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At Peak 5.5% of the Economy

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January 17, 2008 – Comments (3)

Sometimes it amazes me how differently I interpret something compared to someone else. This is a comment I read on Mish's blog today:

"The truth is that there's a touch of hysteria to much current economic commentary that is, as yet, unjustified by what's actually happened to the economy. Yes, the housing slump is vicious, but at its peak, housing was only 5.5 percent of the economy, and the present slump is still only the fourth-worst since World War II."

If housing is "only 5.5%" of the economy, how come it takes 30-50% of your income for 30 years to pay for it?

3 Comments – Post Your Own

#1) On January 17, 2008 at 1:46 AM, MakeItSeven (32.34) wrote:

What Mish said was probably Residential Investment which peaked at 6% of GDP

That doesn't count any of the related business such as brokers, loan officers, furnitures, building materials, etc.   IIRC, I read a year or so ago that the number of brokers, loan officers accounted for 10% of the labor force in Orange County, CA.

There is also a ripple effect into all the service sectors such as restaurants, cleaning services, etc.

As an analogy, here was what Stephen Roach said last August:

When the bubble burst in early 2000, the optimists said not to worry. After all, Internet stocks accounted for only about 6% of total U.S. equity-market capitalization at the end of 1999. Unfortunately, the broad S&P 500 index tumbled some 49% over the ensuing 2 1/2 years, and an overextended corporate America led the U.S. and global economy into recession.

Similarly, today's optimists are preaching the same gospel: Why worry, they say, if subprime is only about 10% of total U.S. securitized mortgage debt? Yet the unwinding of the far broader credit cycle gives good reason for concern--especially for
overextended American consumers and a U.S.-centric global
economy. Central banks have now been forced into making emergency liquidity injections, leaving little doubt of the mounting risks of another financial crisis. The jury is out on whether these efforts will succeed in stemming the rout in still overvalued credit markets. Is this any way to run a modern-day world economy? The answer is an unequivocal "no."

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#2) On January 17, 2008 at 7:47 AM, TDRH (99.66) wrote:

Not sure I understand the math to come up with 5%?  

 Read an article by Roach where he also said that consumer spending represented 72% of GDP.  

 If even a small percentage of individuals in the section of your GDP that accounts for the 72% loses value or defaults on an investement that represents 30-50% of his/her income for 30 years, how do you think it is going to ripple through the economy?   

The banks are righting down billions of dollars because they did not plan for the defaults that are occuring now, and we still have relatively high employment.   What happens to the ripples as they move through and cause the losses of additinal jobs?   Hopefully they do not grow into a tsunami. 

Sorry if I keep repeating myself, but the biggest question I have is what is going to lead us out of the downward cycle?    The  next president of the US has my sympathies already.   I keep looking at the candidates on both sides thinking why are you fighting so hard just to be a scapegoat.  

I had  added a list of things that the government and American people would have to do to start us in the right direction, but it sounded kind of subjective and this is dwot's blog.

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#3) On January 17, 2008 at 9:02 AM, dwot (72.07) wrote:

TDRH, you certianly bring up the double edge sword to this, on one side people are cash strapped or "house poor," and on the other side people who might be spending will spend a lot less if they start losing in their investments.

Makeitseven, it was in the comments, nothing Mish said. 

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