Is The Party Over?.....for a while
June 15, 2008
– Comments (12)
Think about how our economy grow over the past 7 years.....over 100% of job growth can be attributed to real estate and health care. If you think about it, the process was pretty incredible. Loan Trillions. Build Millions of Homes and Condos. Create Massive Big Box Shopping Destinations. Hire millions of workers to build, sell, and loan to support the growth.
We loaned trillions, built millions, and while the party was going on, nobody really thought about what would happen if things started to slow. How would the loans be paid back? where would all those workers work? and what would we do with all that retail space now that sales couldn't support rent?
Just the above creates an bad enough environment of potentially the worst credit crisis in our nations history.......but no one, including myself, ever contemplated rapidly rising food and fuel prices.
Combine the two and you have a situation that could rapidly pull our nation's economy into a hole deeper than anything we have seen before.
A credit crisis causes wages to decline and income producing assets to fall in value....couple that with rapidly rising energy and food prices and we reach a very ominous point.
The entire infastructure of our nation is built around the premise of cheap energy. The way we live, the way we work, and the way we shop. Our jobs are also built around that same premise. Rising fuel prices destroys mobility. For an economy dependent on mobility, rising fuel prices can destroy an economy.
The earnings of many of our corporations are dependent on cheap fuel. Without customers, many of our business will fail resulting in millions and millions of job losses.
We are already seeing the effect ripping through some of our largest industries. Initially, I attributed the slowdown to an inability of consumers to borrow without much consequence. But now a second front is having an even more immediate impact....basically rising food and fuel prices sucking away all discretionary dollars of many families.....even those that did not excessively borrow during the boom years.
Without consumers' ability to spend, business in America will come to a grinding halt. And it doesn't matter the industry...all will be affected. Initially some will benefit at the expense of others as consumers migrate from one business to another...but if the process continues to unwind....few will be able to afford to buy much.
It is truly amazing what is happening to America right now. Over 1 million homes have been foreclosed. Millions of jobs have been lost. Employers are cutting back wages and benefits. Major industries are unable to make a dime in profit. And against the back drop of a collasping economy, the cost for just about everything we spend money on is rising.
I doubt the denial phase can last too much longer. Due to declining revenues, businesses are being forced to shut down. Municipalities are being forced to cut back. Projects are being delayed or abandoned.
At the end of the day, a product or service can only be sold if a customer can buy. With declining wages....a greater and greater pecentage of Americans' incomes is going to service debt, food, and fuel. In a rising number of cases, many families have ZERO dollars left after paying food, fuel, and debt service. Even before the rapid rise in food and fuel prices our nation had a negative savings rate, can you imagine the distress now that prices have skyrocketed and people can't borrow?
As more jobs are lost and wages continue to fall, more and more families will be unable to meet monthly expenses. I never dreamed how substantial the impact of rising fuel prices would have on our economy...a tax of about $500 Billion dollars per year....couple that with a contraction of credit availability and our nation is rapidly heading down a path much more dire than The Great Depression.
In The Great Depression we had falling wages and falling costs, this time we have falling wages and rising costs.....a combination we have NEVER seen before.
The fall in home prices now reminds me of the dot.com implosion. A stock that was $100 per share was a bargain at $80. When it hit $60 you should load up the truck. At $40 it was at a price you would never see in your lifetime again. At $20 it was time to sell the house and go all in. At $2 it was time to sell.
Remember, at the end of the day, a house is worth what an individual can afford to pay. If interest rates go up, most can afford less. If fuel prices rise, affordilbility goes down even further. Same with food prices. If wages go down, a further decline in buying power.
Think about the average $60K per year family that was buying $250-$300K houses a few years ago. Assuming their wages have remained intact, today their food, fuel, insurance, property tax, and interest expenses have probably risen at least $15K per year.......that is just about their mortgage payment assuming they didn't take out a home equity loan.
It is my belief that America is about to go through a revolutionary phase in its history. As a nation we are going to have to completely restructure the way we live. The migration from an industrial economy to an information based economy will be difficult and painful for many....but in the end our country will be more competitive to play in a global economy.
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