Our Coming Depression 61 comments
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"Gentlemen, I have had men watching you for a long time, and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. I intend to rout you out, and by the eternal God, I will rout you out." (President Andrew Jackson 1832)
Contrast the words of President Andrew Jackson who had a strong moral compass and a firm grasp of right and wrong to the words of our current President, George W. Bush.
“The bipartisan economic rescue plan addresses the root cause of the financial crisis -- the assets related to home mortgages that have lost value during the housing decline. Under the Emergency Economic Stabilization Act, the federal government will be authorized to purchase these assets from banks and other financial institutions, which will help free them to resume lending to businesses and consumers. I know many Americans are worried about the cost of the bill, and I understand their concern. This bill commits up to 700 billion taxpayer dollars, because a large amount of money is necessary to have an impact on our financial system. However, both the non-partisan Congressional Budget Office and the Office of Management and Budget expect that the ultimate cost to the taxpayer will be far less than that. In fact, we expect that over time, much -- if not all -- of the tax dollars we invest will be paid back.”
Mr. Bush fails to realize that the root cause of the financial crisis is not the housing decline. The root cause is the greed of Wall Street CEOs, including his current Treasury Secretary, the failure of government to enforce existing rules to protect consumers and the greed and recklessness of Main Street USA as they attempted to borrow their way to prosperity. In the classic Washington fashion, the banker bailout bill was repackaged by Washington PR maggots into the Main Street Rescue bill. This is what constitutes progress in Washington. A three page fascist-like bill proposed by Hank Paulson grew to a 450 page goliath pork laden bill in less than one week. The bill that passed bought off every constituent in the U.S. with pork for rum producers, toy arrow makers, and film producers, while adding an additional $120 billion to the national debt. President Bush signed the bill before the ink was dry. The market immediately proceeded to decline 450 points in minutes, declaring that it will not work. Not to worry. Another bailout bill will be on its way shortly.
President Jackson was at war with the bankers who had taken undue risks and caused much pain in the country. He was willing to allow short term pain on American families, rather than let these bankers inflict much more damage in the future. President Bush and his cohorts at the Federal Reserve & Treasury have attempted to reverse the natural capitalist cycle of boom and bust during his entire eight year administration. The reduction of interest rates to 1%, tax rebates, excessive deregulation, and encouragement by the President and Federal Reserve to speculate and spend have led to our financial crisis today. A President with a backbone and moral compass would be telling the American people that our bankers have ruined this country and have caused the coming deep recession. He would explain that it is a painful lesson that must be faced now so that future generations would not have to pay for the sins of today. Instead, he urged the American people to support a $820 billion banker bailout which will attempt to push off pain far into the future. He has clearly failed the test of leadership and doesn’t deserve to be in the same company as “Old Hickory”.
In the last few weeks I’ve heard a lot of discussion about the Great Depression. Jim Cramer has said that if the bailout wasn’t passed, we would experience a second Great Depression. This has led me to try and assess the circumstances which existed prior to the Great Depression of the 1930’s versus the conditions today. The chart below is extremely disturbing. The most recent flow of funds data shows that total credit market debt is $51 trillion versus our $14.3 trillion GDP. Debt as a percentage of GDP is now 356% versus 260% during the Great Depression of the 1930’s. This massive buildup of leverage has just begun to unwind. If this is just the beginning of the great leverage unwind, then the pain will be tremendous when it really gets going. The conclusion that I reach when looking at the vertical takeoff of debt in the early 1980’s is that this country has been living a lie of false prosperity. The huge McMansions, luxury cars, high tech gadgets, granite kitchens homes, and exotic vacations were purchased with debt. These “assets” are depreciating rapidly and consumers and companies are desperately selling assets to pay down the debt that is strangling them. The psychology of this country has begun to change from conspicuous consumption to forced liquidation and saving.
click to enlarge images
The psychology of the country has taken longer to get to this point than I thought it would. Real median household income in the U.S. is $50,233 today. It was $50,577 in 2000 when George Bush took office. The government has added over $4 trillion to the national debt during this time. This proves that most people in this country have not been able to generate enough income to keep up with inflation. And this is using the fake CPI numbers put out by the government. Using inflation rates in the real world would make the situation more dire for the average household. The only way people have been able to maintain their lifestyle has been to borrow against their house and run up their credit cards. That is a phony improvement in lifestyle. The country has been living a lie for the last twenty years. It is now time to pay the piper.
Even more disturbing is the fact that the top 20% of households showed real increases in income. The bottom 50% lost income during the Bush years, with the bottom 20% losing 6% of income over this time frame. No wonder there is so much anger in the country regarding this bailout for the top 1%. Fifty million households make less today than they made 8 years ago. The criminal CEOs on Wall Street collected $30 million annual salaries while their companies have lost $500 billion in the last year. The average American is living paycheck to paycheck and can’t maintain a lifestyle without borrowing. The unwinding of this unbelievable debt load could lead to the next Great Depression.
Coming Depression?
There is no absolute consensus regarding the causes of the Great Depression, but some common themes become clear. I will try to evaluate today’s environment versus the conditions that existed in the 1920’s.
