The Coming Great Depression: Leaving Fantasyland
Wall Street Journal commentator Peggy Noonan is undoubtedly not alone is seeing no evidence of Depression in America--yet: Turbulence Ahead:
"One of the weirdest, most perceptually jarring things about the economic crisis is that everything looks the same. We are told every day and in every news venue that we are in Great Depression II, that we are in a crisis, a cataclysm, a meltdown, the credit crunch from hell, that we will lose millions of jobs, and that the great abundance is over and may never return. Three great investment banks have fallen while a fourth totters, and the Dow Jones Industrial Average has fallen 31% in six months. And yet when you free yourself from media and go outside for a walk, everything looks . . . the same.
Everyone is dressed the same. Everyone looks as comfortable as they did three years ago, at the height of prosperity. The mall is still there, and people are still walking into the stores and daydreaming with half-full carts in aisle 3. Everyone's still overweight.
But the point is: Nothing looks different.
In the Depression people sold apples on the street. They sold pencils. Angels with dirty faces wore coats too thin and short and shivered in line at the government surplus warehouse."
Peg would be well-served by reading up a bit on the Depression's timeline. As noted here last week, (The Coming Great Depression: Scapegoats and Exploitation) the Dow Jones Industrial Average actually recovered in early 1930 to early-1929 levels. (Look for the same this time around, too--DJIA 12,600 is in the cards a few months out, despite all the structural damage to the market and economy.)
Breadlines didn't form in November 1929--the structural damage took years to play out then, and it will take years to play out now. So don't rush things, Peggy--we'll get to a visible Depression soon enough.
Great Depression: (Wikipedia)
The Great Depression was not a sudden, total collapse. The stock market turned upward in early 1930, returning to early 1929 levels by April, though still almost 30 percent below the peak of September 1929. Together, government and business actually spent more in the first half of 1930 than in the corresponding period of the previous year. But consumers, many of whom had suffered severe losses in the stock market the previous year, cut back their expenditures by ten percent, and a severe drought ravaged the agricultural heartland of the USA beginning in the summer of 1930.
In early 1930, credit was ample and available at low rates, but people were reluctant to add new debt by borrowing. By May 1930, auto sales had declined to below the levels of 1928. Prices in general began to decline, but wages held steady in 1930, then began to drop in 1931. We can already anticipate "ample credit at low rates" in 2009, just as we can also anticipate wages holding steady for awhile even as sales fall. The wheels will fall off later in 2009 and deteriorate further in 2010, 2011 and 2012.
Here are the structural realities which have yet to play out:
1. You can't force households or businesses to borrow more money and spend it. Japan's central bank has flooded that nation with liquidity and low interest money for 19 years to little effect.
2. U.S. consumers and corporations are already burdened with staggering debt. Not only can't you force people to borrow more, you also can't force lenders to loan more money to insolvent households and businesses.
3. Whatever money people get their hands on is going to paying down debt and savings. Studies of the first "stimulus package" checks which went out to taxpayers in 2008 revealed that 2/3 of the money was not spent but used to service debt or saved. Future "stimulus checks" will also fail to boost spending; people already have more stuff than they know what to do with.
4. The FIRE economy is dead. Finance, insurance and real estate (FIRE) all prospered for one reason: the velocity of transactions and debt instruments. With the volume of transactions off by 2/3 (real estate) or 99% (home equity loans), the FIRE economy is shrinking fast, with no barriers to further declines. With lending standards rising even as real estate values plummet, there is nothing to stop transaction and debt velocity from falling much further.
5. Governments and corporations alike are living with Fantasyland expectations of revenue. I recently pored over the 2009 fiscal year budget of my town of 120,000 people (general fund spending is $135 million, which doesn't include capital projects or bond-funded spending) and was dumbstruck by the insanely unrealistic revenue expectations.
The city expects to reap the same amount of easy money from real estate transfer taxes (1% of any real estate transaction goes to the city) in 2009 as it did in 2007 and 2008: about $11 million.
Huh? As transaction volumes decline by 2/3 and the sales prices plummet, then how can you possibly expect to rake in the same transfer tax revenues?
The downtown shopping district was eerily quiet on Black Friday; empty storefronts are everywhere, and sales are falling even at the town's sales-tax heavyweights, the Toyota and Honda auto dealerships. Yet the city expects to haul in the same sales tax revenue as in 2008. Based on what?
The entire nation is in the grip of massive, total denial that revenues will drop in a recession. Companies are trimming travel costs, as are consumers; San Francisco International Airport was virtually empty on Wednesday, once one of the busiest travel days of the year. Airports almost empty day before Thanksgiving.
"The dreaded Day before Thanksgiving was not so dreadful after all. Bay Area airports were eerily empty for much of what traditionally has been among the busiest travel days of the year.
"There's nobody here," said Deborah Vainieri, who was waiting at San Francisco International Airport with her husband, Humberto, for a flight to Portland. In a plot to beat the crowds, the Vainieris had arrived at the airport four hours early. They walked right up to the check-in machine and were done in less than a minute."
6. If lenders make risky loans, they will go under--and most U.S. households and businesses are no longer creditworthy risks. So there you have it: This conflict cannot be resolved. Lenders who foolishly extend credit to over-indebted, risk-laden borrowers will be paid back with losses and insolvency, yet as lending standards tighten and assets plummet in value, the number of creditworthy borrowers in the U.S. has shrunk.
As noted here many times: many of those who qualify for loans are deadset against debt. That's why they're creditworthy--they've refused to take on huge debt for cultural or fiscal-prudence reasons. They have zero interest in taking on debt, even at zero interest.
You can't force people to borrow money, especially when they're already overloaded with debt, and you can't force prudent people to borrow when they have no need for more property, nor can you force people to buy real estate even as the values continue falling.
7. The U.S. already has too much of everything: too many hotels, malls, office towers, homes, condos, strip-malls, lamps, furniture, CDs, TVs, clothing, etc. As 50 million storage lockers filled to capacity with consumer crap are emptied in a desperate move to reduce expenses and raise cash, the value of literally everything ever manufactured will fall to near-zero.
As noted here many times before, the entire U.S. housing market was held aloft by two anomalies: speculators hoping to "flip" for huge profits, and a "one dwelling for every person" mentality that confused rising population with a rising number of households.
We are already seeing how population can continue rising slowly even as the number of households declines. It's called moving back home, doubling up, renting out a room, etc. There are at least 20 million surplus dwellings in the U.S. right now; there is no need for 700,000 more a year to be built, or even 70,000 more.
The FIRE economy based on transaction and debt volume/velocity: gone, over, toast. Housing market based on speculative flipping and one-person households: over, gone, toast. Loose lending by delusional lenders to risky, over-indebted borrowers: gone, over, toast. Borrowing based on rising real estate values: gone, over, toast.
The notion that we "need" more of anything: gone, over, toast. The idea that you can force lenders to lend to uncreditworthy borrowers: gone, over, toast. The idea you can force people drowning in debt to borrow more: gone, over, toast.
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Saturday, November 29, 2008
The Coming Great Depression: Leaving Fantasyland
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