The Deteriorating Real Economy's Financial Indicators

More and more we see concern being expressed about the deteriorating real economy and less emphasis being placed on the crises within the financial sector. The concern about the growing weakness in the real economy points to a longer and deeper recession than had been anticipated.

The current recession, as defined by the NBER, is in its twelfth month and trails two other recessions which lasted 16 months, as the longest post-World War II downturns on record. As economists revise their forecasts, most seem to believe that the 16-month period will be exceeded and many are saying that the current recession will reach the 20-24 month time span.

Economists only have to point to the daily release of employee layoff announcements to support their increasing pessimism. Companies are restructuring and these efforts are accompanied by reductions in workforce by 5,000 and 10,000 and more, per firm. On Thursday, AT&T (T) announced that it was going to lay off 12,000 employees and was taking a $600 million charge in the fourth quarter to cover severance payments. And, given recent experience, there will be two or three other companies also announcing layoffs. There will be more today…and Monday…and…

Then these layoffs must work their way through the rest of the economy. Lower spending…credit card defaults…additional decline in sales…more layoffs…and so on and so on. The effects are cumulative.

The policy problem is how to stop the cumulative contraction so that the downward spiral is broken.

The potential effects of this downward spiral in the real economy are being translated into the financial markets and the warnings are rather severe. For example, take the article in the Financial Times, titled “Record number of companies at risk of default." This article focuses on the Markit iTraxx Crossover index which, measures the cost of protecting junk-grade companies against default. This index rose above 1,000 basis points for the first time ever indicating, “a record number of companies are on the verge of default because of deepening financial problems.”

The authors also write, “Some of the world’s leading investment-grade companies look in danger of default, according to CDS prices.” The point being that the future shows nothing but dark clouds now. As these firms continue to restructure to avoid default on their debt the situation, at least in the short run, can only worsen because the layoffs lead to lower incomes which, results in lower spending which, results more restructuring and so on.

This deterioration in the real economy is also being transmitted to the government sector. There are two concerns being expressed in terms of the government securities. First, at local and regional levels…state and local governments…there is a restructuring gong on as government revenues drop and attempts are made to bring government budgets into balance…or at least into manageable level of deficit.

Second, governments at the national level are attempting to protect financial markets and combat the deterioration in their real economies. As a consequence, national deficits are ballooning and concern is being raised over the possibility of default on the part of sovereign nations. Another article in the Financial Times speaks to this concern:

Sovereign CDS prices soar as debt mounts. Credit default swaps, which insure against bond defaults, rose to all-time highs on the US, UK, France, Spain, Italy and Germany yesterday…The dramatic rise is due to investor concerns over the amount of bonds the government will have to issue to bail out the banks and stimulate the economy.

The concern relates not only to the current economic and financial difficulties but also to the possibility that these governments will not be able to stem the downswing and will have to issue more and more bonds in the future.

Retail sales figures for November have just been release and the story reads that November retail sales are amongst the weakest in many years.

The difficulty that any government faces in attempting to compose a monetary or fiscal policy which, can turn this situation around and is also in the best interests of most economic units in the economy, individual, family, business, or non-profit, to get back to basics, to restructure what they do, to cut back their living standard, and to reduce debt. Consequently, government efforts are like “pushing on a string”… there is nothing to push against.

Comments

[Did U Think...:]

The Ponzi sheme is bust. History is about to be made and someone is going to get screwed in the deal. Let's hope that someone is not nuclear capable. Thankyou very much you dirty wall street moneymen for doing this to the people of the USA and of the world. You are all traitors and should be tried in a criminal court for the high crime of treason and nothing less.

Start running, boys. You know that when it all collapses we will be looking for you, right?

2008 Dec 05 08:34 AM

[JoeSixPack:]

The $1/2-1 QUADRILLION derivatives ponzi scheme has collapsed. It will take a few years before we even know how deep we will be in. We will likely have a new currency within 1-2 years. If congress had moved immediately to create one and put the current derivatives mess into bankruptcy we may have had a chance to save the economy. Instead congress and the executve are bailing out their banking constituents.

DerivativesCollapse.co...

2008 Dec 05 09:29 AM

[investor88:]

Good article, realistic assessment of the situation in banking and "main street". Expect a tough period ahead despite government pushing on a string and possibly prolonging the economic cancer.

2008 Dec 05 09:44 AM

[sheople:]

Wall Street, Federal Reserve, Paulson, George W. Bush, Congress, past presidents, fellow sheople. There is a lot of blame to go around. Fellow citizens sat by and watched as Wall Street and the Central Bankers moved our manufacturing out of the United States and we began our economy based on inflated prices and savings. Now it's too late to make corrections and our leaders, the Federal Reserve and Treasury have taken over. We are truly lost. Trying to get borrowing going again without jobs is truly "pushing a string".

2008 Dec 05 09:49 AM

[Dr.Jackpot:]

If retail is so weak why was a man killed due to a stampede into a Walmart store at 5 a.m.? EVERY YEAR, retailers snivel and whine before Christmas to plead for charity from the stupid public only to brag in February about how much they sold their garbage for. Every year traditional stooges send this garbage to friends and relatives to avoid appearing cheap and guilty. What a bunch of smucks we are. The "I can get it for you wholesale" crowd remains in control..

2008 Dec 05 10:10 AM

[nmelendez:]

You still do not get it. You look only at the water and do not see the ocean. If the US is pumping billions into banks and the USD so strong, don't you think these banks are buying foreign assets? So when the dollar drops these foreign assets will go thru the roof. The 700 billion invested will go up by 5 or 6. What do you think happens to the economy with the largest market gain and the weakest currency? jejeje. There will be pain but this is the end game to end all end games. When Foreign countries see they fell into the US trap, boy are they going to be pissed. I love it when a plan comes togethor.