1. Expansion of the money supply by the Federal Reserve during the 1920’s
According to the Austrian School of economics, the Great Depression was mainly caused by the expansion of the money supply by the Federal Reserve in the 1920’s that led to an unsustainable credit driven boom. Both Friedrich Hayek and Ludwig von Mises predicted an economic collapse in early 1929. In the Austrian view it was this inflation of the money supply that led to an unsustainable boom in both asset prices (stocks and bonds) and capital goods. Ben Strong, the head of the Federal Reserve, attempted to help Britain by keeping interest rates low and the USD weak versus the Pound. The artificially low interest rates led to over investment in textiles, farming and autos. In 1927 he lowered rates yet again leading to a speculative frenzy leading up to the Great Crash. By the time the Federal Reserve belatedly tightened in 1929, it was far too late and, in the Austrian view, a depression was inevitable. The artificial interference in the economy was a disaster prior to the Depression, and government efforts to prop up the economy after the crash of 1929 only made things worse. According to Murray Rothbard, government intervention delayed the market's adjustment and made the road to complete recovery more difficult.
Alan Greenspan reduced interest rates to 1% for over a year in 2003. This act led to a speculative frenzy in real estate, $3 trillion of equity withdrawal by consumers and tremendous overconsumption built upon a foundation of debt. This speculative frenzy was exacerbated by the “Masters of the Universe” on Wall Street with their CDOs, MBSs, and other magic potions that made bad loans appear good. The Bush administration’s decision to not enforce any existing oversight of the banks also contributed greatly to the current situation. Realistically, the current conditions are worse than they were prior to the Great Depression based on the speculation that has occurred in the last eight years in stocks and real estate. Debt as a percentage of GDP is now 356% versus 260% prior to the Crash of 1929.
2. Excessive use of debt which led to a false prosperity
According to author Jeffrey Kaplan, consumerism took hold of America during the 1920’s.
“By the late 1920s, America’s business and political elite had found a way to defuse the dual threat of stagnating economic growth and a radicalized working class in what one industrial consultant called “the gospel of consumption”—the notion that people could be convinced that however much they have, it isn’t enough. President Herbert Hoover’s 1929 Committee on Recent Economic Changes observed in glowing terms the results: “By advertising and other promotional devices . . . a measurable pull on production has been created which releases capital otherwise tied up.” They celebrated the conceptual breakthrough: “Economically we have a boundless field before us; that there are new wants which will make way endlessly for newer wants, as fast as they are satisfied.”
By 1929, the richest 1% owned 40% of the nation’s wealth. The top 5% earned 33% of the income in the country. The bottom 93% experienced a 4% drop in real disposable income between 1923 and 1929. The middle class comprised only 20% of all Americans. Society was skewed heavily towards the haves. By 1929, more than half of all Americans were living below a minimum subsistence level. Those with means were taking advantage of low interest rates by using margin to invest in stocks. The margin requirement was only 10%, so you could buy $10,000 worth of stock for $1,000 and borrow the rest. With artificially low interest rates and a booming economy, companies extrapolated the good times and invested in huge expansions. During the 1920s there were 1,200 mergers that swallowed up more than 6,000 companies. By 1929, only 200 mega-corporations controlled over half of all American industry.
There are some disturbing parallels between what was happening during the 1920s and what has been happening in America in the last 10 years. Today, the richest 1% own 21% of the nation’s wealth. The bottom 50% has experienced a 4% drop in real disposable income in the last eight years. During the dot.com boom of 1998 – 2000, small investors used massive amounts of margin debt to speculate in companies with no earnings. When this bubble collapsed, a lesson should have been learned that would last a lifetime. Instead, Alan Greenspan lowered interest rates to 1% and encouraged everyone to take out an Adjustable Rate Mortgage. The speculation in real estate reached phenomenal heights by 2005. The downside of that speculation is now only half finished. Stabilization of house prices is at least another year away and another 20% to the downside. That would still leave prices high on a historical basis. Home prices did not fall on a national level during the Great Depression. In the last ten years, there have been hundreds of mergers, particularly in the financial industry. The repeal of the Glass-Steagall Act in 1999, spearheaded by Senator Phil Gramm, allowed the massive consolidation in the industry. This is why our financial institutions have become too big to fail and are on the brink of collapsing the world economy.
3. Excess speculation by a small group of wealthy investors
The administrations of Warren Harding and Calvin Coolidge are considered the most corrupt in American history. Coolidge’s administration was committed to laissez-faire non-regulation government. He announced to all Americans, “The business of America is business.” The top tax rate was lowered to 25% in 1925, the lowest top tax rate in any decade since. Exports boomed due to the low value of the Dollar versus the British Pound. The ruling elite of society were the Wall Street speculators. Only 1.5 million people out of an entire population of 120 million invested in the stock market. Ben Strong, attempting to help Britain, reduced rates in 1927. This ignited a speculative frenzy in 1928 and 1929. Margin loans increased from $3.5 billion in 1927 to $8.5 billion in 1929. Stock prices rose 40% between May 1928 and September 1929, while daily trading rose from 2 million shares to 5 million shares per day. The market reached a peak of 381, with a PE ratio of 23 based on normalized earnings, on September 3, 1929.
Ben Strong died in October 1928. Therefore, he did not witness the terrible pain inflicted upon Americans by his reckless policies. Alan Greenspan has not been so fortunate. He is able to witness how his reckless interest rate reductions have resulted in a worldwide financial collapse. He continues to defend his actions, but his legacy will forever be linked to this disaster. These low rates caused a speculative frenzy in stocks and then housing. The Bush administration’s belief in allowing free markets to regulate themselves led financial institutions to take ridiculous risks using massive amounts of debt. Despite two ongoing wars and growing budget deficits, the Bush administration decreased taxes on the wealthy. The dollar declined dramatically in the last eight years, resulting in increased exports. The PE ratio of the market reached an astronomical 38 in 2000, before crashing below 20 by 2003. Currently, the PE ratio of 25 exceeds the level at the peak prior to the Crash in 1929.
