..meanwhile, be pragmatic. During tough economic times take some precautions for yourselves. look how many people have been caught with their pans down. Do you have any idea, really, how your employer is weathering this mess?
We have a business that employs 14 individuals that rely on their job to feed, clothe, provide health care etc.. for their family. Trust me, none of them have any idea what the balance sheet is for our business, or how it has been affected by this market.
So, you too, unless you are self-employed, and very well -heeled, have no idea when the domino that is falling is the one that is right behind you...
Prepare in case you are wrong. Your family will thank you for it.
But memory is just one component of intelligence. How you process all that information is another component.
If you read Ben Stein's latest article, he has the humility to confess he didn't have all the pieces to the puzzle anyways, and his conclusions were flawed. At least he believed in himself and now confesses he will have to adapt to a more Spartan lifestyle since he lost his arse in the markets.
Ben's Documentary movie "Expelled: No Intelligence Allowed" will confirm to anybody who has high intelligence of the 2nd type I mentioned above, that excelling in retaining millions of bits of Trivia doesn't mean squat.
You have quite a mixture in your comment.
1. Your description of the panic spiral into depression is good.
2. Your call for a new energy technology and economic revival is good.
3. Blaming the entire economic crisis on the high oil spike is not defensible. I wrote an article last summer (published on SA) trying to define the economic burden of importing oil at the 2008 at an average of $140 a barrel for 30 years. The conclusion: that would be a bigger economic burden than the total combination of (a) the national debt, (b) unfunded future social security liabilities and (c) unfunded future medicare/medicaid liabilities. The current economic crisis is not yet defined in dollar terms (the bad debt write-down has yet to be determined) but it is far larger than even several years of the other "Big Three" economic problems and it is being experienced now in a compressed time scale.
You are correct that the precipitous drop in oil prices is an economic stimulus, as you aptly described in terms of your own circumstances. However, this stimulus is a one time thing and your disposable income will not rise again in a similar manner because oil will not be cut by 65% again in the coming months. The one-year spike to nearly $150 a barrel was also a temporary drag on the economy. The lack of credit and spending is a much larger drag on the economy and will persist much longer than the recent oil spike.
Let me try a simile (or a pair of similes). The oil spike was like a night on the town with a morning after treatment requiring only tomato juice and coffee. The credit bubble was like a chronic alcoholic binge that requires a month in a rehab center for recovery.
On Nov 26 08:41 AM TheBIGpic wrote:
> Just my two cents:
>
> Oil prices put us in this mess - not bad loans. I don't know about
> everyone else, but compared to May-September I now have $140 more
> a month now that gas prices have dropped. That's $140 more to spend/save
> as I like (that may have been the unfortunate difference where people
> could pay or not pay their mortgage) and put back into the economy.
> As long as oil keeps around historic averages and the American people
> don't panic and stop spending (sending us into a quicksand vortex
> that has already begun) we can climb back out of this recession.
>
>
> The more people panic, the less they spend. The less they spend,
> the more companies that go out of business. The more companies that
> go out of business, the more people lose jobs - AND - the more money
> the government loses (as stated above in the article). Get the idea?
>
>
> The quicker the United States comes up with an energy solution, the
> quicker we get out of a recession and start creating new jobs and
> also saving money (and our planet). Self reliance is key for this
> nation - UNITED WE STAND!
>
Jason, as you know I agree with many of your positions. However, even if Obama is a political genius, can we hope for your prescription to be met? You said:
"There is no way to avoid a decreased quality of life for a good number of years for America, but the system as being run now will create either an outright collapse or revolution.The faster this current crop of self-centered and lazy leadership exits the better off the country will be."
If he does succeed in addressing this issue, can it possibly be substantially underway in just four years? If it is started, can the intervening austerity allow his re-election? Or will Obama be a band-aid dispenser and get re-elected but not really address the problem?
We can only hope that some new policy postions are articulated from the "Grass Roots" and a new concensus reached in America. Bureaucrats can be more effective in administering consensus than in defining it. Can a new broad based process for consensus definition be established? Jason, I know your answer. I'm asking this question of any others who read this.
No thanks! I'd rather live in reality!
On Nov 26 10:58 AM MurphMan wrote:
> I have a rule I used successfully all my life....personally and professionally:
> one is not allowed to curse the darkness unless they also light some
> candles.
>
> This author is so busy cursing the darkness, he's forgotten what
> a candle even looks like, much less how to light one.
The American society operates on too much conspicuous and useless consumption. For example, no one really needs to drive a Lexis SUV or wear a five thousand dollar watch. And all those Americans who weigh over 250 pounds don't need to eat that much junk food to be happy.
Fast food is unhealthy and costs more than good food cooked at home.
Cigarettes are expensive and bad for the body.
Business travel is mostly wasted and could be done with telecommuting.
.....................
Adding to the above list is boring and thankless because just about everyone knows the list by heart already but tries not to think about it.
It's the very poor who suffer during depressions but they are already suffering in Africa, Brazil and other third world locations.
Pushing even more Americans into the homeless condition where millions already live would just make American poverty harder to ignore but wouldn't make much difference.