2008 Dec 05 10:43 AM

[nmelendez:]

BTW why do you think China is buying up so many investments in SA and Africa. China is playing the same end game. It's a Chess match between the Dragon and the Eagle. OMG THIS IS FUN!!!!

2008 Dec 05 10:45 AM

[hazeleyes:]

Dear...
Did You Think:
JoeSixPack:
Investor88:
Sheople:
DrJackpot:
Cruiser9:

What a breath of fresh air all of you are! Seems to me you've all been awake (instead of asleep, as most have) during the last months. I've been awake and appreciate discovering others who have also and who are willing to speak what I believe is the truth. Feeling very angry and certain that things are going to get far worse over a much longer period of time than the morning talking heads on every channel would like us to believe.

Please keep on commenting here.

Thanks for being sane in a crazy world.

2008 Dec 05 11:24 AM

[axelrod608:]

Yeah, this is not rocket science. When the intelligentsia tell you that the US economy is 70% driven by consumer spending and finance adds half the rest, and BOTH are swirling in the bowl, it's relatively clear that Q2 2009 is not going to be the start of a new bull market. Just more bull$*!).

2008 Dec 05 12:26 PM

[Socialism c...:]

The problem is that the government thinks they should be involved in the economy AT ALL. They are just there to provide for national defense and our well-being in other areas where we need protection in common, such as food & drug safety. Maybe common infra like roads. That's IT. They are not to be the economic machine -- that is the business of the people!!

We need to *drastically* reduce the size and scope of government. We need to start with abolishing the income tax and property taxes...move solely to consumptive taxation and tariffs. Read up on what Jefferson and Madison said on this!!

Some stuff for y'all:
fairtax.org
givemeliberty.org

2008 Dec 05 12:56 PM

[BUGGS:]

WHEN I THINK OF THE NUMBER OF SUPPOSEDLY INTELLIGENT PEOPLE THAT RUN THIS COUNTRY IT REALLY IRRITATES ME TO DISCOVER JUST HOW UN-EDUCATED THEY ARE WHEN IT COMES TO MONEY. THERE IS A VERY SIMPLE SOLUTION TO THIS PROBLEM BUT THEY ARE GIVING MONEY TO THE WRONG GROUP IE BANKS AND OTHERS. CONSIDER THIS OPTION FOR A MOMENT. GIVE EVERY TAXPAYER A CHECK WITH A $200,000 CAP THAT EQUALS FIVE TIMES THEIR ANNUAL INCOME, TAX THAT CHECK AND WATCH THE SPENDING FRENZY. THIS WOULD ACCOMPLISH MANY THINGS, SUCH AS A HUGE INFUSION OF TAX DOLLARS BACK TO THE GOVERNMENT, REDUCTION OF FORECLOSURES, AUTOMOBILE MANUFACTURERS WOULD NOT NEED TO BE BEGGING WASHINGTON FOR DOLLARS, RETAILERS, RESTAURANTS AND OTHER VENDORS WOULD PROSPER. THIS IS A CAPITALISTIC SOCIETY AND WILL ALWAYS PROSPER WHEN PEOPLE ARE SPENDING MONEY!!

2008 Dec 05 03:05 PM

[unclej0:]

My dear BUGGS, printing money would be just wonderful if it were not for inflation. It is the economic analog of perpetual motion.

Lets see. Assume 100,000,000 taxpayers X $200,000. That gives us

20,000,000,000,000, or, in words, twenty trillions of dollars that you have just printed. That, I suspect, will be multiplied a few times by the magic of banking and financial derivatives that hardly anyone understands.

Does anyone have an economic model to deal with that? Well, Bernanke might actually print that much and we can find out in the real world.

2008 Dec 05 04:01 PM

[unclej0:]

ONE MORE THOUGHT, THANKS TO BUGGS.

Why not let us all print our own money. We could put George W Bush's face on the greenbacks.

That is the ultimate form of free enterprise.

2008 Dec 05 04:05 PM

[ATHELSTAN:]

Don't expect the Obama administration to take Bush's depression seriously with corrective measures as an alternative to the weak pablum he and the Clinton Democratic holdovers around him seem bent on following at the moment until we have reached 15% unemployment, are experiencing food riots, and see burning cities on television screens.

2008 Dec 08 02:15 AM

[BUGGS:]

MY DEAR unclejO, 100,000,000 TAX PAYERS WOULD NOT RECEIVE THE SUM OF $200,000.00 BUT 5% OF THEIR ANNUAL INCOME WITH A CAP OF $200,000.00!!! THE MAJORITY OF TAX PAYERS DON'T EARN $20K PER YEAR!!

2008 Dec 08 08:57 AM

[unclej0:]

My dear Buggs, thank you for correcting my first impression of your creative proposal.

If we are to give newly printed money to all taxpayers, why should we give the most to those who have the most? Why not a flat sum or, to be really wildly creative, why not give the most to those who have the least? Why not a taxpayers' lottery?

Without serious regulation, it will mostly end up with the big financial firms in any case. Of course, if we could repeat the process every 20 years, that might help.

2008 Dec 18 01:20 PM

[website:]

I agree with "Socialism cannot compete"

Jan 01 03:50 PM

[smokey888:]

This isn't a cure but I sure think we should have a much more aggressive SEC. The kind of SEC that could and would order a full tax audit at the nod of big club. And a Czar who can fire federal employee's for lack of action. Then double the prison time for all white collar crime. Hell you can steel a few million in this country, hide it away, go do a few years in boy scout camp and walk out retired. I should have been much more aggressive in my early twenty's but for some stupid reason I respected the law.

Jan 20 12:41 AM