The stock market declined to 41 by 1932, an 89% decline in three years. The PE ratio of the market declined to below 5 by the mid 1930’s. The market did not return to its 1929 level until 25 years later, in 1954. As the market began to fall, prominent Wall Street CEOs did their best to prop up the market. Charles Mitchell of National City Bank on October 21, 1929, a few short days before the crash, said, “I know nothing fundamentally wrong with the stock market.” George Harrison, the new Federal Reserve Chairman, provided tremendous amounts of credit to the banking system in 1929 and early 1930, attempting to keep the party going. In the last few months, how many times have we heard Hank Paulson, John Thain, and other Wall Street cheerleaders tell us the banking system is safe and sound? Ben Bernanke has reduced interest rates dramatically, pumped money into the banking system, and taken bad assets onto the Fed balance sheet. So far, this does not appear to be working. The market has declined 30% from the peak, but is overvalued on a historical basis with profits about to plunge during the coming downturn.
4. Government responding with tighter credit, higher taxes and higher tariffs
Ben Bernanke, a self proclaimed expert on the Great Depression, concluded that missteps by the Federal Reserve in 1930 and 1931 resulted in the financial crisis becoming a depression. After the stock market crashed, speculators began selling dollars for gold in 1931. This caused the value of the dollar to plummet. The Federal Reserve raised rates and reduced the money supply by 30% to try and prop up the dollar. Investors began to withdraw their dollars from banks, and banks began to fail. By the end of 1932, 9,000 banks failed. People hid their cash under their mattresses. Bank deposits were uninsured, so when banks failed, people lost their life savings and businesses failed. Panic and fear gripped the nation. The remaining banks hoarded their cash, refusing to make loans to businesses. Treasury Secretary Andrew Mellon declared, “Liquidate labor, liquidate stocks, liquidate real estate, values will be adjusted, and enterprising people will pick up the wreck from less competent people.”
The failure to stimulate the economy with increases in the money supply was a huge mistake. The United States had the flexibility to stimulate the economy. At that point in history the U.S. was the biggest creditor in the world, with a trade surplus of $638 million. Instead of stimulating the money supply, the government attempted to protect American businesses by passing the Smoot-Hawley Tariff in June 1930. This bill increased taxes on imports which led to retaliation by other countries and contributed greatly to the worldwide downturn. World trade declined 67% by 1933. Herbert Hoover increased the top tax rate from 25% to 63% in 1932. All of these government missteps led to a downward spiral in the economy. In 1930 the GNP declined 9.4% and unemployment rose from 3.2% to 8.7%. In 1931 the GNP declined a further 8.5% and unemployment surged to 15.9%. The worst year of the Depression was reached in 1932 with GNP declining 13.4% and unemployment reaching 23.6%.
After the election of Franklin Roosevelt in 1932, his New Deal programs made people in the country feel like progress was being made, but unemployment remained above 14% throughout the 1930s. Roosevelt’s plans to redistribute wealth from the rich to the poor prompted millionaire businessmen Du Pont and J.P. Morgan to plan an overthrow of Roosevelt by military coup and installation of a fascist government. They tried to convince General Smedley Butler that they would provide an army of 500,000 and unlimited funding. The plot was foiled when the general reported it to Congress. Desperate times sometimes lead to desperate measures. The Depression did not truly end until 1939 when the U.S. borrowed $1 billion to begin rearmament in preparation for war.
Thus far, in this current financial crisis no one can accuse the Federal Reserve or the Administration of not responding with injecting liquidity into the system or reducing interest rates sufficiently. The discount rate has been reduced from 4.75% to 2% in the past year. The Federal Reserve has increased their balance sheet by over $1 trillion in the last 9 months. The government has committed in excess of $1.3 trillion of taxpayer money to keep the financial system from imploding. The question that has yet to be answered is whether these actions are just pushing on a string. Are the current conditions so extreme that we are destined for a severe recession or possible depression? The country has a national debt of $9.6 trillion, annual deficits of $600 billion, unfunded future liabilities of $53 trillion, a trade deficit of $600 billion, inflation of 6%, two wars costing $12 billion per month, and a weak currency. Therefore, we have not entered this extremely dangerous period with strong economic fundamentals.
In the last few years Congress has become much more protectionist. The sale of U.S. ports to an Abu Dabai company was blocked. The acquisition of a U.S. oil company by a Chinese oil company was also blocked. Worldwide trade negotiations recently broke down with no agreement. Free trade is being threatened. In 4 weeks the country will likely elect Barrick Obama President and Congress will be overwhelmingly in the hands of the Democratic Party. Mr. Obama has made it clear that he will increase taxes on those earning more than $250,000 and corporations. His plans include health coverage for all Americans and major spending initiatives on education and infrastructure. With colossal deficits, a protectionist Congress, tax increases coming, and gigantic spending initiatives, the next four years are setting up to be exceptionally difficult for the U.S. economy. The parallels to the early 1930s are eerie. The next administration could easily make policy mistakes which would cause a second Great Depression.
Boundless Morass of Uncertainty
The $820 billion bailout package will not fix what is wrong with this country. Hank Paulson will buy bad assets from any financial institution in the entire world for some yet to be determined price. Many smart people, including John Hussman, Nouriel Roubini, and Chris Whalen have concluded that the plan will not work. The banks need a direct infusion of capital to begin their recovery process. This entire exercise in futility will be overwhelmed by events in a matter of days. The American taxpayer will never see a dime of that $820 billion paid back. When was the last time a government program actually worked? Corrupt politicians, Washington bureaucrats, Wall Street fat cats, and clueless commentators have failed to realize that the gig is up. Our entire financial system has been built upon deception, lies and debt. The only thing keeping the system afloat has been blind faith in our government and financial leaders to do the right thing. The whole world now has seen that these leaders were lying and the blind trust has been shattered into a billion pieces.
