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alstry (35.13)

Why our economy must IMPLODE!!!!!!

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June 14, 2008 – Comments (6)

The consumer makes up 2/3 of our economy.

Never in American History has costs risen for the consumer so far so fast.

For many families, if you factor rising food costs, rising fuel costs, rising interest costs, rising insurance/healthcare costs, and rising property tax costs...expenses have increased upwards of $20K per year in the past five years.

However, for many of the above families, incomes have remained stagnant or actually declined.  As a result, our nation fell into a negative savings rate which was supplemented by home equity withdrawal accounting for hundreds of billions of dollars of accumlated debt since 2002.

As home values have contracted, home equity withdrawal has recently decreased dramatically.  The problem is that the expenses have continued to rise and the consumer simply  cannot bridge the gap any further.  Consumers have been forced to cut spending way back and are still unable to meet montly obligations.

Compounding the above is the fact that employers are reducing staff at rapid rates.  Not only that, for those employees being retained, many employers are cutting benefits, wages, or both in order to remain competitive.

It is falling wages coupled with the rising costs that is forcing record number of American families into financial distress.  But it is not just working families....retirees on fixed incomes are just as distressed as almost everything they spend money on is rising but income is fixed.  Teenagers face the worst job prospects since 1948.

Few are telling this story...many are feeling the effects.

Practically every retailer is scaling back growth or shutting stores down.  Many many restuarants are on the brink of insolvency as consumers eat out less.  Auto dealers that used to sell 300 cars per month are selling 30.  Airlines, if not going bankrupt, are cutting capacity and charging for just about everything.  Banks are having trouble finding suitable borrowers while losing billions of dollars writing off bad debts.

We could go on and on. 

Right now many families are spending down their savings and extinguishing their borrowing capacity.  Businesses are scaling back or shutting down.  Government deficits are at record levels as tax receipt are now falling while expenses are rising.

It seems like the consumer is becoming aware if the problem as sentiment is the worst in 30 years.   Being 2/3 of the economy, a dying consumer means a dying economy. 

Simply from an income/expense perspective....many many Americans are now insolvent.  Over a million families have had their homes foreclosed and notices of default are rising.  Bankruptcies are skyrocketing

Factor shrinking and/or shuttering business and declining government receipts....all piled upon an unprecdented pile of debt......our nation faces something we have never faced before....

What is amazing is how few really understand the problem.  Our country no longer has the income to support its expenses.  For the past few years we masked the problem with excessive borrowing...especially by consumers using an inflated housing asset.  As collateral is crashing in value, our banks are running dry speeding up the contraction.

The above is simply the facts.  As long as income is too low to meet expenses, and credit is not available to cover the deficit, our economy must implode....and since we are so leveraged, it may happen quicker than many may think.

6 Comments – Post Your Own

#1) On June 14, 2008 at 1:33 AM, alstry (35.13) wrote:

Why do I think its sooner than later?

Asset values are now crashing:  Houses, Commercial Real Estate, Bonds.

Interest Rates have started Rising Rapidly.

Rapidly rising interest rates with crashing asset values is a very toxic combination with leverage.

Add in a banking system under stress and rapidly rising defaults.....I simply can't find a suitable replacement to the stimulating effect of credit creation now evaporating.

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#2) On June 14, 2008 at 5:11 AM, DemonDoug (71.12) wrote:

official government cpi was 7.2% annualized in may.  Unofficial cpi from shadowstats has it around 12%.

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#3) On June 14, 2008 at 7:19 AM, alstry (35.13) wrote:

Demon,

It is the combination of RISING costs and FALLING/stagnant revenues which makes the problem even more severe.  Costs are rising everywhere, this week interest rates were the most obvious and the price per gallon of gas the most emotional....but revenues for many are falling.

And we have falling or stagnant revenues for many governments, businesses, and consumers.  The revenue side is forcing many to shut down/default and each week the gap widens the problem will get worse.

It is amazing how little commentary is out there on this issue but the effects are profound.  We hear a lot about rising costs buy very little about stagnant revenues.