Maybe a Greater Depression would be a very good thing because America would be forced to get back to the basics of happiness: health, friends, family and a job that contributes something to society.
Dad and mom would have more time to cook nice meals together at home, spend time with their kids and get off the freeway for a few years.
"A man is rich in proportion to the number of things he can afford to let alone."
Henry David Thoreau
Banks
Banks are barely functioning and debt defaults are increasing, not decreasing.
* Sub Prime and mortgage loses
* Credit Card loses
* Auto loan loses
* Commercial Real-Estate loses are just getting started
* Most all forms of debts are exhibiting accelerating defaults
Consumers
The consumer is finally out of money
* Housing, down 38% and still falling
* Stocks, down 45% and still falling
* Job loses at 250,000 per month, and growing
* Incomes have been stagnant for 10 years
* Access to credit has been revoked or is at higher interest rates
Credit
Credit from all sources is contacting, not expanding
Leverage
Leverage is unwinding at all levels, all at once.
* Hedge Funds
* Derivatives
* Financial Institutions
* Insurance Companies
Businesses
Businesses are hitting two concrete walls at once
* Any business who requires financing "most do" are at risk
* Any business that relies on consumers "72% of GDP" will be effected
* Any business that is week or marginal in an overlapping product or service
* Auto, big ticket, luxury, etc etc.
To Recap
* Banks are barely functioning and getting worse
* Consumers are experiencing the decline of all of their assets at once
* Credit is on life support and becoming more restrictive, not less
* Leverage is unwinding in all of it's forms
* Businesses are experiencing declining access to credit and a shrinking consumer
My question to you
Can our government print enough money to reinflate all of these pillars at once, and can the system that created the problem in the first place, hope to know where and how to perfectly apply these moneys before the entire system implodes on itself?
people not spending? sorry, this country's population was raised to consume. they may slow down for a few days, but once they see those 20%, 30% 40% 50% signs, they will be drooling. every store is already competing to find some way to keep their customers buying, they offer twelve months-same as cash or no interest leasing or lay away plans.
businesses folding? two out of three small businesses have always folded every year. we have the greatest system in the world for recirculating employees into the economy: small businesses and our no fault bankruptcy laws. this process keeps money flowing through the hands of the lawyers and their ilk.
our economy may contract, but we don't really make anything, do we?. we sell insurance. we sell services, ideas, condo shares, whatever. we are like those people in the future in h,g, wells' time machine. our function is to have fun and go into the shelters when the sirens go off. no sirens, no problem. all our food and supplies come to us courtesy of the underground people. so, relax, my friend. i have seen the future and it is surprisingly familiar.
Our Government is pushing on a string.
what IS the reality and what should we do about it, genius?
hobbes gives absolutely no answers (oh - wait - he did: short TLT. thanks!! LOL), only whining and chicken little-ing......
On Nov 26 01:53 PM sbenard wrote:
> Yes! Let's all sit around and sing Cumbayah! Let's also quit our
> jobs, become couch potatoes, and just wait for monthly government
> stimulus checks for the rest of our lives while we live in endless
> prosperity!
> No thanks! I'd rather live in reality!
>
>
> On Nov 26 10:58 AM MurphMan wrote:
comments from ithinkbig, kelly lieberman, carey_jim, and jlounsbury are on target. to ignore the potential of an economic meltdown and not prepare seems absolutely stupid. there is no one who can say it will happen, and only fools are singing pollyanna tunes. the economy is in a crisis. things are happening which have never happened before. how can you trust that we can be lead out of this event unscathed?
and if you are positioned, this event (IF IT HAPPENS) does not have effect the quality of your life. you will still have a car. your kids might have to go to public school. a big mac meal may take the place of your two hour martini lunch. but your enjoyment of life will still be good (or as bad as the case may be) as it is today.
Actually i was thinking that a contrarian approach to stimulus - lower taxes only - might be the correct approach. but actually, at this point i think we are wasting good money by doing anything at this point but trying to ease the social problems caused by this economic event.
that's what i am doing. is that what you had in mind? what else can be done? i think that people hunkering down and doing all listed above is a foregone conclusion.....
On Nov 28 03:58 AM The hand wrote:
> my internet is screwed up and it is late in the day.
>
> comments from ithinkbig, kelly lieberman, carey_jim, and jlounsbury
> are on target. to ignore the potential of an economic meltdown and
> not prepare seems absolutely stupid. there is no one who can say
> it will happen, and only fools are singing pollyanna tunes. the
> economy is in a crisis. things are happening which have never happened
> before. how can you trust that we can be lead out of this event
> unscathed?
>
> and if you are positioned, this event (IF IT HAPPENS) does not have
> effect the quality of your life. you will still have a car. your
> kids might have to go to public school. a big mac meal may take
> the place of your two hour martini lunch. but your enjoyment of
> life will still be good (or as bad as the case may be) as it is today.
>
>
> Actually i was thinking that a contrarian approach to stimulus -
> lower taxes only - might be the correct approach. but actually,
> at this point i think we are wasting good money by doing anything
> at this point but trying to ease the social problems caused by this
> economic event.
>