There is currently a worldwide run on the banking system. The pictures from the Great Depression show people standing in line to get their cash out of the banks. We are in a different age that allows bank runs to occur in seconds rather than days. Companies and wealthy people in the know are pressing buttons and transferring billions in cash out of dangerous shaky financial institutions. With leverage of 30 or 40 times their cash balances, banks are collapsing around the globe. The average American does not see this happening and is being kept in the dark by the all powerful lords of finance. The market hailed the investment by Warren Buffett last week in General Electric. Of course, no one from CNBC would ask why GE would sell stock at a 10 year low price after buying back billions when the stock was in the $30’s, pay 10% interest to Mr. Buffett when market rates are 4%, and stop dividend increases after decades of increases. GE is in much worse shape than anyone is willing to admit. Governments throughout the world are desperately trying to stem the tide of defaults, but confidence in the Ponzi scheme has been destroyed. Behind the scenes, Ben Bernanke and Hank Paulson are scrambling to provide enough liquidity to keep the system from imploding. A worldwide coordinated, reduction in interest rates will occur soon as a last ditch effort.
For the 1st time in many years I saw something that shows promise for our country’s future. Despite the rhetoric from President Bush, Hank Paulson, Ben Bernanke, Nancy Pelosi, Barney Frank, all CNBC commentators, and various ultra-rich Wall Street shills, the American public was firmly against this bailout bill. I sense that the “ME GENERATION” is finally ready to accept the consequences of their selfish lifestyle over the last 30 years. The materialistic frenzy that has been the hallmark of the Baby Boom Generation is coming to an end. It is being forced upon many, but will be the choice of many more. The worldwide deleveraging will lead to a new mantra for this generation, frugality and living beneath your means. The psychology of the whole world has changed in a fortnight. Our leaders are so consumed by their own agendas that they have not realized the implications of this psychological change. Chaos and turmoil reign in the markets today. The population of the U.S. will turn inward and seek comfort in more simple pursuits. This will ultimately be a beneficial change for our society. But, the immediate result will be wrenching for the country.
The Catch-22 of our current economic system is that if everyone in the country lives within their means, the economy will collapse. The spending of money we do not have is what has driven our “Great” country for the last three decades. We can always count on Government to not live within its means, so deficit spending will continue and most likely accelerate. But, consumers have been dependent upon the stupidity and recklessness of banks, credit card companies, retailers, and auto makers to help them live above their means. This part of the American Dream is lying in shambles. Banks will not lend, credit card companies are cancelling credit lines, retailers are closing stores, and auto makers have stopped financing cars. Part 2 of our economic crisis has just begun. Having worked for a big box retailer and a major public homebuilder, I have witnessed first hand that faulty pie in the sky assumptions about growth will lead to dreadful strategic decisions that have huge negative financial consequences to those companies.
The coming Holiday season will be the worst for retail in decades. Most retailers generate 50% to 75% of their profits in November and December. Early in 2009, the avalanche of retail bankruptcies will begin. The big box retailers who built their expansion plans upon demand that was a debt induced fallacy, will experience tremendous losses. They will begin to close stores by 2010. Automakers will continue to see sales decline to levels never thought imaginable. All three major U.S. automakers could go bankrupt by 2010. House prices will continue downward. Two or three major homebuilders will go bankrupt by 2010, while hundreds of small builders will collapse. Mall developers and commercial developers have taken on billions in debt in the last decade. As tenants go bankrupt and the rents dry up, hundreds of large public developers will declare bankruptcy. These losses are not factored into the numbers of the 8,500 banks in the U.S. By the time this crisis is finished, we are likely to be left with 5,000 banks or less. The official unemployment rate will easily surpass 7% and possibly reach 8% by 2010. Based on the unemployment calculation used during the time of the Great Depression, we already have unemployment of 15%. This could conceivably reach 20%. The PE of the market is still above 20. Profits will plunge in 2009 and irrational pessimism could propel the Dow to its 2002 low of 7,200. That would be 28% below today’s levels and almost 50% below the all time high of 14,000.
Even if we somehow avoid a true depression, the next few years will be extremely painful. The question is whether we come out the other side as a stronger Nation or a weaker declining Nation. The words of Congressman Ron Paul should be the rallying cry for our great country.
“The issue boils down to this: do we care about freedom? Do we care about responsibility and accountability? Do we care that our government and media have been bought and paid for? Do we care that average Americans are being looted in order to subsidize the fattest of cats on Wall Street and in government? Do we care? When the chips are down, will we stand up and fight, even if it means standing up against every stripe of fashionable opinion in politics and the media? Times like these have a way of telling us what kind of a people we are, and what kind of country we shall be.”
It is time for our citizens to accept the bitter medicine of bad times, but to learn from our mistakes and put this great nation back on course as the beacon of democracy that our Founding Fathers envisioned.
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This article has 61 comments:
depression ? In their mind, most people are just fools.
Wind the clock back to 1995, and you will see the seeds of this debacle were planted by then Sec. Treasury, Robert Rubin.
Unfortunately, although no economic expert, I did follow your logic and it all kept clicking together, step by step, like the sound of a well made watch, with all its precise parts meshing perfectly together. I say "unfortunately" because I kept getting more and more depressed with each paragraph. I have no argument with you on your facts or their relationships. You may be absolutely correct. What is to come in the next few years may unfold exactly as you say, to all our horror.
