how short-sighted many so-called experts are when it comes to
understanding the pace and path of forces swirling through the economy.
Even when it was
apparent to everyone that the bubble had burst in housing, for
example, some forecasters were predicting
that municipal finances would not be seriously affected.
Aside from wishful
thinking, one reason for the cognitive dissonance appeared to stem
from the fact that people were not getting immediate reports from state and
local officials that budgets were being wracked by falling revenues and
Yet that should not
have been a surprise to anyone. There are in-built delays, such as the time
it takes to build a house or the grace period allowed for tax receipts to be
remitted to authorities, that would postpone the moment of reckoning for
months -- or longer.
The same holds true
in terms of the state of the overall economy. The optimists seem to be saying
that since today's
data are not so bad, fears about a serious downturn are overblown.
As it happens,
Charles Hugh Smith, publisher of the Of Two Minds blog, has taken the
time to take such reassurances to task in "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
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
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
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.
Michael J. Panzner
Michael J. Panzner is a
25-year veteran of the global stock, bond, and currency markets and the
author of Financial Armageddon: Protecting Your Future from Four Impending
Catastrophes, published by Kaplan Publishing.