It is destroying our airlines, autos, banking, construction, commercial real estate, local governments, manufacturing, residential real estate, retail, restaurants, and more.  I am now hearing many health care systems are now starting to feel the pinch.

Revenues can stagnate for so long before rising costs create havoc.  You can delay the problem with credit creation and debt accumulation....but in time it only makes the problem worse.

This flat revenue issue alone makes the problem much more severe than the 70s.  However, you add in the increased debt burden and lower manufacturing capacity and we are heading into a storm many are not prepared.

 

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#4) On June 14, 2008 at 9:07 AM, EScroogeJr (< 20) wrote:

alstry, if you compensate your increasing food/fuel costs with HEWs, how many decades will it take before your equity falls back to pre-bubble levels? If you live in California, it will take you at least a century at the current rate before you're forced to tighten your belt. Look at your equity gain from 1998 as a wallet given to you by Californian officials precisely so that you could keep spending during these times.

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#5) On June 14, 2008 at 10:10 AM, alstry (35.13) wrote:

The problem with your logic is that it accounts for the past few years.

Many people in CA have now extinguished HEW capacity....factor in home price declines and lenders backing out of the market....and HEW is no longer an option.

Why do you think so many homes are being foreclosed now.  People were using HEW  to make mortgage payments....now that it is gone...so is the house.  With so much debt still out there, this problem has a long long way to go.

Once you really think about how much money was taken out of HEW alone over the past five years....it is incredible.  Some years as much as a trillion dollars...almost 10% of GDP.  My guess is most who tapped home equity no longer have any to tap.....especially considering homes in a number of areas of CA are now selling for 50% off peak.

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#6) On June 14, 2008 at 11:43 AM, dwot (45.35) wrote:

alstry, I was thinking it would happen quickly, but as I've studied the economics more, I think it will be more gradual.  Perhaps "more gradual" will feel like very quick for the economy.

If you look at the depression, the housing top was actually reached about 3 years ahead of the stock market crash and the stock market bottom took about another 3 years, so it was a 6 year process.

I keep on that this mirrors what I think of what the Vancouver market was.  Lots had jobs, but there has been an increasing number locked out or left behind in the economy.  Those in power haven't been affected and the degree of harm and hurting to those left out has been ignored, or the people have been blamed for some perceived incompetencies.

I lived a life of enormous declining buying power my whole adult life.  I was able to support myself and save money on minimum wage when I was a teenager.  The hours worked for a tank of gas as a teenager was less than the hours I need to work now mid-career, with two degrees and at what I consider to be a very good job.  Minimum wage hardly cover's one's rent now.  I have to work close to two hours to pay for a tank of gas and when I was a teen it was just over an hour.  And I thought the cost of driving was expensive then... 

The buying power of the bottom end of society has moved wages from something that you could live on to what those of us in good jobs consider pocket change.  Indeed, it would take a whole day of work to pay for that tank of gas at minimum wage now.

I think this trend started in Vancouver in the early 80s and my occupation choices were even harder hit.  In Vancouver teacher wages have consistently fallen below the already manipulated cpi since the late 80s.  Teacher wages were higher than nursing wages and now they are about 20% less for starting and 15% less at the top and it takes 3 years longer to make that 15% less. 

It certainly drove me to make radical changes in my life.  I loved my home but sold it.  There is emotional attachment to a loved home, but ultimately because Vancouver was/is so bubbled, I come out enormously ahead from this decision.

There is something seriously wrong with the world when sticking to the course or path means that retirement options will be completely squandered.  By selling, in 4.5 years we gained 8 times my under employment wage.  By leaving BC and going to work where I am now I am no longer under employed and I am making about 2.5 times what I was making in BC. 

We have two rents and household expenses now, but the two households cost us about the same as what our single household cost and now we also get interest income from our equity.  The interest income before taxes actually pays for one of the rents, and I clear about 2x as much as I used to.  And people ask me if it is worth it coming north to work...  I'll retire to having to live through -50 degree winters for the lifestyle potential I now have.  Vancouver is a beautiful city, but the cost meant that it was constantly budgeting and justifying to spend money on anything.  I lived the last 30 years with nothing but financial stress.

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