Right now I feel like selling the remaining 10% of my portfolio that's in the market as quickly as possible, just to get the hell out. I'm really scared...
On the other hand, if you are right, then what's coming will be the time of our lives. Our emotions will run the gamut, we will have to meet difficult challenges and find our true metal, which only comes on those rare occasions in life which boil the blood and lead to high mountain tops of a very special kind of fulfillment. Perhaps its time for this generation to come together in something other than fear and greed, and discover a deeper, more meaningful connection that we all share.
Could be a good thing.
Where is the excess social security tax going? funding other 'necessities'. why should anyone expect this borrowed money to end up being used more prudently by the same squanderers?
Everyone looks at housing but we have had housing booms and busts before. The CDO - CDS situation is holding us back - trust? - what trust.
This matter must be cleaned up and regulations put in place if we hope to proceed as a nation.
Our advantage? In America, we talk about our problems. The 60 minutes special got the word out. Now the public outcry needs to swell. Maybe something can be done yet.
We need fresh blood in congress - vote out all incumbents!
Yes there are parallels to the great depression, but there are some things that are different than in the past. The author notes some of them in that instead of reducing the money supply in response, it is adding more liquidity. This is unprecedented, is the author correct. I know not.
The other thing we have now that we didn't have in the past is the Internet, a grass roots method to inform the general public outside the main street media. In another Seeking Alpha article, another author talked about how financial markets and even the dollar are all based on trust. That trust has been shaken.
The fact is the only way we can truly get to a full depression is if collectively the world gets so panicked that everyone goes into a bunker and hides (the protectionism noted above).
I have no political affiliation to either American political party since I am Canadian. But the author makes the assumption that the democrats will get elected and their policies will exasperate the situation.
Personally, I see this article as irresponsible. It is well written, and has an easy to follow logic, and let's face it, it is a definite possibility. But even as it commends the American people for their reaction to the bailout bill, it condemns them to make the same mistakes of the past. Is the scenario outlined above possible? Yes, but only if everyone buys into it. Trust is key here.
I think everyone needs to accept that the party in America is over, and it will be hard. But if people irresponsibly incite panic it will be worse.
Will you lose money? Yes. But so will everyone else in the world, we will all be a little poorer (a period of deflation will occur), but if the underlying value returns it just means that everything will be cheaper and hey you might be able to buy something with a dollar then.
I commend the author for a well written article that has described accurately where we are today and the hard road ahead, but as someone who is clearly intelligent I find it hard to fathom why he would not consider the impact of his words and how they are just another irresponsible act on top of all the others.
I hope this helps those who are considering burying themselves in a storm shelter. By trying to help everyone else calm down maybe we can make sure the future is merely painful instead of catastrophic.
Clinton and Franklin Rains started this thing by insisting that everyone should be able to buy a home and Fannie was going to make it happen. OBama ain't going to pull the plug on that one.
There is a fire sale of incredible proportion going on now. Buffet knows a good thing when he sees it. So does Vikram Pandit. He got such a good deal with Wachovia now they are fighting over it. Paulson is going to look like a genius in 2-3 years when he makes a profit on on the debt he now owns returns to normal.....ah oops actually Obama will be credited as the genius.
I'd say this was capitulation. The blood is in the streets. Get ready to buy.
Article describes what happened after huge tax increase.
The rape continues. And not even a kiss.
Whilst nothing in the future is set in stone and cannot be forseen, the facts and consequences of over indulgence in debt are clear. It doesn't hurt to prepare for the worst whilst hoping for the best. The idea is navigate and survive the coming deep recession in one piece [except of course the very wealthy who are not leveraged].
A few of the readers feel that such articles talking about Depression should not be written. If people who have a view supported by well researched facts and trends cannot express them, is America a democracy where people freely speak their minds on important economic issues?
uneducated consuming innocents who contributed in their own way to this fiasco but never saw it coming. These are indeed interesting times here at the end of empire.
I'll go with Buffett and those like him, who are behind the scenes making deals right now while everyone else goes shopping for guns and canned foods.
The inflationary boom is definitely coming...
Can you imagine the uproar if one of Obama's daughters (if they were older) was pregnant? Republican family values?? Only when they are convenient.. Cheny's gay daughter? OK...But see...their family values just don't work at home.... Hypocrites. Pathetic.
Just wait till the next administration tries to fix the problem!
Cal48koho, great summary comment.
Many others, you are still in a state of denial. A few have left denial and are now in anger. More will follow. We have to work through the stages of mourning to get to the other side and rebuild our society and economy.
I have studied the data presented and there are clear changes in trends at certain times in our history. I draw some clear conclusions regarding what political and public policy events have played a roll in our history simply from the timeline. My conclusions would spread a rather broad range of blame across the political spectrum.
I will not share my conclusions for three reasons:
(1) Some would prompt political garbage comments from the "left".
(2) Some would prompt political garbage comments from the "right".
(3) For logically analytical people, my conclusions are obvious.
Finally, James Quinn, please keep up these detailed analytical articles.
The middle class took it in the rear and will continue doing so for some time. Both political parties are responsible. That there are no consequences for those that committed outright fraud is not surprising. That would only directly implacate those in power in Washington.
There are opportunities for those with cash that acted responsibly and understood enough about history and economics to make it out the other side just fine, but I have much pity for Joe six pack.
The fraudulent and irresponsible are a minority in this economy and catastrophe. Certainly some lived beyond there means because that was the USA's economic model and government encouraged reckless spending for years, at a time when prudence was in order. This message that our economy had to go from Efficient Market to Save and Invest should have been yelled from the roof tops but leadership is bankrupt in Washington, hence a bankrupt nation.
All enjoyed the party, hence the pain should be equally distributed but the upper class are protecting themselves and the middle class has been, is and will get slaughtered. And few actually read the historical consequences of destroying the middle class. Trickle down economics only works with good stewards that are trusted, not the corrupt.
Your analogies to the 1920's-30's are valid, debt as a percentage of GDP are way too high. However I disagree that people are really aware of the problem and ready to accept the 'bitter' medicine. Rather we live in an entitlement society born of the new deal, and the entitlement mentality has only grown each decade with new government programs designed to help the 'needy' yet used by the middle and upper class. The most egregious of entitlements today seem to the 'right' to pay lower taxes in the guise of creating jobs for the lower classes. I think that when the reality comes home to roost that we are not as wealthy as we seem, we will see some very serious social upheaval - like riots that will make the one in LA in 1991 look like a picnic!( I am stocking up on firearms, ammo and fire extinguishers)
True value destruction has yet to be seen from the coming calamity. I think your projection of Dow are far too generous. If we see massive store closings, we will see concurrent retail store bankruptcies. Try to picture a world without either Lowes or Home Depot, Target, Bed Bath and Beyond, Whole Foods. Picture lots of malls with empty store fronts and therefore lots of bankrupt REITS. GGP will be the first to go followed by many others like SPG, CBL, MAC.
As an investor your guide should be to look to the bond markets. In the deflationary environment that we will soon face, its better to have a contract guaranteeing repayment and secured by assets than a residual equity interest.
Can you imagine if John MCcain's preacher said the things that Obama's did? What you mentioned has no bearing on the financial issues going on, but I know one thing that does....can you imagine if McCain was the No.2 recipient of lobby money from Fannie and Freddie like your boy Obama? Do you deny that lending to people who cant pay their bills has a bearing on the crisis we are in today? That is a liberal policy if I have ever heard one. Who cares who is pregnant? Your decisions/mistakes to have sex, dont influence your financial decisions, but the thought that anyone and everyone should own a home does.
This guy's figures are a little inflated to support his thoughts of doom and gloom...PE ratios that exceed 25? What index is this guy referring to?
This guy makes it sound like we should just do away with Credit....Credit is not the problem...Lending to fools who are not credit worthy is the problem which causes a backlash in the sytem. Shame on the wall street carnviores that did encourage these lending practices...which once again was brought on by liberal thinking and liberal pressure from the Clinton Administration...look it up..Im not making this up...
As politicians and their colleges in governmental administrative bureaus and regulatory branches are corrupted by the cartels and monopolies they create. All governments are monopolies and only governments can grant and enforce monopolies in the private sector. The first monopolies created by the US Federal Government were the US Post Office (a government monopoly) and the George Washington's private whiskey monopoly.
The cartels and monopolies (both in governments and public and private) pauperize the great majority of citizens to the advantage of themselves and other government workers (public monopolies) and patronage purchasing private monopolies.
See Wealth of Nations by Adam Smith dated 1750.
The bigger and older the nation state the worse this corruption becomes and the more the living standard falls for the general citizens in the population who are disconnected from government patronage.
In the end all such governed nations implode and collapse permanently as did Egypt, Rome, Greece, China, and England to name a few. The population dies off or moves away and the dwindling big government lovers write books or at least short reports explaining why more government was needed.
Good Luck
The author wants to increase the power and size of US governments which are the problem and not the solution
Massive spending by the government in lucrative contracts for business to build up military armaments for world war II is often cited as the genesis of the economic turnaround. The war effort put people back to work. But war was not needed to end the depression. The reality was the repeal of highly restrictive global tariffs (e.g., Smoot-Hawley in the U.S.) which stifled international trade would have been enough to turn the economy back around.
Is a new world war the solution? No, putting the American people back to work is the only answer.
Business needs capital to fund new enterprises, new channels of growth, new manufacturing here in the U.S. They need a financial incentive to rebuild the economy in the U.S. instead of seeking lower cost labor markets elsewhere in the world. There are many federal/state regulations that do not impact worker safety or the environment that can be scaled back to encourage a resurgence of capitalism back on American soil.
The American people need to work to generate income to pay their debts and build up cash reserves. I believe they are learning to understand that 'debt equity' is a myth and unsustainable.
In order to work they need affordable educational opportunities. Institutions of higher education must reduce the huge financial burden put upon our young people through excessive increases in costs for tuition, books, room and board, etc. The corporate profit model adopted by academia must be scaled back as it has contributed to the knowledge bankruptcy of America’s youth.
Labor unions need to re-think their role in this picture. They will have to make changes as their demands on business for excessive compensation and benefits cannot continue as it drives employers away from the U.S.
Broadcast media must contribute their share to rebuilding the economy as well. They must return to the independence of journalistic integrity instead of acting as corporate sock puppet propaganda machines.
Unfortunately because the fascist corporatists control Washington, we will see more government intervention that will only protract and deepen the current recession. Instead of government reducing spending and shrinking in size, they will expand their power and control over the economy. The TARP act is a perfect example of how corporations have beguiled Congress with fear if they didn’t spend more of the people’s wealth.
We, the American people have to act politically. This is our only hope short of armed rebellion. The two party duopoly of Democrat and Republican ideals no longer serves the people. Keep in mind that party affiliation is not what this country was founded upon. The American republic was created to escape the oppression of abusive government.
Vote out the incumbents who represent corporate agendas and not your interests. If your congressional representative voted for the bailout, vote against him or her. Pick a third party candidate whose platform is close to what you and your family believe in.
Be your own hero.
September 7, 2008
If there's a silver lining to bear markets, it is that they make stocks cheap for the next wave of investors. But so far in this downturn, it isn't working out that way.
Based on the price-to-earnings ratio, stocks have actually become more expensive even as share prices have come tumbling down. In fact, the P/E ratio for the Standard & Poor's 500-stock index, based on earnings over the previous four quarters, has risen to just more than 24 from about 19, according to S&P.
In the early stages of a bear market, earnings are still near the top of the cycle while stock prices are dropping in anticipation of lower earnings. If earnings do not drop, we do not end up in a bear market, but simply have a correction followed by a further advance. If earnings do drop, there is often a period of denial in the market that allows prices to remain high enough that PE ratios actually rise before prices drop into bear territory and remain relatively high through the market bottom. Only with multi-year bear markets do we actually see very low PEs near a market bottom. After a market bottom, often earnings are not yet rising but stock prices are. In other words, PE values are a trailing indicator.
In comparison to what was done in the wake of the Great Depression, policy makers are now reacting in an opposite, but equally excessive fashion. The current problem is a crisis of trust (lack thereof) and NOT of liquidity.
Central bankers do not seem to understand this, and are flooding more and more liquidity into the market. Attempting to micro-manage the economy is a huge mistake, and the Federal Reserve will, hopefully, be closed down because of what they are now creating. But, before that happens, they will trigger inflation levels that we have not seen in the developed world, since 1923.
The current decline in the stock market is temporary. Soon, it will go up, again, in nominal terms. Paper money, however, including especially the U.S. dollar will become worth less and less. The world is awash with money that cannot be productively put to use. Instead of sending out an army of auditors to close all shaky banks in order to raise levels of trust, central bankers are sending out paper money.
Accordingly, we do not face a deflationary depression of the type that you've described, at least not yet. Rather, we face the very real prospect of Wiemar Germany style hyperinflation. Both forms of economic excess are terrible, but the latter is worse. Depending on policy maker's reaction to hyperinflation, however, we may yet get into the worst Great Depression in history.
The wealthy are in almost complete control of America by controlling corporate business wealth and most of the Congress and the Executive branch.
Wealth and income distribution are more unequal than at any time since the American Revolution.
We shouldn't need to face an economic collapse to change this situation and we don't need to become socialists either.
Table 1: Distribution of net worth and financial wealth in the United States, 1983-2001
Total Net Worth
Top 1 percent Next 19 percent Bottom 80 percent
1983 33.8% 47.5% 18.7%
1989 37.4% 46.2% 16.4%
1992 37.2% 46.6% 16.3%
1995 38.5% 45.4% 16.1%
1998 38.1% 45.3% 16.6%
2001 33.4% 51.0% 15.5%
Financial Wealth
Top 1 percent Next 19 percent Bottom 80 percent
1983 42.9% 48.4% 8.7%
1989 46.9% 46.5% 6.6%
1992 45.6% 46.7% 7.7%
1995 47.2% 45.9% 7.0%
1998 47.3% 43.6% 9.1%
2001 39.7% 51.5% 8.8%
Total assets are defined as the sum of: (1) the gross value of owner-occupied housing; (2) other real estate owned by the household; (3) cash and demand deposits; (4) time and savings deposits, certificates of deposit, and money market accounts; (5) government bonds, corporate bonds, foreign bonds, and other financial securities; (6) the cash surrender value of life insurance plans; (7) the cash surrender value of pension plans, including IRAs, Keogh, and 401(k) plans; (8) corporate stock and mutual funds; (9) net equity in unincorporated businesses; and (10) equity in trust funds.
Total liabilities are the sum of: (1) mortgage debt; (2) consumer debt, including auto loans; and (3) other debt. From Wolff (2004).
Do we have to espouse socialism to try to bring more equity to the distribution of wealth in America?
We could:
Control our borders
Have strong unions
Tax the super rich to redistribute SOME of their massive wealth.
(I'm not talking about taxing the well-off middle class who are worth as much as five million dollars!)
Why is that SOCIALISM?
Do we really need a depression to accomplish this?
Before you get condescending on me, the most current data I have, which is today, is TTM Earnings of 56.55, which with S&P at 996.53 puts the P/E at 17.62....so...Im not sure what date you are looking at, but when this clown wrote this article, it was not in excess of 25
I'm a little pessimistic myself, thinking that human inequality is "insurmountable."
It seems that one group has to have hundreds and even thousands of times more money, power, prestige, etc. than another and the lower classes, who seem to be the bottom 95% have to be, more or less, the servants of the upper 5%.
Revolutions just change the hats on the heads of the top 5%.
"Hello commissar, you look familiar. Nice hat you've got there, sir."
I'm the clown who wrote the article. The S&P was trading at 1250 when I started the article. I can't help it that it plunges 5% per day. Of course, I'm overly pessimistic. The PE is based upon normalized earnings. Read some articles by John Hussman on the subject and you might realize that PE's are much higher than reported.
You will only be wasting your vote if you vote for the established party candidates. Why? Because once they get to DC they are all the same! Because it makes no difference which party gets your vote, in terms of the practical outcome.
They must all work together to pass these tragically ridiculous laws, those that erode our constitutional liberties and those that pollute our economy. They must have a MAJORITY. There is no majority unless BOTH PARTIES VOTE TOGETHER. By mutual assent on this bailout, those reps in close races for their seats this fall were allowed to vote no, but make no mistake, Congress ensured the votes were there to pass the bill, anyway, regardless of what the voters wanted. The correct response is to get them out of office in November.
We consumers appreciate and demand expensive marketing, as we have been trained to do, but we don't question how it is financed. That should be the first question in any debate - who are the top 20 contributors to your campaign? That will give you the true agenda more surely than anything else they can possibly say. And who do you think is supporting the campaigns of the third party candidates? Just us. That is why they can't afford the air time, and can't get media exposure. Wake up, America. Stop rewarding the sell-outs. Vote out all incumbents. Vote in an entirely new congress. Vote in a new party to the White House. Maybe it can be turned around.
I am sick of hearing Bush this Bush That.Every single person in Washington knew what was happening.And yes I went from Middle class to low income in 2 years.As far as I know Middle Class always gets it in the rear end and it is time for this to stop.
Tax the damn wealthy .I don't begrudge anyone wealth but holy cow you have trillions of dollars going in the garbage that can be put back into America.
And yes Noone can fix this problem.Because Americans have become lazy and just keep voting the same old in over and again.While us peons work our fannies with 2 sometimes 3 jobs keeping America alive.
I am disgusted with the greedy Americans and the Lazy Ones.Share your tax money I been paying up the fanny since I was 17 years old.
Many thanks for giving the political hacks and dolts their deserved press, and much, much, more of this needs to be done, and done more often. We cannot depend on their brethren, the Corporate TV media, Wall St., and Admin, hacks and cronies to do it for us, which is why you provide us with an extremely vital and timely service. I look forward to all future articles.
For us to move forward, the accceptance of our mistakes is necessary, and perhaps the most important factor. Our administration has been lying to us, saying the economy is not that bad, and we are not in a recession. How does it help to sugarcoat that fact, and lessen the acceptance of this current economic situation?
Chris B, I have been wrong in the past and attacked you unfairly in some instances. It is clear to me that we may be more in agreement on some things than I'd previously assumed though not in agreement on many. I absolutely agree with you that some of the best investments anyone can make in our current situation, are in educations on things that will be useful to a rebuilding country and their fellow citizens.
Right now my top investments are in books, educational courses, and a couple of businesses that should be greatly helpful to my fellow Americans who are hurting financially. I also believe strongly in the need to get passports for my family, hold some assets denominated in precious metals, and also to get emergency related supplies for the protection and support of my family.
We save and invest much now (though not in the US stock market), are producing things of value to the average American, and consume/spend very little. This should be the mantra for every American.
Oh, and one more thing, vote out EVERY Democrat or Republican who voted for the bailout bill. Hell, vote out any of them not endorsed by Ron Paul. Write in a candidate, like Ron Paul, who has an honest voting record that doesn't flip-flop on every issue. At least we know how he will handle the situation, and if he was wrong we can't be dis-illusioned by having voted for him, because he's been voting his beliefs for 30 years without fail, and will continue to do so in any governmental function!
Voting for Obama, a Constitutional law professor before being a politician, who being one of the more educated people about the Constitution in this country, gave a great and impassioned speech about how the Patriot Act would rape our Constitution, then proceeded to vote in favor of that very same act, will not help this country one iota. And this is not even including the facts as to where his campaign monies originate.
Voting for McCain, who shows so little a grasp of economics, that he can't even answer valid economic questions intelligently, is equally ludicrous. Not only that, but history has shown us that putting men in positions of power who have been tortured, is a VERY bad idea.
I don't know it all, but I learn every day.
Viva Ron Paul
Because the world is globalized the depression will spread around the world. Likely effects will change nations demographically, militarily and politically. I agree that materialism will end and for White Americans-they will have to increase there birth rates as there will be no pension funds and no security for there old age-period! The same goes for countries like Australia, Europe and Canada. Once the markets collapse and unemployment raises (starving tax revenues) pensions, the walfare state and pension funds will end. Materialism and "career" will all mean Jack Shit. Unemployment will be worse this time around as well, because nowdays many jobs are pointless. Overpaid yuppies paid enormous amounts of money to produce and/or service nothing! This wastful economic practice will be ditched. Also expect massive emmegration as millions of immigants (and there children) dump the collapsing dollar and flee. There is no point in staying in a nation where there is no work opportunities.
Becaue the western nations have no savings, massive deficits and cusume the most of the world's dwindling oil, they will be the first to suffer the Second Great Depression.
Fact is the economy is much like a spacecraft. It goes up and it goes DOWN.
PS. I bet you were really good at the game of RISK. You strike me as someone who would approach the game with a great strategy.
This was much needed...after the dust has settled....the world will be a different place...the "Rise of the Rest" will have resumed and America (I still love you) will no longer be the sole Superpower. The best thing for us to do is take cues from the British Empire when they handed the crown to us.
The problem is that we pay trillions of dollars (government and personal) to do what we could easily do for ourselves ABSOLUTELY FREE: that is, to supply ourselves with money to exchange with each other and with workers in other countries.
Replace the Fed dollar with our own money, put it into circulation via equal-dollar distribution=End of Depression.
Replace the FederaI Income tax with a flat, one-half percent electronic transfer fee (and get rid of all corporate and personal subsidies and 4000 Federal laws), and the next 200-year boom will start.
thecomingdepression.bl...
On Oct 07 10:22 AM Kelly Lieberman wrote:
> Can you imagine the uproar if one of Obama's daughters (if they were
> older) was pregnant?